Caremark Rx, Inc. Reports Record Fourth Quarter and Full Year 2006 Results

Caremark Rx, Inc. (NYSE: CMX) today reported fourth quarter diluted earnings per share of $.71, exceeding the top of the company’s guidance range by $.02 per share. Diluted earnings per share grew 29% compared to adjusted diluted earnings per share for the fourth quarter of 2005. Full year 2006 adjusted diluted earnings grew 23% to $2.42 per share compared to adjusted diluted earnings of $1.97 per share in 2005. Full year 2006 net revenue increased 11% to $36.8 billion. Fourth Quarter Operating Results Net revenue was $9.3 billion in the fourth quarter of 2006, an increase of 11% over the fourth quarter of 2005. Revenue growth was driven by an increase in retail and mail sales, including the addition of Medicare Part D and other new client revenues. Retail revenue grew 14% to $6.0 billion compared to the fourth quarter of 2005. Retail pharmacy claims increased 1% to 112.8 million compared to the fourth quarter of 2005. The increase in retail claims is primarily a result of increases in Medicare and other net new client prescription claims. Mail pharmacy revenue increased 5% to $3.2 billion and mail pharmacy claims were 14.8 million, down 1% from the fourth quarter of 2005. Mail claims declined primarily as a result of previously disclosed mid-year client contract terminations. Selling, general and administrative (SG&A) expenses were $141.9 million, an increase of 15% over the fourth quarter of 2005. Fourth quarter 2006 SG&A expenses included $9.9 million of share-based compensation expense resulting from the adoption of FAS 123R. Excluding $9.9 million and $1.3 million of share-based compensation expense in the fourth quarter of 2006 and the fourth quarter of 2005, respectively, SG&A expenses grew by 8%. EBITDA (earnings before interest, taxes, depreciation and amortization) for the fourth quarter of 2006 was $516.8 million, an increase of 16% over the fourth quarter of 2005, excluding in both periods merger, integration and other related expenses as well as a non-operating gain from the sale of a retained interest in a previously disposed subsidiary in the fourth quarter of 2005. EBITDA per adjusted claim grew to $3.30, a 15% increase compared to the fourth quarter of 2005. Fourth quarter diluted earnings increased 29% to $.71 per share compared to adjusted diluted earnings per share for the fourth quarter of 2005. Fourth quarter 2005 adjusted diluted earnings per share exclude merger, integration and other related expenses, a non-operating gain from the sale of a retained interest in a previously disposed subsidiary and a positive adjustment to the provision for income taxes. Fourth quarter 2006 results include $5.4 million in expenses related to Caremark’s proposed merger with CVS and a favorable $5.3 million settlement related to a former AdvancePCS client. Fourth quarter 2006 earnings benefited by approximately $.01 per share from a 0.2% reduction in the full year tax rate to 39.3%. Full Year 2006 Operating Results Full year net revenue grew 11% to $36.8 billion. Retail revenue grew 13% to $23.9 billion. Retail claims declined 4% during 2006 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 $12.5 billion, an increase of 8%. Mail claims grew 2% for the full year. SG&A expenses increased 15% to $546.3 million, which includes $41.1 million of share-based compensation expense resulting from the adoption of FAS123R. Excluding $41.1 million and $10.5 million of share-based compensation expense for 2006 and 2005, respectively, SG&A expenses grew by 9%. EBITDA for the full year, excluding a $10.6 million gain in the second quarter of 2006 from a settlement with a former client, was $1.8 billion, an increase of 14%, excluding in both periods merger, integration and other related expenses as well as a non-operating gain recorded in the fourth quarter of 2005. EBITDA per adjusted claim for the year was $2.92, an increase of 17%. Adjusted diluted earnings grew 23% to $2.42 per share compared to adjusted diluted earnings of $1.97 per share. Adjusted diluted earnings exclude merger, integration and other related expenses in both periods. Full year 2006 adjusted earnings also exclude a gain in the second quarter from a settlement with a former client and a gain on a treasury lock agreement. Adjusted earnings for 2005 also exclude a non-operating gain from the sale of a retained interest in a previously disposed subsidiary and a positive adjustment for the provision of income taxes. Balance Sheet and Cash Flow At December 29, 2006, net