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)
|
4
|
||
b)
|
5
|
||
c)
|
6
|
||
d)
|
7
|
||
Item
2.
|
8
|
||
Item
3.
|
14
|
||
Item
4.
|
14
|
Item
2.
|
15
|
|
Item
4.
|
15
|
|
Item
6.
|
16
|
WALGREEN CO. AND
SUBSIDIARIES
|
|||||||
CONSOLIDATED CONDENSED BALANCE
SHEETS
|
|||||||
(UNAUDITED)
|
|||||||
(In Millions, Except Shares and Per
Share Amounts)
|
|||||||
February 28,
|
August 31,
|
||||||
2007
|
2006
|
||||||
Assets
|
|||||||
Current
Assets:
|
|||||||
Cash
and cash equivalents
|
$
|
694.2
|
$
|
919.9
|
|||
Short
term investments - available for sale
|
263.9
|
415.1
|
|||||
Accounts
receivable, net
|
1,979.1
|
2,062.7
|
|||||
Inventories
|
6,531.3
|
6,050.4
|
|||||
Other
current assets
|
225.4
|
257.3
|
|||||
Total
Current Assets
|
9,693.9
|
9,705.4
|
|||||
Property and Equipment, at cost, less
accumulated depreciation and
amortization
of $2,555.2 at February 28 and $2,338.1 at August
31
|
7,451.7
|
6,948.9
|
|||||
Other
Non-Current Assets
|
523.3
|
476.8
|
|||||
Total
Assets
|
$
|
17,668.9
|
$
|
17,131.1
|
|||
Liabilities and Shareholders' Equity
|
|||||||
Current
Liabilities:
|
|||||||
Trade
accounts payable
|
$
|
3,883.5
|
$
|
4,039.2
|
|||
Accrued
expenses and other liabilities
|
1,723.1
|
1,713.3
|
|||||
Income
taxes
|
209.0
|
2.8
|
|||||
Total
Current Liabilities
|
5,815.6
|
5,755.3
|
|||||
Non-Current
Liabilities:
|
|||||||
Deferred
income taxes
|
87.3
|
141.1
|
|||||
Other
non-current liabilities
|
1,199.7
|
1,118.9
|
|||||
Total
Non-Current Liabilities
|
1,287.0
|
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 February 28 and August 31
|
80.1
|
80.1
|
|||||
Paid-in
capital
|
563.3
|
558.5
|
|||||
Employee
stock loan receivable
|
(66.4
|
)
|
(70.3
|
)
|
|||
Retained
earnings
|
11,240.3
|
10,311.7
|
|||||
Treasury
stock at cost, 28,621,844 shares at February 28
and
17,537,881 shares at August 31
|
(1,251.0
|
)
|
(764.2
|
)
|
|||
Total
Shareholders' Equity
|
10,566.3
|
10,115.8
|
|||||
Total
Liabilities and Shareholders' Equity
|
$
|
17,668.9
|
$
|
17,131.1
|
WALGREEN CO. AND
SUBSIDIARIES
|
|||||||||||||
CONSOLIDATED CONDENSED STATEMENTS OF
EARNINGS
|
|||||||||||||
(UNAUDITED)
|
|||||||||||||
(In Millions, Except Per Share
Amounts)
|
|||||||||||||
Three Months Ended
|
Six Months Ended
|
||||||||||||
February
28,
|
February 28,
|
February 28,
|
February 28,
|
||||||||||
2007
|
2006
|
2007
|
2006
|
||||||||||
Net sales
|
$
|
13,933.7
|
$
|
12,163.1
|
$
|
26,642.2
|
$
|
23,063.5
|
|||||
Costs and Deductions:
|
|||||||||||||
Cost of sales
|
9,897.9
|
8,703.8
|
19,030.8
|
16,601.7
|
|||||||||
Selling, occupancy and
administration
|
3,015.3
|
2,638.4
|
5,919.0
|
5,099.1
|
|||||||||
12,913.2
|
11,342.2
|
24,949.8
|
21,700.8
|
||||||||||
Other Income:
|
|||||||||||||
Interest income
|
10.2
|
10.0
|
20.8
|
16.8
|
|||||||||
Earnings before income tax provision
|
1,030.7
|
830.9
|
1,713.2
|
1,379.5
|
|||||||||
