CVS 2006 Annual Report Download

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More good things ON THE HORIZON
CVS CORPORATION
2006 ANNUAL REPORT

Table of contents

  • Page 1
    More good things ON THE HORIZON CVS CORPORATION 2006 ANNUAL REPORT

  • Page 2
    ... $ 43,813.8 2,441.6 1,368.9 1.60 30.91 25,479.1 $ 37,006.2 2,019.5 1,224.7 1.45 26.42 21,514.0 18.4% 20.9% 11.8% 10.3% 17.0% 18.4% STORE COUNT AT YEAR END 06 05 04 6,202 5,471 5,375 CVS/pharmacy and PharmaCare Specialty Pharmacy locations ANNUAL DIVIDENDS DECLARED 06 05 04 $0.155 $0.145 $0.133

  • Page 3
    ... prescriptions in the United States. Our 176,000 colleagues work hard to make things "CVS easy" for our customers - from the pharmacy and the front of the store to MinuteClinic, PharmaCare, and CVS.com. Our company trades on the New York Stock Exchange under the ticker symbol "CVS." OUR VISION We...

  • Page 4
    ... dividend increase for 2007. Our 176,000 CVS colleagues across the country helped us achieve these excellent results. I want to thank them all for their hard work in making things "CVS easy" for our customers. Turning to our stock's performance, the 17.6 percent total return on CVS shares in 2006...

  • Page 5
    ... and Texas as well as Las Vegas, Los Angeles, Chicago, Minneapolis, and Phoenix. All our new stores in these markets are running at or above plan, with both the front end and pharmacy performing well. Benefiting from new opportunities in the pharmacy CVS/pharmacy stores now fill 16 percent of...

  • Page 6
    ...number of MinuteClinics from 83 to 155 across 19 states. Furthermore, we plan to open approximately 300 MinuteClinics in 2007 with well over 2,500 CVS/pharmacy stores slated to have MinuteClinics over the long term. will combine our unmatched retail footprint and PharmaCare subsidiary with Caremark...

  • Page 7
    ... drive growth. In MinuteClinic, we took an important step in broadening our healthcare offerings. Finally, our pending merger with Caremark would position us to be the low-cost provider and to offer payors, insurers, and consumers greater choice in prescription delivery and new, value-added services...

  • Page 8
    CVS Corporation enjoyed an outstanding year in 2006, and we see "more good things" on the horizon - for our customers and shareholders alike. We're opening new stores in some of the nation's fastest-growing markets, introducing even more consumers to our exclusive brands and the "CVS easy" shopping ...

  • Page 9
    ... benefit from several long-term trends driving their increasing use. According to industry sources, U.S. pharmacy sales are expected to continue growing at an annual rate of 5 to 8 percent for the foreseeable future. With more locations than any other U.S. pharmacy retailer, CVS stands to be among...

  • Page 10
    More good things FOR HEALTHY LIVING 2006 Annual Report 

  • Page 11
    ... of the ways we make our stores "CVS easy." Customers also appreciate our in-store beauty advisors, digital photo labs, and the benefits of our ExtraCare loyalty program. By using the ExtraCare card with every purchase, shoppers take advantage of in-store sales while avoiding the hassle of clipping...

  • Page 12
    More good things AT YOUR FINGERTIPS 2006 Annual Report 

  • Page 13
    More good things IN STORE 0 CVS Corporation

  • Page 14
    .... By focusing on a limited number of ailments that can be addressed quickly, MinuteClinics provide an ideal solution for professionals and parents with busy schedules. They are open seven days a week and do not require appointments. Moreover, visitors can scan a list of services and prices prior to...

  • Page 15
    More good things DOWN THE ROAD 2 CVS Corporation

  • Page 16
    ...business as we leverage a long-term turnaround opportunity. More CVS/pharmacy locations are on the way. We plan to open 275 new or relocated stores in 2007, adding another 3 percent to our total retail square footage. CVS/pharmacy Markets PharmaCare Specialty Pharmacy Stores 2006 Annual Report 

  • Page 17
    More good things BEYOND OUR STORES  CVS Corporation

  • Page 18
    ...people, the CVS name is synonymous with our 6,150 retail pharmacies located from coast to coast. Through our PharmaCare subsidiary, we also operate strong mail order, specialty pharmacy, and pharmacy benefits management businesses. In fact, PharmaCare generated $3.7 billion in revenue in 2006, a 25...

  • Page 19
    ... Playgrounds, and works with schools such as Meeting Street in Providence, Rhode Island. This National Center of Excellence serves as a model of education and inclusion for all children. CVS also funds Easter Seals affiliates across the country, and we raise more than $2 million annually to support...

