þ
|
QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
¨
|
TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF
1934
|
Illinois
|
36-1924025
|
(State
of Incorporation)
|
(I.R.S.
Employer Identification No.)
|
200
Wilmot Road, Deerfield, Illinois
|
60015
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Yes
þ No
¨
|
Large
accelerated filer þ
Accelerated Filer ¨
Non-accelerated filer¨
|
Yes
¨ No
þ
|
Item
1.
|
Consolidated
Condensed Financial Statements (Unaudited)
|
||
a)
|
Balance
Sheets
|
4 | |
b)
|
Statements
of Earnings
|
5 | |
c)
|
Statements
of Cash Flows
|
6 | |
d)
|
Notes
to Financial Statements
|
7 | |
Item
2.
|
Management's
Discussion and Analysis of Results of Operations and Financial
Condition
|
8 | |
Item
3.
|
Qualitative
and Quantitative Disclosure about Market Risk
|
14 | |
Item
4.
|
Controls
and Procedures
|
14 |
Item
2.
|
Unregistered
Sales of Equity Securities and Use of Proceeds
|
15 |
Item
6.
|
Exhibits
|
16 |
WALGREEN
CO. AND SUBSIDIARIES
|
|||||||
CONSOLIDATED
CONDENSED BALANCE SHEETS
|
|||||||
(UNAUDITED)
|
|||||||
(In
Millions, except shares and per share amounts)
|
|||||||
November
30,
|
August
31,
|
||||||
2006
|
2006
|
||||||
Assets
|
|||||||
Current
Assets:
|
|||||||
Cash
and cash equivalents
|
$
|
669.7
|
$
|
919.9
|
|||
Short-term
investments - available for sale
|
99.7
|
415.1
|
|||||
Accounts
receivable, net
|
2,304.3
|
2,062.7
|
|||||
Inventories
|
6,998.8
|
6,050.4
|
|||||
Other
current assets
|
228.9
|
257.3
|
|||||
Total
Current Assets
|
10,301.4
|
9,705.4
|
|||||
Property
and Equipment, at cost, less accumulated depreciation and
amortization
of $2,478.0 at November 30 and $2,338.1 at August 31
|
7,203.1
|
6,948.9
|
|||||
Other
Non-Current Assets
|
521.5
|
476.8
|
|||||
Total
Assets
|
$
|
18,026.0
|
$
|
17,131.1
|
|||
Liabilities
& Shareholders' Equity
|
|||||||
Current
Liabilities:
|
|||||||
Trade
accounts payable
|
$
|
4,552.3
|
$
|
4,039.2
|
|||
Accrued
expenses and other liabilities
|
1,800.6
|
1,713.3
|
|||||
Income
taxes
|
245.8
|
2.8
|
|||||
Total
Current Liabilities
|
6,598.7
|
5,755.3
|
|||||
Non-Current
Liabilities:
|
|||||||
Deferred
income taxes
|
107.7
|
141.1
|
|||||
Other
non-current liabilities
|
1,165.1
|
1,118.9
|
|||||
Total
Non-Current Liabilities
|
1,272.8
|
1,260.0
|
|||||
Shareholders'
Equity:
|
|||||||
Preferred
stock $.0625 par value; authorized 32 million shares, none
issued
|
-
|
-
|
|||||
Common
stock $.078125 par value; authorized 3.2 billion shares;
issued
1,025,400,000 at November 30 and August 31
|
80.1
|
80.1
|
|||||
Paid-in
capital
|
561.2
|
558.5
|
|||||
Employee
stock loan receivable
|
(66.4
|
)
|
(70.3
|
)
|
|||
Retained
earnings
|
10,665.7
|
10,311.7
|
|||||
Treasury
stock, at cost; 25,048,561 shares at November 30 and
17,537,881 shares at August 31
|
(1,086.1
|
)
|
(764.2
|
)
|
|||
Total
Shareholders' Equity
|
10,154.5
|
10,115.8
|
|||||
Total
Liabilities & Shareholders' Equity
|
$
|
18,026.0
|
$
|
17,131.1
|
WALGREEN
CO. AND SUBSIDIARIES
|
|||||||
CONSOLIDATED
CONDENSED STATEMENTS OF EARNINGS
|
|||||||
(UNAUDITED)
|
|||||||
(In
Millions, except per share amounts)
