SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of Earliest Event Reported): August 4, 2005
Caremark Rx, Inc.
(Exact Name of Registrant as Specified in its Charter)
| Delaware | 1-14200 | 63-1151076 | ||
| (State or other jurisdiction of incorporation) |
(Commission File Number) | (IRS Employer Identification No.) |
| 211 Commerce Street, Suite 800 Nashville, Tennessee |
37201 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code: (615) 743-6600
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions (see General Instruction A.2. below):
| ¨ | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
| ¨ | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
| ¨ | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
| ¨ | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02 Results of Operations and Financial Condition
On August 4, 2005, Caremark Rx, Inc. (the “Company”) issued the following press release disclosing material, non-public financial information concerning the Company’s quarterly fiscal period ended June 30, 2005. This press release contains certain non-GAAP financial measures as described therein.
[Caremark Rx, Inc. Letterhead]
FOR IMMEDIATE RELEASE
Contacts:
Investor Relations
Ryan Hall, 615/743-6607
or
Corporate Communications
Joan Gallagher, 615/743-6652
Caremark Rx, Inc. Announces Record Second Quarter Results
Earnings Per Diluted Share Increases 57%
Company Raises 2005 Earnings Guidance
Nashville, TN, August 4, 2005 – Caremark Rx, Inc. (NYSE: CMX) today reported diluted earnings per share of $.47 for the second quarter of 2005, $.01 ahead of First Call consensus estimates. The second quarter financial results included $5.9 million of integration and other expenses related to the acquisition of AdvancePCS, which closed in the first quarter of 2004. Excluding these expenses, diluted earnings per share for the second quarter of 2005 also was $.47, a 57% increase from the second quarter of 2004.
Second Quarter 2005 Operating Results
Caremark reported net revenues of $8.2 billion in the second quarter of 2005, an increase of 13% over the second quarter of 2004. During the second quarter of 2005, mail pharmacy revenues totaled $2.8 billion, an increase of 34%, and mail claims totaled 14.5 million, an increase of 26% over the second quarter of 2004. During the second quarter of 2005, retail revenues totaled $5.3 billion, an increase of 4%, and retail claims totaled 120.2 million, a decrease of 10% as compared to the second quarter of 2004. As has been mentioned on prior investor conference calls, the decrease in retail claims was anticipated and can be attributed to previously disclosed terminations of predominantly retail-oriented clients.
EBITDA (earnings before interest, taxes, depreciation and amortization) for the second quarter of 2005, excluding integration and other related expenses, was $394.7 million, an increase of 40% over the second quarter of 2004. Operating cash flow in the second quarter was $304.0 million.
Diluted earnings per share of $.47, excluding integration and other related expenses, for the second quarter of 2005, represented an increase of 57% from $.30 for the second quarter of 2004.
“Caremark continues to perform well both operationally and financially,” said Mac Crawford, Chairman, President and Chief Executive Officer. “Caremark’s focus on driving value for our clients has again translated into value for shareholders through recording another quarter of record earnings and significant cash flow. We look forward to continuing to help our clients manage their costs during the second half of the year.”
First Half 2005 Operating Results
Caremark closed the acquisition of AdvancePCS on March 24, 2004. As a result, Caremark’s operating results for the first half of 2004 only include the AdvancePCS operations from March 24, 2004 through June 30, 2004.
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During the first six months of 2005, Caremark reported net revenues of $16.6 billion, an increase of $6.3 billion over the same period in the prior year. EBITDA for the first six months of 2005, excluding integration and other related expenses, was $762.7 million, an increase of $306.7 million over the same period of 2004. The Company’s cash flow from operations for the first half of 2005 totaled $571.0 million.
Diluted earnings per share for the first six months of 2005, excluding integration and other related expenses, increased 49% to $.91 compared to $.61 in the first six months of 2004.
