CVS Caremark Reports Strong Profit Growth for Full Year 2013; Fourth Quarter Adjusted EPS at High End of Its Expectations

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

December 31,

Year Ended

December 31,

In millions, except per share amounts

2013

2012

2013

2012

Net revenues

$

32,830

$

31,397

$

126,761

$

123,120

Cost of revenues

26,492

25,103

102,978

100,632

Gross profit

6,338

6,294

23,783

22,488

Operating expenses

4,121

3,995

15,746

15,278

Operating profit

2,217

2,299

8,037

7,210

Interest expense, net

135

159

509

557

Loss on early extinguishment of debt

—

348

—

348

Income before income tax provision

2,082

1,792

7,528

6,305

Income tax provision

816

667

2,928

2,436

Income from continuing operations

1,266

1,125

4,600

3,869

Loss from discontinued operations, net of tax

(1)

—

(8)

(7)

Net income

1,265

1,125

4,592

3,862

Net loss attributable to noncontrolling interest

—

—

—

2

Net income attributable to CVS Caremark

$

1,265

$

1,125

$

4,592

$

3,864

Income from continuing operations attributable to CVS Caremark:

Income from continuing operations

$

1,266

$

1,125

$

4,600

$

3,869

Net loss attributable to noncontrolling interest

—

—

—

2

Income from continuing operations attributable to CVS Caremark

$

1,266

$

1,125

$

4,600

$

3,871

Basic earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

1.06

$

0.91

$

3.78

$

3.05

Loss from discontinued operations attributable to CVS Caremark

$

—

$

—

$

(0.01)

$

(0.01)

Net income attributable to CVS Caremark

$

1.06

$

0.91

$

3.77

$

3.04

Weighted average basic common shares outstanding

1,192

1,241

1,217

1,271

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

1.05

$

0.90

$

3.75

$

3.02

Loss from discontinued operations attributable to CVS Caremark

$

—

$

—

$

(0.01)

$

(0.01)

Net income attributable to CVS Caremark

$

1.05

$

0.90

$

3.74

$

3.02

Weighted average diluted common shares outstanding

1,201

1,249

1,226

1,280

Dividends declared per common share

$

0.2250

$

0.1625

$

0.90

$

0.65

During the fourth quarter of 2013, the Company began recognizing revenue from the sale of prescription drugs within the Retail Pharmacy Segment when the prescription is picked up by the customer. Prior to this, revenue from the sale of prescription drugs was recognized at the time the prescription was filled. This immaterial error correction is reflected in all periods presented. See Note 1 "Significant Accounting Policies" (Revenue Recognition - Retail Pharmacy Segment) to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

In millions, except per share amounts

2013

2012

Assets:

Cash and cash equivalents

$

4,089

$

1,375

Short-term investments

88

5

Accounts receivable, net

8,729

6,479

Inventories

11,045

11,032

Deferred income taxes

902

693

Other current assets

472

577

Total current assets

25,325

20,161

Property and equipment, net

8,615

8,632

Goodwill

26,542

26,395

Intangible assets, net

9,529

9,753

Other assets

1,515

1,280

Total assets

$

71,526

$

66,221

Liabilities:

Accounts payable

$

5,548

$

5,070

Claims and discounts payable

4,548

3,974

Accrued expenses

4,768

4,411

Short-term debt

—

690

Current portion of long-term debt

561

5

Total current liabilities

15,425

14,150

Long-term debt

12,841

9,133

Deferred income taxes

3,901

3,784

Other long-term liabilities

1,421

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; 1,680 shares issued and 1,180

   shares outstanding at December 31, 2013 and 1,667 shares issued and 1,231 shares

   outstanding at December 31, 2012

17

17

Treasury stock, at cost: 500 shares at December 31, 2013 and 435 shares

   at December 31, 2012

(20,169)

(16,270)

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

(31)

(31)

Capital surplus

29,777

29,120

Retained earnings

28,493

24,998

Accumulated other comprehensive loss

(149)

