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, 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, DEERFEILD, 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, 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 February 28, 1995 and the Consolidated Condensed Statements of
Earnings for the three and six months ended February 28, 1995 and 1994, and
the Consolidated Condensed Statements of Cash Flows for the six months ended
February 28, 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)
February 28, August 31,
1995 1994
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 53,403 $ 77,915
Marketable securities, at cost which
approximates market 2,033 30,510
Accounts receivable, net of allowances
for doubtful accounts of $31,593,000 at
February 28, and $21,601,000 at August 31 253,909 193,930
Inventories 1,331,390 1,263,400
Other current assets 43,263 71,148
Total Current Assets 1,683,998 1,636,903
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $563,134,000 at February 28, and
$511,754,000 at August 31 1,176,443 1,085,487
Other Non-Current Assets 171,727 150,451
TOTAL ASSETS $3,032,168 $2,872,841
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 510,801 $ 532,816
Other current liabilities 450,004 413,058
Total Current Liabilities 960,805 945,874
Non-Current Liabilities:
Deferred income taxes 145,325 137,741
Other non-current liabilities 236,326 215,586
Total Non-Current Liabilities 381,651 353,327
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 February 28 and August 31 76,919 76,919
Retained earnings 1,612,793 1,496,721
Total Shareholders' Equity 1,689,712 1,573,640
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,032,168 $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 Six Months Ended
February 28, February 28,
1995 1994 1995 1994
(Dollars in Thousands Except Per Share Data)
Net Sales $2,806,984 $2,498,537 $5,212,540 $4,616,491
Costs and Deductions:
Cost of sales 2,009,123 1,785,579 3,749,887 3,313,731
Selling, occupancy and
administration 616,476 555,317 1,193,417 1,073,760
2,625,599 2,340,896 4,943,304 4,387,491
Other (Income) Expense:
Interest income (991) (1,119) (1,815) (2,129)
Interest expense 242 679 763 1,448
(749) (440) (1,052) (681)
Earnings before income tax
provision 182,134 158,081 270,288 229,681
Income tax provision 70,577 60,466 104,737 87,853
Net Earnings $ 111,557 $ 97,615 $ 165,551 $ 141,828
=========== =========== =========== ===========
Per Share:
Net Earnings $ .90 $ .79 $ 1.34 $ 1.15
=========== =========== =========== ===========
Dividends Declared $ .195 $ .17 $ .39 $ .34
=========== =========== =========== ===========
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,
1995 1994
(In Thousands)
Net cash provided by operating activities $ 174,739 $ 117,554
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (161,393) (139,361)
Net sales of marketable securities 28,477 5,973
Net (investment in) borrowings against
corporate-owned life insurance (23,567) 9,850
Proceeds from disposition of property and
equipment 7,134 6,407
Net cash used for investing activities (149,349) (117,131)
Cash (Used for) Provided by Financing Activities:
Cash dividends paid (44,921) (39,388)
Payments of long-term obligations (5,114) (5,100)
Other 133 949
Net cash used for financing activities (49,902) (43,539)
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (24,512) (43,116)
Cash and cash equivalents at beginning
of year 77,915 91,597
Cash and Cash Equivalents at end of period $ 53,403 $ 48,481
========== ==========
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 February 28, 1995
presentation.
(2) Inventories are valued on a lower of last-in, first-out (LIFO) cost or
market basis. At February 28, 1995 and August 31, 1994, inventories would have
been greater by $414,097,000 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 123,647,000 and 123,720,000 for
the six months ended February 28, 1995 and 1994, respectively. Fully diluted
net earnings per share are the same as primary net earnings per share.
(4) The company is involved in various legal proceedings incidental to the
normal course of business. These include one group of product liability claims
and a patent infringement suit. The company has secured an indemnification
under which over 85% of the product liability claims have been settled without
the company being required to make any payments. On October 20, 1994, a
judgment of $11.3 million plus interest was entered in the patent infringement
suit against the company and its co-defendant supplier. 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 remaining product liability claims, 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 second quarter, ended February 28, 1995, were
$111,557,000 or $.90 per share. This was a 14.3% increase over last year.
Net earnings for the six months were up 16.7% to $165,551,000 or $1.34 per
share. Earnings increases resulted from improved sales and lower expense
ratios, which were partially offset by lower gross margins.
Sales increased by 12.3% in the second quarter, to $2.8 billion, and rose by
12.9% to $5.2 billion for the first six 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 7.2% for the quarter and
7.5% for the first six months. New store openings accounted for 7.6% and
7.7% of the quarterly and six-month sales increases. The company operated
2,028 drugstores as of February 28, 1995 compared to 1,901 a year earlier.
