Walgreen (WAG) 10-Q 5 Jan 10 2010 Q1 Quarterly report Financial data

Consolidated Condensed Balance

Consolidated Condensed Balance Sheets (USD $)
In Millions	Nov. 30, 2009	Aug. 31, 2009	Nov. 30, 2008
Current Assets:
Cash and cash equivalents	$2,552	$2,087	$886
Short term investments	600	500	0
Accounts receivable, net	2,577	2,496	2,776
Inventories	7,474	6,789	8,298
Other current assets	170	177	199
Total Current Assets	13,373	12,049	12,159
Non-Current Assets:
Property and equipment, at cost, less accumulated depreciation and amortization	10,865	10,802	10,150
Goodwill	1,467	1,461	1,433
Other non-current assets	843	830	771
Total Non-Current Assets	13,175	13,093	12,354
Total Assets	26,548	25,142	24,513
Current Liabilities:
Short-term borrowings	13	15	1,080
Trade accounts payable	5,043	4,308	5,026
Accrued expenses and other liabilities	2,446	2,406	2,246
Income taxes	320	40	144
Total Current Liabilities	7,822	6,769	8,496
Non-Current Liabilities:
Long-term debt	2,366	2,336	1,337
Deferred income taxes	275	265	154
Other non-current liabilities	1,464	1,396	1,395
Total Non-Current Liabilities	4,105	3,997	2,886
Shareholders' Equity:
Preferred stock $.0625 par value; authorized 32 million shares, none issued	0	0	0
Common stock $.078125 par value; authorized 3.2 billion shares; issued 1,025,400,000 at February 28, 2009, August 31, 2008 and February 28, 2008	80	80	80
Paid-in capital	633	605	593
Employee stock loan receivable	(127)	(140)	(47)
Retained earnings	15,679	15,327	14,088
Accumulated other comprehensive income (loss)	36	37	9
Treasury stock, at cost; 33,691,010 shares at February 28, 2009, 36,223,782 at August 31, 2008 and 34,943,070 at February 29, 2008	(1,680)	(1,533)	(1,592)
Total Shareholders' Equity	14,621	14,376	13,131
Total Liabilities & Shareholders' Equity	$26,548	$25,142	$24,513

Parenthetical Data to the Conso

Parenthetical Data to the Consolidated Condensed Balance Sheets (USD $)
	Nov. 30, 2009	Aug. 31, 2009	Nov. 30, 2008
Preferred stock, par value	0.0625	0.0625	0.0625
Preferred stock, authorized	32,000,000	32,000,000	32,000,000
Preferred stock, none issued	0	0	0
Common stock, par value	0.078125	0.078125	0.078125
Common stock, authorized shares	3,200,000,000	3,200,000,000	3,200,000,000
Common stock, issued	1,025,400,000	1,025,400,000	1,025,400,000
Treasury stock, shares	40,226,063	36,838,610	38,655,129

Consolidated Condensed Statemen

Consolidated Condensed Statements of Earnings (USD $)
In Millions, except Per Share data	3 Months Ended Nov. 30, 2009	3 Months Ended Nov. 30, 2008
Net sales	$16,364	$14,947
Cost of sales	11,826	10,796
Gross Profit	4,538	4,151
Selling, general and administrative expenses	3,741	3,482
Operating Income	797	669
Interest expense, net	21	15
Earnings Before Income Tax Provision	776	654
Income tax provision	287	246
Net Earnings	$489	$408
Net earnings per common share - basic	0.49	0.41
Net earnings per common share - diluted	0.49	0.41
Dividends declared	0.1375	0.1125
Average shares outstanding	988.4	988.6
Dilutive effect of stock options	5	1.6
Average shares outstanding assuming dilution	993.4	990.2