Income tax provision
|
378.8
|
307.4
|
629.6
|
510.4
|
|||||||||
Net earnings
|
$
|
651.9
|
$
|
523.5
|
$
|
1,083.6
|
$
|
869.1
|
|||||
Net earnings per common share-
|
|||||||||||||
Basic
|
$
|
.65
|
$
|
.52
|
$
|
1.08
|
$
|
.86
|
|||||
Diluted
|
$
|
.65
|
$
|
.51
|
$
|
1.07
|
$
|
.85
|
|||||
Dividends declared
|
$
|
.0775
|
$
|
.065
|
$
|
.155
|
$
|
.13
|
|||||
Average shares outstanding
|
999.6
|
1,010.7
|
1,002.7
|
1,011.7
|
|||||||||
Dilutive effect of stock options
|
7.6
|
9.3
|
7.9
|
9.4
|
|||||||||
Average shares outstanding assuming dilution
|
1,007.2
|
1,020.0
|
1,010.6
|
1,021.1
|
|||||||||
WALGREEN CO. AND
SUBSIDIARIES
|
|||||||
CONSOLIDATED CONDENSED STATEMENTS OF
CASH FLOWS
|
|||||||
(UNAUDITED)
|
|||||||
(In Millions)
|
|||||||
Six Months Ended
|
|||||||
February 28,
|
February 28,
|
||||||
2007
|
2006
|
||||||
Cash flows from operating activities:
|
|||||||
Net earnings
|
$
|
1,083.6
|
$
|
869.1
|
|||
Adjustments to reconcile
net
earnings to net cash provided by operating activities -
|
|||||||
Depreciation and
amortization
|
318.7
|
271.7
|
|||||
Deferred income taxes
|
(45.8
|
)
|
(74.0
|
)
|
|||
Stock compensation
expense
|
49.8
|
63.6
|
|||||
Income tax savings from
employee
stock plans
|
3.3
|
17.6
|
|||||
Other
|
21.1
|
33.8
|
|||||
Changes in operating assets
and
liabilities
|
|||||||
Inventories
|
(480.9
|
)
|
(13.3
|
)
|
|||
Trade accounts
payable
|
58.3
|
346.6
|
|||||
Accounts receivable,
net
|
81.7
|
(439.2
|
)
|
||||
Accrued expenses and other
liabilities
|
3.3
|
(2.9
|
)
|
||||
Income taxes
|
206.3
|
122.2
|
|||||
Other
|
69.6
|
71.1
|
|||||
Net cash provided by operating activities
|
1,369.0
|
1,266.3
|
|||||
Cash flows from investing activities:
|
|||||||
Purchases of short term
investments - available for sale
|
(4,170.0
|
)
|
(4,018.0
|
)
|
|||
Proceeds from sale of short
term
investments - available for sale
|
4,329.2
|
3,874.2
|
|||||
Additions to property and
equipment
|
(818.0
|
)
|
(601.2
|
)
|
|||
Disposition of property
and
equipment
|
19.3
|
2.4
|
|||||
Business and intangible
asset
acquisitions, net of cash received
|
(46.3
|
)
|
(131.3
|
)
|
|||
Net cash used for investing
activities
|
(685.8
|
)
|
(873.9
|
)
|
|||
Cash flows from financing activities:
|
|||||||
Stock purchases
|
(673.1
|
)
|
(344.7
|
)
|
|||
Proceeds related to employee
stock plans
|
144.1
|
98.4
|
|||||
Cash dividends paid
|
(155.9
|
)
|
(131.7
|
)
|
|||
Bank overdrafts
|
(213.9
|
)
|
-
|
||||
Other
|
(10.1
|
)
|
(12.4
|
)
|
|||
Net cash used for financing
activities
|
(908.9
|
)
|
(390.4
|
)
|
|||
Changes in cash and cash equivalents:
|
|||||||
Net (decrease) increase
in cash
and cash equivalents
|
(225.7
|
)
|
2.0
|
||||
Cash and cash
equivalents at beginning of year
|
919.9
|
576.8
|
|||||
Cash and cash equivalents at end of period
|
$
|
694.2
|
$
|
578.8
|
Three Months Ended
|
Six Months Ended
|
||||||||||||
