CVS Caremark Reports Strong First Quarter Results

2013 Guidance Range Narrowed To Reflect Higher-Than-Expected Performance

May 01, 2013, 07:00 ET from CVS Caremark Corporation

WOONSOCKET, R.I., May 1, 2013 /PRNewswire/ -- CVS Caremark Corporation (NYSE: CVS) today announced operating results for the three months ended March 31, 2013.

(Logo: http://photos.prnewswire.com/prnh/20090226/NE75914LOGO )

First Quarter Year-over-year Highlights:

  • Operating profit increased 21.0% to $1.7 billion
  • Adjusted EPS increased 28.1% to $0.83; GAAP diluted EPS from continuing operations increased 29.9% to $0.77
  • Retail pharmacy same store prescription volumes increased 2.0%; 4.7% on a 30-day equivalent basis
  • Retail pharmacy same store sales declined 2.3% due to new generic introductions; front store same store sales increased 1.4%
  • Generated free cash flow of $1.3 billion; cash flow from operations of $1.6 billion

2013 Guidance:

  • Narrowed 2013 full year Adjusted EPS range to $3.89 to $4.00 and GAAP diluted EPS from continuing operations range narrowed to $3.64 to $3.75
  • Provided second quarter Adjusted EPS guidance of $0.94 to $0.97 and GAAP diluted EPS from continuing operations guidance of $0.88 to $0.91
  • Reconfirmed full year free cash flow of $4.8 to $5.1 billion and cash flow from operations of $6.4 to $6.6 billion

Revenues

Net revenues for the three months ended March 31, 2013, decreased 0.1%, or $35 million, compared to the three months ended March 31, 2012.

Revenues in the Pharmacy Services Segment increased 0.1% in the three months ended March 31, 2013. The growth was primarily driven by volume increases across all channels and drug cost inflation in our specialty pharmacy business, mostly offset by the impact of new generic introductions. When substituted for brand equivalents, generic drugs lower revenue while increasing profit. Pharmacy network claims processed during the three months ended March 31, 2013, increased 4.3% to 207.1 million, compared to 198.5 million in the prior year period. The increase in pharmacy network claims was primarily due to higher claims activity associated with 1) new clients, 2) a strong flu season and 3) our Medicare Part D program. Mail choice claims processed during the three months ended March 31, 2013, increased approximately 0.6% to 20.5 million, compared to 20.4 million in the prior year period. The increase in the mail choice claim volume was primarily due to increased claims associated with the continuing adoption of our Maintenance Choice offerings.

Revenues in the Retail Pharmacy Segment increased 0.2% in the three months ended March 31, 2013. Same store sales decreased 1.2% when compared to the prior year period, with pharmacy same store sales down 2.3% and front store same store sales up 1.4%. The change in same store sales was primarily driven by new generic drug introductions, a strong flu season, the shift of the Easter holiday from April in 2012 to March in 2013 and the absence of leap day in 2013. Pharmacy same store prescription volumes rose 2.0% when 90-day prescriptions are counted as one prescription. On a 30-day equivalent basis, same store prescription volumes increased 4.7% in the quarter. Pharmacy same store sales were negatively impacted by approximately 925 basis points due to recent generic introductions. The high incidence of flu positively impacted pharmacy same store sales by approximately 90 basis points. Front store same store sales were positively impacted by 65 basis points due to the earlier Easter holiday. The absence of leap day in the three months ended March 31, 2013, had a negative impact on pharmacy same store sales of approximately 70 basis points and front store same store sales of approximately 120 basis points.

The increases in revenue in the Pharmacy Services and Retail Pharmacy segments were offset by an increase in intersegment activity primarily driven by the continued adoption of our Maintenance Choice program.

For the three months ended March 31, 2013, the generic dispensing rate increased approximately 400 basis points in our Pharmacy Services Segment, to 80.5%, and approximately 300 basis points in our Retail Pharmacy Segment, to 81.2%, compared to the prior year period.

