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 MAY 31, 1995
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
JUNE 30, 1995.
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 May 31, 1995 and the Consolidated Condensed Statements of
Earnings for the three and nine months ended May 31, 1995 and 1994, and the
Consolidated Condensed Statements of Cash Flows for the nine months ended
May 31, 1995 and 1994, 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)
May 31, August 31,
1995 1994
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 116,029 $ 77,915
Marketable securities, at cost which
approximates market 2,032 30,510
Accounts receivable, net of allowances
for doubtful accounts of $31,335,000 at
May 31, and $21,601,000 at August 31 240,008 193,930
Inventories 1,340,298 1,263,400
Other current assets 67,516 71,148
Total Current Assets 1,765,883 1,636,903
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $591,595,000 at May 31, and
$511,754,000 at August 31 1,212,337 1,085,487
Other Non-Current Assets 179,525 150,451
TOTAL ASSETS $3,157,745 $2,872,841
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 567,609 $ 532,816
Other current liabilities 456,140 413,058
Total Current Liabilities 1,023,749 945,874
Non-Current Liabilities:
Deferred income taxes 144,950 137,741
Other non-current liabilities 245,361 215,586
Total Non-Current Liabilities 390,311 353,327
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 May 31 and August 31 76,919 76,919
Retained earnings 1,666,766 1,496,721
Total Shareholders' Equity 1,743,685 1,573,640
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,157,745 $2,872,841
========== ==========
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 Nine Months Ended
May 31, May 31,
1995 1994 1995 1994
(Dollars in Thousands Except Per Share Data)
Net Sales $2,617,368 $2,335,961 $7,829,908 $6,952,452
Costs and Deductions:
Cost of sales 1,888,246 1,679,924 5,638,133 4,993,655
Selling, occupancy and
administration 601,517 541,941 1,794,934 1,615,701
2,489,763 2,221,865 7,433,067 6,609,356
Other (Income) Expense:
Interest income (1,470) (1,456) (3,285) (3,585)
Interest expense 112 543 875 1,991
(1,358) (913) (2,410) (1,594)
Earnings before income tax
provision 128,963 115,009 399,251 344,690
Income tax provision 49,973 43,991 154,710 131,844
Net Earnings $ 78,990 $ 71,018 $ 244,541 $ 212,846
=========== =========== =========== ===========
Per Share:
Net Earnings $ .64 $ .57 $ 1.98 $ 1.72
=========== =========== =========== ===========
Dividends Declared $ .195 $ .17 $ .585 $ .51
=========== =========== =========== ===========
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)
Nine Months Ended
May 31,
1995 1994
(In Thousands)
Net cash provided by operating activities $ 336,986 $ 350,689
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (234,086) (211,139)
Net sales (purchases) of marketable securities 28,478 (2,130)
Net (investment in) borrowings against
corporate-owned life insurance (28,491) 3,995
Proceeds from disposition of property and
equipment 10,661 9,874
Net cash used for investing activities (223,438) (199,400)
Cash (Used for) Provided by Financing Activities:
Cash dividends paid (68,919) (60,309)
Payments of long-term obligations (6,788) (5,421)
Other 273 2,704
Net cash used for financing activities (75,434) (63,026)
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents 38,114 88,263
Cash and cash equivalents at beginning
of year 77,915 91,597
Cash and Cash Equivalents at end of period $ 116,029 $ 179,860
========== ==========
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) Certain amounts in the August 31, 1994 Consolidated Condensed Balance
Sheet have been reclassified to be consistent with the May 31, 1995
presentation.
(2) Inventories are valued on a lower of last-in, first-out (LIFO) cost or
market basis. At May 31, 1995 and August 31, 1994, inventories would have
been greater by $418,364,000 and $393,568,000 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
inventories.
