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CVS HEALTH Corp 10-Q 2011

Documents found in this filing:

  1. 10-Q
  2. Ex-15.1
  3. Ex-31.1
  4. Ex-31.2
  5. Ex-32.1
  6. Ex-32.2
  7. Ex-32.2

Table of Contents

 

 

 

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 September 30, 2011

 

Commission File Number 001-01011

 

 

CVS CAREMARK 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 has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [   ]

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):

 

Large accelerated filer [X]

 

Accelerated filer [   ]

Non-accelerated filer [   ] (Do not check if a smaller reporting company)

 

Smaller Reporting Company [   ]

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

 

Common Stock, $0.01 par value, issued and outstanding at October 31, 2011:

 

1,301,630,309 shares

 

 



Table of Contents

 

INDEX

 

 

 

Page

Part I

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

Condensed Consolidated Statements of Income (Unaudited) -
Three and Nine Months Ended September 30, 2011 and 2010

3

 

 

 

 

Condensed Consolidated Balance Sheets (Unaudited) -
As of September 30, 2011 and December 31, 2010

4

 

 

 

 

Condensed Consolidated Statements of Cash Flows (Unaudited) -
Nine Months Ended September 30, 2011 and 2010

5

 

 

 

 

Notes to Condensed Consolidated Financial Statements (Unaudited)

6

 

 

 

 

Report of Independent Registered Public Accounting Firm

16

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

29

Item 4.

Controls and Procedures

29

 

 

 

Part II

 

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

31

 

 

 

Item 6.

Exhibits

32

 

 

 

Signatures

33

 

2



Table of Contents

 

Part I

 

Item 1

 

CVS Caremark Corporation

Condensed Consolidated Statements of Income

(Unaudited)

 

 

 

 

Three Months Ended

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

 

 

September 30,

 

In millions, except per share amounts

 

 

2011

 

 

 

2010

 

 

 

2011

 

 

 

2010

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

26,674

 

 

 

$

23,711

 

 

 

$

78,783

 

 

 

$

71,189

 

Cost of revenues

 

 

21,496

 

 

 

18,696

 

 

 

63,777

 

 

 

56,424

 

Gross profit

 

 

5,178

 

 

 

5,015

 

 

 

15,006

 

 

 

14,765

 

Operating expenses

 

 

3,594

 

 

 

3,537

 

 

 

10,633

 

 

 

10,389

 

Operating profit

 

 

1,584

 

 

 

1,478

 

 

 

4,373

 

 

 

4,376

 

Interest expense, net

 

 

155

 

 

 

137

 

 

 

437

 

 

 

399

 

Income before income tax provision

 

 

1,429

 

 

 

1,341

 

 

 

3,936

 

 

 

3,977

 

Income tax provision

 

 

562

 

 

 

526

 

 

 

1,547

 

 

 

1,575

 

Income from continuing operations

 

 

867

 

 

 

815

 

 

 

2,389

 

 

 

2,402

 

Income (loss) from discontinued operations, net of tax

 

 

 

 

 

(7

)

 

 

5

 

 

 

(3

)

Net income

 

 

867

 

 

 

808

 

 

 

2,394

 

 

 

2,399

 

Net loss attributable to noncontrolling interest

 

 

1

 

 

 

1

 

 

 

3

 

 

 

2

 

Net income attributable to CVS Caremark

 

 

$

868

 

 

 

$

809

 

 

 

$

2,397

 

 

 

$

2,401

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Caremark

 

 

$

0.65

 

 

 

$

0.60

 

 

 

$

1.77

 

 

 

$

1.76

 

Income (loss) from discontinued operations attributable to CVS Caremark

 

 

 

 

 

(0.01

)

 

 

0.01

 

 

 

(0.01

)

Net income attributable to CVS Caremark

 

 

$

0.65

 

 

 

$

0.59

 

 

 

$

1.78

 

 

 

$

1.75

 

Weighted average basic common shares outstanding

 

 

1,332

 

 

 

1,360

 

 

 

1,350

 

 

 

1,368

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Diluted earnings per common share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Caremark

 

 

$

0.65

 

 

 

$

0.60

 

 

 

$

1.76

 

 

 

$

1.75

 

Income (loss) from discontinued operations attributable to CVS Caremark

 

 

 

 

 

(0.01

)

 

 

0.01

 

 

 

(0.01

)

Net income attributable to CVS Caremark

 

 

$

0.65

 

 

 

$

0.59

 

 

 

$

1.77

 

 

 

$

1.74

 

Weighted average diluted common shares outstanding

 

 

1,340

 

 

 

1,368

 

 

 

1,356

 

 

 

1,378

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

 

$

0.1250

 

 

 

$

0.0875

 

 

 

$

0.3750

 

 

 

$

0.2625

 

 

See accompanying notes to condensed consolidated financial statements.

 

3



Table of Contents

 

Part I

 

Item 1

 

CVS Caremark Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

 

 

 

 

September 30,

 

 

 

December 31,

 

In millions, except per share amounts

 

 

2011

 

 

 

2010

 

Assets:

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

 

$

1,707

 

 

 

$

1,427

 

Short-term investments

 

 

5

 

 

 

4

 

Accounts receivable, net

 

 

5,901

 

 

 

4,925

 

Inventories

 

 

10,379

 

 

 

10,695

 

Deferred income taxes

 

 

444

 

 

 

511

 

Other current assets

 

 

502

 

 

 

144

 

Total current assets

 

 

18,938

 

 

 

17,706

 

Property and equipment, net

 

 

8,642

 

 

 

8,322

 

Goodwill

 

 

26,506

 

 

 

25,669

 

Intangible assets, net

 

 

9,947

 

 

 

9,784

 

Other assets

 

 

1,218

 

 

 

688

 

Total assets

 

 

$

65,251

 

 

 

$

62,169

 

 

 

 

 

 

 

 

 

 

Liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

 

$

4,387

 

 

 

$

4,026

 

Claims and discounts payable

 

 

3,103

 

 

 

2,569

 

Accrued expenses

 

 

4,259

 

 

 

3,070

 

Short-term debt

 

 

530

 

 

 

300

 

Current portion of long-term debt

 

 

71

 

 

 

1,105

 

Total current liabilities

 

 

12,350

 

 

 

11,070

 

Long-term debt

 

 

10,167

 

 

 

8,652

 

Deferred income taxes

 

 

3,868

 

 