1_Consolidated Condensed Statem

Consolidated Condensed Statements of Cash Flows (USD $)
In Millions	3 Months Ended Nov. 30, 2009	3 Months Ended Nov. 30, 2008
Cash Flows from Operating Activities:
Net earnings	$489	$408
Adjustments to reconcile net earnings to net cash provided by operating activities -
Depreciation and amortization	257	236
Deferred income taxes	(4)	16
Stock compensation expense	24	32
Income tax savings from employee stock plans	3	0
Other	5	4
Changes in operating assets and liabilities -
Accounts receivable, net	(54)	(313)
Inventories	(682)	(1,036)
Other assets	3	15
Trade accounts payable	735	736
Accrued expenses and other liabilities	65	21
Income taxes	259	210
Other non-current liabilities	68	(17)
Net cash provided by operating activities	1,168	312
Cash Flows from Investing Activities:
Purchases of short-term investments held to maturity	(600)	0
Proceeds from sale of short-term investments held to maturity	500	0
Additions to property and equipment	(304)	(638)
Proceeds from sale of assets	5	15
Business and intangible asset acquisitions, net of cash received	(32)	(61)
Net cash used for investing activities	(431)	(684)
Cash Flows from Financing Activities:
Net (payments) proceeds from short-term borrowings	0	998
Stock purchases	(195)	(99)
Proceeds related to employee stock plans	63	32
Cash dividends paid	(136)	(111)
Other	(4)	(5)
Net cash provided by (used for) financing activities	(272)	815
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents	465	443
Cash and cash equivalents at beginning of year	2,087	443
Cash and cash equivalents at end of period	$2,552	$886

Basis of Presentation

Basis of Presentation
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Basis of Presentation	(1) The consolidated condensed financial statements include the accounts of the Company and its subsidiaries.All intercompany transactions have been eliminated.The consolidated condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on managements prudent judgments and estimates.Actual results may differ from these estimates.For a complete discussion of all our significant accounting policies please see our 2009 annual report on Form 10-K. In accordance with Accounting Standard Codification (ASC) topic 855 (formerly Statement of Financial Accounting Standards (SFAS) No. 165, Subsequent Events), the Company has evaluated subsequent events through the date the financial statements were issued on January 5, 2010.

Restructuring

Restructuring
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Restructuring	(2) On October 30, 2008, we announced a series of strategic initiatives, approved by the Board of Directors, to enhance shareholder value.One of these initiatives was a program designed to reduce cost and improve productivity through strategic sourcing of indirect spend, reducing corporate overhead and work throughout our stores, rationalization of inventory categories, and transforming the community pharmacy. We have recorded the following pre-tax charges associated with our restructuring initiatives within the Consolidated Condensed Statements of Earnings (In millions): Three Months Ended Three Months Ended November30, 2009 November30, 2008 Severance and other benefits $ 7 $ - Inventory charges 19 - Restructuring expense 26 - Consulting 7 14 Restructuring and restructuring related costs $ 33 $ 14 Cost of sales $ 19 $ - Selling, general and administrative expense 14 14 $ 33 $ 14 The $7 million of severance and other benefits includes the charges associated with 72 employees who were separated from the Company.To date, 769 employees have been separated from the Company. Inventory charges consist of on-hand inventory that has been reduced from cost to current selling prices and the loss we incurred on the sale of inventory below cost. Additionally, in conjunction with our Customer Centric Retailing (CCR) initiative, we are enhancing the store format to ensure we have the proper assortments, better category layouts and adjacencies, better shelf height and sight lines and better assortment and brand layout, all of which are designed to positively enhance the shopper experience and increase customer frequency and purchase size.This format will be rolled out to approximately 5,500 to 6,000 stores.The first quarter of fiscal 2010 included 241 stores and to date we have remodeled 443 stores.We plan to enhance approximately 2,400 stores in the next nine months of fiscal 2010 and the remaining stores in fiscal 2011.Although we will continue to refine our estimates as the rollout progresses, based on our experience with the first 443 stores, we expect the total cost, which includes both selling, general and administrative expense and capital, to be $30 thousand to $50 thousand per store.For the three months ended November 30, 2009, we incurred $11 million in total program costs, of which $8 million was included in selling, general and administrative expenses and $3 million in capital costs. We have recorded the following balances in accrued expenses and other liabilities on our Consolidated Balance Sheets (In millions): August 31, 2009 Reserve Balance Charges Cash Payments November 30, 2009 Reserve Balance Severance and other benefits $ 4 $ 9 $ (12 ) $ 1

Short-Term Investments

Short-Term Investments
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Short-term Investments	(3) Short-term investments at November 30, 2009, include Treasury Bills totaling $600 million maturing in January and February 2010.The interest rate on the Treasury Bill is less than one percent.The investments are held to maturity and recorded at cost in accordance with ASC topic 320 (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities).The fair value of the Treasury Bills at November 30, 2009 approximated cost.

Inventories

Inventories
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Inventories	(4) Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis.At November 30, 2009, August 31, 2009 and November 30, 2008, inventories would have been greater by $1,273 million, $1,239 million and $1,110 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. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances not included as a reduction of advertising expense.

