S E C U R I T I E S A N D E X C H A N G E C O M M I S S I O N
WASHINGTON, D. C. 20549
_______________________
FORM 10-Q
(Mark One)
____X____ Quarterly Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
FOR THE QUARTER ENDED FEBRUARY 28, 1994
or
__________ Transition Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the Transition Period from __________ to ___________
Commission file number 1-604.
_____________________WALGREEN CO._____________________
(Exact name of registrant as specified in its charter)
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)
Registrant's telephone number, including area code: (708) 940-2500___
Indicate by check mark whether the registrant (1) has filed all reports
required by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes ___X___ No _______
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date (applicable only to
corporate issuers).
COMMON STOCK, $.625 PAR VALUE: ISSUED AND OUTSTANDING 123,070,536 AT
MARCH 31, 1994.
Page 1 of 11
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
The consolidated condensed financial statements included herein have
been prepared by the company pursuant to the rules and regulations of the
Securities and Exchange Commission. The Consolidated Condensed Balance
Sheet as of February 28, 1994 and the Consolidated Condensed Statements of
Earnings for the three and six months ended February 28, 1994 and 1993, and
the Consolidated Condensed Statements of Cash Flows for the six months ended
February 28, 1994 and 1993 have been prepared without audit. Certain
information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to such rules and
regulations, although the company believes that the disclosures are adequate
to make the information presented not misleading. It is suggested that
these consolidated condensed financial statements be read in conjunction
with the financial statements and the notes thereto included in the
company's latest annual report on Form 10-K.
In the opinion of the company the condensed statements for the
unaudited interim periods presented include all adjustments, consisting
only of normal recurring adjustments, necessary to present a fair statement
of the results for such interim periods. Because of the influence of
certain holidays, seasonal and other factors on the company's operations,
net earnings for any interim period may not be comparable to the same
interim period in previous years, nor necessarily indicative of earnings for
the full year.
2
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(Unaudited)
February 28, August 31,
1994 1993___
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 48,481 $ 91,597
Marketable securities, at cost which
approximates market 23,722 29,695
Accounts receivable, net of allowances
for doubtful accounts of $26,382,000 at
February 28, and $23,050,000 at August 31 190,913 139,313
Inventories 1,191,089 1,094,035
Other current assets 86,711 108,493
Total Current Assets 1,540,916 1,463,133
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $502,885,000 at February 28, and
$453,155,000 at August 31 1,004,210 927,333
Other Non-Current Assets 137,188 144,725
TOTAL ASSETS $2,682,314 $2,535,191
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 419,911 $ 427,185
Other current liabilities 492,777 456,322
Total Current Liabilities 912,688 883,507
Non-Current Liabilities:
Deferred income taxes 182,223 173,343
Other non-current liabilities 109,779 99,590
Total Non-Current Liabilities 292,002 272,933
Shareholders' Equity:
Preferred stock $.50 par value; authorized
4,000,000 shares; none issued - -
Common stock $.625 par value; authorized
400,000,000 shares; issued and outstanding
123,070,536 at February 28 and August 31 76,919 76,919
Retained earnings 1,400,705 1,301,832
1,477,624 1,378,751
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $2,682,314 $2,535,191
========== ==========
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
3
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
Three Months Ended Six Months Ended
February 28, February 28,
1994 1993 1994 1993___
(Dollars in Thousands Except Per Share Data)
Net Sales $2,498,537 $2,257,921 $4,616,491 $4,172,551_
Costs and Deductions:
Cost of sales 1,785,579 1,619,735 3,313,731 3,006,911
Selling, occupancy and
administration 555,317 497,361 1,073,760 959,740_
2,340,896 2,117,096 4,387,491 3,966,651_
Other (Income) Expense:
Interest income (1,119) (1,540) (2,129) (3,493)
Interest expense 679 1,282 1,448 4,658
Debt redemption costs - 6,821 - 6,821_
(440) 6,563 (681) 7,986_
Earnings before income tax
provision and cumulative
effect of accounting
changes 158,081 134,262 229,681 197,914
Income tax provision 60,466 50,679 87,853 74,703_
Earnings before cumulative
effect of accounting
changes 97,615 83,583 141,828 123,211
Cumulative effect of
accounting changes - - - (23,623)
Net Earnings $ 97,615 $ 83,583 $ 141,828 $ 99,588
