CVS 2006 Annual Report Download - page 22

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2006 Annual Report 19
its special meeting of shareholders to be held for the same purpose
had been adjourned to March 9, 2007. In light of the Delaware court’s
ruling, CVS intends to once again adjourn the meeting to a later date
in March and will inform shareholders 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 allocated to the assets acquired and
liabilities assumed from Caremark based on their fair values as of the date
of the completion of the merger and any excess of purchase price over
those fair values will be recorded as goodwill. Our reported financial
condition and results of operations issued after completion of the merger
will reflect Caremark’s balances and results after completion of the
merger, but will not be restated retroactively to reflect the historical
financial position or results of operations of Caremark. Following the
completion of the merger, our earnings will reflect purchase accounting
adjustments, including increased amortization expense for acquired
intangible assets.
ACQUIRED BUSINESS
On June 2, 2006, CVS acquired certain assets and assumed certain
liabilities from Albertson’s, Inc. (“Albertsons”) for $4.0 billion. The assets
acquired and the liabilities assumed included approximately 700 standalone
drugstores and a distribution center (collectively the “Standalone Drug
Business”). CVS financed the acquisition of the Standalone Drug Business
by issuing commercial paper and borrowing $1.0 billion from a bridge loan
facility. During the third quarter of 2006, CVS repaid a portion of the
commercial paper used to finance the acquisition with the proceeds received
from the issuance of $800 million of 5.75% unsecured senior notes due
August 15, 2011 and $700 million of 6.125% unsecured senior notes due
August 15, 2016. During the fourth quarter of 2006, CVS sold a substantial
portion of the acquired real estate through a sale-leaseback transaction,
the proceeds of which were used in retiring the bridge loan facility.
Please see Note 2 to our consolidated financial statements for further
information on the Standalone Drug Business.
RESULTS OF OPERATIONS AND INDUSTRY ANALYSIS
The Company’s fiscal year is a 52 or 53 week period ending on the
Saturday closest to December 31. Fiscal 2006, which ended on
December 30, 2006, fiscal 2005, which ended on December 31, 2005,
and fiscal 2004, which ended on January 1, 2005, each included
52 weeks. Unless otherwise noted, all references to years relate to
these fiscal years.
Net Revenues
The following table summarizes our revenue performance:
2006 2005 2004
Net revenues (in billions) $ 43.8 $ 37.0 $ 30.6
Net revenue increase:
Total 18.4 % 21.0 % 15.1 %
Pharmacy 18.3 % 22.0 % 17.1 %
Front store 18.7 % 18.4 % 10.5 %
Same store
sales increase: (1)
Total 8.2 % 6.5 % 5.5 %
Pharmacy 9.1 % 7.0 % 7.0 %
Front store 6.2 % 5.5 % 2.3 %
Pharmacy % of
total revenue 69.6 % 70.2 % 70.0 %
Third party % of
pharmacy revenue 94.7 % 94.1 % 94.1 %
Retail adjusted
prescriptions filled
(in millions) 513 450 375
(1) Same store sales do not include the sales results of the Standalone Drug Business.
The Standalone Drug Business will be included in same store sales following the
one-year anniversary of the acquisition, beginning in fiscal July 2007.
As you review our performance in this area, we believe you should
consider the following important information:
• During 2006, total net revenues were significantly affected by the
acquisition of the Standalone Drug Business. Excluding the revenues
from the Standalone Drug Business, total revenues increased
approximately 10.4% during 2006.
• During 2005, total net revenues were significantly affected by the
July 31, 2004 acquisition of certain assets and certain assumed
liabilities from J.C. Penney Company, Inc. and certain of its subsidiaries,
including Eckerd Corporation (“Eckerd”). This acquisition included
more than 1,200 Eckerd retail drugstores and Eckerd Health Services,
which included Eckerd’s mail order and pharmacy benefit management
businesses (collectively, the “2004 Acquired Businesses”). Excluding
the revenues from the 2004 Acquired Businesses, total net revenues
increased approximately 8.4% and 5.2% during 2005 and 2004,
respectively. Beginning in August 2005, same store sales include the
acquired Eckerd stores, which increased total same store sales by
approximately 110 basis points during 2006.
• Total net revenues from new stores accounted for approximately
130 basis points of our total net revenue percentage increase in
2006, and 160 basis points in 2005.