 

3,655

 

Other long-term liabilities

 

 

1,348

 

 

 

1,058

 

Commitments and contingencies (Note 12)

 

 

 

 

 

 

 

 

Redeemable noncontrolling interest

 

 

31

 

 

 

34

 

 

 

 

 

 

 

 

 

 

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; 1,636 shares issued and 1,308 shares outstanding at September 30, 2011 and 1,624 shares issued and 1,363 shares outstanding at December 31, 2010

 

 

16

 

 

 

16

 

Treasury stock, at cost: 326 shares at September 30, 2011 and 259 shares at December 31, 2010

 

 

(11,500)

 

 

 

(9,030

)

Shares held in trust: 2 shares at September 30, 2011 and December 31, 2010

 

 

(56)

 

 

 

(56

)

Capital surplus

 

 

27,987

 

 

 

27,610

 

Retained earnings

 

 

21,192

 

 

 

19,303

 

Accumulated other comprehensive loss

 

 

(152)

 

 

 

(143

)

Total shareholders’ equity

 

 

37,487

 

 

 

37,700

 

Total liabilities and shareholders’ equity

 

 

$

65,251

 

 

 

$

62,169

 

 

See accompanying notes to condensed consolidated financial statements.

 

4



Table of Contents

 

Part I

 

Item 1

 

CVS Caremark Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

 

 

 

 

Nine Months Ended

 

 

 

 

September 30,

 

In millions

 

 

2011

 

 

 

2010

 

Cash flows from operating activities:

 

 

 

 

 

 

 

 

Cash receipts from customers

 

 

$

72,875

 

 

 

$

68,524

 

Cash paid for inventory and prescriptions dispensed by retail network pharmacies

 

 

(55,625

)

 

 

(52,953

)

Cash paid to other suppliers and employees

 

 

(10,092

)

 

 

(10,346

)

Interest received

 

 

3

 

 

 

3

 

Interest paid

 

 

(454

)

 

 

(439

)

Income taxes paid

 

 

(1,672

)

 

 

(1,785

)

Net cash provided by operating activities

 

 

5,035

 

 

 

3,004

 

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

 

Purchases of property and equipment

 

 

(1,168

)

 

 

(1,379

)

Proceeds from sale-leaseback transactions

 

 

11

 

 

 

124

 

Proceeds from sale of property and equipment

 

 

1

 

 

 

24

 

Acquisitions (net of cash acquired) and other investments

 

 

(1,406

)

 

 

(158

)

Purchase of short-term investments

 

 

(3

)

 

 

 

Maturity of short-term investments

 

 

2

 

 

 

1

 

Net cash used in investing activities

 

 

(2,563

)

 

 

(1,388

)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Increase in short-term debt

 

 

230

 

 

 

1,069

 

Proceeds from issuance of long-term debt

 

 

1,463

 

 

 

991

 

Repayments of long-term debt

 

 

(1,149

)

 

 

(2,102

)

Dividends paid

 

 

(508

)

 

 

(360

)

Derivative settlements

 

 

(19

)

 

 

(5

)

Proceeds from exercise of stock options

 

 

341

 

 

 

171

 

Excess tax benefits from stock-based compensation

 

 

12

 

 

 

13

 

Repurchase of common stock

 

 

(2,553

)

 

 

(1,500

)

Other

 

 

(9

)

 

 

 

Net cash used in financing activities

 

 

(2,192

)

 

 

(1,723

)

Net increase (decrease) in cash and cash equivalents

 

 

280

 

 

 

(107

)

Cash and cash equivalents at beginning of period

 

 

1,427

 

 

 

1,086

 

Cash and cash equivalents at end of period

 

 

$

1,707

 

 

 

$

979

 

 

 

 

 

 

 

 

 

 

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

 

 

 

 

 

 

 

 

Net income

 

 

$

2,394

 

 

 

$

2,399

 

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

 

 

 

 

 

 

 

 

Depreciation and amortization

 

 

1,172

 

 

 

1,096

 

Stock-based compensation

 

 

100

 

 

 

112

 

Deferred income taxes and other non-cash items

 

 

134

 

 

 

43

 

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

 

 

 

 

 

 

 

 

Accounts receivable, net

 

 

(479

)

 

 

346

 

Inventories

 

 

316

 

 

 

(242

)

Other current assets

 

 

(173

)

 

 

(41

)

Other assets

 

 

(52

)

 

 

11

 

Accounts payable and claims and discounts payable

 

 

716

 

 

 

(112

)

Accrued expenses

 

 

980

 

 

 

(567

)

Other long-term liabilities

 

 

(73

)

 

 

(41

)

Net cash provided by operating activities

 

 

$

5,035

 

 

 

$

3,004

 

 

See accompanying notes to condensed consolidated financial statements.

 

5



Table of Contents

 

Part I

 

Item 1

 

CVS Caremark Corporation

Notes to Condensed Consolidated Financial Statements

(Unaudited)

 

Note 1 – Accounting Policies

 

Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements of CVS Caremark Corporation and its majority owned subsidiaries (“CVS Caremark” or the “Company”) have been prepared, in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) regarding interim financial reporting. In accordance with such rules and regulations, certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted, although the Company believes the disclosures included herein are adequate to make the information presented not misleading. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto, which are included in Exhibit 13 to the Company’s Annual Report on Form 10-K for the year ended December 31, 2010 (the “2010 Form 10-K”).

 

In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments consisting only of normal recurring adjustments, necessary for a fair presentation of the results for the interim periods presented. Because of the influence of various factors on the Company’s operations, including business combinations, certain holidays and other seasonal influences, net income for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of income for the full fiscal year.

 

Principles of Consolidation

 

The condensed consolidated financial statements include the accounts of the Company and its majority owned subsidiaries. All material intercompany balances and transactions have been eliminated.

 

Fair Value of Financial Instruments

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

§        Level 1 – Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

§        Level 2 – Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

 

§        Level 3 – Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

As of September 30, 2011, the carrying value of cash and cash equivalents, short-term investments, accounts receivable and short-term debt approximated their fair value due to the short-term nature of these financial instruments. The Company invests in money market funds, commercial paper and time deposits that are classified as cash and cash equivalents within the accompanying condensed consolidated balance sheets, as these funds are highly liquid and readily convertible to known amounts of cash. These investments are classified within Level 1 of the fair value hierarchy because they are valued using quoted market prices. The Company’s short-term investments consist of certificates of deposit with initial maturities of greater than three months when purchased. These investments, which are classified within Level 1 of the fair value hierarchy, are carried at historical cost, which approximated fair value at September 30, 2011. The carrying amount and estimated fair value of the Company’s total long-term debt was $10.2 billion and $11.5 billion, respectively, as of September 30, 2011. The fair value of the Company’s total long-term debt was estimated based on rates currently offered to the Company for debt with

 

6



Table of Contents

 

identical terms and maturities, which is considered Level 1 of the fair value hierarchy.

