CVS Caremark Reports Record Second Quarter Results

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

In millions, except per share amounts

2012⁽¹⁾

2011

2012⁽¹⁾

2011

Net revenues

$  30,714

$  26,414

$   61,512

$   52,109

Cost of revenues

25,265

21,328

50,950

42,281

Gross profit

5,449

5,086

10,562

9,828

Operating expenses

3,741

3,602

7,451

7,039

Operating profit

1,708

1,484

3,111

2,789

Interest expense, net

132

148

263

282

Income before income tax provision

1,576

1,336

2,848

2,507

Income tax provision

610

523

1,106

985

Income from continuing operations

966

813

1,742

1,522

Income (loss) from discontinued operations, net of tax

(1)

2

(2)

5

Net income

965

815

1,740

1,527

Net loss attributable to noncontrolling interest

1

1

2

2

Net income attributable to CVS Caremark

$       966

$        816

$     1,742

$     1,529

Income from continuing operations attributable to CVS

  Caremark:

    Income from continuing operations

$       966

$        813

$     1,742

$     1,522

    Net loss attributable to noncontrolling interest

1

1

2

2

    Income from continuing operations attributable to CVS Caremark

$       967

$        814

$     1,744

$     1,524

Basic earnings per common share:

  Income from continuing operations attributable to CVS Caremark

$    0.76

$    0.60

$    1.35

$    1.12

    Income (loss) from discontinued operations attributable to CVS
        Caremark

—

—

—

—

    Net income attributable to CVS Caremark

$     0.76

$    0.60

$     1.35

$    1.13

    Weighted average basic common shares outstanding

1,278

1,355

1,289

1,359

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$    0.75

$    0.60

$    1.34

$     1.11

    Income (loss) from discontinued operations attributable to CVS
         Caremark

—

—

—

—

    Net income attributable to CVS Caremark

$    0.75

$    0.60

$    1.34

$    1.12

    Weighted average diluted common shares outstanding

1,287

1,364

1,298

1,368

Dividends declared per common share

$0.1625

$  0.1250

$0.3250

$  0.2500

(1)

Effective January 1, 2012, the Company changed its methods of accounting for prescription drug inventories in the Retail Pharmacy Segment.
Additional details of this accounting change are discussed in Note 2 to the condensed consolidated financial statements included in the Company's
Form 10-Q for the quarter ended June 30, 2012.

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

In millions, except per share amounts

June 30,

2012⁽¹⁾

December 31,

2011

Assets:

    Cash and cash equivalents

$           1,823

$           1,413

    Short-term investments

5

5

    Accounts receivable, net

6,124

6,047

    Inventories

10,428

10,046

    Deferred income taxes

535

503

    Other current assets

384

580

       Total current assets

19,299

18,594

    Property and equipment, net

8,614

8,467

    Goodwill

26,425

26,458

    Intangible assets, net

9,891

9,869

    Other assets

1,360

1,155

       Total assets

$         65,589

$         64,543

Liabilities:

    Accounts payable

$           4,903

$           4,370

    Claims and discounts payable

3,648

3,487

    Accrued expenses

4,380

3,293

    Short-term debt

200

750

    Current portion of long-term debt

5

56

       Total current liabilities

13,136

11,956

    Long-term debt

9,208

9,208

    Deferred income taxes

3,894

3,853

    Other long-term liabilities

1,438

1,445

    Commitments and contingencies

    Redeemable noncontrolling interest

—

30

Shareholders' equity:

Preferred stock, par value $0.01: 0.1 shares authorized; none issued or
       outstanding

—

—

Common stock, par value $0.01: 3,200 shares authorized; 1,658 shares
        issued and 1,271 shares outstanding at June 30, 2012 and 1,640
        shares issued and 1,298 shares outstanding at December 31, 2011

17

16

Treasury stock, at cost: 385 shares at June 30, 2012 and 340 shares at
        December 31, 2011

(13,945)

