CVS Caremark Reports Record Third Quarter Results

CVS CAREMARK CORPORATION
Condensed Consolidated Statements of Income
(Unaudited)

Three Months Ended

September 30,

Nine Months Ended

September 30,

In millions, except per share amounts

2013

2012

2013

2012

Net revenues

$

31,968

$

30,227

$

93,979

$

91,739

Cost of revenues

25,933

24,580

76,527

75,530

Gross profit

6,035

5,647

17,452

16,209

Operating expenses

3,874

3,833

11,624

11,284

Operating profit

2,161

1,814

5,828

4,925

Interest expense, net

122

134

374

397

Income before income tax provision

2,039

1,680

5,454

4,528

Income tax provision

779

669

2,116

1,775

Income from continuing operations

1,260

1,011

3,338

2,753

Loss from discontinued operations, net of tax

(6)

(5)

(7)

(7)

Net income

1,254

1,006

3,331

2,746

Net loss attributable to noncontrolling interest

—

—

—

2

Net income attributable to CVS Caremark

$

1,254

$

1,006

$

3,331

$

2,748

Income from continuing operations attributable to CVS Caremark:

Income from continuing operations

$

1,260

$

1,011

$

3,338

$

2,753

Net loss attributable to noncontrolling interest

—

—

—

2

Income from continuing operations attributable to CVS Caremark

$

1,260

$

1,011

$

3,338

$

2,755

Basic earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

1.04

$

0.80

$

2.72

$

2.15

Loss from discontinued operations attributable to CVS Caremark

$

(0.01)

$

—

$

(0.01)

$

(0.01)

Net income attributable to CVS Caremark

$

1.03

$

0.80

$

2.72

$

2.15

Weighted average basic common shares outstanding

1,218

1,265

1,226

1,281

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

1.03

$

0.79

$

2.70

$

2.14

Loss from discontinued operations attributable to CVS Caremark

$

(0.01)

$

—

$

(0.01)

$

(0.01)

Net income attributable to CVS Caremark

$

1.02

$

0.79

$

2.70

$

2.13

Weighted average diluted common shares outstanding

1,226

1,274

1,234

1,290

Dividends declared per common share

$

0.2250

$

0.1625

$

0.6750

$

0.4875

CVS CAREMARK CORPORATION
Condensed Consolidated Balance Sheets
(Unaudited)

September 30,

December 31,

In millions, except per share amounts

2013

2012

Assets:

Cash and cash equivalents

$

1,505

$

1,375

Short-term investments

108

5

Accounts receivable, net

8,035

6,473

Inventories

10,825

10,759

Deferred income taxes

558

663

Other current assets

401

577

Total current assets

21,432

19,852

Property and equipment, net

8,749

8,632

Goodwill

26,550

26,395

Intangible assets, net

9,587

9,753

Other assets

1,487

1,280

Total assets

$

67,805

$

65,912

Liabilities:

Accounts payable

$

5,412

$

5,070

Claims and discounts payable

4,360

3,974

Accrued expenses

3,940

4,051

Short-term debt

814

690

Current portion of long-term debt

572

5

Total current liabilities

15,098

13,790

Long-term debt

8,819

9,133

Deferred income taxes

3,791

3,784

Other long-term liabilities

1,563

1,501

Commitments and contingencies

—

—

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; 1,669 shares issued and

1,204 shares outstanding at September 30, 2013 and 1,667 shares issued and 1,231

shares outstanding at December 31, 2012

17

17

Treasury stock, at cost: 473 shares at September 30, 2013 and 435 shares at

December 31, 2012

(18,462)

(16,270)

Shares held in trust: 1 share at September 30, 2013 and December 31, 2012

(31)

(31)

Capital surplus

29,653

29,120

Retained earnings

27,551

25,049

Accumulated other comprehensive loss

(194)

(181)

