CVS 2001 Annual Report Download - page 16

CVS Corporation
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The decrease in interest expense in 2001 was due to a
co mbinatio n o f lo wer average interest rates and lower average
borrowing levels during 2001 co mpared to 2000. The increase in
interest expense in 2000 was due to a co mbinatio n o f higher
average interest rates and higher average borro wing levels during
2000 co mpared to 1999.
I ncome tax provision ~ Our effective inco me tax rate was 41.8%
in 2001, 40.0% in 2000 and 41.0% in 1999. Our effective inco me
tax rate was higher in 2001 because certain co mpo nents o f the
Restructuring Charge were no t deductible fo r inco me tax
purpo ses. The decrease in o ur effective inco me tax rate in 2000
was primarily due to lo wer state inco me taxes. Excluding the
impact o f the Restructuring Charge, o ur effective inco me tax rate
was 39.4% in 2001.
Net earnings decreased $332.8 millio n to $413.2 millio n ( o r
$1.00 per diluted share) in 2001. This co mpares to $746.0
millio n ( o r $1.83 per diluted share) in 2000 and $635.1 millio n
( o r $1.55 per diluted share) in 1999. If yo u exclude the effect o f
the Restructuring Charge and the $2.1 millio n net no nrecurring
gain ( o r $0.56 per diluted share) in 2001 and the $11. 5 millio n
litigatio n gain ( o r $0.03 per diluted share) in 2000, o ur
co mparable net earnings decreased $92.9 millio n to $641. 6
millio n ( o r $1.56 per diluted share) in 2001. This compares to
$734.5 millio n ( o r $1.80 per diluted share) in 2000 and $635.1
millio n ( o r $1.55 per diluted share) in 1999.
Liquidit y & Capital Resources
We fund the gro wth o f o ur business through a co mbinatio n o f
cash flo w fro m o peratio ns, co mmercial paper and long- term
borrowings. Our liquidity is no t currently dependent o n the use o f
off- balance sheet transactio ns o ther than no rmal operating leases.
We had $235.8 millio n o f co mmercial paper o utstanding at a
weighted average interest rate o f 2.1% as of December 29, 2001.
In c o nnection with o ur co mmercial paper pro gram, we maintain a
$650 millio n, five- year unsecured bac k-up credit facility, which
expires o n May 30, 2006 and a $650 millio n, 364- day unsecured
bac k-up credit facility, which expires on May 30, 2002. We
currently expec t to replace the 364-day facility with a similar
facility during 2002. The credit facilities allo w fo r bo rro wings at
vario us rates depending o n o ur public debt rating. As o f December
29, 2001, we had no t bo rro wed against the credit facilities.
During 2001, we issued $300 millio n of 5.625% unsecured senio r
notes. The notes are due March 15, 2006 and pay interest semi-
annually. We may redeem these no tes at any time, in who le or in
part, at a defined redemptio n pric e plus accrued interest. Net
pro ceeds from the no tes were used to repay o utstanding
co mmercial paper.
Our credit facilities and unsecured senio r notes co ntain custo mary
restrictive financial and o perating co venants. We do no t believe
that the restrictio ns co ntained in the co venants materially affec t
o ur financial o r o perating flexibility.
Our liquidity is based, in part, o n maintaining strong investment-
grade debt ratings. During 2001, o ur debt ratings were upgraded
by Mo o dy’s to ‘A2’ fo r long- term debt and ‘P-1’ fo r co mmercial
paper, while Standard and Po o r’s affirmed o ur ‘A’ rating fo r lo ng-
term debt and ‘A- 1’ fo r co mmercial paper. We do no t currently
fo resee any reaso nable circumstances under which we wo uld lo se
o ur investment- grade debt ratings. Ho wever, if this were to o c cur,
it co uld adversely impact, amo ng o ther things, o ur future
borrowing co sts, ac cess to capital markets and new sto re
o perating lease co sts.
We believe that o ur cash o n hand, cash pro vided by o peratio ns,
o ur co mmercial paper program and o ur ability to o btain
alternative so urces o f financing should be sufficient to c o ver o ur
working capital needs, capital expenditures and debt service
requirements fo r at least the next twelve months and beyo nd.
On March 6, 2000, the Bo ard of Directo rs appro ved a co mmo n
sto ck repurchase pro g ram, which allo ws the Co mpany to acquire
up to $1 billio n o f its co mmo n sto c k, in part, to fund emplo yee
benefit plans. During 2001, we repurchased 3.4 millio n shares at
an aggregate co st o f $129. 0 millio n. Since inceptio n of the
pro gram, we repurc hased 8.1 millio n shares at an aggregate c o st
of $292.2 million.
Net cash provided by operating acti vit ies decreased to $680.6
millio n in 2001. This co mpares to $780.2 millio n in 2000 and
$726.3 millio n in 1999. The decline in net cash pro vided by
o peratio ns was primarily the result o f lo wer net earnings. Cash
pro vided by o perating activities will be neg atively impac ted by
future payments asso c iated with the Restructuring Charge. The
timing of future cash payments related to the Restructuring
Charge depend o n when, and if, early lease terminatio ns can be
reac hed. We currently anticipate that a majo rity o f the lease
o bligatio ns will be settled during 2002. As o f December 29, 2001,
the remaining payments, which primarily co nsist o f no ncancelable
lease o blig atio ns extending thro ugh 2024, to taled $244.8 millio n.
Net cash used in investing activities decreased to $536.8
millio n in 2001. This co mpares to $640.5 millio n in 2000 and
$566.4 millio n in 1999. The decline in net cash used in investing
activities was primarily due to reduced acquisitio n activity.
Additio ns to pro perty and equipment totaled $713.6 millio n
during 2001. This co mpares to $695. 3 million in 2000 and $722.7
millio n in 1999. During 2001 we o pened 126 new sto res,
relo cated 122 sto res and clo sed 68 sto res. New sto re develo pment
inc luded 43 sto res in new markets, including: Miami and Ft.
Lauderdale, Flo rida; Las Vegas, Nevada; and Dallas, Ho usto n and
Fo rt Wo rth, Texas. During 2002 we pro jec t appro ximately 150-175
new sto res, including 75 in new markets, 100 relo catio ns and 50
sto re clo sings in additio n to the Restructuring Charge sto re
clo sings. As of December 29, 2001, we o perated 4,191 retail and
specialty pharmacy sto res in 33 states and the District o f
Co lumbia. This c o mpares to 4,133 sto res as of December 30, 2000.
Management’s Discussion and Analysis of