CVS Caremark Reports Record Second Quarter Results

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2013

2012

2013

2012

Net revenues

$

31,248

$

30,714

$

62,011

$

61,512

Cost of revenues

25,412

25,265

50,593

50,950

Gross profit

5,836

5,449

11,418

10,562

Operating expenses

3,868

3,741

7,751

7,451

Operating profit

1,968

1,708

3,667

3,111

Interest expense, net

126

132

252

263

Income before income tax provision

1,842

1,576

3,415

2,848

Income tax provision

720

610

1,337

1,106

Income from continuing operations

1,122

966

2,078

1,742

Loss from discontinued operations, net of tax

(1)

(1)

(1)

(2)

Net income

1,121

965

2,077

1,740

Net loss attributable to noncontrolling interest

—

1

—

2

Net income attributable to CVS Caremark

$

1,121

$

966

$

2,077

$

1,742

Income from continuing operations attributable to CVS Caremark:

Income from continuing operations

$

1,121

$

966

$

2,077

$

1,742

Net loss attributable to noncontrolling interest

—

1

—

2

Income from continuing operations attributable to CVS Caremark

$

1,121

$

967

$

2,077

$

1,744

Basic earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

0.91

$

0.76

$

1.69

$

1.35

Loss from discontinued operations attributable to CVS Caremark

—

—

—

—

Net income attributable to CVS Caremark

$

0.91

$

0.76

$

1.69

$

1.35

Weighted average basic common shares outstanding

1,227

1,278

1,230

1,289

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

0.91

$

0.75

$

1.68

$

1.34

Loss from discontinued operations attributable to CVS Caremark

—

—

—

—

Net income attributable to CVS Caremark

$

0.91

$

0.75

$

1.68

$

1.34

Weighted average diluted common shares outstanding

1,236

1,287

1,238

1,298

Dividends declared per common share

$

0.2250

$

0.1625

$

0.4500

$

0.3250

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

June 30,

December 31,

In millions, except per share amounts

2013

2012

Assets:

Cash and cash equivalents

$

1,174

$

1,375

Short-term investments

5

5

Accounts receivable, net

7,093

6,473

Inventories

10,578

10,759

Deferred income taxes

606

663

Other current assets

413

577

Total current assets

19,869

19,852

Property and equipment, net

8,708

8,632

Goodwill

26,554

26,395

Intangible assets, net

9,657

9,753

Other assets

1,496

1,280

Total assets

$

66,284

$

65,912

Liabilities:

Accounts payable

$

5,178

$

5,070

Claims and discounts payable

3,993

3,974

Accrued expenses

3,501

4,051

Short-term debt

—

690

Current portion of long-term debt

18

5

Total current liabilities

12,690

13,790

Long-term debt

9,358

9,133

Deferred income taxes

3,796

3,784

Other long-term liabilities

1,534

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; 1,676 shares issued and

1,227 shares outstanding at June 30, 2013 and 1,667 shares issued and 1,231 shares

outstanding at December 31, 2012

17

17

Treasury stock, at cost: 448 shares at June 30, 2013 and 435 shares at December 31,

(16,987)

(16,270)

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

(31)

(31)

Capital surplus

29,532

29,120

Retained earnings

26,573

25,049

Accumulated other comprehensive loss

(198)

(181)

Total shareholders' equity

38,906

37,704

Total liabilities and shareholders' equity

$

66,284

$

65,912

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

In millions

2013

2012

Cash flows from operating activities:

Cash receipts from customers

$

56,446

$

57,644

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

(44,657)

(45,289)

Cash paid to other suppliers and employees

(7,452)

(7,134)

Interest received

2

1

Interest paid

(267)

(281)

Income taxes paid

(1,530)

(924)

Net cash provided by operating activities

2,542

4,017

Cash flows from investing activities:

Purchases of property and equipment

(804)

(818)

Proceeds from sale of property and equipment

11

—

Acquisitions (net of cash acquired) and other investments

(300)

(274)

Proceeds from sale of subsidiary

—

7

Net cash used in investing activities

(1,093)