Income from Continuing Operations Attributable to CVS Caremark

Income from continuing operations attributable to CVS Caremark for the three months ended March 31, 2013, increased 23.1%, or $179 million, to $956 million, compared with $777 million during the three months ended March 31, 2012. The increase in income from continuing operations was primarily driven by the positive impact from new generics, which significantly improved operating profit in both our Pharmacy Services and Retail Pharmacy segments. Adjusted earnings per share from continuing operations attributable to CVS Caremark (Adjusted EPS) for the three months ended March 31, 2013 and 2012, was $0.83 and $0.65, respectively, an increase of 28.1%. Adjusted EPS excludes $122 million and $118 million of intangible asset amortization related to acquisition activity in the three months ended March 31, 2013 and 2012, respectively. GAAP earnings per diluted share from continuing operations attributable to CVS Caremark for the three months ended March 31, 2013 and 2012, was $0.77 and $0.59, respectively.

President and Chief Executive Officer Larry Merlo, said, "I'm very pleased with our strong first quarter results. As expected, the  influx of new generic drugs was a key driver across the enterprise, resulting in solid gross margin expansion as well as significant growth in operating profit and earnings. In fact, operating profit grew well beyond our expectations across the enterprise, and we delivered EPS that was three cents above the high end of our guidance. This out-performance was driven by stronger-than-expected prescription volumes due in large part to the strong flu season, strong specialty growth, and favorable purchasing and rebate economics."

Mr. Merlo continued, "Furthermore, we generated a substantial amount of free cash this quarter. We remain committed to our disciplined capital allocation strategy, which is enabling us to return significant value to our shareholders through both dividends and share repurchases."

Real Estate Program

During the three months ended March 31, 2013, the Company opened 37 new retail drugstores and closed nine retail drugstores. In addition, the Company relocated 15 retail drugstores. As of March 31, 2013, the Company operated 7,596 locations in 45 states, the District of Columbia, Puerto Rico and Brazil. These locations included 7,531 retail drugstores, 18 onsite pharmacies, 31 retail specialty pharmacy stores, 12 specialty mail order pharmacies and four mail order pharmacies.

Guidance

The Company narrowed its earnings guidance range for the full year 2013 to reflect the solid first quarter performance to date and the outlook for the remainder of the year. The Company currently expects to deliver Adjusted EPS of $3.89 to $4.00 and GAAP diluted earnings per share from continuing operations of $3.64 to $3.75 per share in 2013. The guidance includes the estimated impact on our Medicare Part D business from sequestration. It also includes costs in our Medicare Part D business associated with resolving issues that arose following plan consolidation at the beginning of the year. The Company reconfirmed its 2013 free cash flow guidance of $4.8 billion to $5.1 billion, and its 2013 cash flow from operations guidance of $6.4 billion to $6.6 billion. These 2013 guidance estimates assume the completion of $4.0 billion in share repurchases.

Teleconference and Webcast

The Company will be holding a conference call today for the investment community at 8:30 am (EDT) to discuss its quarterly results. An audio webcast of the call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Caremark website at http://info.cvscaremark.com/investors. This webcast will be archived and available on the website for a one-year period following the conference call.

About the Company

CVS Caremark is dedicated to helping people on their path to better health as the largest integrated pharmacy company in the United States. Through the Company's more than 7,400 CVS/pharmacy® stores; its leading pharmacy benefit manager serving more than 60 million plan members; and its retail health clinic system, the largest in the nation with more than 600 MinuteClinic® locations, it is a market leader in mail order, retail and specialty pharmacy, retail clinics, and Medicare Part D Prescription Drug Plans. As a pharmacy innovation company with an unmatched breath of capabilities, CVS Caremark continually strives to improve health and lower costs by developing new approaches such as its unique Pharmacy Advisor® program that helps people with chronic diseases such as diabetes obtain and stay on their medications. Find more information about how CVS Caremark is reinventing pharmacy for better health at http://info.cvscaremark.com/.

Forward-Looking Statements

This press release contains certain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ materially. For these statements, 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.

 

— Tables Follow —

 

 

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Income

(Unaudited)

 

Three Months Ended

March 31,

In millions, except per share amounts

2013

2012

Net revenues

$

30,763

$

30,798

Cost of revenues

25,181

25,685

Gross profit

5,582

5,113

Operating expenses

3,883

3,709

Operating profit

1,699

1,404

Interest expense, net

126

132

Income before income tax provision

1,573

1,272

Income tax provision

617

496

Income from continuing operations

956

776

Loss from discontinued operations, net of tax

(1)

Net income

956

775

Net loss attributable to noncontrolling interest

1

Net income attributable to CVS Caremark

$

956

$

776

Income from continuing operations attributable to CVS Caremark:

