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HEALTHY OUTCOMES AR 08
CVS Caremark Corporation 2008 Annual Report

Table of contents

  • Page 1
    HEALTHY OUTCOMES AR 08 CVS Caremark Corporation 2008 Annual Report

  • Page 2
    With U.S. health care expenses expected to double over the next decade, plan sponsors are looking for innovative ways to promote healthy outcomes and manage costs. CVS Caremark is taking on this challenge by integrating our leading pharmacy benefit management company with the nation's largest chain...

  • Page 3
    ... Drug Plans. We employ approximately 215,000 colleagues in 44 states, the District of Columbia, and Puerto Rico. At year-end, we operated 6,923 drugstores, 560 MinuteClinic® locations, 58 retail specialty pharmacy stores, 19 specialty mail order pharmacies, six mail service pharmacies, and our CVS...

  • Page 4
    ...Continuing Operations Stock price at calendar year end Market capitalization at year end (1) Fiscal Year 2008 and Fiscal Year 2007 include 368 days and 364 days, respectively. TOTAL REVENUES (dollars in millions) STOCK PRICE AT YEAR END (at calendar year end in dollars) ANNUAL DIVIDENDS DECLARED...

  • Page 5
    ..., CVS Caremark plays a critical role in the way health care is delivered today. We do this, in part, through our traditional strengths in generic substitution, mail service, network management, clinical programs, and specialty guideline management. As we integrate our PBM offerings with CVS/pharmacy...

  • Page 6
    ...drug substitution - in our stores and through the mail. Currently, for more than 6 million plan participants, special CVS ExtraCare® Health Cards offer significant in-store discounts on CVS brand products eligible for reimbursement from Flexible Spending Accounts. Our CVS/pharmacy® Health Savings...

  • Page 7
    ... over 60 percent have drive-thru windows. NH WA MT OR ID WY IA NV UT CA CO KS NE IL IN OH WV MO KY NC TN AZ OK NM AR MS TX LA FL HI AL GA SC VA SD ND MN NY WI MI PA VT ME MA RI CT NJ DE MD DC Retail drug stores PBM mail or specialty retail locations 2008 ANNUAL REPORT 3

  • Page 8
    ... 90-day prescriptions at any CVS/pharmacy store at the same cost as mail for both the plan participant and the payor. Our breadth of capabilities also includes industryleading clinical and disease management programs, customer service excellence, leadership in retail clinics, and specialty pharmacy...

  • Page 9
    ...90-day supplies at CVS/pharmacy. PARTICIPANT SAVINGS PLAN SAVINGS $320 $415 PARTICIPANT SAVINGS PLAN SAVINGS $600 $2,400 MARK REYES ALLIE REYES Allie controls her allergies with an OTC, CVS brand generic antihistamine purchased with an ExtraCare Health card. It costs the family $24 a month less...

  • Page 10
    ... record revenue and earnings, achieved industry-leading same-store sales growth, and continued to gain share across our businesses. 6 CVS CAREMARK • We introduced our Proactive Pharmacy Care offerings, which are designed to make pharmacy care more accessible and lower overall health care costs...

  • Page 11
    ... come to expect from a top-rated PBM; however, we're also offering plan design options and services that no standalone PBM can match." in 2008. CVS Caremark has a solid balance sheet and an investment grade credit rating, and we maintain a commercial paper program currently backed by $4 billion in...

  • Page 12
    ...Our existing stores outperform the Longs locations significantly in sales per square foot, gross margins, and other important measures. We intend to leverage our systems, our focus on private label and exclusive brands, our category mix, and the ExtraCare loyalty card to turn good stores into great...

  • Page 13
    ... of directors and CVS Caremark's 215,000 colleagues across the country, thank you for your confidence in our company and our vision. We are just beginning to realize the benefits of our broader pharmacy health care mission. Thomas M. Ryan Chairman of the Board, President & CEO 2008 ANNUAL REPORT...

