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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
September 30, 2000 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
------- -------
Common Stock, $0.01 par value, issued and
outstanding at November 6, 2000:
391,786,487 shares
--------------------------------------------------------------------------------
<PAGE>
--------------------------------------------------------------------------------
INDEX
<TABLE>
<CAPTION>
PAGE
<S> <C> <C>
PART I
Item 1. Financial Statements
Consolidated Condensed Statements of Operations -
Thirteen and Thirty-Nine Weeks Ended September 30, 2000 3
and September 25, 1999
Consolidated Condensed Balance Sheets -
As of September 30, 2000 and January 1, 2000 4
Consolidated Condensed Statements of Cash Flows -
Thirty-Nine Weeks Ended September 30, 2000 and September 25, 1999 5
Notes to Consolidated Condensed Financial Statements 6
Independent Auditors' Review Report 10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
PART II
Item 6. Exhibits and Reports on Form 8-K 18
Signature Page 18
</TABLE>
2
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 2000 1999
------------------------------------------------------ --------------- --------------- ---------------- ---------------
<S> <C> <C> <C> <C>
Net sales $ 4,916.4 $ 4,311.8 $ 14,598.7 $ 12,914.7
Cost of goods sold, buying and warehousing costs 3,619.0 3,170.7 10,665.5 9,413.7
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Gross margin 1,297.4 1,141.1 3,933.2 3,501.0
Selling, general and administrative expenses 937.7 851.3 2,759.5 2,491.1
Depreciation and amortization 75.0 70.1 220.2 206.8
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Total operating expenses 1,012.7 921.4 2,979.7 2,697.9
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Operating profit 284.7 219.7 953.5 803.1
Interest expense, net 20.1 13.7 59.2 42.5
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Earnings before income tax provision 264.6 206.0 894.3 760.6
Income tax provision 105.9 84.4 357.8 311.8
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Net earnings 158.7 121.6 536.5 448.8
Preference dividends, net of income tax benefit 3.8 3.6 11.3 10.8
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Net earnings available to common shareholders $ 154.9 $ 118.0 $ 525.2 $ 438.0
------------------------------------------------------ --------------- --------------- ---------------- ---------------
BASIC EARNINGS PER COMMON SHARE:
Net earnings $ 0.40 $ 0.30 $ 1.34 $ 1.12
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Weighted average basic common shares outstanding 391.0 391.8 390.8 391.1
------------------------------------------------------ --------------- --------------- ---------------- ---------------
DILUTED EARNINGS PER COMMON SHARE:
Net earnings $ 0.39 $ 0.30 $ 1.32 $ 1.10
------------------------------------------------------ --------------- --------------- ---------------- ---------------
Weighted average diluted common shares outstanding 407.5 398.1 407.3 408.5
------------------------------------------------------ --------------- --------------- ---------------- ---------------
DIVIDENDS DECLARED PER COMMON SHARE $ 0.0575 $ 0.0575 $ 0.1725 $ 0.1725
------------------------------------------------------ --------------- --------------- ---------------- ---------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
3
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(UNAUDITED)
SEPTEMBER 30, January 1,
IN MILLIONS, EXCEPT SHARE AND PER SHARE AMOUNTS 2000 2000
---------------------------------------------------------------------------------- ---------------- -----------------
<S> <C> <C>
ASSETS:
Cash and cash equivalents $ 214.9 $ 230.0
Accounts receivable, net 795.2 699.3
Inventories 3,778.7 3,445.5
Deferred income taxes 149.4 139.4
Other current assets 134.0 93.8
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL CURRENT ASSETS 5,072.2 4,608.0
Property and equipment, net 1,786.9 1,601.0
Goodwill, net 805.8 706.9
Other assets 456.7 359.5
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL ASSETS $ 8,121.6 $ 7,275.4
---------------------------------------------------------------------------------- ---------------- -----------------
LIABILITIES:
Accounts payable $ 1,450.4 $ 1,454.2
Accrued expenses 982.4 967.4
Short-term borrowings 902.3 451.0
Current portion of long-term debt 17.3 17.3
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL CURRENT LIABILITIES 3,352.4 2,889.9
Long-term debt 557.8 558.5
Deferred income taxes 27.2 27.2
Other long-term liabilities 104.3 120.1
SHAREHOLDERS' EQUITY:
Preference stock, series one ESOP convertible, par value $1.00:
authorized 50,000,000 shares; issued and outstanding 5,033,000 shares at
September 30, 2000 and 5,164,000 shares at January 1, 2000 269.0 276.0
Common stock, par value $0.01: authorized 1,000,000,000 shares; issued
406,270,000 shares at September 30, 2000 and 403,047,000 4.1 4.0
shares at January 1, 2000
Treasury stock, at cost: 15,084,000 shares at September 30, 2000 and
11,051,000 shares at January 1, 2000 (405.1) (258.5)
Guaranteed ESOP obligation (257.0) (257.0)
Capital surplus 1,456.5 1,371.7
Retained earnings 3,012.4 2,543.5
