CVS Caremark Reports Third Quarter Financial Results

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions, except per share amounts

2010

2009

2010

2009

Net revenues

$ 23,875

$    24,642

$    71,641

$    72,907

Cost of revenues

18,851

19,630

56,851

58,095

Gross profit

5,024

5,012

14,790

14,812

Operating expenses

3,540

3,446

10,396

10,269

Operating profit

1,484

1,566

4,394

4,543

Interest expense, net

137

123

399

393

Income before income tax provision

1,347

1,443

3,995

4,150

Income tax provision

528

420

1,582

1,494

Income from continuing operations

819

1,023

2,413

2,656

Loss from discontinued operations, net of tax

(11)

(2)

(14)

(10)

Net income

808

1,021

2,399

2,646

Net loss attributable to noncontrolling interest⁽¹⁾

1

—

2

—

Net income attributable to CVS Caremark

$     809

$     1,021

$     2,401

$     2,646

Income from continuing operations attributable to

CVS Caremark:

 Income from continuing operations

$     819

$    1,023

$     2,413

$    2,656

 Plus net loss attributable to noncontrolling interest

1

—

2

—

Income from continuing operations attributable to CVS Caremark

$     820

$   1,023

$     2,415

$   2,656

Basic earnings per common share:

 Income from continuing operations attributable to CVS Caremark

$  0.60

$   0.72

$  1.76

$  1.84

 Loss from discontinued operations

(0.01)

(0.01)

(0.01)

(0.01)

 Net income attributable to CVS Caremark

$  0.59

$   0.71

$  1.75

$  1.83

 Weighted average basic common shares outstanding

1,360

1,429

1,368

1,445

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$  0.60

$   0.71

$  1.75

$   1.82

 Loss from discontinued operations

(0.01)

—

(0.01)

(0.01)

 Net income attributable to CVS Caremark

$  0.59

$   0.71

$  1.74

$   1.81

 Weighted average diluted common shares outstanding

1,368

1,445

1,378

1,462

Dividends declared per common share

$  0.08750

$  0.07625

$  0.26250

$  0.22875

(1) Represents the minority shareholders' portion of the net loss from our majority owned subsidiary Generation Health, Inc.

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

In millions, except per share amounts

September 30, 2010

December 31, 2009

Assets:

 Cash and cash equivalents

$                979

$  1,086

   Short-term investments

4

5

 Accounts receivable, net

5,111

5,457

 Inventories

10,585

10,343

 Deferred income taxes

479

506

 Other current assets

181

140

  Total current assets

17,339

17,537

 Property and equipment, net

8,356

7,923

 Goodwill

25,673

25,680

 Intangible assets, net

9,876

10,127

 Other assets

469

374

  Total assets

$      61,713

$  61,641

Liabilities:

 Accounts payable

$         4,162

$  3,560

 Claims and discounts payable

2,360

3,075

 Accrued expenses

2,664

3,246

 Short-term debt

1,384

315

 Current portion of long-term debt

1,104

2,104

  Total current liabilities

11,674

12,300

 Long-term debt

8,653

8,756

 Deferred income taxes

3,653

3,678

 Other long-term liabilities

1,061

1,102

 Commitments and contingencies

 Redeemable noncontrolling interest

35

37

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; 1,619 shares issued and 1,358 shares outstanding at September 30, 2010 and 1,612 shares issued and 1,391 shares outstanding at December 31, 2009

16

16

Treasury stock, at cost: 259 shares at September 30, 2010 and 219 shares at December 31, 2009

(9,029)

(7,610)

Shares held in trust: 2 shares at September 30, 2010

   and December 31, 2009

(56)

(56)

Capital surplus

27,443

27,198

Retained earnings

18,396

16,355

Accumulated other comprehensive loss

(133)

(135)

 Total shareholders' equity

36,637

35,768

Total liabilities and shareholders' equity

$        61,713

$  61,641

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30,

In millions

2010

2009

Cash flows from operating activities:

 Cash receipts from revenues

$     68,524

$     68,788

 Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(52,953)

(54,553)

 Cash paid to other suppliers and employees

(10,346)

(9,810)

 Interest received

3

4

 Interest paid

(439)

(410)

 Income taxes paid

(1,785)

(1,789)

Net cash provided by operating activities

3,004

2,230

Cash flows from investing activities:

 Additions to property and equipment

(1,379)

(1,752)

 Proceeds from sale-leaseback transactions

124

748

 Proceeds from sale or disposal of assets

24

7

 Acquisitions (net of cash acquired) and investments

(158)

(43)

 Purchase of short-term investments

—

(5)

