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, 1996
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: (847) 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, $.3125 PAR VALUE; ISSUED AND OUTSTANDING 246,141,072 AT
JUNE 30, 1996.
Page 1 of 10
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, 1996 and the Consolidated Condensed Statements of
Earnings for the three and nine months ended May 31, 1996 and 1995, and the
Consolidated Condensed Statements of Cash Flows for the nine months ended
May 31, 1996 and 1995, 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,
1996 1995
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 48,134 $ 22,245
Accounts receivable, net of allowances
for doubtful accounts of $34,378,000 at
May 31, and $24,633,000 at August 31 301,037 246,086
Inventories 1,531,949 1,453,881
Other current assets 87,733 90,705
Total Current Assets 1,968,853 1,812,917
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $669,217,000 at May 31 and
$581,803,000 at August 31 1,374,684 1,248,962
Other Non-Current Assets 160,719 190,728
TOTAL ASSETS $3,504,256 $3,252,607
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 631,709 $ 606,263
Other current liabilities 473,499 471,499
Total Current Liabilities 1,105,208 1,077,762
Non-Current Liabilities:
Deferred income taxes 144,522 142,278
Other non-current liabilities 268,166 239,981
Total Non-Current Liabilities 412,688 382,259
Shareholders' Equity:
Preferred stock $.25 par value; authorized
8,000,000 shares; none issued - -
Common stock $.3125 par value; authorized
800,000,000 shares; issued and outstanding
246,141,072 at May 31 and August 31 76,919 76,919
Retained earnings 1,909,441 1,715,667
Total Shareholders' Equity 1,986,360 1,792,586
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,504,256 $3,252,607
========== ==========
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,
1996 1995 1996 1995
(Dollars in Thousands Except Per Share Data)
Net Sales $2,988,836 $2,617,368 $8,860,692 $7,829,908
Costs and Deductions:
Cost of sales 2,165,612 1,888,246 6,409,200 5,638,133
Selling, occupancy and
administration 674,902 601,517 1,992,970 1,794,934
2,840,514 2,489,763 8,402,170 7,433,067
Other (Income) Expense:
Interest income (1,574) (1,470) (3,857) (3,285)
Interest expense 385 112 1,920 875
(1,189) (1,358) (1,937) (2,410)
Earnings before income tax
provision 149,511 128,963 460,459 399,251
Income tax provision 57,936 49,973 178,428 154,710
Net Earnings $ 91,575 $ 78,990 $ 282,031 $ 244,541
=========== =========== =========== ===========
Per Share:
Net Earnings $ .37 $ .32 $ 1.14 $ .99
=========== =========== =========== ===========
Dividends Declared $ .11 $ .0975 $ .33 $ .2925
=========== =========== =========== ===========
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,
1996 1995
(In Thousands)
Net cash provided by operating activities $ 306,853 $ 336,986
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (243,210) (234,086)
Net investment in corporate-owned
life insurance 50,763 (28,491)
Net sales of marketable securities - 28,478
Proceeds from disposition of property and
equipment 10,578 10,661
Net cash used for investing activities (181,869) (223,438)
Cash (Used for) Provided by Financing Activities:
Cash dividends paid (78,159) (68,919)
Employee stock plans (20,814) 273
Other (122) (6,788)
Net cash used for financing activities (99,095) (75,434)
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents 25,889 38,114
Cash and cash equivalents at beginning
of year 22,245 77,915
Cash and Cash Equivalents at end of period $ 48,134 $ 116,029
========== ==========
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) Inventories are valued on a lower of last-in, first-out (LIFO) cost or
market basis. At May 31, 1996 and August 31, 1995, inventories would have
been greater by $432,606,000 and $415,015,000 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 annually 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.
(2) All share data have been adjusted to reflect a two-for-one stock split
distributed to shareholders August 8, 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.
The weighted average number of common shares and equivalents used for
calculating primary net earnings per share was 248,388,000 and 247,401,000 for
the nine months ended May 31, 1996 and 1995, respectively. Fully diluted net
earnings per share are the same as primary net earnings per share.
(3) 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. On July 2, 1996, the U.S. Court
of Appeals vacated and remanded to the trial court with instructions to order
judgment in the amount of $220,567 plus interest. Management is of the opinion,
with which its General Counsel concurs, that the various 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, 1996, were $91,575,000 or
$.37 per share. This was a 15.9% increase over last year. Net earnings for
the nine months were up 15.3% to $282,031,000 or $1.14 per share. Earnings
increases resulted from improved sales and lower expense ratios, which were
partially offset by lower gross margins.
Sales increased by 14.2% in the second quarter, to $3.0 billion, and rose by
13.2% to $8.9 billion for the first nine months. Drugstore sales increases
resulted from sales gains in existing stores and added sales from new
stores, each of which include an indeterminate amount of market-driven price
changes. Comparable drugstore (those open at least one year) sales were up
9.3% for the quarter and 8.5% for the first nine months. New store openings
accounted for 8.0% and 7.6% of the quarterly and nine-month sales increase.
The company operated 2,149 drugstores as of May 31, 1996, compared to 2,044
a year earlier.
Pharmacy sales increased 17.4% for the third quarter and 18.3% for the first
nine months. Prescription sales in comparable stores were up 12.3% and
13.4% for the quarter and nine-month periods, respectively. Pharmacy sales
trends are expected to continue primarily because of expansion into new
markets, increased penetration in existing markets and demographic changes
such as the aging population.
