Annual Report
United States
Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-K
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the fiscal year ended August 31, 2009.
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the Transition Period From ____________ to ___________
Commission file number
1-604
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WALGREEN CO
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(Exact name of registrant as specified in its charter)
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Illinois
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36-1924025
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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200 Wilmot Road, Deerfield, Illinois
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60015
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(Address of principal executive offices)
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(Zip Code)
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Registrant's telephone number, including area code:
(847) 914-2500
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class
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Name of each exchange on which registered
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Common Stock ($.078125 Par Value)
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New York Stock Exchange
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The NASDAQ Stock Market LLC
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Chicago Stock Exchange
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Securities registered pursuant to section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes
x
No
o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes
o
No
x
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
o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required
to submit and post such files).
Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of "large accelerated filer,” and “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated
filer
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Non-accelerated filer
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Smaller
Reporting Company
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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes
o
No
x
As of February 28, 2009, the aggregate market value of Walgreen Co. common stock, par value $.078125 per share, held by non-affiliates (based upon the closing transaction price on the New York Stock Exchange) was approximately $23,572,655,000. As of September 30, 2009, there were 988,826,319 shares of Walgreen Co. common stock outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the Annual Report to Shareholders for the year ended August 31, 2009, to the extent stated in this Form 10-K, are incorporated by reference into Parts I, II and IV of this Form 10-K. Portions of the registrant's proxy statement for its 2010 annual meeting of shareholders to be held January 13, 2010, are incorporated
by reference into Part III of this Form 10-K.
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Part 1
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Part II
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Part III
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Part IV
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PART I
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Business
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(a)
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General development of business.
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Walgreen Co. (the "company" or "Walgreens") was incorporated as an Illinois corporation in 1909 as a successor to a business founded in 1901. As of August 31, 2009, we operated 7,496 locations in 50 states, the District of Columbia, Puerto Rico and Guam. In 2009 the company opened or acquired 691 locations for a net
increase of 562 locations after relocations and closings. Total locations do not include 337 convenient care clinics operated by Take Care Health Systems, Inc. within our drugstores.
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Number of Locations
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Location Type
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2009
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2008
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2007
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Drugstores
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6,997 | 6,443 | 5,882 | |||||||||
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Worksite Facilities
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377 | 364 | 3 | |||||||||
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Home Care Facilities
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105 | 115 | 101 | |||||||||
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Specialty Pharmacies
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15 | 10 | 8 | |||||||||
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Mail Service Facilities
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2 | 2 | 3 | |||||||||
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Total
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7,496 | 6,934 | 5,997 | |||||||||
Walgreens corporate strategy is to provide the most convenient access to healthcare services and consumer goods in America through our 6,997 community based drugstores, as well as through our specialty pharmacy, home infusion, worksite health center and retail clinic businesses.
Today,
over 70% of the population lives within five miles of a Walgreens and 5.6 million shoppers walk into a Walgreens store daily. In addition to store shoppers, Walgreens.com receives over 12 million visits per month.
We intend to grow pharmacy market share through new store growth, comparable store sales increases, pharmacy prescription file purchases and strategic acquisitions. As an example, in fiscal 2009 we supplemented organic growth by acquiring select locations of Drug Fair to add to our retail drugstore operations and McKesson Specialty
and IVPCARE to supplement our specialty pharmacy operations.
We will also utilize our extensive retail network as a channel to provide affordable, quality, health and wellness services to our customers and patients, as illustrated by our ability to play a significant role in providing flu vaccinations. Finally, we will continue to market Walgreen Co. to employers, governments, managed care
operators and pharmacy benefit managers, expanding beyond our traditional retail consumer model, to contract directly with our payors. W
ith more than 70,000 of the nation’s most trusted and accessible health professionals, Walgreens expects to continue to play a growing role in government and employer efforts to control escalating health care costs.