Pharmacy sales increased 19.8% for the second quarter and 19.6% for the
first six months. Prescription sales accounted for 40.3% of the second
quarter sales and 41.6% of the sales for the six-month period. This
compared to 37.8% and 39.3% for the quarter and six-month periods last year.
Prescription sales in comparable stores (those open at least one year) were
up 13.5% for the six-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 28.4% of sales from 28.5% last
year, and to 28.1% from 28.2% for the six-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 last-in, first-out (LIFO) method of inventory
valuation; therefore, the sales and cost of sales are both in "current
dollars" which more fairly represent current gross margins. However, year
to year comparisons still contain an inflation factor. In the last few
years inflation has slowed. This means comparisons between years for sales,
cost of sales and gross margins are more representative of real volume
growth. The estimated annual inflation rates were 2.50% for fiscal 1995 and
2.75% for 1994, which resulted in charges to cost of sales of $11.0 million
and $20.5 million for the quarter and six-month period ended February 28,
1995 versus $11.0 million and $20.3 million for the same periods a year ago.
The decline in the rate principally resulted from lower inflation estimates
for prescription inventories.
7
Selling, occupancy and administration expenses decreased to 22.0% from 22.2%
of sales in the quarter and to 22.9% from 23.3% of sales for the six months.
As a percent to sales, higher costs associated with closing retail locations
were more than offset by lower advertising and store salaries. Store
closing costs, primarily related to relocations, increased as a result of 25
store closings in the second quarter compared to 22 a year ago, and 47 store
closings for the first six months compared to 32 last year for the same
period.
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.
Financial Condition
Cash and cash equivalents and marketable securities were $55 million at
February 28, 1995, compared to $72 million at February 28, 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 $174.7 million compared to
$117.6 million a year ago. This increase resulted primarily from higher
earnings and improved inventory control. 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 $149.3 million for the first six
months versus $117.1 million last year. Additions to property and equipment
were $161.4 million compared to $139.4 million last year. Additions for
this fiscal year included expenditures for the new distribution center
located in Woodland, California which is expected to become fully
operational during the fourth quarter of this fiscal year. During the first
six months, a record 107 new or relocated drugstores were opened. This
compares to 97 new or relocated drugstores opened in the same period last
year. New stores are both purchased and leased. Openings for the first six
months of this fiscal year included 5 purchased locations versus 13 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. Three stores each in Little Rock and Chattanooga will open
this summer, and later in the year the first Walgreen drugstores in the
Seattle/Tacoma and Philadelphia markets will open. The company expects to
eventually operate as many as 100 stores in Philadelphia, and 60 to 65
stores in the Seattle/Tacoma area. The first three Walgreens in Corpus
Christi will open late this fall. The first Walgreen drugstores will open
in Oklahoma City and Richmond in the spring of 1996. The company plans to
enter both cities with 10 new stores the first year and eventually operate
20 to 25 drugstores in each of these markets. 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.
8
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. A multi-million dollar project called
Intercom Plus has begun. 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. Chainwide implementation is scheduled to be completed
by the end of 1996. An eighth major distribution center will open in April
in Woodland, California, near Sacramento, to serve the growing store base in
the western United States. By July, the facility will be shipping to the
company's California and Washington stores.
At February 28, 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 $76 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
approximately 50 to 70 store locations annually. Purchasing more locations
than in the past 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 February 28, 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 4. Submission of Matters to a Vote of Security Holders
(a) The company held its Annual Meeting of Shareholders on
January 11, 1995.
(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 101,270,315 302,446
Theodore Dimitriou 101,229,986 302,446
James J. Howard 101,248,191 302,446
Charles D. Hunter 101,257,420 302,446
L. Daniel Jorndt 101,270,633 302,446
Cordell Reed 101,218,949 302,446
John B. Schwemm 101,248,008 302,446
William H. Springer 101,235,778 302,446
Marilou M. von Ferstel 101,238,984 302,446
(2) The shareholders voted 100,776,285 shares for and
478,167 shares against with 294,468 abstaining to
ratify the appointment of Arthur Andersen LLP as
auditors.
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 February 28, 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 April 11, 1995 R. L. Polark_________
Senior Vice President
(Chief Financial Officer)
Date April 11, 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 FEBRUARY 28, 1995, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINAANCIAL STATEMENTS.
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<SECURITIES> 2,033
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