CVS 2006 Annual Report Download - page 41

38 CVS Corporation
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Following is a summary of the estimated assets acquired and liabilities
assumed, which includes estimated transaction costs, as of June 2, 2006.
This estimate is preliminary and based on information that was available
to management at the time the financial statements were prepared.
Accordingly, the allocation will change and the impact of such changes
could be material.
Estimated Assets Acquired and Liabilities Assumed
as of June 2, 2006
In millions
Cash and cash equivalents $ 0.9
Inventories 765.0
Other current assets 14.1
Total current assets 780.0
Property and equipment 1,570.9
Goodwill 1,307.1
Intangible assets 595.0
Other assets 20.0
Total assets acquired 4,273.0
Accrued expenses (1) (2) 90.8
Short-term portion of capital leases 2.2
Total current liabilities 93.0
Other long-term liabilities (2) 176.9
Total liabilities 269.9
Net assets acquired $ 4,003.1
(1) Accrued expenses include $6.2 million for the estimated severance, benefits and
outplacement costs for approximately 970 employees of the Standalone Drug Business
that have been or will be terminated. As of December 30, 2006, $1.1 million of the
liability has been settled with cash payments. The $5.1 million remaining liability
will require future cash payments through 2008.
(2) Accrued expenses include $6.6 million, and Other long-term liabilities include
$57.0 million for the estimated costs associated with the non-cancelable lease obligations
of 76 acquired stores the Company intends to close. As of December 30, 2006, 74 of
these locations have been closed and $4.9 million of this liability has been settled
with cash payments. The $59.6 million remaining liability, which includes $0.9 million
of interest accretion, will require future cash payments through 2033.
The following unaudited 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 2006 2005
Pro forma: (1) (2)
Net revenues $ 46,187.7 $ 42,469.2
Net earnings 1,366.0 1,156.8
Basic earnings per share $ 1.65 $ 1.41
Diluted earnings per share 1.60 1.37
(1) The unaudited pro forma combined results of operations assume that the acquisition
of the Standalone Drug Business occurred at the beginning of each period presented.
Such results have been prepared by adjusting the historical results of the Company to
include the historical results of the Standalone Drug Business, the incremental interest
expense and the impact of the preliminary purchase price allocation discussed above.
(2) The unaudited pro forma combined results of operations do not include any cost
savings that may result from the combination of the Company and the Standalone
Drug Business or any costs that will be incurred by the Company to integrate the
Standalone Drug Business.
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 “2004 Acquired Businesses”).
The final purchase price, including transaction costs, was $2.1 billion.
In conjunction with the acquisition, during fiscal 2004, the Company
recorded a liability totaling $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 30, 2006, $45.5 million of
this liability has been settled with cash payments. The $7.8 million
remaining liability will require future cash payments through 2009.
The Company also recorded a $10.5 million liability for the estimated
severance, benefits and outplacement costs for 1,090 Eckerd employees
that have or will be terminated. As of December 30, 2006, $8.1 million
of this liability has been settled with cash payments, representing full
settlement of the obligation. In addition, the Company recorded a
$349.8 million liability for the estimated costs associated with the
non-cancelable lease obligations of 296 Eckerd locations that the Company
did not intend to operate. As of December 30, 2006, 294 of these
locations have been closed and $144.9 million of this liability has been
settled with cash payments. The $215.2 million remaining liability,
which includes $17.8 million of interest accretion, will require future
cash payments through 2030. The Company believes that the remaining
liabilities discussed above are adequate to cover the remaining costs
associated with the related activities.
3 GOODWILL 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 2006, the Company performed
its required annual goodwill impairment test, which concluded there was
no impairment of goodwill.