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 MAY 31, 1999
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, $.078125 par value, as of June 30, 1999 was 1,003,484,404.
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, 1999, the Consolidated Condensed Statements of Earnings
for the three and nine months ended May 31, 1999 and 1998, and the
Consolidated Condensed Statements of Cash Flows for the nine months ended
May 31, 1999 and 1998, 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)
May 31, August 31,
1999 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 255.3 $ 144.4
Accounts receivable 514.8 373.2
Inventories 2,163.0 2,026.9
Other current assets 78.8 78.6
Total Current Assets 3,011.9 2,623.1
Property and Equipment, at cost, less
accumulated depreciation and amortization of
$899.0 at May 31 and $816.8 at August 31 2,443.2 2,143.4
Other Non-Current Assets 137.3 135.1
TOTAL ASSETS $ 5,592.4 $ 4,901.6
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Trade accounts payable $ 994.3 $ 906.9
Other current liabilities 776.4 673.2
Total Current Liabilities 1,770.7 1,580.1
Non-Current Liabilities:
Deferred income taxes 78.3 89.1
Other non-current liabilities 405.1 383.5
Total Non-Current Liabilities 483.4 472.6
Shareholders' Equity:
Preferred stock $.0625 par value; authorized
32 million shares; none issued - -
Common stock $.078125 par value; authorized
3.2 billion shares; issued and outstanding
1,003,049,911 at May 31 and
996,487,044 at August 31 78.4 77.8
Paid-in capital 240.9 118.1
Retained Earnings 3,019.0 2,653.0
Total Shareholders' Equity 3,338.3 2,848.9
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 5,592.4 $ 4,901.6
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 Nine Months Ended
May 31, May 31,
1999 1998 1999 1998
Net sales $ 4,571.4 $ 3,887.5 $ 13,278.8 $ 11,466.1
Costs and Deductions:
Cost of sales 3,330.7 2,840.8 9,664.8 8,342.5
Selling, occupancy and
Administration 984.4 842.7 2,859.0 2,497.8
4,315.1 3,683.5 12,523.8 10,840.3
Other (Income)Expense:
Interest income (5.9) (1.6) (8.2) (3.1)
Interest expense - - 0.2 1.1
(5.9) (1.6) (8.0) (2.0)
Earnings before income tax
provision and cumulative effect of
accounting change 262.2 205.6 763.0 627.8
Income tax provision 102.9 79.7 299.5 243.3
Earnings before cumulative effect
of accounting change 159.3 125.9 463.5 384.5
Cumulative effect of accounting change
for system development costs - - - (26.4)
Net earnings $ 159.3 $ 125.9 $ 463.5 $ 358.1
Per Share-
Basic:
Earnings before cumulative effect
of accounting change $ 0.16 $ 0.13 $ 0.46 $ 0.39
Cumulative effect of accounting change
for system development costs - - - (0.03)
Net earnings $ 0.16 $ 0.13 $ 0.46 $ 0.36
Diluted:
Earnings before cumulative effect
of accounting change $ 0.16 $ 0.13 $ 0.46 $ 0.39
Cumulative effect of accounting change
for system development costs - - - (0.03)
Net earnings $ 0.16 $ 0.13 $ 0.46 $ 0.36
Dividends declared $ 0.0325 $ 0.03125 $ 0.0975 $ 0.09375
Average shares outstanding 1,001.7 993.5 999.3 991.1
Dilutive effect of stock options 13.9 13.6 14.1 13.4
Average shares outstanding assuming
Dilution 1,015.6 1,007.1 1,013.4 1,004.5
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)
Nine Months Ended
May 31,
1999 1998
Net cash provided by operating activities $520.4 $425.3
Cash Flows from Investing Activities:
Additions to property and equipment (485.1) (461.7)
Proceeds from the surrender of corporate-
owned life insurance policies - 58.0
Other 46.2 12.5
Net cash used for investing activities (438.9) (391.2)
Cash Flows from Financing Activities:
Cash dividends paid (96.1) (91.5)
Proceeds from employee stock plans 111.3 80.7
Other 14.2 14.3
Net cash provided by financing activities 29.4 3.5
Changes in Cash and Cash Equivalents:
Net increase(decrease) in cash and cash
equivalents 110.9 37.6
Cash and cash equivalents at beginning of year 144.4 72.9
Cash and Cash Equivalents at end of period $255.3 $110.5
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, 1999 and August 31, 1998, inventories
would have been greater by $536.7 million and $490.8 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 derived from an estimate based upon point-of-sale
scanning and adjusted based on periodic inventories.