(1,085)

Cash flows from financing activities:

Decrease in short-term debt

(690)

(550)

Repayments of long-term debt

—

(54)

Purchase of noncontrolling interest in subsidiary

—

(26)

Dividends paid

(553)

(420)

Proceeds from exercise of stock options

309

518

Excess tax benefits from stock-based compensation

34

8

Repurchase of common stock

(748)

(1,998)

Net cash used in financing activities

(1,648)

(2,522)

Effect of exchange rates on cash

(2)

—

Net increase (decrease) in cash and cash equivalents

(201)

410

Cash and cash equivalents at the beginning of the year

1,375

1,413

Cash and cash equivalents at the end of the year

$

1,174

$

1,823

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

Net income

$

2,077

$

1,740

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

Depreciation and amortization

951

854

Stock-based compensation

66

64

Deferred income taxes and other non-cash items

82

83

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

Accounts receivable, net

(575)

(13)

Inventories

204

(527)

Other current assets

165

254

Other assets

(138)

(181)

Accounts payable and claims and discounts payable

98

655

Accrued expenses

(412)

1,095

Other long-term liabilities

24

(7)

Net cash provided by operating activities

$

2,542

$

4,017

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

June 30,

Six Months Ended

June 30,

In millions, except per share amounts

2013

2012

2013

2012

Income before income tax provision

$

1,842

$

1,576

$

3,415

$

2,848

Amortization

124

123

246

241

Adjusted income before income tax provision

1,966

1,699

3,661

3,089

Adjusted income tax provision⁽¹⁾ 

769

658

1,433

1,199

Adjusted income from continuing operations

1,197

1,041

2,228

1,890

Net loss attributable to noncontrolling interest

—

1

—

2

Adjusted income from continuing operations attributable to

CVS Caremark

$

1,197

$

1,042

$

2,228

$

1,892

Weighted average diluted common shares outstanding

1,236

1,287

1,238

1,298

Adjusted earnings per share from continuing operations

attributable to CVS Caremark

$

0.97

$

0.81

$

1.80

$

1.46

(1) The adjusted income tax provision is computed using the effective income tax rate from the 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:

Six Months Ended

June 30,

In millions

2013

2012

Net cash provided by operating activities

$

2,542

$

4,017

Subtract: Additions to property and equipment

(804)

(818)

Free cash flow

$

1,738

$

3,199

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

June 30, 2013:

Net revenues

$

18,800

$

16,139

$

—

$

(3,691)

$

31,248

Gross profit

963

5,000

—

(127)

5,836

Operating profit (loss)

675

1,596

(176)

(127)

1,968

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

Six Months Ended

June 30, 2013:

Net revenues

37,111

32,191

—

(7,291)

62,011

Gross profit

1,731

9,952

—

(265)

11,418

Operating profit (loss)

1,174

3,133

(375)

(265)

3,667

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

Total Assets:

June 30, 2013

36,271

29,639

1,364

(990)

66,284

December 31, 2012

36,057

29,183

1,408

(736)

65,912

Goodwill:

June 30, 2013

19,658

6,896

—

—

26,554

December 31, 2012

19,646

6,749

—

—

26,395

(1)

Net revenues of the Pharmacy Services Segment include approximately $2.0 billion and $2.1 billion of retail co-payments for the three months ended June 30, 2013 and 2012, respectively, as well as $4.2 billion and $4.4 billion of retail co-payments for the six months ended June 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 $840 million for the three months ended June 30, 2013 and 2012, respectively, and $2.0 billion and $1.6 billion for the six months ended June 30, 2013 and 2012, respectively; gross profit and operating profit of $127 million and $97 million for the three months ended June 30, 2013 and 2012, respectively, and $265 million and $172 million for the six months ended June 30, 2013 and 2012, respectively.