=========== =========== =========== ===========
Per Share:
Earnings before cumulative
effect of accounting
changes $ .79 $ 67 $ 1.15 $ .99
Cumulative effect
of accounting
changes - - - (.19)
Net Earnings $ .79 $ .67 $ 1.15 $ .80
=========== =========== =========== ===========
Dividends Declared $ .17 $ .15 $ .34 $ .30
=========== =========== =========== ===========
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
4
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
Six Months Ended
February 28,
1994 1993____
(In Thousands)
Net cash provided by operating activities $ 117,478 $ 140,583_
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (139,361) (83,297)
Net sales of marketable securities 5,973 22,268
Investment in corporate-owned life insurance (19,676) (19,687)
Proceeds from borrowing against corporate-
owned life insurance 29,526 -
Proceeds from disposition of property and
equipment 6,407 3,662
Other 76 (1,078)_
Net cash used for investing activities (117,055) (78,132)_
Cash (Used for) Provided by Financing Activities:
Cash dividends paid (39,388) (34,459)
Payments of long-term obligations (5,100) (105,068)
Proceeds from (purchases for) employee
stock plans 2,055 (15,640)
Cost of employee common stock purchase and
option plans (1,106) (1,656)
Net cash used for financing activities (43,539) (156,823)
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (43,116) (94,372)
Cash and cash equivalents at beginning
of year 91,597 144,540_
Cash and Cash Equivalents at end of period $ 48,481 $ 50,168
========== ==========
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.
5
WALGREEN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
(1) Fiscal 1993 results have been restated to reflect the early adoption of
two Financial Accounting Standards Board pronouncements in the fourth quarter of
fiscal 1993. In the first quarter of fiscal 1993, the adoption of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than Pensions,"
resulted in a cumulative pretax charge of $59,138,000 ($36,813,000 after tax;
$.30 per share), and the adoption of SFAS No. 109, "Accounting for Income
Taxes," increased net earnings $13,190,000 ($.11 per share). In addition,
accounting for postretirement benefits other than pensions on an accrual basis
resulted in $1,020,000 ($.01 per share) and $2,040,000 ($.02 per share) charges
against pretax earnings for the three and six months ended February 28, 1993,
respectively. The effective date of adoption of both standards was September 1,
1992.
(2) Inventories are valued on a lower of last-in, first-out (LIFO) cost or
market basis. At February 28, 1994 and August 31, 1993, inventories would have
been greater by $408,721,000 and $388,464,000 respectively, if they had been
valued on a lower of first-in, first-out (FIFO) cost or market basis. LIFO
inventory costs can only be determined at the end of each fiscal year when
inflation rates and inventory levels are finalized; therefore, LIFO inventory
costs for interim financial statements are estimated. Cost of sales is
primarily computed on an estimated basis and adjusted based on periodic physical
inventories.
(3) The weighted average number of common shares and equivalents used for
calculating primary net earnings per share was 123,720,000 and 123,758,000 for
the six months ended February 28, 1994 and 1993, respectively. Fully diluted
net earnings per share are the same as primary net earnings per share.
(4) On December 15, 1992, the company redeemed the $100 million 9 1/2%
sinking fund debentures, due 2016, at a cost of $6,821,000 ($.03 per share).
The costs to retire the debt were not reflected as an extraordinary item because
they were not material.
(5) The company is involved in various legal proceedings incidental to
the normal course of business. These include one group of product liability
claims filed against the company seeking damages for alleged personal injuries
resulting from the ingestion of an over-the-counter product alleged to contain a
contaminated bulk material. The company has secured an indemnification from the
American subsidiary of a foreign manufacturer, under which over 55% of the cases
have been settled or dismissed without the company being required to make any
payments. The company also has product liability insurance which it believes
provides coverage against these claims. While it is not feasible to predict the
outcome of the remaining product liability claims and other legal proceedings
and claims with certainty, management is of the opinion, with which its General
Counsel concurs, that their ultimate disposition will not have a material
adverse effect on the company's consolidated financial position or results of
operations.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Results of Operations
Net earnings for the second quarter, ended February 28, 1994, were
$97,615,000 or $.79 per share. This was a 16.8% increase over last year.
