CVS Caremark Reports Results for First Quarter 2009

Tuesday, May 5, 2009

First Quarter Year-Over-Year Highlights:

  • Adjusted EPS from continuing operations of $0.55 [excluding amortization]
  • GAAP diluted EPS from continuing operations of $0.51
  • Net revenues of $23.4 billion, up 9.7%
  • PBM network revenues climbed 6.8% while mail service revenues jumped 8.4%
  • Retail same store sales increased 3.3%
  • Achieved Best-in-Class Generic Dispensing Rate

WOONSOCKET, R.I.--(BUSINESS WIRE)--May. 5, 2009-- CVS Caremark Corporation (NYSE: CVS), today announced revenues, operating profit, and earnings for the first quarter ended March 31, 2009.

Revenues:

Net revenues for the first quarter of 2009, increased $2.1 billion to $23.4 billion, up from $21.3 billion during the first quarter of 2008. Net revenues were negatively impacted by one less reporting day during the first quarter of 2009 compared to the first quarter of 2008. Adjusting for the impact of one less reporting day, net revenues would have increased approximately $343 million, or 11.3%.

Revenues in the pharmacy services segment increased 7.2% to $11.5 billion in the first quarter of 2009. Adjusting the growth rate for the impact of new generics, net revenues would have grown 11.4% in the pharmacy services segment. Retail network claims processed during the first quarter of 2009 increased 4.4% to 147.7 million, compared to 141.5 million in the prior year period. This increase was primarily due to the addition of RxAmerica® claims and claims that were filled at retail pharmacies under the Maintenance Choice™ program. This was offset by a reduction in claims due to the termination of two large health plan clients effective January 1, 2009 and having one less day in the first quarter of 2009 compared to the first quarter of 2008. Mail service claims processed during the first quarter of 2009 increased 3.0% to 15.7 million compared to 15.3 million in the prior year period primarily as a result of net new client starts offset by a shift of participants towards the Company’s Maintenance Choice program.

Revenues in the retail pharmacy segment increased 13.9% to $13.5 billion in the first quarter of 2009. Same store sales (sales from stores open more than one year based on a comparable 90-day reporting period) increased 3.3% over the prior year period. Pharmacy same store sales rose 4.6% and were negatively impacted by approximately 310 basis points due to recent generic introductions, while front-end same store sales increased 0.7%. Same store sales for the first quarter of 2009 were negatively impacted by a later Easter (April 12th this year versus March 23rd last year), which shifted more holiday sales into the second quarter of 2009. The Company estimates the Easter shift had a negative impact of approximately 115 basis points on front-end same store sales for the first quarter of 2009 and approximately 40 basis points on total same store sales.

The generic dispensing rate in our PBM segment increased 360 basis points to a best-in-class 67.7% in the first quarter. At the same time, the generic dispensing rate in our retail segment increased 260 basis points to 69.2%.

Earnings from continuing operations:

Earnings from continuing operations for the first quarter ended March 31, 2009, decreased slightly to $743.5 million, compared with earnings from continuing operations of $748.5 million during the first quarter of 2008. Adjusted earnings per share from continuing operations, which excludes $107.5 million of intangible asset amortization related to acquisition activity, for the first quarter were $0.55, compared with $0.55 in the first quarter of 2008. GAAP earnings per diluted share from continuing operations for the first quarter of 2009 were $0.51, compared with $0.51 in the first quarter of 2008.

The Company’s reported results include the first full quarter’s impact of the Longs business, which has a lower operating margin, as well as integration expenses incurred related to the Longs acquisition. As previously reported, the first quarter reflects the short-term margin investments in key PBM contracts that should help drive long-term performance. Additionally, reported expenses include the impact of the elimination of the joint venture with Universal American, the income from which was historically recorded as an offset to expenses, as well as an increase in litigation reserves in the PBM related to pre-merger matters.

Tom Ryan, Chairman, President, and Chief Executive Officer, said, “I’m very pleased with our results in the first quarter, which are at the top of our expectations. Our performance reflects healthy underlying growth in our business, with solid revenue increases and share gains across the enterprise. Our “Mail Choice” prescription volumes, including mail order and Maintenance Choice, increased a robust 6.6% in the quarter; specialty mail revenues climbed 17%; and we posted a best-in-class generic dispensing rate. The Longs integration is right on track and the stores are performing well, even with the difficult California economy. Our retail same store sales continued to lead the industry, with strong results in both the pharmacy and the front store.”

Loss from discontinued operations:

In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. The Company’s loss from discontinued operations for the first quarter of 2009 includes $5.1 million ($8.3 million, net of a $3.2 million income tax benefit) of lease-related costs (i.e., interest accretion and legal fees).

Real estate program:

For the quarter, CVS Caremark opened 39 new retail pharmacy stores, closed 50 retail pharmacy stores, 5 specialty pharmacies and one mail order facility. In addition, the Company relocated 53 retail pharmacy stores. As of March 31, 2009, the Company operated 6,912 retail pharmacy stores, 52 specialty pharmacy stores, 20 specialty mail order pharmacies and 6 mail order pharmacies in 43 states, the District of Columbia and Puerto Rico.

Fiscal year change:

On December 23, 2008, the Board of Directors of the Company approved a change in the Company’s fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect the Company’s position in the health care, rather than retail, industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. Please note that the first quarter of 2009 and 2008 include 90 days and 91 days, respectively.

