SECURITIES AND EXCHANGE COMMISSION
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, 1998
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)
(847) 940-2500
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed 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 [ ]
The number of shares issued and outstanding of the registrant's
Common Stock, $.15625 par value, as of March 31, 1998 was
496,666,459.
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 28, 1998 and
the Consolidated Condensed Statements of Earnings for the three and
six months ended February 28, 1998 and 1997, 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
(Dollars in Millions)
(Unaudited)
February 28, August 31,
1998 1997
ASSETS
Current Assets:
Cash and cash equivalents $ 35 $ 73
Accounts receivable 367 376
Inventories 1,939 1,733
Other current assets 87 144
Total Current Assets 2,428 2,326
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $831 at February 28 and $748 at
August 31 1,941 1,754
Other Non-Current Assets 133 127
TOTAL ASSETS $ 4,502 $ 4,207
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 856 $ 813
Other current liabilities 637 626
Total Current Liabilities 1,493 1,439
Non-Current Liabilities:
Deferred income taxes 92 113
Other non-current liabilities 325 282
Total Non-Current Liabilities 417 395
Shareholders' Equity:
Preferred stock $.125 par value; authorized
16 million shares; none issued - -
Common stock $.15625 par value; authorized
1.6 billion shares; issued and outstanding
496,375,731 at February 28 and
493,789,966 at August 31 78 77
Paid-in capital 77 30
Retained Earnings 2,437 2,266
Total Shareholders' Equity 2,592 2,373
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 4,502 $ 4,207
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)
(In Millions Except Per Share Data)
Three Months Ended Six Months Ended
February 28, February 28,
1998 1997 1998 1997
Net sales $ 4,094 $ 3,603 $ 7,579 $ 6,657
Costs and Deductions:
Cost of sales 2,961 2,597 5,502 4,821
Selling, occupancy and
administration 854 766 1,655 1,474
3,815 3,363 7,157 6,295
Other (Income)Expense:
Interest income - (1) (1) (2)
Interest expense - - 1 1
- (1) - (1)
Earnings before income tax provision
and cumulative effect of
accounting change 279 241 422 363
Income tax provision 108 94 164 141
Earnings before cumulative effect
of accounting change 171 147 258 222
Cumulative effect of accounting change
for system development costs - - (26) -
Net earnings $ 171 $ 147 $ 232 $ 222
Per Share-basic and diluted:
Earnings before cumulative effect
of accounting change $ 0.34 $ 0.30 $ 0.52 $ 0.45
Cumulative effect of accounting change
for system development costs - - (0.05) -
Net earnings $ 0.34 $ 0.30 $ 0.47 $ 0.45
Dividends declared $ 0.0625 $ 0.0600 $ 0.1250 $0.1200
Average shares outstanding 496 492 495 492
Dilutive effect of stock options 6 6 7 6
Average shares outstanding assuming
dilution 502 498 502 498
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)
(Dollars in Millions)
Six Months Ended
February 28,
1998 1997
Net cash provided by operating activities $ 223 $ 276
Cash Flows from Investing Activities:
Additions to property and equipment (329) (175)
Proceeds from the surrender of corporate-
owned life insurance policies 58 -
Other 9 (16)
Net cash used for investing activities (262) (191)
Cash Flows from Financing Activities:
Cash dividends paid (60) (57)
Proceeds from (purchases for) employee
stock plans 62 (15)
Other (1) (1)
Net cash provided by (used for) financing
activities 1 (73)
Changes in Cash and Cash Equivalents:
Net (decrease)increase in cash and cash
equivalents (38) 12
Cash and cash equivalents at beginning of year 73 9
Cash and Cash Equivalents at end of period $ 35 $ 21
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 28, 1998 and August 31,
1997, inventories would have been greater by $460 million and $444
million 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) Financial Accounting Board Statement No. 128 "Earnings Per
Share" was adopted by the company in the quarter ended February 28,
1998. "Basic earnings per share" and "diluted earnings per share,"
as defined by the bulletin, replaced "primary earnings per share"
and "fully diluted earnings per share." The restated earnings per
share presentation has resulted in the same amounts for both
computations for the quarter and six-month periods ended February
28, 1998 and 1997, respectively.
All share data have been adjusted to reflect a two-for-one
stock split distributed to shareholders August 8, 1997. In
addition the Board of Directors approved increases in the
authorized common stock, from 800 million shares to 1.6 billion
shares, and in the authorized preferred stock, from 8 million
shares to 16 million shares.
(3) In accordance with the EITF (Emerging Issues Task
Force) consensus reached on November 20, 1997, the company was
required to change its accounting for business process
reengineering costs. EITF 97-13 "Accounting for Costs Incurred in
Connection with a Consulting Contract or an Internal Project that
Combines Business Process Reengineering and Information Technology
Transformation," requires that the cost of business process
reengineering activities that are part of a project to acquire,
develop or implement internal use software, whether done internally
or by third parties, be expensed as incurred. Previously, the
company capitalized these costs as systems development costs.