  • Page 20
    ... 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 21
    ..., located in  states, of which 2 are located within CVS retail drugstores. In addition, we provide pharmacy benefit management, mail order services and specialty pharmacy services through PharmaCare Management Services ("PharmaCare") and PharmaCare Pharmacy® stores. As of December 0, 2006...

  • Page 22
    ... of the new meeting date as promptly as possible. The proposed merger would be accounted for using the purchase method of accounting under U.S. GAAP. Under the purchase method of accounting, CVS will be considered the acquiror of Caremark for accounting purposes and the total purchase price will be...

  • Page 23
    ...Part D and a prescription benefit plan for State of Connecticut employees. Net premium revenue related to these contracts totaled $0. million and $.6 million during 2006 and 2005, respectively. • Pharmacy revenue growth continued to benefit from new market expansions, increased penetration in...

  • Page 24
    ...you review our results in this area, we believe you should consider the following important information: • The effective income tax rate was negatively impacted during 2006 due to the implementation of SFAS No. 2(R), as the compensation expense associated with our employee stock purchase plan is...

  • Page 25
    ... pay fixed rate swaps (the "Swaps"), with a notional amount of $50 million. The Swaps settled in conjunction with the placement of the long-term financing. As of December 0, 2006, we had no freestanding derivatives in place. Total stores (beginning of year) New and acquired stores Closed stores...

  • Page 26
    ... information. Although we currently believe our long-term debt ratings will remain investment grade, we cannot guarantee the future actions of Moody's and Standard & Poor's. Our debt ratings have a direct impact on our future borrowing costs, access to capital markets and new store operating lease...

  • Page 27
    ..., 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 underlying lease, the specific marketplace demand and general economic conditions. 2 CVS Corporation

  • Page 28
    ... a number of factors, which include but are not limited to, historical physical inventory results on a location-by-location basis and current inventory loss trends. Our total reserve for estimated inventory losses covered by this critical accounting policy was $25. million as of December 0, 2006...

  • Page 29
    ... relating to sales growth, earnings or earnings per common share growth, free cash flow, debt rating, inventory levels, inventory turn and loss rates, store development, relocations and new market entries, as well as statements expressing optimism or pessimism about future operating results...

  • Page 30
    ... to establish effective advertising, marketing and promotional programs (including pricing strategies and price reduction programs implemented in response to competitive pressures and/or to drive demand); • Our ability to continue to secure suitable new store locations under acceptable lease terms...

  • Page 31
    ... includes those policies and procedures that pertain to the Company's ability to record, process, summarize and report a system of internal accounting controls and procedures to provide reasonable assurance, at an appropriate cost/benefit relationship, that the unauthorized acquisition, use or...

  • Page 32
    ... Company Accounting Oversight Board (United States), the consolidated balance sheets of CVS Corporation and subsidiaries as of December 0, 2006 and December , 2005, and the related consolidated statements of operations, shareholders' equity, and cash flows for the fifty-two week periods ended...

  • Page 33
    ... Fiscal Year Ended Dec. 30, 2006 (52 weeks) Fiscal Year Ended Dec. , 2005 (52 weeks) Fiscal Year Ended Jan. , 2005 (52 weeks) Net revenues Cost of goods sold, buying and warehousing costs Gross profit Selling, general and administrative expenses Depreciation and amortization Total operating...

  • Page 34
    CONSOLIDATED BALANCE SHEETS In millions, except shares and per share amounts Dec. 30, 2006 Dec. , 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 35
    ... 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: Beginning of year Conversion of preference stock Stock option activity and awards Tax benefit...

  • Page 36
    ... Stock based compensation 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 Accounts payable Accrued expenses Other long-term...

  • Page 37
    ... 6, 2005 to shareholders of record as of May 2, 2005. All share and per share amounts presented herein have been restated to reflect the effect of the stock split. Inventories Inventory is stated at the lower of cost or market on a first-in, first-out basis using the retail method of accounting to...

  • Page 38
    ... reported are calculated using standard insurance industry actuarial assumptions based on historical data, current enrollment, health service utilization statistics and other related information and are provided by third party actuaries. The Company capitalizes application development stage costs...

  • Page 39
    ... book value of abandoned property and equipment, are charged to expense. The long-term portion of the lease obligations associated with store closings was $.0 million, $06. million, and $50. million in 2006, 2005 and 200, respectively. Income Taxes The Company provides for federal and state...