cash and short-term investments totaled $1.2 billion. In October 2006, the 7.375% Senior Notes totaling $450 million matured and were retired. Operating cash flow for the fourth quarter of 2006 was $374.9 million compared to $509 million during the same period of 2005. Operating cash flow for the full year was $1.2 billion compared to $1.3 billion in 2005. The decline in operating cash flow was driven by cash payments of federal income taxes in 2006 after Caremark utilized the majority of its federal net operating loss carryforward in 2005. Income tax payments, net of refunds, totaled $709.5 million in 2006 compared to $30.6 million in 2005. Capital expenditures were $28.4 million in the fourth quarter and $107.5 million for 2006. Share Repurchase and Dividend In May 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. The company has not repurchased any shares under this program since the end of the third quarter of 2006. Cumulative repurchases under the program are 59.1 million shares at a total cost of $2.4 billion, leaving approximately $570 million available under the current authorization. On December 18, 2006, Caremark announced that its Board of Directors declared a quarterly cash dividend of $.10 per share of common stock. The dividend for the fourth quarter was paid on January 15, 2007. Financial Guidance For 2007, Caremark expects diluted earnings per share to be in the range of $2.89 to $2.92 representing 19% to 21% growth compared to full year 2006 adjusted earnings per share of $2.42. The 2007 earnings per share guidance range does not include expenses related to Caremark’s proposed merger with CVS. In addition, the company expects its effective tax rate to be 39.3% for the year. First quarter 2007 diluted earnings are expected to be $.68 per share. 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 2007 earnings per share projections, 2007 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)   December 31, December 31, 2006  2005  (Unaudited) ASSETS Current assets: Cash and cash equivalents $ 804,033  $ 1,268,883  Short-term investments 396,650  666,040  Short-term investments - restricted -  27,500  Accounts receivable, net 2,231,785  2,074,586  Inventories 540,939  449,199  Deferred tax asset, net 114,652  112,586  Prepaid expenses and other current assets   33,768    46,303  Total current assets 4,121,827  4,645,097    Property and equipment, net 319,859  314,959  Goodwill, net 7,072,916  7,131,050  Other intangible assets, net 686,148  731,300  Other assets   30,339    28,442  Total assets $ 12,231,089  $ 12,850,848      LIABILITIES AND STOCKHOLDERS' EQUITY   Current liabilities: Accounts payable $ 1,075,454  $ 849,358  Claims and discounts payable 2,469,435  2,438,813  Other accrued expenses and liabilities 393,737  343,158  Income taxes payable 54,493  17,137  Current portion of long-term debt   -    63,400  Total current liabilities 3,993,119  3,711,866    Long-term debt, net of current portion -  386,600  Deferred tax liability 231,983  245,389  Other long-term liabilities   326,303    326,427  Total liabilities 4,551,405  4,670,282    Commitments and contingencies   Stockholders' equity: Common stock 486  481  Additional paid-in capital 8,714,446  8,719,492  Treasury stock (2,429,432) (986,641) Shares held in trust (89,758) (93,616) Retained earnings 1,499,122  551,447  Accumulated other comprehensive income (loss), net   (15,180)   (10,597) Total stockholders' equity   7,679,684    8,180,566  Total liabilities and stockholders' equity $ 12,231,089  $ 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 Percentage Twelve Months Ended Percentage December 31, Increase / December 31, Increase / 2006  2005  (Decrease)   2006  2005  (Decrease)   Net revenue (a) $ 9,269,436  $ 8,367,756  10.8% $ 36,750,203  $ 32,991,251  11.4%   Operating expenses: Cost of revenues (b) 8,610,700  7,799,461  10.4% 34,344,126  30,888,945  11.2% Selling, general and administrative expenses (c) 141,924  123,183  15.2% 546,278  474,036  15.2% Depreciation 26,317  26,150  0.6% 102,286  100,112  2.2% Amortization of intangible assets 10,619  11,725  (9.4%) 43,456  47,258  (8.0%) Merger, integration and other related expenses (Note 3)   125    2,269  (94.5%)   125    11,076  (98.9%) Operating income 479,751  404,968  18.5% 1,713,932  1,469,824  16.6% Interest income, net (12,771) (7,131) 79.1% (38,374) (2,953) 1,199.5% Gain on treasury lock (Note 3) -  -  -  (17,077) -  -  Non-operating gain, net   -    (25,688) (100.0%)   -    (25,688) (100.0%) Income before provision for income taxes 492,522  437,787  