CVS 2010 Annual Report Download - page 38

Management’s Discussion and Analysis of
Financial Condition and Results of Operations
On September 10, 2008, we issued $350 million of floating 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
accrued interest. The net proceeds from the 2008 Notes were used to fund a portion of the Longs Acquisition.
Our backup credit facility, unsecured senior notes and Enhanced Capital Advantaged Preferred Securities (see Note 5 to the
Consolidated Financial Statements) contain customary restrictive financial and operating covenants.
These covenants do not include a requirement for the acceleration of our debt maturities in the event of a downgrade in our
credit rating. We do not believe the restrictions contained in these covenants materially affect our financial or operating flexibility.
As of December 31, 2010 and 2009 we had no freestanding derivatives in place.
Debt Ratings – As of December 31, 2010, our long-term debt was rated “Baa2” by Moody’s with a stable outlook and “BBB+”
by Standard & Poor’s with a negative outlook, and our commercial paper program was rated “P-2” by Moody’s and “A-2” by
Standard & Poor’s. In assessing our credit strength, we believe that both Moody’s and Standard & Poor’s considered, among
other things, our capital structure and financial policies as well as our consolidated balance sheet, our historical acquisition
activity and other financial information. Although we currently believe our long-term debt ratings will remain investment grade,
we cannot guarantee the future actions of Moody’s and/or Standard & Poor’s. Our debt ratings have a direct impact on our
future borrowing costs, access to capital markets and new store operating lease costs.
Quarterly Dividend Increase – In January 2010, our Board of Directors authorized a 15% increase in our quarterly common stock
dividend to $0.0875 per share. This increase equates to an annual dividend rate of $0.35 per share. On January 11, 2011, our
Board of Directors authorized a 43% increase in our quarterly common stock dividend to $0.125 per share. This increase equate
to an annual dividend rate of $0.50 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 to unrelated parties and then leasing
the stores back under leases that qualify and are accounted for as operating leases. We do not have any retained or contingent
interests in the stores, and we do not provide any guarantees, other than a guarantee of the lease payments, in connection with
the transactions. In accordance with generally accepted accounting principles, our operating leases are not reflected on our
consolidated balance sheets.
Between 1991 and 1997, the Company sold or spun off a number of subsidiaries, including Bob’s Stores, Linens ‘n Things,
Marshalls, Kay-Bee Toys, This End Up and Footstar. In many cases, when a former subsidiary leased a store, the Company
provided a guarantee of the store’s lease obligations. When the subsidiaries were disposed of, the Company’s guarantees
remained in place, although each initial purchaser has indemnified the Company for any lease obligations the Company was
required to satisfy. If any of the purchasers or any of the former subsidiaries were to become insolvent and failed to make the
required payments under a store lease, the Company could be required to satisfy these obligations.
As of December 31, 2010, the Company guaranteed approximately 70 such store leases (excluding the lease guarantees related
to Linens ‘n Things), with the maximum remaining lease term extending through 2019. Management believes the ultimate
disposition of any of the remaining lease guarantees will not have a material adverse effect on the Company’s consolidated
financial condition or future cash flows. Please see “Loss from Discontinued Operations” previously in this document for further
information regarding our guarantee of certain Linens ‘n Things’ store lease obligations.
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CVS Caremark 2010 Annual Report