(3) The weighted average number of common shares and equivalents used for
calculating primary net earnings per share was 123,701,000 and 123,683,000 for
the nine months ended May 31, 1995 and 1994, respectively. Fully diluted net
earnings per share are the same as primary net earnings per share.
On July 12, 1995, the Board of Directors voted a two-for-one stock split
to be distributed August 8, 1995, to shareowners of record July 24, 1995. In
addition the Board of Directors approved increases in the authorized common
stock, from 400 million shares to 800 million shares, and in the authorized
preferred stock, from 4 million shares to 8 million shares. All per share
amounts referenced herein are reflected on a pre-split basis.
Under the terms of the Rights Agreement dated July 9, 1986, as amended,
the aforementioned stock split caused a proportionate adjustment in the
preferred share purchase rights, which are fully described in the Agreement.
(4) The company is involved in various legal proceedings incidental to the
normal course of business. This includes a patent infringement suit against the
company and its co-defendant supplier. On October 20, 1994, a judgment of $11.3
million plus interest was entered on this suit. The plaintiff subsequently
filed a motion for treble damages, which was denied. That denial has been
appealed. The case has also been appealed by the defendants, and the company
has an indemnification agreement from its supplier for the amount of the
judgment plus interest. Management is of the opinion, with which its General
Counsel concurs, that the patent infringement suit and other legal proceedings
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 third quarter, ended May 31, 1995, were $78,990,000 or
$.64 per share. This was an 11.2% increase over last year. Net earnings
for the nine months were up 14.9% to $244,541,000 or $1.98 per share.
Earnings increases resulted from improved sales and lower expense ratios,
which were partially offset by lower gross margins.
Sales increased by 12.0% in the third quarter, to $2.6 billion, and rose by
12.6% to $7.8 billion for the first nine months. Drugstore sales increases
resulted from sales gains in existing stores and added sales from new
stores, which include an indeterminate amount of market-driven price
changes. Comparable drugstore sales gains were 6.7% for the quarter and
7.2% for the first nine months. New store openings accounted for 7.5% and
7.7% of the quarterly and nine-month sales increases. The company operated
2,044 drugstores as of May 31, 1995 compared to 1,922 a year earlier.
Pharmacy sales increased 20.0% for the third quarter and 19.8% for the first
nine months. Prescription sales accounted for 45.2% of the third quarter
sales and 42.8% of the sales for the nine-month period. This compared to
42.2% and 40.3% for the quarter and nine-month periods last year.
Prescription sales in comparable stores (those open at least one year) were
up 13.7% for the nine-month period. Pharmacy sales trends are expected to
continue. Trends include the aging population, the continued development of
new drugs and the country's movement toward managed care. The company is in
a position to benefit from these changes because of its large national store
base and Healthcare Plus, the company's mail service subsidiary.
Gross margins decreased in the quarter to 27.9% of sales from 28.1% last
year, and to 28.0% from 28.2% for the nine-month period. Third party
prescription business continued to negatively affect pharmacy gross margins.
This more than offset improved gross margins in the rest of the store.
Additional emphasis is being placed on minimum third party profitability
standards. Cash business should not subsidize unprofitable third party
plans.
The company uses the LIFO method of inventory valuation, which can only be
determined at the end of the fiscal year when inflation rates and inventory
levels are finalized; therefore, LIFO inventory costs for interim financial
statements are estimated. Cost of sales for the May quarter includes a LIFO
provision of $4.3 million ($.02 per share) versus a credit of $.8 million
for the same period a year ago. The nine-month provision was $24.8 million
this year compared to $19.4 million last year.
Selling, occupancy and administration expenses decreased to 23.0% from 23.2%
of sales in the quarter and to 22.9% from 23.2% of sales for the nine
months. Store salaries and advertising expenses were the principal reasons
for the decline.
The 1995 effective tax rate increased to 38.75% from 38.25% primarily due to
estimated interest on tax audits and discontinuance of the targeted jobs
credit effective December 31, 1994.
