CMX Caremark RX

Caremark Rx, Inc. (NYSE: CMX) today reported third quarter diluted earnings per share of $.67, exceeding the top of the company�s guidance range by $.04 per share. Excluding a $.02 per share after tax gain from a treasury lock agreement, diluted earnings were $.65 per share, up 27% compared to the third quarter of 2005. �We are pleased at yet another quarter of strong financial performance. Our third quarter results demonstrate the strength of our overall business and our ability to capitalize on a number of high profile generic launches on behalf of our customers. Caremark remains well positioned to help health plan sponsors and participants get more value for their pharmaceutical dollar,� said Mac Crawford, Chairman, President and Chief Executive Officer. Third Quarter Operating Results Net revenues were $9.1 billion in the third quarter of 2006, an increase of 13% over the third quarter of 2005. Revenue growth was driven primarily by an increase in retail sales, including the addition of Medicare Part D and other new client revenues. During the second quarter, Caremark began providing additional Medicare Part D services to a large health plan client under a revised contract which also contributed to third quarter revenue growth. Mail pharmacy revenues increased 6% to $3.1 billion and mail pharmacy claims were 14.6 million, up slightly from the third quarter of 2005. Retail revenues grew 18% to $6.0 billion compared to the third quarter of 2005. Retail pharmacy claims decreased 5% to 110.5 million compared to the third 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 $136.1 million, an increase of 15% over the third quarter of 2005. Third quarter 2006 SG&A expenses included $10.3 million of share-based compensation expense resulting from the adoption of FAS 123R. Excluding $10.3 million and $2.7 million of share-based compensation expense in the third quarter of 2006 and the third quarter of 2005, respectively, SG&A expenses grew by 9%. EBITDA (earnings before interest, taxes, depreciation and amortization) for the third quarter of 2006 was $489.9 million, an increase of 17% over the third quarter of 2005. EBITDA per adjusted claim grew to $3.19, a 21% increase compared to the third quarter of 2005. Diluted earnings for the third quarter grew by 31% to $.67 per share. Excluding $.02 per share after tax gain from a treasury lock agreement, diluted earnings for the third quarter were up 27% to $.65 per share. Nine Months 2006 Operating Results Through September 30, net revenue grew 12% to $27.5 billion. Retail revenue grew by 13% to $17.9 billion. Retail claims declined 6% during the first nine months 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 $9.4 billion, an increase of 9%. Mail claims grew 4% through the end of the third quarter. SG&A expenses increased 15% to $404.4 million, which includes $31.2 million of share-based compensation expense. Excluding $31.2 million and $9.2 million of share-based compensation expense in the first nine months of 2006 and the first nine months of 2005, respectively, SG&A expenses grew by 9%. EBITDA for the first nine months, excluding a $10.6 million gain in the second quarter on a settlement with a former client, was $1.3 billion, an increase of 13%. EBITDA per adjusted claim for the first nine months was $2.80, an increase of 17%. Diluted earnings per share for the first nine months grew by 25% to $1.76. Excluding a $.01 per share after tax gain in the second quarter from a settlement with a former client and a $.02 per share after tax gain from a treasury lock agreement, diluted earnings for the first nine months were up 21% to $1.72 per share. Balance Sheet and Cash Flow At September 30, 2006, net cash and short-term investments totaled $878 million, reflecting total cash and cash equivalents and short-term investments of $1.3 billion, offset by Senior Notes totaling $450 million. In October, the 7.375% Senior Notes totaling $450 million matured and were retired. The company also terminated an associated treasury lock agreement, which was an instrument used to hedge interest rates. Since the company does not currently intend to refinance the Senior Notes, the treasury lock agreement no longer qualified for hedge accounting treatment creating a $17.1 million pre-tax gain in the third quarter or $.02 per share after tax. Operating cash flow through nine months was $855 million compared to $797 million in the first nine months of 2005. Capital expenditures