CVS's Q1 earnings rose 18.3% year-over-year to US$1.1B as revenues increased 6.3% to US$32.7B, same-store sales grew 1.4%; company confirms full-year guidance

WOONSOCKET, Rhode Island , May 2, 2014 (press release) – CVS Caremark Corporation (CVS) today announced operating results for the three months ended March 31, 2014.

First Quarter Year-over-year Highlights:

  • Operating profit increased 19.5% to approximately $2.0 billion
  • Adjusted EPS increased 22.5% to $1.02, while GAAP diluted EPS from continuing operations increased 23.3% to $0.95
  • Retail Pharmacy Segment same store prescription volumes increased 2.1% on a 30-day equivalent basis
  • Retail Pharmacy Segment same store sales increased 1.4%
  • Generated free cash flow of $1.8 billion; cash flow from operations of $2.2 billion

2014 Guidance Confirmed:

  • Confirmed full-year Adjusted EPS range of $4.36 to $4.50 and GAAP diluted EPS from continuing operations range to $4.09 to $4.23
  • Provided second quarter Adjusted EPS guidance of $1.08 to $1.11 and GAAP diluted EPS from continuing operations guidance of $1.01 to $1.04
  • Confirmed full year free cash flow at $5.5 to $5.8 billion; cash flow from operations at $7.0 to $7.3 billion

Revenues

Net revenues for the three months ended March 31, 2014, increased 6.3%, or approximately $1.9 billion, to $32.7 billion compared to the three months ended March 31, 2013.

Revenues in the Pharmacy Services Segment increased 10.3%, or $1.9 billion, to $20.2 billion in the three months ended March 31, 2014. The increase was primarily driven by growth in our specialty pharmacy business, including the acquisition of Coram, as well as drug cost inflation, new clients and new products. Pharmacy network claims processed during the three months ended March 31, 2014 increased 0.4% to 208.0 million, compared to 207.1 million in the first quarter of last year. The increase in the pharmacy network claim volume was primarily due to new client starts. Mail choice claims processed during the three months ended March 31, 2014, decreased 3.6% to 19.8 million, compared to 20.5 million in the prior year. The decrease in mail choice claims was driven by a decline in traditional mail volumes, which was partially offset by growth in our Maintenance Choice program.

Revenues in the Retail Pharmacy Segment increased 2.7%, or $441 million, to $16.5 billion in the three months ended March 31, 2014. Same store sales increased 1.4% versus the first quarter of last year, with pharmacy same store sales up 3.8% and front store same store sales down 3.8%. Pharmacy same store prescription volumes rose 2.1% on a 30-day equivalent basis. Both front store same store sales and pharmacy same store sales were negatively impacted by a weaker flu season in the three months ended March 31, 2014 and severe weather across much of the United States, compared to the prior year. The Company estimates that the extreme weather experienced this year along with the comparison against last year's strong flu season resulted in a negative impact to pharmacy same store prescription volumes of 180 to 200 basis points. Front store same store sales were also negatively impacted by approximately 80 basis points from the shift of Easter from March in 2013 to April in 2014, as well as softer customer traffic. The Company estimates that the extreme weather experienced this year along with the comparison against last year's strong flu season resulted in a negative impact of 140 to 160 basis points to front store same store sales. Despite the decline in front store same store sales, front store basket size improved modestly while front store margins improved notably during the quarter. The increase in total same store sales was primarily driven by the growth of prescription volumes and brand name drug cost inflation. Pharmacy same store sales include a negative impact of approximately 120 basis points from recent generic drug introductions.

For the three months ended March 31, 2014, the generic dispensing rate increased approximately 190 basis points in the Pharmacy Services Segment, to 82.4%, and approximately 170 basis points in the Retail Pharmacy Segment, to 82.9%, compared to the prior year.

Net Income

Net income for the three months ended March 31, 2014, increased 18.3%, or approximately $175 million, to $1.1 billion, compared with approximately $1.0 billion during the three months ended March 31, 2013. The Pharmacy Services and Retail Pharmacy segments both benefited from the impact of increased generic drugs dispensed and slower growth in expenses. Net income was also positively impacted by rebate improvement in the Pharmacy Services Segment and an increase in front store gross margins in the Retail Pharmacy Segment. Adjusted earnings per share (Adjusted EPS) for the three months ended March 31, 2014 and 2013, was $1.02 and $0.83, respectively, an increase of 22.5%. Adjusted EPS in the three months ended March 31, excludes $131 million and $122 million in 2014 and 2013, respectively, of intangible asset amortization related to acquisition activity. GAAP earnings per diluted share for the three months ended March 31, 2014 and 2013, was $0.95 and $0.77, respectively, an increase of 23.3%.

