CVS Caremark Corporation — FY 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009. This is an annual report, not a standalone fourth-quarter filing. The company changed its fiscal year-end to December 31; FY 2009 had 365 days versus 368 days in FY 2008. CVS Caremark operates Pharmacy Services, Retail Pharmacy and Corporate segments, combining PBM, mail and specialty pharmacy, retail drugstores, MinuteClinic and online services.
Financial and operating highlights
| Metric | FY 2009 | FY 2008 | Change |
|---|---|---|---|
| Net revenues | $98.729 billion | $87.472 billion | +12.9% |
| Gross profit | $20.380 billion | $18.290 billion | +11.4% |
| Operating profit | $6.438 billion | $6.046 billion | +6.5% |
| Income from continuing operations | $3.708 billion | $3.344 billion | +10.9% |
| Net income | $3.696 billion | $3.212 billion | +15.1% |
| Diluted EPS | $2.55 | $2.18 | +17.0% |
| Interest expense, net | $525 million | $509 million | +3.1% |
| Long-term debt at year-end | $8.756 billion | $8.057 billion | +8.7% |
| Total assets | $61.641 billion | $60.960 billion | +1.1% |
| Shareholders' equity | $35.768 billion | $34.574 billion | +3.5% |
Calculated margins were approximately 20.6% gross, 6.5% operating and 3.7% net in 2009, compared with 20.9%, 6.9% and 3.7%, respectively, in 2008. These are calculations from the selected financial data. Cash flow amounts, cash balances, current debt and other detailed liquidity figures are not provided in the supplied filing text; the filing refers readers to incorporated Annual Report financial statements and MD&A. It says operations are funded through operating cash flow, commercial paper and long-term borrowings.
- Prescription drugs represented 68% of consolidated revenue in both 2009 and 2008.
- At year-end, the company had 7,025 retail drugstores and 569 MinuteClinics. It filled approximately 615 million retail prescriptions in FY 2009 and managed approximately 660 million PBM prescriptions.
- FY 2009 included a $12 million after-tax loss from discontinued operations, primarily estimated costs under former Linens 'n Things lease guarantees, versus $132 million in FY 2008.
- The 2009 income tax provision included recognition of $167 million of previously unrecognized tax benefits, including interest, related to statute expirations and settlements.
Changes, outlook and management commentary
- Revenue, gross profit and net income rose year over year, while operating margin declined modestly. Comparability is affected by the different fiscal-year lengths and the Longs Drug Stores acquisition completed in October 2008.
- During 2009, CVS Caremark revised segment reporting and the accounting presentation of certain intersegment activity; the company stated these changes did not affect consolidated results.
- Management expected to open 250–300 new or relocated retail stores in 2010. The Rx Connect pharmacy system rollout was expected to be completed by year-end 2010; the company also planned to offer pharmacogenomic services to clients during 2010.
- The company expected lower Medicaid reimbursement in 2010 for certain products following changes to published Average Wholesale Price benchmarks. It also expected 2010 Medicare Part D rules on reporting price differentials and rebates to reduce the profitability of that business.
- Management cited pressure from PBM client pricing demands, generic reimbursement reductions, competition, and economic weakness affecting prescription utilization and retail demand. It also identified client retention as a risk: some large PBM accounts elected not to renew for 2010, and the top 10 clients were expected to represent about 29% of 2010 revenue.
- Health reform legislation was under consideration, and the filing said its eventual content and effects were uncertain. Other material risks include evolving federal and state regulation, reimbursement and pricing-benchmark changes, privacy requirements, and litigation or government investigations.
Contingencies and unusual items
- Legal matters include government inquiries concerning Medicaid claims processing, Medicare Part D, pseudoephedrine distribution, and an FTC investigation; the company said outcomes could not be predicted for several matters.
- Other disclosed cases include a qui tam government-claims lawsuit, pharmacy-network antitrust litigation, a securities class action and shareholder derivative action, and wage-and-hour class or collective actions. The filing describes several as being vigorously defended and does not provide a clear estimate of potential exposure for many of them.
- In January 2010, the company received an OIG subpoena concerning possible improper Medicare and Medicaid claims for dual-eligible customers.
- During Q4 2009, the company repurchased approximately 28 million shares for about $900 million under two programs; it authorized a new $2 billion repurchase program in November. Annual dividends were $0.305 per share, up from $0.258 in 2008.
Investor verification priorities
- Review the incorporated consolidated statements and MD&A for operating cash flow, capital expenditures, cash and short-term investments, current maturities, and liquidity or covenant detail not included in the supplied text.
- Assess the drivers of revenue and profit growth, including acquisition effects, prescription volume, PBM pricing, generic mix and the slight operating-margin decline.
- Check the timing and financial impact of PBM client non-renewals, especially the expected concentration of approximately 29% of 2010 revenue among the top 10 clients.
- Track 2010 reimbursement changes, Part D rules and potential replacement pricing benchmarks for AWP, including effects on Medicaid and PBM contract economics.
- Review developments, reserves and potential exposure for the government investigations, litigation, and former Linens 'n Things lease guarantees.