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CVS CORPORATION ANNUAL REPORT
At CVS, All Signs Point to Growth
2005

Table of contents

  • Page 1
    At CVS, All Signs Point to Growth CVS CORPORATION ANNUAL REPORT 2005

  • Page 2
    ... to being the easiest pharmacy for customers to use. Our 148,000 colleagues work hard so that everyone can "expect something extra" whether entering one of our stores, shopping at CVS.com, or using PharmaCare's services. Our company trades on the New York Stock Exchange under the ticker "CVS."

  • Page 3
    ...Services, acquired in 2004. At the same time, we opened approximately 300 new or relocated stores in both existing and new markets. Throughout this activity, we never lost focus on our core business, as evidenced by our same store sales growth and market share gains. Our PharmaCare pharmacy benefits...

  • Page 4
    ... We will also acquire a distribution center in La Habra, California. The transaction is expected to be accretive to both earnings and cash flow in its first full year. Leveraging new opportunities in pharmacy CVS now fills 14 percent of all U.S. retail drug prescriptions. Generics account for well...

  • Page 5
    ... PharmaCare will provide a full array of PBM services to Universal American-sponsored Medicare prescription plans. Our ExtraCare® loyalty card has become a powerful tool, and customers tell us that they love the benefits. Gaining share in all key, front-store categories CVS gained share in the...

  • Page 6
    ...left a legacy that will help guide our company well into the future. In closing, the bright opportunities before us mean that all signs point to growth for CVS. We expect to reap multi-year benefits from the turnaround of our acquired properties. Our retail pharmacies will leverage our leadership in...

  • Page 7
    ... footprint over the past several years. At year-end 2005, we operated 5,420 CVS/pharmacy locations in 34 states and Washington, D.C. With the expected addition of approximately 700 Osco and Sav-on stores later in 2006, we will have the No. 1 or No. 2 share in 75 percent of the top 100 U.S. drugstore...

  • Page 8
    6 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 9
    ...IMS Health, pharmacy sales are expected to continue growing at a 5 to 8 percent compound annual rate. The increased use of pharmaceuticals as the first line of defense in health care, the introduction of new and better drug therapies, and an aging population requiring more prescription drugs are all...

  • Page 10
    8 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 11
    ...locations, such merchandise now accounts for 12 percent of total sales, up from 8 percent just a year ago. Consumers are already embracing some of our newest CVS brand and exclusive offerings, including the Life Fitness® line of vitamins and, in the beauty aisle, Skin Effects® by Dr. Jeffrey Dover...

  • Page 12
    10 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 13
    ... a snap for customers to find us. That's because our stores are conveniently located within two miles of half the population in our markets. With 5,420 locations and counting, CVS pharmacies fill one in every five prescriptions in our markets. We dispensed more than 400 million scripts in 2005, and...

  • Page 14
    12 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 15
    ... the CVS/pharmacy beauty care aisle from one found in a department store. Except when it comes to cost, of course. That's because we offer premium-quality brands, such as Finland's Lumene®, at prices that don't break the bank. We continue to be first-to-market with exciting new products launched...

  • Page 16
    14 AT CVS, ALL SIGNS POINT TO GROWTH

  • Page 17
    ... complex medical needs. As for "overall service and performance," the Pharmacy Benefit Management Institute recently ranked PharmaCare No. 1 in its annual Customer Satisfaction Report for the fifth consecutive year. The launch of the Medicare Part D prescription drug benefit provides a significant...

  • Page 18
    Our Vision We help people live longer, healthier, happier lives. Our Mission We will be the easiest pharmacy retailer for customers to use. Respect for individuals Integrity Teamwork Openness to new ideas Commitment to flawless execution Passion for extraordinary customer service Our Values for...

  • Page 19
    ... Condition and Results of Operations 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...

  • Page 20
    ... drugs, 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...

  • Page 21
    ... future programs, we may not be able to sustain our current rate of sales growth. TOTAL OPERATING EXPENSES, which include store and administrative payroll, employee benefits, store and administrative occupancy costs, selling expenses, advertising expenses, administrative expenses and depreciation...

  • Page 22
    ..., including the cost of extending store hours. The elevated inventory levels during 2004 were primarily the result of inventory purchased to reset the acquired stores with the CVS/pharmacy product mix. NET CASH USED IN INVESTING ACTIVITIES decreased to $911.6 million in 2005. This compares to $3,163...

  • Page 23
    ... adverse effect on our consolidated financial condition, results of operations or future cash flows. Off-Balance Sheet Arrangements In connection with executing operating leases, we provide a guarantee of the lease payments. We finance a portion of our new store development through sale-leaseback...

  • Page 24
    ... lower of cost or market on a first-in, first-out basis using the retail method of accounting to determine cost of sales and inventory in our stores, and the cost method of accounting to determine inventory in our distribution centers. Under the retail method, inventory is stated at cost, which is...

  • Page 25
    ... to maintain relationships with suppliers on favorable terms; Our ability to implement successfully and to manage new computer systems and technologies; The strength of the economy in general or in the markets served by CVS, including changes in consumer purchasing power and/or spending patterns...

  • Page 26
    ... of the operating effectiveness of controls. Our system of internal control over financial reporting is enhanced by periodic reviews by our internal auditors, written policies and procedures and a written Code of Conduct adopted by our Company's Board of Directors, applicable to all employees of our...