President and Chief Executive Officer Larry Merlo stated, "We once again posted a very strong quarter, with solid results across the enterprise. Adjusted EPS increased 22.5%, to $1.02, which was a penny below our expectations primarily due to the significant amount of unforeseen weather-related issues we experienced throughout the quarter. I'm particularly pleased with the exceptional growth in the PBM, especially the growth of the specialty pharmacy business. Additionally, with the substantial amount of free cash we generated during the quarter, we remain confident in our ability to achieve our 2014 goals."

Guidance

The Company confirmed its earnings guidance range for the full year 2014. The Company expects to deliver Adjusted EPS of $4.36 to $4.50 and GAAP diluted EPS from continuing operations of $4.09 to $4.23 in 2014. The Company also continues to expect to deliver 2014 free cash flow of $5.5 billion to $5.8 billion, and 2014 cash flow from operations guidance of $7.0 billion to $7.3 billion. The Company expects to deliver Adjusted EPS of $1.08 to $1.11 and GAAP diluted EPS from continuing operations of $1.01 to $1.04 in the second quarter of 2014.

Real Estate Program

During the three months ended March 31, 2014, the Company opened 22 new retail drugstores, and closed seven retail drugstores, one specialty retail pharmacy and one infusion branch. In addition, the Company relocated nine retail drugstores. As of March 31, 2014, the Company operated 7,829 locations in 47 states, the District of Columbia, Puerto Rico and Brazil. These locations included 7,675 retail drugstores, 17 onsite pharmacies, 24 retail specialty pharmacy stores, 11 specialty mail order pharmacies, four mail service dispensing pharmacies, and 84 branches and six centers of excellence for infusion and enteral services.

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 7,600 retail pharmacy stores; its leading pharmacy benefit manager serving nearly 64 million plan members; and its retail health clinic system, the largest in the nation with more than 800 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, 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 CVS Caremark at http://info.cvscaremark.com/.

Forward-Looking Statements

This press release contains forward-looking statements within the meaning of the federal securities laws. By their nature, all forward-looking statements involve risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking statements for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2013 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

 

2014

   

2013

 
             

Net revenues

 

$

32,689

   

$

30,751

 

Cost of revenues

 

26,747

   

25,174

 

Gross profit

 

5,942

   

5,577

 

Operating expenses

 

3,918

   

3,883

 

Operating profit

 

2,024

   

1,694

 

Interest expense, net

 

158

   

126

 

Income before income tax provision

 

1,866

   

1,568

 

Income tax provision

 

737

   

614

 

Net income

 

$

1,129

   

$

954

 
             

Net income per share:

           

Basic

 

$

0.96

   

$

0.77

 

Diluted

 

$

0.95

   

$

0.77

 

Weighted average shares outstanding:

           

Basic

 

1,180

   

1,232

 

Diluted

 

1,190

   

1,241

 

Dividends declared per share

 

$

0.275

   

$

0.225

 

 

 

CVS CAREMARK CORPORATION

Condensed Consolidated Balance Sheets

(Unaudited)

 
   

March 31,

   

December 31,

 

In millions, except per share amounts

 

2014

   

2013

 

Assets:

       

Cash and cash equivalents

 

$

2,766

   

$

4,089

 

Short-term investments

 

82

   

88

 

Accounts receivable, net

 

9,086

   

8,729

 

Inventories

 

11,188

   

11,045

 

Deferred income taxes

 

929

   

902

 

Other current assets

 

409

   

472

 

Total current assets

 

24,460

   

25,325

 

Property and equipment, net

 

8,676

   

8,615

 

Goodwill

 

28,139

   

26,542

 

Intangible assets, net

 

9,986

   

9,529

 

Other assets

 

1,561

   

1,515

 

Total assets

 

$

72,822

   

$

71,526

 
             

Liabilities:

       

Accounts payable

 

$

5,638

   

$

5,548

 

Claims and discounts payable

 

4,878

   

4,548

 

Accrued expenses

 

5,132

   

4,768

 

Current portion of long-term debt

 

565

   

561

 

Total current liabilities

 

16,213

   

15,425

 

Long-term debt

 

12,845

   

12,841

 

Deferred income taxes

 

4,053

   

3,901

 

Other long-term liabilities

 

1,499

   

1,421

 

Commitments and contingencies

 

   

 
             

Shareholders' equity:

       

CVS Caremark 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; 1,684 shares issued and

           

1,173 shares outstanding at March 31, 2014 and 1,680 shares issued and 1,180

           

shares outstanding at December 31, 2013

 

17

   

17

 

Treasury stock, at cost: 510 shares at March 31, 2014 and 500 shares at

           