 

New Accounting Pronouncements

 

In May 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”). ASU 2011-05 requires entities to present the total of comprehensive income, the components of net income and the components of other comprehensive income in either (1) a single continuous statement of comprehensive income or (2) two separate but consecutive statements. ASU 2011-05 does not change the items that are required to be reported in other comprehensive income. ASU 2011-05 is effective for interim and annual periods beginning after December 15, 2011 and should be applied retrospectively. The Company is still evaluating which of the two alternatives it will apply in reporting comprehensive income. Neither alternative is expected to have a material impact on the Company’s consolidated results of operations and neither alternative will have an impact on the Company’s financial condition or cash flows.

 

In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment (“ASU 2011-08”). ASU 2011-08 allows entities to use a qualitative approach to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying value. If after performing the qualitative assessment an entity determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step goodwill impairment test is unnecessary. However, if an entity concludes otherwise, then it is required to perform the first step of the two-step goodwill impairment test. ASU 2011-08 is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-08 will have a material impact on the Company’s consolidated results of operations, financial condition or cash flows.

 

In September 2011, the FASB issued ASU 2011-09, Disclosures about an Employer’s Participation in a Multiemployer Plan (“ASU 2011-09”). ASU 2011-09 requires additional quantitative and qualitative disclosures of entities who participate in multiemployer pension and other postretirement plans. ASU 2011-09 is effective for annual periods ending after December 15, 2011 and should be applied retrospectively. The Company is currently evaluating the impact of adopting ASU 2011-09.

 

Note 2 – Acquisition

 

On April 29, 2011, the Company acquired the Medicare prescription drug business of Universal American Corp. (the “UAM Medicare Part D Business”) for approximately $1.3 billion. The UAM Medicare Part D Business offers prescription drug plan benefits to Medicare beneficiaries throughout the United States through its Community CCRxSM prescription drug plan. The fair value of assets acquired and liabilities assumed were $2.4 billion and $1.1 billion, respectively, which included identifiable intangible assets of approximately $0.4 billion and goodwill of approximately $1.0 billion that were recorded in the Company’s Pharmacy Services segment. The allocation of the purchase price is preliminary and is based on information that was available to management at the time the condensed consolidated financial statements were prepared, accordingly, the allocation may change. The Company’s results of operations and cash flows include the UAM Medicare Part D Business beginning on April 29, 2011.

 

Note 3 – Discontinued Operations

 

On September 26, 2011, the Company entered into an agreement with AmerisourceBergen Corporation (“ABC”) to sell its TheraCom, L.L.C. (“TheraCom”) subsidiary for $250 million. On November 1, 2011, the Company completed the sale of TheraCom to ABC. TheraCom is a provider of commercialization support services to the biotech and pharmaceutical industry. As of September 30, 2011 and December 31, 2010, TheraCom had approximately $0.1 billion of current assets (consisting primarily of accounts receivable) and $0.1 billion of current liabilities (consisting primarily of accounts payable). In connection with the anticipated sale, as of September 30, 2011, the Company reclassified approximately $0.2 billion of goodwill expected to be derecognized as part of the sale to other current assets. The TheraCom business has historically been part of the Company’s Pharmacy Services segment. The results of the TheraCom business are presented as discontinued operations and have been excluded from both continuing operations and segment results for all periods presented.

 

In connection with certain business dispositions completed between 1991 and 1997, the Company retained guarantees on store lease obligations for a number of former subsidiaries, including Linens ‘n Things which filed for

 

7



Table of Contents

 

bankruptcy in 2008. The Company’s income (loss) from discontinued operations includes lease-related costs which the Company believes it will likely be required to satisfy pursuant to its Linens ‘n Things lease guarantees.

 

Below is a summary of the results of discontinued operations:

 

 

 

 

 

Three Months Ended September 30, 2011

 

 

 

Three Months Ended September 30, 2010

 

In millions

 

TheraCom

 

Linens ‘n
Things

 

Total

 

TheraCom

Linens ‘n
Things

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

181

 

 

 

$

 

 

 

$

181

 

 

 

$

164

 

 

 

$

 

 

 

$

164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

$

4

 

 

 

$

 

 

 

$

4

 

 

 

$

6

 

 

 

$

 

 

 

$

6

 

Loss on disposal

 

 

 

 

 

(4

)

 

 

(4

)

 

 

 

 

 

(18

)

 

 

(18

)

Income tax benefit (provision)

 

 

(1

)

 

 

1

 

 

 

 

 

 

(2

)

 

 

7

 

 

 

5

 

Income (loss) from discontinued operations, net of tax

 

 

$

3

 

 

 

$

(3

)

 

 

$

 

 

 

$

4

 

 

 

$

(11

)

 

 

$

(7

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2011

 

 

 

Nine Months Ended September 30, 2010

 

 

 

TheraCom

 

Linens ‘n
Things

 

Total

 

TheraCom

 

Linens ‘n
Things

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

582

 

 

 

$

 

 

 

$

582

 

 

 

$

452

 

 

 

$

 

 

 

$

452

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from operations

 

 

$

16

 

 

 

$

 

 

 

$

16

 

 

 

$

18

 

 

 

$

 

 

 

$

18

 

Loss on disposal

 

 

 

 

 

(8

)

 

 

(8

)

 

 

 

 

 

(22

)

 

 

(22

)

Income tax benefit (provision)

 

 

(6

)

 

 

3

 

 

 

(3

)

 

 

(7

)

 

 

8

 

 

 

1

 

Income (loss) from discontinued operations, net of tax

 

 

$

10

 

 

 

$

(5

)

 

 

$

5

 

 

 

$

11

 

 

 

$

(14

)

 

 

$

(3

)

 

Note 4 – Goodwill and Intangible Assets

 

Goodwill and indefinitely-lived trademarks are not amortized, but are subject to annual impairment reviews, or more frequent reviews if events or circumstances indicate there may be impairment. During the three months ended September 30, 2011, the Company performed its required annual impairment tests and concluded there was no impairment of goodwill or trademarks.