Prescription sales continue to be a large portion of the company's business. This year prescriptions accounted for 65.3% of sales compared to 64.9% last year. Third party sales, where reimbursement is received from managed care organizations, government and
private insurance, were 95.4% of
prescription sales compared to 95.3% a year ago. Overall, Walgreens filled approximately 651 million prescriptions in 2009, an increase of 5.5% from the previous year. Adjusted to 30 day equivalents, prescriptions filled were 723 million in 2009, 677 million in 2008 and 636 million in 2007. Walgreens continues to gain market share accounting for 18.3% of the U.S. retail prescription drug market in fiscal 2009 compared to 17.6% and 16.8%
in fiscal 2008 and 2007, respectively.
Walgreens expects to continue to grow pharmacy sales due, in part, to the aging population and the continued development of innovative drugs that improve quality of life and control health care costs.
During fiscal year 2009 the company added $1.9
billion to property and equipment, which included approximately $1.6 billion related to stores, $133 million for distribution centers, and $231 million related to other locations. Capital expenditures for fiscal 2010 are
expected to be approximately $1.6 billion, excluding acquisitions and prescription file purchases.
In fiscal 2007, the company opened a distribution center in Anderson, South Carolina. This was the first of a new-generation of distribution centers that will increase the company’s productivity. A second new-generation center in Windsor, Connecticut opened in fiscal 2009.
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(b)
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Financial information about industry segments.
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The company is principally in the retail drugstore business and its operations are within one reportable segment.
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(c)
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Narrative description of business.
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(i)
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Principal products produced and services rendered.
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The company’s drugstores are engaged in the retail sale of prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, household items, personal care, convenience foods, beauty care, photofinishing, candy, and seasonal items. Walgreens offers customers the
choice to have prescriptions filled at the drugstore counter, as well as through the mail, by telephone and via the Internet.
The estimated contributions of various product classes to sales for each of the last three fiscal years are as follows:
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Product Class
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2009
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2008 | 2007 | |||||||||
| Prescription Drugs | 65 | 65 | 65 | |||||||||
| Non-prescription Drugs | 10 | 10 | 10 | |||||||||
| General Merchandise | 25 | 25 | 25 | |||||||||
| Total Sales | 100 | 100 | 100 | |||||||||
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(ii)
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Status of a product or segment.
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Not applicable.
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(iii)
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Sources and availability of raw materials.
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Inventories are purchased from numerous domestic and foreign suppliers. The loss of any one supplier or group of suppliers under common control would not have a material effect on the company’s business.
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(iv)
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Patents, trademarks, licenses, franchises and concessions held.
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Walgreens markets products under various trademarks, trade dress and trade names and holds assorted business licenses (such as pharmacy, occupational, and liquor) having various lives, which are necessary for the normal operation of business. The company also has filed various patent applications relating to its business and
products, eight of which have been issued.
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(v)
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Seasonal variations in business.
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The business is seasonal in nature, with Christmas generating a higher proportion of front-end sales and earnings than other periods. Both prescription and non-prescription drug sales are affected by the timing and severity of the cold/flu season. See the caption "Summary of Quarterly Results (Unaudited)" on page 21
of the Annual Report to Shareholders for the year ended August 31, 2009 ("2009 Annual Report"), which section is incorporated herein by reference.
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(vi)
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Working capital practices.
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The company generally finances its inventory and expansion needs with internally generated funds. In fiscal 2009 we supplemented cash provided by operations with short-term borrowings and long-term debt. See Note 8, "Short-Term Borrowings and Long-Term Debt" on page 16 and "Management's Discussion and Analysis
of Results of Operations and Financial Condition" on pages 2 through 7 of the 2009 Annual Report, which sections are incorporated herein by reference.
Due to the nature of our business, 95.4% of all prescription sales are now covered by third party payors. Prescription sales represent 65.3% of total company sales. The remaining store sales are principally for cash, credit and debit cards. Customer returns are immaterial.
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(vii)
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Dependence upon limited number of customers.
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The company sells to numerous customers including various managed care organizations; therefore, the loss of any one customer or a group of customers under common control would not have a material effect on the business. No customer accounts for ten percent or more of the company's consolidated net sales.