(11,953)

Shares held in trust: 2 shares at June 30, 2012

    and December 31, 2011

(56)

(56)

Capital surplus

28,744

28,126

Retained earnings

23,324

22,090

Accumulated other comprehensive loss

(171)

(172)

    Total shareholders' equity

37,913

38,051

Total liabilities and shareholders' equity

$         65,589

$         64,543

(1)

Effective January 1, 2012, the Company changed its methods of accounting for prescription drug inventories in the Retail Pharmacy Segment.
Additional details of this accounting change are discussed in Note 2 to the condensed consolidated financial statements included in the Company's
Form 10-Q for the quarter ended June 30, 2012.

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

In millions

2012⁽¹⁾

2011

Cash flows from operating activities:

    Cash receipts from customers

$      57,644

$    47,950

    Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(45,289)

(37,307)

    Cash paid to other suppliers and employees

(7,134)

(6,149)

    Interest received

1

2

    Interest paid

(281)

(298)

    Income taxes paid

(924)

(1,125)

Net cash provided by operating activities

4,017

3,073

Cash flows from investing activities:

    Purchases of property and equipment

(818)

(710)

    Proceeds from sale-leaseback transactions

—

11

    Acquisitions (net of cash acquired) and other investments

(274)

(1,366)

    Purchase of available-for-sale investments

—

(2)

    Maturity of available-for-sale investments

—

1

    Proceeds from sale of subsidiary

7

—

Net cash used in investing activities

(1,085)

(2,066)

Cash flows from financing activities:

    Decrease in short-term debt

(550)

(300)

    Proceeds from issuance of long-term debt

—

1,463

    Repayments of long-term debt

(54)

(302)

    Purchase of noncontrolling interest in subsidiary

(26)

—

    Dividends paid

(420)

(341)

    Derivative settlements

—

(19)

    Proceeds from exercise of stock options

518

264

    Excess tax benefits from stock-based compensation

8

—

    Repurchase of common stock

(1,998)

(971)

Net cash used in financing activities

(2,522)

(206)

Net increase in cash and cash equivalents

410

801

Cash and cash equivalents at beginning of period

1,413

1,427

Cash and cash equivalents at end of period

$         1,823

$      2,228

Reconciliation of net income to net cash provided by operating activities:

    Net income

$         1,740

$       1,527

Adjustments required to reconcile net income to net cash provided by operating 
       activities:

          Depreciation and amortization

854

765

          Stock-based compensation

64

65

          Deferred income taxes and other noncash items

83

129

          Change in operating assets and liabilities, net of effects from acquisitions:

            Accounts receivable, net

(13)

(472)

                Inventories

(527)

584

                Other current assets

254

(164)

                Other assets

(181)

(62)

                Accounts payable

655

722

                Accrued expenses

1,095

54

                Other long-term liabilities

(7)

(75)

Net cash provided by operating activities

$         4,017

$       3,073

(1)

Effective January 1, 2012, the Company changed its methods of accounting for prescription drug inventories in the Retail Pharmacy Segment.
Additional details of this accounting change are discussed in Note 2 to the condensed consolidated financial statements included in the Company's
Form 10-Q for the quarter ended June 30, 2012.

Adjusted Earnings Per Share

(Unaudited)

For internal comparisons, management finds it useful to assess year-to-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

The Company defines adjusted earnings per share as income before income tax provision plus amortization, less adjusted income tax provision, plus net loss attributable to noncontrolling interest divided by the weighted average diluted common shares outstanding.

