CMX Caremark RX

Caremark Rx, Inc. (NYSE: CMX) today reported second quarter diluted earnings per share of $.58, exceeding the top of the company's guidance range by $.03 per share. Diluted earnings per share grew 23% compared to the second quarter of 2005. Excluding a $.01 after tax gain from the settlement of a contractual dispute with a former AdvancePCS client, diluted earnings per share were $.57. "Our healthy second quarter results and upward revision in earnings guidance reflect a commitment to delivering long-term shareholder value. We paid our first dividend in July and we also made significant share repurchases during the quarter. We continue to pursue strategic acquisitions to drive long-term shareholder value and enhance the client and consumer experience," said Mac Crawford, Chairman, President and Chief Executive Officer. Senior Executive Vice President and Chief Operating Officer, Howard McLure added, "With several major generic introductions this year and our proven ability to rapidly substitute generics at mail, we continue to drive savings for our clients as well as participants. Additionally, we have recently added several products to our already broad specialty portfolio, further complementing our industry-leading specialty services that we provide to our clients." Second Quarter Operating Results Net revenues were $9.4 billion in the second quarter of 2006, an increase of 15% over the second quarter of 2005. Revenue growth was driven primarily by increases in both mail and retail sales, including the addition of Medicare Part D and other new client revenues. During the quarter Caremark began providing additional Medicare Part D services to a large health plan client under a revised contract which also contributed to revenue growth. Mail pharmacy revenues increased 11% to $3.2 billion and mail pharmacy claims were 15.2 million, up 5% from the second quarter of 2005. Retail revenues grew 17% to $6.2 billion compared to the second quarter of 2005. Retail pharmacy claims decreased 3% to 116.3 million compared to the second quarter of 2005. The decrease in retail claims is primarily a result of previously disclosed terminations of retail-oriented contracts, partially offset by Medicare and other new client prescription claims. SG&A (selling, general and administrative) expenses were $138.6 million, an increase of 18% over the second quarter of 2005. Second quarter 2006 SG&A expenses included $10.7 million of share-based compensation expense resulting from the adoption of FAS 123R. Excluding $10.7 million and $2.9 million of share-based compensation expense in the second quarter of 2006 and the second quarter of 2005, respectively, SG&A expenses grew by 11%. EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter of 2006, excluding a $10.6 million gain from a settlement with a former client, was $438.3 million, an increase of 11% over the second quarter of 2005. EBITDA per adjusted claim, excluding the gain on the settlement, grew to $2.72, a 12% increase compared to the second quarter of 2005. Stock repurchases completed since Caremark provided second quarter guidance on May 2, 2006 contributed less than one half of one cent to earnings per share. Six Months 2006 Operating Results Through June 30, net revenue grew 11% to $18.3 billion. Retail revenue grew by 11% to $11.9 billion. Retail claims declined 7% during the first half of the year which was primarily a result of previously disclosed terminations of retail-oriented contracts, partially offset by Medicare and other new client prescription claims. Mail revenue was $6.3 billion, an increase of 11%. Mail claims grew 5% through the end of the second quarter. SG&A expenses increased 15% to $268.3 million, which includes $20.9 million of share-based compensation expense. Excluding $20.9 million and $6.4 million of share-based compensation expense in the first half of 2006 and the first half of 2005, respectively, SG&A expenses grew by 10%. EBITDA for the first six months, excluding the gain on the settlement with a former client, was $842.4 million, an increase of 10%. EBITDA per adjusted claim for the first six months was $2.61, an increase of 15%. First half diluted earnings per share grew by 21% to $1.09. Excluding a $.01 after tax gain from a settlement with a former client, diluted earnings were $1.08 per share. Stock repurchases completed through the first six months contributed approximately $.01 to earnings per share. Balance Sheet and Cash Flow At June 30, 2006, net cash and short-term investments totaled $826.6 million, reflecting total cash and cash equivalents and short-term investments of nearly $1.3 billion, offset by Senior Notes totaling $450 million. Operating cash flow through six months was $623.5 million compared to $571 million in the first half of 2005. Capital expenditures totaled $22 million in the second quarter and $50.8 million through the first half of 2006. Share Repurchase