 

The carrying amount of goodwill was $26.5 billion and $25.7 billion as of September 30, 2011 and December 31, 2010, respectively. The $0.8 billion increase in goodwill for the nine months ended September 30, 2011 was primarily due to an increase of approximately $1.0 billion related to the acquisition of the UAM Medicare Part D Business, partially offset by an approximately $0.2 billion reclassification of goodwill associated with the TheraCom business held for sale, which was reclassified to other current assets as a result of the anticipated sale. Intangible assets with finite useful lives are amortized over their estimated useful life.

 

The following is a summary of the Company’s intangible assets as of the respective balance sheet dates:

 

 

 

 

As of September 30, 2011

 

 

 

As of December 31, 2010

 

In millions

 

 

Gross
Carrying
Amount

 

 

 

Accumulated
Amortization

 

 

 

Net
Carrying
Amount

 

 

 

Gross
Carrying
Amount

 

 

 

Accumulated
Amortization

 

 

 

Net
Carrying
Amount

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks (indefinitely-lived)

 

 

$

6,398

 

 

 

$

¾

 

 

 

$

6,398

 

 

 

$

6,398

 

 

 

$

¾

 

 

 

$

6,398

 

Customer contracts and relationships and covenants not to compete

 

 

5,376

 

 

 

(2,284

)

 

 

3,092

 

 

 

4,903

 

 

 

(1,982

)

 

 

2,921

 

Favorable leases and other

 

 

785

 

 

 

(328

)

 

 

457

 

 

 

762

 

 

 

(297

)

 

 

465

 

 

 

 

$

12,559

 

 

 

$

(2,612

)

 

 

$

9,947

 

 

 

$

12,063

 

 

 

$

(2,279

)

 

 

$

9,784

 

 

The amortization expense related to finite-lived intangible assets for the three and nine months ended September 30, 2011 was $118 million and $338 million, respectively. The amortization expense related to finite-lived intangible assets for the three and nine months ended September 30, 2010 was $108 million and $319 million, respectively.

 

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Note 5 – Segment Reporting

 

The Company has three segments: Pharmacy Services, Retail Pharmacy and Corporate. The Company’s segments maintain separate financial information for which operating results are evaluated on a regular basis by the Company’s chief operating decision maker in deciding how to allocate resources and in assessing performance. The Company evaluates its Pharmacy Services and Retail Pharmacy segments’ 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 Pharmacy Services segment provides a full range of pharmacy benefit management (“PBM”) services including mail order pharmacy services, specialty pharmacy services, plan design consultation and administration, formulary management and claims processing. The Company’s customers are primarily employers, insurance companies, unions, government employee groups, managed care organizations, other sponsors of health benefit plans and individuals throughout the United States. In addition, through our SilverScript Insurance Company, Accendo Insurance Company, and Pennsylvania Life Insurance Company subsidiaries, we are a national provider of drug benefits to eligible beneficiaries under the Federal Government’s Medicare Part D program. The Pharmacy Services business operates under the CVS Caremark® Pharmacy Services, Caremark®, CVS Caremark®, CarePlus CVS/pharmacy®, CarePlus™, RxAmerica®, Memberhealth®, MHRx® and Accordant® names. As of September 30, 2011, the Pharmacy Services segment operated 31 retail specialty pharmacy stores, 13 specialty mail order pharmacies and four mail service pharmacies located in 23 states, Puerto Rico and the District of Columbia.

 

The Retail Pharmacy segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy® and Longs Drug® retail stores, our CarePlus™ and CarePlus CVS/pharmacy® onsite stores and apothecaries, and online through CVS.com®. As of September 30, 2011, the Retail Pharmacy segment included 7,304 retail drugstores, of which 7,247 operated a pharmacy, the online retail website, CVS.com, 32 retail apothecary pharmacies and 645 retail health care clinics. The retail drugstores are located in 41 states, Puerto Rico and the District of Columbia. The retail health care clinics operate under the MinuteClinic® name, of which 635 are located within CVS/pharmacy stores. MinuteClinics utilize nationally recognized medical protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions and deliver vaccinations. The clinics are staffed by board-certified nurse practitioners and physician assistants who provide access to affordable care without appointment.

 

The Corporate segment provides management and administrative services to support the Company. The Corporate segment consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.

 

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Table of Contents

 

In millions

 

 

Pharmacy
Services
Segment
(1)

 

 

 

Retail
Pharmacy
Segment

 

 

 

Corporate
Segment

 

 

 

Intersegment
Eliminations
(2)

 

 

 

Consolidated
Totals

 

Three Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

$

14,798

 

 

 

$

14,693

 

 

 

$

¾

 

 

 

$

(2,817)

 

 

 

$

26,674

 

Gross profit

 

 

914

 

 

 

4,306

 

 

 

¾

 

 

 

(42)

 

 

 

5,178

 

Operating profit (loss)

 

 

657

 

 

 

1,123

 

 

 

(154)

 

 

 

(42)

 

 

 

1,584

 

September 30, 2010(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

11,762

 

 

 

14,159

 

 

 

¾

 

 

 

(2,210)

 

 

 

23,711

 

Gross profit

 

 

873

 

 

 

4,181

 

 

 

¾

 

 

 

(39)

 

 

 

5,015

 

Operating profit (loss)

 

 

646

 

 

 

1,039

 

 

 

(168)

 

 

 

(39)

 

 

 

1,478

 

Nine Months Ended

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

43,000

 

 

 

44,106

 

 

 

¾

 

 

 

(8,323)

 

 

 

78,783

 

Gross profit

 

 

2,263

 

 

 

12,860

 

 

 

¾

 

 

 

(117)

 

 

 

15,006

 

Operating profit (loss)

 

 

1,496

 

 

 

3,459

 

 

 

(465)

 

 

 

(117)

 

 

 

4,373

 

September 30, 2010(3):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net revenues

 

 

35,151

 

 

 

42,448

 

 

 

¾

 

 

 

(6,410)

 

 

 

71,189

 

Gross profit

 

 

2,460

 

 

 

12,397

 

 

 

¾

 

 

 

(92)

 

 

 

14,765

 

Operating profit (loss)

 

 

1,763

 

 

 

3,164

 

 

 

(459)

 

 

 

(92)

 

 

 

4,376

 

Total assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

35,817

 

 

 

28,774

 

 

 

1,203

 

 

 

(543)

 

 

 

65,251

 

December 31, 2010

 

 

32,254

 

 

 

28,927

 

 

 

1,439

 

 

 

(451)

 

 

 

62,169

 

Goodwill:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

September 30, 2011

 

 

19,705

 

 

 

6,801

 

 

 

¾

 

 

 

¾

 

 

 

26,506

 

December 31, 2010

 

 

18,868

 

 

 

6,801

 

 

 

¾

 

 

 

¾

 

 

 

25,669

 

 

(1)          Net revenues of the Pharmacy Services segment include approximately $1.9 billion and $1.6 billion of retail co-payments for the three months ended September 30, 2011 and 2010, respectively, as well as $6.0 billion and $5.0 billion of retail co-payments for the nine months ended September 30, 2011 and 2010, respectively.

