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 29, 2000
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 March 31, 2000 was 1,007,856,179.
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
February 29, 2000, the Consolidated Condensed Statements of Earnings for the
three and six months ended February 29, 2000 and February 28, 1999, and the
Consolidated Condensed Statements of Cash Flows for the six months ended
February 29, 2000 and February 28, 1999, 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 29, August 31,
2000 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 11.8 $ 141.8
Accounts receivable 626.9 486.5
Inventories 2,633.8 2,462.6
Other current assets 81.0 130.8
Total Current Assets 3,353.5 3,221.7
Property and Equipment, at cost, less
accumulated depreciation and amortization of
$980.0 at February 29 and $878.8 at
August 31 2,967.7 2,593.9
Other Non-Current Assets 93.5 91.1
TOTAL ASSETS $ 6,414.7 $ 5,906.7
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 7.1 $ -
Trade accounts payable 1,083.2 1,130.3
Other current liabilities 960.0 793.5
Total Current Liabilities 2,050.3 1,923.8
Non-Current Liabilities:
Deferred income taxes 71.7 74.8
Other non-current liabilities 457.1 423.8
Total Non-Current Liabilities 528.8 498.6
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 1,007,260,097 at February 29 and
1,004,022,258 at August 31 78.7 78.4
Paid-in capital 311.2 258.9
Retained Earnings 3,445.7 3,147.0
Total Shareholders' Equity 3,835.6 3,484.3
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 6,414.7 $ 5,906.7
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
Feb 29, Feb 28, Feb 29, Feb 28,
2000 1999 2000 1999
Net sales $ 5,608.8 $ 4,691.0 $ 10,432.0 $ 8,707.4
Costs and Deductions:
Cost of sales 4,065.3 3,392.4 7,616.3 6,334.1
Selling, occupancy and
administration 1,152.3 968.6 2,214.3 1,874.6
5,217.6 4,361.0 9,830.6 8,208.7
Other (Income)Expense:
Interest income (1.3) (1.1) (2.6) (2.3)
Interest expense 0.2 0.1 0.4 0.2
(1.1) (1.0) (2.2) (2.1)
Earnings before income tax provision 392.3 331.0 603.6 500.8
Income tax provision 153.4 130.8 236.9 196.6
Net earnings $ 238.9 $ 200.2 $ 366.7 $ 304.2
Per Share-
Basic $ 0.23 $ 0.20 $ 0.36 $ 0.30
Diluted $ 0.23 $ 0.20 $ 0.36 $ 0.30
Dividends declared $ 0.03375 $ 0.03250 $ 0.0675 $ 0.0650
Average shares outstanding 1,006.4 999.0 1,005.6 998.1
Dilutive effect of stock options 13.0 14.6 12.8 14.3
Average shares outstanding
assuming dilution 1,019.4 1,013.6 1,018.4 1,012.4
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
Feb 29, Feb 28,
2000 1999
Net cash provided by operating activities $309.5 $375.5
Cash Flows from Investing Activities:
Additions to property and equipment (491.1) (289.3)
Proceeds from the surrender of corporate-
owned life insurance policies 47.7 -
Other 6.3 26.6
Net cash used for investing activities (437.1) (262.7)
Cash Flows from Financing Activities:
Net proceeds from notes payable 7.1 -
Cash dividends paid (66.6) (63.7)
Proceeds from employee stock plans 58.1 58.1
Other (1.0) 12.0
Net cash (used for)provided by financing activities (2.4) 6.4
Changes in Cash and Cash Equivalents:
Net (decrease)increase in cash and cash
equivalents (130.0) 119.2
Cash and cash equivalents at beginning of year 141.8 144.4
Cash and Cash Equivalents at end of period $ 11.8 $263.6
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, 2000 and August 31, 1999, inventories would have
been greater by $570.5 million and $536.0 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) During the first quarter of the current fiscal year, the company
implemented "Statement of Position 98-1 "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use." This pronouncement provides
guidance on the capitalization of costs related to internal use software. The
adoption of this pronouncement has not had, nor is it expected to have, a
material impact on the company's consolidated financial position or results of
operations for the year.
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, 2000, were $238.9
million or $.23 per share. This was a 19.3% increase over last year. Net
earnings for the six months were up 20.5% to $366.7 million or $.36 per share.
Net earnings increases resulted from improved sales and lower expense ratios,
which were partially offset by lower gross margin rates.
Sales increased by 19.6% in the second quarter, to $5.6 billion, and rose by
19.8% to $10.4 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 12.2% and
12.8% for the quarter and first six months. New store openings accounted for
11.4% and 11.2% of the quarterly and six-month sales increases. The company
operated 2,967 drugstores as of February 29, 2000, compared to 2,667 a year
earlier.
