CVS 2005 Annual Report Download - page 35

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In October 2005, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”)
No. FAS 13-1, “Accounting for Rental Costs Incurred during a Construction Period.” The FSP addresses the
accounting for rental costs associated with operating leases that are incurred during a construction period and
requires rental costs associated with ground or building operating leases that are incurred during a construction
period to be recognized as rental expense. The provisions of the FSP are required to be applied to the first
reporting period beginning after December 15, 2005. The Company does not expect that the adoption of this
position will have a material impact on the Company’s consolidated results of operations or financial position.
2Acquisition
On July 31, 2004, the Company acquired certain assets and assumed certain liabilities from J.C. Penney
Company, Inc. and certain of its subsidiaries, including Eckerd Corporation (“Eckerd”). The acquisition
included more than 1,200 Eckerd retail drugstores and Eckerd Health Services, which includes Eckerd’s
mail order and pharmacy benefit management businesses (collectively, the “Acquired Businesses”). The
final purchase price, including transaction costs, was $2.1 billion.
Following is the allocation of the final purchase price and transaction costs:
ASSETS ACQUIRED AND LIABILITIES ASSUMED AS OF JULY 31, 2004
In millions
Cash and cash equivalents $3.0
Accounts receivable 358.5
Inventories 928.4
Other current assets 67.2
Total current assets 1,357.1
Property and equipment 477.2
Goodwill 903.3
Intangible assets 500.0
Other assets 135.3
Total assets acquired 3,372.9
Accounts payable 499.5
Accrued expenses(1)(2)(3) 268.4
Total current liabilities 767.9
Other long-term liabilities(2)(3) 471.0
Total liabilities 1,238.9
Net assets acquired 2,134.0
(1) Accrued expenses include $54.7 million for the estimated costs associated with terminating various Eckerd contracts
that were in place at the time of acquisition. As of December 31, 2005, $40.1 million of this liability has been settled with
cash payments. The $14.6 million remaining liability will require future cash payments through 2009. Accrued expenses also
include $10.5 million for the estimated severance, benefits and outplacement costs for 1,090 Eckerd employees that will
be terminated. As of December 31, 2005, $8.0 million of this liability has been settled with cash payments. The $2.5 million
remaining liability will require future cash payments through 2007.
(2) Accrued expenses include $23.0 million and Other long-term liabilities include $326.8 million for the estimated costs
associated with the non-cancelable lease obligations of 302 Eckerd locations that the Company does not intend to operate.
As of December 31, 2005, 275 of these locations have been closed and $100.8 million of this liability has been settled with
cash payments. The $264.4 million remaining liability, which includes $9.2 of interest accretion, will require future cash
payments through 2030.
(3) The Company believes that the remaining liability balances discussed above are adequate to cover the remaining costs
associated with the related activities.
The following pro forma combined results of operations have been provided for illustrative purposes only
and do not purport to be indicative of the actual results that would have been achieved by the combined
companies for the periods presented or that will be achieved by the combined companies in the future:
In millions, except per share amounts 2004
Pro forma:(1)(2)
Net sales $ 34,564.3
Net earnings 907.0
Basic earnings per share $ 1.12
Diluted earnings per share 1.11
(1) The pro forma combined results of operations assume that the acquisition of the Acquired Businesses occurred at the
beginning of the period presented. Such results have been prepared by adjusting the historical results of the Company to
include the historical results of the Acquired Businesses, the incremental interest expense and the impact of the purchase
price allocation discussed above.
(2) The pro forma combined results of operations do not include any cost savings that resulted from the combination of the
Company and the Acquired Businesses or any costs that were incurred by the Company to integrate the Acquired Businesses.
3Goodwill and Other Intangibles
Goodwill represents the excess of the purchase price over the fair value of net assets acquired. The Company
accounts for goodwill and intangibles under SFAS No. 142, “Goodwill and Other Intangible Assets.” As such,
goodwill and other indefinite-lived assets are not amortized, but are subject to annual impairment reviews,
or more frequent reviews if events or circumstances indicate there may be an impairment. When evaluating
goodwill for potential impairment, the Company first compares the fair value of the reporting unit, based on
estimated future discounted cash flows, with its carrying amount. If the estimated fair value of the reporting
unit is less than its carrying amount, an impairment loss calculation is prepared. The impairment loss
calculation compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill.
If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess. During the third quarter of 2005, the Company
performed its required annual goodwill impairment test, which concluded there was no impairment of goodwill.
The carrying amount of goodwill was $1,789.9 million and $1,898.5 million as of December 31, 2005 and
January 1, 2005, respectively. During 2005, gross goodwill decreased $108.6 million due to an $85.0 million
favorable post-closing adjustment to the purchase price paid for the Acquired Businesses and $23.6 million
in adjustments recorded to finalize the purchase price allocation. There was no impairment of goodwill
during 2005.