Total shareholders' equity

38,534

37,704

Total liabilities and shareholders' equity

$

67,805

$

65,912

CVS CAREMARK CORPORATION
Condensed Consolidated Statements of Cash Flows
(Unaudited)

Nine Months Ended

September 30,

In millions

2013

2012

Cash flows from operating activities:

Cash receipts from customers

$

85,408

$

84,463

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(67,826)

(67,464)

Cash paid to other suppliers and employees

(10,760)

(10,120)

Interest received

5

2

Interest paid

(369)

(411)

Income taxes paid

(2,213)

(1,530)

Net cash provided by operating activities

4,245

4,940

Cash flows from investing activities:

Purchases of property and equipment

(1,330)

(1,314)

Proceeds from sale-leaseback transactions

156

427

Proceeds from sale of property and equipment

13

—

Acquisitions (net of cash acquired) and other investments

(354)

(303)

Purchase of available-for-sale investments

(107)

—

Proceeds from sale of subsidiary

—

7

Net cash used in investing activities

(1,622)

(1,183)

Cash flows from financing activities:

Increase in short-term debt

124

75

Repayments of long-term debt

—

(56)

Purchase of noncontrolling interest in subsidiary

—

(26)

Dividends paid

(829)

(627)

Proceeds from exercise of stock options

431

677

Excess tax benefits from stock-based compensation

48

21

Repurchase of common stock

(2,272)

(4,001)

Net cash used in financing activities

(2,498)

(3,937)

Effect of exchange rates on cash

5

—

Net increase (decrease) in cash and cash equivalents

130

(180)

Cash and cash equivalents at the beginning of the year

1,375

1,413

Cash and cash equivalents at the end of the year

$

1,505

$

1,233

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

Net income

$

3,331

$

2,746

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

Depreciation and amortization

1,412

1,297

Stock-based compensation

101

97

Deferred income taxes and other non-cash items

129

87

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

Accounts receivable, net

(1,518)

(296)

Inventories

(39)

(586)

Other current assets

176

425

Other assets

(125)

(142)

Accounts payable and claims and discounts payable

697

919

Accrued expenses

32

325

Other long-term liabilities

49

68

Net cash provided by operating activities

$

4,245

$

4,940

Adjusted Earnings Per Share
(Unaudited)

For internal comparisons, management finds it useful to assess year-over-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

September 30,

Nine Months Ended

September 30,

In millions, except per share amounts

2013

2012

2013

2012

Income before income tax provision⁽¹⁾

$

2,039

$

1,680

$

5,454

$

4,528

Amortization

124

121

370

362

Adjusted income before income tax provision

2,163

1,801

5,824

4,890

Adjusted income tax provision⁽²⁾ 

827

717

2,259

1,916

Adjusted income from continuing operations

1,336

1,084

3,565

2,974

Net loss attributable to noncontrolling interest

—

—

—

2

Adjusted income from continuing operations attributable to

CVS Caremark

$

1,336

$

1,084

$

3,565

$

2,976

Weighted average diluted common shares outstanding

1,226

1,274

1,234

1,290

Adjusted earnings per share from continuing operations

attributable to CVS Caremark

$

1.09

$

0.85

$

2.89

$

2.31

(1)

  Includes a $72 million gain on a legal settlement (approximately $0.04 per diluted share) during the three and nine months ended September 30, 2013.

(2)

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

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:

Nine Months Ended

September 30,

In millions

2013

2012

Net cash provided by operating activities

$

4,245

$

4,940

Subtract: Additions to property and equipment

(1,330)

(1,314)

Add: Proceeds from sale-leaseback transactions

156

427

Free cash flow

$

3,071

$

4,053

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⁾

Retail 

Pharmacy 

Segment

Corporate 

Segment

Intersegment 

Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

September 30, 2013:

Net revenues

$

19,483

$

16,284

$

—

$

(3,799)

$

31,968

Gross profit

1,294

4,884

—

(143)