Net earnings for the six months, before the cumulative effect of accounting
changes for postretirement benefits and income taxes, which involved
restatement of fiscal 1993 earnings, were up 15.1% to $141,828,000 or $1.15
per share. Net earnings for the six months ended February 28, 1994 were up
42.4% from last year which was negatively impacted by the cumulative effect
of accounting changes for postretirement benefits and income taxes.
Net earnings for both the quarter and six months benefited by comparison to
last year, which was negatively impacted by 3 cents per share due to
redemption of all $100 million of the company's 9 1/2 percent sinking fund
debentures, due in 2016.
Sales increased by 10.7% in the second quarter, to $2,498,537,000, and rose
by 10.6% to $4,616,491,000 for the first six months. Drug store sales
increases resulted from sales gains in existing stores, added sales from new
stores, and an indeterminate amount of market driven price changes.
Comparable drug store sales gains were 4.6% for the quarter and 4.9% for the
first six months. New stores accounted for 7.5% and 7.0% of the quarterly
and six-month sales increases. The company operated 1,901 drug stores as of
February 28, 1994, compared to 1,769 a year earlier.
Prescriptions continued to be the strongest sales category, increasing 18.5%
for the second quarter and 18.9% for the first six months. Prescription
sales accounted for 37.8% of the second quarter sales and 39.3% of the sales
for the six-month period. This compared to 35.3% and 36.5% for the quarter
and six-month periods last year. Prescription sales in comparable stores
(those open at least one year) were up 12.3% for the six-month period.
Favorable prescription sales trends should continue. The population
continues to age. People over 65 were 12% of the population in 1990 and
could be 15% of the population by 2010. This group accounts for a third of
the annual healthcare bill in the U.S. today and could be 50% by the year
2000. The development of new drugs is expected to continue, with special
emphasis on drug therapy for diseases that affect the elderly. Proposed
healthcare reform is another factor that could result in additional
prescription use. Universal pharmaceutical coverage, for example, would
extend prescription benefits to as many as 70 million people who don't have
them today. Besides these external factors, the company is expanding in new
and existing markets. Future growth is also expected in both Healthcare
Plus (the company mail service subsidiary) and RxPress (pharmacy-only
stores).
Cost of sales as a percentage of sales decreased in the second quarter to
71.5% from 71.7% last year, and to 71.8% from 72.1% for the six-month
period. Third party prescription business continued to negatively affect
pharmacy gross margins. This was more than offset by improved gross margins
in the rest of the store. The company uses the last-in, first-out (LIFO)
method of inventory valuation, which states cost of sales at the most recent
costs. The estimated annual inflation rates were 2.75% for fiscal 1994 and
7
3.25% for 1993, which resulted in charges to cost of sales of $11.0 million
and $20.3 million for the quarter and six-month period ended February 28,
1994 versus $11.9 million and $22.0 million for the same periods a year ago.
The decline in the rate principally resulted from lower inflation estimates
for prescription inventories.
Selling, occupancy and administration expenses increased to 22.2% from 22.0%
of sales for the quarter and to 23.3% from 23.0% of sales for the six
months. As a percent to sales, decreases in headquarters costs and improved
bad debt experience were more than offset by higher store salaries and
various other store expenses. New stores, which temporarily experience
higher salary expense ratios, and the 40 additional stores open 24 hours
were the principal reasons for the salary increases as a percent to sales.
In addition, higher advertising costs contributed to the six-month increase.
Interest expense decreased due to the December 1992 early redemption of the
company's $100 million 9 1/2% sinking fund debentures which cost the company
$6,821,000 ($.03 per share) in the second quarter last year. This reduced
annual interest expense $9.5 million. The decrease in interest income for
the quarter and six months resulted from lower investment rates and levels.
Average net investment levels were approximately $87 million for the quarter
and $76 million for the six months. This compared to $110 million and
$141 million for the same periods a year ago.