|
|||||||
Three
Months Ended
|
|||||||
November
30,
|
November
30,
|
||||||
2006
|
2005
|
||||||
Net
sales
|
$
|
12,708.5
|
$
|
10,900.4
|
|||
Costs
and Deductions:
|
|||||||
Cost
of sales
|
9,132.9
|
7,897.9
|
|||||
Selling,
occupancy and administration
|
2,903.7
|
2,460.7
|
|||||
12,036.6
|
10,358.6
|
||||||
Other
Income:
|
|||||||
Interest
income
|
10.6
|
6.8
|
|||||
Earnings
before income tax provision
|
682.5
|
548.6
|
|||||
Income
tax provision
|
250.8
|
203.0
|
|||||
Net
earnings
|
$
|
431.7
|
$
|
345.6
|
|||
Net
earnings per common share:
|
|||||||
Basic
|
$
|
.43
|
$
|
.34
|
|||
Diluted
|
$
|
.43
|
$
|
.34
|
|||
Dividends
declared
|
$
|
.0775
|
$
|
.065
|
|||
Average
shares outstanding
|
1,005.2
|
1,012.8
|
|||||
Dilutive
effect of stock options
|
8.2
|
9.5
|
|||||
Average
shares outstanding assuming dilution
|
1,013.4
|
1,022.3
|
|||||
WALGREEN
CO. AND SUBSIDIARIES
|
|||||||
CONSOLIDATED
CONDENSED STATEMENTS OF CASH FLOWS
|
|||||||
(UNAUDITED)
|
|||||||
(In
Millions)
|
|||||||
Three
Months Ended
|
|||||||
November
30,
|
November
30,
|
||||||
2006
|
2005
|
||||||
Cash
flows from operating activities:
|
|||||||
Net
earnings
|
$
|
431.7
|
$
|
345.6
|
|||
Adjustments
to reconcile net earnings to net cash provided by operating activities
-
|
|||||||
Depreciation
and amortization
|
160.2
|
133.0
|
|||||
Deferred
income taxes
|
(23.9
|
)
|
(51.7
|
)
|
|||
Stock
compensation expense
|
34.5
|
36.2
|
|||||
Income
tax savings from employee stock plans
|
1.6
|
10.2
|
|||||
Other
|
1.4
|
18.4
|
|||||
Changes
in operating assets and liabilities -
|
|||||||
Inventories
|
(948.4
|
)
|
(639.1
|
)
|
|||
Trade
accounts payable
|
727.1
|
380.9
|
|||||
Accounts
receivable, net
|
(242.5
|
)
|
(72.9
|
)
|
|||
Accrued
expenses and other liabilities
|
75.4
|
57.8
|
|||||
Income
taxes
|
243.0
|
164.2
|
|||||
Other
current assets
|
40.1
|
54.8
|
|||||
Net
cash provided by operating activities
|
500.2
|
437.4
|
|||||
Cash
flows from investing activities:
|
|||||||
Purchases
of short-term investments - available for sale
|
(2,340.5
|
)
|
(1,577.1
|
)
|
|||
Proceeds
from sale of short-term investments - available for sale
|
2,660.4
|
1,763.6
|
|||||
Additions
to property and equipment
|
(418.2
|
)
|
(338.4
|
)
|
|||
Disposition
of property and equipment
|
14.0
|
2.9
|
|||||
Business
and intangible asset acquisitions, net of cash received
|
(34.0
|
)
|
(95.0
|
)
|
|||
Net
cash used for investing activities
|
(118.3
|
)
|
(244.0
|
)
|
|||
Cash
flows from financing activities:
|
|||||||
Stock
purchases
|
(433.9
|
)
|
(158.5
|
)
|
|||
Proceeds
from employee stock plans
|
83.7
|
49.4
|
|||||
Cash
dividends paid
|
(78.2
|
)
|
(65.9
|
)
|
|||
Bank
overdrafts
|
(213.9
|
)
|
-
|
||||
Other
|
10.2
|
(11.1
|
)
|
||||
Net
cash used for financing activities
|
(632.1
|
)
|
(186.1
|
)
|
|||
Changes
in cash and cash equivalents:
|
|||||||
Net
(decrease) increase in cash and cash equivalents
|
(250.2
|
)
|
7.3
|
||||
Cash
and cash equivalents at beginning of year
|
919.9
|
576.8
|
|||||
Cash
and cash equivalents at end of period
|
$
|
669.7
|
$
|
584.1
|
Three
Months Ended
|