totaled $28.3 million in the third quarter and $79.1 million through the first nine months 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 $3.0 billion. Prior to the third quarter of 2006, the company had repurchased 57.3 million shares at a total cost of $2.3 billion. During the third quarter of 2006, Caremark repurchased 1.8 million shares at a total cost of $102.4 million. Since the end of the third quarter through November 2, 2006, the company has not repurchased its stock in the open market. As of November 2, 2006, cumulative repurchases since August 2002 were 59.1 million shares at a total cost of $2.4 billion, leaving approximately $570 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. The second consecutive dividend of $.10 per share of common stock was paid on October 16, 2006 to stockholders of record on September 29, 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. Due to strong performance through the third quarter driven in part by generic launches, the company is raising and narrowing it earnings guidance range. Diluted earnings per share for 2006 are now expected to be in the range of $2.40 to $2.41, or 22% growth compared to full year 2005 earnings per share of $1.97. This updated guidance range excludes the second quarter $.01 per share after tax gain from a settlement with a former client and the third quarter $.02 per share after tax gain from a treasury lock agreement. The updated guidance range includes the impact of share-based compensation expense. Several key assumptions supporting the full year 2006 earnings guidance range follow: Revenue in 2006 is projected to grow in the range of 11% to 12%. FAS 123R share-based compensation expense is expected to be approximately $41 million. Depreciation expense is expected to be approximately $103 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 due to future interest rates, cash used for share repurchases and the timing and magnitude of operating cash flows. 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 436 million to 437 million. Cash flow from operations is expected to exceed $1 billion for the full year. Fourth quarter diluted earnings is expected to be $.68 to $.69 per share. Webcast of Earnings Conference Call As previously announced, Caremark will hold a conference call to discuss third quarter 2006 results, its 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 Thursday, November 2, 2006 at 10:30 a.m. Eastern Time and will be available for replay via the website through November 16, 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, launch and impact of new branded and generic pharmaceuticals, regulatory and legal matters, government investigations, and 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. � CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (In thousands) � September 30, 2006 December 31, 2005 (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 1,061,643� $ 1,268,883� Short-term investments 266,350� 666,040� Short-term investments - restricted -� 27,500� Accounts receivable, net 2,228,320� 2,074,586� Inventories 452,116� 449,199� Deferred tax asset, net 123,938� 112,586� Prepaid expenses and other current assets 50,977� 46,303� Total current assets 4,183,344� 4,645,097� � Property and equipment, net 318,917� 314,959� Goodwill, net 7,126,224� 7,131,050� Other intangible assets, net 697,602� 731,300� Other assets 29,907� 28,442� Total assets $ 12,355,994� $ 12,850,848� � � LIABILITIES AND STOCKHOLDERS' EQUITY � Current liabilities: Accounts payable $ 959,316� $ 849,358� Claims and discounts payable 2,346,119� 2,438,813� Other accrued expenses and liabilities 414,980� 343,158� Income taxes payable 138,320� 17,137� Current portion of long-term debt 450,000� 63,400� Total current liabilities 4,308,735� 3,711,866� � Long-term debt, net of current portion -� 386,600� Deferred tax liability 236,895� 245,389� Other long-term liabilities 339,766� 326,427� Total liabilities 4,885,396� 4,670,282� � Commitments and contingencies � Stockholders' equity: Common stock 485� 481� Additional paid-in capital 8,768,308� 8,719,492� Treasury stock (2,429,432) (986,641) Shares held in trust (90,644) (93,616) Retained earnings 1,239,707� 551,447� Accumulated other comprehensive income (loss), net (17,826) (10,597) Total stockholders' equity 7,470,598� 8,180,566� Total liabilities and stockholders' equity $ 12,355,994� $ 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 September 30, Percentage Increase / Nine Months Ended September 30, Percentage Increase / � 2006� � 2005� (Decrease) � 2006� � 2005� (Decrease) � Net revenue (a) $ 9,135,213� $ 8,072,441� 13.2% $ 27,480,767� $ 24,623,495� 11.6% � Operating expenses: Cost of revenues (b) 8,509,220� 7,533,395� 13.0% 25,733,426� 23,089,484� 11.5% Selling, general and administrative expenses (c) 136,082� 118,581� 14.8% 404,354� 350,853� 15.2% Depreciation 25,491� 25,402� 0.4% 75,969� 73,962� 2.7% Amortization of intangible assets 10,619� 11,725� (9.4%) 32,837� 35,533� (7.6%) Integration and other related expenses � -� � 1,686� (100.0%) � -� � 8,807� (100.0%) Operating income 453,801� 381,652� 18.9% 1,234,181� 1,064,856� 15.9% Interest (income) expense, net (6,072) (863) 603.6% (25,603) 4,178� -� Gain on treasury lock � (17,077) � -� -� � (17,077) � -� -� Income before provision for income taxes 476,950� 382,515� 24.7% 1,276,861� 1,060,678� 20.4% Provision for income taxes � 188,395� � 151,094� 24.7% � 504,360� � 418,968� 20.4% Net income $ 288,555� $ 231,421� 24.7% $ 772,501� $ 641,710� 20.4% � Average number of common shares outstanding - basic 421,675� 444,507� (5.1%) 432,183� 447,593� (3.4%) Dilutive effect of stock options and warrants � 7,402� � 9,087� (18.5%) � 7,307� � 8,859� (17.5%) Average number of common shares outstanding - diluted � 429,077� � 453,594� (5.4%) � 439,490� � 456,452� (3.7%) � Net income per common share - diluted $ 0.67� $ 0.51� 31.4% $ 1.76� $ 1.41� 24.8% � Revenues: Mail service $ 3,082,816� $ 2,917,549� 5.7% $ 9,364,833� $ 8,556,832� 9.4% Retail 5,978,937� 5,084,874� 17.6% 17,883,536� 15,855,848� 12.8% Other � 73,460� � 70,018� 4.9% � 232,398� � 210,815� 10.2% $ 9,135,213� $ 8,072,441� 13.2% $ 27,480,767� $ 24,623,495� 11.6% � Pharmacy claims: Mail 14,619� 14,559� 0.4% 44,874� 43,314� 3.6% Retail � 110,472� � 116,159� (4.9%) � 343,991� � 366,713� (6.2%) Total � 125,091� � 130,718� (4.3%) � 388,865� � 410,027� (5.2%) Adjusted Claims (Note 1) � 153,611� � 159,236� (3.5%) � 476,547� � 494,884� (3.7%) � Supplemental presentation of non-GAAP financial measures: � EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 489,911� $ 418,779� 17.0% $ 1,342,987� $ 1,174,351� 14.4% � EBITDA excluding integration and other related expenses, client settlement (Notes 2 and 3) $ 489,911� $ 420,465� 16.5% $ 1,332,347� $ 1,183,158� 12.6% � EBITDA per adjusted claim excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 3.19� $ 2.64� 20.8% $ 2.80� $ 2.39� 17.2% � Adjusted net income (Note 3) $ 278,223� $ 232,441� 19.7% $ 755,732� $ 647,038� 16.8% � Adjusted net income per common share - diluted (Note 3) $ 0.65� $ 0.51� 27.5% $ 1.72� $ 1.42� 21.1% � (a) Includes a $10.6 million gain from a settlement with a former client in the nine months ended September 30, 2006. (b) Excludes depreciation which is presented separately. (c) Includes share-based compensation of $10.3 million and $31.2 million based on FAS 123R in the three months and nine months ended September 30, 2006, respectively, and $2.7 million and $9.2 million based on APB 25 in the three months and nine months ended September 30, 2005, respectively. � CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) � � Nine Months Ended September 30, 2006� 2005� � Cash flows from continuing operations: Net income $ 772,501� $ 641,710� Adjustments to reconcile net income to net cash provided by continuing operations: � Depreciation and amortization 108,806� 109,495� Share-based compensation 31,212� 9,174� Non-cash interest expense 1,669� 1,754� Write-off of deferred financing costs 322� 686� Other non-cash expenses, net 285� 796� Deferred income taxes (15,343) 343,243� Changes in operating assets and liabilities, net of effects of acquisitions/disposals of businesses (43,959) (309,979) Net cash provided by continuing operations 855,493� 796,879� � Cash flows from investing activities: Sale of short-term investments 1,120,436� 426,732� Purchase of short-term investments (693,246) (765,325) Capital expenditures, net (79,094) (96,994) Proceeds from sale of property and equipment -� 2,113� Investment in businesses (464) (7,438) Net cash provided by (used in) investing activities 347,632� (440,912) � Cash flows from financing activities: Purchase of treasury stock (1,442,791) (385,984) Dividends paid (42,158) -� Deferred financing costs (890) -� Excess tax benefit from share-based compensation 20,516� -� Proceeds from stock issued under equity-based compensation plans 61,934� 51,793� Payments on indebtedness -� (148,678) Net