CVS 2004 Annual Report Download

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CVS Corporation 2004 Annual Report
At CVS, it’s all in a day’s work...

Table of contents

  • Page 1
    At CVS, it's all in a day's work...CVS Corporation 2004 Annual Report

  • Page 2
    ...acquired Eckerd stores, we completed the training of more than 11,000 pharmacists and pharmacy support personnel on CVS systems, service processes, and standards. With more than 5,300 retail stores throughout the country and more on the way, CVS is well positioned to benefit from long-term pharmacy...

  • Page 3
    Supported by the latest in technology, there's always a trusted CVS pharmacist ready to meet your prescription needs...even in the middle of the night. 1

  • Page 4
    ... CVS opens its doors. In 2004, 225 new or relocated CVS stores opened for business. From Southern California and Las Vegas to Minneapolis/St. Paul and Chicago, we focused our expansion efforts on some of the fastestgrowing markets in the country. Meanwhile, we replaced Eckerd signs with CVS/pharmacy...

  • Page 5
    CVS signs are going up across Florida, Texas, and points in between as we rapidly convert acquired Eckerd stores to the CVS/pharmacy brand. 3

  • Page 6
    ... we became the first national pharmacy retailer to install self-service digital photo kiosks chain-wide. We followed up by being the first to offer printing from digital camera phones, the first to offer uploading of digital images to the Web for next-day, in-store pickup, and the first to offer...

  • Page 7
    Beauty advisors are just one of the ways we help make shopping "CVS easy." Among our beauty solutions, we offer Finland's exclusive Lumene product line. 5

  • Page 8
    ... mail order pharmacy business whose sales exceed $1 billion annually. As a result, CVS can now provide an unmatched total solution to meet the specific service and costcontainment needs of major payors. With our combined retail and mail order presence, we can offer unique plan designs that provide...

  • Page 9
    Through our stores and mail order pharmacy facilities like this one, CVS is uniquely positioned to offer payors flexible solutions to help control costs. 7

  • Page 10
    ... give their time to a broad range of worthwhile causes. CVS colleagues reach out to the underprivileged, teach children how to read, and tend to the sick and elderly. The CVS/pharmacy Charitable Trust continued to support their efforts in 2004 by providing a record $1.7 million in grants to 76...

  • Page 11
    The Windy City Kids Child Development Center is one of many organizations through which CVS colleagues help our communities across America. 9

  • Page 12
    ...from the delivery truck to store shelves. When our new Central Florida distribution center opens in late 2006, it will incorporate the same technology. At the store level, the EPIC system has improved pharmacy workflow and cut costs, while our Assisted Inventory Management (AIM) system has taken the...

  • Page 13
    The first of its kind in North America, our highly efficient distribution center in Ennis, Texas, makes it "CVS easy" to keep our stores well-stocked. 11

  • Page 14
    Financial Highlights 2004 In millions, except per share 52 weeks 2003 53 weeks % Change Sales Operating profit Net earnings Diluted earnings per common share Stock price at calendar year end Market capitalization at calendar year end $30,594.3 1,454.7 918.8 2.20 45.07 18,071 $26,588.0 1,423.6 ...

  • Page 15
    ... preview, and other new CVS private label and exclusive brands, we continued to differentiate our offerings. Rapidly integrating our new businesses; expanding in high-growth markets I'm happy to report that the Eckerd integration is proceeding faster than any large-scale integration in our industry...

  • Page 16
    ... and closings. As a result, square footage grew 3.4 percent. With the acquired stores, retail square footage increased 33 percent. Virtually all our net growth took place in newer CVS markets such as Texas, Florida, Phoenix, Las Vegas, and Chicago. We opened our first stores in Los Angeles and...

  • Page 17
    ... co-insurance arrangements, Rx to over-the-counter switches, and the growth in mandatory mail order plans. However, ours is still a growth industry. Pharmaceutical and biotech companies are hard at work '02 '03 '04 discovering new drugs, and $40-$50 billion worth of branded drug sales will...

  • Page 18
    ...Thank you for investing in CVS. Thomas M. Ryan Chairman of the Board, President, and Chief Executive Officer March 8, 2005 CVS/pharmacy Retail Markets Expanding Our Reach Five years ago, CVS/pharmacy stores filled prescriptions in 4,098 stores in 26 states and the District of Columbia. Today, we...