(viii) Backlog orders.
Not applicable.
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(ix)
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Government contracts.
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The company fills prescriptions for many state public assistance plans. Revenues from all such plans are approximately 5.8% of total sales.
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(x)
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Competitive conditions.
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The drugstore industry is highly competitive. As a volume leader in the retail drug industry, Walgreens competes with various retailers, including chain and independent drugstores, mail order prescription providers, grocery stores, convenient stores, mass merchants and dollar stores. Competition remained keen during
the fiscal year with the company competing on the basis of service, convenience, variety and price. The company's geographic dispersion tends to offset the impact of temporary economic and competitive conditions in individual markets. The number and location of the company's drugstores appears under Item 2 - "Properties" in this Form 10-K.
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(xi)
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Research and development activities.
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The company does not engage in any material research and development activities.
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(xii)
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Environmental disclosures.
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Federal, state and local environmental protection requirements have no material effect upon capital expenditures, earnings or the competitive position of the company.
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(xiii)
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Number of employees.
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The company employs approximately 238,000 persons, about 72,000 of whom are part-time employees working less than 30 hours per week.
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(d)
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Financial information about foreign and domestic operations and export sales.
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All the company sales occurred within the United States and Puerto Rico. There are no export sales.
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(e)
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Available information
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The company maintains a website at investor.walgreens.com. The company makes copies of its Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and any amendments to those reports filed with or furnished to the SEC available to investors on or through its website free of charge as soon as
reasonably practicable after the company electronically files them with or furnishes them to the SEC. The contents of the company's website are not, however, a part of this report. In addition, charters of all committees of the company's Board of Directors, as well as the company's Corporate Governance Guidelines and Ethics Policy Statement, are available on the company's website at investor.walgreens.com or, upon written request, in printed hardcopy form. Written requests should
be sent to Walgreen Co., Attention: Shareholder Relations, Mail Stop #2261, 200 Wilmot Road, Deerfield, Illinois 60015. Changes to or waivers, if any, of the company's Ethics Policy Statement for directors and executive officers would be promptly disclosed on the company's website.
The company has also adopted a Code of Ethics for Financial Executives. This Code applies to and has been signed by the Chief Executive Officer, the Chief Financial Officer and the Controller. The full text of the Code of Ethics for Financial Executives is available at the company's website, investor.walgreens.com. Changes
to or waivers, if any, of the company's Code of Ethics for Financial Executives would be promptly disclosed on the company's website.
Cautionary Note Regarding Forward Looking Statements
Certain information in this annual report, as well as in our other public filings, the company website, press releases and oral statements made by our representatives, is forward-looking information based on the company’s current expectations and plans, which involve risks and uncertainties. Forward-looking information
includes statements concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, the level of capital expenditures, and demographic trends. Forward-looking information also includes statements with words such as "expects," "estimates," "believes," "plans," "anticipates" or similar language. For such statements, we claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements involve risks and uncertainties, known or unknown to the company that could cause results to differ materially from management expectations as projected in such forward-looking statements. These risks and uncertainties are discussed in Item 1A below. Unless otherwise required by applicable
securities laws, the company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.
Item 1A.
Risk
Factors
The risks described below could materially and adversely affect our business, financial condition and results of operations. These risks are not the only risks that we face. Our business operations could also be affected by additional factors that are not presently known to us or that we currently consider to be immaterial to our operations.
The retail drugstore and pharmacy benefit services industries are highly competitive and further increases in competition could adversely affect us.
We face intense competition from local, regional and national companies, including other drug store chains, independent drug stores, mail-order prescription providers and various other retailers such as grocery stores, convenience stores, mass merchants and dollar stores, many of which are aggressively expanding in markets we serve. In
the pharmacy benefit services industry, our competitors include large national and regional pharmacy benefit managers and insurance companies and managed care providers, some of which are owned by or have affiliations with our retail drug store competitors. As competition increases in the markets in which we operate, a significant increase in general pricing pressures could occur, which could require us to reevaluate our pricing structures to remain competitive. Our failure to reduce prices
could result in decreased revenue, and reducing prices without also reducing costs could negatively affect profits.