6,035

Operating profit (loss)⁽³⁾

1,012

1,471

(179)

(143)

2,161

September 30, 2012:

Net revenues

18,079

15,504

—

(3,356)

30,227

Gross profit

1,081

4,672

—

(106)

5,647

Operating profit (loss)

784

1,305

(169)

(106)

1,814

Nine Months Ended

September 30, 2013:

Net revenues

56,593

48,474

—

(11,088)

93,979

Gross profit

3,025

14,836

—

(409)

17,452

Operating profit (loss)⁽³⁾

2,186

4,604

(553)

(409)

5,828

September 30, 2012:

Net revenues

54,802

47,373

—

(10,436)

91,739

Gross profit

2,474

14,014

—

(279)

16,209

Operating profit (loss)

1,644

4,071

(511)

(279)

4,925

Total Assets:

September 30, 2013

37,274

30,048

1,679

(1,196)

67,805

December 31, 2012

36,057

29,183

1,408

(736)

65,912

Goodwill:

September 30, 2013

19,657

6,893

—

—

26,550

December 31, 2012

19,646

6,749

—

—

26,395

(1)

Net revenues of the Pharmacy Services Segment include approximately $1.9 billion and $2.0 billion of retail co-payments for the three months ended September 30, 2013 and 2012, respectively, as well as $6.1 billion and $6.4 billion of retail co-payments for the nine months ended September 30, 2013 and 2012, respectively.

(2)

Intersegment eliminations relate to two types of transaction: (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. The following amounts are eliminated in consolidation in connection with the item (ii) intersegment activity: net revenues of $1.1 billion and $841 million for the three months ended September 30, 2013 and 2012, respectively, and $3.1 billion and $2.5 billion for the nine months ended September 30, 2013 and 2012, respectively; gross profit and operating profit of $143 million and $106 million for the three months ended September 30, 2013 and 2012, respectively, and $409 million and $279 million for the nine months ended September 30, 2013 and 2012, respectively.

(3)

Consolidated operating profit for the three and nine months ended September 30, 2013 includes a $72 million gain on a legal settlement, of which, $11 million is included in the Pharmacy Services Segment and $61 million is included in the Retail Pharmacy Segment.

Supplemental Information
(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

In millions

2013

2012

2013

2012

Net revenues

$

19,483

$

18,079

$

56,593

$

54,802

Gross profit

1,294

1,081

3,025

2,474

Gross profit % of net revenues

6.6

%

6.0

%

5.4

%

4.5

%

Operating expenses⁽⁴⁾

282

297

839

830

Operating expense % of net revenues

1.4

%

1.6

%

1.5

%

1.5

%

Operating profit

1,012

784

2,186

1,644

Operating profit % of net revenues

5.2

%

4.3

%

3.9

%

3.0

%

Net revenues⁽¹⁾:

Mail choice⁽²⁾

$

6,369

$

5,675

$

18,274

$

17,084

Pharmacy network⁽³⁾

13,063

12,363

38,163

37,573

Other

51

41

156

145

Pharmacy claims processed⁽¹⁾:

Total

221.9

217.4

676.2

654.6

Mail choice⁽²⁾

21.0

20.4

62.3

61.3

Pharmacy network⁽³⁾

200.9

197.0

613.9

593.3

Generic dispensing rate⁽¹⁾:

Total

81.0

%

79.3

%

80.7

%

78.0

%

Mail choice⁽²⁾

76.2

%

73.1

%

75.8

%

71.1

%

Pharmacy network⁽³⁾

81.5

%

79.9

%

81.2

%

78.6

%

Mail choice penetration rate

23.0

%

22.9

%

22.5

%

22.9

%

(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 include 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, but excluding Maintenance Choice activity.

(4)

Operating expenses for the three and nine months ended September 30, 2013 includes a $11 million gain on a legal settlement.