  • Page 14
    ... for all the PBM and retail services, including those that have been made possible as a result of our merger. A. LARRY MERLO: Exactly. Maintenance Choice, Bridge Supply, and Specialty Pickup at CVS/pharmacy are all examples of Proactive Pharmacy Care. Our in-store pharmacists have really embraced...

  • Page 15
    ... the company that we each thought would best fit our approach to pharmacy health care. Q. Specialty accounts for the fastest growing sector in pharmaceutical spend today. How will CVS Caremark help rein in costs? A. LM: Beauty remains one of the key front-end categories in our CVS/pharmacy stores...

  • Page 16
    ... a pharmacist at one of our CVS Caremark call centers and receiving prescriptions through mail order works best. Many others prefer the option of visiting one of our convenient retail or specialty stores. Here we invite you to the future of pharmacy care by following the journey of one CVS Caremark...

  • Page 17
    ... practitioner runs this test as well. Anna is encouraged to consult her health care provider to develop a treatment plan. Non-adherence can happen for many reasons. If it does, Anna will receive targeted counseling from the local CVS/pharmacy team she knows and trusts. 2008 ANNUAL REPORT 13

  • Page 18
    ... of customer service. Take the case of John C., a newly diagnosed rheumatoid arthritis patient: EASY BILLING When John brings his specialty medication prescription to his CVS/pharmacy, he learns his benefits do not cover the treatment. Our pharmacist seamlessly refers John's order to CVS Caremark...

  • Page 19
    ...IN-STORE PICKUP Now that John is working again, he is concerned about the safety of his refills if he isn't home to receive them. His CVS Caremark Specialty Pharmacy service representative informs him that we can fill his specialty prescription at a CVS/pharmacy near his home. SPECIALTY SERVICES...

  • Page 20
    ... CVS Caremark All Kids Can™ program. Through All Kids Can, we support nonprofit organizations that focus on helping children with disabilities learn, play, and succeed in life. For example, teams of CVS Caremark colleagues logged more than 75,000 volunteer hours across the company in 2008...

  • Page 21
    ... 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 Cash Flows Consolidated Statements of Shareholders' Equity...

  • Page 22
    ...can drive value for our customers by effectively managing pharmaceutical costs and improving health care outcomes through our pharmacy benefit management, mail order and specialty pharmacy division, Caremark Pharmacy Services®; our more than 6,900 CVS/pharmacy® and Longs Drug® retail stores; our...

  • Page 23
    ... including mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. Our customers are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health...

  • Page 24
    ... from Caremark from the merger date (March 22, 2007) forward. • Effective October 20, 2008, we acquired Longs Drug Stores Corporation, which included 529 retail drug stores (the "Longs Drug Stores"), RxAmerica, LLC ("RxAmerica"), which provides pharmacy benefit management services and Medicare...

  • Page 25
    ... to an increase in our average debt balance, which resulted primarily from the borrowings used to fund the special cash dividend paid to Caremark shareholders and the accelerated share repurchase program that commenced subsequent to the Caremark Merger. During 2006, net interest expense increased by...

  • Page 26
    ... statements for additional information about Retail Co-Payments. (2) Intersegment eliminations relate to intersegment revenues that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the revenue on...

  • Page 27
    ... the consummation of the Caremark Merger, resulting from the change-in-control provisions in certain Caremark employment agreements, and merger-related costs of $150.1 million. (3) 2008 includes the results of RxAmerica from the acquisition date (October 20, 2008) forward. 2008 ANNUAL REPORT 23

  • Page 28
    ... of the historical financial results provides meaningful information. Net revenues. As you review our Pharmacy Services Segment's revenue performance, we believe you should consider the following important information: • During 2008 and 2007, the Caremark Merger increased net revenues by...

  • Page 29
    ... and 2006, respectively. During 2008 and 2007, the Caremark Merger significantly affected our gross profit dollars and gross profit rates. As you review our Pharmacy Services Segment's performance in this area, we believe you should consider the following important information: • Our comparable...