Retirement Plan

Retirement Plan
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Retirement Plan	(5) The principal retirement plan for employees is the Walgreen Profit-Sharing Retirement Trust to which both the Company and participating employees contribute.The Company's contribution, which has historically related to pre-tax income and a portion of which is in the form of a guaranteed match, is determined annually at the discretion of the Board of Directors.The profit-sharing provision was $69 million for the first quarter compared to $58 million last year.The Company made no cash or other contributions during the first quarter of fiscal 2010 or 2009.

Stock Based Compensation

Stock Based Compensation
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Stock Based Compensation	(6) The Company granted 6,950,306 and 16,349,716 stock options under the Walgreen Co. Executive Stock Option Plan and the Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) for the quarters ended November 30, 2009 and 2008, respectively.Total stock-based compensation expense was $24 million for the quarter ended November 30, 2009 compared to $32 million last year.In accordance with ASC topic 718 (formerly SFAS No. 123(R), Share-Based Payment), compensation expense is recognized on a straight-line basis over the employee's vesting period or to the employee's retirement eligible date, if earlier.For the quarters ended November 30, 2009 and 2008, the Company fully recognized retiree eligible expenses of $6 million and $14 million, respectively.Therefore, compensation expense for the quarters ended November 30, 2009 and 2008 are not representative of compensation expense for the entire fiscal year.There have been no material changes in the assumptions used to compute compensation expense during the current quarter. The Company granted 599,117 restricted stock units under the Walgreen Co. Restricted Stock Unit Award Program and 602,568 performance shares under the Walgreen Co. Performance Share Program for the quarter ended November 30, 2009.In the prior years period the Company granted 477,321 restricted stock units and 501,522 performance shares. Compensation expense is recognized on a straight line basis based on a three year cliff vesting schedule for the Restricted Stock Unit Award Program and straight line over a three year vesting schedule for the Performance Share Program.For the quarters ended November 30, 2009 and 2008 the Company recognized expense related to these plans of $3 million and $5 million, respectively.

Stock Options and EPS

Stock Options and EPS
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Stock Option/EPS	(7)The dilutive effect of outstanding stock options on earnings per share is calculated using the treasury stock method.Stock options are anti-dilutive and excluded from the earnings per share calculation if the exercise price exceeds the average market price of the common shares for the periods presented.At November 30, 2009 and 2008, outstanding options to purchase common shares of 21,820,384 and 49,251,284, respectively were excluded from the calculation.

Post Employment Benefits

Post Employment Benefits
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Post Employment Benefits	(8) The Company provides certain health insurance benefits for retired employees who meet eligibility requirements, including age, years of service and date of hire.The costs of these benefits are accrued over the period earned. The Company's postretirement health benefit plans are not funded. Three Months Ended November 30, Components of Net Periodic Benefit Costs (In millions) 2009 2008 Service cost $ 3 $ 3 Interest cost 5 7 Amortization of actuarial loss 2 1 Amortization of prior service cost (3 ) (1 ) Total postretirement benefit cost $ 7 $ 10

Debt

Debt
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Debt	(9) Short-term borrowings and long-term debt consists of the following at November 30, 2009, August 31, 2009 and November 30, 2008 (In millions): November 30, 2009 August 31, 2009 November 30, 2008 Short-Term Borrowings - Commercial paper $ - $ - $ 1,068 Current maturities of loans assumed through the purchase of land and buildings; various interest rates from 5.00% to 8.75%; various maturities from 2010 to 2035 9 10 8 Other 4 5 4 Total short-term borrowings $ 13 $ 15 $ 1,080 Long-Term Debt - 4.875% unsecured notes due 2013 net of unamortized discount and interest rate swap fair market value adjustment (see Note 10) $ 1,325 $ 1,294 $ 1,295 5.250% unsecured notes due 2019 net of unamortized discount 995 995 - Loans assumed through the purchase of land and buildings; various interest rates from 5.00% to 8.75%; various maturities from 2010 to 2035 55 57 50 2,375 2,346 1,345 Less current maturities (9 ) (10 ) (8 ) Total-long term debt $ 2,366 $ 2,336 $ 1,337 Short-term borrowings under the Companys commercial paper program had the following characteristics (In millions): November 30, 2009 August 31, 2009 November 30, 2008 Balance outstanding at end of period $ - $ - $ 1,068 Maximum outstanding at any month-end - 1,068 1,068 Average daily short-term borrowings - 272 641 Weighted-average interest rate - 1.51 % 1.80 % We had no commercial paper outstanding at November 30, 2009.In connection with our commercial paper program, we maintain two unsecured backup syndicated lines of credit that total $1,200 million.The first $600 million facility expires on August 9, 2010, and allows for the issuance of up to $400 million in letters of credit, which reduce the amount available for borrowing.The second $600 million facility expires on August 12, 2012.Our ability to access these facilities is subject to our compliance with the terms and conditions of the credit facilities, including financial covenants.The covenants require us to maintain certain financial ratios related to minimum net worth and priority debt, along with limitations on the sale of assets and purchases of investments.As of November 30, 2009, we were in compliance with all such covenants.The Company pays a facility fee to the financing bank to keep these lines of credit active.As of November 30, 2009, there was $191 million in letters of credit issued against these credit facilities.We do not expect any borrowings under these facilities, together with our outstanding commercial paper, to exceed $1,200 million. On July 17, 2008, we issued notes totaling $1,300 million bearing an interest rate of 4.875% paid semiannually in arrears on February1 and August1 of each year, beginning on February1, 2009. The notes will mature on August1, 2013. We may redeem the notes, at any time in whole or from time to time in part, at our option at a redempti