  • Page 40
    ... additional information regarding stock-based compensation. The Company adopted FASB Staff Position ("FSP") No. FAS -, "Accounting for Rental Costs Incurred during a Construction Period," effective January , 2006. The FSP addresses the accounting for rental costs associated with operating leases...

  • Page 41
    ..., including Eckerd Corporation ("Eckerd"). The acquisition included more than ,200 Eckerd retail drugstores and Eckerd Health Services, which includes Eckerd's mail order and pharmacy benefit management businesses (collectively, the "200 Acquired Businesses"). The final purchase price, including...

  • Page 42
    ...the life of the related long-term financing. As of December 0, 2006, the Company had no freestanding derivatives in place. Following is a summary of the Company's borrowings as of the respective balance sheet dates: Dec. 30, 2006 Dec. , 2005 In millions Commercial paper 5.625% senior notes due...

  • Page 43
    ... reflected in shareholders' equity in the accompanying consolidated balance sheets. Each share of ESOP Preference Stock has a guaranteed minimum liquidation value of $5.5, is convertible into .62 shares of common stock and is entitled to receive an annual dividend of $.0 per share. 2006 2005...

  • Page 44
    ... on the date of grant. Compensation expense related to stock options, which includes the  Employee Stock Purchase Plan ("ESPP") totaled $60. million for 2006. The recognized tax benefit was $.0 million for 2006. Compensation expense related to restricted stock awards totaled $.2 million for...

  • Page 45
    NOTES TO CONSOLIDATED FINANCIAL STATEMENTS The Company's  Incentive Compensation Plan (the "ICP") provides for the granting of up to 5. million shares of common stock in the form of stock options and other awards to selected officers, employees and directors of the Company. The ICP allows for...

  • Page 46
    ... including the Company's matching contribution, can be moved without restriction among various investment options, including the Company's common stock. The Company also maintains a nonqualified, unfunded Deferred Compensation Plan for certain key employees. This plan provides 2006 Annual Report 

  • Page 47
    ... full-time employees of Revco, D.S., Inc. who were not covered by collective bargaining agreements. On September 20, , 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 48
    ...of the related benefits. The expected long-term rate of return is determined by using the target allocation and historical returns for each asset class. The Company utilized a measurement date of December  to determine pension and other postretirement benefit measurements. The Company In millions...

  • Page 49
    ... 0, 2006. Management believes the ultimate disposition of any of the guarantees will not have a material adverse effect on the Company's consolidated financial condition, results of operations or future cash flows. The Rhode Island Attorney General's Office, the Rhode Island Ethics Commission...

  • Page 50
    ...200, that motion was denied. The Louisiana Municipal Police Employees' Retirement System also filed a purported class action lawsuit purportedly on behalf of Caremark stockholders in the Delaware Court of Chancery against Caremark's directors and CVS. The complaint alleges, among other things, that...

  • Page 51
    ... 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, formulary management and claims processing, as well as providing reinsurance services in...

  • Page 52
    ... benefit Net earnings available to common shareholders, basic Net earnings Dilutive earnings adjustment Net earnings available to common shareholders, diluted Denominator for earnings per common share calculation: Weighted average common shares, basic Preference stock Stock options Restricted stock...

  • Page 53
    ... expense for acquired intangible assets. On November , 2006, the Company entered into a definitive agreement and plan of merger with Caremark Rx, Inc., ("Caremark"). The agreement is structured as a merger of equals under which Caremark shareholders will receive .60 shares of common stock, par...

  • Page 54
    ... tax provision () Net earnings (5) Per common share data: Net earnings: (5) Basic Diluted Cash dividends per common share Balance sheet and other data: Total assets Long-term debt (less current portion) Total shareholders' equity Number of stores (at end of period) (1) () (2) $ 43,813.8 11,939...

  • Page 55
    .... As discussed in Note  to the consolidated financial statements, CVS Corporation adopted the provisions of Statement of Financial Accounting Standards No. 2 (revised 200), "Share-Based Payment" effective January , 2006. KPMG LLP Providence, Rhode Island February 2, 200 52 CVS Corporation

  • Page 56
    ...One CVS Drive, Woonsocket, RI 025 (0) 65-500 Annual Shareholders' Meeting May , 200 CVS Corporate Headquarters Stock Market Listing New York Stock Exchange Symbol: CVS (1) (3) Transfer Agent and Registrar Questions regarding stock holdings, certificate replacement/transfer, dividends and...

  • Page 57
    CVS CORPORATION 2006 ANNUAL REPORT ® ® ® One CVS Drive Woonsocket, RI 025 (0) 65-500 www.cvs.com