Gross margins decreased in the quarter to 27.5% of sales from 27.9% last
year and to 27.7% from 28.0% for the nine-month period. Prescription
margins continue to decrease as third party retail and mail order sales
become a larger portion of pharmacy sales. The company is responding to
gross margin pressures by emphasizing minimum third party profitability
standards.
The company uses the LIFO method of inventory valuation, which can only be
determined annually when inflation rates and inventory levels are finalized;
therefore, LIFO inventory costs for interim financial statements are
estimated. Cost of sales include a LIFO provision of $3.6 million ($.01 per
share) and $17.6 million ($.04 per share) for the quarter and nine-month
periods ended May 31, 1996 versus $4.3 million ($.01 per share) and $24.8
million ($.06 per share) for the same periods a year ago.
Selling, occupancy and administration expenses decreased to 22.6% from 23.0%
of sales in the quarter and to 22.5% from 22.9% of sales for the nine
months. Lower store salaries, advertising expenses, and insurance costs, as
a percent to sales, accounted for most of the decline in the quarter and for
the nine months. The growth in mail order pharmacy, which has a lower
expense ratio, also contributed to the decrease.
Financial Condition
Net cash provided by operating activities was $306.9 million compared to
$337.0 million a year ago. The company's ongoing profitability is expected
to continue supporting expansion and remodeling programs, dividends to
shareholders and the funding for various technological improvements.
7
Net cash used for investing activities was $181.9 million for the first nine
months of fiscal 1996 versus $223.4 million last year. Additions to
property and equipment were $243.2 million compared to $234.1 million last
year. During the first nine months, 124 new or relocated drugstores were
opened. This compares to 140 new or relocated drugstores opened in the same
period last year. New stores are owned and leased. Openings for the first
nine months included 20 owned locations versus 8 for the same period last
year. Capital expenditures for fiscal 1996 are expected to exceed $300
million. During the first nine months, the company borrowed $76.3 million
from corporate-owned life insurance policies. Sales of marketable
securities provided $28.5 million during the nine month period last year.
The company expects to open more than 200 new stores in fiscal 1996, which
includes entry into Dallas, Las Vegas, and Richmond, Virginia, all new
markets for the company. In addition, the company intends to enter the
Detroit market in fiscal 1997. Plans are to escalate new store openings to
300 per year beginning in 1998 and to be operating 3,000 stores across the
country by the year 2000. Intercom Plus, an advanced pharmacy computer and
workflow system, has been implemented in more than 300 stores and is
expected to be completed in fiscal 1997. Healthcare Plus, the company's
managed care subsidiary, has formed WHP Health Initiatives, Inc., its own
PBM (pharmacy benefits manager) network which began serving new plans in
January.
Net cash used for financing activities was $99.1 million compared to $75.4
million a year ago. During both periods, the company obtained funds through
the placement of commercial paper and repaid those borrowings. At May 31,
1996, the company had $127 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 an additional $21 million against corporate-owned life
insurance policies.
In fiscal 1995, the company received an unfavorable Tax Court ruling
concerning the depreciable lives of certain assets. The company appealed,
and on October 17, 1995, the United States Court of Appeals rendered an
opinion which reversed the ruling. The case, which involves approximately
$50 million of tax deductions taken in prior years, was remanded back to the
Tax Court for further findings on the facts. As of May 31, 1996, the
company has adequately provided for all possible tax and related interest.
The company has adopted Financial Accounting Board Statement No. 121
"Accounting for the Impairment of Long-Lived Assets." This pronouncement,
which was adopted early, requires long-lived assets to be reviewed for
impairment whenever events or changes in circumstances indicate that the
carrying amount of the assets may not be recoverable. No material effect on
the financial statements occurred due to the existing accounting policy
conforming in all material aspects to the new standard. Financial
Accounting Board Statement No. 123 "Accounting for Stock-Based Compensation"
was issued in October 1995. This pronouncement will require the company to
disclose the effect on income of stock options based on a formula outlined
in the bulletin. This disclosure will be required in fiscal 1997. This
pronouncement is not expected to materially impact the company's
consolidated financial position or results of operations.
8
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On June 21, 1996, the company was served with an action
entitled State of California, ex rel. Louis H. Mueller vs.
Walgreen Corporation, Case No. 976292, which was filed in the
Superior Court of the State of California, County of San
Francisco. The plaintiff alleges that on occasion Walgreens
has in stock an insufficient amount of a drug to completely
fill a prescription for a California Medical Assistance
Program ("Medi-Cal") patient. In those instances, Medi-Cal
is billed for the full prescription, and the customer is
requested to return to the store at a later date for the
balance of the prescription. The plaintiff further alleges
that in cases where the patient does not return for the
remainder of the prescription, Medi-Cal is not refunded for
the undispensed portion. The Complaint seeks treble damages,
as well as the imposition of civil monetary penalties. While
the total dollar amount of damages and penalties sought is
material, based upon an internal investigation conducted by
the company, management is of the opinion that, although the
ultimate disposition of this suit cannot be forecast with
certainty, this litigation should not have a material adverse
effect on the company's consolidated financial position or
results of operations. The company intends to vigorously
defend the suit.
Item 6. Exhibits and 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, 1996.
9
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 11, 1996 R. L. Polark_________
Senior Vice President
(Chief Financial Officer)
Date July 11, 1996 R. H. Clausen________
Controller
(Chief Accounting Officer)
10
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q QUARTERLY REPORT FOR THE QUARTER ENDED MAY 31, 1996, AND IS QUALIFIED IN
ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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