(2)          Intersegment eliminations relate to two types of transactions: (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 standalone 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. As a result, both the Pharmacy Services and the Retail Pharmacy segments include the following results associated with this activity: net revenues of $657 million and $489 million for the three months ended September 30, 2011 and 2010, respectively, and $1.8 billion and $1.3 billion for the nine months ended September 30, 2011 and 2010, respectively; gross profit and operating profit of $42 million and $39 million for the three months ended September 30, 2011 and 2010, respectively, and $117 million and $92 million for the nine months ended September 30, 2011 and 2010, respectively.

(3)          The results of the Pharmacy Services segment for the three and nine months ended September 30, 2010 have been revised to reflect the results of TheraCom as discontinued operations. See Note 3 to the condensed consolidated financial statements.

 

 

Note 6 – Long-Term Debt

 

On May 12, 2011, the Company issued $550 million of 4.125% unsecured senior notes due May 15, 2021 and issued $950 million of 5.75% unsecured senior notes due May 15, 2041 (collectively, the “2011 Notes”). The 2011 Notes pay interest semi-annually and may be redeemed, in whole at any time, or in part from time to time, at the Company’s option at a defined redemption price plus accrued and unpaid interest to the redemption date. The net proceeds of the 2011 Notes were used to repay commercial paper borrowings and certain other corporate debt, and may also be used for general corporate purposes.

 

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Table of Contents

 

Note 7 – Share Repurchase Programs

 

On June 14, 2010, the Company’s Board of Directors authorized a share repurchase program for up to $2.0 billion of outstanding common stock (the “2010 Repurchase Program”). The share repurchase authorization, which was effective immediately and expires at the end of 2011, permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2010 Repurchase Program may be modified, extended or terminated by the Board of Directors at any time. During the three and nine months ended September 30, 2011, the Company repurchased an aggregate of 16.3 million and 43.8 million shares of common stock for approximately $579 million and $1.5 billion, respectively, pursuant to the 2010 Repurchase Program. During 2010, the Company did not make any share repurchases under the 2010 Repurchase Program. As of September 30, 2011, there was approximately $450 million available for repurchases under the 2010 Repurchase Program.

 

On August 23, 2011, the Company’s Board of Directors authorized a new share repurchase program for up to $4.0 billion of outstanding common stock (the “2011 Repurchase Program”). The share repurchase authorization, which was effective immediately, permits the Company to effect repurchases from time to time through a combination of open market repurchases, privately negotiated transactions, accelerated share repurchase transactions, and/or other derivative transactions. The 2011 Repurchase Program may be modified or terminated by the Board of Directors at any time.

 

Pursuant to the authorization under the 2011 Repurchase Program, on August 24, 2011, the Company entered into a $1.0 billion fixed dollar accelerated share repurchase (“ASR”) agreement with Barclays Bank PLC (“Barclays”). The ASR agreement contains provisions that establish the minimum and maximum number of shares that will be repurchased during its term. Pursuant to the ASR agreement, on August 25, 2011, the Company paid $1.0 billion to Barclays in exchange for Barclays delivering 20.3 million shares of common stock to the Company. On September 16, 2011, upon establishment of the minimum number of shares to be repurchased, Barclays delivered an additional 5.4 million shares of common stock to the Company. The aggregate 25.7 million shares of common stock delivered to the Company by Barclays, were placed into treasury stock. The Company may receive up to 3.5 million additional shares of common stock, depending on the market price of common stock over the term of the ASR agreement, which is currently expected to conclude during the fourth quarter of 2011.

 

Note 8 – Stock-Based Compensation

 

Compensation expense related to stock options for the three and nine months ended September 30, 2011 totaled $28 million and $83 million, respectively, compared to $30 million and $95 million for the three and nine months ended September 30, 2010, respectively. Compensation expense related to restricted stock awards for the three and nine months ended September 30, 2011 totaled $6 million and $16 million, respectively, compared to $6 million and $17 million for the three and nine months ended September 30, 2010, respectively. The Company had 63.9 million stock options outstanding as of September 30, 2011 with a weighted average exercise price of $32.91 and a weighted average contractual term of 4.2 years.

 

Note 9 – Interest Expense

 

The following are the components of net interest expense:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

In millions

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Interest expense

 

$

156

 

$

138

 

$

440

 

$

402

Interest income

 

(1)

 

(1)

 

(3)

 

(3)

Interest expense, net

 

$

155

 

$

137

 

$

437

 

$

399

 

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Table of Contents

 

Note 10 – Comprehensive Income

 

The following are the components of comprehensive income:

 

 

 

Three Months Ended
September 30,

 

Nine Months Ended
September 30,

In millions

 

2011

 

2010

 

2011

 

2010

 

 

 

 

 

 

 

 

 

Net income

 

$

867

 

$ 

808

 

$

2,394

 

$  2,399

Net cash flow hedges, net of tax

 

1

 

 

(9)

 

(2)

Pension adjustment, net of tax

 

 

 

 

4

Comprehensive income

 

868

 

808

 

2,385

 

2,401

Comprehensive loss attributable to noncontrolling interest

 

1

 

1

 

3

 

2

Comprehensive income attributable to CVS Caremark

 

$

869

 

$ 

809

 

$

2,388

 

$    2,403

 

Note 11 – Earnings Per Share

 

Basic earnings per common share attributable to CVS Caremark is computed by dividing: (i) net income attributable to CVS Caremark by (ii) the weighted average number of common shares outstanding in the period (the “Basic Shares”).