cash used in financing activities (1,403,389) (482,869) � Cash used in discontinued operations - operating activities (6,976) (9,163) Net decrease in cash and cash equivalents (207,240) (136,065) Cash and cash equivalents - beginning of period 1,268,883� 1,078,803� Cash and cash equivalents - end of period $ 1,061,643� $ 942,738� Caremark Rx, Inc. Notes to Press Release Tables September 30, 2006 (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): Three Months Ended Nine Months Ended September 30, September 30, 2006� 2005� 2006� 2005� Net income $ 288,555� $ 231,421� $ 772,501� $ 641,710� Depreciation 25,491� 25,402� 75,969� 73,962� Amortization of intangible assets 10,619� 11,725� 32,837� 35,533� Interest (income) expense, net (6,072) (863) (25,603) 4,178� Gain on treasury lock (17,077) -� (17,077) -� Provision for income taxes 188,395� 151,094� 504,360� 418,968� EBITDA 489,911� 418,779� 1,342,987� 1,174,351� Cash interest receipts,net 13,671� 9,529� 37,404� 5,822� Cash tax payments, net (168,778) (17,873) (426,782) (9,256) Other non-cash expenses 10,190� 3,567� 31,497� 10,161� Other changes in operating assets and liabilities,net ofacquisitions/disposals of businesses (112,957) (188,096) (129,613) (384,199) Net cash provided by continuing operations $ 232,037� $ 225,906� $ 855,493� $ 796,879� 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, the benefit from a settlement with a former client and the gain from a treasury lock agreement. 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 EBITDA, adjusted net income and earnings per share which exclude these integration and other related expenses, the benefit from a settlement with a former client and the gain from a treasury lock agreement 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, the benefit from a settlement with a former client and the gain from a treasury lock agreement, are as follows (in thousands, except per share amounts): Three Months Ended Nine Months Ended September 30, September 30, 2006� 2005� 2006� 2005� � EBITDA $ 489,911� $ 418,779� $ 1,342,987� $ 1,174,351� Integration and other related expenses -� 1,686� -� 8,807� Client settlement -� -� (10,640) -� EBITDA excluding integration and other related expenses and client settlement � � � � � � $ 489,911� $ 420,465� $ 1,332,347� � $ 1,183,158� � Net income $ 288,555� $ 231,421� $ 772,501� $ 641,710� Integration and other related expenses (net of income tax benefit) -� 1,020� -� 5,328� Client settlement (net of income taxes) -� -� (6,437) -� Gain on treasury lock (net of income taxes) (10,332) � (10,332) � � Adjusted net income $ 278,223� $ 232,441� $ 755,732� � $ 647,038� � Net income per common share - diluted $ 0.6725� $ 0.5102� $ 1.7577� $ 1.4059� Integration and other related expenses per share (net of income tax benefit) -� 0.0022� -� 0.0117� Client settlement per share (net of income taxes) -� -� (0.0146) -� Gain on treasury lock per share (net of income taxes) (0.0241) -� (0.0235) -� Adjusted net income per common share - diluted $ 0.6484� $ 0.5124� $ 1.7196� $ 1.4176� Caremark Rx, Inc. (NYSE: CMX) today reported third quarter diluted earnings per share of $.67, exceeding the top of the company's guidance range by $.04 per share. Excluding a $.02 per share after tax gain from a treasury lock agreement, diluted earnings were $.65 per share, up 27% compared to the third quarter of 2005. "We are pleased at yet another quarter of strong financial performance. Our third quarter results demonstrate the strength of our overall business and our ability to capitalize on a number of high profile generic launches on behalf of our customers. Caremark remains well positioned to help health plan sponsors and participants get more value for their pharmaceutical dollar," said Mac Crawford, Chairman, President and Chief Executive Officer. Third Quarter Operating Results Net revenues were $9.1 billion in the third quarter of 2006, an increase of 13% over the third quarter of 2005. Revenue growth was driven primarily by an increase in retail sales, including the addition of Medicare Part D and other new client revenues. During the second quarter, Caremark began providing additional Medicare Part D services to a large health plan client under a revised contract which also contributed to third quarter revenue growth. Mail pharmacy revenues increased 6% to $3.1 billion and mail pharmacy claims were 14.6 million, up slightly from the third quarter of 2005. Retail revenues grew 18% to $6.0 