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL SHAREHOLDERS' EQUITY 4,079.9 3,679.7
---------------------------------------------------------------------------------- ---------------- -----------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 8,121.6 $ 7,275.4
---------------------------------------------------------------------------------- ---------------- -----------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
4
<PAGE>
PART I ITEM 1
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CVS CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
<TABLE>
<CAPTION>
39 WEEKS ENDED
SEPTEMBER 30, SEPTEMBER 25,
IN MILLIONS 2000 1999
------------------------------------------------------------------------------ ------------------- -----------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 536.5 $ 448.8
Adjustments required to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 220.2 206.8
Deferred income taxes and other non-cash items 11.6 8.8
Change in assets and liabilities, excluding acquisitions and dispositions:
(Increase) in accounts receivable, net (56.0) (120.1)
(Increase) in inventories (318.5) (182.9)
(Increase) in other current assets (20.6) (24.6)
(Increase) in other assets (55.5) (87.3)
(Decrease) increase in accounts payable (34.7) 136.3
Increase (decrease) in accrued expenses 35.0 (27.8)
(Decrease) in other long-term liabilities (15.8) (42.4)
------------------------------------------------------------------------------ ------------------- -----------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 302.2 315.6
------------------------------------------------------------------------------ ------------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment (496.6) (484.8)
Proceeds from sale-leaseback transactions 140.9 86.3
Acquisitions, net of cash (244.9) (21.1)
Proceeds from sale or disposal of assets 9.2 26.5
------------------------------------------------------------------------------ ------------------- -----------------
NET CASH USED IN INVESTING ACTIVITIES (591.4) (393.1)
------------------------------------------------------------------------------ ------------------- -----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Additions to (reductions in) short-term borrowings 451.4 (182.2)
Proceeds from exercise of stock options 54.1 17.9
(Reductions in) additions to long-term debt (0.7) 298.3
Dividends paid (67.5) (67.4)
Purchase of treasury shares (163.2) --
------------------------------------------------------------------------------ ------------------- -----------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 274.1 66.6
------------------------------------------------------------------------------ ------------------- -----------------
Net decrease in cash and cash equivalents (15.1) (10.9)
Cash and cash equivalents at beginning of period 230.0 180.8
------------------------------------------------------------------------------ ------------------- -----------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 214.9 $ 169.9
------------------------------------------------------------------------------ ------------------- -----------------
</TABLE>
See accompanying notes to consolidated condensed financial statements.
5
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1
The accompanying consolidated condensed financial statements of CVS Corporation
("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
financial statements and notes thereto included in the Company's Annual Report
on Form 10-K for the fiscal year ended January 1, 2000.
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 of operations 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.
Certain reclassifications have been made to the consolidated financial
statements of prior periods to conform to the current period presentation.
NOTE 2
The Company currently operates four business segments: Retail Pharmacy, Pharmacy
Benefit Management ("PBM"), Specialty Pharmacy and Internet Pharmacy. The
Company's business segments are operating units that offer different products
and services, and require distinct technology and marketing strategies.
The Retail Pharmacy segment, which includes 4,066 retail drugstores located in
24 states and the District of Columbia, operates under the CVS/pharmacy name.
The Retail Pharmacy segment is the Company's only reportable segment.
The PBM segment provides a full range of prescription benefit management
services to managed care providers and other organizations. These services
include plan design and administration, formulary management, mail order
pharmacy services, claims processing and generic substitution. The PBM segment
operates under the PharmaCare Management Services name.
The Specialty Pharmacy segment, which includes mail order facilities and 40
retail pharmacies located in 12 states and the District of Columbia, operates
under the CVS ProCare name. The Specialty Pharmacy segment focuses on supporting
individuals that require complex and expensive drug therapies.
The Internet Pharmacy segment, which includes a mail order facility and a
complete online retail pharmacy, operates under the CVS.com name.
The Company evaluates segment performance based on operating profit before
intersegment profits.