February 28,
|
February 28,
|
February 28,
|
February 28,
|
||||||||||
Components
of Net Periodic Benefit Costs (In Millions)
|
2007
|
2006
|
2007
|
2006
|
|||||||||
Service cost
|
$
|
3.4
|
$
|
4.6
|
$
|
6.8
|
$
|
9.1
|
|||||
Interest cost
|
5.5
|
5.3
|
11.0
|
10.7
|
|||||||||
Amortization of actuarial loss
|
1.4
|
2.2
|
2.8
|
4.4
|
|||||||||
Amortization of prior service cost
|
(1.1
|
)
|
(1.0
|
)
|
(2.1
|
)
|
(2.0
|
)
|
|||||
Total postretirement benefit cost
|
$
|
9.2
|
$
|
11.1
|
$
|
18.5
|
$
|
22.2
|
Percentage Increases
|
||
Three Months Ended
February 28, 2007
|
Six Months Ended
February 28, 2007
|
|
Net Sales
|
14.6
|
15.5
|
Net Earnings
|
24.5
|
24.7
|
Comparable Drugstore Sales
|
8.9
|
9.3
|
Prescription Sales
|
16.4
|
17.5
|
Comparable Drugstore Prescription Sales
|
10.9
|
11.4
|
Front-End Sales
|
13.0
|
12.8
|
Comparable Front-End Sales
|
5.7
|
5.7
|
Percent to Sales
|
||||
Three Months Ended
|
Six Months Ended
|
|||
February 28,
|
February 28,
|
February 28,
|
February 28,
|
|
2007
|
2006
|
2007
|
2006
|
|
Gross Margin
|
29.0
|
28.4
|
28.6
|
28.0
|
Selling,
Occupancy and Administration Expenses
|
21.6
|
21.7
|
22.2
|
22.1
|
Other Statistics
|
||||
Three Months Ended
|
Six Months Ended
|
|||
February 28, 2007
|
February 28, 2006
|
February 28, 2007
|
February 28, 2006
|
|
Prescription Sales as a % of Net Sales
|
62.4
|
61.5
|
64.0
|
62.9
|
Third Party Sales as a % of Total Prescription
Sales
|
94.7
|
92.7
|
94.7
|
92.6
|
Total Number of Prescriptions (in millions)
|
288
|
258
|
||
Total Number of Stores
|
5,641
|
5,156
|
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)
|
$
|
27,351.4
|
$
|
1,536.1
|
$
|
3,199.3
|
$
|
3,129.9
|
$
|
19,486.1
|
||||||
Purchase obligations (2):
|
||||||||||||||||
Open
inventory purchase orders
|
1,060.5
|
1,060.5
|
-
|
-
|
-
|
|||||||||||
Real
estate development
|
882.8
|
882.3
|
.5
|
-
|
-
|
|||||||||||
Other
corporate obligations
|
655.5
|
317.1
|
235.1
|
69.3
|
34.0
|
|||||||||||
Insurance*
|
495.5
|
167.6
|
164.9
|
81.5
|
81.5
|
|||||||||||
Retiree health & life*
|
309.4
|
8.3
|
19.2
|
24.3
|
257.6
|
|||||||||||
Closed location obligations*
|
60.7
|
16.2
|
21.3
|
11.6
|
11.6
|
|||||||||||
Capital lease obligations * (1)
|
39.0
|
1.0
|
2.1
|
2.4
|
33.5
|
|||||||||||
Other long-term liabilities reflected on the
balance sheet*
|
517.6
|
29.4
|
70.0
|
49.5
|
368.7
|
|||||||||||
Total
|
$
|
31,372.4
|
$
|
4,018.5
|
$
|
3,712.4
|
$
|
3,368.5
|
$
|
20,273.0
|
(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
|
$
|
38.0
|
||
Real estate development
|
10.0
|
|||
Insurance
|
276.7
|
|||
Total
|
$
|
324.7
|
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 February 28, 2007, 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)
|
|||||||||
12/01/2006
- 12/31/2006
|
-
|
-
|
-
|
$
|
1,000,000,000
|
||||||||
01/01/2007 -01/31/2007
|
1,860,000
|
$
|
46.08
|
860,000
|
960,259,394
|