  • Page 30
    ... related to selling, general and administrative activities and retail specialty pharmacy store and administrative payroll, employee benefits and occupancy costs decreased to 2.3% of net revenues in 2008, compared to 2.6% and 3.8% in 2007 and 2006, respectively. As you review our Pharmacy Services...

  • Page 31
    ...consuming a greater number of prescription drugs. In addition, the increased use of pharmaceuticals as the first line of defense for individual health care also contributed to the growing demand for pharmacy services. We believe these favorable industry trends will continue. 2008 ANNUAL REPORT 27

  • Page 32
    ... sales, which normally yield a higher gross profit rate than other front store products) and benefits derived from our ExtraCare loyalty program. • During 2008, our pharmacy gross profit rate continued to benefit from a portion of the purchasing synergies resulting from the Caremark Merger...

  • Page 33
    ...fic timing and amount of future sale-leaseback transactions will vary depending on future market conditions and other factors. Following is a summary of our store development activity for the respective years: 2008 2007 2006 LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities...

  • Page 34
    ... the other credit facilities. Long-term borrowings. On September 10, 2008, we issued $350 million of ï¬,oating rate senior notes due September 10, 2010 (the "2008 Notes"). The 2008 Notes pay interest quarterly and may be redeemed at any time, in whole or in part at a defined redemption price plus...

  • Page 35
    ...common stock of the Company to 7.625 cents per share. OFF-BALANCE SHEET ARRANGEMENTS In connection with executing operating leases, we provide a guarantee of the lease payments. We also finance a portion of our new store development through sale-leaseback transactions, which involve selling stores...

  • Page 36
    ...-term liabilities reï¬,ected in our consolidated balance sheet Capital lease obligations (1) Interest payments on long-term debt are calculated on outstanding balances and interest rates in effect on December 31, 2008. CRITICAL ACCOUNTING POLICIES We prepare our consolidated financial statements...

  • Page 37
    ... These estimates can be affected by a number of factors including, but not limited to, general economic conditions, availability of market information as well as the profitability of the Company. Goodwill is tested on a reporting unit basis using the expected present value of future cash ï¬,ows. In...

  • Page 38
    ... basis using the retail method of accounting to determine cost of sales and inventory in our CVS/pharmacy stores, average cost to determine cost of sales and inventory in our mail service and specialty pharmacies and the cost method of accounting to determine inventory in the Longs Drug Stores and...

  • Page 39
    ... of operations, financial position and cash ï¬,ows. In the first quarter of 2008, we adopted Financial Accounting Standards Board ("FASB") Staff Position No. FAS 157-3, "Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active," which clarifies the application...

  • Page 40
    ... planned benefits in accordance with the expected timing; • The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies and other third party payors to reduce prescription drug costs and pharmacy reimbursement rates, particularly...

  • Page 41
    ... and testing 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...

  • Page 42
    ... Public Company Accounting Oversight Board (United States), the consolidated balance sheet of CVS Caremark Corporation as of December 31, 2008 and the related consolidated statements of operations, shareholders' equity and cash ï¬,ows for the fiscal year ended December 31, 2008 and our report dated...

  • Page 43
    ... shares outstanding DILUTED EARNINGS PER COMMON SHARE: Earnings from continuing operations Loss from discontinued operations Net earnings Weighted average common shares outstanding Dividends declared per common share See accompanying notes to consolidated financial statements. 2008 ANNUAL REPORT...

  • Page 44
    ...Accounts payable Claims and discounts payable Accrued expenses Short-term debt Current portion of long-term debt Total current liabilities Long-term debt Deferred income taxes Other long-term liabilities Commitments and contingencies (Note 12) SHAREHOLDERS' EQUITY: Preferred stock, $0.01 par value...

  • Page 45
    ... 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...

  • Page 46
    ...stock issued for Caremark Merger Stock options exercised and awards End of year TREASURY STOCK: Beginning of year Purchase of treasury shares Conversion of preference stock Transfer from Trust Employee stock purchase plan issuance End of year GUARANTEED ESOP OBLIGATION: Beginning of year Reduction...