First Half 2005 Operating Results-Pro Forma
On a pro forma basis, assuming the AdvancePCS acquisition was included in the full first half of 2004, net revenues increased by 11% over the first six months of 2004. On a pro forma basis, EBITDA for the first six months of 2005, excluding integration and other related expenses, was $762.7 million, an increase of 42% from $535.4 million during the first six months of 2004.
Pro forma diluted earnings per share, excluding integration and other related expenses, were $.91 for the first half of 2005, an increase of 60% compared to $.57 recorded in the same period of the prior year.
Balance Sheet
At June 30, 2005, Caremark reported a net cash and short-term investments position of $958.5 million, reflecting total cash and cash equivalents and short-term investments of $1.4 billion offset by Senior Notes totaling $450.0 million. During the quarter, Caremark called the remaining AdvancePCS Senior Notes totaling $1.7 million, spent $28.8 million on capital expenditures and repurchased $208.3 million of its common stock.
Share Repurchase
On May 17, 2005, Caremark announced that its Board of Directors had authorized an increase in its stock repurchase program to repurchase up to $1.25 billion of the Company’s common stock in the open market. Prior to the second quarter of 2005, the Company had repurchased 20.2 million shares at an approximate total cost of $591 million. During the second quarter of 2005, the Company repurchased 5.0 million shares at an approximate total cost of $208 million. Since the end of the second quarter of 2005, the company has repurchased an additional 2.0 million shares at an approximate cost of $85 million. In total, as of August 3, 2005, the Company has repurchased 27.2 million shares at an approximate total cost of $884 million, leaving $366 million available under its authorized program.
Outlook
Caremark expects 2005 revenue growth on a GAAP basis to be 28% to 30%. Caremark expects that its 2005 diluted earnings per share, before integration and other related expenses, will be in the range of $1.95 to $1.97, based on 457 million diluted shares outstanding and an effective tax rate of 39.5%. This is compared to the previous guidance of $1.92 to $1.94 per diluted share. Caremark’s 2005 earnings expectations are currently based, in part, on the following assumptions:
| • | Stock option expense associated with the unvested stock options held by AdvancePCS employees at the acquisition is expected to be approximately $11 million in 2005. |
| • | Amortization expense related to identifiable intangible assets acquired in the AdvancePCS transaction is estimated to total approximately $47 million in 2005. |
| • | Depreciation expense is expected to total approximately $101 million in 2005. |
| • | Net interest expense is expected to total $3 million to $5 million in 2005. |
| • | The Company will continue to expense certain ongoing integration expenses related to the AdvancePCS acquisition as these costs are incurred. These expenses are not included in the Company’s earnings per share expectations for 2005. |
3
In addition, Caremark expects diluted earnings per share, before integration and other related expenses, to be $.51 for the third quarter of 2005.
Medicare Part D
Caremark is actively supporting clients in the implementation of the Medicare Drug benefit. The Company has submitted bids to become a Prescription Drug Plan (PDP) under the name SilverScript Insurance Company in all 34 regions designated by the Centers for Medicare and Medicaid Services (CMS). As a result of this decision, Caremark believes it is well positioned to support the unique needs and requirements of both health plan and employer clients through a complete suite of options ranging from support of the subsidy to several PDP solutions.
Conference Call
As announced, Caremark will hold a conference call to discuss second quarter 2005 results and general operations of the company. The details of the call are as follows:
| Date: | Thursday, August 4, 2005 | |
| Time: | 10:30 a.m. Eastern Time | |
| 9:30 a.m. Central Time | ||
| Toll-Free Number: | (888) 596-9623 | |
| Int’l/Local Dial-in#: | (706) 634-6560 | |
| Leader: | Mac Crawford | |
| Replay Number: | (800) 642-1687 or (706) 645-9291 | |
| Conference ID: | 7841895 |
The call also will be broadcast live as well as replayed through the Internet. The Webcast can be accessed through the “Investor Relations” page on the Caremark Rx, Inc. Web site at www.caremarkrx.com.