Derivatives

Derivatives
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Derivatives	10)We use a derivative instrument to manage our interest rate exposure associated with some of our fixed-rate borrowings.We do not use derivative instruments for trading or speculative purposes.All derivative instruments are recognized in the consolidated balance sheets at fair value.We designate interest rate swaps as fair value hedges of fixed-rate borrowings.For derivatives designated as fair value hedges, the change in the fair value of both the derivative instrument and the hedged item are recognized in earnings in the current period.At the inception of a hedge transaction, we formally document the hedge relationship and the risk management objective for undertaking the hedge.In addition, we assess both at inception of the hedge and on an ongoing basis, whether the derivative in the hedging transaction has been highly effective in offsetting changes in fair value of the hedged item and whether the derivative is expected to continue to be highly effective.The impact of any ineffectiveness is recognized currently in earnings. Counterparties to derivative financial instruments expose us to credit-related losses in the event of nonperformance, but we currently do not expect any counterparties to fail to meet their obligations given their high credit ratings. Fair Value Hedges For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings. The notional amounts of derivative instruments outstanding as of November 30, 2009, were as follows (In millions): Notional Amount Derivatives designated as hedges: Interest rate swaps $ 1,300 The changes in fair value of the notes as a result of the derivative instrument are included in long-term debt on our Consolidated Condensed Balance Sheets, (see Note 9) and amortized through maturity.As of November 30, 2009, we had net unamortized fair value changes of $28 million. The fair value and balance sheet presentation of derivative instruments as of November 30, 2009, were as follows (In millions): Location in Consolidated Balance Sheet Fair Value Asset derivatives designated as hedges: Interest rate swaps Other non-current assets $ 28 Gains and losses on derivative instruments are recorded in interest expense on our consolidated statement of earnings.The amount recorded for the quarter ended November 30, 2009, was immaterial.

Fair Value

Fair Value
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Fair Value	(11) In the first quarter of fiscal 2010, we adopted the full provisions of ASC topic 820 (formerly SFAS No. 157, Fair Value Measurements) for assets and liabilities.ASC topic 820 defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels: Level1- Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs. Level2- Observable inputs other than quoted prices in active markets. Level3- Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs. Assets and liabilities measured at fair value on a recurring basis were as follows (In millions): November 30, 2009 Level 1 Level 2 Level 3 Assets: Interest rate swaps $ 28 - $ 28 - Interest rate swaps are valued using future LIBOR rates. Our debt instruments are not reported at fair value in our statement of financial position and as a result, we will continue to report under the guidance of ASC topic 825 (formerly SFAS No. 107, Disclosures about Fair Value of Financial Instruments) that requires us to disclose the fair value of our debt in the footnotes.

