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 29, 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
March 31, 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 February 29, 1996 and the Consolidated Condensed Statements of
Earnings for the three and six months ended February 29, 1996 and February
28, 1995, and the Consolidated Condensed Statements of Cash Flows for the
six months ended February 29, 1996 and February 28, 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)
February 29, August 31,
1996 1995
(In Thousands)
ASSETS
Current Assets:
Cash and cash equivalents $ 7,752 $ 22,245
Accounts receivable, net of allowances
for doubtful accounts of $30,262,000 at
February 29, and $24,633,000 at August 31 293,978 246,086
Inventories 1,589,744 1,453,881
Other current assets 83,335 90,705
Total Current Assets 1,974,809 1,812,917
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $635,906,000 at February 29 and
$581,803,000 at August 31 1,330,747 1,248,962
Other Non-Current Assets 228,740 190,728
TOTAL ASSETS $3,534,296 $3,252,607
========== ==========
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable 673,114 606,263
Other current liabilities 528,911 471,499
Total Current Liabilities 1,202,025 1,077,762
Non-Current Liabilities:
Deferred income taxes 146,107 142,278
Other non-current liabilities 263,914 239,981
Total Non-Current Liabilities 410,021 382,259
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 February 29 and August 31 76,919 76,919
Retained earnings 1,845,331 1,715,667
Total Shareholders' Equity 1,922,250 1,792,586
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $3,534,296 $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 Six Months Ended
February 29, February 28, February 29, February 28,
1996 1995 1996 1995
(Dollars in Thousands Except Per Share Data)
Net Sales $3,179,089 $2,806,984 $5,871,856 $5,212,540
Costs and Deductions:
Cost of sales 2,289,803 2,009,123 4,243,588 3,749,887
Selling, occupancy and
administration 682,860 616,476 1,318,068 1,193,417
2,972,663 2,625,599 5,561,656 4,943,304
Other (Income) Expense:
Interest income (1,240) (991) (2,283) (1,815)
Interest expense 645 242 1,535 763
(595) (749) (748) (1,052)
Earnings before income tax
provision 207,021 182,134 310,948 270,288
Income tax provision 80,220 70,577 120,492 104,737
Net Earnings $ 126,801 $ 111,557 $ 190,456 $ 165,551
=========== =========== =========== ===========
Per Share:
Net Earnings $ .51 $ .45 $ .77 $ .67
=========== =========== =========== ===========
Dividends Declared $ .11 $ .0975 $ .22 $ .195
=========== =========== =========== ===========
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 29, February 28,
1996 1995
(In Thousands)
Net cash provided by operating activities $ 230,388 $ 174,739
Cash (Used for) Provided by Investing Activities:
Additions to property and equipment (159,164) (161,393)
Net investment in corporate-owned
life insurance (19,680) (23,567)
Net sales of marketable securities - 28,477
Proceeds from disposition of property and
equipment 8,098 7,134
Net cash used for investing activities (170,746) (149,349)
Cash (Used for) Provided by Financing Activities:
Cash dividends paid (51,075) (44,921)
Employee stock plans (21,788) 133
Other (1,272) (5,114)
Net cash used for financing activities (74,135) (49,902)
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (14,493) (24,512)
Cash and cash equivalents at beginning
of year 22,245 77,915
Cash and Cash Equivalents at end of period $ 7,752 $ 53,403
========== ==========
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 February 29, 1996 and August 31, 1995, inventories would have
been greater by $429,045,000 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 248,299,000 and 247,294,000 for
the six months ended February 29, 1996 and February 28, 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. 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 second quarter, ended February 29, 1996, were
$126,801,000 or $.51 per share. This was a 13.7% increase over last year.
Net earnings for the six months were up 15.0% to $190,456,000 or $.77 per
share. Earnings increases resulted from improved sales and lower expense
ratios, which were partially offset by lower gross margins.
Sales increased by 13.3% in the second quarter, to $3.2 billion, and rose by
12.6% to $5.9 billion for the first six 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
8.7% for the quarter and 8.1% for the first six months. New store openings
accounted for 7.6% and 7.4% of the quarterly and six-month sales increase.
The company operated 2,131 drugstores as of February 29, 1996, compared to
2,028 a year earlier.
Pharmacy sales increased 18.5% for the second quarter and 18.9% for the
first six months. Prescription sales in comparable stores were up 13.7% and
14.0 % for the quarter and six-month period, 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 28.0% of sales from 28.4% last
year and to 27.7% from 28.1% for the six-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 $5.5 million ($.01 per
share) and $14.0 million ($.03 per share) for the quarter and six-month
period ended February 29, 1996 versus $11.0 million ($.03 per share) and
$20.5 million ($.05 per share) for the same period a year ago.
Selling, occupancy and administration expenses decreased to 21.5% from 22.0%
of sales in the quarter and to 22.4% from 22.9% of sales for the six months.
Lower store salaries, advertising expenses, and store closing costs, as a
percent to sales, accounted for most of the decline in the quarter and for
the six 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 $230.4 million compared to
$174.7 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 $170.7 million for the first half
of fiscal 1996 versus $149.3 million last year. Additions to property and
equipment were $159.2 million compared to $161.4 million last year. During
the first six months, 90 new or relocated drugstores were opened. This
compares to 107 new or relocated drugstores opened in the same period last
year. New stores are owned and leased. Openings for the first half
included 12 owned locations versus 5 for the same period last year. Capital
expenditures for fiscal 1996 are expected to exceed $300 million. The sale
of marketable securities provided $28.5 million during the six month period
last year.
The company expects to open 215 new stores in fiscal 1996, which includes
entry into Dallas and Las Vegas, both new markets for the company. The
company plans 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 $74.1 million compared to $49.9
million a year ago. During both periods, the company obtained funds through
the placement of commercial paper and repaid those borrowings. At February
29, 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 $87 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 February 29, 1996, the
company has adequately provided for all possible tax and related interest.
Adoption of Financial Accounting Board Statement No. 121 "Accounting for the
Impairment of Long-Lived Assets" is required by fiscal 1997. This
pronouncement 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. 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. Neither of
these pronouncements are expected to materially impact the company's
consolidated financial position or results of operations.
8
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 10, 1996.
(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 197,240,503 670,250
Theodore Dimitriou 197,216,414 670,250
James J. Howard 197,233,768 670,250
Charles D. Hunter 197,249,073 670,250
L. Daniel Jorndt 197,255,400 670,250
Cordell Reed 197,149,564 670,250
John B. Schwemm 197,221,505 670,250
William H. Springer 197,211,524 670,250
Marilou M. von Ferstel 197,236,287 670,250
(2) The shareholders voted 196,757,286 shares for and
610,500 shares against with 526,247 abstaining to
ratify the appointment of Arthur Andersen LLP as
auditors.
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 February 29, 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 April 11, 1996 R. L. Polark_________
Senior Vice President
(Chief Financial Officer)
Date April 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 FEBRUARY 29, 1996, AND IS QUALIFIED
IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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