CVS 2002 Annual Report Download - page 39

Restructuring & Asset Impairment
Charge
During the fourth quarter of 2001, management approved a
strategic restructuring, which resulted from a comprehensive
business review designed to streamline operations and enhance
operating efficiencies.
Following is a summary of the specific initiatives contained in the
2001 strategic restructuring:
1. 229 CVS/pharmacy and CVS ProCare store locations (the
“Stores”) would be closed by no later than March 2002. Since
these locations were leased facilities, management planned to
either return the premises to the respective landlords at the
conclusion of the current lease term or negotiate an early
termination of the contractual obligations. As of March 31,
2002, all of the Stores had been closed.
2. The Henderson, North Carolina distribution center (the “D.C.”)
would be closed and its operations would be transferred to the
Company’s remaining distribution centers by no later than May
2002. Since this location was owned, management planned to
sell the property upon closure. The D.C. was closed in April
2002 and sold in May 2002.
3. The Columbus, Ohio mail order facility (the “Mail Facility”)
would be closed and its operations would be transferred to the
Company’s Pittsburgh, Pennsylvania mail order facility by no
later than April 2002. Since this location was a leased facility,
management planned to either return the premises to the
landlord at the conclusion of the lease or negotiate an early
termination of the contractual obligation. The Mail Facility was
closed in March 2002.
4. Two satellite office facilities (the “Satellite Facilities”) would be
closed and their operations would be consolidated into the
Company’s Woonsocket, Rhode Island corporate headquarters
by no later than December 2001. Since these locations were
leased facilities, management planned to either return the
premises to the landlords at the conclusion of the leases or
negotiate an early termination of the contractual obligations.
The Satellite Facilities were closed in December 2001.
5. Approximately 1,500 managerial, administrative and store
employees in the Company’s Woonsocket, Rhode Island
corporate headquarters; Columbus Mail Facility; Henderson D.C.
and the Stores would be terminated. As of April 30, 2002, all
of these employees had been terminated.
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2002 Annual Report
11
In accordance with, Emerging Issues Task Force (“EITF”) Issue 94-
3, “Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (Including Certain Costs
Incurred in a Restructuring),” SFAS No. 121, and Staff Accounting
Bulletin No. 100, “Restructuring and Impairment Charges,” the
Company recorded a $346.8 million pre-tax charge ($226.9
million after-tax) to operating expenses during the fourth quarter
of 2001 for restructuring and asset impairment costs associated
with the Action Plan. In accordance with Accounting Research
Bulletin No. 43, “Restatement and Revision of Accounting
Research Bulletins,” the Company also recorded a $5.7 million
pre-tax charge ($3.6 million after-tax) to cost of goods sold
during the fourth quarter of 2001 to reflect the markdown of
certain inventory contained in the Stores to its net realizable value.
In total, the restructuring and asset impairment charge was $352.5
million pre-tax ($230.5 million after-tax), or $0.56 per diluted
share in 2001 (the “Restructuring Charge”). The aggregate impact
of the 229 stores on the Company’s consolidated financial
statements for the year ended December 29, 2001, totaled
$585.3 million in net sales and $13.7 million in operating losses,
which included depreciation and amortization of $12.4 million,
incremental markdowns incurred in connection with liquidating
inventory and incremental payroll and other store-related costs
incurred in connection with closing and/or preparing the 229
stores for closing. Whenever possible, the company attempts to
transfer the customer base of its closed stores to adjacent CVS
store locations. The Company’s success in retaining customers and
the related impact on the above revenue and operating income or
loss, however, cannot be precisely calculated.
Following is a summary of the significant components of the
Restructuring Charge:
The Restructuring Charge will require total cash payments of
$246.9 million, which primarily consist of noncancelable lease
obligations extending through 2024. As of December 28, 2002,
the remaining future cash payments total $192.1 million.
Noncancelable lease obligations included $227.4 million for the
estimated continuing lease obligations of the Stores, the Mail
Facility and the Satellite Facilities. As required by EITF Issue 88-10,
“Costs Associated with Lease Modification or Termination,” the
estimated continuing lease obligations were reduced by estimated
probable sublease rental income.
In millions
Noncancelable lease obligations $ 227.4
Asset write-offs 105.6
Employee severance and benefits 19.5
Total (1) $ 352.5
(1) The Restructuring Charge is comprised of $5.7 million recorded in cost of goods sold
and $346.8 million recorded in selling, general and administrative expenses.