CVS 2007 Annual Report Download - page 69

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65 I 2007 Annual Report
In addition to the CAP examination, the IRS is examining
the Company’s consolidated U.S. income tax return for fiscal year
2006 and the consolidated U.S. income tax returns of Caremark
for fiscal years 2004 and 2005, which benefit from net operating
loss carry-forwards going back to 1993. The Company and its
subsidiaries are also currently under examination by various state
and local jurisdictions. As of December 29, 2007, no examination
has resulted in any proposed adjustments that would result in a
material change to the Company’s results of operations, financial
condition or liquidity.
The Company recognizes interest accrued related to unrecognized
tax benefits and penalties in income tax expense. During the
fiscal year ended December 29, 2007, the Company recognized
interest of approximately $17.8 million. The Company had
approximately $44.3 million accrued for interest and penalties
as of December 29, 2007.
There are no material reserves established at December 29,
2007 for income tax positions for which the ultimate deductibility
is highly certain but for which there is uncertainty about the
timing of such deductibility. If present, such items would impact
deferred tax accounting, not the annual effective income tax rate,
and would accelerate the payment of cash to the taxing authority
to an earlier period.
The total amount of unrecognized tax benefits that, if recognized,
would affect the effective income tax rate is approximately
$26.9 million, after considering the federal benefit of state
income taxes.
We are currently unable to estimate if there will be any significant
changes in the amount of unrecognized tax benefits over the next
twelve months. Pursuant to SFAS No. 141, “Business Combinations,”
and EITF No. 93-7, “Uncertainties Related to Income Taxes in a
Purchase Business Combination” (“EITF 93-7”), any income tax
adjustments made in the Company’s 2008 financial statements
that are related to pre-acquisition tax periods will result in
modifications to the assets acquired and liabilities assumed in
the applicable business combination.
Business Segments
The Company currently operates two business segments:
Retail Pharmacy and Pharmacy Services. The operating segments
are businesses of the Company for which separate financial
information is available and for which operating results are
evaluated on a regular basis by executive management in
deciding how to allocate resources and in assessing performance.
The Company’s business segments offer different products and
services and require distinct technology and marketing strategies.
As of December 29, 2007, the Retail Pharmacy Segment
included 6,245 retail drugstores, the Company’s online retail
website, CVS.com® and its retail healthcare clinics. The retail
drugstores are located in 40 states and the District of Columbia
and operate under the CVS® or CVS/pharmacy® name. The retail
healthcare clinics utilize nationally recognized medical protocols
to diagnose and treat minor health conditions and are staffed by
board-certified nurse practitioners and physician assistants. The
retail healthcare clinics operate under the MinuteClinic® name
and include 462 clinics located in 25 states, 437 of which are
located within the Company’s retail drugstores.
The Pharmacy Services Segment provides a full range of phar-
macy benefit management services to employers, managed care
providers and other organizations. These services include mail
order pharmacy services, specialty pharmacy services, plan design
and administration, formulary management and claims process-
ing, as well as providing insurance and reinsurance services in
conjunction with prescription drug benefit plans. The specialty
pharmacy business focuses on supporting individuals that require
complex and expensive drug therapies. Currently, the Pharmacy
Services Segment operates under the Caremark Pharmacy
Services®, PharmaCare Management Services® and PharmaCare
Pharmacy® names.
As of December 29, 2007, the Pharmacy Services Segment
included 56 retail specialty drugstores, 20 specialty mail order
pharmacies and 9 mail service pharmacies located in 26 states
and the District of Columbia.
The Company evaluates segment performance based on net
revenues, gross profit and operating profit before the effect
of certain intersegment activities and charges. The accounting
policies of the segments are substantially the same as those
described in Note 1.
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