Litigation

Litigation
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Litigation	(12) The Company is involved in legal proceedings, and is subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, incidental to the normal course of the Companys business. On April 16, 2008, the Plumbers and Steamfitters Local No. 7 Pension Fund filed a putative class action suit against the Company and its former and current chief executive officers in the United States District Court for the Northern District of Illinois.The plaintiffs amended the complaint on October 16, 2008, which upon the Companys motion the District Court dismissed on September 24, 2009.Subsequently, the plaintiffs moved for the District Court to reconsider the dismissal and to allow plaintiffs leave to further amend the complaint.The District Court granted plaintiffs motion on November 11, 2009. The second amended complaint was then filed on behalf of purchasers of Company common stock during the period between June 25, 2007 and October 1, 2007.As in the first amended complaint, the second amended complaint charges the Company and its former and current chief executive officers with violations of Section 10(b) of the Securities Exchange Act of 1934, claiming that the Company misled investors by failing to disclose (i) declining rates of growth in generic drug sales and (ii) increasing selling, general and administrative expenses in fourth quarter of 2007, which allegedly had a negative impact on earnings.The Company is vigorously contesting these charges. On August 31, 2009, a Walgreen Co. shareholder named Dan Himmel filed a lawsuit, purportedly on the Companys behalf, against several current and former officers and directors (each, an Individual Defendant).The case is captioned Himmel v. Wasson, et. al. and was filed in the Circuit Court of Lake County, Illinois.The allegations in the lawsuit are similar to the securities fraud lawsuit described above.Himmel alleges that Walgreens management: (i) knew, or was reckless in not knowing, that selling, general and administrative expenses in the fourth quarter of 2007 were too high, in light of decreased profits from generic drug sales; (ii) knew, or was reckless in not knowing, that the Company would not realize gross profits near what many Wall Street analysts were predicting; and (iii) the directors and officers had a duty both to prevent the drop in gross profits and to disclose the expected drop to the public and failed to do either.The Companys investigation to date suggests that the allegations are without merit, and that the Individual Defendants acted in good faith, exercised prudent business judgment and acted in a manner that they reasonably believed to be in the Company's best interests during the period at issue.The Company intends to vigorously contest the allegations. Although the outcome in the Himmel suit, the Plumbers and Steamfitters suit, and other legal proceedings and investigations to which the Company is subject, cannot be forecast with certainty, management believes the final disposition of these matters will not have a material adverse effect on the Company's consolidated financial position or results of operations. The Company gua

Impairment

Impairment
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Impairment	(13) The Company tests long-lived assets for impairment whenever events or circumstances indicate that a certain asset may be impaired.Store locations that have been open at least five years are reviewed for impairment indicators at least annually.Once identified, the amount of the impairment is computed by comparing the carrying value of the assets to the fair value, which is based on the discounted estimated future cash flows.The impaired asset reserve for the periods ended November, 30, 2009, August 31, 2009 and November 30, 2008 was $47 million, $47 million and $48 million, respectively. The Company also provides for future costs related to closed locations.The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date.The store closings reserve for the periods ended November, 30, 2009, August 31, 2009 and November 30, 2008 was $111 million, $99 million and $74 million, respectively.

Depreciation and Amortization

Depreciation and Amortization
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Depreciation and Amortization	(14) We have recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (In millions): Three Months Ended November 30, 2009 2008 Depreciation expense $ 207 $ 191 Intangible asset amortization 39 35 Amortization of system development costs 11 10 Total depreciation and amortization expense $ 257 $ 236

Supplemental Cash Flow Disclosu

Supplemental Cash Flow Disclosures
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Supplemental Cash Flow Disclosures	(15)Cash interest paid for the three month period ended November 30, 2009 was $2 million compared to $5 million in the prior years three month period.Cash paid for income taxes was $18 million and $20 million for the three months ended November 30, 2009 and 2008, respectively.

Accounting Changes

Accounting Changes
	3 Months Ended Nov. 30, 2009 USD / shares
Notes to Financial Statements [Abstract]
Accounting Changes	(16) In June 2009, the Financial Accounting Standards Board (FASB) issued ASC topic 810 (formerly SFASNo. 167, Amendments to FASB Interpretation No.46(R), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under ASC topic 810. The application of the new provisions under this topic, which will be effective for the first quarter of fiscal 2011, is not expected to have a material impact on our consolidated financial position or results of operations.

Document Information

Document Information
	3 Months Ended Nov. 30, 2009 USD / shares
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	2009-11-30

Entity Information

Entity Information (USD $)
	3 Months Ended Nov. 30, 2009
Entity Information [Line Items]
Entity Registrant Name	WALGREEN CO
Entity Central Index Key	0000104207
Current Fiscal Year End Date	--08-31
Entity Well-known Seasoned Issuer	Yes
Entity Voluntary Filers	No
Entity Current Reporting Status	Yes
Entity Filer Category	Large Accelerated Filer
Entity Public Float	$38,167,808,556
Entity Common Stock, Shares Outstanding	985,173,937