UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended April 3, 2004
Commission File Number 001-01011
CVS CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 05-0494040 | |
| (State of Incorporation) | (I.R.S. Employer Identification Number) |
One CVS Drive, Woonsocket, Rhode Island 02895
(Address of principal executive offices)
Telephone: (401) 765-1500
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Securities Exchange Act of 1934). Yes x No ¨
Common Stock, $0.01 par value, issued and outstanding at May 8, 2004:
397,302,000 shares
1
| Part I |
Item 1 |
CVS Corporation
Consolidated Condensed Statements of Operations
(Unaudited)
| 13 Weeks Ended | ||||||
| In millions, except per share amounts |
April 3, 2004 |
March 29, 2003 | ||||
| Net sales |
$ | 6,818.6 | $ | 6,312.8 | ||
| Cost of goods sold, buying and warehousing costs |
5,046.9 | 4,707.3 | ||||
| Gross margin |
1,771.7 | 1,605.5 | ||||
| Selling, general and administrative expenses |
1,272.7 | 1,191.6 | ||||
| Depreciation and amortization |
93.4 | 82.6 | ||||
| Total operating expenses |
1,366.1 | 1,274.2 | ||||
| Operating profit |
405.6 | 331.3 | ||||
| Interest expense, net |
7.8 | 12.6 | ||||
| Earnings before income tax provision |
397.8 | 318.7 | ||||
| Income tax provision |
153.2 | 122.4 | ||||
| Net earnings |
244.6 | 196.3 | ||||
| Preference dividends, net of income tax benefit |
3.6 | 3.6 | ||||
| Net earnings available to common shareholders |
$ | 241.0 | $ | 192.7 | ||
| Basic earnings per common share: |
||||||
| Net earnings |
$ | 0.61 | $ | 0.49 | ||
| Weighted average basic common shares outstanding |
396.3 | 393.4 | ||||
| Diluted earnings per common share: |
||||||
| Net earnings |
$ | 0.59 | $ | 0.48 | ||
| Weighted average diluted common shares outstanding |
412.2 | 405.7 | ||||
| Dividends declared per common share |
$ | 0.06625 | $ | 0.05750 | ||
See accompanying notes to consolidated condensed financial statements.
2
| Part I |
Item 1 |
CVS Corporation
Consolidated Condensed Balance Sheets
(Unaudited)
| In millions, except share and per share amounts |
April 3, 2004 |
January 3, 2004 |
||||||
| Assets: |
||||||||
| Cash and cash equivalents |
$ | 651.5 | $ | 843.2 | ||||
| Accounts receivable, net |
1,287.9 | 1,349.6 | ||||||
| Inventories |
3,923.4 | 4,016.5 | ||||||
| Deferred income taxes |
278.2 | 252.1 | ||||||
| Other current assets |
65.2 | 35.1 | ||||||
| Total current assets |
6,206.2 | 6,496.5 | ||||||
| Property and equipment, net |
2,659.6 | 2,542.1 | ||||||
| Goodwill |
889.0 | 889.0 | ||||||
| Intangible assets, net |
400.9 | 403.7 | ||||||
| Other assets |
209.1 | 211.8 | ||||||
| Total assets |
$ | 10,364.8 | $ | 10,543.1 | ||||
| Liabilities: |
||||||||
| Accounts payable |
$ | 1,635.1 | $ | 1,666.4 | ||||
| Accrued expenses |
1,397.3 | 1,499.6 | ||||||
| Short-term debt |
— | — | ||||||
| Current portion of long-term debt |
23.2 | 323.2 | ||||||
| Total current liabilities |
3,055.6 | 3,489.2 | ||||||
| Long-term debt |
752.8 | 753.1 | ||||||
| Deferred income taxes |
41.6 | 41.6 | ||||||
| Other long-term liabilities |
234.1 | 237.4 | ||||||
| Shareholders’ equity: |
||||||||
| Preference stock, series one ESOP convertible, par value $1.00: authorized 50,000,000 shares; issued and outstanding 4,426,000 shares at April 3, 2004 and 4,541,000 shares at January 3, 2004 |
236.6 | 242.7 | ||||||
| Common stock, par value $0.01: authorized 1,000,000,000 shares; issued 411,005,000 shares at April 3, 2004 and 410,187,000 shares at January 3, 2004 |
4.1 | 4.1 | ||||||
| Treasury stock, at cost: 14,061,000 shares at April 3, 2004 and 14,803,000 shares at January 3, 2004 |
(407.3 | ) | (428.6 | ) | ||||
| Guaranteed ESOP obligation |
(163.2 | ) | (163.2 | ) | ||||
| Capital surplus |
1,582.6 | 1,557.2 | ||||||
| Retained earnings |
5,064.8 | 4,846.5 | ||||||
| Accumulated other comprehensive loss |
(36.9 | ) | (36.9 | ) | ||||
| Total shareholders’ equity |
6,280.7 | 6,021.8 | ||||||
| Total liabilities and shareholders’ equity |
$ | 10,364.8 | $ | 10,543.1 | ||||
See accompanying notes to consolidated condensed financial statements.