A taped replay of the call also will be available beginning at 11:30 a.m. Eastern Time on August 4, 2005, until Midnight Eastern Time on August 18, 2005, by calling the replay number listed above.
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. Caremark’s clients include corporate health plans, managed care organizations, insurance companies, unions, government agencies and other funded benefit plans. 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 Rx is available on the World Wide Web at www.caremarkrx.com.
Forward-Looking Statement
This press release contains statements that constitute “forward-looking statements” within the meaning of the Securities Act of 1933 and the Securities Exchange Act of 1934 as amended by the Private Securities Litigation Reform Act of 1995. “Forward-looking statements” contained in this press release include the intent, belief or current expectations of the Company and members of its senior management team with respect to the anticipated growth prospects for the Company’s business, including 2005 earnings per share projections, 2005 revenue growth, 2005 diluted earnings per share projections and third quarter 2005 diluted earnings per share projections,
4
as well as the assumptions upon which such statements are based. 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 from those contemplated by such forward-looking statements. Important factors currently known to management that could cause actual results to differ materially from those contemplated by the forward-looking statements in this press release include, but are not limited to, adverse developments with respect to the Company’s operating plan and objectives, as well as adverse developments in the healthcare or pharmaceutical industry generally. Additional factors that could cause actual results to differ materially from those contemplated in this press release can be found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2004, and the company’s other periodic filings from time to time with the SEC. This press release includes certain non-GAAP financial measures as defined under SEC rules. As required by SEC rules, we have provided, in the footnotes to the tables attached hereto, a reconciliation of those measures to the most directly comparable GAAP measures.
Additional information about Caremark Rx is available on the World Wide Web at
http://www.caremarkrx.com.
-tables follow-
5
CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands)
| June 30, 2005 |
December 31, 2004 |
|||||||
| (Unaudited) | ||||||||
| ASSETS | ||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 742,441 | $ | 1,078,803 | ||||
| Short-term investments |
638,566 | 223,610 | ||||||
| Short-term investments—restricted |
27,500 | — | ||||||
| Accounts receivable, net |
2,071,873 | 1,977,557 | ||||||
| Inventories |
362,370 | 436,754 | ||||||
| Deferred tax asset, net |
289,873 | 402,698 | ||||||
| Income taxes receivable |
23,141 | 64,654 | ||||||
| Prepaid expenses and other current assets |
33,080 | 35,550 | ||||||
| Total current assets |
4,188,844 | 4,219,626 | ||||||
| Property and equipment, net |
289,656 | 285,214 | ||||||
| Goodwill, net |
7,123,206 | 6,982,551 | ||||||
| Other intangible assets, net |
756,578 | 782,312 | ||||||
| Other assets |
35,208 | 40,031 | ||||||
| Total assets |
$ | 12,393,492 | $ | 12,309,734 | ||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||||