and Dividend On May 11, 2006, Caremark's Board of Directors approved an additional $1.25 billion in share repurchases bringing the total authorization under the company's share repurchase program to $3 billion. Prior to the second quarter of 2006, the company had repurchased 37.4 million shares at a total cost of $1.39 billion. During the second quarter of 2006, Caremark repurchased 19.9 million shares at a total cost of $939.2 million. Since the end of the second quarter through August 7, 2006, the company repurchased 352,300 shares at a total cost of $18.1 million. As of August 7, 2006, cumulative repurchases since August 2002 were 57.6 million shares at a total cost of $2.35 billion, leaving approximately $650 million available under the current authorization. On April 5, 2006, Caremark announced that its Board of Directors declared a quarterly cash dividend of $.10 per share of common stock. The first quarterly dividend was paid on July 17, 2006 to stockholders of record on June 30, 2006. Financial Guidance There are a number of factors that may affect projected 2006 results, including the timing of launch and number of initial suppliers of new generic drugs, and certain aspects of the Medicare Part D benefit. As a result of solid performance and accretive share repurchases during the first half of 2006, the company is raising and narrowing its full year earnings per share guidance range. Diluted earnings per share for 2006 are now expected to be in the range of $2.38 to $2.40 including the $.01 per share gain from a settlement with a former client and the impact of share-based compensation expense. Diluted earnings per share for 2006, excluding the $.01 per share gain from the settlement, is expected to be $2.37 to $2.39. This updated guidance range reflects earnings per share growth of 20% to 21% compared to full year 2005 earnings per share of $1.97. Previous earnings per share guidance was $2.29 to $2.35. If $.04 per share for FAS 123R share-based compensation expense were adjusted from 2005 results, 2006 EPS growth would be in the range of 23% to 24%. Several key assumptions supporting the full year 2006 earnings guidance range follow: -- Revenue in 2006 is projected to grow in the range of 12% to 14%. The increase in revenue guidance includes the impact of the revised Medicare Part D contract with a large health plan client previously mentioned. -- FAS 123R share-based compensation expense is expected to be $40 million to $42 million before taxes. -- Depreciation expense is expected to be approximately $105 million. -- Amortization expense is estimated to be approximately $44 million. -- Net interest income is estimated to be approximately $35 million, but is subject to change based on interest rates, cash used for share repurchases and the timing and magnitude of operating cash flows. Net interest income guidance has been reduced from the previous expectation of $45 to $50 million, reflecting a lower cash balance resulting from significant share repurchases. -- The effective tax rate is expected to be 39.5%. -- Assuming full dilution, weighted average shares outstanding for 2006 should be in the range of 435 million to 437 million. Third quarter diluted earnings per share is expected to be $.62 to $.63. Webcast of Earnings Conference Call As previously announced, Caremark will hold a conference call to discuss second quarter 2006 results, its 2006 outlook and the general operations of the company. Investors and the general public can access a live webcast of the conference call through the Investor Relations page at www.caremarkrx.com. The call will be held Tuesday, August 8, 2006 at 10:30 a.m. Eastern Time (9:30 a.m. Central Time) and will be available for replay via the website through August 22, 2006. About Caremark Rx, Inc. Caremark Rx, Inc. is a leading pharmaceutical services company, providing through its affiliates comprehensive drug benefit services to over 2,000 health plan sponsors and their plan participants throughout the U.S. The company's clients include corporate health plans, managed care organizations, insurance companies, unions, government agencies and other funded benefit plans. In addition, Caremark is a national provider of drug benefits to eligible beneficiaries under the Medicare Part D program. The company operates a national retail pharmacy network with over 60,000 participating pharmacies, seven mail service pharmacies, the industry's only FDA-regulated repackaging plant and 21 licensed specialty pharmacies for delivery of advanced medications to individuals with chronic or genetic diseases and disorders. Additional information about Caremark is available at www.caremarkrx.com. Forward-Looking Statement This press release contains "forward-looking statements," as defined in the Private Securities Litigation Reform Act of 1995, and such statements are based on management's current expectations with respect to anticipated growth