Reductions in third-party reimbursement levels, from private or government plans, for prescription drugs could reduce our margin on pharmacy sales and could have a significant effect on our retail drugstore profits.
The continued efforts of health maintenance organizations, managed care organizations, pharmacy benefit management companies, government entities, and other third-party payors to reduce prescription drug costs and pharmacy reimbursement rates, as well as litigation relating to how drugs are priced, may impact our profitability.
In addition, some of these entities may offer pricing terms that we may not be willing to accept or otherwise restrict our participation in their networks of pharmacy providers. Certain provisions of the Deficit Reduction Act of 2005 seek to reduce federal spending by altering the Medicaid reimbursement formula for multi-source (i.e., generic) drugs. These changes are expected to result in reduced Medicaid reimbursement rates for retail pharmacies. Also, in conjunction with a recently approved
class action settlement with two entities that publish the average wholesale price (AWP) of pharmaceuticals, the methodology used to calculate the AWP, a pricing reference widely used in the pharmacy industry, reduced the AWP for many brand-name prescription drugs effective September 26, 2009. The company has reached understandings with most of its third party payors to adjust reimbursements to correct for this change in methodology, but state Medicaid programs that utilize AWP as a pricing reference
have not taken action to make similar adjustments, which is expected to result in reduced Medicaid reimbursement levels in fiscal 2010. Reduced reimbursement rates could adversely affect our revenues and profits.
We are subject to governmental regulations and procedures and other legal requirements. A significant change in, or noncompliance with, these regulations, procedures and requirements could have a material adverse effect on profitability.
Our retail drugstore, pharmacy benefit and health services businesses are subject to numerous federal, state and local regulations. Changes in these regulations may require extensive system and operating changes that may be difficult to implement. Untimely compliance or noncompliance with applicable regulations could result in the imposition
of civil and criminal penalties that could adversely affect the continued operation of our business, including: suspension of payments from government programs; loss of required government certifications; loss of authorizations to participate in or exclusion from government reimbursement programs, such as the Medicare and Medicaid programs; loss of licenses; or significant fines or monetary penalties, and could adversely affect the continued operation of our business.
The
regulations to which we are subject include, but are not limited to: federal, state and local registration and regulation of pharmacies; applicable Medicare and Medicaid regulations; the Health Insurance Portability and Accountability Act, or HIPAA; accounting standards; tax laws and regulations; laws and regulations relating to the protection of the environment and health and safety matters, including those governing exposure to, and the management and disposal of, hazardous substances; regulations of the U.S.
Food and Drug Administration, the U.S. Federal Trade Commission, the Drug Enforcement Administration, and the Consumer Product Safety Commission, as well as state regulatory authorities, governing the sale, advertisement and promotion of products we sell; anti-kickback laws; false claims laws; laws against the corporate practice of medicine; and federal and state laws governing the practice of the profession of pharmacy. In addition, we are party to a Corporate Integrity Agreement with the U.S. Department of
Health and Human Services under which we have agreed to maintain a corporate compliance program. We are also governed by federal and state laws of general applicability, including laws regulating matters of working conditions, health and safety and equal employment opportunity. In addition, we could have exposure if we are found to have infringed another party's intellectual property rights.
Efforts
to reform the U.S. health care system may adversely affect our business.
The Federal government has been considering proposals to reform the U.S. health care system. These proposals may increase government involvement in health care, increase regulation of pharmacy services, result in changes to pharmacy reimbursement rates, and otherwise change the way we do business. The effect of these proposals could have
an impact on our results of operations.
Our ability to hire and retain pharmacy personnel is important to the continued success of our business.