|||||||
November
30,
|
November
30,
|
||||||
Components
of Net Periodic Benefit Costs (In Millions)
|
2006
|
2005
|
|||||
Service
cost
|
$
|
3.4
|
$
|
4.6
|
|||
Interest
cost
|
5.5
|
5.3
|
|||||
Amortization
of actuarial loss
|
1.4
|
2.2
|
|||||
Amortization
of prior service cost
|
(1.0
|
)
|
(1.0
|
)
|
|||
Total
postretirement benefit cost
|
$
|
9.3
|
$
|
11.1
|
Percentage
Increases
|
|
Three
Months Ended
November
30, 2006
|
|
Net
Sales
|
16.6
|
Net
Earnings
|
24.9
|
Comparable
Drugstore Sales
|
9.7
|
Prescription
Sales
|
18.7
|
Comparable
Drugstore
Prescription
Sales
|
11.9
|
Front-End
Sales
|
12.6
|
Comparable
Front-End Sales
|
5.8
|
Percent
to Sales
|
||
Three
Months Ended
|
||
November
30,
|
November
30,
|
|
2006
|
2005
|
|
Gross
Margin
|
28.1
|
27.5
|
Selling,
Occupancy and Administration
Expenses
|
22.8
|
22.6
|
Other
Statistics
|
|||
Three
Months Ended
|
|||
November
30, 2006
|
November
30, 2005
|
||
Prescription
Sales as a % of Net Sales
|
65.7
|
64.5
|
|
Third
Party Sales as a % of Total Prescription
Sales
|
94.6
|
92.5
|
|
Total
Number of Prescriptions (in
millions)
|
140.9
|
125.0
|
|
Total
Number of Stores
|
5,580
|
5,068
|
Liability
for closed locations -
|
|
The
liability is based on the present value of future rent obligations
and
other related costs (net of estimated sublease rent) to the first
lease
option date. We have not made any material changes to the method
of
estimating our liability for closed locations during the last three
years.
Based on current knowledge, we do not believe there is a reasonable
likelihood that there will be a material change in the estimate or
assumptions used to determine the liability.
|
|
Liability
for insurance claims -
|
|
The
liability for insurance claims is recorded based on estimates for
claims
incurred. The provisions are estimated in part by considering historical
claims experience, demographic factors and other actuarial assumptions.
We
have not made any material changes to the method of estimating our
liability for insurance claims during the last three years. Based
on
current knowledge, we do not believe there is a reasonable likelihood
that
there will be a material change in the estimate or assumptions used
to
determine the liability.
|
|
Vendor
allowances -
|
|
Vendor
allowances are principally received as a result of purchase levels,
sales
or promotion of vendors' products. Allowances are generally recorded
as a
reduction of inventory and are recognized as a reduction of cost
of sales
when the related merchandise is sold. Those allowances received for
promoting vendors' products are offset against advertising expense
and
result in a reduction of selling, occupancy and administration expense
to
the extent of advertising incurred, with the excess treated as a
reduction
of inventory costs. We have not made any material changes to the
method of
estimating our vendor allowances during the last three years. Based
on
current knowledge, we do not believe there is a reasonable likelihood
that
there will be a material change in the estimate or assumptions used
to
determine vendor allowances.