and performance prospects. Forward-looking statements in this press release include 2006 earnings per share projections, 2006 revenue growth, the anticipated impact in 2006 of the company's participation in the Medicare Part D program and projected enrollment of Medicare Part D beneficiaries, estimated 2006 assumptions set forth in the "Financial Guidance" section of this press release and other assumptions. Current and prospective investors are cautioned that any such forward-looking statements are not guarantees of future performance, involve risks and uncertainties and that actual results may differ materially due to various factors. For example, adverse developments could occur with respect to the company's operating plan and objectives, competitive trends, Medicare Part D participation, the timing and launch of new branded and generic pharmaceuticals, regulatory and legal matters, government investigations and governmental action regarding pricing and reimbursement. Additional factors can be found in the company's Forms 10-K, 10-Q and other SEC filings. This press release includes certain non-GAAP financial measures as defined under SEC rules. A reconciliation to the most directly comparable GAAP measures can be found in the footnotes to the tables attached to this press release. -0- *T CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) June 30, December 31, 2006 2005 ----------- ----------- (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 880,285 $ 1,268,883 Short-term investments 396,320 666,040 Short-term investments - restricted - 27,500 Accounts receivable, net 2,251,806 2,074,586 Inventories 411,255 449,199 Deferred tax asset, net 93,514 112,586 Prepaid expenses and other current assets 71,684 46,303 ----------- ----------- Total current assets 4,104,864 4,645,097 Property and equipment, net 314,707 314,959 Goodwill, net 7,131,050 7,131,050 Other intangible assets, net 708,055 731,300 Other assets 28,430 28,442 ----------- ----------- Total assets $12,287,106 $12,850,848 =========== =========== LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $ 955,427 $ 849,358 Claims and discounts payable 2,386,543 2,438,813 Other accrued expenses and liabilities 495,585 343,158 Income taxes payable 13,220 17,137 Current portion of long-term debt 60,900 63,400 ----------- ----------- Total current liabilities 3,911,675 3,711,866 Long-term debt, net of current portion 389,100 386,600 Deferred tax liability 240,162 245,389 Other long-term liabilities 335,733 326,427 ----------- ----------- Total liabilities 4,876,670 4,670,282 Commitments and contingencies Stockholders' equity: Common stock 484 481 Additional paid-in capital 8,832,057 8,719,492 Treasury stock (2,326,983) (986,641) Shares held in trust (91,772) (93,616) Retained earnings 993,231 551,447 Accumulated other comprehensive income (loss), net 3,419 (10,597) ----------- ----------- Total stockholders' equity 7,410,436 8,180,566 ----------- ----------- Total liabilities and stockholders' equity $12,287,106 $12,850,848 =========== =========== CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share and per adjusted claim amounts) Three Months Ended June 30, Percentage -------------------------- Increase / 2006 2005 (Decrease) ----------- ----------- ----------- Net revenue $ 9,438,304 $ 8,199,167 15.1% Operating expenses: Cost of revenues (a) 8,850,761 7,686,461 15.1% Selling, general and administrative expenses (b) 138,648 117,993 17.5% Depreciation 25,198 24,556 2.6% Amortization of intangible assets 10,619 11,725 (9.4%) Integration and other related expenses - 5,912 (100.0%) ----------- ----------- ---------- Operating income 413,078 352,520 17.2% Interest (income) expense, net (8,657) 819 - ----------- ----------- ---------- Income before provision for income taxes 421,735 351,701 19.9% Provision for income taxes 166,586 138,922 19.9% ----------- ----------- ---------- Net income $ 255,149 $ 212,779 19.9% =========== =========== ========== Average number of common shares outstanding - basic 431,278 447,559 (3.6%) Dilutive effect of stock options and warrants 5,749 8,920 (35.5%) ----------- ----------- ---------- Average number of common shares outstanding - diluted 437,027 456,479 (4.3%) =========== =========== ========== Net income per common share - diluted $ 0.58 $ 0.47 23.4% =========== =========== ========== Revenues: Mail Service $ 3,189,812 $ 2,860,888 11.5% Retail 6,165,299 5,268,224 17.0% Other 83,193 70,055 18.8% ----------- ----------- ---------- $ 9,438,304 $ 8,199,167 15.1% =========== =========== ========== Pharmacy claims: Mail 15,199 14,452 5.2% Retail 116,289 120,232 (3.3%) ----------- ----------- ---------- Total 131,488 134,684 (2.4%) =========== =========== ========== Adjusted Claims (Note 1) 161,181 163,097 (1.2%) =========== =========== ========== Supplemental presentation of non-GAAP financial measures: EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 448,895 $ 