6
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
Following is a reconciliation of the Company's business segments to the
consolidated condensed financial statements as of and for the thirteen and
thirty-nine weeks ended September 30, 2000 and September 25, 1999:
<TABLE>
<CAPTION>
------------------------------- -------------------- --------------------- -------------------- --------------------
Retail Pharmacy All Other Intersegment Consolidated
IN MILLIONS Segment Segments Eliminations(1) Totals
------------------------------- -------------------- --------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
13 WEEKS ENDED:
SEPTEMBER 30, 2000:
Net sales $ 4,764.6 $ 203.0 $ (51.2) $ 4,916.4
Operating profit 284.1 0.6 -- 284.7
September 25, 1999:
Net sales $ 4,193.1 $ 219.1 $ (100.4) $ 4,311.8
Operating profit 217.5 2.2 -- 219.7
------------------------------- -------------------- --------------------- -------------------- --------------------
39 WEEKS ENDED:
SEPTEMBER 30, 2000:
Net sales $ 14,157.0 $ 644.9 $ (203.2) $ 14,598.7
Operating profit 947.9 5.6 -- 953.5
September 25, 1999:
Net sales $ 12,583.3 $ 635.2 $ (303.8) $ 12,914.7
Operating profit 786.8 16.3 -- 803.1
------------------------------- -------------------- --------------------- -------------------- --------------------
Total assets:
SEPTEMBER 30, 2000 $ 7,728.7 $ 410.9 $ (18.0) $ 8,121.6
January 1, 2000 7,146.1 173.4 (44.1) 7,275.4
------------------------------- -------------------- --------------------- -------------------- --------------------
</TABLE>
(1) Intersegment eliminations relate to intersegment sales and accounts
receivable that occur when a PBM segment customer uses a Retail segment
store to purchase covered merchandise. When this occurs, both segments
record the sale on a stand-alone basis.
NOTE 3
Following are the components of net interest expense:
<TABLE>
<CAPTION>
------------------------------- ----------------------------------------- -----------------------------------------
13 WEEKS ENDED 39 WEEKS ENDED
IN MILLIONS SEPTEMBER 30, 2000 SEPTEMBER 25, 1999 SEPTEMBER 30, 2000 SEPTEMBER 25, 1999
------------------------------- -------------------- -------------------- -------------------- --------------------
<S> <C> <C> <C> <C>
Interest expense $ 21.3 $ 15.8 $ 62.4 $ 48.3
Interest income (1.2) (2.1) (3.2) (5.8)
------------------------------- -------------------- -------------------- -------------------- --------------------
Interest expense, net $ 20.1 $ 13.7 $ 59.2 $ 42.5
------------------------------- -------------------- -------------------- -------------------- --------------------
</TABLE>
7
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 4
Basic earnings per common share is computed by dividing: (i) net earnings, after
deducting the after-tax dividends on the ESOP preference stock, by (ii) the
weighted average number of common shares outstanding during the period (the
"Basic Shares").
When computing diluted earnings per common share, the Company normally assumes
that the ESOP preference stock is converted into common stock and all dilutive
stock options are exercised. After the assumed ESOP preference stock conversion,
the ESOP Trust would hold common stock rather than ESOP preference stock and
would receive common stock dividends (currently $0.23 per share) rather than
ESOP preference stock dividends (currently $3.90 per share). Since the ESOP
Trust uses the dividends it receives to service its debt, the Company would have
to increase its contribution to the ESOP Trust to compensate it for the lower
dividends. This additional contribution would reduce the Company's net earnings,
which in turn, would reduce the amounts that would have to be accrued under the
Company's incentive compensation plans. 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
options are exercised and the ESOP preference stock is converted into common
stock.