 

Diluted earnings per common share attributable to CVS Caremark is computed by dividing: (i) net income attributable to CVS Caremark by (ii) Basic Shares plus the additional shares that would be issued assuming that all dilutive stock awards are exercised. Options to purchase approximately 34.1 million and 40.9 million shares of common stock were outstanding, but were not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2011, respectively, because the options’ exercise prices were greater than the average market price of the common shares and, therefore, the effect would be antidilutive. For the same reason, options to purchase approximately 38.4 million and 33.4 million shares of common stock were outstanding, but were not included in the calculation of diluted earnings per share for the three and nine months ended September 30, 2010, respectively.

 

The following is a reconciliation of basic and diluted earnings per common share for the respective periods:

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

September 30,

 

September 30,

In millions, except per share amounts

 

2011

 

2010

 

2011

 

2010

Numerators for earnings per common share calculations:

 

 

 

 

 

 

 

 

Income from continuing operations

 

$  867

 

$ 815

 

$ 2,389

 

$ 2,402

Net loss attributable to noncontrolling interest

 

1

 

1

 

3

 

2

Income from continuing operations attributable to CVS Caremark

 

868

 

816

 

2,392

 

2,404

Income (loss) from discontinued operations, net of tax

 

-

 

(7)   

 

5

 

(3)   

Net income attributable to CVS Caremark, basic and diluted

 

$  868

 

$ 809

 

$ 2,397

 

$ 2,401

 

 

 

 

 

 

 

 

 

Denominators for earnings per common share calculations:

 

 

 

 

 

 

 

 

Weighted average common shares, basic

 

1,332

 

1,360

 

1,350

 

1,368

Effect of dilutive securities:

 

 

 

 

 

 

 

 

Stock options

 

6

 

6

 

5

 

7

Restricted stock units

 

2

 

2

 

1

 

3

Weighted average common shares, diluted

 

1,340

 

1,368

 

1,356

 

1,378

Basic earnings per common share:

 

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Caremark

 

$  0.65

 

$ 0.60

 

$ 1.77

 

$ 1.76

Income (loss) from discontinued operations attributable to CVS Caremark

 

 

(0.01)   

 

0.01

 

(0.01)   

Net income attributable to CVS Caremark

 

$  0.65

 

$ 0.59

 

$ 1.78

 

$ 1.75

Diluted earnings per common share:

 

 

 

 

 

 

 

 

Income from continuing operations attributable to CVS Caremark

 

$  0.65

 

$ 0.60

 

$ 1.76

 

$ 1.75

Income (loss) from discontinued operations attributable to CVS Caremark

 

¾

 

(0.01)   

 

0.01

 

(0.01)   

Net income attributable to CVS Caremark

 

$  0.65

 

$ 0.59

 

$ 1.77

 

$ 1.74

 

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Table of Contents

 

Note 12 – Commitments and Contingencies

 

Lease Guarantees

 

Between 1991 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things, Marshalls, Kay-Bee Toys, Wilsons, This End Up and Footstar. In many cases, when a former subsidiary leased a store, the Company provided a guarantee of the store’s lease obligations. When the subsidiaries were disposed of, the Company’s guarantees remained in place, although each initial purchaser has indemnified the Company for any lease obligations the Company was required to satisfy. If any of the purchasers or any of the former subsidiaries were to become insolvent and failed to make the required payments under a store lease, the Company could be required to satisfy these obligations. As of September 30, 2011, the Company guaranteed approximately 84 such store leases (excluding the lease guarantees related to Linens ‘n Things, which are discussed in Note 3), with the maximum remaining lease term extending through 2021. Management believes the ultimate disposition of any of the remaining guarantees will not have a material adverse effect on the Company’s consolidated financial condition, results of operations or future cash flows.

 

Legal Matters

 

The Company cannot predict with certainty the timing or outcome of the legal matters described below, but we do not believe that any of these matters will have a material adverse effect on the Company’s business, operating results or financial condition. However, the Company can give no assurances that our business, operating results or financial condition will not be materially adversely affected, or that we will not be required to materially change our business practices, based on (i) adverse developments or outcomes in any of the matters described below, (ii) enactment of new health care or other laws or regulations; (iii) interpretation or application of existing laws or regulations, as they may relate to our business or to the pharmacy services or retail pharmacy industry; (iv) pending or future federal or state governmental investigations or enforcement actions related to our business or to the pharmacy services or retail pharmacy industry; or (v) adverse developments or outcomes in other pending or future legal proceedings, including sealed and unsealed qui tam actions, affecting us or affecting the pharmacy services or retail pharmacy industry.

 

We believe that our business practices comply in all material respects with applicable laws and regulations, and we are vigorously defending the actions described below.

 

Caremark (the term “Caremark” being used herein to generally refer to any one or more of the PBM subsidiaries of the Company, as applicable) is a defendant in a qui tam lawsuit initially filed by a relator on behalf of various state and federal government agencies in Texas federal court in 1999. The case was unsealed in May 2005. The case seeks monetary damages and alleges that Caremark’s processing of Medicaid and certain other government claims on behalf of its clients (which allegedly resulted in underpayments from our clients to the applicable government agencies) on one of Caremark’s adjudication platforms violates applicable federal or state false claims acts and fraud statutes. The United States and the States of Texas, Tennessee, Florida, Arkansas, Louisiana and California intervened in the lawsuit, but Tennessee and Florida withdrew from the lawsuit in August 2006 and May 2007, respectively. Thereafter, in 2008, the Company prevailed on several motions for partial summary judgment and, following an appellate ruling from the Fifth Circuit Court of Appeals in 2011 which affirmed in part and reversed in part these prior rulings, the claims asserted in the case against Caremark have been substantially narrowed. In April 2009, the State of Texas filed a purported civil enforcement action against Caremark for injunctive relief, damages and civil penalties in Travis County, Texas alleging that Caremark violated the Texas Medicaid Fraud Prevention Act and other state laws based on our processing of Texas Medicaid claims on behalf of PBM clients. In September 2011, the Company prevailed on a motion for partial summary judgment against the State of Texas and narrowed the remaining claims in the lawsuit. The claims and issues raised in this lawsuit are related to the claims and issues pending in the federal qui tam lawsuit described above.