Supplemental Information

(Unaudited)

Pharmacy Services Segment

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

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions

2013

2012

2013

2012

Net revenues

$

18,800

$

18,423

$

37,111

$

36,722

Gross profit

963

777

1,731

1,393

Gross profit % of net revenues

5.1

%

4.2

%

4.7

%

3.8

%

Operating expenses

288

266

557

533

Operating expense % of net revenues

1.5

%

1.4

%

1.5

%

1.5

%

Operating profit

675

511

1,174

860

Operating profit % of net revenues

3.6

%

2.8

%

3.2

%

2.3

%

Net revenues⁽¹⁾:

Mail choice⁽²⁾

$

6,036

$

5,744

$

11,905

$

11,410

Pharmacy network⁽³⁾

12,709

12,625

25,100

25,209

Other

55

54

105

103

Pharmacy claims processed⁽¹⁾:

Total

226.6

218.3

454.3

437.2

Mail choice⁽²⁾

20.7

20.5

41.3

40.9

Pharmacy network⁽³⁾

205.9

197.8

413.0

396.3

Generic dispensing rate⁽¹⁾:

Total

80.7

%

78.0

%

80.6

%

77.3

%

Mail choice⁽²⁾

75.8

%

71.2

%

75.6

%

70.1

%

Pharmacy network⁽³⁾

81.1

%

78.6

%

81.0

%

78.0

%

Mail choice penetration rate

22.4

%

22.9

%

22.3

%

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.

Supplemental Information

(Unaudited)

Retail Pharmacy Segment

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

Three Months Ended

June 30,

Six Months Ended

June 30,

In millions

2013

2012

2013

2012

Net revenues

$

16,139

$

15,846

$

32,191

$

31,869

Gross profit

5,000

4,769

9,952

9,341

Gross profit % of net revenues

31.0

%

30.1

%

30.9

%

29.3

%

Operating expenses

3,404

3,300

6,819

6,575

Operating expense % of net revenues

21.1

%

20.8

%

21.2

%

20.6

%

Operating profit

1,596

1,469

3,133

2,766

Operating profit % of net revenues

9.9

%

9.3

%

9.7

%

8.7

%

Retail prescriptions filled (90 Day = 1Rx)

181.1

176.4

365.8

355.9

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

220.3

208.5

441.8

418.5

Net revenue increase:

Total

1.9

%

6.9

%

1.0

%

8.4

%

Pharmacy

2.2

%

8.3

%

0.5

%

9.7

%

Front store

1.1

%

3.9

%

2.1

%

5.5

%

Total prescription volume (90 Day = 1 Rx)

2.6

%

8.7

%

2.8

%

8.5

%

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

5.6

%

10.8

%

5.6

%

10.6

%

Same store increase (decrease):

Total sales

0.4

%

5.6

%

(0.4)%

7.0

%

Pharmacy sales

0.8

%

7.2

%

(0.8)%

8.5

%

Front store sales

(0.4)%

2.3

%

0.5

%

3.7

%

Prescription volume (90 Day = 1 Rx)

1.8

%

7.7

%

1.9

%

7.4

%

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

5.0

%

9.8

%

4.9

%

9.5

%

Generic dispensing rate

81.9

%

79.1

%

81.6

%

78.6

%

Pharmacy % of total revenues

69.1

%

68.8

%

69.0

%

69.4

%

Third party % of pharmacy revenue

97.8

%

97.6

%

97.8

%

97.9

%

(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.

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

$

7,347

$

7,476

Amortization

495

495

Adjusted income before income tax provision

7,842

7,971

Adjusted income tax provision

3,054

3,111

Adjusted income from continuing operations attributable to CVS Caremark

$

4,788

$

4,860

Weighted average diluted common shares outstanding

1,229

1,227

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

3.90

$

3.96

Three Months Ending

September 30, 2013

Income before income tax provision

$

1,888

$

1,942

Amortization

125

125

Adjusted income before income tax provision

2,013

2,067

Adjusted income tax provision

781

800

Adjusted income from continuing operations attributable to CVS Caremark

$

1,232

$

1,267

Weighted average diluted common shares outstanding

1,234

1,233

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

1.00

$

1.03

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)

(2,000)

Add: Proceeds from sale-leaseback transactions

600

500

Free cash flow

$

4,750

$

5,050