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 conference call will be broadcast simultaneously for all interested parties through the Investor Relations section of the CVS Caremark Web site at cvscaremark.com/investors. This webcast will be archived and available on the Web site for a one-month period following the conference call.

About the Company:

CVS Caremark is the largest provider of prescriptions in the nation. The Company fills or manages more than 1 billion prescriptions annually. Through its unmatched breadth of service offerings, CVS Caremark is transforming the delivery of health care services in the U.S. The Company is uniquely positioned to effectively manage costs and improve health care outcomes through its more than 6,900 CVS/pharmacy and Longs Drugs stores; its Caremark Pharmacy Services division (pharmacy benefit management, mail order and specialty pharmacy); its retail-based health clinic subsidiary, MinuteClinic; and its online pharmacy, CVS.com. General information about CVS Caremark is available through the Investors section of the Company’s Web site, at cvscaremark.com, as well as through the Newsroom section of the Company’s Web site, at cvscaremark.com/newsroom.

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 Part I, Item 1A – Risk Factors in our Annual Report on Form 10-K for the year ended December 31, 2008.

CVS CAREMARK CORPORATION
Consolidated Condensed Statements of Operations (Unaudited)

Consolidated Condensed Statements of Operations (Unaudited)

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the first quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

(2) In connection with certain business dispositions completed between 1991 and 1997, the Company continues to guarantee store lease obligations for a number of former subsidiaries, including Linens ‘n Things. On May 2, 2008, Linens Holding Co. and certain affiliates, which operate Linens ‘n Things, filed voluntary petitions under Chapter 11 of the United States Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. Pursuant to the court order entered on October 16, 2008, Linens Holding Co. is in the process of liquidating the entire Linens ‘n Things retail chain. The Company’s loss from discontinued operations for the first quarter of 2009 includes $5.1 million ($8.3 million, net of a $3.2 million income tax benefit) of lease-related costs (i.e., interest accretion and legal fees).

(3) Diluted earnings per common share is computed by dividing (i) net earnings, after accounting for the difference between the dividends on the ESOP preference stock and common stock and after making adjustments for the incentive compensation plans by (ii) Basic shares plus the additional shares that would be issued assuming that all dilutive stock awards are exercised and the ESOP preference stock is converted into common stock. The dilutive earnings adjustment related to preference dividends was $3.5 million for the first quarter of 2008.

CVS CAREMARK CORPORATION
Consolidated Condensed Balance Sheets (Unaudited)

Consolidated Condensed Balance Sheets (Unaudited)

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the first quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

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

Consolidated Condensed Statements of Cash Flows (Unaudited)

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

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 earnings from continuing operations before income taxes plus amortization, less income tax provision and dilutive earnings adjustment, divided by the weighted average diluted common shares outstanding.

Following is a reconciliation of earnings from continuing operations before income tax provision to adjusted earnings per share:

Reconciliation of earnings from continuing operations

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

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).

Following is a reconciliation of net cash provided by operating activities to free cash flow:

Reconciliation of net cash

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

Supplemental Unaudited Information

The Company evaluates segment performance based on net revenue, gross profit and operating profit before the effect of discontinued operations and certain intersegment activities and charges.

Following is a reconciliation of the Company’s business segments to the accompanying consolidated financial statements:

Reconciliation of the Company’s business segments

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

(2) Net revenues of the Pharmacy Services Segment include approximately $1,667.9 million and $1,664.9 million of Retail Co-payments for the first quarter of 2009 and 2008, respectively.

(3) Intersegment eliminations relate to intersegment revenues and accounts receivables that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the revenue on a standalone basis.

Supplemental Information

Preliminary and Unaudited

Pharmacy Services Segment

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

Pharmacy Services Segment’s performance

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

(2) Excluding the impact of RxAmerica and Maintenance Choice™, the mail order penetration rate would have been 25.8% for the first quarter of 2009, compared to 23.1% in the first quarter of 2008.

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.

Following is a reconciliation of operating profit to EBITDA:

Reconciliation of operating profit to EBITDA

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry. As you review our operating performance, please consider that the fiscal quarter ended March 31, 2009 and March 29, 2008 include 90 days and 91 days, respectively.

(2) Excluding the impact of RxAmerica, Maintenance Choice™, and an increase in litigation reserves, EBITDA per adjusted claim would have been $3.46 for the first quarter of 2009, compared to $3.35 in the first quarter of 2008.

(3) The EBITDA per adjusted claim number, which was reported in the Company’s first quarter 2008 earnings release, was $3.41 as a result of adding back merger and integration costs related to the Caremark merger of $10.4 million.

Supplemental Information

Preliminary and Unaudited

Retail Pharmacy Segment

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

Retail Pharmacy Segment’s Performance

(1) On December 23, 2008, our Board of Directors approved a change in our fiscal year end from the Saturday nearest December 31 of each year to December 31 of each year to better reflect our position in the health care, rather than the retail, industry.

(2) Same store sales increase excludes the Longs Drug Stores, which were acquired effective October 20, 2008. These stores will be included in same store sales beginning in November 2009.

(3) Same store sales increase is based on sales from stores open more than one year based on a comparable 90-day reporting period.

Investor Contact:

Nancy Christal, 914-722-4704
Senior Vice President
Investor Relations

or

Media Contact:

Eileen Howard Dunn, 401-770-4561
Senior Vice President
Corporate Communications &
Community Relations

Source: CVS Caremark Corporation