The 1994 effective tax rate increased to 38.25% from 37.75% primarily due to
the changes in the federal income tax law enacted in August 1993.
Financial Condition
Cash and cash equivalents and marketable securities were $72 million at
February 28, 1994, compared to $109 million at February 28, 1993.
Short-term investment objectives are to maximize yields while minimizing
risk and maintaining liquidity. To attain these objectives, investment
limits are placed on the amount, type, and issuer of securities.
Net cash provided by operating activities declined $23 million compared to
the same period a year ago primarily due to inventory required for new
stores. The company's ongoing profitability is expected to continue
supporting expansion and remodeling programs, dividends to shareholders and
the funding for various technological improvements.
Net cash used for investing activities was $117 million for the first six
months versus $78 million last year. During fiscal 1994 the company
borrowed $30 million against corporate-owned life insurance which was used
to finance working capital requirements. Additions to property and
equipment were $139 million compared to $83 million last year. Ninety-seven
stores opened in the first six months of fiscal 1994 -- the largest
six-month non-acquisition growth ever. This compares to 57 stores opened in
the same period last year. Planned capital expenditures for fiscal 1994 are
$300 million. Plans include opening 175 drugstores and retrofitting all
pharmacies with new workstations and laser printers during the fiscal year.
The company will enter two new markets - Cleveland with at least 15 full
service drugstores and Buffalo with five - in the fall. In addition,
RxPress (pharmacy-only) units will be introduced into the greater Los
Angeles market this summer. By 1996, expectations are to be opening 200
stores per year across the country. The company's goal is to operate 3,000
stores by the year 2000. In September the company plans to open a new mail
service facility in Tempe, Arizona. An eighth major distribution center is
8
planned to open in fiscal 1995 near Sacramento, California, to serve the
growing store base in the western United States.
Net cash used for financing activities was $44 million for the first six
months of fiscal 1994 compared to $157 million in fiscal 1993, which
included the redemption of $100 million in debentures. At February 28, the
company had $111 million in unused bank lines of credit and $100 million of
unissued authorized debt securities, previously filed with the Securities
and Exchange Commission. In addition, the company has the ability to borrow
up to $88 million against corporate-owned life insurance policies.
There are no accounting standards issued that have not been adopted which
would have a material impact on the company's financial statements.
9
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Security Holders
(a) The company held its Annual Meeting of Shareholders on
January 12, 1994.
(c) The matters voted upon at the company's annual meeting
and the results of the voting were as follows:
(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
Votes For Withheld
Charles R. Walgreen III 102,934,959 194,290
Fred F. Canning 102,868,359 194,290
Theodore Dimitriou 102,875,757 194,290
James J. Howard 102,902,886 194,290
Charles D. Hunter 102,930,962 194,290
L. Daniel Jorndt 102,935,932 194,290
Cordell Reed 102,735,436 194,290
John B. Schwemm 102,899,664 194,290
William H. Springer 102,895,730 194,290
Marilou M. von Ferstel 102,892,961 194,290
(2) The shareholders voted 88,344,473 shares for and
13,900,968 shares against with 836,111 abstaining
to amend the company's Articles of Incorporation to
limit the liability of its directors.
(3) The shareholders voted 102,393,902 shares for and
396,603 shares against with 291,048 abstaining to
ratify the appointment of Arthur Andersen & Co. as
auditors.
Item 6. Reports on Form 8-K
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
which ended February 28, 1994.
10
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALGREEN CO._________
(Registrant)
Date April 11, 1994 C. D. Hunter_________
Vice Chairman
(Chief Financial Officer)
Date April 11, 1994 R. H. Clausen________
Controller
(Chief Accounting Officer)
11
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
WALGREEN CO.__________
(Registrant)
Date April 11, 1994 _________________________________
C. D. Hunter
Vice Chairman
(Chief Financial Officer)
Date April 11, 1994 _________________________________
R. H. Clausen
Controller
(Chief Accounting Officer)
11
INDEX TO EXHIBITS
Page No.
Exhibit 19 Walgreen Co. Executive Stock 12 - 23
Option Plan (as amended
effective October 13, 1992)
12