  • Page 47
    ...of FIN 48 End of year Total shareholders' equity COMPREHENSIVE INCOME: Net earnings Recognition of unrealized gain/(loss) on derivatives, net of income tax Pension liability, net of income tax Comprehensive income See accompanying notes to consolidated financial statements. 2008 ANNUAL REPORT 43

  • Page 48
    ... mail order pharmacy services, specialty pharmacy services, plan design and administration, formulary management and claims processing. The Company's customers are primarily employers, insurance companies, unions, government employee groups, managed care organizations and other sponsors of health...

  • Page 49
    ... service and specialty pharmacies and the cost method of accounting to determine inventory in the Longs Drug Stores and our distribution centers. The Longs Drug Stores will be conformed to the retail method of accounting when their accounting systems are converted in 2009. Physical inventory counts...

  • Page 50
    ... prescription drugs sold by its mail service pharmacies and under national retail pharmacy network contracts where the PSS is the principal using the gross method at the contract prices negotiated with its customers. Net revenue from the PSS includes: (i) the portion of the price the customer pays...

  • Page 51
    ...' customers is included in "Claims and discounts payable" in the accompanying consolidated balance sheets. Medicare Part D. The PSS began participating in the Federal Government's Medicare Part D program as a Prescription Drug Plan ("PDP") on January 1, 2006. The PSS' net revenues include insurance...

  • Page 52
    ...related to health and medical liabilities. The Company's self-insurance accruals, which include reported claims and claims incurred but not reported, are calculated using standard insurance industry actuarial assumptions and the Company's historical claims experience. Store opening and closing costs...

  • Page 53
    ... price equal to the fair market value of the underlying common stock on the date of grant. See Note 10 for additional information about stock-based compensation. Income taxes. The Company provides for federal and state income taxes currently payable, as well as for those deferred because of timing...

  • Page 54
    ...quarter of 2008, the Company adopted EITF Issue No. 06-4, "Accounting for Deferred Compensation and Postretirement Benefit Aspects of Endorsement Split-Dollar Life Insurance Arrangements" ("EITF 06-4"). EITF 06-4 requires the application of the provisions of SFAS No. 106, "Employers' Accounting for...

  • Page 55
    ..., of the Company for each share of common stock of Caremark, par value $0.001 per share, issued and outstanding immediately prior to the effective time of the merger. In addition, Caremark shareholders of record as of the close of business on the day immediately preceding the closing date of the...

  • Page 56
    ... annual amortization expense for these intangible assets is $421.4 million in 2009, $408.8 million in 2010, $399.0 million in 2011, $376.3 million in 2012 and $355.0 million in 2013. Following is a summary of the Company's intangible assets as of the respective balance sheet dates: Dec. 31, 2008...

  • Page 57
    ... Company's borrowings as of the respective balance sheet dates: Dec. 31, 2008 $ 2,544.1 500.0 650.0 350.0 1,750.0 800.0 550.0 700.0 1,750.0 1,000.0 - 1,000.0 7.1 153.4 11,754.6 Dec. 29, 2007 In millions Commercial paper Bridge credit facility 4.0% senior notes due 2009 Floating rate notes due 2010...

  • Page 58
    ... store development program through sale-leaseback transactions. The properties are sold 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 and does not provide any guarantees, other than a guarantee...

  • Page 59
    ... guaranteed ESOP obligation was reï¬,ected in shareholders' equity in the accompanying consolidated balance sheets. 8 EMPLOYEE STOCK OWNERSHIP PLAN 2008 $ 34.3 14.0 34.3 3.8 0.4 2007 2006 ESOP expense recognized Dividends paid Cash contributions Interest payments ESOP shares allocated...

  • Page 60
    ... who meet eligibility requirements. The Company's funding policy is generally to pay covered expenses as they are incurred. For retiree medical plan accounting, the Company reviews external data and its own historical trends for health care costs to determine the health care cost trend rates. As...