||||||||
02/01/2007 -02/28/2007
|
3,376,000
|
$
|
45.48
|
1,876,000
|
874,983,942
|
||||||||
Total
|
5,236,000
|
$
|
45.70
|
2,736,000
|
$
|
874,983,942
|
(1)
|
The
company repurchased an aggregate of 2,500,000 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
January 10, 2007, the Board of Directors approved a stock
repurchase program ("2007 repurchase program"), pursuant to which
up to $1
billion of the company's common stock may be purchased prior to the
expiration date of the program on January 10, 2011. This program
was
announced in the company's report on Form 8-K, which was filed on
January
11, 2007. The total remaining authorization under the repurchase
program
was $874,983,942 as of February 28, 2007.
|
(a)
|
The
company held its Annual Meeting of Shareholders on
January 10, 2007.
|
(c)
|
(1)
The shareholders voted for election of the following
directors to serve until the next annual meeting or until their
successors
are elected and qualified:
|
Votes For
|
Votes Withheld
|
|
David W. Bernauer
|
863,645,216
|
19,126,162
|
William C. Foote
|
858,503,789
|
24,267,588
|
James J. Howard
|
858,150,257
|
24,621,120
|
Alan G. McNally
|
873,225,382
|
9,545,995
|
Cordell Reed
|
858,656,927
|
24,114,450
|
Jeffrey A. Rein
|
863,925,157
|
18,846,220
|
Nancy M. Schlichting
|
872,255,551
|
10,515,826
|
David Y. Schwartz
|
872,500,854
|
10,270,524
|
James A. Skinner
|
871,257,694
|
11,513,683
|
Marilou M. von Ferstel
|
862,833,164
|
19,938,213
|
Charles R. Walgreen III
|
863,400,779
|
19,370,598
|
|
(2) The proposal to ratify the appointment of
Deloitte
& Touche as the company's independent registered public accounting
firm was approved by a vote of 872,538,108 for, 3,470,954 against
and
7,345,867 abstentions.
|
|
(3) The proposal to approve the amended and
restated
Walgreen Co. Restricted Performance Share Plan was approved by
a vote of
630,117,868 for, 50,731,305 against and 10,841,204 abstentions.
There were
191,664,552 broker non-votes.
|
(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.
|
||
10.1
|
Walgreen
Co. Long-Term Performance Incentive Plan (amendment
and restatement of the Walgreen Co. Restricted Performance Share
Plan)
filed with the Securities and Exchange Commission on January 11,
2007 as
Exhibit 10.1 to the company's Current Report on Form 8-K and incorporated
by reference herein.
|
||
10.2
|
Walgreen Co. Long-Term Performance Incentive Plan
Amendment No. 1 (effective January 10, 2007) filed with the Securities
and
Exchange Commission as Exhibit 10.2 to the company's Quarterly Report
on
Form 10-Q for the quarter ended February 28, 2007.
|
||
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: April 4, 2007
|
/s/ W.M. Rudolphsen
|
W.M. Rudolphsen
|
|
Senior Vice President
|
|
(Chief Financial Officer)
|
|
Dated: April 4, 2007
|
/s/ M.M. Scholz
|
M.M. Scholz
|
|
Controller
|
|
(Chief Accounting Officer)
|
|