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 NOVEMBER 30, 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 December 31, 1998 was 499,172,296.
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
November 30, 1998 and the Consolidated Condensed Statements of Earnings for the
three months ended November 30, 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)
November 30, August 31,
1998 1998
ASSETS
Current Assets:
Cash and cash equivalents $ 113 $ 144
Accounts receivable 435 373
Inventories 2,238 2,027
Other current assets 97 79
Total Current Assets 2,883 2,623
Property and Equipment, at cost, less
accumulated depreciation and amortization
of $864 at November 30 and $817 at August 31 2,222 2,144
Other Non-Current Assets 135 135
TOTAL ASSETS $ 5,240 $ 4,902
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 100 $ -
Trade accounts payable 1,050 907
Other current liabilities 641 673
Total Current Liabilities 1,791 1,580
Non-Current Liabilities:
Deferred income taxes 90 89
Other non-current liabilities 417 384
Total Non-Current Liabilities 507 473
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
498,959,806 at November 30 and
498,243,522 at August 31 78 78
Paid-in capital 139 118
Retained Earnings 2,725 2,653
Total Shareholders' Equity 2,942 2,849
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 5,240 $ 4,902
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)
(Dollars in Millions Except Per Share Data)
Three Months Ended
November 30,
1998 1997
Net sales $ 4,016 $ 3,485
Costs and Deductions:
Cost of sales 2,942 2,541
Selling, occupancy and administration 904 801
3,846 3,342
Other (Income)Expense:
Interest income (1) (1)
Interest expense - 1
(1) -
Earnings before income tax provision and cumulative
effect of accounting change 171 143
Income tax provision 67 56
Earnings before cumulative effect of accounting change 104 87
Cumulative effect of accounting change for system
development costs - (26)
Net earnings $ 104 $ 61
Per Share-
Basic:
Earnings before cumulative effect of accounting change $ 0.21 $ 0.18
Cumulative effect of accounting change for system
development costs - (0.05)
Net earnings $ 0.21 $ 0.13
Diluted:
Earnings before cumulative effect of accounting change $ 0.21 $ 0.18
Cumulative effect of accounting change for system
development costs - (0.05)
Net earnings $ 0.21 $ 0.13
Dividends declared $0.0650 $0.0625
Average shares outstanding 499 494
Dilutive effect of stock options 7 7
Average shares outstanding assuming dilution 506 501
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)
Three Months Ended
November 30,
1998 1997
Net cash provided by(used for) operating activities $ 11 $ (15)
Cash Flows from Investing Activities:
Additions to property and equipment (146) (148)
Proceeds from the surrender of corporate-
owned life insurance policies - 58
Other 2 5
Net cash used for investing activities (144) (85)
Cash Flows from Financing Activities:
Cash dividends paid (31) (30)
Net proceeds from notes payable 100 35
Proceeds from employee stock plans 19 37
Other 14 (1)
Net cash provided by financing activities 102 41
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (31) (59)
Cash and cash equivalents at beginning of year 144 73
Cash and Cash Equivalents at end of period $ 113 $ 14
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 November 30, 1998 and August 31, 1998, inventories would have
been greater by $505 million and $491 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) Financial Accounting Standards Board (FASB) 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." Earnings per share have been
restated for prior periods.
(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 $.05 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
Earnings for the first quarter of fiscal 1999 were $104 million or $.21 per
share. This was a 19.5% increase over last year's earnings before accounting
change. The accounting change last year involved expensing the cumulative cost
of business process reengineering activities that had been capitalized as part
of system development projects. Including that $26 million after-tax charge
($.05 per share), net earnings increased 70.5%.
Sales for the quarter ended November 30, 1998, increased by 15.2% to $4.0
billion. 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 10.4% for the quarter. New store openings accounted for
8.9% of the quarterly sales increase. The company operated 2,612 drugstores as
of November 30, 1998, compared to 2,390 a year earlier.
Prescription sales increased 22.8% for the first quarter and were 52.6% of total
sales compared to 49.4% a year ago. Prescription sales in comparable stores
increased 18.9%. 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 to 26.7% of sales from 27.1% last
year. The two major factors contributing to the decrease were the decline in
pharmacy gross profit margins and the interim LIFO provision.
Third party retail and mail order 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. 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 for the November quarter includes a LIFO provision of $14 million
($.02 per share) versus $6 million ($.01 per share) for the same period a year
ago.
Selling, occupancy and administration expenses were 22.5% of sales in the
quarter compared to 23.0% a year ago. The decrease, as a percent to sales, was
caused by lower payroll, advertising, and headquarters expenses.
The effective tax rates were 38.75% in both periods.
7
FINANCIAL CONDITION
Cash and cash equivalents were $113 million at November 30, 1998, compared to
$14 million at November 30, 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 quarter was $11 million
compared to $15 million used for operating activities a year ago. The change
between periods was principally due to better inventory control. 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 $144 million versus $85 million last
year. Additions to property and equipment were $146 million compared to $148
million last year. There were 80 new or relocated drugstores opened during the
first quarter of this year. This compares to 58 in the same period last year.
There were 51 owned locations opened during the quarter or under construction at
November 30, 1998 versus 46 for the same period last year. During the first
quarter of last fiscal 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. The company
is continuing to relocate stores to more convenient and profitable freestanding
locations. Expectations 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.
Net cash provided by financing activities was $102 million compared to $41
million a year ago. During both quarters, the company obtained funds through
the placement of short-term notes payable. At November 30, 1998, the company
had $140 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.
At November 30, 1998, it is estimated that 80% of the work plan activities have
been completed and approximately 50% of the costs have been incurred. The total
cost of these changes is expected to be approximately $10 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 which identify "risk points" within
key business processes and is developing alternative solutions if a failure
occurs at a risk point. Any unexpected problems which occur concerning this
issue will be attacked vigorously and, if necessary, workarounds will be
pursued.
8
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, 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) Exhibits filed with this report:
27. Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the
quarter ending November 30, 1998.
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 January 12, 1999 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated January 12, 1999 /s/W.M. Rudolphsen
W.M. Rudolphsen
Controller
(Chief Accounting Officer)
11
INDEX TO EXHIBITS
DOCUMENT FILED WITH THIS REPORT
Exhibit 27 Financial Data Schedule
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THIS SCHEDULE CONTAINS SUMMARY FINANACIAL INFORMATION EXTRACTED FROM THE
FORM 10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 30, 1998, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> AUG-31-1999
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<PERIOD-END> NOV-30-1998
<CASH> 113
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<RECEIVABLES> 454
<ALLOWANCES> 19
<INVENTORY> 2,238
<CURRENT-ASSETS> 2,883
<PP&E> 2,222
<DEPRECIATION> 864
<TOTAL-ASSETS> 5,240
<CURRENT-LIABILITIES> 1,791
<BONDS> 28
0
0
<COMMON> 217
<OTHER-SE> 2,725
<TOTAL-LIABILITY-AND-EQUITY> 5,240
<SALES> 4,016
<TOTAL-REVENUES> 4,016
<CGS> 2,942
<TOTAL-COSTS> 2,942
<OTHER-EXPENSES> 904
<LOSS-PROVISION> 8
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 171
<INCOME-TAX> 67
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<NET-INCOME> 104
<EPS-PRIMARY> 0.21
<EPS-DILUTED> 0.21
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