  • Page 61
    ...(R). The restricted awards require no payment from the employee. Compensation cost is recorded based on the market price on the grant date and is recognized on a straight-line basis over the requisite service period. The Company granted 1,274,000, 1,129,000, and 673,000 restricted stock units with...

  • Page 62
    ... All grants under the ICP are awarded at fair market value on the date of grant. The fair value of stock options is estimated using the Black-Scholes Option Pricing Model and compensation expense is recognized on a straight-line basis over the requisite service period. Options granted prior to 2004...

  • Page 63
    ... Balance Additions based on tax positions related to the current year Additions based on tax positions related to prior years Reductions for tax positions of prior years Expiration of statute of limitations Settlements Ending Balance $ 43.2 207.5 4.5 (6.7) (2.0) (13.1) $ 233.4 2008 ANNUAL REPORT...

  • Page 64
    ... twelve months, which may cause a utilization or reduction of the Company's reserve for uncertain tax positions of up to approximately $213.7 million. During 2008, the Internal Revenue Service (the "IRS") completed examinations of the Company's 2006 consolidated U.S. income tax return and Caremark...

  • Page 65
    ... General, United States Department of Health and Human Services (OIG), requesting information relating to the processing of Medicaid and other government agency claims on an adjudication platform of AdvancePCS (acquired by Caremark in 2004 and now known as CaremarkPCS, L.L.C.). The Company has...

  • Page 66
    ... Retail Co-Payments in 2008 and 2007 respectively. (2) Intersegment eliminations relate to intersegment revenues and accounts receivable that occur when a Pharmacy Services Segment customer uses a Retail Pharmacy Segment store to purchase covered products. When this occurs, both segments record the...

  • Page 67
    ... units Weighted average common shares, diluted Basic earnings per common share: Earnings from continuing operations Loss from discontinued operations Net earnings Diluted earnings per common share: Earnings from continuing operations Loss from discontinued operations Net earnings 2008 ANNUAL REPORT...

  • Page 68
    ... health care, rather than the retail industry. The fiscal year change was effective beginning with the fourth quarter of fiscal 2008. Prior to Board approval of this change, the Saturday nearest December 31, 2008 would have resulted in a 53-week fiscal year that would have ended January 3, 2009...

  • Page 69
    ...earnings per common share: Earnings from continuing operations Loss from discontinued operations Net earnings 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) $ $ $ $ 2.32...

  • Page 70
    ... Public Accounting Firm The Board of Directors and Shareholders CVS Caremark Corporation We have audited the accompanying consolidated balance sheets of CVS Caremark Corporation as of December 31, 2008 and December 29, 2007, and the related consolidated statements of operations, shareholders...

  • Page 71
    Report of Independent Registered Public Accounting Firm The Board of Directors and Shareholders CVS Caremark Corporation We have audited the accompanying consolidated statements of operations, shareholders' equity and cash ï¬,ows of CVS Caremark Corporation (formerly CVS Corporation) and ...

  • Page 72
    ..., which currently includes nine retail companies. Comparison of Cumulative Total Return to Shareholders December 31, 2003 to December 31, 2008 $250 $200 $150 $100 $50 $0 03 04 05 S&P 500 06 07 08 CVS Caremark Corporation S&P 500 Food & Staples Retail Group Index Compound Annual Return Rate...

  • Page 73
    Shareholder Information Officers THOMAS M. RYAN Chairman of the Board, President and Chief Executive Officer Directors EDWIN M. BANKS (1)(3) Shareholder Information CORPORATE HEADQUARTERS CVS Caremark Corporation One CVS Drive, Woonsocket, RI 02895 (401) 765-1500 Founder and Managing Partner ...

  • Page 74
    One CVS Drive Woonsocket, RI 02895 (401) 765-1500 www.cvscaremark.com 10% The 2008 CVS Caremark Annual Report saved the following resources by printing on paper containing 10% postconsumer recycled content. energy solid waste greenhouse gases waterborne waste trees waste water 114.38 fully ...