  • Page 19
    ... and Results of Operation Management's Report on Internal Control Over Financial Reporting Report of Independent Registered Public Accounting Firm Consolidated Statements of Operations Consolidated Balance Sheets Consolidated Statements of Shareholders' Equity Consolidated Statements of Cash...

  • Page 20
    ... beauty products and cosmetics, film and photofinishing services, seasonal merchandise, greeting cards and convenience foods through our CVS/pharmacy® retail stores and online through CVS.com.® We also provide pharmacy benefit management, mail order services and specialty pharmacy services through...

  • Page 21
    ... brand named drug sales. Front store sales benefited from an increase in promotional programs in 2002 that were designed to respond to competitive and economic conditions, and from the implementation of our Assisted Inventory Management system, which increased our in-stock positions. Our pharmacy...

  • Page 22
    ... properties are sold at net book value and the resulting leases qualify and are accounted for as operating leases. During 2005, we currently plan to invest over $1.4 billion in gross capital expenditures, which will include spending for approximately 275-300 new or relocated stores. 20 | Management...

  • Page 23
    ... or guarantee any off-balance sheet debt. We finance a portion of our new store development through sale-leaseback transactions, which involves selling stores to unrelated parties at net book value and then leasing the stores back under leases that qualify and are accounted for as operating leases...

  • Page 24
    ...corporate level lease guarantees will not have a material adverse effect on our consolidated financial condition, results of operations or future cash flows. We issue letters of credit for insurance programs and import purchases. The fair value of the outstanding letters of credit was $132.5 million...

  • Page 25
    ... these potential termination costs and their related timing, we consider a number of factors, which include, but are not limited to, historical settlement experience, the owner of the property, the location and condition of the property, the terms of the Our inventory is stated at the lower of cost...

  • Page 26
    ... secure suitable new store locations under acceptable lease terms; Our ability to attract, hire and retain suitable pharmacists and management personnel; Our ability to achieve cost efficiencies and other benefits from various operational initiatives and technological enhancements; Litigation risks...

  • Page 27
    ... purchasers of businesses formerly owned by CVS and whose leases are guaranteed by CVS; Fluctuations in inventory cost, availability and loss levels and our ability to maintain relationships with suppliers on favorable terms; Our ability to implement successfully and to manage new computer systems...

  • Page 28
    ...the operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors and independent registered public accounting firm, written policies and procedures and a written Code of Conduct adopted by our Company's Board of...

  • Page 29
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Corporation and subsidiaries as of January 1, 2005 and January 3, 2004, and the related consolidated statements of operations, shareholders' equity, and cash flows for the fifty-two week period ended...

  • Page 30
    ... costs Gross margin Selling, general and administrative expenses Depreciation and amortization Total operating expenses Operating profit Interest expense, net Earnings before income tax provision Income tax provision Net earnings Preference dividends, net of income tax benefit Net earnings available...

  • Page 31
    ... net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, net Deferred income taxes Other assets Total assets LIABILITIES: Accounts payable Accrued expenses Short-term debt Current portion of long-term debt Total current...

  • Page 32
    ... stock Employee stock purchase plan issuance End of year GUARANTEED ESOP OBLIGATION: Beginning of year Reduction of guaranteed ESOP obligation End of year CAPITAL SURPLUS: Beginning of year Conversion of preference stock Stock option activity and awards Tax benefit on stock options and awards...

  • Page 33
    ...,262.9) (5,475.5) 5.7 (64.9) (510.4) 968.9 2002 (52 WEEKS) Cash receipts from sales Cash paid for inventory Cash paid to other suppliers and employees Interest and dividends received Interest paid Income taxes paid NET CASH PROVIDED BY OPERATING ACTIVITIES $ 24,128.4 (17,715.1) (4,832.5) 4.1 (60...

  • Page 34
    ...-counter drugs, beauty products and cosmetics, film and photofinishing services, seasonal merchandise, greeting cards and convenience foods, through its CVS/pharmacy® retail stores and online through CVS.com.® The Company also provides pharmacy benefit management, mail order services and specialty...

  • Page 35
    ...and equipment Leasehold improvements Capitalized software Capital leases Accumulated depreciation and amortization from the sale of merchandise at the time the merchandise is sold. Service revenue from the Company's pharmacy benefit management segment, which is recognized using the net method under...