billion compared to the third quarter of 2005. Retail pharmacy claims decreased 5% to 110.5 million compared to the third 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 $136.1 million, an increase of 15% over the third quarter of 2005. Third quarter 2006 SG&A expenses included $10.3 million of share-based compensation expense resulting from the adoption of FAS 123R. Excluding $10.3 million and $2.7 million of share-based compensation expense in the third quarter of 2006 and the third quarter of 2005, respectively, SG&A expenses grew by 9%. EBITDA (earnings before interest, taxes, depreciation and amortization) for the third quarter of 2006 was $489.9 million, an increase of 17% over the third quarter of 2005. EBITDA per adjusted claim grew to $3.19, a 21% increase compared to the third quarter of 2005. Diluted earnings for the third quarter grew by 31% to $.67 per share. Excluding $.02 per share after tax gain from a treasury lock agreement, diluted earnings for the third quarter were up 27% to $.65 per share. Nine Months 2006 Operating Results Through September 30, net revenue grew 12% to $27.5 billion. Retail revenue grew by 13% to $17.9 billion. Retail claims declined 6% during the first nine months 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 $9.4 billion, an increase of 9%. Mail claims grew 4% through the end of the third quarter. SG&A expenses increased 15% to $404.4 million, which includes $31.2 million of share-based compensation expense. Excluding $31.2 million and $9.2 million of share-based compensation expense in the first nine months of 2006 and the first nine months of 2005, respectively, SG&A expenses grew by 9%. EBITDA for the first nine months, excluding a $10.6 million gain in the second quarter on a settlement with a former client, was $1.3 billion, an increase of 13%. EBITDA per adjusted claim for the first nine months was $2.80, an increase of 17%. Diluted earnings per share for the first nine months grew by 25% to $1.76. Excluding a $.01 per share after tax gain in the second quarter from a settlement with a former client and a $.02 per share after tax gain from a treasury lock agreement, diluted earnings for the first nine months were up 21% to $1.72 per share. Balance Sheet and Cash Flow At September 30, 2006, net cash and short-term investments totaled $878 million, reflecting total cash and cash equivalents and short-term investments of $1.3 billion, offset by Senior Notes totaling $450 million. In October, the 7.375% Senior Notes totaling $450 million matured and were retired. The company also terminated an associated treasury lock agreement, which was an instrument used to hedge interest rates. Since the company does not currently intend to refinance the Senior Notes, the treasury lock agreement no longer qualified for hedge accounting treatment creating a $17.1 million pre-tax gain in the third quarter or $.02 per share after tax. Operating cash flow through nine months was $855 million compared to $797 million in the first nine months of 2005. Capital expenditures totaled $28.3 million in the third quarter and $79.1 million through the first nine months 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 $3.0 billion. Prior to the third quarter of 2006, the company had repurchased 57.3 million shares at a total cost of $2.3 billion. During the third quarter of 2006, Caremark repurchased 1.8 million shares at a total cost of $102.4 million. Since the end of the third quarter through November 2, 2006, the company has not repurchased its stock in the open market. As of November 2, 2006, cumulative repurchases since August 2002 were 59.1 million shares at a total cost of $2.4 billion, leaving approximately $570 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. The second consecutive dividend of $.10 per share of common stock was paid on October 16, 2006 to stockholders of record on September 29, 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. Due to strong performance through the third quarter driven in part by generic launches, the company is raising and narrowing it earnings guidance range. Diluted earnings per share for 2006 are now expected to be in the range of $2.40 to $2.41, or 22% growth compared to full year 2005 earnings per share of $1.97. This updated guidance range excludes the second quarter $.01 per share after tax gain from a settlement with a former client and the third quarter $.02 per share after tax gain from a treasury lock agreement. The updated