 Maturity of short-term investments

1

—

Net cash used in investing activities

(1,388)

(1,045)

Cash flows from financing activities:

 Increase (decrease) in short-term debt

1,069

(1,944)

 Proceeds from issuance of long-term debt

991

2,800

 Repayments of long-term debt

(2,102)

(652)

 Dividends paid

(360)

(331)

 Derivative settlements

(5)

(3)

 Proceeds from exercise of stock options

171

236

 Excess tax benefits from stock-based compensation

13

26

   Repurchase of common stock

(1,500)

(1,539)

Net cash used in financing activities

(1,723)

(1,407)

Net decrease in cash and cash equivalents

(107)

(222)

Cash and cash equivalents at beginning of period

1,086

1,352

Cash and cash equivalents at end of period

$         979

$         1,130

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

 Net income

$  2,399

$  2,646

 Adjustments required to reconcile net income to net cash

  provided by operating activities:

   Depreciation and amortization

1,096

1,037

   Stock-based compensation

112

113

   Deferred income taxes and other non-cash items

43

69

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

   Accounts receivable, net

346

(321)

   Inventories

(242)

(832)

   Other current assets

(41)

(12)

   Other assets

11

(7)

   Accounts payable and claims and discounts payable

(112)

240

   Accrued expenses

(567)

(794)

   Other long-term liabilities

(41)

91

Net cash provided by operating activities

$  3,004

$  2,230

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 from continuing operations attributable to CVS Caremark:

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions, except per share amounts

2010

2009

2010

2009

Income before income tax provision

$   1,347

$   1,443

$   3,995

 $  4,150

Amortization

   108

   108

   319

   323

Adjusted income before income tax provision

1,455

1,551

4,314

4,473

Adjusted income tax provision⁽¹⁾

570

451

1,708

   1,611

Adjusted income from continuing operations

        885

        1,100

          2,606

    2,862

Net loss attributable to noncontrolling interest

1

—

2

—

Adjusted income from continuing operations attributable to CVS Caremark

   $        886

  $     1,100

$         2,608

$    2,862

Weighted average diluted common shares outstanding

1,368

1,445

1,378

1,462

Adjusted earnings per share from continuing operations attributable to CVS Caremark⁽²⁾

$       0.65

$       0.76

$       1.89

$      1.96

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

(2)  Excluding the impact of approximately $156 million of previously unrecognized tax benefits that were recognized in the three months    ended September 30, 2009, adjusted earnings per share from continuing operations attributable to CVS Caremark would have been $0.65 and $1.85 for the three and nine months ended September 30, 2009, respectively.

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, 2009. 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.

Fiscal Year Ending

In millions, except per share amounts

December 31, 2010

Income before income tax provision

$  5,620

$  5,675

Amortization

432

430

Adjusted income before income tax provision

6,052

6,105

Adjusted income tax provision

2,376

2,402

Adjusted income from continuing operations

3,676

3,703

Net loss attributable to noncontrolling interest

4

4

Adjusted income from continuing operations attributable to CVS Caremark

$   3,680

$   3,707

Weighted average diluted common shares outstanding

1,375

1,375

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$    2.68

$    2.70

Free Cash Flow

(Unaudited)

The Company defines free cash flow as net cash provided by operating activities less net additions to property 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

2010

2009

Net cash provided by operating activities

$  3,004

$    2,230

 Subtract:  Additions to property and equipment

(1,379)

(1,752)

 Add:  Proceeds from sale-leaseback transactions

124

748

Free cash flow

$  1,749

$    1,226

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 condensed consolidated financial statements:

In millions

Pharmacy Services

Segment⁽¹⁾

Retail Pharmacy Segment

Corporate  Segment

Intersegment Eliminations⁽²⁾

Consolidated

Totals

Three Months Ended

 September 30, 2010:

  Net revenues

$   11,926

$   14,159

$   -

$    (2,210)

    $       23,875 

  Gross profit

882

4,181

-

(39)

5,024

  Operating profit (loss)

652

1,039

(168)

(39)

1,484

 September 30, 2009:

  Net revenues

$  13,030

$     13,606

$    -

$  (1,994)

$    24,642

  Gross profit

1,031

3,995

-

(14)

5,012

  Operating profit (loss)

799

910

(129)

(14)

1,566

Nine Months Ended

 September 30, 2010:

  Net revenues

$   35,603

$   42,448

$    -

$    (6,410)

    $       71,641

  Gross profit

2,485

12,397

-

(92)

14,790

  Operating profit (loss)

1,781

3,164

(459)

(92)

4,394

 September 30, 2009:

  Net revenues

$  37,573

$     40,900

$    -

$  (5,566)