Supplemental Information
(Unaudited)

Retail Pharmacy Segment

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

Three Months Ended

September 30,

Nine Months Ended

September 30,

In millions

2013

2012

2013

2012

Net revenues

$

16,284

$

15,504

$

48,474

$

47,373

Gross profit

4,884

4,672

14,836

14,014

Gross profit % of net revenues

30.0

%

30.1

%

30.6

%

29.6

%

Operating expenses⁽²⁾

3,413

3,367

10,232

9,943

Operating expense % of net revenues

21.0

%

21.7

%

21.1

%

21.0

%

Operating profit

1,471

1,305

4,604

4,071

Operating profit % of net revenues

9.0

%

8.4

%

9.5

%

8.6

%

Retail prescriptions filled (90 Day = 1Rx)

180.5

176.5

546.3

532.4

Retail prescriptions filled (90 Day = 3 Rx) ⁽¹⁾

220.6

209.8

662.4

628.3

Net revenue increase:

Total

5.0

%

5.5

%

2.3

%

7.4

%

Pharmacy

7.1

%

6.3

%

2.7

%

8.6

%

Front store

0.4

%

3.7

%

1.5

%

4.9

%

Total prescription volume (90 Day = 1 Rx)

2.3

%

9.6

%

2.6

%

8.9

%

Total prescription volume (90 Day = 3 Rx) ⁽¹⁾

5.2

%

11.8

%

5.4

%

11.0

%

Same store increase (decrease):

Total sales

3.6

%

4.3

%

0.9

%

6.1

%

Pharmacy sales

5.7

%

5.3

%

1.3

%

7.4

%

Front store sales

(1.0)

%

2.2

%

—

%

3.2

%

Prescription volume (90 Day = 1 Rx)

1.4

%

8.7

%

1.7

%

7.8

%

Prescription volume (90 Day = 3 Rx) ⁽¹⁾

4.5

%

11.1

%

4.8

%

10.0

%

Generic dispensing rate

81.5

%

79.9

%

81.5

%

79.0

%

Pharmacy % of total revenues

70.4

%

69.1

%

69.5

%

69.3

%

Third party % of pharmacy revenue

97.9

%

97.6

%

97.9

%

98.0

%

(1)

Includes the adjustment to convert 90-day prescriptions to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal 30-day prescription.

(2)

Operating expenses for the three and nine months ended September 30, 2013 includes a $61 million gain on a legal settlement.

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, 2012 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-over-year performance by adjusting diluted earnings per share for amortization, which primarily relates to acquisition activities.

In millions, except per share amounts

Year Ending

December 31, 2013

Income before income tax provision⁽¹⁾

$

7,472

$

7,530

Amortization

495

495

Adjusted income before income tax provision

7,967

8,025

Adjusted income tax provision⁽²⁾

3,090

3,115

Adjusted income from continuing operations attributable to CVS Caremark

$

4,877

$

4,910

Weighted average diluted common shares outstanding

1,226

1,225

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

3.98

$

4.01

In millions, except per share amounts

Three Months Ending

December 31, 2013

Income before income tax provision

$

2,018

$

2,076

Amortization

125

125

Adjusted income before income tax provision

2,143

2,201

Adjusted income tax provision⁽²⁾

831

855

Adjusted income from continuing operations attributable to CVS Caremark

$

1,312

$

1,346

Weighted average diluted common shares outstanding

1,201

1,197

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

1.09

$

1.12

(1)

Includes a $72 million gain on a legal settlement (approximately $0.04 per diluted share) during the year ending December 31, 2013.

(2)

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

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, 2012 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-over-year cash flow performance by adjusting cash provided by operating activities, by capital expenditures and proceeds from sale-leaseback transactions.

In millions

Year Ending

December 31, 2013

Net cash provided by operating activities

$

6,350

$

6,550

Subtract: Additions to property and equipment

(2,200)

(2,050)

Add: Proceeds from sale-leaseback transactions

600

550

Free cash flow

$

4,750

$

5,050