Following is a reconciliation of basic and diluted earnings per common share for
the thirteen and thirty-nine weeks ended:
<TABLE>
<CAPTION>
---------------------------------------------------------- ------------------------------- -------------------------------
13 WEEKS ENDED 39 WEEKS ENDED
SEPTEMBER 30, SEPTEMBER 25, SEPTEMBER 30, SEPTEMBER 25,
IN MILLIONS, EXCEPT PER SHARE AMOUNTS 2000 1999 2000 1999
---------------------------------------------------------- --------------- --------------- --------------- ---------------
<S> <C> <C> <C> <C>
NUMERATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Net earnings $ 158.7 $ 121.6 $ 536.5 $ 448.8
Preference dividends, net of income tax benefit (3.8) (3.6) (11.3) (10.8)
---------------------------------------------------------- --------------- --------------- --------------- ---------------
Net earnings available to common shareholders, basic $ 154.9 $ 118.0 $ 525.2 $ 438.0
---------------------------------------------------------- --------------- --------------- --------------- ---------------
Net earnings $ 158.7 $ 121.6 $ 536.5 $ 448.8
Preference dividends, net of income tax benefit(1) -- (3.6) -- --
Effect of dilutive securities:
Dilutive earnings adjustments (0.1) -- (0.4) 0.2
---------------------------------------------------------- --------------- --------------- --------------- ---------------
Net earnings available to common shareholders, diluted $ 158.6 $ 118.0 $ 536.1 $ 449.0
---------------------------------------------------------- --------------- --------------- --------------- ---------------
DENOMINATOR FOR EARNINGS PER COMMON SHARE CALCULATION:
Weighted average common shares, basic 391.0 391.8 390.8 391.1
Effect of dilutive securities:
ESOP preference stock(1) 10.8 -- 10.8 10.6
Stock options 5.7 6.3 5.7 6.8
---------------------------------------------------------- --------------- --------------- --------------- ---------------
Weighted average common shares, diluted 407.5 398.1 407.3 408.5
---------------------------------------------------------- --------------- --------------- --------------- ---------------
BASIC EARNINGS PER COMMON SHARE $ 0.40 $ 0.30 $ 1.34 $ 1.12
---------------------------------------------------------- --------------- --------------- --------------- ---------------
DILUTED EARNINGS PER COMMON SHARE $ 0.39 $ 0.30 $ 1.32 $ 1.10
---------------------------------------------------------- --------------- --------------- --------------- ---------------
</TABLE>
(1) In the third quarter of 1999, the assumed conversion of the ESOP preference
stock would have increased diluted earnings per common share and,
therefore, was not considered.
8
<PAGE>
PART I ITEM 1
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CVS CORPORATION
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 5
On March 6, 2000, the Board of Directors approved a common stock repurchase
program, which allows the Company to acquire up to $1 billion of its common
stock primarily to fund certain employee benefit plans. During the third quarter
of 2000, the Company repurchased 0.4 million shares of common stock at an
aggregate cost of $13.7 million. From the inception of the program through
September 30, 2000, the Company repurchased 4.7 million shares of common stock
at an aggregate cost of $163.2 million.
NOTE 6
In accordance with Accounting Principles Board Opinion No. 16, "Business
Combinations," Emerging Issues Task Force Issue No. 94-3, "Liability Recognition
for Certain Employee Termination Benefits and Other Costs to Exit an Activity
(Including Certain Costs Incurred in a Restructuring)" and Statement of
Financial Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of," the Company
recorded, during the second quarter of 1998, a $147.3 million charge to
operating expenses for direct and other merger-related costs pertaining to the
CVS/Arbor merger transaction and certain restructuring activities (the
"CVS/Arbor Charge"). The restructuring activities related to management's plan
to close Arbor's Troy, Michigan corporate headquarters, terminate Arbor's
corporate headquarters employees, and close certain store locations. Asset
write-offs included in this charge totaled $41.2 million. The balance of the
charge, $106.1 million, will require cash outlays of which $58.7 million had
been incurred as of September 30, 2000.
Following is a reconciliation of the beginning and ending liability balances
associated with the CVS/Arbor Charge as of September 30, 2000:
<TABLE>
<CAPTION>
-------------------------------------- ------------- ------------ -------------------------------------- ------------
Exit Costs
--------------------------------------
Merger Employee Noncancelable
Transaction Severance Lease Asset Other Exit
IN MILLIONS Costs & Benefits(1) Obligations(2) Write-offs Costs Total
-------------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
CVS/Arbor Charge $ 15.0 $ 27.1 $ 40.0 $ 41.2 $ 24.0 $ 147.3
Utilization through 1/1/00 - cash (15.9) (16.8) (2.7) -- (19.7) (55.1)
Utilization through 1/1/00 - noncash -- -- -- (41.2) -- (41.2)
Transfer(3) 0.9 -- -- -- (0.9) --
-------------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
Balance as of 1/1/00 $ -- $ 10.3 $ 37.3 $ -- $ 3.4 $ 51.0
Utilization through 9/30/00 - cash -- (0.9) (2.7) -- -- (3.6)
-------------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
BALANCE AS OF 9/30/00(4) $ -- $ 9.4 $ 34.6 $ -- $ 3.4 $ 47.4
-------------------------------------- ------------- ------------ ------------ ------------ ------------ ------------
</TABLE>
(1) Employee severance extends through 2000. Employee benefits extend for a
number of years to coincide with the payment of excess parachute payment
excise taxes and related income tax gross-ups.
(2) Noncancelable lease obligations extend through 2020.
