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, 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 December 31, 1999 was 1,006,243,999.
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, 1999, the Consolidated Condensed Statements of Earnings for the
three months ended November 30, 1999 and 1998, and the Consolidated Condensed
Statements of Cash Flows for the three months ended November 30, 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)
November 30, August 31,
1999 1999
ASSETS
Current Assets:
Cash and cash equivalents $ 12.0 $ 141.8
Accounts receivable 565.4 486.5
Inventories 2,957.1 2,462.6
Other current assets 90.0 130.8
Total Current Assets 3,624.5 3,221.7
Property and Equipment, at cost, less
accumulated depreciation and amortization of
$929.5 at November 30 and $878.8 at
August 31 2,755.2 2,593.9
Other Non-Current Assets 92.7 91.1
TOTAL ASSETS $ 6,472.4 $ 5,906.7
LIABILITIES & SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable $ 98.0 $ -
Trade accounts payable 1,413.7 1,130.3
Other current liabilities 847.4 793.5
Total Current Liabilities 2,359.1 1,923.8
Non-Current Liabilities:
Deferred income taxes 73.3 74.8
Other non-current liabilities 438.8 423.8
Total Non-Current Liabilities 512.1 498.6
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
1,005,442,502 at November 30 and
1,004,022,258 at August 31 78.6 78.4
Paid-in capital 281.8 258.9
Retained Earnings 3,240.8 3,147.0
Total Shareholders' Equity 3,601.2 3,484.3
TOTAL LIABILITIES & SHAREHOLDERS' EQUITY $ 6,472.4 $ 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)
(Dollars in Millions Except Per Share Data)
Three Months Ended
November 30,
1999 1998
Net sales $ 4,823.2 $ 4,016.4
Costs and Deductions:
Cost of sales 3,551.0 2,941.7
Selling, occupancy and administration 1,062.0 906.0
4,613.0 3,847.7
Other (Income)Expense:
Interest income (1.3) (1.2)
Interest expense 0.2 0.1
(1.1) (1.1)
Earnings before income tax provision 211.3 169.8
Income tax provision 83.5 65.8
Net earnings $ 127.8 $ 104.0
Per Share-
Basic $ 0.13 $ 0.10
Diluted $ 0.13 $ 0.10
Dividends declared $ 0.03375 $ 0.03250
Average shares outstanding 1,004.7 997.2
Dilutive effect of stock options 12.8 14.0
Average shares outstanding assuming dilution 1,017.5 1,011.2
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,
1999 1998
Net cash (used for) provided by operating activities $(55.1) $ 11.2
Cash Flows from Investing Activities:
Additions to property and equipment (216.6) (145.8)
Proceeds from the surrender of corporate-
owned life insurance policies 47.7 -
Other 2.2 1.4
Net cash used for investing activities (166.7) (144.4)
Cash Flows from Financing Activities:
Net proceeds from notes payable 98.0 100.0
Cash dividends paid (32.6) (31.1)
Proceeds from employee stock plans 23.8 18.6
Other 2.8 14.5
Net cash provided by financing activities 92.0 102.0
Changes in Cash and Cash Equivalents:
Net decrease in cash and cash equivalents (129.8) (31.2)
Cash and cash equivalents at beginning of year 141.8 144.4
Cash and Cash Equivalents at end of period $ 12.0 $113.2
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, 1999 and August 31, 1999, inventories would have
been greater by $553.6 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) 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.
6
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
RESULTS OF OPERATIONS
Net earnings for the first quarter of fiscal 2000 were $127.8 million or $.13
per share. This was a 22.9% increase in net earnings over last year. Net
earnings increases resulted from improved sales and lower expense ratios, which
were partially offset by lower gross margin rates.
Sales for the quarter ended November 30, 1999, increased by 20.1% to $4.8
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 13.5% for the quarter. New store openings accounted for
10.9% of the quarterly sales increase. The company operated 2,894 drugstores as
of November 30, 1999, compared to 2,612 a year earlier.
Prescription sales increased 26.3% for the first quarter and were 55.3% of total
sales compared to 52.6% a year ago. Prescription sales in comparable stores
increased 20.7%. Third party sales, where reimbursement is received from
managed care organizations, are now 85% of pharmacy sales compared to 83% a year
ago. 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 were 26.4% in the quarter compared to 26.8%
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 for the November quarter includes a LIFO provision of $17.6
million ($.01 per share) versus $13.9 million ($.01 per share) for the same
period a year ago.
Selling, occupancy and administration expenses were 22.0% of sales in the
quarter compared to 22.6% a year ago. The decrease, as a percent to sales, was
caused by lower store salaries and expenses and headquarters costs, which were
partially offset by higher advertising.
The effective tax rate increased to 39.50% for the first quarter this fiscal
year compared to 38.75% for the same period last year. The increase was
principally the result of lower tax-advantaged investments.
7
FINANCIAL CONDITION
Cash and cash equivalents were $12 million at November 30, 1999, compared to
$113.2 million at November 30, 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 used for operating activities for the first quarter was $55.1 million
compared to $11.2 million provided by operating activities a year ago. The
change between periods was principally due to increased inventory levels. 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 $166.7 million versus $144.4 million
last year. Additions to property and equipment were $216.6 million compared to
$145.8 million last year. There were 94 new or relocated drugstores opened
during the first quarter of this year. This compares to 80 in the same period
last year. There were 64 owned locations opened during the quarter or under
construction at November 30, 1999 versus 51 for the same period last year.
During the first quarter 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 three more states - Maryland, Utah and Wyoming, bringing coverage to 43
states and Puerto Rico. Major upcoming 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. In
October the company launched its totally redesigned internet pharmacy which is
processing approximately 2,000 prescriptions a day. This growth may necessitate
future long-term borrowings.
Net cash provided by financing activities was $92.0 million compared to $102.0
million a year ago. During both quarters, the company obtained funds through
the placement of short-term notes payable. At November 30, 1999, the company
had $133 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 spent approximately $9 million to insure that transactions
process properly in the year 2000. As of January 11, 2000 no major problems
have been detected. Activities continue to be monitored. In the event of a
system failure, contingency alternative solutions will be implemented.
During the quarter 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 pronouncement resulted in
approximately $1.5 million of capitalized costs in the first quarter which would
have been expensed under the company's prior policy. The annual amount is
estimated to be approximately $15 million.
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 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, 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 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, 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 January 11, 2000 /s/R.L. Polark
R.L. Polark
Senior Vice President
(Chief Financial Officer)
Dated January 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 FINANCIAL INFORMATION EXTRACTED FROM THE FORM
10-Q QUARTERLY REPORT FOR THE QUARTER ENDED NOVEMBER 30, 1999, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
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<PERIOD-END> NOV-30-1999
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<CURRENT-ASSETS> 3,625
<PP&E> 2,755
<DEPRECIATION> 930
<TOTAL-ASSETS> 6,472
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<BONDS> 27
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<COMMON> 360
<OTHER-SE> 3,241
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<SALES> 4,823
<TOTAL-REVENUES> 4,823
<CGS> 3,551
<TOTAL-COSTS> 3,551
<OTHER-EXPENSES> 1,062
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<INCOME-PRETAX> 211
<INCOME-TAX> 83
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