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 | Commission File Number | |
| October 2, 2004 | 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 November 4, 2004:
400,065,000 shares
| Page | ||||||
| Part I | ||||||
| Item 1. | ||||||
| 2 | ||||||
| Consolidated Condensed Balance Sheets (Unaudited) - As of October 2, 2004 and January 3, 2004 |
3 | |||||
| 4 | ||||||
| 5 | ||||||
| 13 | ||||||
| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operation |
14 | ||||
| Item 3. | 23 | |||||
| Item 4. | 24 | |||||
| Part II | ||||||
| Item 6. | 25 | |||||
| Signature Page | 25 | |||||
1
| Part I | Item 1 |
Consolidated Condensed Statements of Operations
(Unaudited – See accompanying review report of KPMG LLP)
| 13 Weeks Ended |
39 Weeks Ended | |||||||||||
| In millions, except per share amounts |
October 2, 2004 |
September 27, 2003 |
October 2, 2004 |
September 27, 2003 | ||||||||
| Net sales |
$ | 7,909.4 | $ | 6,378.1 | $ | 21,671.1 | $ | 19,135.8 | ||||
| Cost of goods sold, buying and warehousing costs |
5,838.6 | 4,719.5 | 16,002.1 | 14,237.9 | ||||||||
| Gross margin |
2,070.8 | 1,658.6 | 5,669.0 | 4,897.9 | ||||||||
| Selling, general and administrative expenses |
1,636.2 | 1,256.1 | 4,252.1 | 3,659.1 | ||||||||
| Depreciation and amortization |
118.6 | 85.8 | 308.1 | 253.8 | ||||||||
| Total operating expenses |
1,754.8 | 1,341.9 | 4,560.2 | 3,912.9 | ||||||||
| Operating profit |
316.0 | 316.7 | 1,108.8 | 985.0 | ||||||||
| Interest expense, net |
15.8 | 11.8 | 29.6 | 37.1 | ||||||||
| Earnings before income tax provision |
300.2 | 304.9 | 1,079.2 | 947.9 | ||||||||
| Income tax provision |
115.6 | 117.1 | 415.5 | 364.0 | ||||||||
| Net earnings |
184.6 | 187.8 | 663.7 | 583.9 | ||||||||
| Preference dividends, net of income tax benefit |
3.6 | 3.7 | 10.9 | 11.0 | ||||||||
| Net earnings available to common shareholders |
$ | 181.0 | $ | 184.1 | $ | 652.8 | $ | 572.9 | ||||
| Basic earnings per common share: |
||||||||||||
| Net earnings |
$ | 0.45 | $ | 0.47 | $ | 1.64 | $ | 1.45 | ||||
| Weighted average basic common shares outstanding |
399.6 | 394.8 | 398.0 | 394.1 | ||||||||
| Diluted earnings per common share: |
||||||||||||
| Net earnings |
$ | 0.44 | $ | 0.46 | $ | 1.59 | $ | 1.42 | ||||
| Weighted average diluted common shares outstanding |
416.5 | 408.3 | 414.6 | 407.0 | ||||||||
| Dividends declared per common share |
$ | 0.06625 | $ | 0.0575 | $ | 0.19875 | $ | 0.1725 | ||||
See accompanying notes to consolidated condensed financial statements.
2
| Part I | Item 1 |
Consolidated Condensed Balance Sheets
(Unaudited – See accompanying review report of KPMG LLP)
| In millions, except share and per share amounts |
October 2, 2004 |
January 3, 2004 |
||||||
| Assets: |
||||||||
| Cash and cash equivalents |
$ | 354.4 | $ | 843.2 | ||||
| Accounts receivable, net |
1,578.9 | 1,349.6 | ||||||
| Inventories |
5,412.4 | 4,016.5 | ||||||
| Deferred income taxes |
246.3 | 252.1 | ||||||
| Other current assets |
105.7 | 35.1 | ||||||
| Total current assets |
7,697.7 | 6,496.5 | ||||||
| Property and equipment, net |
3,503.0 | 2,542.1 | ||||||
| Goodwill |
1,868.1 | 889.0 | ||||||
| Intangible assets, net |
876.5 | 403.7 | ||||||
| Deferred income taxes |
176.5 | — | ||||||
| Other assets |
223.7 | 211.8 | ||||||
| Total assets |
$ | 14,345.5 | $ | 10,543.1 | ||||
| Liabilities: |
||||||||
| Accounts payable |
$ | 2,309.9 | $ | 1,666.4 | ||||
| Accrued expenses |
1,561.3 | 1,499.6 | ||||||
| Short-term debt |
956.5 | — | ||||||
| Current portion of long-term debt |
23.3 | 323.2 | ||||||
| Total current liabilities |
4,851.0 | 3,489.2 | ||||||
| Long-term debt |
1,952.3 | 753.1 | ||||||
| Deferred income taxes |
— | 41.6 | ||||||
| Other long-term liabilities |
828.1 | 237.4 | ||||||
| Shareholders’ equity: |