(2) All share data have been adjusted to reflect a two-for-one stock
split distributed to shareholders February 12, 1999. In addition the Board
of Directors approved increases in the authorized common stock, from 1.6
billion shares to 3.2 billion shares, and in the authorized preferred
stock, from 16 million shares to 32 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 pre-tax charge
of $43 million, or $.03 per share, recorded in the quarter ended November
30, 1997.
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, 1999, were $159.3 million
or $.16 per share. This was a 26.5% increase over last year. Net earnings
for the nine months were $463.5 million or $.46 per share. This was a
20.5% increase over last year's earnings before an accounting change. The
accounting change involved expensing the cumulative cost of business
process reengineering activities that had been capitalized as part of
system development projects. Including that $26 million after-tax charge
($.03 per share), net earnings increased 29.4%.
Sales increased by 17.6% in the third quarter, to $4.6 billion, and rose by
15.8% to $13.3 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 12.3% and 10.7% for the quarter and first nine months. New store
openings accounted for 10.7% and 9.8% of the quarterly and nine-month sales
increases. The company operated 2,738 drugstores as of May 31, 1999,
compared to 2,470 a year earlier.
Prescription sales increased 24.0% for the third quarter and 23.0% for the
first nine months. Prescription sales in comparable stores increased 20.2%
for the quarter and 19.2% for the nine-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 were 27.1% of sales in the quarter and 27.2% for the nine-
month period compared to 26.9% and 27.2% for the comparable periods last
year. Third party retail sales, which have lower gross margin rates
compared to the rest of the store, continue to become a larger portion of
pharmacy sales. The margins are under continued pressure from the
reimbursement rates demanded by managed care organizations. The company is
responding to these gross margin pressures by evaluating contracts with the
organizations on a case by case basis to insure a reasonable return to
shareholders. This may result in sacrificing sales volume to insure that
minimum gross margin standards are met.
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 $15.8 million
and $45.9 million for the quarter and nine-month period ended May 31, 1999
versus $16.4 million and $32.4 million for the same period a year ago.
Selling, occupancy and administration expenses decreased to 21.5% from
21.7% of sales in the quarter and to 21.5% from 21.8% of sales for the nine
months. Lower store salaries and other direct store expenses, as a percent
to sales, were the major reasons for the decline in the quarter and nine
months. Lower insurance expenses, as a percent to sales, also contributed
to the quarterly decline.
The effective tax rate increased to 39.25% this fiscal year compared to
38.75% in fiscal 1998. The increase was principally the result of lower
tax-advantaged investments.
7
FINANCIAL CONDITION
Cash and cash equivalents were $255.3 million at May 31, 1999, compared to
$110.5 million at May 31, 1998. 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 nine months of
fiscal 1999 was $520.4 million compared to $425.3 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 $438.9 million versus $391.2
million last year. Additions to property and equipment were $485.1 million
compared to $461.7 million last year. There were 264 new or relocated
drugstores opened during the first nine months of this year compared to 181
for the same period last year. There were 106 owned locations opened
during the first nine months of the year or under construction at May 31,
1999 versus 100 for the same period last year. During the nine-month period
last year, the company surrendered corporate-owned life insurance policies
resulting in net proceeds of $58 million.
Capital expenditures for fiscal 1999 are estimated to be more than $750
million. The company expects to open at least 365 new stores in fiscal
1999 and 450 in fiscal 2000. Fiscal 1999 openings include stores in Palm
Springs and other Southern California markets with additions in Atlanta,
Baltimore and Salt Lake City scheduled to occur in 2000. Estimates are
that 3,000 drugstores will be operating in the year 2000, with a goal of
6,000 by 2010. This may necessitate future long-term borrowings. Two-
thirds of the chain already consists of convenient freestanding units, of
which more than 1,400 offer drive-thru prescription service. One-hour
photofinishing is available in more than 2,400 locations.
