This excerpt taken from the CVS 10-Q filed May 8, 2007.
Gross profit includes net revenues less the cost of services and the cost of merchandise sold during the reporting period in addition to the related purchasing costs, warehousing costs, delivery costs and actual and estimated inventory losses. Gross profit as a percentage of revenues was 25.4% for the first quarter ending March 31, 2007. This compares to 26.6% of net sales in the first quarter of 2006.
As you review our performance in this area, we believe you should consider the following important information:
Managements Discussion and Analysis of Financial Condition and Results of Operations
Total operating expenses, which include store and administrative payroll, employee benefits, store and administrative occupancy costs, selling expenses, advertising expenses, administrative expenses and depreciation and amortization expense, increased 25.1%. However, total operating expenses were 19.8% of net revenues for the first quarter of 2007, compared 20.9% of net revenues in the first quarter of 2006. Total operating expenses as a percentage of net revenue were impacted by the increase in net revenues as a result of the Caremark Merger. The increase in total operating expenses resulted from costs associated with the Caremark Merger and integration, which totaled $25.3 million.
Interest expense, net consisted of the following:
The increase in interest expense primarily relates to an increase in our average debt balances primarily due to borrowings necessary to fund the acquisition of the Standalone Drug Business and a portion of the special cash dividend paid to Caremark shareholders.
Income tax provision ~ Our effective income tax rate was 39.2% for the first quarter of 2007, compared to 38.9% for the first quarter of 2006. The increase in our effective income tax rate was primarily due to increases in state income taxes as a result of the Caremark Merger. We anticipate that the impact of the Caremark Merger will cause in our effective annual income tax rate to increase to 39.7% for the 2007 fiscal year.
Net earnings for the first quarter of 2007 increased $79.3 million, or 24.1%, to $408.9 million (or $0.43 per diluted share), compared to $329.6 million (or $0.39 per diluted share), in the first quarter of 2006. The increase in net earnings was primarily due to strong revenues and improved margin rates in the Retail Segment in addition to cost controls. Net earnings increased $7.0 million as a result of the Caremark operations for the ten day period, which was offset by integration costs of $25.3 million, increased interest expense and an increase in the income tax rate.