12.5% 1,769,383  1,498,465  18.1% Provision for income taxes   191,008    147,126  29.8%   695,368    566,094  22.8% Net income $ 301,514  $ 290,661  3.7% $ 1,074,015  $ 932,371  15.2%   Average number of common shares outstanding - basic 420,887  444,700  (5.4%) 429,336  446,865  (3.9%) Dilutive effect of stock options and warrants   6,689    8,913  (25.0%)   7,152    8,872  (19.4%) Average number of common shares outstanding - diluted   427,576    453,613  (5.7%)   436,488    455,737  (4.2%)   Net income per common share - diluted $ 0.71  $ 0.64  10.9% $ 2.46  $ 2.05  20.0%   Revenues: Mail service $ 3,184,391  $ 3,037,130  4.8% $ 12,549,224  $ 11,593,962  8.2% Retail 6,003,984  5,253,491  14.3% 23,887,520  21,109,339  13.2% Other   81,061    77,135  5.1%   313,459    287,950  8.9% $ 9,269,436  $ 8,367,756  10.8% $ 36,750,203  $ 32,991,251  11.4%   Pharmacy claims: Mail 14,818  14,987  (1.1%) 59,692  58,301  2.4% Retail   112,824    111,240  1.4%   456,815    477,953  (4.4%) Total   127,642    126,227  1.1%   516,507    536,254  (3.7%) Adjusted Claims (Note 1)   156,478    155,472  0.6%   633,025    650,356  (2.7%)   Supplemental presentation of non-GAAP financial measures:   EBITDA (Earnings before interest, taxes, depreciation and amortization) (Note 2) $ 516,687  $ 468,531  10.3% $ 1,859,674  $ 1,642,882  13.2%   EBITDA excluding merger, integration and other related expenses, client settlement and non-operating gain, net   (Notes 2 and 3) $ 516,812  $ 445,112  16.1% $ 1,849,159  $ 1,628,270  13.6%   EBITDA per adjusted claim excluding merger, integration and other related expenses, client settlement and non-operating gain, net (Notes 2 and 3)   $ 3.30  $ 2.86  15.4% $ 2.92  $ 2.50  16.8%   Adjusted net income (Note 3) $ 301,535  $ 250,693  20.3% $ 1,057,267  $ 897,731  17.8%   Adjusted net income per common share - diluted (Note 3) $ 0.71  $ 0.55  29.1% $ 2.42  $ 1.97  22.8%   (a) Includes a $10.6 million gain from a settlement with a former client in the twelve months ended December 31, 2006. (b) Excludes depreciation which is presented separately. (c) Includes share-based compensation of $9.9 million and $41.1 million based on FAS 123R in the three months and twelve months ended December 31, 2006, respectively, and $1.3 million and $10.5 million based on APB 25 in the three months and twelve months ended December 31, 2005, respectively. CAREMARK RX, INC. AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (In thousands)     Twelve Months Ended December 31, 2006  2005  (Unaudited) Cash flows from continuing operations: Net income $ 1,074,015  $ 932,371  Adjustments to reconcile net income to net cash provided by continuing operations:   Depreciation and amortization 145,742  147,370  Share-based compensation 41,119  10,478  Provision for doubtful accounts 27,013  26,892  Non-cash interest expense 1,767  2,267  Write-off of deferred financing costs 322  686  Other non-cash expenses, net 284  2,219  Gain on treasury lock (17,077) -  Non-operating gain, net -  (25,688) Deferred income taxes (28,777) 392,746  Changes in operating assets and liabilities, net of effects of acquisitions/disposals of businesses   (14,030)   (183,506) Net cash provided by continuing operations 1,230,378  1,305,835    Cash flows from investing activities: Sale of short-term investments 1,585,536  495,459  Purchase of short-term investments (1,288,646) (965,389) Capital expenditures (107,527) (138,154) Proceeds from settlement of treasury lock 17,077  -  Proceeds from sale of property and equipment 329  2,113  Investment in businesses (964) (8,011) Proceeds from sale of investment in business -  43,166  Other   (1,439)   (206) Net cash provided by (used in) investing activities 204,366  (571,022)   Cash flows from financing activities: Purchase of treasury stock (1,442,791) (475,663) Payments on indebtedness (450,000) (148,678) Dividends paid (84,241) -  Deferred financing costs (890) -  Excess tax benefit from share-based compensation 21,402  -  Proceeds from stock issued under share-based compensation plans   65,196    87,270  Net cash used in financing activities (1,891,324) (537,071)   Cash used in discontinued operations - operating activities   (8,270)   (7,662) Net (decrease) increase in cash and cash equivalents (464,850) 190,080  Cash and cash equivalents - beginning of period   1,268,883    1,078,803  Cash and cash equivalents - end of period $ 804,033  $ 1,268,883  Caremark Rx, Inc. Notes to Press Release Tables December 31, 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 Twelve Months Ended December 