(181)

Total shareholders' equity

37,938

37,653

Total liabilities and shareholders' equity

$

71,526

$

66,221

See Note 1 "Significant Accounting Policies" (Revenue Recognition - Retail Pharmacy Segment) to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Year Ended

December 31,

In millions

2013

2012

Cash flows from operating activities:

Cash receipts from customers

$

114,993

$

113,205

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(91,178)

(90,032)

Cash paid to other suppliers and employees

(14,295)

(13,643)

Interest received

8

4

Interest paid

(534)

(581)

Income taxes paid

(3,211)

(2,282)

Net cash provided by operating activities

5,783

6,671

Cash flows from investing activities:

Purchases of property and equipment

(1,984)

(2,030)

Proceeds from sale-leaseback transactions

600

529

Proceeds from sale of property and equipment and other assets

54

23

Acquisitions (net of cash acquired) and other investments

(415)

(378)

Purchase of available-for-sale investments

(226)

—

Sale or maturity of available-for-sale investments

136

—

Proceeds from sale of subsidiary

—

7

Net cash used in investing activities

(1,835)

(1,849)

Cash flows from financing activities:

Decrease in short-term debt

(690)

(60)

Proceeds from issuance of long-term debt

3,964

1,239

Repayments of long-term debt

—

(1,718)

Purchase of noncontrolling interest in subsidiary

—

(26)

Dividends paid

(1,097)

(829)

Proceeds from exercise of stock options

500

836

Excess tax benefits from stock-based compensation

62

28

Repurchase of common stock

(3,976)

(4,330)

Net cash used in financing activities

(1,237)

(4,860)

Effect of exchange rates on cash

3

—

Net increase (decrease) in cash and cash equivalents

2,714

(38)

Cash and cash equivalents at the beginning of the year

1,375

1,413

Cash and cash equivalents at the end of the year

$

4,089

$

1,375

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

Net income

$

4,592

$

3,862

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

Depreciation and amortization

1,870

1,753

Stock-based compensation

141

132

Loss on early extinguishment of debt

—

348

Deferred income taxes and other non-cash items

(86)

(111)

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

Accounts receivable, net

(2,210)

(387)

Inventories

12

(853)

Other current assets

105

3

Other assets

(135)

(99)

Accounts payable and claims and discounts payable

1,024

1,147

Accrued expenses

471

766

Other long-term liabilities

(1)

110

Net cash provided by operating activities

$

5,783

$

6,671

See Note 1 "Significant Accounting Policies" (Revenue Recognition - Retail Pharmacy Segment) to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

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

December 31,

Year Ended

December 31,

In millions, except per share amounts

2013

2012

Income before income tax provision⁽¹⁾

$

2,082

$

1,792

$

7,528

$

6,305

Amortization

124

124

494

486

Adjusted income before income tax provision

2,206

1,916

8,022

6,791

Adjusted income tax provision⁽²⁾

865

713

3,120

2,624

Adjusted income from continuing operations

1,341

1,203

4,902

4,167

Net loss attributable to noncontrolling interest

—

—

—

2

Adjusted income from continuing operations

    attributable to CVS Caremark

$

1,341

$

1,203

$

4,902

$

4,169

Weighted average diluted common shares

    outstanding

1,201

1,249

1,226

1,280

Adjusted earnings per share from continuing

    operations attributable to CVS Caremark

$

1.12

$

0.96

$

4.00

$

3.26

(1) Includes a $72 million gain from a legal settlement (approximately $0.04 per diluted share) recognized in the third quarter of 2013 and a $348 million loss on early extinguishment of debt (approximately $0.17 per diluted share) in the fourth quarter of 2012.