  • Page 27
    ... reporting as of December 31, 2005, based on criteria established in Internal Control- Integrated Framework issued by COSO. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Corporation...

  • Page 28
    ...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 to common shareholders Basic...

  • Page 29
    CONSOLIDATED BALANCE SHEETS In millions, except shares and per share amounts Dec. 31, 2005 Jan. 1, 2005 Assets: Cash and cash equivalents Accounts receivable, net Inventories Deferred income taxes Other current assets Total current assets Property and equipment, net Goodwill Intangible assets, ...

  • Page 30
    ... options exercised and awards End of year Treasury stock: Beginning of year Purchase of treasury shares Conversion of preference 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...

  • Page 31
    ... to net cash provided by operating activities: Depreciation and amortization Deferred income taxes and other non-cash items Change in operating assets and liabilities providing/(requiring) cash, net of effects from acquisitions: Accounts receivable, net Inventories Other current assets Other assets...

  • Page 32
    ...-counter drugs, beauty products and cosmetics, film and photofinishing services, seasonal merchandise, greeting cards and convenience foods, through its CVS/pharmacy ® retail stores and Pharmacy ® ® The Company also provides pharmacy benefit management, mail order services online through CVS.com...

  • Page 33
    ... time the merchandise is sold. Customer returns are immaterial. Service revenue from the Company's pharmacy benefit management segment, which is recognized using the net method under Emerging Issues Task Force ("EITF") Issue No. 99-19, "Reporting Revenue Gross as a Principal Versus Net as an Agent...

  • Page 34
    ... information regarding stock-based compensation. earnings, after deducting the after-tax Employee Stock Ownership Plan ("ESOP") preference dividends, by (ii) the weighted average number of common shares outstanding during the year (the "Basic Shares"). 32 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 35
    ..., including Eckerd Corporation ("Eckerd"). The acquisition included more than 1,200 Eckerd retail drugstores and Eckerd Health Services, which includes Eckerd's mail order and pharmacy benefit management businesses (collectively, the "Acquired Businesses"). The final purchase price, including...

  • Page 36
    ..., while Following is a summary of the Company's amortizable intangible assets as of the respective balance sheet dates: Dec. 31, 2005 In millions Gross Carrying Amount intangible assets with indefinite useful lives are not amortized. The Company currently has no intangible assets with indefinite...

  • Page 37
    ... full-time employees of Revco, D.S., Inc. who were not covered by collective bargaining agreements. On September 20, 1997, the Company suspended future benefit accruals under this plan. Benefits paid to retirees are based upon age at retirement, years of credited service and average compensation...

  • Page 38
    ... 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 expected expense and cash contribution requirements. The pension plan assets...

  • Page 39
    ... in the accompanying consolidated balance sheets. 7 Stock Incentive Plans The Company's 1997 Incentive Compensation Plan (the "ICP") provides for the granting of up to 85.8 million shares of common stock in the form of stock options and other awards to selected officers, employees and directors of...

  • Page 40
    ...'s ICP was approved by shareholders, allowing non-employee directors to receive awards under the ICP. Upon approval of this amendment to the ICP, all authority to make future grants under the Company's 1996 Directors Stock Plan was terminated, although previously granted awards remain outstanding in...

  • Page 41
    ... the respective years: In millions 2005 2004 2003 8 Employee Stock Ownership Plan The Company sponsors a defined contribution Employee Stock Ownership Plan (the "ESOP") that covers full-time employees with at least one year of service. Current: Federal State Deferred: $ 632.8 31.7 664.5 $ 397...

  • Page 42
    ... of business. The Company currently expects to satisfy these purchase commitments by 2008. Jan. 1, 2005 Deferred tax assets: Lease and rents Inventory Employee benefits Accumulated other comprehensive items Retirement benefits Allowance for bad debt Amortization method Other Total deferred tax...

  • Page 43
    ... of the Company's net sales for the respective years: 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 services, specialty pharmacy services, plan design and administration...

  • Page 44
    ..."). Approximately half of the drugstores are located in southern California, with others in the Company's existing markets in numerous states across the Midwest and Southwest. The Company will also acquire Albertson's owned real estate interests in the 42 CVS CORPORATION 2005 ANNUAL REPORT

  • Page 45
    ... common share Stock price: (New York Stock Exchange) High Low Registered shareholders at year-end 2004: 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...

  • Page 46
    ... 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 of the Chief Accountant of the...

  • Page 47
    ... of the Treadway Commission (COSO), and our report dated March 14, 2006 expressed an unqualified opinion on management's assessment of, and the effective operation of, internal control over financial reporting. KPMG LLP Providence, Rhode Island March 14, 2006 CVS CORPORATION 2005 ANNUAL REPORT 45

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    46

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  • Page 50
    ... regarding stock holdings, certificate replacement/transfer, dividends and address changes should be directed to: The Bank of New York Shareholder Relations Department P.O. Box 11258 Church Street Station New York, NY 10286 V. Michael Ferdinandi Senior Vice President-Human Resources and Corporate...

  • Page 51
    ... Astrodome, the Convention Center in Austin, and Kelly Air Force Base in San Antonio. As always, CVS remains committed to higher education. We provide scholarship funding to dozens of pharmacy schools and to the children of our own colleagues through the CVS/pharmacy Corporate Scholarship Program.

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