The following is a reconciliation of income before income tax provision to adjusted earnings per share:

Three Months Ended

Six Months Ended

June 30,

June 30,

In millions, except per share amounts

2012

2011⁽²⁾

2012

2011⁽²⁾

Income before income tax provision

$         1,576

$     1,336

$      2,848

$    2,507

Amortization

123

114

241

220

Adjusted income before income tax provision

1,699

1,450

3,089

2,727

Adjusted income tax provision⁽¹⁾

658

568

1,199

1,072

Adjusted income from continuing operations

1,041

882

1,890

1,655

Net loss attributable to noncontrolling interest

1

1

2

2

Adjusted income from continuing operations attributable to
    CVS Caremark

$       1,042

$        883

$      1,892

$     1,657

Weighted average diluted common shares outstanding

1,287

1,364

1,298

1,368

Adjusted earnings per share from continuing operations
    attributable to CVS Caremark

$        0.81

$       0.65

$        1.46

$       1.21

(1)

The adjusted income tax provision is computed using the effective income tax rate from the consolidated statement of income.

(2)

The adjusted results for the three and six months ended June 30, 2011 have been revised to reflect the results of TheraCom as discontinued operations.

Free Cash Flow

(Unaudited)

The Company defines free cash flow as net cash provided by operating activities less net additions to properties and equipment (i.e., additions to property and equipment plus proceeds from sale-leaseback transactions).

The following is a reconciliation of net cash provided by operating activities to free cash flow:

Six Months Ended

June 30,

In millions

2012

2011

Net cash provided by operating activities

$      4,017

$     3,073

  Subtract: Additions to property and equipment

(818)

(710)

  Add: Proceeds from sale-leaseback transactions

─

11

Free cash flow

$           3,199

$     2,374

Supplemental Information

(Unaudited)

The Company evaluates its Pharmacy Services and Retail Pharmacy segment performance based on net revenue, gross profit and operating profit before the effect of nonrecurring charges and gains and certain intersegment activities. The Company evaluates the performance of its Corporate Segment based on operating expenses before the effect of nonrecurring charges and gains and certain intersegment activities. The following is a reconciliation of the Company's segments to the accompanying consolidated financial statements:

In millions

Pharmacy
Services
Segment⁽¹⁾⁽³⁾

Retail
Pharmacy
Segment

Corporate 
Segment

Intersegment
Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

  June 30, 2012:

    Net revenues

$             18,423

$          15,846

$         --

$            (3,555)

$        30,714

    Gross profit

777

4,769

--

(97)

5,449

    Operating profit (loss)

511

1,469

(175)

(97)

1,708

  June 30, 2011:

    Net revenues

14,374

14,826

--

(2,786)

26,414

    Gross profit

720

4,408

--

(42)

5,086

    Operating profit (loss)

448

1,240

(162)

(42)

1,484

Six Months Ended

  June 30, 2012:

    Net revenues

36,722

31,869

--

(7,079)

61,512

    Gross profit

1,393

9,341

--

(172)

10,562

    Operating profit (loss)

860

2,766

(343)

(172)

3,111

  June 30, 2011:

    Net revenues

28,203

29,413

--

(5,507)

52,109

    Gross profit

1,350

8,555

--

(77)

9,828

    Operating profit (loss)

839

2,336

(309)

(77)

2,789

Total assets:

  June 30, 2012

36,039

28,951

1,253

(654)

65,589

  December 31, 2011

35,704

28,323

1,121

(605)

64,543

Goodwill:

  June 30, 2012

19,624

6,801

--

--

26,425

  December 31, 2011

19,657

6,801

--

--

25,458

(1)

Net revenues of the Pharmacy Services Segment include approximately $2.1 billion and $1.9 billion of retail co-payments for the three months
ended June 30, 2012 and 2011, respectively, as well as $4.4 billion and $4.1 billion of retail co-payments for the six months ended June 30, 2012
and 2011, respectively.