(2) The adjusted income tax provision is computed using the effective income tax rates from the consolidated statements 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:

Year Ended

December 31,

In millions

Net cash provided by operating activities

$

5,783

$

6,671

Subtract: Additions to property and equipment

(1,984)

(2,030)

Add: Proceeds from sale-leaseback transactions

600

529

Free cash flow

$

4,399

$

5,170

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

December 31, 2013:

Net revenues

$

19,615

$

17,192

$

—

$

(3,977)

$

32,830

Gross profit

1,211

5,284

—

(157)

6,338

Operating profit (loss)

901

1,671

(198)

(157)

2,217

December 31, 2012:

Net revenues

18,642

16,283

—

(3,528)

31,397

Gross profit

1,334

5,092

—

(132)

6,294

Operating profit (loss)

1,035

1,578

(182)

(132)

2,299

Year Ended

December 31, 2013:

Net revenues

76,208

65,618

—

(15,065)

126,761

Gross profit

4,237

20,112

—

(566)

23,783

Operating profit (loss)⁽³⁾

3,086

6,268

(751)

(566)

8,037

December 31, 2012:

Net revenues

73,444

63,641

—

(13,965)

123,120

Gross profit

3,808

19,091

—

(411)

22,488

Operating profit (loss)

2,679

5,636

(694)

(411)

7,210

During the fourth quarter of 2013, the Company began recognizing revenue from the sale of prescription drugs within the Retail Pharmacy Segment when the prescription is picked up by the customer. Prior to this, revenue from the sale of prescription drugs was recognized at the time the prescription was filled. This immaterial error correction is reflected in all periods presented. See Note 1 "Significant Accounting Policies" (Revenue Recognition - Retail Pharmacy Segment) to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

(1) Net revenues of the Pharmacy Services Segment include approximately $2.0 billion of retail co-payments for both the three months ended December 31, 2013 and 2012, as well as $7.9 billion and $8.4 billion of retail co-payments for the year ended December 31, 2013 and 2012, 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. The following amounts are eliminated in consolidation in connection with the item (ii) intersegment activity: net revenues of $1.2 billion and $888 million for the three months ended December 31, 2013 and 2012, respectively, and $4.3 billion and $3.4 billion for the year ended December 31, 2013 and 2012, respectively; gross profit and operating profit of $157 million and $132 million for the three months ended December 31, 2013 and 2012, respectively, and $566 million and $411 million for the year ended December 31, 2013 and 2012, respectively.

(3) Consolidated operating profit for the year ended December 31, 2013 includes a $72 million gain from 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

December 31,

Year Ended

December 31,

In millions

2013

2012

2013

2012

Net revenues

$

19,615

$

18,642

$

76,208

$

73,444

Gross profit

$

1,211

$

1,334

$

4,237

$

3,808

Gross profit % of net revenues

6.2

%

7.2

%

5.6

%

5.2

%

Operating expenses⁽⁴⁾

$

310

$

299

$

1,151

$

1,129

Operating expense % of net revenues

1.6

%

1.6

%

1.5

%

1.5

%

Operating profit

$

901

$

1,035

$

3,086

$

2,679

Operating profit % of net revenues

4.6

%

5.6

%

4.1

%

3.6

%

Net revenues⁽¹⁾:

Mail choice⁽²⁾

$

6,516

$

5,759

$

24,791

$

22,843

Pharmacy network⁽³⁾

$

13,048

$

12,838

$

51,211

$

50,411

Other

$

51

$

45

$

206

$

190

Pharmacy claims processed⁽¹⁾:

Total

225.9

225.9

902.1

880.5

Mail choice⁽²⁾

21.0

20.4

83.3

81.7

Pharmacy network⁽³⁾

204.9

205.5

818.8

798.8

Generic dispensing rate⁽¹⁾:

Total

81.1

%

80.0

%

80.8

%

78.5

%

Mail choice⁽²⁾

76.6

%

74.5

%

76.0

%

72.0

%

Pharmacy network⁽³⁾

81.6

%

80.5

%

81.3

%

79.1

%

Mail choice penetration rate

22.7

%

22.1

%

22.6

%

22.7

%

(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 our retail stores 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 year ended December 31, 2013 include an $11 million gain from 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