December 31, 2013

 

(20,919)

   

(20,169)

 

Shares held in trust: 1 share at March 31, 2014 and December 31, 2013

 

(31)

   

(31)

 

Capital surplus

 

29,985

   

29,777

 

Retained earnings

 

29,297

   

28,493

 

Accumulated other comprehensive loss

 

(139)

   

(149)

 

Total CVS Caremark shareholders' equity

 

38,210

   

37,938

 

Noncontrolling interest

 

2

   

 

Total shareholders' equity

 

38,212

   

37,938

 

Total liabilities and shareholders' equity

 

$

72,822

   

$

71,526

 

 

 

CVS CAREMARK CORPORATION

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 
   

Three Months Ended

March 31,

In millions

 

2014

   

2013

 

Cash flows from operating activities:

       

Cash receipts from customers

 

$

30,505

   

$

28,018

 

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

 

(23,966)

   

(22,270)

 

Cash paid to other suppliers and employees

 

(4,196)

   

(3,889)

 

Interest received

 

3

   

1

 

Interest paid

 

(104)

   

(104)

 

Income taxes paid

 

(70)

   

(116)

 

Net cash provided by operating activities

 

2,172

   

1,640

 
             

Cash flows from investing activities:

       

Purchases of property and equipment

 

(388)

   

(318)

 

Proceeds from sale-leaseback transactions

 

5

   

 

Proceeds from sale of property and equipment

 

5

   

5

 

Acquisitions (net of cash acquired) and other investments

 

(2,194)

   

(254)

 

Purchase of available-for-sale investments

 

(43)

   

 

Sale or maturity of available-for-sale investments

 

55

   

 

Net cash used in investing activities

 

(2,560)

   

(567)

 
             

Cash flows from financing activities:

       

Decrease in short-term debt

 

   

(390)

 

Dividends paid

 

(325)

   

(277)

 

Proceeds from exercise of stock options

 

154

   

150

 

Excess tax benefits from stock-based compensation

 

37

   

13

 

Repurchase of common stock

 

(801)

   

(393)

 

Net cash used in financing activities

 

(935)

   

(897)

 

Net increase (decrease) in cash and cash equivalents

 

(1,323)

   

176

 

Cash and cash equivalents at the beginning of the year

 

4,089

   

1,375

 

Cash and cash equivalents at the end of the year

 

$

2,766

   

$

1,551

 
             

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

       

Net income

 

$

1,129

   

$

954

 

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

       

Depreciation and amortization

 

477

   

502

 

Stock-based compensation

 

35

   

34

 

Deferred income taxes and other non-cash items

 

16

   

66

 

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

           

Accounts receivable, net

 

(139)

   

(113)

 

Inventories

 

(64)

   

186

 

Other current assets

 

70

   

238

 

Other assets

 

(39)

   

(135)

 

Accounts payable and claims and discounts payable

 

339

   

(230)

 

Accrued expenses

 

362

   

114

 

Other long-term liabilities

 

(14)

   

24

 

Net cash provided by operating activities

 

$

2,172

   

$

1,640

 

 

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, divided by the weighted average diluted 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

 

2014

   

2013

 
             

Income before income tax provision

 

$

1,866

   

$

1,568

 

Amortization

 

131

   

122

 

Adjusted income before income tax provision

 

1,997

   

1,690

 

Adjusted income tax provision(1)

 

789

   

661

 

Adjusted net income

 

$

1,208

   

$

1,029

 
             

Weighted average diluted shares outstanding

 

1,190

   

1,241

 

Adjusted earnings per share

 

$

1.02

   

$

0.83

 
 

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

   

Three Months Ended

March 31,

In millions

 

2014

   

2013

 
             

Net cash provided by operating activities

 

$

2,172

   

$

1,640

 

Subtract: Additions to property and equipment

 

(388)

   

(318)

 

Add: Proceeds from sale-leaseback transactions

 

5

   

 

Free cash flow

 

$

1,789

   

$

1,322

 

 

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, 2014:

                   

Net revenues

 

$

20,195

   

$

16,480

   

$

   

$

(3,986)

   

$

32,689

 

Gross profit

 

934

   

5,184

   

   

(176)

   

5,942

 

Operating profit (loss)

 

640

   

1,750

   

(190)

   

(176)

   

2,024

 

March 31, 2013:

                   

Net revenues

 

18,311

   

16,039

   

   

(3,599)

   

30,751

 

Gross profit

 

768

   

4,947

   

   

(138)

   

5,577

 

Operating profit (loss)

 

499

   

1,532

   

(199)

   

(138)

   

1,694

 
 

(1) Net revenues of the Pharmacy Services Segment include approximately $2.2 billion of retail co-payments for both of the three months ended March 31, 2014 and 2013.

