CVS Health Corporation — 2015 Form 10-K Summary
Business context and reporting period
Fiscal year ended December 31, 2015. CVS Health operates Pharmacy Services, Retail/LTC and Corporate segments, combining a pharmacy benefit manager with retail pharmacies, clinics, specialty pharmacy and long-term-care services. The filing incorporates its full MD&A and financial statements by reference; the supplied text includes selected financial data but not detailed cash-flow, segment or liquidity disclosures.
Financial performance and key metrics
| Metric | 2015 | 2014 | Change |
|---|---|---|---|
| Net revenues | $153.290 billion | $139.367 billion | +10.0% |
| Gross profit | $26.528 billion | $25.367 billion | +4.6% |
| Operating profit | $9.454 billion | $8.799 billion | +7.4% |
| Income from continuing operations | $5.230 billion | $4.645 billion | +12.6% |
| Net income attributable to CVS Health | $5.237 billion | $4.644 billion | +12.8% |
| Diluted earnings per share | $4.63 | $3.96 | +16.9% |
| Net interest expense | $838 million | $600 million | +39.7% |
| Long-term debt | $26.267 billion | $11.630 billion | +$14.637 billion |
| Total assets | $93.657 billion | $74.187 billion | +$19.470 billion |
| Shareholders’ equity | $37.203 billion | $37.963 billion | −$760 million |
| Cash dividends per share | $1.40 | $1.10 | +27.3% |
Gross margin was approximately 17.3% versus 18.2% in 2014; operating margin was approximately 6.2% versus 6.3%. Net margin attributable to CVS Health was approximately 3.4% versus 3.3%. Cash flow, cash balances, current liquidity measures and a clear liquidity ratio are not provided in the supplied filing text.
Material changes versus the prior comparable period
- Revenue and earnings increased, while gross margin contracted and interest expense rose.
- CVS completed its Omnicare acquisition on August 18, 2015, expanding its long-term-care and specialty pharmacy businesses.
- On December 16, 2015, CVS acquired Target’s 1,672 pharmacies and 79 clinics. Omnicare and Target businesses together represented 18% of year-end assets and 2% of 2015 revenue, according to the filing; both acquisitions were excluded from the company’s 2015 internal-control evaluation as permitted by SEC rules.
- Long-term debt increased substantially. CVS repurchased 48.0 million shares for approximately $5.0 billion during 2015; $7.7 billion remained authorized under the 2014 repurchase program at year-end.
- 2014 included a $521 million loss on early extinguishment of debt; no such loss was reported for 2015.
Outlook, risks and unusual items
- The supplied text provides no specific 2016 revenue, earnings or cash-flow guidance. Management’s detailed outlook and commentary are incorporated by reference, rather than reproduced here.
- Management identifies reimbursement and pricing pressure, PBM and pharmacy competition, generic-drug cost and supply trends, client retention, regulatory change and government audits as significant risks. Other risks include cybersecurity and privacy incidents, system integration, litigation, seasonality and acquisition integration.
- CVS stated that it was negotiating with the EPA over alleged historical hazardous-waste regulatory noncompliance at certain Omnicare pharmacies; it described the proceedings as not material to its business or financial position. Other legal matters are addressed in incorporated notes, whose details are not included in the supplied text.
- CVS reported disclosure controls as adequate and effective at a reasonable-assurance level. It had no interest-rate, foreign-exchange or commodity derivative instruments outstanding at year-end and considered the related exposures not material.
Important facts for investors to verify
- Review the incorporated audited financial statements and MD&A for operating cash flow, free cash flow, cash and current liabilities, segment results, acquisition costs, debt maturities and covenants.
- Separate organic growth from revenue and earnings contributed by Omnicare and Target, and assess their integration and expected returns.
- Investigate the drivers of gross-margin compression and higher interest expense, and whether those trends continued after 2015.
- Check the incorporated legal-contingency disclosures for material claims, government investigations, settlements and potential losses.
- Confirm subsequent share repurchases, dividend decisions and debt-reduction plans, including the final settlement of the $725 million accelerated share repurchase in January 2016.