guidance range includes the impact of share-based compensation expense. Several key assumptions supporting the full year 2006 earnings guidance range follow: -- Revenue in 2006 is projected to grow in the range of 11% to 12%. -- FAS 123R share-based compensation expense is expected to be approximately $41 million. -- Depreciation expense is expected to be approximately $103 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 due to future interest rates, cash used for share repurchases and the timing and magnitude of operating cash flows. -- 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 436 million to 437 million. -- Cash flow from operations is expected to exceed $1 billion for the full year. Fourth quarter diluted earnings is expected to be $.68 to $.69 per share. Webcast of Earnings Conference Call As previously announced, Caremark will hold a conference call to discuss third quarter 2006 results, its 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 Thursday, November 2, 2006 at 10:30 a.m. Eastern Time and will be available for replay via the website through November 16, 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, launch and impact of new branded and generic pharmaceuticals, regulatory and legal matters, government investigations, and 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) September 30, December 31, 2006 2005 ------------- ------------ (Unaudited) ASSETS Current assets: Cash and cash equivalents $1,061,643 $1,268,883 Short-term investments 266,350 666,040 Short-term investments - restricted - 27,500 Accounts receivable, net 2,228,320 2,074,586 Inventories 452,116 449,199 Deferred tax asset, net 123,938 112,586 Prepaid expenses and other current assets 50,977 46,303 ------------- ------------ Total current assets 4,183,344 4,645,097 Property and equipment, net 318,917 314,959 Goodwill, net 7,126,224 7,131,050 Other intangible assets, net 697,602 731,300 Other assets 29,907 28,442 ------------- ------------ Total assets $12,355,994 $12,850,848 ============= ============ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable $959,316 $849,358 Claims and discounts payable 2,346,119 2,438,813 Other accrued expenses and liabilities 414,980 343,158 Income taxes payable 138,320 17,137 Current portion of long-term debt 450,000 63,400 ------------- ------------ Total current liabilities 4,308,735 3,711,866 Long-term debt, net of current portion - 386,600 Deferred tax liability 236,895 245,389 Other long-term liabilities 339,766 326,427 ------------- ------------ Total liabilities 4,885,396 4,670,282 Commitments and contingencies Stockholders' equity: Common stock 485 481 Additional paid-in capital 8,768,308 8,719,492 Treasury stock (2,429,432) (986,641) Shares held in trust (90,644) (93,616) Retained earnings 1,239,707 551,447 Accumulated other comprehensive income (loss), net (17,826) (10,597) ------------- ------------ Total stockholders' equity 7,470,598 8,180,566 ------------- ------------ Total liabilities and stockholders' equity $12,355,994 $12,850,848 ============= ============ *T - -0- *T CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited) (In thousands, except per share and per adjusted claim amounts) Three Months Ended Percentage September 30, Increase / ----------------------- 2006 2005 (Decrease) ---------------------------------- Net revenue (a) $9,135,213 $8,072,441 13.2% Operating expenses: Cost of revenues (b) 8,509,220 7,533,395 13.0% Selling, general and administrative expenses (c) 136,082 118,581 14.8% Depreciation 25,491 25,402 0.4% Amortization of intangible assets 10,619 11,725 (9.4%) Integration and other related expenses - 1,686 (100.0%) --------------------------------- Operating income 453,801 381,652 18.9% Interest (income) expense, net (6,072) (863) 603.6% Gain on treasury lock (17,077) - - --------------------------------- Income before provision for income taxes 476,950 382,515 24.7% Provision for income taxes 188,395 151,094 24.7% --------------------------------- Net income $ 288,555 $ 231,421 24.7% ================================= Average number of common shares outstanding - basic 421,675 444,507 (5.1%) Dilutive effect of stock options and warrants 7,402 9,087 (18.5%) --------------------------------- Average number of common shares outstanding - diluted 429,077 453,594 (5.4%) ================================= Net income per common share - diluted $ 0.67 $ 0.51 31.4% ================================= Revenues: Mail service $3,082,816 $2,917,549 