388,801 15.5% =========== =========== ========== EBITDA excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 438,255 $ 394,713 11.0% =========== =========== ========== EBITDA per adjusted claim excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 2.72 $ 2.42 12.4% =========== =========== ========== Adjusted net income (Note 3) $ 248,712 $ 216,356 15.0% =========== =========== ========== Adjusted net income per common share - diluted (Note 3) $ 0.57 $ 0.47 21.3% =========== =========== ========== Six Months Ended June 30, Percentage -------------------------- Increase / 2006 2005 (Decrease) ----------- ----------- ---------- Net revenue $18,345,554 $16,551,054 10.8% Operating expenses: Cost of revenues (a) 17,224,206 15,556,089 10.7% Selling, general and administrative expenses (b) 268,272 232,272 15.5% Depreciation 50,478 48,560 3.9% Amortization of intangible assets 22,218 23,808 (6.7%) Integration and other related expenses - 7,121 (100.0%) ----------- ----------- ---------- Operating income 780,380 683,204 14.2% Interest (income) expense, net (19,531) 5,041 - ----------- ----------- ---------- Income before provision for income taxes 799,911 678,163 18.0% Provision for income taxes 315,965 267,874 18.0% ----------- ----------- ---------- Net income $ 483,946 $ 410,289 18.0% =========== =========== ========== Average number of common shares outstanding - basic 437,524 449,162 (2.6%) Dilutive effect of stock options and warrants 6,135 8,745 (29.8%) ----------- ----------- ---------- Average number of common shares outstanding - diluted 443,659 457,907 (3.1%) =========== =========== ========== Net income per common share - diluted $ 1.09 $ 0.90 21.1% =========== =========== ========== Revenues: Mail Service $ 6,282,017 $ 5,639,283 11.4% Retail 11,904,599 10,770,974 10.5% Other 158,938 140,797 12.9% ----------- ----------- ---------- $18,345,554 $16,551,054 10.8% =========== =========== ========== Pharmacy claims: Mail 30,255 28,755 5.2% Retail 233,519 250,554 (6.8%) ----------- ----------- ---------- Total 263,774 279,309 (5.6%) =========== =========== ========== Adjusted Claims (Note 1) 322,936 335,648 (3.8%) =========== =========== ========== Supplemental presentation of non-GAAP financial measures: EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 853,076 $ 755,572 12.9% =========== =========== ========== EBITDA excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 842,436 $ 762,693 10.5% =========== =========== ========== EBITDA per adjusted claim excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 2.61 $ 2.27 15.0% =========== =========== ========== Adjusted net income (Note 3) $ 477,509 $ 414,597 15.2% =========== =========== ========== Adjusted net income per common share - diluted (Note 3) $ 1.08 $ 0.91 18.7% =========== =========== ========== (a) Excludes depreciation which is presented separately. (b) Includes share-based compensation of $10.7 million and $20.9 million based on FAS 123R in the three months and six months ended June 30, 2006, respectively, and $2.9 million and $6.4 million based on APB 25 in the three months and six months ended June 30, 2005, respectively. CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Six Months Ended June 30, -------------------------- 2006 2005 ----------- ----------- Cash flows from continuing operations: Net income $ 483,946 $ 410,289 Adjustments to reconcile net income to net cash provided by continuing operations: Depreciation and amortization 72,696 72,368 Share-based compensation 20,903 6,441 Deferred income taxes 4,766 236,125 Non-cash interest expense 1,027 1,240 Write-off of deferred financing costs - 686 Other non-cash expenses, net 404 153 Changes in operating assets and liabilities, net of effects of acquisitions/disposals of businesses 39,714 (156,329) ----------- ----------- Net cash provided by continuing operations 623,456 570,973 Cash flows from investing activities: Purchase of short-term investments (270,596) (689,000) Sale of short-term investments 567,816 246,544 Capital expenditures, net (50,755) (55,801) Investment in business (464) (2,251) ----------- ----------- Net cash provided by (used in) investing activities 246,001 (500,508) Cash flows from financing activities: Purchase of treasury stock (1,340,342) (287,988) Excess tax benefit from share-based compensation 49,092 - Proceeds from stock issued under equity- based compensation plans 39,767 38,431 Payments on indebtedness - (148,678) ----------- ----------- Net cash used in financing activities (1,251,483) (398,235) Cash used in discontinued operations - operating activities (6,572) (8,592) ----------- ----------- Net decrease in cash and cash equivalents (388,598) (336,362) Cash and cash equivalents - beginning of period 1,268,883 1,078,803 ----------- ----------- Cash and cash equivalents - end of period $ 880,285 $ 742,441 =========== =========== Caremark Rx, Inc. Notes to Press Release Tables June 30, 2006 *T (1) Adjusted pharmacy claims normalize the claims volume statistic for the difference in average days' supply for mail and retail claims. Adjusted pharmacy claims are calculated by multiplying 90-day claims (the majority of total mail claims) by 3 and adding the 30-day claims (retail claims) to the product. (2) We believe that EBITDA is a supplemental measurement tool used by analysts and investors to help evaluate a company's overall operating performance, its ability to incur and service debt and its capacity for making capital expenditures. We use EBITDA, in addition to operating income and cash flows from operating activities, to assess our liquidity and performance and believe that it is important for investors to be able to evaluate our company using the same measures used by our management. EBITDA can be reconciled to net cash provided by continuing operations, which we believe to be the most directly comparable financial measure calculated and presented in accordance with GAAP, as follows (in thousands): -0- *T Three Months Ended Six Months Ended June 30, June 30, -------------------- --------------------- 2006 2005 2006 2005 --------- -------- --------- --------- Net income $ 255,149 $212,779 $ 483,946 $ 410,289 Depreciation 25,198 24,556 50,478 48,560 Amortization of intangible assets 10,619 11,725 22,218 23,808 Interest (income) expense, net (8,657) 819 (19,531) 5,041 Provision for income taxes 166,586 138,922 315,965 267,874 --------- -------- --------- --------- EBITDA 448,895 388,801 853,076 755,572 Cash interest receipts (payments), net 5,230 (9,415) 23,733 (3,707) Cash tax (payments) refunds, net (215,560) 12,597 (258,004) 8,617 Other non-cash expenses 10,419 3,007 21,307 6,594 Other changes in operating assets and liabilities, net of acquisitions/disposals of businesses 10,087 (91,029) (16,656) (196,103) --------- -------- --------- --------- Net cash provided by continuing operations $ 259,071 $303,961 $ 623,456 $ 570,973 ========= ======== ========= ========= *T EBITDA does not represent funds available for our discretionary use and is not intended to represent or to be used as a substitute for net income or cash flow from operations data as measured under GAAP. The items excluded from EBITDA are significant components of our statement of income and must be considered in performing a comprehensive assessment of our overall financial performance. EBITDA and the associated year-to-year trends should not be considered in isolation. Our calculation of EBITDA may not be consistent with calculations of EBITDA used by other companies. (3) The analyses used by management to evaluate the performance of our business exclude integration and other related expenses and the benefit from a settlement with a former client. However, under the SEC's Regulation G, financial measures which exclude non-recurring items are non-GAAP financial measures; therefore, our presentations of amounts of gross profit, EBITDA and earnings per share which exclude these integration and other related expenses and the benefit from a settlement with a former client are, likewise, non-GAAP financial measures which require reconciliation to the most directly comparable financial measure calculated and presented in accordance with GAAP. Since EBITDA is itself a non-GAAP financial measure, we direct your attention to Note 2 above for a reconciliation of EBITDA to net cash provided by continuing operations, which we believe to be the most directly comparable financial measure calculated and presented in accordance with GAAP. Our reconciliations of the financial measures presented in the attached press release, which exclude integration and other related expenses and the benefit from a settlement with a former client, are as follows (in thousands, except per share amounts): -0- *T Three Months Ended Six Months Ended June 30, June 30, -------------------- ------------------- 2006 2005 2006 2005 --------- -------- -------- -------- EBITDA $ 448,895 $388,801 $853,076 $755,572 Integration and other related expenses - 5,912 - 7,121 Client settlement (10,640) - (10,640) - EBITDA excluding integration and other related expenses and client settlement $ 438,255 $394,713 $842,436 $762,693 ========= ======== ======== ======== Net income $ 255,149 $212,779 $483,946 $410,289 Integration and other related expenses (net of income tax benefit) - 3,577 - 4,308 Client settlement (net of income taxes) (6,437) - (6,437) - --------- -------- --------- -------- Adjusted net income $ 248,712 $216,356 $477,509 $414,597 ========= ======== ========= ======== Net income per common share - diluted $ 0.58 $ 0.47 $ 1.09 $ 0.90 Integration and other related expenses per share (net of income tax benefit) - - - 0.01 Client settlement per share (net of income taxes) (0.01) - (0.01) - --------- -------- -------- -------- Adjusted net income per common share - diluted $ 0.57 $ 0.47 $ 1.08 $ 0.91 ========= ======== ======== ======== *T