(3) The transfers between the components of the plan were recorded in the same
period that the changes in estimates were determined. These amounts are
considered to be immaterial.
(4) The Company believes that the reserve balances as of September 30, 2000 are
adequate to cover the remaining liabilities associated with the CVS/Arbor
Charge.
9
<PAGE>
PART I INDEPENDENT AUDITORS' REVIEW REPORT
-------------------------------------------------------------------------------
The Board of Directors and Shareholders of
CVS Corporation:
We have reviewed the consolidated condensed balance sheet of CVS Corporation
as of September 30, 2000, and the related consolidated condensed statements
of operations for the thirteen and thirty-nine week periods ended September
30, 2000 and September 25, 1999, and cash flows for the thirty-nine week
periods then ended. These consolidated condensed financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with generally accepted auditing standards, the objective of which is the
expression of an opinion regarding the financial statements taken as a whole.
Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to the consolidated condensed financial statements referred to above for
them to be in conformity with accounting principles generally accepted in the
United States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of CVS
Corporation as of January 1, 2000 and the related consolidated statements of
operations, shareholders' equity, and cash flows for the fifty-three week period
ended January 1, 2000 and the fifty-two week period ended December 26, 1998,
(not presented herein); and in our report dated February 7, 2000 we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying consolidated condensed balance
sheet as of January 1, 2000, is fairly presented, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/S/ KPMG LLP
-------------------------------
KPMG LLP
Providence, Rhode Island
October 27, 2000
10
<PAGE>
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
INTRODUCTION
The following discussion explains the material changes in our results of
operations for the thirteen and thirty-nine weeks ended September 30, 2000 and
September 25, 1999 and the significant developments affecting our financial
condition since January 1, 2000. We strongly recommend that you read our audited
consolidated financial statements and footnotes and Management's Discussion and
Analysis of Financial Condition and Results of Operations included in our Annual
Report on Form 10-K for the fiscal year ended January 1, 2000.
RESULTS OF OPERATIONS
THIRD QUARTER (Thirteen Weeks Ended September 30, 2000 versus September 25,
1999)
NET SALES for the third quarter of 2000 increased $604.6 million (or 14.0%) to
$4.9 billion, compared to $4.3 billion in the third quarter of 1999. Same store
sales, consisting of sales from stores that have been open for more than one
year, rose 12.2%, while pharmacy same store sales increased 18.7%. Pharmacy
sales were 63% of total sales in the third quarter of 2000, compared to 59% in
the third quarter of 1999. Third party prescription sales were 89% of pharmacy
sales during the third quarter of 2000, compared to 87% in the third quarter of
1999.
As you review our sales performance, we believe you should consider the
following important information:
o Our pharmacy sales growth continued to benefit from our ability to
attract and retain managed care customers, our ongoing program of
purchasing prescription files from independent pharmacies and favorable
industry trends. These trends include an aging American population;
many "baby boomers" are now in their fifties and are consuming a
greater number of prescription drugs. The increased use of
pharmaceuticals as the first line of defense for healthcare and the
introduction of a number of successful new prescription drugs also
contributed to the growing demand for pharmacy services.
o Our front store sales growth was primarily driven by solid performance
in general merchandise, health and beauty, convenience foods and film
and photofinishing.
o Sales also benefited from our active relocation program which seeks to
move our existing shopping center stores to larger, more convenient,
freestanding locations. Historically, we have achieved significant
improvements in customer count and net sales when we do this. The
resulting increase in net sales has typically been driven by an
increase in front store sales, which normally have a higher gross
margin. We believe that our relocation program offers a significant
opportunity for future growth, as only 37% of our existing stores are
freestanding at September 30, 2000. Our long-term goal is to have
70-80% of our stores located in freestanding sites. We cannot,
however, guarantee that future store relocations will deliver the same
results as those historically achieved. Please read the "Cautionary
Statement Concerning Forward-Looking Statements" section below.
GROSS MARGIN for the third quarter of 2000 increased $156.3 million (or 13.7%)
to $1.3 billion, compared to $1.1 billion in the third quarter of 1999. Gross
margin as a percentage of net sales for the third quarter of 2000 was 26.4%,
compared to 26.5% of net sales in the third quarter of 1999.
Why has our gross margin rate been declining?
o Pharmacy sales are growing at a faster pace than front store sales. On
average, our gross margin on pharmacy sales is lower than our gross
margin on front store sales.
11
<PAGE>
PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
o Sales to customers covered by third party insurance programs have
continued to increase and, thus, have become a larger part of our total
pharmacy business. On average our gross margin on third party pharmacy
sales is lower than our gross margin on cash pharmacy sales.