||||||||
| Preference stock, series one ESOP convertible, par value $1.00: authorized 50,000,000 shares; issued and outstanding 4,379,000 shares at October 2, 2004 and 4,541,000 shares at January 3, 2004 |
234.0 | 242.7 | ||||||
| Common stock, par value $0.01: authorized 1,000,000,000 shares; issued 413,436,000 shares at October 2, 2004 and 410,187,000 shares at January 3, 2004 |
4.1 | 4.1 | ||||||
| Treasury stock, at cost: 13,560,000 shares at October 2, 2004 and 14,803,000 shares at January 3, 2004 |
(392.9 | ) | (428.6 | ) | ||||
| Guaranteed ESOP obligation |
(163.2 | ) | (163.2 | ) | ||||
| Capital surplus |
1,658.3 | 1,557.2 | ||||||
| Retained earnings |
5,431.2 | 4,846.5 | ||||||
| Accumulated other comprehensive loss |
(57.4 | ) | (36.9 | ) | ||||
| Total shareholders’ equity |
6,714.1 | 6,021.8 | ||||||
| Total liabilities and shareholders’ equity |
$ | 14,345.5 | $ | 10,543.1 | ||||
See accompanying notes to consolidated condensed financial statements.
3
| Part I | Item 1 |
Consolidated Condensed Statements of Cash Flows
(Unaudited – See accompanying review report of KPMG LLP)
| 39 Weeks Ended |
||||||||
| In millions |
October 2, 2004 |
September 27, 2003 |
||||||
| Cash flows from operating activities: |
||||||||
| Net earnings |
$ | 663.7 | $ | 583.9 | ||||
| Adjustments required to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
308.1 | 253.8 | ||||||
| Deferred income taxes and other noncash items |
(40.2 | ) | 30.4 | |||||
| Change in operating assets and liabilities, providing/(requiring) cash, net of effects from acquisitions: |
||||||||
| Accounts receivable, net |
125.4 | (41.7 | ) | |||||
| Inventories |
(432.2 | ) | (5.5 | ) | ||||
| Other current assets |
(42.0 | ) | 1.4 | |||||
| Other assets |
1.3 | (11.1 | ) | |||||
| Accounts payable |
159.2 | (8.3 | ) | |||||
| Accrued expenses |
(148.5 | ) | (35.7 | ) | ||||
| Other long-term liabilities |
123.8 | (10.5 | ) | |||||
| Net cash provided by operating activities |
718.6 | 756.7 | ||||||
| Cash flows from investing activities: |
||||||||
| Additions to property and equipment |
(812.1 | ) | (760.2 | ) | ||||
| Proceeds from sale-leaseback transactions |
52.0 | 155.2 | ||||||
| Acquisitions (net of cash acquired) and investments |
(2,307.0 | ) | (87.7 | ) | ||||
| Cash outflow from hedging activities |
(32.8 | ) | — | |||||
| Proceeds from sale or disposal of assets |
14.7 | 7.8 | ||||||
| Net cash used in investing activities |
(3,085.2 | ) | (684.9 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Additions to (reductions in) short-term debt |
956.5 | (4.8 | ) | |||||
| Dividends paid |
(79.0 | ) | (68.0 | ) | ||||
| Additions to long-term debt |
1,200.0 | — | ||||||
| Reductions in long-term debt |
(300.7 | ) | (0.5 | ) | ||||
| Proceeds from exercise of stock options |
101.0 | 28.4 | ||||||
| Net cash provided by (used in) financing activities |
1,877.8 | (44.9 | ) | |||||
| Net (decrease) increase in cash and cash equivalents |
(488.8 | ) | 26.9 | |||||
| Cash and cash equivalents at beginning of period |
843.2 | 700.4 | ||||||
| Cash and cash equivalents at end of period |
$ | 354.4 | $ | 727.3 | ||||
See accompanying notes to consolidated condensed financial statements.
4
| Part I | Item 1 |
Notes to Consolidated Condensed Financial Statements
(Unaudited – See accompanying review report of KPMG LLP)
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 |
39 weeks ended | |||||||||||
| In millions, except per share amount |
October 2, 2004 |
September 27, 2003 |
October 2, 2004 |
September 27, 2003 | ||||||||
| Net earnings, as reported |
$ | 184.6 | $ | 187.8 | $ | 663.7 | $ | 583.9 | ||||
| Add: Stock-based employee compensation expense included in reported net earnings, net of related tax effects (1) |
0.3 | 0.6 | 1.2 | 1.6 | ||||||||