Net cash provided by financing activities was $29.4 million compared to
$3.5 million a year ago. At May 31, 1999, the company had $147 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 and hardware
modifications or replacements to enable transactions to process properly in
the year 2000. Included in the hardware review is an examination of
critical non-IT systems, including embedded technology at company
facilities. Left uncorrected, the "year 2000 problem" could result in
business interruptions. However, based on currently available information,
all necessary changes are expected to occur in a timely manner.
As part of the project, a detailed work plan was developed to identify key
processes such as point-of-sale, pharmacy and inventory control. Each
process was broken down into tasks which included analysis at the program
level to identify date issues, modifications to programs where the date
processing did not properly handle the year 2000 and testing to insure the
process functions correctly in the year 2000. For many key processes such
as pharmacy, inventory control, and financial systems, year 2000
simulations were executed by running year 2000 ready processes on non-
production hardware while modifying the system date to simulate the year
2000. At May 31, 1999, it is estimated that 95%
8
of the work plan activities have been completed and approximately 85% of
the costs have been incurred. The total cost of these changes is expected
to be approximately $9 million which is based on management's best
estimates and subject to change as additional information becomes
available.
Although the company is working with suppliers and customers regarding this
issue, no assurance can be given with respect to potential adverse effects
on the company of any failure by other parties to achieve year 2000
compliance. The company is developing contingency plans that identify
"risk points" within key business processes such as pharmacy and cash flow.
For each "risk point" identified, the probability of failure is estimated
and a contingency alternative solution identified. Although effort is
being made to develop the best contingency alternative solutions, in some
cases the alternative solution is not as optimal as the process it would
replace. The goals of the contingency plans are to identify and document
alternative solutions that could be implemented in the event of failure and
would allow the company to continue to provide service to its customers and
business partners. Plans will remain flexible and subject to change.
In March 1998, Statement of Position 98-1 "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use" was issued. This
pronouncement, which is effective by the company's fiscal year 2000,
provides guidance on the capitalization of costs related to internal use
software. The pronouncement is not expected to materially impact the
company's consolidated financial position or results of operations.
Cautionary Note Regarding Forward-looking Statements
Certain information in this Form 10-Q, as well as in other public filings,
press releases and oral statements made by our representatives, is forward-
looking information based on current expectations and plans that involve
risks and uncertainties. Forward-looking information includes statements
concerning pharmacy sales trends, prescription margins, number of new store
openings, the level of capital expenditures and the company's success in
addressing Year 2000 issues; as well as those that include or are preceded
by the words "expects,""estimates,""believes" or similar language. For
such statements, we claim the protection of the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995.
The following factors, in addition to those discussed elsewhere in this
Form 10-Q and in our Annual Report on Form 10-K for the fiscal year ended
August 31, 1998, could cause results to differ materially from management
expectations as projected in such forward-looking statements: changes in
economic conditions generally or in the markets served by the company;
consumer preferences and spending patterns; competition from other
drugstore chains, supermarkets, on-line retailers, other retailers and mail
order companies; changes in state or federal legislation or regulations; the
efforts of third party payers to reduce prescription drug costs; the success
of planned advertising and merchandising strategies; the availability and cost
of real estate and construction; accounting policies and practices; the
company's ability to hire and retain pharmacists and other store and
management personnel; the company's relationships with its suppliers; the
ability of the company, its vendors and others to manage Year 2000 issues;
the company's ability to successfully implement new computer systems and
technology; and adverse determinations with respect to litigation or other
claims. The company assumes no obligation to update its forward-looking
statements to reflect subsequent events or circumstances.
9
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 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, 1999.
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)
Dated July 13, 1999 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated July 13, 1999 /s/W.M. Rudolphsen
W.M. Rudolphsen
Controller
(Chief Accounting Officer)
11
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