TOTAL OPERATING EXPENSES for the third quarter of 2000 were $1,012.7 million or
20.6% of net sales, compared to $921.4 million or 21.4% of net sales in the
third quarter of 1999. During the third quarter of 2000, we recognized a $19.2
million pre-tax ($11.5 million after-tax) nonrecurring gain in total operating
expenses representing partial payment of our share of the settlement proceeds
from a class action lawsuit against certain manufacturers of brand name
prescription drugs. If you exclude the effect of this nonrecurring gain,
comparable total operating expenses for the third quarter of 2000 were $1,031.9
million or 21.0% of net sales, compared to $921.4 million or 21.4% of net sales
in the third quarter of 1999.
What have we done to improve our total operating expenses as a percentage of net
sales?
o Our strong sales performance has consistently allowed net sales to grow
at a faster pace than total operating expenses.
o Our information technology initiatives have led to greater
productivity, which has resulted in lower operating costs, particularly
at the store level.
OPERATING PROFIT for the third quarter of 2000 increased $65.0 million (or
29.6%) to $284.7 million, compared to $219.7 million in the third quarter of
1999. If you exclude the effect of the nonrecurring gain we recognized during
the third quarter of 2000, our comparable operating profit increased $45.8
million (or 20.8%) to $265.5 million, compared to $219.7 million in the third
quarter of 1999. Comparable operating profit as a percentage of net sales was
5.4% in the third quarter of 2000, compared to 5.1% in the third quarter of
1999.
INTEREST EXPENSE, NET for the third quarter of 2000 was $20.1 million, compared
to $13.7 million in the third quarter of 1999. Our interest expense totaled
$21.3 million in the third quarter of 2000, compared to $15.8 million in the
third quarter of 1999. Interest income was $1.2 million in the third quarter of
2000 versus $2.1 million in the third quarter of 1999. Our interest expense
increased due to a combination of higher average interest rates and higher
average borrowing levels during the third quarter of 2000.
INCOME TAX PROVISION ~ Our effective income tax rate was 40.0% for the third
quarter of 2000, compared to 41.0% for the third quarter of 1999. The decrease
in our effective income tax rate was primarily due to lower state income taxes.
NET EARNINGS for the third quarter of 2000 increased $37.1 million (or 30.5%) to
$158.7 million, or $0.39 per diluted share, compared to $121.6 million, or $0.30
per diluted share, in the third quarter of 1999. If you exclude the effect of
the nonrecurring gain we recognized in the third quarter of 2000, our comparable
net earning increased $25.6 million (or 21.1%) to $147.2 million, or $0.36 per
diluted share, compared to $121.6 million, or $0.30 per diluted share in the
third quarter of 1999.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
NINE MONTHS (Thirty-Nine Weeks Ended September 30, 2000 versus September 25,
1999)
NET SALES for the first nine months of 2000 increased $1.7 billion (or 13.0%) to
$14.6 billion, compared to $12.9 billion in the first nine months of 1999. Same
store sales, rose 11.1%, while pharmacy same store sales increased 17.5%.
Pharmacy sales were 62% of total sales in the first nine months of 2000,
compared to 59% in the first nine months of 1999. Third party prescription sales
were 89% of pharmacy sales during the first nine months of 2000, compared to 86%
in the first nine months of 1999. See "Third Quarter" above for further
information about the factors that affected our net sales.
GROSS MARGIN for the first nine months of 2000 increased $432.2 million (or
12.3%) to $3.9 billion, compared to $3.5 billion in the first nine months of
1999. Gross margin as a percentage of net sales for the first nine months of
2000 was 26.9%, compared to 27.1% in the first nine months of 1999. See "Third
Quarter" above for further information about the factors that affected our gross
margin as a percentage of net sales.
TOTAL OPERATING EXPENSES for the first nine months of 2000 were $3.0 billion or
20.4% of net sales, compared to $2.7 billion or 20.9% of net sales in the first
nine months of 1999. If you exclude the effect of the nonrecurring gain we
recognized in the third quarter 2000, comparable total operating expenses were
20.5% of net sales in the first nine months of 2000 compared to 20.9% of net
sales in the first nine months of 1999. See "Third Quarter" above for further
information about the factors that affected our operating expenses as a
percentage of net sales and the nonrecurring gain.