As our business expands, we believe that our future success will depend greatly on our continued ability to attract and retain skilled and qualified pharmacists. The retail drugstore industry is experiencing an ongoing shortage of licensed pharmacists in some parts of the United States. Although we generally have been able to
meet our pharmacist staffing requirements in the past, any future inability to do so could limit our ability to offer extended pharmacy hours and negatively impact our revenue and our ability to deliver high levels of customer service.
Should a product liability issue, recall or personal injury issue arise, inadequate product or other liability insurance coverage or our inability to maintain such insurance may result in a material adverse effect on our business and financial condition.
Products that we sell could become subject to contamination, product tampering, mislabeling, recall or other damage. In addition, errors in the dispensing and packaging of pharmaceuticals could lead to serious injury. Product liability or personal injury claims may be asserted against us with respect to any of the products or pharmaceuticals
we sell or services we provide. Our health and wellness business also involves exposure to professional liability claims related to medical care. Should a product or other liability issue arise, the coverage limits under our insurance programs and the indemnification amounts available to us may not be adequate to protect us against claims. We also may not be able to maintain this insurance on acceptable terms in the future. Damage to our reputation in the event of a product liability or personal injury
issue or judgment against us or a product recall could have an adverse effect on our business, financial condition or results of operations.
Our ability to grow our business may be constrained by our inability to find suitable new store locations at acceptable prices or by the expiration of our current leases.
Our ability to grow our business may be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations applicable to the types of stores we desire to
construct may impact our ability to find suitable locations and influence the cost of constructing our stores. The expiration of leases at existing store locations may adversely affect us if the renewal terms of those leases are unacceptable to us and we are forced to close or relocate stores. Further, changing local demographics at existing store locations may adversely affect revenue and profitability levels at those stores.
Changes in economic conditions could adversely affect consumer buying practices and reduce our revenues and profitability.
Our performance may be negatively influenced by changes in national, regional or local economic conditions and consumer confidence. External factors that affect consumer confidence and over which we exercise no influence include unemployment rates, levels of personal disposable income, national, regional or local economic conditions, the
introduction of new merchandise or brand and generic prescription drugs, and acts of war or terrorism. Changes in economic conditions and consumer confidence could adversely affect consumer preferences, purchasing power and spending patterns. A decrease in overall consumer spending as a result of changes in economic conditions could adversely affect our front-end and pharmacy sales and negatively impact our profitability. All these factors could impact our revenues, operating results and financial condition.
Our profitability can be adversely affected by a decrease in the introduction of new brand name and generic prescription drugs.
Our sales and profit margins are affected by the introduction of new brand name and generic drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically result in higher gross profit margins. Accordingly, a
decrease in the number of significant new drugs or generics successfully introduced could adversely affect our results of operations.
If we fail to offer the merchandise and services that our customers want, our sales may be affected.
Our success depends on our ability to offer a superior shopping experience, a quality assortment of available merchandise and superior customer service. We must identify, obtain supplies of, and offer to our customers, attractive, innovative and high-quality merchandise on a continuous basis. Our products and services must satisfy the
desires of our customers, whose preferences may change in the future. If we misjudge either the demand for products and services we sell or our customers’ purchasing habits and tastes, we may be faced with excess inventories of some products and missed opportunities for products and services we chose not to offer. In addition, our sales may decline or we may be required to sell the merchandise we have obtained at lower prices. This would have a negative effect on our business and results
of operations.
We have made and expect to continue to make acquisitions that could disrupt our operations and harm our operating results.
We have grown our business through acquisitions in recent years and expect to continue to acquire drugstore chains, independent drugstores and related businesses in the future. Acquisitions involve numerous risks, including difficulties in integrating the operations and personnel of the acquired companies, distraction of management from
overseeing our existing operations, difficulties in entering markets in which we have no or limited direct prior experience, and difficulties in achieving the synergies we anticipated. Acquisitions may also cause us to significantly increase our interest expense, leverage and debt service requirements if we incur additional debt to pay for an acquisition, issue common stock that would dilute our current shareholders’ percentage ownership, or incur write-offs and restructuring and other related expenses. No
assurance can be given that our acquisitions will be successful and will not materially adversely affect our results of operations.