 

In December 2007, the Company received a document subpoena from the Office of Inspector General, United States Department of Health and Human Services (“OIG”), requesting information relating to the processing of Medicaid and other government agency claims on a different adjudication platform of Caremark. In October 2009 and October 2010, the Company received civil investigative demands from the Office of the Attorney General of the State of Texas requesting, respectively, information produced under this OIG subpoena, and other information related to the processing of Medicaid claims. The civil investigative demands state that the Office of the Attorney General of the State of Texas is investigating allegations currently pending under seal relating to two of Caremark’s adjudication platforms. The Company has been producing documents on a rolling basis in response to the requests for

 

13



Table of Contents

 

information contained in the OIG subpoena and in these civil investigative demands. The Company cannot predict with certainty the timing or outcome of any review of such information.

 

Caremark was named in a putative class action lawsuit filed in October 2003 in Alabama state court by John Lauriello, purportedly on behalf of participants in the 1999 settlement of various securities class action and derivative lawsuits against Caremark and others. Other defendants include insurance companies that provided coverage to Caremark with respect to the settled lawsuits. The Lauriello lawsuit seeks approximately $3.2 billion in compensatory damages plus other non-specified damages based on allegations that the amount of insurance coverage available for the settled lawsuits was misrepresented and suppressed. A similar lawsuit was filed in November 2003 by Frank McArthur, also in Alabama state court, naming as defendants Caremark, several insurance companies, attorneys and law firms involved in the 1999 settlement. This lawsuit was stayed as a later-filed class action, but McArthur was subsequently allowed to intervene in the Lauriello action. The attorneys and law firms named as defendants in McArthur’s intervention pleadings have been dismissed from the case, and discovery on class certification and adequacy issues is underway.

 

Various lawsuits have been filed alleging that Caremark has violated applicable antitrust laws in establishing and maintaining retail pharmacy networks for client health plans. In August 2003, Bellevue Drug Co., Robert Schreiber, Inc. d/b/a Burns Pharmacy and Rehn-Huerbinger Drug Co. d/b/a Parkway Drugs #4, together with Pharmacy Freedom Fund and the National Community Pharmacists Association filed a putative class action against Caremark in Pennsylvania federal court, seeking treble damages and injunctive relief. In October 2003, two independent pharmacies, North Jackson Pharmacy, Inc. and C&C, Inc. d/b/a Big C Discount Drugs, Inc. filed a putative class action complaint in Alabama federal court against Caremark and two PBM competitors, seeking treble damages and injunctive relief. The North Jackson Pharmacy case was transferred to Illinois federal court, and the Bellevue case was sent to arbitration based on contract terms between the pharmacies and Caremark. The Bellevue arbitration was then stayed by the parties pending developments in the North Jackson Pharmacy court case.

 

In August 2006, the Bellevue case and the North Jackson Pharmacy case were both transferred to Pennsylvania federal court by the Judicial Panel on Multidistrict Litigation for coordinated and consolidated proceedings with other cases before the panel, including cases against other PBMs. Caremark appealed a decision vacating the order compelling arbitration and staying the proceedings in the Bellevue case and, following the appeal, the Court of Appeals reinstated the order compelling arbitration of the Bellevue case. Motions for class certification in the coordinated cases within the multidistrict litigation, including the North Jackson Pharmacy case, remain pending, and in 2011 were reassigned to a new judge who ordered supplemental briefing of the class certification. The consolidated action is now known as the In Re Pharmacy Benefit Managers Antitrust Litigation.

 

In August 2009, the Company was notified by the Federal Trade Commission (“FTC”) that it is conducting a non-public investigation under the Federal Trade Commission Act into certain of the Company’s business practices. In March 2010, the Company learned that various State Attorneys General offices and certain other government agencies are conducting a multi-state investigation of the Company regarding issues similar to those being investigated by the FTC. At this time, 24 states, the District of Columbia, and the County of Los Angeles are known to be participating in this multi-state investigation. The Company has been cooperating in these investigations, and has provided documents and other information as requested. The Company is not able to predict with certainty the timing or outcome of these investigations. However, it remains confident that its business practices and service offerings (which are designed to reduce health care costs and expand consumer choice) are being conducted in compliance with the antitrust laws.

 

In March 2009, the Company received a subpoena from the OIG requesting information concerning the Medicare Part D prescription drug plans of RxAmerica, the PBM subsidiary of Longs Drug Stores Corporation which was acquired by the Company in October 2008. The Company continues to respond to this request for information and has been producing responsive documents on a rolling basis. The Company cannot predict with certainty the timing or outcome of any review by the government of such information.

 

Since March 2009, the Company has been named in a series of putative collective and class action lawsuits filed in federal courts around the country, purportedly on behalf of current and former assistant store managers working in the Company’s stores at various locations outside California. The lawsuits allege that the Company failed to pay overtime to assistant store managers as required under the Fair Labor Standards Act (“FLSA”) and under certain state statutes. The lawsuits also seek other relief, including liquidated damages, punitive damages, attorneys’ fees, costs and injunctive relief arising out of the state and federal claims for overtime pay. Notice was issued to over 13,000 current and former assistant store managers offering them the opportunity to “opt in” to certain of the FLSA collective actions and about 2,000 have elected to participate in these lawsuits. The Company has aggressively challenged both the merits of the lawsuits and the allegation that the cases should be certified as class or collective actions. In light of the cost and uncertainty involved in this litigation, however, the Company has negotiated an

 

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agreement with plaintiffs’ counsel on the key terms of a global settlement. Any final resolution of these matters will be subject to approval by a court, and as yet the parties have not finalized a settlement agreement or submitted any agreement for court approval. The Company has established legal reserves related to these matters at September 30, 2011 to cover the estimated settlement payments.

 

In March 2009, the Company received a subpoena from the OIG requesting information about programs under which the Company has offered customers remuneration conditioned upon the transfer of prescriptions for drugs or medications to our pharmacies in the form of gift cards, cash, non-prescription merchandise or discounts or coupons for non-prescription merchandise. The subpoena relates to an investigation of possible false or otherwise improper claims for payment under the Medicare and Medicaid programs. The Company continues to respond to this request for information and has been producing responsive documents on a rolling basis. We cannot predict with certainty the timing or outcome of any reviews by the government of such information.