OPERATING PROFIT for the first nine months of 2000 increased $150.4 million
(or 18.7%) to $953.5 million, compared to $803.1 million for the first nine
months of 1999. If you exclude the effect of the nonrecurring gain we
recognized during the third quarter of 2000, our comparable operating profit
increased $131.2 million (or 16.3%) to $934.3 million, compared to $803.1
million for the first nine months of 1999. Comparable operating profit as a
percentage of net sales was 6.4% in the first nine months of 2000, compared
to 6.2% in the first nine months of 1999.
INTEREST EXPENSE, NET for the first nine months of 2000 was $59.2 million,
compared to $42.5 million in the first nine months of 1999. Our interest expense
totaled $62.4 million in the first nine months of 2000, compared to $48.3
million in the first nine months of 1999. Interest income was $3.2 million in
the first nine months of 2000, compared to $5.8 million in the first nine months
of 1999. Our interest expense increased due to a combination of higher average
interest rates and higher average borrowing levels during the first nine months
of 2000.
INCOME TAX PROVISION ~ Our effective income tax rate was 40.0% for the first
nine months of 2000, compared to 41.0% for the first nine months of 1999. The
decrease in our effective income tax rate was primarily due to lower state
income taxes.
NET EARNINGS in the first nine months of 2000, increased $87.7 million (or
19.5%) to $536.5 million, or $1.32 per diluted share, compared to $448.8
million, or $1.10 per diluted share in the first nine months of 1999. If you
exclude the effect of the nonrecurring gain we recognized in the third
quarter of 2000, our comparable net earnings increased $76.2 million (or
17.0%) to $525.0 million, or $1.29 per diluted share in the first nine months
of 2000 compared to $448.8 million, or $1.10 per diluted share in the first
nine months of 1999.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
LIQUIDITY AND CAPITAL RESOURCES
LIQUIDITY ~ The Company has three primary sources of liquidity: cash provided by
operations, commercial paper and uncommitted lines of credit. We generally
finance our working capital and capital expenditure requirements with internally
generated funds and our commercial paper program. In addition, we may elect to
use additional long-term borrowings in the future to support our continued
growth.
Our commercial paper program is supported by a $670 million, five-year unsecured
revolving credit facility which expires on May 30, 2002 and a $795 million,
364-day unsecured revolving credit facility which expires on May 25, 2001. We
can also obtain short-term financing through various uncommitted lines of
credit. As of September 30, 2000, we had $867.2 million of commercial paper
outstanding at a weighted average interest rate of 6.7% and $35.1 million
outstanding under the uncommitted lines of credit at a weighted average interest
rate of 6.9%.
Our credit facilities and unsecured senior notes contain customary restrictive
financial and operating covenants. We do not believe that the restrictions
contained in these covenants materially affect our financial or operating
flexibility.
We believe that our cash on hand and cash provided by operations, together with
our ability to obtain additional short-term and long-term financing, will be
sufficient to cover our working capital needs, capital expenditures and debt
service requirements for at least the next twelve months.
On March 6, 2000, the Board of Directors approved a common stock repurchase
program, which allows the Company to acquire up to $1 billion of its common
stock primarily to fund certain employee benefit plans. During the third quarter
of 2000, the Company repurchased 0.4 million shares of common stock at an
aggregate cost of $13.7 million. From the inception of the program through
September 30, 2000, the Company repurchased 4.7 million shares of common stock
at an aggregate cost of $163.2 million.
On September 18, 2000, the Company completed the acquisition of certain assets
of Stadtlander Pharmacy of Pittsburgh, Pa., a subsidiary of Bergen Brunswig
Corporation, for $124 million in cash plus the assumption of certain
liabilities. The results of operations of Stadtlander have been included in the
consolidated financial statements since this date.
NET CASH PROVIDED BY OPERATIONS ~ Net cash provided by operations decreased
$13.4 million to $302.2 million during the first nine months of 2000,
compared to $315.6 during the first nine months of 1999. The decrease in net
cash provided by operations resulted primarily from additional investments in
inventory and a decrease in accounts payable. As of September 30, 2000, the
future cash payments associated with various restructuring programs totaled
$107.3 million. These payments primarily include: (i) $18.6 million for
employee severance and benefits, which extend for a number of years to
coincide with the payment of retirement benefits, and (ii) $85.3 million for
continuing lease obligations, which extend through 2020.