The change, effective as of September 1, 1997, resulted in a
cumulative pretax charge of $43 million, or $.05 per share,
recorded in the quarter ended November 30, 1997. No restatement of
prior year financial statements was required, and the effect of
this change on the current year and prior year quarters is not
material.
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, 1998, were
$171 million or $.34 per share. This was a 13.3% increase over
last year. Earnings before accounting change for the six months
were up 16.2% to $258 million or $.52 per share. The accounting
change involved expensing the cumulative cost of business process
reengineering activities that had been capitalized as part of
system development projects. After this $26 million after-tax
charge ($.05 per share), net earnings were $232 million or $.47 per
share.
Sales increased by 13.6% in the second quarter, to $4.1 billion,
and rose by 13.9% to $7.6 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 8.4% and
8.7% for the quarter and first six months. New store openings
accounted for 8.7% and 8.5% of the quarterly and six-month sales
increase. The company operated 2,432 drugstores as of February 28,
1998, compared to 2,256 a year earlier.
Prescription sales increased 19.3% for the second quarter and 19.2%
for the first six months. Prescription sales in comparable stores
increased 14.2% for the quarter and six-month period. 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 as a percent of sales decreased in the quarter to
27.7% of sales from 27.9% last year and to 27.4% from 27.6% 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. Improved gross margins in the rest of the store helped
offset the decline.
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 includes a LIFO
provision of $10 million ($.01 per share) and $16 million ($.02 per
share) for the quarter and six-month period ended February 28, 1998
versus $9 million ($.01 per share) and $15 million ($.02 per share)
for the same period a year ago.
Selling, occupancy and administration expenses decreased to 20.9%
from 21.3% of sales in the quarter and to 21.8% from 22.1% of sales
for the six months. Lower advertising costs, insurance and store
closing costs, as a percent to sales, were the principal reasons
for the decline in the quarter and six months. The growth in mail
order pharmacy, which has a lower expense ratio, also contributed
to the decrease.
The effective tax rates were 38.75% for the quarters and six-month
periods.
7
FINANCIAL CONDITION
Cash and cash equivalents were $35 million at February 28, 1998,
compared to $21 million at February 28, 1997. 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 for the first half of
fiscal 1998 was $223 million compared to $276 million a year ago.
The company's profitability is the principal source for providing
funds for expansion and remodeling programs, dividends to
shareholders and funding for various technological improvements.
Net cash used for investing activities was $262 million versus $191
million last year. Additions to property and equipment were $329
million compared to $175 million last year. There were 122 new or
relocated drugstores opened during the first half of this year
compared to 102 for the same period last year. There were 76 owned
locations opened during the first half of the year or under
construction at February 28, 1998 versus 48 for the same period
last year. Capital expenditures are expected to exceed $500
million and the company plans to open approximately 280 new stores
in fiscal 1998. During the six-month period the company
surrendered corporate-owned life insurance policies resulting in
net proceeds of $58 million.
Net cash provided by financing activities was $1 million compared
to $73 million used a year ago. The company issued 2.6 million
shares of authorized but previously unissued shares to satisfy
various stock option and purchase plan requirements. This avoided
purchasing shares on the open market which would have resulted in
cash outflows of approximately $59 million. At February 28, 1998,
the company had $218 million in unused bank lines of credit and
$100 million of unissued authorized debt securities, previously
filed with the Securities and Exchange Commission.
The company has been addressing computer software modifications or
replacements to enable transactions to process properly in the year
2000. Based on currently available information, all necessary
changes are expected to occur in a timely manner and the cost will
not have a significant impact on the company's consolidated
financial position or results of operations. Although the company
is working with suppliers and customers regarding this issue, no
assurance can be given with respect to any potential adverse
effects on the company of any failure by other parties to achieve
year 2000 compliance.
8
PART II. OTHER INFORMATION
Item 4. Submission of Matters to a Vote of Securities Holders
(a) The company held its Annual Meeting of Shareholders on
January 14, 1998.
(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 403,854,237 1,384,200
William C. Foote 403,485,438 1,384,200
James J. Howard 403,902,798 1,384,200
Charles D. Hunter 403,838,986 1,384,200
L. Daniel Jorndt 403,926,701 1,384,200
Cordell Reed 403,473,982 1,384,200
John B. Schwemm 403,572,592 1,384,200
William H. Springer 403,787,395 1,384,200
Marilou M. von Ferstel 403,916,410 1,384,200
(2) The shareholders voted 402,405,353 shares for and
1,365,036 shares against with 1,364,760 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:
A report on Form 8-K was filed on December 23, 1997, reporting
under "Item 5. Other Events." that the Registrant complied
with a new required accounting interpretation announced
November 20, 1997, by the Emerging Issues Task Force that the
cost of business process reengineering activities that are part
of a systems development project be expensed as those costs are
incurred.
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)
Dated April 7, 1998 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated April 7, 1998 /s/W.M. Rudolphsen
W.M. Rudolphsen
Controller
(Chief Accounting Officer)
10
INDEX TO EXHIBITS
DOCUMENT FILED WITH THIS REPORT
Exhibit 27 Financial Data Schedule
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THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
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QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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