CVS 2007 Annual Report Download - page 56


52 I CVS Caremark
Standalone Drug Business
On June 2, 2006, CVS acquired certain assets and assumed
certain liabilities from Albertson’s, Inc. (“Albertson’s”) for
$4.0 billion. The assets acquired and the liabilities assumed
included approximately 700 standalone drugstores and a
distribution center (collectively the “Standalone Drug Business”).
In conjunction with the acquisition of the Standalone Drug
Business, during fiscal 2006, the Company recorded a
$49.5 million liability for the estimated costs associated with
the non-cancelable lease obligations of 94 acquired stores that
the Company does not intend to operate. As of December 29,
2007, 81 of these locations have been closed and $3.6 million
of this liability has been settled with cash payments. The
$47.5 million remaining liability, which includes $3.1 million
of interest accretion, will require future cash payments through
2033, unless settled prior thereto. The Company believes the
remaining liability is adequate to cover the remaining costs
associated with the related activities.
The following unaudited pro forma combined results of opera-
tions 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 2007 2006
Pro forma:(1)(2)(3)(4)
Net revenues $ 83,798.6 $ 78,668.9
Net earnings 2,906.6 2,167.5
Basic earnings per share $ 1.76 $ 1.41
Diluted earnings per share 1.72 1.37
(1) The pro forma combined results of operations assume that the
Caremark Merger and the acquisition of the Standalone Drug Business
occurred at the beginning of each period presented. These results have
been prepared by adjusting the historical results of the Company to
include the historical results of Caremark and the Standalone Drug
Business, incremental interest expense and the impact of the prelimi-
nary purchase price allocation discussed above. The historical results
of Caremark are based on a calendar period end, whereas the historical
results of the Pharmacy Services Segment of CVS are based on a 52 week
fiscal year ending on the Saturday nearest to December 31.
(2) Inter-company revenues that occur when a Caremark customer uses
a CVS/pharmacy retail store to purchase covered products were
eliminated. These adjustments had no impact on pro forma net
earnings or pro forma earnings per share.
(3) The pro forma combined results of operations do not include any
cost savings that may result from the combination of the Company
and Caremark or any estimated costs that will be incurred by the
Company to integrate the businesses.
(4) The pro forma combined results of operations for fiscal year ended
December 29, 2007, exclude $80.3 million pre-tax ($48.6 million
after-tax) of stock option expense associated with the accelerated
vesting of certain Caremark stock options, which vested upon
consummation of the merger due to change in control provisions
included in the underlying Caremark stock option plans. The pro
forma combined results for the fiscal year ended December 29, 2007
also exclude $42.9 million pre-tax ($25.9 million after-tax) related
to change in control payments due upon the consummation of the
merger due to change in control provisions in certain Caremark
employment agreements. In addition, the pro forma combined results
of operations for the fiscal year ended December 29, 2007, exclude
merger-related costs of $150.1 million pre-tax ($101.7 million after-
tax), which primarily consist of investment banker fees, legal fees,
accounting fees and other merger-related costs incurred by Caremark.
Goodwill and Other Intangibles
The Company accounts for goodwill and intangibles under
SFAS No. 142, “Goodwill and Other Intangible Assets.” Under
SFAS No. 142, goodwill and other indefinitely-lived assets are not
amortized, but are subject to annual impairment reviews, or more
frequent reviews if events or circumstances indicate an impair-
ment may exist.
When evaluating goodwill for potential impairment, the
Company first compares the fair value of the reporting unit,
based on estimated future discounted cash flows, to 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 a reporting unit’s goodwill with the carrying amount
of its goodwill. If the carrying amount of the goodwill exceeds
the implied fair value, an impairment loss is recognized in an
amount equal to the excess. During the third quarter of 2007,
the Company performed its required annual goodwill impairment
tests, and concluded there were no goodwill impairments.
Indefinitely-lived intangible assets are tested by comparing
the estimated fair value of the asset to its carrying value. If the
carrying value of the asset exceeds its estimated fair value, an
impairment loss is recognized and the asset is written down to
its estimated fair value.
#3