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The
financial statements contain the accounts of the Company and
all majority-owned subsidiaries. Intercompany accounts and transactions
are eliminated.
Cash
and cash equivalents consist primarily of highly liquid investments
with original maturities of three months or less at the date
of acquisition.
Inventories
are valued at the lower of cost or market, cost being determined
principally by the last-in, first-out (“LIFO”) method
for the majority of the subsidiaries included in the domestic
distribution segment and by the first-in, first-out (“FIFO”)
method for all other subsidiaries. The LIFO cost method is generally
used for subsidiaries that have also elected LIFO cost for tax
purposes.
Property,
plant and equipment is recorded at cost. Major improvements
are capitalized while expenditures for maintenance, repairs
and minor improvements are charged to expense. When assets are
retired or otherwise disposed of, the assets and related accumulated
depreciation are eliminated from the accounts and any resulting
gain or loss is reflected in income. Depreciation is generally
based upon the following estimated useful lives: buildings and
improvements 5 to 33 years and machinery, equipment and other
3 to 12 years. Depreciation is computed using the straight-line
method. Depreciation expense for 2002, 2001 and 2000 was $47.0
million, $43.5 million and $33.3 million, respectively.
In June 2001, the
Financial Accounting Standards Board (“FASB”) issued
Statement of Financial Accounting Standard No. 142, “Goodwill
and Other Intangible Assets” (“SFAS 142”).
SFAS 142 requires the use of a nonamortization approach to account
for goodwill and indefinite-lived intangible assets. Under the
nonamortization approach, goodwill and indefinite-lived intangible
assets are not amortized but instead are reviewed for impairment
and written down with a resulting charge to operations in the
period in which the recorded value of goodwill and indefinite-lived
intangible assets exceeds its fair value. Prior to January 1,
2002, goodwill acquired in a business combination completed
prior to June 30, 2001 was amortized on a straight-line basis
over 5 to 40 years. Goodwill is not being amortized as of January
1, 2002.
Intangible
assets with a finite useful life are being amortized on a straight-line
basis over their estimated useful lives, ranging up to 20 years.
Intangible assets with an indefinite useful life are not being
amortized. Net intangible assets of $111.7 million and $106.9
million are included in Other Assets and are stated net of accumulated
amortization of $37.2 million and $29.2 million at December
31, 2002 and 2001, respectively. During 2002, 2001 and 2000,
the Company recorded amortization expense of $8.1 million, $6.8
million and $3.0 million, respectively.
Impairment losses are recorded on long-lived assets used
in operations when indicators of impairment are present and
the quoted market price, if available, or the anticipated undiscounted
operating cash flows generated by those assets are less than
the assets’ carrying value. An impairment charge is recorded
for the difference between the fair value and carrying value
of the asset.
The Company
expenses advertising costs as incurred, except for certain direct-response
advertising, which is capitalized and amortized over its expected
period of future benefit, generally two years. Direct-response
advertising consists of catalog production and mailing costs
that are amortized from the date catalogs are mailed. Advertising
expenses, including internal employment costs for marketing
personnel and amortization of capitalized direct-response advertising,
were $37.5 million, $21.8 million and $20.1 million for the
three years ended December 31, 2002, 2001 and 2000, respectively.
The
Company records distribution revenue and self-manufactured-product
revenue when persuasive evidence of an arrangement exists, the
price is fixed or determinable, title and risk of loss has been
transferred to the customer and collectibility of the resulting
receivable is reasonably assured. Risk of loss is generally
transferred to the customer upon delivery. Products are typically
delivered without significant post-sale obligations to customers.
When significant obligations exist, revenue recognition is deferred
until the obligations are satisfied. Provisions for discounts,
warranties and rebates to customers, and returns and other adjustments
are provided for in the period the related sales are recorded.
Pharmaceutical outsourcing service revenues, which consist of
specialized packaging, warehousing and distribution of products,
are recognized as each of the service elements is performed.
The Company recognizes revenue for each element based on the
fair value of the services being provided, which has been determined
by referencing historical pricing policies when the services
are sold separately. Other service revenue is recognized as
the services are performed. Certain contracts associated with
the Company’s laboratory workstations segment are recorded
under the percentage-of-completion method of accounting. Changes
in estimates to complete and revisions in overall profit estimates
on percentage-of-completion contracts are recognized in the
period in which they are determined.
Deferred
debt issue costs of $18.7 million and $23.5 million at December
31, 2002 and 2001, respectively, relate to the Company’s
9 percent Notes, 7 1/8 percent Notes, 8 1/8 percent Notes and
Credit Facility debt. Deferred debt issue costs are included
in Other Assets and are amortized using the effective interest
rate method over the term of the related debt. During 2002,
2001 and 2000, the Company recorded amortization expense of
$4.5 million, $5.0 million and $4.6 million, respectively.
The Company
accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109, “Accounting for Income Taxes”
(“SFAS 109”), that requires the asset and liability
approach to account for income taxes by recognizing deferred
tax assets and liabilities for the expected future tax consequences
of temporary differences between the carrying amounts and the
tax basis of assets and liabilities. The Company records a valuation
allowance to reduce the deferred tax assets to the amount that
is more likely than not to be realized.