5.7% Retail 5,978,937 5,084,874 17.6% Other 73,460 70,018 4.9% --------------------------------- $9,135,213 $8,072,441 13.2% ================================= Pharmacy claims: Mail 14,619 14,559 0.4% Retail 110,472 116,159 (4.9%) --------------------------------- Total 125,091 130,718 (4.3%) ================================= Adjusted Claims (Note 1) 153,611 159,236 (3.5%) ================================= Supplemental presentation of non- GAAP financial measures: EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 489,911 $ 418,779 17.0% ================================= EBITDA excluding integration and other related expenses, client settlement (Notes 2 and 3) $ 489,911 $ 420,465 16.5% ================================= EBITDA per adjusted claim excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 3.19 $ 2.64 20.8% ================================= Adjusted net income (Note 3) $ 278,223 $ 232,441 19.7% ================================= Adjusted net income per common share - diluted (Note 3) $ 0.65 $ 0.51 27.5% ================================= Nine Months Ended Percentage September 30, Increase / ------------------------ 2006 2005 (Decrease) ---------------------------------- Net revenue (a) $27,480,767 $24,623,495 11.6% Operating expenses: Cost of revenues (b) 25,733,426 23,089,484 11.5% Selling, general and administrative expenses (c) 404,354 350,853 15.2% Depreciation 75,969 73,962 2.7% Amortization of intangible assets 32,837 35,533 (7.6%) Integration and other related expenses - 8,807 (100.0%) ---------------------------------- Operating income 1,234,181 1,064,856 15.9% Interest (income) expense, net (25,603) 4,178 - Gain on treasury lock (17,077) - - ---------------------------------- Income before provision for income taxes 1,276,861 1,060,678 20.4% Provision for income taxes 504,360 418,968 20.4% ---------------------------------- Net income $ 772,501 $ 641,710 20.4% ================================== Average number of common shares outstanding - basic 432,183 447,593 (3.4%) Dilutive effect of stock options and warrants 7,307 8,859 (17.5%) ---------------------------------- Average number of common shares outstanding - diluted 439,490 456,452 (3.7%) ================================== Net income per common share - diluted $ 1.76 $ 1.41 24.8% ================================== Revenues: Mail service $ 9,364,833 $ 8,556,832 9.4% Retail 17,883,536 15,855,848 12.8% Other 232,398 210,815 10.2% ---------------------------------- $27,480,767 $24,623,495 11.6% ================================== Pharmacy claims: Mail 44,874 43,314 3.6% Retail 343,991 366,713 (6.2%) ---------------------------------- Total 388,865 410,027 (5.2%) ================================== Adjusted Claims (Note 1) 476,547 494,884 (3.7%) ================================== Supplemental presentation of non- GAAP financial measures: EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 1,342,987 $ 1,174,351 14.4% ================================== EBITDA excluding integration and other related expenses, client settlement (Notes 2 and 3) $ 1,332,347 $ 1,183,158 12.6% ================================== EBITDA per adjusted claim excluding integration and other related expenses and client settlement (Notes 2 and 3) $ 2.80 $ 2.39 17.2% ================================== Adjusted net income (Note 3) $ 755,732 $ 647,038 16.8% ================================== Adjusted net income per common share - diluted (Note 3) $ 1.72 $ 1.42 21.1% ================================== *T -0- *T (a) Includes a $10.6 million gain from a settlement with a former client in the nine months ended September 30, 2006. (b) Excludes depreciation which is presented separately. (c) Includes share-based compensation of $10.3 million and $31.2 million based on FAS 123R in the three months and nine months ended September 30, 2006, respectively, and $2.7 million and $9.2 million based on APB 25 in the three months and nine months ended September 30, 2005, respectively. *T -0- *T CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited) (In thousands) Nine Months Ended September 30, ---------------------- 2006 2005 ----------- ---------- Cash flows from continuing operations: Net income $772,501 $641,710 Adjustments to reconcile net income to net cash provided by continuing operations: Depreciation and amortization 108,806 109,495 Share-based compensation 31,212 9,174 Non-cash interest expense 1,669 1,754 Write-off of deferred financing costs 322 686 Other non-cash expenses, net 