CVS Caremark Corporation — FY2013 Form 10-K
Reporting period: Fiscal year ended December 31, 2013. This is an annual report, not a standalone fourth-quarter filing. CVS Caremark operated Pharmacy Services, Retail Pharmacy and Corporate segments. The filing incorporates the full MD&A and financial statements by reference; the supplied text does not include their detailed segment results or cash flow statement.
Business context and financial performance
CVS Caremark described itself as an integrated U.S. pharmacy health care provider, combining pharmacy benefit management (PBM), retail pharmacies, specialty and mail pharmacies, and MinuteClinic. At year-end it reported 7,660 retail drugstores and 800 MinuteClinic locations. During 2013 it filled or managed approximately 902 million PBM prescriptions and filled 734 million retail prescriptions.
| Metric | 2013 | 2012 | Change |
|---|---|---|---|
| Net revenue | $126.761 billion | $123.120 billion | +3.0% |
| Gross profit | $23.783 billion | $22.488 billion | +5.8% |
| Operating profit | $8.037 billion | $7.210 billion | +11.5% |
| Net income attributable to CVS Caremark | $4.592 billion | $3.864 billion | +18.8% |
| Diluted EPS | $3.74 | $3.02 | +23.8% |
| Net interest expense | $509 million | $557 million | −8.6% |
| Long-term debt at year-end | $12.841 billion | $9.133 billion | +$3.708 billion |
| Total assets at year-end | $71.526 billion | $66.221 billion | +8.0% |
| Shareholders’ equity at year-end | $37.938 billion | $37.653 billion | +0.8% |
Calculated from reported figures, gross margin was approximately 18.8% versus 18.3%, operating margin 6.3% versus 5.9%, and net margin 3.6% versus 3.1%. The filing text does not provide a clear value for operating cash flow, free cash flow, cash balances, current liquidity ratios or segment-level financial results.
Material changes and capital allocation
- Revenue, gross profit, operating profit, net income and diluted EPS all increased from 2012. 2012 included a $348 million loss on early debt extinguishment; none was reported in 2013.
- Long-term debt increased by $3.7 billion year over year. Net interest expense nevertheless declined. The supplied text does not explain the full debt movement or provide enough detail to assess liquidity.
- The company repurchased 66.2 million shares for approximately $4.0 billion in 2013. It authorized a further $6.0 billion repurchase program in December; approximately $6.7 billion remained available across the programs at year-end.
- Annual cash dividends rose to $0.90 per share from $0.65 in 2012.
- CVS announced a ten-year generic drug sourcing venture with Cardinal Health, expected to begin operating July 1, 2014. CVS acquired Coram on January 16, 2014, after year-end, expanding infusion and enteral nutrition services.
Outlook, risks and unusual items
- For 2014, management expected approximately 150 new MinuteClinic openings and retail store square-footage growth of 2%–3%. The supplied filing text does not provide company-wide earnings or revenue guidance.
- Management highlighted competitive PBM pricing and margin pressure, reimbursement reductions, generic drug sourcing and pricing, client retention and contract renewals, Medicare Part D and health care reform changes, and extensive regulatory requirements as material risks.
- Cybersecurity, privacy and information-system disruptions could impair operations, expose sensitive information and cause regulatory, legal or remediation costs.
- The company reached an agreement in principle with SEC staff to pay a $20 million civil penalty concerning alleged 2009 disclosure and securities-law violations. The amount was reserved; settlement remained subject to SEC and court approval, and the company said it would not restate prior financial statements.
- A long-running Medicaid claims qui tam case was dismissed following a December 2013 settlement. Other government inquiries and litigation remained pending, including a securities class action and pharmacy network antitrust litigation. A separate Alabama action sought approximately $3.2 billion plus unspecified damages; its appeal was pending.
- A January 2014 New Jersey environmental settlement required $132,000 in civil penalties. Two Florida pharmacies’ DEA registrations for dispensing controlled substances had been revoked in 2012; the stores continued operating without dispensing controlled substances.
- 2013 discontinued-operations loss was $8 million, primarily reflecting Linens ’n Things lease-related costs. The company also noted prior-year accounting-method changes for retail prescription drug inventories, effective January 1, 2012.
Most important facts for investors to verify
- Review the incorporated 2013 Annual Report’s MD&A, cash flow statement, balance sheet details and segment disclosures to assess cash generation, liquidity, capital spending and segment profitability.
- Understand the causes and intended use of the substantial increase in long-term debt, alongside the scale of share repurchases and dividends.
- Track PBM contract renewals, reimbursement and generic-drug margins, and the financial contribution of the Cardinal Health venture and Coram acquisition.
- Check the status and financial exposure of the SEC settlement, pending litigation and government investigations.
- Assess whether the limited 2014 operating targets in this text were achieved; the filing does not provide full-year earnings guidance.