Other
expense, net consists of interest income on cash and cash equivalents
and other non-operating income and expense items. In 2002, the
Company recorded a charge of $11.2 million consisting of $7.1
million of fixed-swap unwind costs and $4.1 million of deferred
financing and other costs associated with the retirement of
bank term debt. The 2000 amount includes a $23.6 million write-down
of the Company’s Internet-related investments.
The
Company measures compensation expense for its stock-based employee
compensation plans using the intrinsic value method. Had compensation
cost for options been based upon fair value as determined under
Statement of Financial Accounting Standard No. 123, “Accounting
for Stock Based Compensation” (“SFAS 123”),
the Company’s 2002, 2001 and 2000 net income would have
been $41.5 million, $29.0 million and $20.4 million, respectively,
with basic earnings per share of $0.76, $0.59 and $0.51 for
2002, 2001 and 2000, respectively, and diluted earnings per
share of $0.72, $0.55 and $0.46, for 2002, 2001 and 2000, respectively.
In accordance with SFAS 123, the following weighted average
assumptions were used to calculate compensation cost for option
grants in 2002, 2001 and 2000: risk-free interest rates of approximately
3.8 percent, 4.5 percent and 6.0 percent, respectively, annual
dividend of $0; expected lives of 5 years and expected volatility
of 47 percent, 51 percent and 55 percent, respectively.
Assets and liabilities of the Company’s foreign subsidiaries,
where the functional currency is the local currency, are translated
into U.S. dollars using year-end exchange rates. Revenues and
expenses of foreign subsidiaries are translated at the average
exchange rates in effect during the year. Adjustments resulting
from financial statement translations are included as a separate
component of stockholders’ equity. Gains and losses resulting
from foreign currency transactions are reported on the income
statement line item corresponding with the transaction when
recognized.
Effective
January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, “Accounting for Derivative
Instruments and Hedging Activities” (“SFAS 133”),
as amended, which established accounting and reporting standards
for derivative instruments, including certain derivative instruments
embedded in other contracts and for hedging activities. All
derivatives, whether designated in hedging relations or not,
are recorded on the balance sheet at fair value. If the derivative
is designated as a fair value hedge, the changes in the fair
value of the derivative and of the hedged item attributable
to the hedged risk are recognized in earnings. If the derivative
is designated as a cash flow hedge, the effective portions of
changes in the fair value of the derivative are recorded in
accumulated other comprehensive income (“OCI”) and
are recognized in the income statement when the hedged item
affects earnings. Ineffective portions of changes in the fair
value of cash flow hedges are recognized in earnings. For derivative
instruments not designated as hedging instruments, changes in
fair value are recognized in earnings in the current period.
The adoption of SFAS 133, as amended, did not have a material
effect on the Company’s financial position or results
of operations.
The nature of the Company’s business activities necessarily
involves the management of various financial and market risks,
including those related to changes in interest rates, foreign
currency and commodity rates. As discussed below, the Company
uses derivative financial instruments to mitigate or eliminate
certain of those risks. The Company assesses, both at the inception
of the hedge and on an ongoing basis, whether the derivatives
that are used in hedging transactions are highly effective in
offsetting changes in cash flows of hedge items. When it is
determined that a derivative is not highly effective as a hedge,
the Company discontinues hedge accounting prospectively. The
Company does not hold derivatives for trading purposes.
The Company enters into interest-rate swap and option agreements
in order to manage its exposure to interest rate risk. These
interest rate swaps are designated as cash flow hedges of the
Company’s variable rate debt. During 2002, no ineffectiveness
was recognized in the statement of operations on these hedges.
Amounts accumulated in OCI are reclassified into earnings as
interest is accrued on the hedge transactions. The amounts accumulated
in OCI will fluctuate based on changes in the fair value of
the Company’s derivatives at each reporting period.
The Company enters into forward currency and option contracts
to hedge exposure to fluctuations in foreign currency rates.
For foreign currency contracts that are designated as hedges,
changes in the fair value are recorded in OCI to the extent
of hedge effectiveness and are subsequently recognized in earnings
once the forecasted transactions are recognized. For forward
currency contracts not designated as hedges, changes in fair
value are recognized in other expense, net.
The Company enters into commodity swaps and option contracts
to hedge exposure to fluctuations in commodity prices. For foreign
currency contracts that are designated as hedges, changes in
the fair value are recorded in OCI to the extent of hedge effectiveness
and are subsequently recognized in earnings once the forecasted
transactions are recognized. For forward currency contracts
not designated as hedges, changes in fair value are recognized
in other expense, net.
Other comprehensive income (loss) refers to revenues,
expenses, gains and losses that under accounting principles
generally accepted in the United States of America are included
in other comprehensive income (loss) but are excluded from net
income (loss) as these amounts are recorded directly as an adjustment
to stockholders’ equity, net of tax. The Company’s
other comprehensive income (loss) is composed of unrealized
gains and losses on available-for-sale securities, unrealized
losses on cash flow hedges, minimum pension liability and foreign
currency translation adjustments.
The preparation
of financial statements in conformity with accounting principles
generally accepted in the United States of America requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from
those estimates.
Certain
prior year amounts have been reclassified to conform to their
current presentation. |
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