Income from continuing operations

$

956

$

776

Net loss attributable to noncontrolling interest

1

Income from continuing operations attributable to CVS Caremark

$

956

$

777

Basic earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

0.78

$

0.60

Loss from discontinued operations attributable to CVS Caremark

Net income attributable to CVS Caremark

$

0.78

$

0.60

Weighted average basic common shares outstanding

1,232

1,299

Diluted earnings per common share:

Income from continuing operations attributable to CVS Caremark

$

0.77

$

0.59

Loss from discontinued operations attributable to CVS Caremark

Net income attributable to CVS Caremark

$

0.77

$

0.59

Weighted average diluted common shares outstanding

1,241

1,309

Dividends declared per common share

$

0.2250

$

0.1625

 

 

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

 

March 31,

December 31,

In millions, except per share amounts

2013

2012

Assets:

Cash and cash equivalents

$

1,551

$

1,375

Short-term investments

5

5

Accounts receivable, net

6,635

6,473

Inventories

10,592

10,759

Deferred income taxes

604

663

Other current assets

340

577

Total current assets

19,727

19,852

Property and equipment, net

8,556

8,632

Goodwill

26,575

26,395

Intangible assets, net

9,738

9,753

Other assets

1,472

1,280

Total assets

$

66,068

$

65,912

Liabilities:

Accounts payable

$

5,506

$

5,070

Claims and discounts payable

3,854

3,974

Accrued expenses

3,523

4,051

Short-term debt

300

690

Current portion of long-term debt

12

5

Total current liabilities

13,195

13,790

Long-term debt

9,352

9,133

Deferred income taxes

3,774

3,784

Other long-term liabilities

1,538

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;

      1,671 shares issued and 1,228 shares outstanding at

      March 31, 2013 and 1,667 shares issued and 1,231 shares

      outstanding at December 31, 2012

17

 

17

Treasury stock, at cost: 441 shares at March 31, 2013 and

  435 shares at December 31, 2012

(16,625)

(16,270)

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

  December 31, 2012

(31)

(31)

Capital surplus

29,302

29,120

Retained earnings

25,728

25,049

Accumulated other comprehensive loss

(182)

(181)

Total shareholders' equity

38,209

37,704

Total liabilities and shareholders' equity

$

66,068

$

65,912

 

 

 

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

Three Months Ended

March 31,

In millions

2013

2012

Cash flows from operating activities:

Cash receipts from customers

$

28,018

$

29,207

Cash paid for inventory and prescriptions dispensed by retail

  network pharmacies

(22,270)

(22,515)

Cash paid to other suppliers and employees

(3,889)

(3,751)

Interest received

1

1

Interest paid

(104)

(128)

Income taxes paid

(116)

(28)

Net cash provided by operating activities

1,640

2,786

Cash flows from investing activities:

Purchases of property and equipment

(318)

(376)

Proceeds from sale of property and equipment

5

Acquisitions (net of cash acquired) and other investments

(254)

(74)

Proceeds from sale of subsidiary

7

Net cash used in investing activities

(567)

(443)

Cash flows from financing activities:

Decrease in short-term debt

(390)

(750)

Repayments of long-term debt

(52)

Dividends paid

(277)

(211)

Proceeds from exercise of stock options

150

278

Excess tax benefits from stock-based compensation

13

Repurchase of common stock

(393)

(810)

Net cash used in financing activities

(897)

(1,545)

Net increase in cash and cash equivalents

176

798

Cash and cash equivalents at the beginning of the year

1,375

1,413

Cash and cash equivalents at the end of the year

$

1,551

$

2,211

Reconciliation of net income to net cash provided by operating

 activities:

Net income

$

956

$

775

Adjustments required to reconcile net income to net cash

 provided by operating activities:

Depreciation and amortization

502

423

Stock-based compensation

34

36

Deferred income taxes and other non-cash items

66

21

Change in operating assets and liabilities, net of effects 

  of acquisitions:

Accounts receivable, net

(113)

(70)

Inventories

193

(776)

Other current assets

238

286

Other assets

(135)

(189)

Accounts payable and claims and discounts payable

(230)

1,044

Accrued expenses

105

1,250)

Other long-term liabilities

24

(14)

Net cash provided by operating activities

$

1,640

$

2,786

 

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

March 31,

In millions, except per share amounts

2013

2012

Income before income tax provision

$

1,573

$

1,272

Amortization

122

118

Adjusted income before income tax provision

1,695

1,390

Adjusted income tax provision(1) 