285 796 Deferred income taxes (15,343) 343,243 Changes in operating assets and liabilities, net of effects of acquisitions/disposals of businesses (43,959) (309,979) ----------- ---------- Net cash provided by continuing operations 855,493 796,879 Cash flows from investing activities: Sale of short-term investments 1,120,436 426,732 Purchase of short-term investments (693,246) (765,325) Capital expenditures, net (79,094) (96,994) Proceeds from sale of property and equipment - 2,113 Investment in businesses (464) (7,438) ----------- ---------- Net cash provided by (used in) investing activities 347,632 (440,912) Cash flows from financing activities: Purchase of treasury stock (1,442,791) (385,984) Dividends paid (42,158) - Deferred financing costs (890) - Excess tax benefit from share-based compensation 20,516 - Proceeds from stock issued under equity-based compensation plans 61,934 51,793 Payments on indebtedness - (148,678) ----------- ---------- Net cash used in financing activities (1,403,389) (482,869) Cash used in discontinued operations - operating activities (6,976) (9,163) ----------- ---------- Net decrease in cash and cash equivalents (207,240) (136,065) Cash and cash equivalents - beginning of period 1,268,883 1,078,803 ----------- ---------- Cash and cash equivalents - end of period $1,061,643 $942,738 =========== ========== *T Caremark Rx, Inc. Notes to Press Release Tables September 30, 2006 (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 Nine Months Ended September 30, September 30, ------------------- --------------------- 2006 2005 2006 2005 --------- --------- ---------- ---------- Net income $288,555 $231,421 $772,501 $641,710 Depreciation 25,491 25,402 75,969 73,962 Amortization of intangible assets 10,619 11,725 32,837 35,533 Interest (income) expense, net (6,072) (863) (25,603) 4,178 Gain on treasury lock (17,077) - (17,077) - Provision for income taxes 188,395 151,094 504,360 418,968 --------- --------- ---------- ---------- EBITDA 489,911 418,779 1,342,987 1,174,351 Cash interest receipts, net 13,671 9,529 37,404 5,822 Cash tax payments, net (168,778) (17,873) (426,782) (9,256) Other non-cash expenses 10,190 3,567 31,497 10,161 Other changes in operating assets and liabilities, net of acquisitions/disposals of businesses (112,957) (188,096) (129,613) (384,199) --------- --------- ---------- ---------- Net cash provided by continuing operations $232,037 $225,906 $855,493 $796,879 ========= ========= ========== ========== *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, the benefit from a settlement with a former client and the gain from a treasury lock agreement. 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 EBITDA, adjusted net income and earnings per share which exclude these integration and other related expenses, the benefit from a settlement with a former client and the gain from a treasury lock agreement 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, the benefit from a settlement with a former client and the gain from a treasury lock agreement, are as follows (in thousands, except per share amounts): -0- *T Three Months Ended Nine Months Ended September 30, September 30, ------------------- ----------------------- 2006 2005 2006 2005 --------- --------- ----------- ----------- EBITDA $489,911 $418,779 $1,342,987 $1,174,351 Integration and other related expenses - 1,686 - 8,807 Client settlement - - (10,640) - EBITDA excluding integration and other related expenses and client settlement ---------- --------- ----------------------- $489,911 $420,465 $1,332,347 $1,183,158 ========= ========= ======================= Net income $288,555 $231,421 $772,501 $641,710 Integration and other related expenses (net of income tax benefit) - 1,020 - 5,328 Client settlement (net of income taxes) - - (6,437) - Gain on treasury lock (net of income taxes) (10,332) (10,332) --------- --------- ----------------------- Adjusted net income $278,223 $232,441 $755,732 $647,038 ========= ========= ======================= Net income per common share - diluted $0.6725 $0.5102 $1.7577 $1.4059 Integration and other related expenses per share (net of income tax benefit) - 0.0022 - 0.0117 Client settlement per share (net of income taxes) - - (0.0146) - Gain on treasury lock per share (net of income taxes) (0.0241) - (0.0235) - --------- --------- ----------- ----------- Adjusted net income per common share - diluted $0.6484 $0.5124 $1.7196 $1.4176 ========= ========= =========== =========== *T