| Current liabilities: |
||||||||
| Accounts payable |
$ | 851,729 | $ | 678,083 | ||||
| Claims and discounts payable |
2,331,094 | 2,644,426 | ||||||
| Other accrued expenses and liabilities |
453,667 | 293,017 | ||||||
| Current portion of long-term debt |
— | 148,610 | ||||||
| Total current liabilities |
3,636,490 | 3,764,136 | ||||||
| Long-term debt, net of current portion |
450,000 | 450,000 | ||||||
| Deferred tax liability |
240,870 | 220,141 | ||||||
| Other long-term liabilities |
332,373 | 335,740 | ||||||
| Total liabilities |
4,659,733 | 4,770,017 | ||||||
| Commitments and contingencies |
||||||||
| Stockholders’ equity: |
||||||||
| Common stock |
477 | 475 | ||||||
| Additional paid-in capital |
8,625,258 | 8,564,031 | ||||||
| Unearned stock-based compensation |
(12,569 | ) | (21,783 | ) | ||||
| Treasury stock |
(798,966 | ) | (510,978 | ) | ||||
| Shares held in trust |
(95,430 | ) | (97,452 | ) | ||||
| Retained earnings (accumulated deficit) |
29,365 | (380,924 | ) | |||||
| Accumulated other comprehensive loss |
(14,376 | ) | (13,652 | ) | ||||
| Total stockholders’ equity |
7,733,759 | 7,539,717 | ||||||
| Total liabilities and stockholders’ equity |
$ | 12,393,492 | $ | 12,309,734 | ||||
6
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, |
Six Months Ended June 30, | |||||||||||
| 2005 |
2004 |
2005 |
2004 (a) | |||||||||
| Net revenue |
$ | 8,236,215 | $ | 7,304,442 | $ | 16,612,298 | $ | 10,330,385 | ||||
| Operating expenses: |
||||||||||||
| Cost of revenues (b) |
7,723,509 | 6,894,591 | 15,617,333 | 9,689,402 | ||||||||
| Selling, general and administrative expenses |
115,128 | 119,945 | 225,831 | 175,856 | ||||||||
| Depreciation |
24,556 | 24,474 | 48,560 | 37,263 | ||||||||
| Amortization of intangible assets |
11,725 | 12,300 | 23,808 | 13,359 | ||||||||
| Stock option expense |
2,865 | 8,266 | 6,441 | 9,085 | ||||||||
| Integration and other related expenses |
5,912 | 5,028 | 7,121 | 15,438 | ||||||||
| Operating income |
352,520 | 239,838 | 683,204 | 389,982 | ||||||||
| Interest expense, net |
819 | 8,578 | 5,041 | 18,408 | ||||||||
| Income before provision for income taxes |
351,701 | 231,260 | 678,163 | 371,574 | ||||||||
| Provision for income taxes |
138,922 | 92,041 | 267,874 | 148,167 | ||||||||
| Net income |
$ | 212,779 | $ | 139,219 | $ | 410,289 | $ | 223,407 | ||||
| Average number of common shares outstanding—basic |
447,559 | 459,817 | 449,162 | 368,785 | ||||||||
| Dilutive effect of stock options and warrants |
8,920 | 11,110 | 8,745 | 9,635 | ||||||||
| Average number of common shares outstanding—diluted |
456,479 | 470,927 | 457,907 | 378,420 | ||||||||
| Net income per common share—diluted |
$ | 0.47 | $ | 0.30 | $ | 0.90 | $ | 0.59 | ||||
| Pharmacy claims: |
||||||||||||
| |
14,452 | 11,431 | 28,755 | 18,572 | ||||||||
| Retail |
120,232 | 133,927 | 250,554 | 168,192 | ||||||||
| Total |
134,684 | 145,358 | 279,309 | 186,764 | ||||||||
| Adjusted Claims (Note 4) |
163,097 | 167,808 | 335,648 | 222,963 | ||||||||
| Supplemental presentation of non-GAAP financial measures: |
||||||||||||
| EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) |
$ | 388,801 | $ | 276,612 | $ | 755,572 | $ | 440,604 | ||||
| EBITDA excluding integration and other related expenses (Notes 2 and 3) |
$ | 394,713 | $ | 281,640 | $ | 762,693 | $ | 456,042 | ||||
| EBITDA per adjusted claim excluding integration and other related expenses (Notes 3 and 4) |