|
|
Allowance
for doubtful accounts -
|
|
The
provision for bad debt is based on both specific receivables and
historic
write-off percentages. We have not made any material changes to the
method
of estimating our allowance for doubtful accounts during the last
three
years. Based on current knowledge, we do not believe there is a reasonable
likelihood that there will be a material change in the estimate or
assumptions used to determine the allowance.
|
|
Cost
of sales -
|
|
Drugstore
cost of sales is primarily derived based on point-of-sale scanning
information with an estimate for shrinkage and adjusted based on
periodic
inventories. We have not made any material changes to the method
of
estimating cost of sales during the last three years. Based on current
knowledge, we do not believe there is a reasonable likelihood that
there
will be a material change in the estimate or assumptions used to
determine
cost of sales.
|
Rating
Agency
|
Rating
|
Outlook
|
Moody's
|
Aa3
|
Negative
|
Standard
& Poor's
|
A+
|
Stable
|
Payments
Due by Period (In Millions)
|
||||||||||||||||
Total
|
Less
than 1 Year
|
1-3
Years
|
3-5
Years
|
Over
5 Years
|
||||||||||||
Operating
leases (1)
|
$
|
26,823.0
|
$
|
1,505.4
|
$
|
3,136.6
|
$
|
3,055.0
|
$
|
19,126.0
|
||||||
Purchase
obligations (2):
|
||||||||||||||||
Open
inventory purchase orders
|
1,510.8
|
1,510.8
|
-
|
-
|
-
|
|||||||||||
Real
estate development
|
1,036.3
|
1,034.4
|
1.9
|
-
|
-
|
|||||||||||
Other
corporate obligations
|
586.2
|
274.3
|
219.6
|
77.7
|
14.6
|
|||||||||||
Insurance*
|
471.0
|
156.3
|
158.3
|
78.2
|
78.2
|
|||||||||||
Retiree
health & life*
|
301.0
|
8.2
|
18.7
|
23.5
|
250.6
|
|||||||||||
Closed
location obligations*
|
72.0
|
17.6
|
25.9
|
14.4
|
14.1
|
|||||||||||
Capital
lease obligations *(1)
|
39.3
|
1.0
|
2.1
|
2.4
|
33.8
|
|||||||||||
Other
long-term liabilities reflected on the balance sheet*
|
502.5
|
37.6
|
60.4
|
47.6
|
356.9
|
|||||||||||
Total
|
$
|
31,342.1
|
$
|
4,545.6
|
$
|
3,623.5
|
$
|
3,298.8
|
$
|
19,874.2
|
(1)
|
Amounts
for operating leases (nominal dollar) and capital leases do not include
certain operating expenses under the leases such as common area
maintenance, insurance and real estate taxes. These expenses for
the
company's most recent fiscal year were $228.8 million.
|
(2)
|
The
purchase obligations include agreements to purchase goods or services
that
are enforceable and legally binding and that specify all significant
terms, including open purchase
orders.
|
Inventory
obligations
|
$
|
62.1
|
||
Real
estate development
|
8.2
|
|||
Insurance
|
282.2
|
|||
Total
|
$
|
352.5
|
PART
II. OTHER INFORMATION
|
Item
2. Unregistered Sales of Equity Securities and Use of
Proceeds
|
(c)
|
The
following table provides information about purchases by the company
during
the quarter ended November 30, 2006 of equity securities that are
registered by the company pursuant to Section 12 of the Exchange
Act:
|
ISSUER
PURCHASES OF EQUITY SECURITIES
|
|||||||||||||
Period
|
Total
Number of Shares
Purchased (1)
|
Average
Price Paid
per Share
|
Total
Number of Shares Purchased as Part of Publicly Announced Plans
or
Programs
|
Approximate
Dollar Value of Shares that May Yet Be Purchased Under the Plans
or
Programs
(2)
|
|||||||||
9/1/2006
- 9/30/2006
|
-
|
$
|
-
|
-
|
$
|
343,226,823
|
|||||||
10/1/2006
- 10/31/2006
|
6,350,000
|
43.9778
|
5,250,000
|
111,980,487
|
|||||||||
11/1/2006
- 11/30/2006
|
3,623,349
|
42.6681
|
2,623,349
|
-
|
|||||||||
Total
|
9,973,349
|
$
|
43.5020
|
7,873,349
|
$
|
-
|
(1)
|
The
company repurchased an aggregate of 2,100,000 shares of its common
stock
in open-market transactions to satisfy the requirements of the company's
employee stock purchase and option plans, as well as the company's
Nonemployee Director Stock Plan.
