10-QPeriod: Q3 FY2008

CVS HEALTH Corp Quarterly Report for Q3 Ended Sep 27, 2008

Filed October 31, 2008For Securities:CVS

Summary

CVS Health Corp. (CVS) reported a solid third quarter for 2008, with net revenues increasing to $20.86 billion, up from $20.50 billion in the prior year's comparable quarter. This growth was primarily driven by the Retail Pharmacy segment. The company also showed strong profitability, with net earnings available to common shareholders rising to $732.5 million from $686.1 million year-over-year. Diluted earnings per share also saw an improvement, reaching $0.50 compared to $0.45 in the same period last year. The results reflect the ongoing integration of the Caremark merger and demonstrate continued operational strength in both the retail and pharmacy services segments. A significant event during the quarter was the completion of the acquisition of Longs Drug Stores Corporation for approximately $2.9 billion. This strategic move is expected to expand CVS Health's retail footprint and further enhance its market position. The company's liquidity remains strong, with significant cash flow from operations and available credit facilities to support its growth initiatives and operations. Despite some challenges, such as increased pressure on pharmacy reimbursement rates, the company appears well-positioned for future growth.

Financial Highlights

31 data points
Beta

Revenue

$20.86B

21.1% Gross Margin

Net Income

$736.00M

3.5% Net Margin

EPS (Diluted)

$0.50

Cash & Equivalents

$1.28B

Free Cash Flow

$258.30M

Financial Statements
Beta
Revenue$20.86B
Cost of Revenue$16.46B
Gross Profit$4.40B
Operating Expenses$2.93B
Operating Income$1.47B
Net Income$736.00M
EPS (Basic)$0.51
EPS (Diluted)$0.50
Shares Outstanding (Basic)1.44B
Shares Outstanding (Diluted)1.47B

Key Highlights

  • 1Net revenues for the thirteen weeks ended September 27, 2008, were $20.86 billion, a slight increase from $20.50 billion in the prior year's quarter.
  • 2Net earnings available to common shareholders increased to $732.5 million for the thirteen weeks ended September 27, 2008, up from $686.1 million in the comparable 2007 period.
  • 3Diluted earnings per share rose to $0.50 for the thirteen weeks ended September 27, 2008, compared to $0.45 for the same period in 2007.
  • 4The company completed the acquisition of Longs Drug Stores Corporation for approximately $2.9 billion, expanding its retail store count and market reach.
  • 5Net cash provided by operating activities was $2.18 billion for the thirty-nine weeks ended September 27, 2008, an increase from $1.87 billion in the prior year period.
  • 6The Retail Pharmacy segment saw a gross profit margin of 30.4% for the thirteen weeks ended September 27, 2008, up from 29.8% in the prior year quarter, driven by an increase in generic drug sales and purchasing synergies from the Caremark merger.
  • 7The Pharmacy Services segment reported an operating profit of $658.0 million for the thirteen weeks ended September 27, 2008, a slight increase from $654.7 million in the prior year period.

Frequently Asked Questions

The Caremark merger, completed in March 2007, significantly impacts the year-over-year comparisons. The results for the thirty-nine weeks ended September 27, 2008, include a larger portion of post-merger Caremark operations (273 days) compared to the prior year's period (192 days), leading to increased revenues and operating expenses. The merger has also contributed to purchasing synergies, particularly benefiting gross profit in both the Retail Pharmacy and Pharmacy Services segments.

Revenue growth in the Retail Pharmacy segment is driven by several factors including an increase in the number of retail stores, a successful relocation program for existing stores to more convenient freestanding locations, and favorable industry trends such as an aging population consuming more prescription drugs. Growth in pharmacy revenue is also supported by new market expansions, increased penetration in existing markets, and the introduction of Medicare Part D benefits. However, revenue is partially offset by the conversion of brand-name drugs to lower-priced generics and increased consumer co-payments.

The loss from discontinued operations of $82.8 million (or $0.06 per diluted share) for the thirteen weeks ended September 27, 2008, primarily relates to lease guarantee obligations for former subsidiaries, notably Linens 'n Things, which filed for bankruptcy. The company has recorded an initial estimate of its potential obligations for these lease guarantees, totaling $131.5 million before tax benefit, due to the expected liquidation of Linens 'n Things.

CVS Health maintains a strong liquidity position. Operating cash flows totaled $2.18 billion for the first nine months of 2008. The company has a $4.0 billion commercial paper program backed by credit facilities and successfully funded the Longs acquisition using cash on hand, commercial paper, and a bridge loan. The company anticipates that cash flows from operations, supplemented by short-term and long-term borrowings, will continue to fund future growth. The company also authorized a share repurchase program, though it was temporarily delayed due to the Longs acquisition.