$ | 2.42 | $ | 1.68 | $ | 2.27 | $ | 2.05 | ||||
| Net income per common share—diluted excluding integration and other related expenses (Note 3) |
$ | 0.47 | $ | 0.30 | $ | 0.91 | $ | 0.61 | ||||
| (a) | Includes the results of operations of AdvancePCS beginning March 24, 2004. |
| (b) | Excludes depreciation which is presented separately. |
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CAREMARK RX, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)
| Six Months Ended June 30, |
||||||||
| 2005 |
2004 (a) |
|||||||
| Cash flows from continuing operations: |
||||||||
| Net income . |
$ | 410,289 | $ | 223,407 | ||||
| Adjustments to reconcile net income to net cash provided by continuing operations: |
||||||||
| Deferred income taxes |
236,125 | 101,252 | ||||||
| Depreciation and amortization |
72,368 | 50,622 | ||||||
| Stock option expense |
6,441 | 9,085 | ||||||
| Non-cash interest expense |
1,240 | 1,645 | ||||||
| Writeoff of deferred financing costs |
686 | 2,206 | ||||||
| Other non-cash expenses |
153 | 249 | ||||||
| Changes in operating assets and liabilities, net of effects of acquisitions/disposals of businesses . |
(156,329 | ) | 313,430 | |||||
| Net cash provided by continuing operations |
570,973 | 701,896 | ||||||
| Cash flows from investing activities: |
||||||||
| Purchase of short-term investments |
(689,000 | ) | — | |||||
| Sale of short-term investments |
246,544 | — | ||||||
| Acquisition of business, net of cash acquired |
— | (391,021 | ) | |||||
| Capital expenditures, net |
(55,801 | ) | (31,151 | ) | ||||
| (Acquisition)/partial liquidation of cost-method investments |
(2,251 | ) | 10,382 | |||||
| Net cash used in investing activities |
(500,508 | ) | (411,790 | ) | ||||
| Cash flows from financing activities: |
||||||||
| Net repayments under credit facilities |
(147,000 | ) | (96,625 | ) | ||||
| Repurchase of AdvancePCS Senior Notes . |
(1,678 | ) | (206,810 | ) | ||||
| Proceeds from stock issued under equity-based compensation plans . |
38,431 | 113,691 | ||||||
| Purchase of treasury stock . |
(287,988 | ) | (33,609 | ) | ||||
| Deferred financing costs . |
— | (3,857 | ) | |||||
| Securities issuance costs |
— | (2,729 | ) | |||||
| Net cash used in financing activities . |
(398,235 | ) | (229,939 | ) | ||||
| Cash used in discontinued operations . |
(8,592 | ) | (2,259 | ) | ||||
| Net (decrease) increase in cash and cash equivalents |
(336,362 | ) | 57,908 | |||||
| Cash and cash equivalents—beginning of period . |
1,078,803 | 815,328 | ||||||
| Cash and cash equivalents—end of period |
$ | 742,441 | $ | 873,236 | ||||
| (a) | Includes the cash flows of AdvancePCS beginning March 24, 2004. |
8
CAREMARK RX, INC. AND SUBSIDIARIES
SELECTED PRO FORMA FINANCIAL AND STATISTICAL INFORMATION (a)
(In thousands, except per share and per adjusted claim amounts)
| Three Months Ended June 30, |
Percentage Increase (Decrease) |
||||||||
| 2005 Pro Forma |
2004 Pro Forma |
||||||||
| Financial Information |
|||||||||
| Net revenue |
$ | 8,236,215 | $ | 7,304,442 | 13 | % | |||
| Cost of revenues (b) |
7,723,509 | 6,894,591 | 12 | % | |||||
| Selling, general and administrative expenses |
115,128 | 119,945 | -4 | % | |||||
| Stock option expense |
2,865 | 8,266 | -65 | % | |||||
| EBITDA (c) (Notes 2 and 3) |
394,713 | 281,640 | 40 | % | |||||
| Depreciation |
24,556 | 24,474 | 0 | % | |||||