December 31,

Year Ended

December 31,

In millions

Net revenues

$

17,192

$

16,283

$

65,618

$

63,641

Gross profit

$

5,284

$

5,092

$

20,112

$

19,091

Gross profit % of net revenues

30.7

%

31.3

%

30.6

%

30.0

%

Operating expenses⁽²⁾

$

3,613

$

3,514

$

13,844

$

13,455

Operating expense % of net revenues

21.0

%

21.6

%

21.1

%

21.1

%

Operating profit

$

1,671

$

1,578

$

6,268

$

5,636

Operating profit % of net revenues

9.7

%

9.7

%

9.6

%

8.9

%

Retail prescriptions filled (90 Day = 1 Rx)

188.5

185.5

734.3

717.4

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

229.6

219.4

890.1

845.8

Net revenue increase:

Total

5.6

%

4.9

%

3.1

%

6.8

%

Pharmacy

8.5

%

4.6

%

4.1

%

7.6

%

Front store

(0.5)%

5.5

%

1.0

%

5.1

%

Total prescription volume (90 Day = 1 Rx)

1.6

%

9.5

%

2.4

%

9.1

%

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

4.6

%

11.3

%

5.2

%

11.0

%

Same store increase:

Total sales

4.0

%

3.8

%

1.7

%

5.6

%

Pharmacy sales

6.8

%

3.8

%

2.6

%

6.6

%

Front store sales

(1.9)%

3.9

%

(0.5)%

3.4

%

Prescription volume (90 Day = 1 Rx)

0.8

%

8.7

%

1.5

%

8.1

%

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

3.8

%

10.5

%

4.4

%

10.0

%

Generic dispensing rate

81.0

%

79.9

%

81.4

%

79.2

%

Pharmacy % of total revenues

69.5

%

67.6

%

69.5

%

68.8

%

Third party % of pharmacy revenue

98.1

%

97.6

%

97.9

%

97.5

%

During the fourth quarter of 2013, the Company began recognizing revenue from the sale of prescription drugs within the Retail Pharmacy Segment when the prescription is picked up by the customer. Prior to this, revenue from the sale of prescription drugs was recognized at the time the prescription was filled. This immaterial error correction is reflected in all periods presented. See Note 1 "Significant Accounting Policies" (Revenue Recognition - Retail Pharmacy Segment) to the consolidated financial statements included in the Annual Report on Form 10-K for the year ended December 31, 2013.

(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 prescription.

(2) Operating expenses for the year ended December 31, 2013 include a $61 million gain from 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 in our Securities and Exchange Commission filings, including those in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2013. 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.

In millions, except per share amounts

Year Ending

December 31, 2014

Income before income tax provision

$

7,882

$

8,136

Amortization

515

515

Adjusted income before income tax provision

8,397

8,651

Adjusted income tax provision⁽¹⁾

3,293

3,383

Adjusted income from continuing operations

$

5,104

$

5,268

Weighted average diluted common shares outstanding

1,170

1,170

Adjusted earnings per share from continuing operations

$

4.36

$

4.50

In millions, except per share amounts

Three Months Ending

March 31, 2014

Income before income tax provision

$

1,884

$

1,945

Amortization

124

124

Adjusted income before income tax provision

2,008

2,069

Adjusted income tax provision⁽¹⁾

783

807

Adjusted income from continuing operations

$

1,225

$

1,262

Weighted average diluted common shares outstanding

1,188

1,188

Adjusted earnings per share from continuing operations

$

1.03

$

1.06

(1) 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 in our Securities and Exchange Commission filings, including those in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2013. 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.

In millions

Year Ending

December 31, 2014

Net cash provided by operating activities

$

6,950

7,250

Subtract: Additions to property and equipment

(2,100)

(2,000)

Add: Proceeds from sale-leaseback transactions

600

500

Free cash flow

$

5,450

$

5,750