664

542

Adjusted income from continuing operations

1,031

848

Net loss attributable to noncontrolling interest

1

Adjusted income from continuing operations attributable to CVS Caremark

$

1,031

$

849

Weighted average diluted common shares outstanding

1,241

1,309

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

0.83

$

0.65

 

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

Three Months Ended

March 31,

In millions

2013

2012

Net cash provided by operating activities

$

1,640

$

2,786

Subtract: Additions to property and equipment

(318)

(376)

Free cash flow

$

1,322

$

2,410

 

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

March 31, 2013:

Net revenues

$

18,311

$

16,051

$

$

(3,599)

$

30,763

Gross profit

768

4,952

(138)

5,582

Operating profit (loss)

499

1,537

(199)

(138)

1,699

March 31, 2012

Net revenues

18,300

16,024

(3,526)

30,798

Gross profit

616

4,572

(75)

5,113

Operating profit (loss)

349

1,298

(168)

(75)

1,404

 

(1)         Net revenues of the Pharmacy Services Segment include approximately $2.2 billion and $2.3 billion of retail co-payments for the three months ended March 31, 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 $939 million and $798 million for the three months ended March 31, 2013 and 2012, respectively, gross profit and operating profit of $138 million and $75 million for the three months ended March 31, 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

March 31,

In millions

2013

2012

Net revenues

$

18,311

$

18,300

Gross profit

768

616

Gross profit % of net revenues

4.2%

3.4%

Operating expenses

269

267

Operating expense % of net revenues

1.5%

1.5%

Operating profit

499

349

Operating profit % of net revenues

2.7%

1.9%

Net revenues(1):

Mail choice(2)

$

5,869

$

5,666

Pharmacy network(3)

12,392

12,584

Other

50

50

Pharmacy claims processed(1):

Total

227.6

218.9

Mail choice(2)

20.5

20.4

Pharmacy network(3)

207.1

198.5

Generic dispensing rate(1):

Total

80.5%

76.5%

Mail choice(2)

75.4%

69.0%

Pharmacy network(3)

81.0%

77.3%

Mail choice penetration rate

22.1%

22.8%

 

(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 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

March 31,

In millions

2013

2012

Net revenues

$

16,051

$

16,024

Gross profit

4,952

4,572

Gross profit % of net revenues

30.9%

28.5%

Operating expenses

3,415

3,275

Operating expense % of net revenues

21.3%

20.4%

Operating profit

1,537

1,298

Operating profit % of net revenues

9.6%

8.1%

Retail prescriptions filled (90 Day = 1Rx)

184.7

179.5

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

221.5

210.0

Net revenue increase:

Total

0.2%

9.9%

Pharmacy

(1.1)%

11.1%

Front store

3.1%

7.1%

Total prescription volume (90 Day = 1 Rx)

2.9%

8.4%

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

5.5%

10.4%

Same store increase (decrease):

Total sales

(1.2)%

8.4%

Pharmacy sales

(2.3)%

9.8%

Front store sales

1.4%

5.3%

Prescription volume (90 Day = 1 Rx)

2.0%

7.2%

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

4.7%

9.2%

Generic dispensing rate

81.2%

78.1%

Pharmacy % of total revenues

69.0%

69.9%

Third party % of pharmacy revenue

97.8%

97.7%

 

(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-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, 2013

Income before income tax provision

$

7,257

$

7,435

Amortization

495

495

Adjusted income before income tax provision

7,752

7,930

Adjusted income tax provision

3,007

3,076

Adjusted income from continuing operations

4,745

4,854

Net loss attributable to noncontrolling interest

Adjusted income from continuing operations attributable to CVS Caremark

$

4,745

$

4,854

Weighted average diluted common shares outstanding

1,221

1,215

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

3.89

$

4.00

 

 

Three Months Ending

June 30, 2013

Income before income tax provision

$

1,780

$

1,843

Amortization

123

124

Adjusted income before income tax provision

1,903

1,967

Adjusted income tax provision

746

771

Adjusted income from continuing operations

1,157

1,196

Net loss attributable to noncontrolling interest

Adjusted income from continuing operations attributable to CVS Caremark

$

1,157

$

1,196

Weighted average diluted common shares outstanding

1,229

1,227

Adjusted earnings per share from continuing operations attributable to CVS Caremark

$

0.94

$

0.97

 

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-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, 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

 

SOURCE CVS Caremark Corporation



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http://info.cvscaremark.com/