 

In November 2009, a securities class action lawsuit was filed in the United States District Court for the District of Rhode Island purportedly on behalf of purchasers of CVS Caremark Corporation stock between May 5, 2009 and November 4, 2009. The lawsuit names the Company and certain officers as defendants and includes allegations of securities fraud relating to public disclosures made by the Company concerning the PBM business and allegations of insider trading. In addition, a shareholder derivative lawsuit was filed in December 2009 in the same court against the directors and certain officers of the Company. A derivative lawsuit is a lawsuit filed by a shareholder purporting to assert claims on behalf of a corporation against directors and officers of the corporation. This lawsuit includes allegations of, among other things, securities fraud, insider trading and breach of fiduciary duties and further alleges that the Company was damaged by the purchase of stock at allegedly inflated prices under its share repurchase program. In January 2011, both lawsuits were transferred to the United States District Court for the District of New Hampshire. The Company believes these lawsuits are without merit, and the Company plans to defend them vigorously. The Company received a subpoena dated February 28, 2011 from the SEC requesting, among other corporate records, information relating to public disclosures made by the Company in 2009 concerning its PBM and Medicare Part D businesses and information concerning ownership and transactions in the Company’s securities by certain officers of the Company. The Company received a related subpoena dated September 20, 2011 from the SEC seeking, among other things, additional information concerning securities transactions by certain employees of the Company and public disclosures made by the Company during 2009. The Company is cooperating with these requests for information and has been providing documents and other information to the SEC as requested.

 

In addition to the legal matters described above, the Company is also a party to other legal proceedings and inquiries arising in the normal course of its business, none of which is expected to be material to the Company.

 

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Part I

 

Item 1

 

Report of Independent Registered Public Accounting Firm

 

The Board of Directors and Shareholders

CVS Caremark Corporation:

 

We have reviewed the condensed consolidated balance sheet of CVS Caremark Corporation (the Company) as of September 30, 2011, and the related condensed consolidated statements of income for the three-month and nine-month periods ended September 30, 2011 and 2010, and the condensed consolidated statements of cash flows for the nine-month periods ended September 30, 2011 and 2010. These financial statements are the responsibility of the Company’s management.

 

We conducted our review in accordance with the standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the Public Company Accounting Oversight Board, 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 condensed consolidated financial statements referred to above for them to be in conformity with U.S. generally accepted accounting principles.

 

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CVS Caremark Corporation as of December 31, 2010, and the related consolidated statements of income, shareholders’ equity, and cash flows for the year then ended not presented herein, and in our report dated February 18, 2011, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2010, is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.

 

 

/s/ Ernst & Young LLP

 

November 3, 2011

Boston, Massachusetts

 

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Part I

 

Item 2

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview of Our Business

 

CVS Caremark Corporation (“CVS Caremark”, the “Company”, “we” or “us”), together with its subsidiaries, is the largest pharmacy health care provider in the United States. As a fully integrated pharmacy services company, we believe we can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management (“PBM”), mail order and specialty pharmacy division; our approximately 7,300 CVS/pharmacy® retail stores; our retail-based health clinic subsidiary, MinuteClinic®; and our online pharmacy, CVS.com®.

 

We currently have three reportable segments: Pharmacy Services, Retail Pharmacy and Corporate.

 

Pharmacy Services Segment

 

Our Pharmacy Services segment provides a full range of PBM services including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our clients are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health benefit plans and individuals throughout the United States. As a PBM, we manage the dispensing of pharmaceuticals through our mail order pharmacies and national network of approximately 65,000 retail pharmacies (which include our CVS/pharmacy stores) to eligible members in the benefit plans maintained by our clients and utilize our information systems to perform, among other things, safety checks, drug interaction screenings and brand to generic substitutions.

 

Our specialty pharmacies support individuals that require complex and expensive drug therapies. Our specialty pharmacy business includes mail order and retail specialty pharmacies that operate under the CVS Caremark® and CarePlus CVS/pharmacy® names. We also provide health management programs, which include integrated disease management for 28 conditions, through our strategic alliance with Alere, L.L.C. and our Accordant® health management offering. In addition, through our SilverScript Insurance Company, Accendo Insurance Company, and Pennsylvania Life Insurance Company subsidiaries, we are a national provider of drug benefits to eligible beneficiaries under the Federal Government’s Medicare Part D program. The Pharmacy Services business operates under the CVS Caremark® Pharmacy Services (“Caremark”), Caremark®, CVS Caremark®, CarePlus CVS/pharmacy®, RxAmerica®, Memberhealth®, MHRx® and Accordant® names. As of September 30, 2011, the Pharmacy Services segment operated 31 retail specialty pharmacy stores, 13 specialty mail order pharmacies and four mail service pharmacies located in 23 states, Puerto Rico and the District of Columbia.

 

On April 29, 2011, we acquired the Medicare prescription drug business of Universal American Corp. (the “UAM Medicare Part D Business”) for approximately $1.3 billion. The UAM Medicare Part D Business offers prescription drug plan benefits to Medicare beneficiaries throughout the United States through its Community CCRxsm prescription drug plan. Subsequent to this acquisition, we now provide Medicare benefits to over 3 million beneficiaries.

 

Retail Pharmacy Segment

 

Our Retail Pharmacy segment sells prescription drugs and a wide assortment of general merchandise, including over-the-counter drugs, beauty products and cosmetics, photo finishing, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy® and Longs Drugs® retail stores, our CarePlus™ and CarePlus CVS/pharmacy® onsite stores and apothecaries,  and online through CVS.com®. Our Retail Pharmacy segment derives the majority of its revenues through the sale of prescription drugs, which are dispensed by our more than 21,000 retail pharmacists. Our Retail Pharmacy segment also provides health care services through our MinuteClinic health care clinics. MinuteClinics are staffed by nurse practitioners and physician assistants who utilize nationally recognized protocols to diagnose and treat minor health conditions, perform health screenings, monitor chronic conditions, and deliver vaccinations. As of September 30, 2011, our Retail Pharmacy segment included 7,304 retail drugstores (of which 7,247 operated a pharmacy) located in 41 states, the District of Columbia, and Puerto Rico operating primarily under the CVS/pharmacy or Longs Drugs names, our online retail website, CVS.com, 32 retail apothecary pharmacy stores and 645 retail health care clinics operating under the MinuteClinic name (of which 635 were located in CVS/pharmacy stores).

 

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Corporate Segment

 

The Corporate segment provides management and administrative services to support the Company. The Corporate segment consists of certain aspects of our executive management, corporate relations, legal, compliance, human resources, corporate information technology and finance departments.