| Amortization of intangible assets |
11,725 | 12,083 | -3 | % | |||||
| Operating income (Note 3) |
358,432 | 245,083 | 46 | % | |||||
| Interest expense, net |
819 | 8,578 | -90 | % | |||||
| Income before provision for income taxes |
357,613 | 236,505 | 51 | % | |||||
| Provision for income taxes |
141,257 | 94,044 | 50 | % | |||||
| Net income (Note 3) |
$ | 216,356 | $ | 142,461 | 52 | % | |||
| Average number of common shares outstanding—diluted |
456,479 | 470,927 | -3 | % | |||||
| Net income per common share—diluted |
$ | 0.47 | $ | 0.30 | 57 | % | |||
| Claims Processed |
|||||||||
| |
14,452 | 11,431 | 26 | % | |||||
| Retail |
120,232 | 133,927 | -10 | % | |||||
| Total |
134,684 | 145,358 | -7 | % | |||||
| Adjusted Claims (Note 4) |
163,097 | 167,808 | -3 | % | |||||
| EBITDA per adjusted claim (Notes 2 and 4) |
$ | 2.42 | $ | 1.68 | 44 | % | |||
| Six Months Ended June 30, |
Percentage Increase |
||||||||
| 2005 Pro Forma |
2004 Pro Forma |
||||||||
| Financial Information |
|||||||||
| Net revenue |
$ | 16,612,298 | $ | 14,940,188 | 11 | % | |||
| Cost of revenues (b) |
15,617,333 | 14,150,298 | 10 | % | |||||
| Selling, general and administrative expenses |
225,831 | 237,264 | -5 | % | |||||
| Stock option expense |
6,441 | 17,266 | -63 | % | |||||
| EBITDA (c) (Notes 2 and 3) |
762,693 | 535,360 | 42 | % | |||||
| Depreciation |
48,560 | 47,364 | 3 | % | |||||
| Amortization of intangible assets |
23,808 | 24,166 | -1 | % | |||||
| Operating income (Note 3) |
690,325 | 463,830 | 49 | % | |||||
| Interest expense, net |
5,041 | 18,518 | -73 | % | |||||
| Income before provision for income taxes |
685,284 | 445,312 | 54 | % | |||||
| Provision for income taxes |
270,687 | 177,192 | 53 | % | |||||
| Net income (Note 3) |
$ | 414,597 | $ | 268,120 | 55 | % | |||
| Average number of common shares outstanding—diluted |
457,907 | 467,505 | -2 | % | |||||
| Net income per common share—diluted |
$ | 0.91 | $ | 0.57 | 60 | % | |||
| Claims Processed |
|||||||||
| |
28,755 | 22,754 | 26 | % | |||||
| Retail |
250,554 | 271,665 | -8 | % | |||||
| Total |
279,309 | 294,419 | -5 | % | |||||
| Adjusted Claims (Note 4) |
335,648 | 338,980 | -1 | % | |||||
| EBITDA per adjusted claim (Notes 2 and 4) |
$ | 2.27 | $ | 1.58 | 44 | % | |||
| (a) | Assumes the AdvancePCS acquisition occurred on January 1, 2004. See Note 1. |
| (b) | Excludes depreciation which is presented separately. |
| (c) | Excludes integration and other related expenses. See Note 3. |
9
Caremark Rx, Inc.
Notes to Press Release Tables
June 30, 2005
(1) On March 24, 2004, we completed our acquisition of AdvancePCS. The results of operations and cash flows of AdvancePCS are included in the accompanying condensed consolidated statements of income and cash flows beginning March 24, 2004. To assist you in understanding the impact of the AdvancePCS acquisition, we have also included pro forma information presenting the results of operations of Caremark Rx, Inc. and AdvancePCS as if the acquisition of AdvancePCS had been completed at January 1, 2004.
The pro forma income amounts exclude integration and other related expenses (net of benefit from income taxes) of approximately $3.6 million and $3.0 million in the three months ended June 30, 2005 and 2004, and $4.3 million and $9.3 million in the six months ended June 30, 2005 and 2004, respectively, incurred in connection with the AdvancePCS Acquisition. See Note 3 below.