3
| Part I | Item 1 |
CVS Corporation
Consolidated Condensed Statements of Cash Flows
(Unaudited)
| 13 Weeks Ended |
||||||||
| In millions |
April 3, 2004 |
March 29, 2003 |
||||||
| Cash flows from operating activities: |
||||||||
| Net earnings |
$ | 244.6 | $ | 196.3 | ||||
| Adjustments required to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
93.4 | 82.6 | ||||||
| Deferred income taxes and other noncash items |
(22.1 | ) | 5.1 | |||||
| Change in operating assets and liabilities, providing/(requiring) cash, net of effects from acquisitions: |
||||||||
| Accounts receivable, net |
61.7 | (67.8 | ) | |||||
| Inventories |
93.0 | 146.2 | ||||||
| Other current assets |
(30.1 | ) | (2.3 | ) | ||||
| Other assets |
7.2 | 2.0 | ||||||
| Accounts payable |
(31.4 | ) | (89.1 | ) | ||||
| Accrued expenses |
(91.5 | ) | (88.7 | ) | ||||
| Other long-term liabilities |
(2.5 | ) | (0.7 | ) | ||||
| Net cash provided by operating activities |
322.3 | 183.6 | ||||||
| Cash flows from investing activities: |
||||||||
| Additions to property and equipment |
(195.7 | ) | (176.0 | ) | ||||
| Proceeds from sale-leaseback transactions |
1.7 | — | ||||||
| Acquisitions (net of cash acquired) and investments |
(21.9 | ) | (52.1 | ) | ||||
| Proceeds from sale or disposal of assets |
4.6 | 7.5 | ||||||
| Net cash used in investing activities |
(211.3 | ) | (220.6 | ) | ||||
| Cash flow from financing activities: |
||||||||
| Reductions in short-term debt |
— | (4.8 | ) | |||||
| Dividends paid |
(26.2 | ) | (22.6 | ) | ||||
| Proceeds from exercise of stock options |
23.7 | 12.2 | ||||||
| Reductions in long-term debt |
(300.2 | ) | (0.1 | ) | ||||
| Net cash used in financing activities |
(302.7 | ) | (15.3 | ) | ||||
| Net decrease in cash and cash equivalents |
(191.7 | ) | (52.3 | ) | ||||
| Cash and cash equivalents at beginning of period |
843.2 | 700.4 | ||||||
| Cash and cash equivalents at end of period |
$ | 651.5 | $ | 648.1 | ||||
See accompanying notes to consolidated condensed financial statements.
4
| Part I | Item 1 |
CVS Corporation
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 1
The accompanying consolidated condensed financial statements of CVS Corporation and its wholly owned subsidiaries (“CVS” or the “Company”) have been prepared without audit, in accordance with the rules and regulations of the Securities and Exchange Commission. In accordance with such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. These consolidated condensed financial statements should be read in conjunction with the consolidated audited financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended January 3, 2004.
In the opinion of management, the accompanying consolidated condensed financial statements include all adjustments (consisting only of normal recurring adjustments), which are necessary to present a fair statement of the Company’s results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including certain holidays and other seasonal influences, net earnings for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of earnings for the full fiscal year.
Note 2
The Company accounts for its stock-based compensation plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations. As such, no stock-based employee compensation cost is reflected in net earnings for options granted under those plans since they had an exercise price equal to the market value of the underlying common stock and the number of shares were fixed on the date of grant. The following table summarizes the effect on net earnings and earnings per common share if the Company had applied the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation,” to stock-based employee compensation for the respective periods:
| 13 Weeks Ended | ||||||
| In millions, except per share amounts |
April 3, 2004 |
March 29, 2003 | ||||
| Net earnings, as reported |
$ | 244.6 | $ | 196.3 | ||
| Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects(1) |
0.4 | 0.5 | ||||
| Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effects |
11.2 | 13.7 | ||||
| Pro forma net earnings |
$ | 233.8 | $ | 183.1 | ||
| Basic EPS: As reported |
$ | 0.61 | $ | 0.49 | ||
| Pro forma |
0.58 | 0.46 | ||||
| Diluted EPS: As reported |
$ | 0.59 | $ | 0.48 | ||
| Pro forma |
0.57 | 0.45 | ||||
| (1) | Amounts represent the after-tax compensation costs for restricted stock grants. |
5
| Part I | Item 1 |
CVS Corporation
Notes to Consolidated Condensed Financial Statements
(Unaudited)
Note 3
The Company operates two business segments, Retail Pharmacy and Pharmacy Benefit Management (“PBM”). The Company’s business segments are operating units that offer different products and services, and require distinct technology and marketing strategies.
As of April 3, 2004, the Retail Pharmacy segment included 4,140 retail drugstores and the Company’s online retail website, CVS.com®. The retail drugstores, which operate under the CVS® or CVS/pharmacy® name, are located in 27 states and the District of Columbia. The Retail Pharmacy segment is the Company’s only reportable segment.
The PBM segment, which operates under the PharmaCare Management Services name, provides a full range of prescription benefit management services to managed care and other organizations. These services include plan design and administration, formulary management, mail order pharmacy services, claims processing and generic substitution. The PBM segment also includes the Company’s specialty pharmacy business, which focuses on supporting individuals that require complex and expensive drug therapies. The PBM segment operates 47 retail and specialty pharmacies, located in 19 states and the District of Columbia. Following is a reconciliation of the Company’s business segments to the consolidated condensed financial statements as of and for the respective periods:
| In millions |
Retail Segment |
PBM Segment |
Consolidated Totals | ||||||
| 13 weeks ended: |
|||||||||
| April 3, 2004: |
|||||||||
| Net sales |
$ | 6,479.9 | $ | 338.7 | $ | 6,818.6 | |||
| Operating profit |
380.5 | 25.1 | 405.6 | ||||||
| March 29, 2003: |
|||||||||
| Net sales |
$ | 5,977.4 | $ | 335.4 | $ | 6,312.8 | |||
| Operating profit |
306.7 | 24.6 | 331.3 | ||||||
| Total assets: |
|||||||||
| April 3, 2004 |
$ | 9,832.5 | $ | 532.3 | $ | 10,364.8 | |||
| January 3, 2004 |
</ | ||||||||