(2)

Intersegment eliminations relate to two types of transactions: (i) Intersegment revenues that occur when Pharmacy Services Segment customers
use Retail Pharmacy Segment stores to purchase covered products. When this occurs, both the Pharmacy Services and Retail Pharmacy segments
record the revenue on a standalone basis, and (ii) Intersegment revenues, gross profit and operating profit that occur when Pharmacy Services
Segment customers, through the Company's intersegment activities (such as the Maintenance Choice program), elect to pick-up their
maintenance prescriptions at Retail Pharmacy Segment stores instead of receiving them through the mail. When this occurs, both the Pharmacy
Services and Retail Pharmacy segments record the revenue, gross profit and operating profit on a standalone basis. Beginning in the fourth
quarter of 2011, the Maintenance Choice eliminations reflect all discounts available for the purchase of mail order prescription drugs. The
following amounts are eliminated in consolidation in connection with the item (ii) intersegment activity: net revenues of $840 million and $626
million for the three months ended June 30, 2012 and 2011, respectively, and $1.6 billion and $1.2 billion for the six months ended June 30, 2012
and 2011, respectively; gross profit and operating profit of $97 million and $42 million for the three months ended June 30, 2012 and 2011,
respectively, and $172 million and $77 million for the six months ended June 30, 2012 and 2011, respectively.

(3)

The results of the Pharmacy Services Segment for the three and six months ended June 30, 2011 have been revised to reflect the results of
TheraCom as discontinued operations.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

The following table summarizes the Pharmacy Services Segment's performance for the respective periods:

Three Months Ended

Six Months Ended

June 30,

June 30,

In millions

2012

2011⁽⁴⁾

2012

2011⁽⁴⁾

Net revenues

$18,423

$ 14,374

$ 36,722

$   28,203

Gross profit

777

720

1,393

1,350

    Gross profit % of net revenues

4.2%

5.0%

3.8%

4.8%

Operating expenses

266

272

533

511

     Operating expense % of net revenues

1.4%

1.9%

1.5%

1.8%

Operating profit

511

448

860

839

     Operating profit % of net revenues

2.8%

3.1%

2.3%

3.0%

Net revenues⁽¹⁾:

    Mail choice⁽²⁾

$ 5,744

$    4,582

$ 11,410

$     8,975

   Pharmacy network⁽³⁾

12,625

9,737

25,209

19,114

    Other

54

55

103

114

Pharmacy claims processed⁽¹⁾:

    Total

218.3

191.8

437.2

367.0

    Mail choice⁽²⁾

20.5

17.8

40.9

35.3

    Pharmacy network⁽³⁾

197.8

174.0

396.3

331.7

Generic dispensing rate⁽¹⁾:

    Total

78.0%

74.1%

77.3%

73.9%

    Mail choice⁽²⁾

71.2%

64.6%

70.1%

64.2%

    Pharmacy network⁽³⁾

78.6%

75.0%

78.0%

74.9%

Mail choice penetration rate

22.9%

22.6%

22.9%

23.3%

(1)

Pharmacy network net revenues, claims processed and generic dispensing rates do not include Maintenance Choice, which are included within
the mail choice category.

(2)

Mail choice is defined as claims filled at a Pharmacy Services' mail facility, which includes specialty mail claims, as well as 90-day claims filled
at retail under the Maintenance Choice program.

(3)

Pharmacy network is defined as claims filled at retail pharmacies, including our retail drugstores.

(4)

The results of the Pharmacy Services Segment for the three and six months ended June 30, 2011 have been revised to reflect the results of
TheraCom as discontinued operations.

EBITDA and EBITDA per Adjusted Claim

(Unaudited)

The Company defines EBITDA as earnings before interest, taxes, depreciation and amortization. We define EBITDA per adjusted claim as EBITDA divided by adjusted pharmacy claims. Adjusted pharmacy claims normalize the claims volume statistic for the difference in average days' supply for mail and retail claims. Adjusted pharmacy claims are calculated by multiplying 90-day claims (the majority of total mail claims) by 3 and adding the 30-day claims. EBITDA can be reconciled to operating profit, which we believe to be the most directly comparable GAAP financial measure.