Various factors could adversely affect our achievement of the cost savings targeted by our Rewiring for Growth restructuring.
On October 30, 2008 we announced our “Rewiring for Growth” initiative (“RFG”) designed to reduce cost and improve productivity. We also announced a goal of saving pre-tax costs equal to $500 million in FY2010 and $1 billion in FY2011 through this initiative. While we believe we are on track to achieve the
targeted savings, RFG is a multi-faceted initiative, and numerous elements have to remain on track for us to achieve our overall cost-saving goals. A shortfall or delay in a single element of RFG could cause the company to fall short of the overall goal, unless offset by better-than-expected savings in other areas.
In general, we expect our savings from the components of the RFG initiative to trend upwards over the course of FY2010 and FY2011, but the rate of progress during each fiscal year may be uneven and there is no assurance that the savings or net benefits achieved in any specific quarter will exceed the prior quarter results or meet analyst
or investor expectations.
Because the company does not give specific earnings guidance, analysts and investors might incorrectly estimate what our selling, general and administrative expenses will be as they try to take into account our RFG cost savings in one or more quarters over the course of FY2010 and FY2011, even if we achieve our targeted savings. If the resulting market expectations exceed our actual
results, the perceived earnings disappointment could cause our stock price to drop even if the targeted savings are achieved.
Because our senior management and board of directors manage the company with the broader goal of maximizing overall return for our shareholders, the pursuit of other important business objectives could cause us to change, defer or cancel one or more elements of the RFG initiative, which could prevent us from realizing the targeted savings,
on the targeted timeframe or at all.
Our credit ratings are important to our cost of capital and lease terms for our stores.
The major credit rating agencies have given us and our corporate debt investment grade credit ratings. These ratings are based on a number of factors, which include our financial strength and financial policies. We aim to maintain our high ratings as they serve to lower our borrowing costs and facilitate our access to a variety of lenders
and other creditors, including landlords for our leased stores, on terms that we consider advantageous to our business. Failure to maintain our credit ratings could adversely affect our cost of funds, liquidity, competitive position and access to capital markets.
There are a number of additional business risks which could adversely affect our financial results.
Our success depends on our ability to establish effective advertising, marketing and promotional programs. If we are unsuccessful in our advertising, merchandising or promotional strategies, sales or sales margins could be negatively affected. Our success also depends on our continued ability to attract and retain store and management
personnel, and the loss of key personnel could have an adverse effect on the results of our operations, financial condition or cash flow. We also may not be able to successfully and timely implement new computer systems and technology or business processes, or may experience disruptions or delays to the computer systems we depend on to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes, which could adversely impact our operations and our ability to attract and retain customers.
Severe weather conditions, terrorist activities, health epidemics or pandemics or the prospect of these events can impact our store operations or damage our facilities in affected areas or have an adverse impact on consumer confidence levels and spending in our stores. Furthermore, the products we sell are sourced from a wide variety of domestic and international vendors, and any future inability to find qualified vendors and access products in a timely and efficient manner could adversely impact our business.
There are no unresolved staff comments outstanding with the Securities and Exchange Commission at this time.
Item 2.
Properties
The company's locations by state for fiscal 2009 and 2008 are listed below.