|
(2)
|
On
July 14, 2004, the Board of Directors approved a stock repurchase
program,
pursuant to which up to $1 billion of the company's common stock
could be
repurchased prior to the expiration date of the program on July 13,
2008.
This program was announced in the company's report on Form 8-K, which
was
filed on July 15, 2004. As of November 30, 2006, the company’s repurchases
under the program had exhausted the funds available for repurchase
under
the program. As a result, the program has effectively
concluded.
|
(a) |
Exhibits
|
3.
|
(a)
|
Articles
of Incorporation of the company, as amended, filed with the Securities
and
Exchange Commission as Exhibit 3(a) to the company's Quarterly Report
on
Form 10-Q for the quarter ended February 28, 1999, and incorporated
by
reference herein.
|
|
(b)
|
By-Laws
of the company, as amended and restated effective as of July 9, 2003,
filed with the Securities and Exchange Commission as Exhibit 3(b)
to the
company's quarterly report on Form 10-Q for the quarter ended November
30,
2003, and incorporated by reference herein.
|
||
10.
|
(a)
|
Walgreen
Co. Executive Stock Option Plan Amendment No. 1 (effective October
11,
2006) filed with the Securities and Exchange Commission as Exhibit
10 (a)
to the company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 2006.
|
|
(b)
|
Share
Walgreens Stock Purchase/Option Plan Amendment No. 5 (effective October
11, 2006) filed with the Securities and Exchange Commission as Exhibit
10
(b) to the company's Quarterly Report on Form 10-Q for the quarter
ended
November 30, 2006.
|
||
(c)
|
Walgreen
Co. Restricted Performance Share Plan Amendment No. 6 (effective
October
11, 2006) filed with the Securities and Exchange Commission as Exhibit
10
(c) to the company's Quarterly Report on Form 10-Q for the quarter
ended
November 30, 2006.
|
||
(d)
|
Walgreen
Co. Option 3000 Plan Amendment No. 1 (effective October 11, 2006)
filed
with the Securities and Exchange Commission as Exhibit 10 (d) to
the
company's Quarterly Report on Form 10-Q for the quarter ended November
30,
2006.
|
||
(e)
|
Walgreen
Co. Broad-Based Employee Stock Option Plan Amendment No. 2 (effective
October 11, 2006) filed with the Securities and Exchange Commission
as
Exhibit 10 (e) to the company's Quarterly Report on Form 10-Q for
the
quarter ended November 30, 2006.
|
||
(f)
|
Walgreen
Co. Nonemployee Director Stock Plan Amendment No. 2 (effective October
11,
2006) filed with the Securities and Exchange Commission as Exhibit
10 (f)
to the company's Quarterly Report on Form 10-Q for the quarter ended
November 30, 2006.
|
||
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.
|
||
32.1
|
Certification
of Chief Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002,
18
U.S.C. Section 1350.
|
||
32.2
|
Certification
of Chief Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.
18
U.S.C. Section 1350.
|
WALGREEN
CO.
|
|
(Registrant)
|
|
Dated:
1/4/2007
|
/s/
W.M. Rudolphsen
|
W.M.
Rudolphsen
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Senior
Vice President
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(Chief
Financial Officer)
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Dated:
1/4/2007
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/s/
M.M. Scholz
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M.M.
Scholz
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Controller
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(Chief
Accounting Officer)
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