7
Financial Condition
Cash and cash equivalents and marketable securities were $118.1 million at
May 31, 1995, compared to $211.7 million at May 31, 1994. 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 was $337.0 million compared to
$350.7 million a year ago. This decrease resulted primarily from higher
earnings offset by a buildup of warehouse inventories. Warehouse inventory
additions were due in large part to the stocking of the new Woodland,
California distribution center which became operational in June. The
company's ongoing profitability should continue supporting existing
expansion and remodeling programs, dividends to shareholders and
technological improvements.
Net cash used for investing activities was $223.4 million for the first nine
months versus $199.4 million last year. Additions to property and equipment
were $234.1 million compared to $211.1 million last year. Additions for
this fiscal year included expenditures for the new distribution center.
During the first nine months, a record 140 new or relocated drugstores were
opened. This compares to 136 new or relocated drugstores opened in the same
period last year. New stores are both purchased and leased. Openings for
the first nine months of this fiscal year included 8 purchased locations
versus 23 for the same period last year. Planned capital expenditures for
fiscal 1995 are expected to be approximately $300 million.
The company continues its strategy of becoming a fully national drugstore
chain by entering seven new markets: Philadelphia, Seattle/Tacoma, Little
Rock AK, Chattanooga, TN, Oklahoma City, OK; Richmond, VA; and Corpus
Christi, Texas. Two additional major markets will be announced this summer.
The company expects to open 200 or more new stores annually for the next
five years, with the goal of operating 3,000 stores by the year 2000.
Healthcare Plus, the company's managed care subsidiary, opened its second
mail service facility. This facility can fill 5,000 prescriptions per day
and is expandable to 15,000 per day. Walgreens has formed a PBM (pharmacy
benefits manager) to provide a formal umbrella for services offered to
managed care plans by our Healthcare Plus subsidiary. These include
retail/mail prescriptions, nursing home pharmaceuticals, durable medical
equipment, infusion therapy, formulary management and claims processing.
A multi-million dollar project called Intercom Plus is being rolled out to
the stores with chainwide implementation scheduled to be completed by the
end of 1996. This system, which is a re-engineering of the prescription
filling process, is designed to meet the demands of new business and
pharmacist/patient consultation without corresponding increases in pharmacy
payroll.
Walgreens has signed a letter of intent to sell its Pre-Scribe computer
software system to IBM's subsidiary, Integrated Systems Solutions Corp.
(ISSC). The Pre-Scribe software permits physician offices to be
electronically linked to pharmacies. This is not expected to have a
material effect on the company's financial condition or results of
operation.
8
At May 31, 1995, the company had $123 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 $83 million against corporate-owned life
insurance policies. With the movement to freestanding store locations (from
strip centers and malls), the decision has been made to purchase more store
locations than in the past. This will result in lower store occupancy costs
and provide the foundation to capitalize on the strength of the real estate
selection process. Borrowings may be necessary to finance these future
obligations.
As a result of a recent tax court ruling concerning the depreciable lives of
certain assets, the company may be required to pay federal income taxes
related to prior years. The decision of the tax court has been appealed.
As of May 31, 1995, the company has adequately provided for all the tax and
related interest. Depending on the results of the appeal, this could
adversely impact the company's cash position by approximately $50 million.
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 6. Reports on Form 8-K
(a) Exhibits filed with this report:
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports were filed on Form 8-K during the quarter
which ended May 31, 1995.
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 July 13, 1995 R. L. Polark_________
Senior Vice President
(Chief Financial Officer)
Date July 13, 1995 R. H. Clausen________
Controller
(Chief Accounting Officer)
11
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MAY 31, 1995, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-START> SEP-01-1994
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<CASH> 116,029
<SECURITIES> 2,032
<RECEIVABLES> 271,343
<ALLOWANCES> 31,335
<INVENTORY> 1,340,298
<CURRENT-ASSETS> 1,765,883
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