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State
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2009
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2008
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State
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2009
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2008
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State
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2009
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2008
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Alabama
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99 | 90 |
Louisiana
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134 | 127 |
Oklahoma
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109 | 105 | ||||||||||||||||||
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Alaska
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3 | - |
Maine
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9 | 9 |
Oregon
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69 | 62 | ||||||||||||||||||
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Arizona
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250 | 241 |
Maryland
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56 | 48 |
Pennsylvania
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123 | 106 | ||||||||||||||||||
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Arkansas
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55 | 50 |
Massachusetts
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165 | 153 |
Rhode Island
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29 | 26 | ||||||||||||||||||
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California
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570 | 525 |
Michigan
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225 | 211 |
South Carolina
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102 | 83 | ||||||||||||||||||
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Colorado
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165 | 150 |
Minnesota
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138 | 122 |
South Dakota
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14 | 13 | ||||||||||||||||||
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Connecticut
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117 | 109 |
Mississippi
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70 | 63 |
Tennessee
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250 | 242 | ||||||||||||||||||
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Delaware
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64 | 64 |
Missouri
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192 | 18 0 |
Texas
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679 | 631 | ||||||||||||||||||
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District of Columbia
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3 | 3 |
Montana
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13 | 11 |
Utah
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39 | 36 | ||||||||||||||||||
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Florida
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824 | 781 |
Nebraska
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59 | 56 |
Vermont
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4 | 4 | ||||||||||||||||||
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Georgia
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190 | 166 |
Nevada
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84 | 76 |
Virginia
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109 | 93 | ||||||||||||||||||
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Hawaii
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9 | 1 |
New Hampshire
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33 | 31 |
Washington
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122 | 115 | ||||||||||||||||||
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Idaho
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37 | 32 |
New Jersey
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175 | 138 |
West Virginia
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18 | 11 | ||||||||||||||||||
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Illinois
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571 | 549 |
New Mexico
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59 | 57 |
Wisconsin
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230 | 221 | ||||||||||||||||||
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Indiana
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212 | 205 |
New York
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245 | 208 |
Wyoming
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8 | 8 | ||||||||||||||||||
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Iowa
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72 | 68 |
North Carolina
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169 | 148 |
Guam
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1 | 1 | ||||||||||||||||||
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Kansas
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63 | 61 |
North Dakota
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1 | 1 |
Puerto Rico
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98 | 95 | ||||||||||||||||||
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Kentucky
|
95 | 89 |
Ohio
|
266 | 259 |
TOTAL
|
7,496 | 6,934 | ||||||||||||||||||
The company owns approximately 21
%
of the retail drugstores open at August 31, 2009. The remaining drugstore locations are leased. The leases are for various terms and periods. See Note 3, "Leases" on page 14 of the 2009 Annual Report, which section
is incorporated herein by reference. The company has a moderate expansion program of adding new stores
and remodeling and relocating existing stores. Net retail selling space was increased from 73 million square feet at August 31, 2008, to 79 million square feet at August 31, 2009. Approximately
38%
of company stores have been opened or remodeled during the past five
years.
The company's retail store operations are supported by fourteen major distribution centers with a total of approximately 13 million square feet of space in all distribution centers, of which 8 million square feet is owned. The remaining space is leased. All distribution centers are served by modern systems for order
processing control, operating efficiencies and rapid merchandise delivery to stores. In addition, the company uses public warehouses to handle certain distribution needs. New distribution centers opened in Anderson, South Carolina and Windsor, Connecticut in fiscal years 2007 and 2009, respectively.
There are 27 principal office facilities containing approximately 3 million square feet of which approximately 2 million square feet is owned and the remainder is leased. The company operates two mail service facilities containing approximately 237 thousand square feet of which approximately 133 thousand square feet is owned
and the remainder is leased.
The company also owns 33 strip shopping malls containing approximately 2 million square feet of which approximately 708 thousand square feet is leased to others.
Item 3.
Legal Proceedings
The information in response to this item is incorporated herein by reference to Note 11 "Commitments and Contingencies" on page 17 of the 2009 Annual Report.
|
Submission of Matters to a Vote of Security Holders
|
No matters were submitted to a vote of security holders during the fourth quarter of the fiscal year.
Item 4.1.