(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 stand-alone 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 above: net revenues of $1.1 billion and $939 million for the three months ended March 31, 2014 and 2013, respectively; and gross profit and operating profit of $176 million and $138 million for the three months ended March 31, 2014 and 2013, 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

 

2014

   

2013

 
             

Net revenues

 

$

20,195

   

$

18,311

 

Gross profit

 

934

   

768

 

Gross profit % of net revenues

 

4.6

%

 

4.2

%

Operating expenses

 

294

   

269

 

Operating expense % of net revenues

 

1.5

%

 

1.5

%

Operating profit

 

640

   

499

 

Operating profit % of net revenues

 

3.2

%

 

2.7

%

Net revenues(1):

       

Mail choice(2)

 

$

6,834

   

$

5,869

 

Pharmacy network(3)

 

13,302

   

12,392

 

Other

 

59

   

50

 

Pharmacy claims processed(1):

       

Total

 

227.8

   

227.6

 

Mail choice(2)

 

19.8

   

20.5

 

Pharmacy network(3)

 

208.0

   

207.1

 

Generic dispensing rate(1):

         

Total

 

82.4

%

 

80.5

%

Mail choice(2)

 

78.0

%

 

75.4

%

Pharmacy network(3)

 

82.8

%

 

81.0

%

Mail choice penetration rate

 

21.2

%

 

22.1

%

 

(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

 

2014

   

2013

 
             

Net revenues

 

$

16,480

   

$

16,039

 

Gross profit

 

5,184

   

4,947

 

Gross profit % of net revenues

 

31.5

%

 

30.8

%

Operating expenses

 

3,434

   

3,415

 

Operating expense % of net revenues

 

20.8

%

 

21.3

%

Operating profit

 

1,750

   

1,532

 

Operating profit % of net revenues

 

10.6

%

 

9.6

%

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

 

227.1

   

221.1

 

Net revenue increase:

       

Total

 

2.7

%

 

0.1

%

Pharmacy

 

5.1

%

 

(1.1)

%

Front store

 

(2.4)

%

 

3.1

%

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

 

2.7

%

 

5.5

%

Same store increase (decrease):

       

Total sales

 

1.4

%

 

(1.2)

%

Pharmacy sales

 

3.8

%

 

(2.3)

%

Front store sales

 

(3.8)

%

 

1.4

%

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

 

2.1

%

 

4.6

%

Generic dispensing rate

 

82.9

%

 

81.2

%

Pharmacy % of total revenues

 

70.5

%

 

69.0

%

Third party % of pharmacy revenue

 

98.3

%

 

97.8

%

(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 30-day 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. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2013 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, 2014

             

Income before income tax provision

 

$

7,888

   

$

8,137

 

Amortization

 

519

   

519

 

Adjusted income before income tax provision

 

8,407

   

8,656

 

Adjusted income tax provision(1)

 

3,292

   

3,381

 

Adjusted income from continuing operations

 

$

5,115

   

$

5,275

 
             

Weighted average diluted shares outstanding

 

1,172

   

1,172

 

Adjusted earnings per share from continuing operations

 

$

4.36

   

$

4.50

 

 

 

In millions, except per share amounts

 

Three Months Ending

June 30, 2014

             

Income before income tax provision

 

$

1,957

   

$

2,027

 

Amortization

 

134

   

134

 

Adjusted income before income tax provision

 

2,091

   

2,161

 

Adjusted income tax provision(1)

 

826

   

854

 

Adjusted income from continuing operations

 

$

1,265

   

$

1,307

 
             

Weighted average diluted shares outstanding

 

1,174

   

1,174

 

Adjusted earnings per share from continuing operations

 

$

1.08

   

$

1.11

 

(1) The adjusted income tax provision is computed using the effective income tax rate from the consolidated statement of income.

 

Free Cash Flow Guidance
(Unaudited)

The following reconciliation of net cash provided by operating activities to free cash flow contains forward-looking information. All forward-looking information involves risks and uncertainties. Actual results may differ materially from those contemplated by the forward-looking information for a number of reasons as described in our Securities and Exchange Commission filings, including those set forth in the Risk Factors section in our Annual Report on Form 10-K for the year ended December 31, 2013 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, 2014

             

Net cash provided by operating activities

 

$

6,950

   

$

7,250

 

Subtract: Additions to property and equipment

 

(2,100)

   

(2,000)

 

Add: Proceeds from sale-leaseback transactions

 

600

   

500

 

Free cash flow

 

$

5,450

   

$

5,750

 

 

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