31, December 31, 2006  2005  2006  2005  Net income $ 301,514  $ 290,661  $ 1,074,015  $ 932,371  Depreciation 26,317  26,150  102,286  100,112  Amortization of intangible assets 10,619  11,725  43,456  47,258  Interest income, net (12,771) (7,131) (38,374) (2,953) Gain on treasury lock -  -  (17,077) -  Provision for income taxes   191,008    147,126    695,368    566,094  EBITDA 516,687  468,531  1,859,674  1,642,882  Cash interest receipts (payments), net (2,869) (4,068) 34,535  1,754  Cash tax payments, net (282,703) (21,393) (709,485) (30,649) Non operating gain, net -  (25,688) -  (25,688) Other non-cash expenses 9,906  2,536  41,403  12,697  Other changes in operating assets and liabilities, net of acquisitions/disposals of businesses   133,864    89,038    4,251    (295,161) Net cash provided by continuing operations $ 374,885  $ 508,956  $ 1,230,378  $ 1,305,835  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 year ended December 31, 2006, we recorded a $10.6 million gain from a settlement with a former client and a $17.1 million gain on a treasury lock agreement. In addition, in the quarter and year ended December 31, 2006, we recorded $5.4 million of expenses related to our proposed merger with CVS Corporation, offset by a $5.3 million gain from an insurance settlement related to our acquisition of AdvancePCS. In the quarter and year ended December 31, 2005, we recorded a non-operating gain, net, of approximately $25.7 million, which consists primarily of a gain on the sale of our retained interest in a previously disposed subsidiary, and a positive adjustment to the provision for income taxes of approximately $25.8 million primarily to reflect resolution of income tax uncertainties related to the conclusion of a tax audit of another former discontinued operations subsidiary that was also divested several years ago. In addition, in the quarter and year ended December 31, 2005, we incurred approximately $2.3 million and $11.1 million, respectively, of integration and other expenses related to our acquisition of AdvancePCS. The analyses used by management to evaluate the performance of our business exclude merger, integration and other related expenses, the benefit from a settlement with a former client, the gain from a treasury lock agreement, the non-operating gain, net and the positive adjustment to the provision for income taxes. 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 merger, integration and other related expenses, the benefit from a settlement with a former client, the gain from a treasury lock agreement, the non-operating gain, net and the positive adjustment to the provision for income taxes 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 merger, integration and other related expenses, the benefit from a settlement with a former client, the gain from a treasury lock agreement, the non-operating gain, net and the positive adjustment to the provision for income taxes, are as follows (in thousands, except per share amounts): Three Months Ended Twelve Months Ended December 31, December 31, 2006  2005  2006  2005    EBITDA $ 516,687  $ 468,531  $ 1,859,674  $ 1,642,882  Merger, integration and other related expenses 125  2,269  125  11,076  Client settlement -  -  (10,640) -  Non-operating gain, net -  (25,688) -  (25,688) EBITDA excluding merger, integration and other related expenses, client settlement and non-operating gain, net $ 516,812  $ 445,112  $ 1,849,159    $ 1,628,270    Net income $ 301,514  $ 290,661  $ 1,074,015  $ 932,371  Merger, integration and other related expenses (net of income tax benefit) 76  1,373  76  6,701  Client settlement (net of income taxes) (21) -  (6,458) -  Gain on treasury lock (net of income taxes) (34) -  (10,366) -  Non-operating gain, net (net of income taxes) -  (15,541) -  (15,541) Positive adjustment to the provision for income taxes   -    (25,800)   -      (25,800) Adjusted net income $ 301,535  $ 250,693  $ 1,057,267    $ 897,731    Net income per common share - diluted $ 0.7052  $ 0.6408  $ 2.4606  $ 2.0459  Merger, integration and other related expenses per share (net of income tax benefit) 0.0002  0.0030  0.0002  0.0147  Client settlement per share (net of income taxes) -  -  (0.0148) -  Gain on treasury lock per share (net of income taxes) (0.0001) -  (0.0237) -  Non-operating gain, net per share (net of income taxes) -  (0.0343) -  (0.0341) Positive adjustment to the provision for income taxes per share   -    (0.0569)   -    (0.0566) Adjusted net income per common share - diluted $ 0.7053  $ 0.5526  $ 2.4223  $ 1.9699