The following is a reconciliation of operating profit to EBITDA for the Pharmacy Services Segment:

Three Months Ended

Six Months Ended

June 30,

June 30,

In millions, except per adjusted claim amounts

2012

2011⁽¹⁾

2012

2011⁽¹⁾

Operating profit

$    511

$    448

$       860

$       839

Depreciation and amortization

129

107

251

205

EBITDA

640

555

1,111

1,044

  Adjusted claims

256.7

224.9

513.7

432.5

EBITDA per adjusted claim

$   2.49

$   2.46

$      2.16

$      2.41

(1)

The results of the Pharmacy Services Segment for the three and six months ended June 30, 2011 have been revised to reflect the results of
TheraCom as discontinued operations.

Supplemental Information

(Unaudited)

Retail Pharmacy Segment

The following table summarizes the Retail Pharmacy Segment's performance for the respective periods:

Three Months Ended

Six Months Ended

June 30,

June 30,

In millions

2012

2011

2012

2011

Net revenues

$15,846

$14,826

$31,869

$29,413

Gross profit

4,769

4,408

9,341

8,555

    Gross profit % of net revenues

30.1%

29.7%

29.3%

29.1%

Operating expenses

3,300

3,168

6,575

6,219

     Operating expense % of net revenues

20.8%

21.4%

20.6%

21.1%

Operating profit

1,469

1,240

2,766

2,336

     Operating profit % of net revenues

9.3%

8.4%

8.7%

7.9%

Net revenue increase:

    Total

6.9%

3.6%

8.4%

4.0%

    Pharmacy

8.3%

3.9%

9.7%

4.5%

    Front store

3.9%

3.0%

5.5%

2.9%

Same store sales increase:

    Total

5.6%

2.0%

7.0%

2.3%

    Pharmacy

7.2%

2.6%

8.5%

3.1%

    Front store

2.3%

0.8%

3.7%

0.6%

Generic dispensing rate

79.1%

75.6%

78.6%

75.4%

Pharmacy % of total revenues

68.8%

67.9%

69.4%

68.5%

Third party % of pharmacy revenue

97.6%

97.7%

97.9%

97.6%

Retail prescriptions filled

176.4

162.4

355.9

328.0

Adjusted Earnings Per Share Guidance

(Unaudited)

The following reconciliation of estimated income before income tax provision to estimated adjusted earnings per share contains forward-looking information that is subject to risks and uncertainties that could cause actual results to differ materially. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company strongly recommends that you become familiar with the specific risks and uncertainties outlined under the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2011 and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Quarterly Report on Form 10-Q. For internal comparisons, management finds it useful to assess year-to-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

Year Ending

In millions, except per share amounts

December 31, 2012

Income before income tax provision

$       6,477

$    6,596

Amortization

480

482

Adjusted income before income tax provision

6,957

7,078

Adjusted income tax provision

2,691

2,736

Adjusted income from continuing operations

4,266

4,342

Net loss attributable to noncontrolling interest

2

2

Adjusted income from continuing operations attributable to CVS Caremark

$      4,268

$    4,344

Weighted average diluted common shares outstanding

1,287

1,287

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$         3.32

$      3.38

Free Cash Flow Guidance

(Unaudited)

The following reconciliation of net cash provided by operating activities to free cash flow contains forward-looking information that is subject to risks and uncertainties that could cause actual results to differ materially. The Company claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. The Company strongly recommends that you become familiar with the specific risks and uncertainties outlined under the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2011 and under the section entitled "Cautionary Statement Concerning Forward-Looking Statements" in our most recently filed Quarterly Report on Form 10-Q. For internal comparisons, management finds it useful to assess year-to-year cash flow performance by adjusting cash provided by operating activities, by capital expenditures and proceeds from sale-leaseback transactions.

Year Ending

In millions

December 31, 2012

Net cash provided by operating activities

$       6,223

$          6,404

    Subtract:  Additions to property and equipment

(2,145)

(2,075)

    Add:  Proceeds from sale-leaseback transactions

500

600

Free cash flow

$       4,578

$          4,929