(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 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 June 30, |
Six Months Ended June 30, |
||||||||||||||
| 2005 |
2004 |
2005 |
2004 |
||||||||||||
| Net income |
$ | 212,779 | $ | 139,219 | $ | 410,289 | $ | 223,407 | |||||||
| Depreciation |
24,556 | 24,474 | 48,560 | 37,263 | |||||||||||
| Amortization of intangible assets |
11,725 | 12,300 | 23,808 | 13,359 | |||||||||||
| Interest expense, net |
819 | 8,578 | 5,041 | 18,408 | |||||||||||
| Provision for income taxes |
138,922 | 92,041 | 267,874 | 148,167 | |||||||||||
| EBITDA |
388,801 | 276,612 | 755,572 | 440,604 | |||||||||||
| Cash interest (payments) receipts |
(9,415 | ) | 395 | (3,707 | ) | (24,234 | ) | ||||||||
| Cash tax refunds |
12,597 | 38,816 | 8,617 | 34,318 | |||||||||||
| Other non-cash expenses |
3,007 | 8,386 | 6,594 | 11,540 | |||||||||||
| Other changes in operating assets and liabilities, net of acquisitions/disposals of businesses |
(91,029 | ) | 174,736 | (196,103 | ) | 239,668 | |||||||||
| Net cash provided by continuing operations |
$ | 303,961 | $ | 498,945 | $ | 570,973 | $ | 701,896 | |||||||
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) In the quarters ended June 30, 2005 and 2004, we incurred approximately $5.9 million and $5.0 million of expenses, respectively, primarily for: (1) integration activities related to our acquisition of AdvancePCS (in the second quarter of 2004) and (2) involuntary termination/employee retention and related benefits ($5.3 million in the second quarter of 2005 and $2.9 million in the second quarter of 2004). In the six months ended June 30,
10
Caremark Rx, Inc.
Notes to Press Release Tables—(Continued)
June 30, 2005
2005 and 2004, we incurred approximately $7.1 million and $15.4 million of expenses, respectively, primarily for: (1) integration activities related to our acquisition of AdvancePCS (in the first half of 2004), including pre-acquisition integration planning; (2) involuntary termination/employee retention and related benefits ($6.5 million in the first half of 2005 and $4.4 million in the first half of 2004) and (3) writing off approximately $2.2 million (in the first half of 2004) of deferred financing costs related to our credit agreement that was replaced upon consummation of the AdvancePCS acquisition. The analyses used by management to evaluate the performance of our business excludes these integration and other related expenses.
Under the SEC’s Regulation G, financial measures which exclude non-recurring expense items are non-GAAP financial measures; therefore, our presentations of amounts of EBITDA, operating income and earnings per share which exclude these integration and other related expenses 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 are as follows (in thousands, except per share amounts):
| Three Months Ended June 30, |
Six Months Ended June 30, | |||||||||||
| 2005 |
2004 |
2005 |
2004 | |||||||||
| EBITDA |
$ | 388,801 | $ | 276,612 | $ | 755,572 | $ | 440,604 | ||||
| Integration and other related expenses |
5,912 | 5,028 | 7,121 | 15,438 | ||||||||
| EBITDA excluding integration and other related expenses |
$ | 394,713 | $ | 281,640 | $ | 762,693 | $ | 456,042 | ||||
| Net income |
$ | 212,779 | $ | 139,219 | $ | 410,289 | $ | 223,407 | ||||
| Integration and other related expenses (net of income tax benefit) |
3,577 | 3,027 | 4,308 | 9,294 | ||||||||
| Net income excluding integration and other related expenses |
$ | 216,356 | $ | 142,246 | $ | 414,597 | $ | 232,701 | ||||
| Net income per common share—diluted |
$ | 0.47 | $ | 0.30 | $ | 0.90 | $ | 0.59 | ||||
| Integration and other related expenses per share (net of tax benefit) |
— | — | 0.01 | 0.02 | ||||||||
| Net income per common share—diluted excluding integration and other related expenses |
$ | 0.47 | $ | 0.30 | $ | 0.91 | $ | 0.61 | ||||
(4) 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.
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| Caremark Rx, Inc. | ||
| By: |
/s/ PETER J. CLEMENS IV | |
| Peter J. Clemens IV Executive Vice President and Chief Financial Officer | ||
Date: August 4, 2005