CVS Caremark Corporation — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012 (366 days). Although the request metadata says “2012 Q4,” this is an annual 10-K, not a standalone quarterly report. The filing is dated February 15, 2013. Detailed MD&A and the complete financial statements are incorporated by reference to the 2012 Annual Report to Stockholders and are not included in the supplied text.
Business context
CVS Caremark operated three reportable segments: Pharmacy Services, Retail Pharmacy and Corporate. Its integrated model combined pharmacy benefit management, mail and specialty pharmacy, retail drugstores, MinuteClinic health clinics and online pharmacy services. At year-end, the company reported 7,458 retail drugstores and 640 MinuteClinic locations. It filled or managed approximately 881 million PBM prescriptions and filled approximately 718 million retail prescriptions during 2012.
Key financial metrics
| Metric | 2012 | 2011 |
|---|---|---|
| Net revenues | $123.133 billion | $107.100 billion |
| Gross profit | $22.506 billion | $20.561 billion |
| Operating profit | $7.228 billion | $6.330 billion |
| Net income attributable to CVS Caremark | $3.877 billion | $3.461 billion |
| Diluted EPS | $3.03 | $2.57 |
| Long-term debt | $9.133 billion | $9.208 billion |
| Total assets | $65.912 billion | $64.543 billion |
| Total shareholders’ equity | $37.704 billion | $38.051 billion |
| Cash dividends per common share | $0.65 | $0.50 |
Year over year, revenue increased approximately 15%, operating profit 14%, attributable net income 12% and diluted EPS 18%. Gross margin was approximately 18.3% versus 19.2%; operating margin was approximately 5.9% in both years. The company recorded a $348 million loss on early extinguishment of debt in 2012. Cash flow, cash balances, current liabilities and a clear liquidity ratio are not provided in the supplied filing text.
Material changes and capital allocation
- 2012 included 366 days, compared with 365 days in 2011, which affects year-over-year comparability.
- Effective January 1, 2012, the company changed its accounting method for prescription drug inventories in Retail Pharmacy; details are incorporated by reference and are not supplied here.
- The company repurchased 95.0 million shares for approximately $4.3 billion during 2012. A $6.0 billion repurchase authorization was approved in September; approximately $4.7 billion remained available at year-end.
- The annual dividend rose from $0.50 to $0.65 per share.
Outlook, risks and contingencies
- Management anticipated 2%–3% retail square-footage growth and approximately 150 new MinuteClinic locations in 2013. The supplied text does not provide earnings or revenue guidance.
- Management identified reimbursement reductions, PBM pricing and margin pressure, client contract renewals, competition, generic drug pricing, Medicare Part D changes and evolving health-care regulation as material business risks. The company also highlighted information security and compliance risks.
- Effective January 15, 2013, CMS imposed intermediate sanctions on the SilverScript Medicare Part D plan, suspending new enrollment and marketing. CMS granted a limited waiver for certain employer-related enrollments through April 30, 2013; duration and required corrective actions remained uncertain.
- Pending matters include government inquiries and litigation involving Medicaid claims processing, prescription transfer incentives, automatic refills, PBM network practices and other conduct. The filing does not provide a clear aggregate estimate of potential exposure for these matters.
- In January 2013, the company agreed to pay $300,000 in civil penalties and $500,000 for environmental projects under Connecticut consent orders, and accepted compliance requirements.
- The company reported a $12 million loss on disposal of Linens ’n Things in 2012. Its 2008 corporate integrity agreement, as amended, includes monitoring, training and reporting obligations.
Important facts for investors to verify
- Review the incorporated 2012 Annual Report for full cash-flow statements, liquidity, segment results, debt maturities, accounting-change effects and management’s explanations of performance.
- Assess the financial and operational effect of the CMS SilverScript sanctions, including the timetable for corrective action and removal of restrictions.
- Check subsequent developments and any disclosed reserves or estimates for the government investigations, qui tam actions and other litigation.
- Evaluate whether higher revenue translated into sustainable margins, given the reported decline in gross margin and stated reimbursement and PBM pricing pressures.
- Confirm the effect of share repurchases and the increased dividend on cash availability, leverage and future capital needs.