Prescription sales increased 26.7% for the second quarter and 26.5% for the
first six months. Prescription sales in comparable stores increased 20.4% for
the quarter and 20.5% for the six-month period. Third party sales, where
reimbursement is received from managed care organizations and government and
private insurance, were 85% of pharmacy sales compared to 83% a year ago.
Pharmacy sales growth 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 27.5% of sales in the quarter and 27.0% for the six-month
period compared to 27.7% and 27.3% for the comparable periods last year. Third
party reimbursement rates remain stable, however, the increase in third party
sales as a percent of prescription sales resulted in lower overall pharmacy
margins. Contributing to the decrease in gross margins in the rest of the store
were specific pricing decisions in selected categories.
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 $16.9 million ($.01 per share) and
$34.5 million ($.02 per share) for the quarter and six-month periods ended
February 29, 2000 versus $16.2 million ($.01 per share) and $30.1 million ($.02
per share) for the same periods a year ago.
Selling, occupancy and administration expenses decreased to 20.5% from 20.7% of
sales in the quarter and to 21.2% from 21.5% of sales for the six months. Lower
headquarters costs, as a percent to sales, was the principal reason for the
decline in the quarter and six months. Lower advertising expenses, as a percent
to sales, also contributed to the quarter decline.
The effective tax rate was 39.25% for the six-month periods of both fiscal
years, however, in the quarter ended February 29, 2000, the effective rate was
reduced from the 39.50% rate used in the first fiscal quarter as a result of
lower state income taxes. During the second quarter last year, the effective
tax rate was increased from 38.75%. That increase was principally the result of
lower tax-advantaged investments.
7
FINANCIAL CONDITION
Cash and cash equivalents were $11.8 million at February 29, 2000, compared to
$263.6 million at February 28, 1999. 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 2000 was
$309.5 million compared to $375.5 million a year ago. The change between
periods was principally due to timing of payments for trade accounts payable.
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 $437.1 million versus $262.7 million
last year. Additions to property and equipment were $491.1 million compared to
$289.3 million last year. There were 197 new or relocated drugstores opened
during the first half of this year compared to 160 for the same period last
year. There were 109 owned locations opened during the first half of the year
or under construction at February 29, 2000 versus 72 for the same period last
year. During the six-month period, the company surrendered corporate-owned life
insurance policies resulting in net proceeds of $47.7 million.
Capital expenditures for fiscal 2000 are budgeted to be over $1 billion. The
company expects to open 450 new stores in fiscal 2000 and have a total of 6,000
drugstores by the year 2010. By the end of calendar 2000, stores will be added
in two more states - Utah and Wyoming, bringing coverage to 43 states and Puerto
Rico. Major new markets are Atlanta, Baltimore and Southern California, where
200 full-size stores are planned by 2004. The company is continuing to relocate
stores to more convenient and profitable freestanding locations. In addition to
new stores, a significant portion of the expenditures will be made for
technology and distribution centers. Plans are to open or expand one
distribution center a year for the next five years. This growth may necessitate
future long-term borrowings. In October the company launched its totally
redesigned Internet pharmacy which is processing approximately 2,300
prescriptions a day.
Net cash used for financing activities was $2.4 million compared to $6.4 million
provided a year ago. During both periods, the company obtained funds through
the placement of short-term notes. At February 29, 2000, the company had $134
million in unused bank lines of credit and $100 million of unissued authorized
debt securities, previously filed with the Securities and Exchange Commission.
8
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 and location of new store
openings, the level of capital expenditures, demographic trends; 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, 1999, 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 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 4. Submission of Matters to a Vote of Securities Holders
(a) The company held its Annual Meeting of Shareholders on
January 12, 2000.
(c) 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
in after-split number of shares):
Votes
Votes for Withheld
L. Daniel Jorndt 829,724,687 3,168,714
David W. Bernauer 829,701,495 3,168,714
Vernon A. Brunner 829,613,657 3,168,714
William C. Foote 829,340,145 3,168,714
James J. Howard 829,258,356 3,168,714
Alan G. McNally 829,240,368 3,168,714
Cordell Reed 829,374,034 3,168,714
David Y. Schwartz 829,330,132 3,168,714
John B. Schwemm 829,232,053 3,168,714
Marilou M. von Ferstel 829,260,401 3,168,714
Charles R. Walgreen III 829,636,038 3,168,714
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, 2000.
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 April 11, 2000 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated April 11, 2000 /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 FEBRUARY 29, 2000,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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