CAPITAL EXPENDITURES ~ Our additions to property and equipment totaled $496.6
million in the first nine months of 2000, compared to $484.8 million in the
first nine months of 1999. During the first nine months of 2000, we opened 107
new stores, relocated 166 stores and closed 99 stores. As of September 30, 2000,
we operated 4,106 retail and specialty pharmacy stores in 29 states and the
District of Columbia, compared to 4,089 stores as of September 25, 1999. During
the third quarter of 2000, we entered into a sale-leaseback transaction,
resulting in net proceeds of $140.9 million, as a means of financing a portion
of our store development program. The properties were sold at net book value and
the resulting leases are being accounted for as operating leases.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING STATEMENTS ~ Certain statements
in this Form 10-Q (as well as in other public filings, our web site, press
releases and oral statements made by Company management and/or representatives),
constitute forward-looking statements, which are subject to risks and
uncertainties. Forward-looking statements include information concerning:
o our future results of operations, including sales and earnings per
common share growth and cost savings and synergies following the Revco
and Arbor mergers;
o our planned store development, including store openings, number of
freestanding locations, new markets and capital expenditures;
o our belief that we have sufficient cash flows to support working
capital needs, capital expenditures and debt service requirements;
o our belief concerning the growth of our free cash flow;
o our belief that we can continue to improve operating performance by
relocating existing in-line stores to freestanding locations;
o our ability to continue to reduce selling, general and administrative
expenses as a percentage of net sales;
o our belief concerning the profitability of CVS.com;
o our belief concerning the growth and profitability of CVS ProCare; and
o our belief that we can continue to reduce inventory levels and improve
inventory turnover.
In addition, statements that include the words "believes", "expects",
"anticipates", "intends", "estimates" or similar expressions are forward-looking
statements. For all of these statements, we claim the protection of the safe
harbor for forward-looking statements contained in the Private Securities
Litigation Reform Act of 1995.
You should understand that the following important factors, in addition to those
discussed elsewhere in this report and in the documents which are incorporated
by reference (and in our other public filings, press releases and oral
statements made by Company management and/or representatives), could cause
actual results to differ materially from those expressed in the forward-looking
statements.
WHAT FACTORS COULD AFFECT THE OUTCOME OF OUR FORWARD-LOOKING STATEMENTS?
INDUSTRY AND MARKET FACTORS
o changes in economic conditions generally or in the markets served by
CVS;
o future federal and/or state regulatory and legislative actions
affecting CVS and/or the chain drugstore industry;
o consumer preferences and spending patterns;
o competition from other drugstore chains, from alternative distribution
channels such as supermarkets, membership clubs, mail order companies
and internet companies (e-commerce) and from other third party plans;
o the continued efforts of health maintenance organizations, managed
care organizations, pharmacy benefit management companies,
governmental agencies and other third party payers to reduce
prescription drug costs; and
o changes in accounting policies and practices, including taxation
requirements.
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PART I ITEM 2
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
OPERATING FACTORS
o our ability to continue to implement new computer systems and
technologies;
o our ability to continue to secure suitable new store locations at
favorable lease terms;
o the creditworthiness of the purchasers of former businesses whose store
leases are guaranteed by CVS;
o our ability to continue to purchase inventory on favorable terms;
o our ability to attract, hire and retain suitable pharmacists and
management personnel;and
o our ability to establish effective advertising, marketing and
promotional programs (including pricing strategies) in the different
geographic markets in which we operate.
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PART I ITEM 3
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QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company has not entered into any transactions using derivative financial
instruments or derivative commodity instruments and believes that its exposure
to market risk associated with other financial instruments, principally interest
rate risk inherent in its debt portfolio, is not material.
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PART II ITEM 6
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EXHIBITS AND REPORTS ON FORM 8-K
EXHIBITS:
3.1 Amended and Restated Certificate of Incorporation of the
Registrant (incorporated by reference to Exhibit 3.1 to CVS
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1996).
3.1A Certificate of Amendment to the Amended and Restated
Certificate of Incorporation, effective May 13, 1998
(incorporated by reference to Exhibit 4.1A to Registrant's
Registration Statement No. 333-52055 on Form S-3/A dated May
18, 1998).
3.2 By-laws of the Registrant, as amended and restated
(incorporated by reference to Exhibit 3.2 to CVS
Corporation's Annual Report on Form 10-K for the fiscal year
ended December 31, 1998).
15.1 Letter re: Unaudited Interim Financial Information.
27.1 Financial Data Schedule - September 30, 2000.
REPORTS ON FORM 8-K:
There were no Reports on Form 8-K filed during the third quarter of 2000.
SIGNATURES:
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this Quarterly Report on Form 10-Q to be signed on
its behalf by the undersigned thereunto duly authorized.
CVS Corporation
(REGISTRANT)
/S/ David B. Rickard
------------------------------
David B. Rickard
Executive Vice President
and Chief Financial Officer
November 14, 2000
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