  • Page 36
    ...25, "Accounting for Stock Issued to Employees," and related interpretations. As such, no stock-based employee compensation cost is reflected in net earnings for options granted under those plans since they had an exercise price equal to the market value of the underlying common stock on the date of...

  • Page 37
    ... retail drugstores and Eckerd Health Services, which includes Eckerd's mail order and pharmacy benefit management businesses (collectively, the "Acquired Businesses"). The Company believes that the acquisition of the Acquired Businesses is consistent with its long-term strategy of expanding its...

  • Page 38
    ... equivalents Accounts receivable Inventories Other current assets Total current assets Property and equipment Goodwill Intangible assets Other assets Total assets acquired Accounts payable Accrued expenses Total current liabilities Other long-term liabilities Total liabilities Net assets acquired...

  • Page 39
    ... Mortgage notes payable Capital lease obligations Less: Short-term debt Current portion of long-term debt (885.6) (30.6) $ 1,925.9 (1) See Note 6 for further information about the Company's ESOP Plan. In connection with our commercial paper program, the Company maintains a $650 million, five-year...

  • Page 40
    ... through sale-leaseback transactions. The properties are sold at net book value and the resulting leases qualify and are accounted for as operating leases. The Company does not have any retained or contingent interests in the stores nor does the Company provide any guarantees, other than a corporate...

  • Page 41
    ... nonqualified supplemental executive retirement plans in place for certain key employees for whom it has purchased cost recovery variable life insurance. The Company uses an investment strategy which emphasizes equities in order to produce higher expected returns, and in the long run, lower expense...

  • Page 42
    ...expected long-term rate of return is determined by using the target allocation and historical returns for each asset class. Following is a reconciliation of the benefit obligation, fair value of plan assets and funded status of the Company's defined benefit and other postretirement benefit plans as...

  • Page 43
    ...the Directors Plan. The ICP provides for the granting of up to 42.9 million shares of common stock in the form of stock options and other awards to selected officers and employees of the Company. All grants under the ICP are awarded at fair market value on the date of grant. Options granted prior to...

  • Page 44
    ... purchase $116 million of merchandise inventory for use in the normal course of business. The Company currently expects to satisfy these purchase commitments by 2008. Beginning in August 2001, a total of nine actions were filed against the Company in the United States District Court for the District...

  • Page 45
    ...States District Court for the District of Massachusetts and designated as related to the Securities Action. The complaint names as defendants the Company, its chief executive officer, certain members of the CVS Board of Directors and certain unnamed fiduciaries. The Company believes the ERISA Action...

  • Page 46
    ... and operate under the CVS® or 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 mail order pharmacy...

  • Page 47
    ...YEAR Dollars in millions, except per share amounts Net sales Gross margin Operating profit(1) Net earnings(2) Net earnings per common share, basic(2) Net earnings per common share, diluted(2) Dividends per common share Stock price: (New York Stock Exchange) High Low Registered shareholders at year...

  • Page 48
    ...million after-tax) non-recurring charge in 2001 related to the markdown of certain inventory contained in stores closed as part of a strategic restructuring program. (2) In 2004, the Company conformed its accounting for operating leases and leasehold improvements to the views expressed by the Office...

  • Page 49
    ...Public Accounting Firm THE BOARD OF DIRECTORS AND SHAREHOLDERS CVS CORPORATION We have audited the accompanying consolidated balance sheets of CVS Corporation and subsidiaries as of January 1, 2005 and January 3, 2004, and the related consolidated statements of operations, shareholders' equity and...

  • Page 50
    ...-Human Resources and Corporate Communications T errence Murray Retired; formerly Chairman of the Board and Chief Executive Officer FleetBoston Financial Corporation Philip C. Galbo Senior Vice President and Treasurer Direct Stock Purchase/Dividend Reinvestment Program BuyDIRECT sm provides...

  • Page 51
    ..., healthier, happier lives. OUR MISSION We will be the easiest pharmacy retailer for customers to use. OUR VALUES FOR SUCCESS Respect for individuals Integrity Teamwork Openness to new ideas Commitment to flawless execution Passion for extraordinary customer service It's all in a day's work.

  • Page 52
    CVS Corporation One CVS Drive, Woonsocket, RI 02895 http://investor.cvs.com