$    72,907

  Gross profit

2,760

12,082

-

(30)

14,812

  Operating profit (loss)

2,033

2,938

(398)

(30)

4,543

(1)  Net revenues of the Pharmacy Services segment include approximately $1.6 billion and $1.7 billion of retail co-payments for the three months ended September 30, 2010 and 2009, respectively, and $5.0 billion and $5.2 billion of retail co-payments for the nine months ended September 30, 2010 and 2009, 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.  As a result, both the Pharmacy Services and the Retail Pharmacy segments include the following results associated with this activity: net revenues of $489 million and $196 million for the three months ended September 30, 2010 and 2009, respectively, and $1.3 billion and $450 million for the nine months ended September 30, 2010 and 2009, respectively; gross profit of $39 million and $14 million for the three months ended September 30, 2010 and 2009, respectively, and $92 million and $30 million for the nine months ended September 30, 2010 and 2009, respectively; and operating profit of $39 million and $14 million for the three months ended September 30, 2010 and 2009, respectively, and $92 million and $30 million for the nine months ended September 30, 2010 and 2009, respectively.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions

2010

2009

2010

2009

Net revenues

$   11,926

$   13,030

$    35,603

$   37,573

Gross profit

882

1,031

2,485

2,760

   Gross profit % of net revenues

7.4%

7.9%

7.0%

7.3%

Operating expenses

230

232

704

727

    Operating expense % of net revenues

1.9%

1.8%

2.0%

1.9%

Operating profit

652

799

1,781

2,033

    Operating profit % of net revenues

5.5%

6.1%

5.0%

5.4%

Net revenues⁽¹⁾:

 Mail choice⁽²⁾

$     4,197

$     4,156

$    12,386

$     12,438

 Pharmacy network⁽³⁾

7,615

8,782

22,915

24,871

 Other

114

92

302

264

Pharmacy claims processed⁽¹⁾:

 Total

144.4

162.9

436.1

490.4

 Mail choice⁽²⁾

16.2

16.4

47.7

49.3

 Pharmacy network⁽³⁾

128.2

146.5

388.4

441.1

Generic dispensing rate⁽¹⁾:

 Total

72.0%

68.3%

71.1%

67.9%

 Mail choice⁽²⁾

62.4%

56.6%

60.8%

56.1%

 Pharmacy network⁽³⁾

73.1%

69.5%

72.3%

69.1%

Mail choice penetration rate

26.3%

23.8%

25.7%

23.8%

(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.

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

Nine Months Ended

September 30,

September 30,

In millions, except per adjusted claim  amounts

2010

2009

2010

2009

Operating profit

$  652

$  799

$  1,781

$  2,033

Depreciation and amortization

98

91

292

277

EBITDA

750

890

2,073

2,310

Adjusted claims

173.9

192.4

522.7

579.3

EBITDA per adjusted claim

$       4.31

$       4.63

$       3.97

$      3.99

Supplemental Information

(Unaudited)

Retail Pharmacy Segment

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

In millions

2010

2009

2010

2009

Net revenues

$   14,159

$   13,606

$   42,448

$   40,900

Gross profit

4,181

3,995

12,397

12,082

   Gross profit % of net revenues

29.5%

29.4%

29.2%

29.5%

Operating expenses

3,142

3,085

9,233

9,144

    Operating expense % of net revenues

22.2%

22.7%

21.8%

22.4%

Operating profit

1,039

910

3,164

2,938

    Operating profit % of net revenues

7.3%

6.7%

7.5%

7.2%

Net revenue increase⁽¹⁾:

 Total

4.1%

17.9%

3.8%

16.3%

 Pharmacy

4.3%

18.0%

4.4%

15.8%

 Front store

3.6%

17.6%

2.5%

17.4%

Same store sales increase⁽²⁾:

 Total

2.5%

5.7%

2.3%

5.0%

 Pharmacy

3.0%

8.0%

3.2%

6.7%

 Front store

1.4%

0.8%

0.4%

1.5%

Generic dispensing rate

73.5%

70.1%

72.8%

69.6%

Pharmacy % of total revenues

68.7%

68.4%

68.4%

67.8%

Third party % of pharmacy revenue

97.3%

97.1%

97.3%

96.9%

Retail prescriptions filled

157.7

151.8

472.5

457.5

(1)  The net revenue increase for the three and nine months ended September 30, 2009 include the results associated with stores acquired in the acquisition of Longs Drug Stores Corporation in October 2008.

(2)  Beginning in November 2009, same store sales increase includes the stores acquired in the acquisition of Longs Drug Stores Corporation in October 2008.