Executive Officers of the Registrant
The following information is furnished with respect to each executive officer of the company and certain other officers as of October 25, 2009:
|
NAME AND BUSINESS EXPERIENCE
|
AGE
|
OFFICE HELD
|
||
|
Gregory D. Wasson
|
51
|
President and Chief Executive Officer
|
||
|
President and Chief Executive Officer since February 2009
|
||||
|
Director since February 2009
|
||||
|
President and Chief Operating Officer – May 2007
to February 2009
|
||||
|
Executive Vice President – October 2005 to May 2007
|
||||
|
Senior Vice President – February 2004 to October 2005
|
||||
|
Vice President – October 2001 to February 2004
|
||||
|
President, Walgreens Health Services –
March 2002 to May 2007
|
||||
|
Wade D. Miquelon
|
44
|
Executive Vice President and Chief
Financial Officer
|
||
|
Executive Vice President and Chief Financial Officer
since July 2009
|
|
|||
|
Senior Vice President and Chief Financial Officer –
June 2008 to July 2009
|
||||
|
Executive Vice President and Chief Financial Officer,
Tyson Foods, Inc. – June 2006 to June 2008
|
||||
|
Vice President, Finance, Western Europe, The Proctor &
Gamble Company – September 2003 to June 2006
|
||||
|
Mark A. Wagner
|
48
|
Executive Vice President
|
||
|
Executive Vice President since March 2006
|
||||
|
Senior Vice President – February 2002 to March 2006
|
||||
|
Stanley B. Blaylock
|
46
|
Senior Vice President
|
||
|
Senior Vice President since January 2008
|
||||
|
Vice President – October 2007 to January 2008
|
||||
|
Divisional Vice President – January 2007 to October 2007
|
||||
|
Senior Vice President, Walgreens Health Services –
January 2007 to October 2007
|
||||
|
Vice President, Specialty Pharmacy,
Walgreens Health
Services – August 2006
to January
2007
|
||||
|
President and Chief Executive Officer, Medmark Inc. –
October 2005 to August 2006
|
||||
|
President, Medmark Inc. – June 2005 to October 2005
|
||||
|
Executive Vice President, Chief Financial Officer and
Chief Administrative Officer, Medmark Inc. – August
2003 to June 2005
|
||||
|
R. Bruce Bryant
|
59
|
Senior Vice President
|
||
|
Senior Vice President since September 2000
|
||||
|
|
||||
|
Sona Chawla
|
42
|
Senior Vice President
|
||
|
Senior Vice President since July 2008
|
||||
|
Vice President, Global Online Business, Dell,
Inc. – December 2006 to May 2008
|
||||
|
Executive Vice President, Online Sales,
Service and Marketing, Wells Fargo &
Company – March 2005 to October 2006
|
||||
|
Executive Vice President, Web Channel
Management, Wells Fargo & Company –
June 2003 to February 2005
|
||||
|
Kermit R. Crawford
|
50
|
Senior Vice President
|
||
|
Senior Vice President since October 2007
|
||||
|
Vice President – October 2005 to October
2007
|
||||
|
Senior Vice President, Walgreens Health
Services – October 2005 to September
2007
|
||||
|
Vice President, Walgreens Health Service –
September 2004 to October 2005
|
||||
|
Vice President, Operations – October 2000 to
October 2004
|
||||
|
Dana I. Green
|
59
|
Senior Vice President, General Counsel
and Corporate Secretary
|
||
|
Senior Vice President, General Counsel and
Corporate Secretary since January 2005
|
|
|||
|
Senior Vice President – February 2004 to
January 2005
|
||||
|
Vice President – May 2000 to February 2004
|
||||
|
Donald C. Huonker, Jr.
|
48
|
Senior Vice President
|
||
|
Senior Vice President since October 2007
|
||||
|
Vice President, Pharmacy Services – April
2005 to October 2007
|
||||
|
Vice President, Operations – April 2003 to
April 2005
|
||||
|
|
||||
|
J. Randolph Lewis
|
59
|
Senior Vice President
|
||
|
Senior Vice President since January 2000
|
||||
|
George J. Riedl
|
49
|
Senior Vice President
|
||
|
Senior Vice President since April 2009
|
||||
|
Executive Vice President – January 2006 to
April 2009
|
||||
|
Senior Vice President – January 2003 to
January 2006
|
||||
|
|
||||
|
Hal F. Rosenbluth
|
57
|
Senior Vice President
|
||
|
Senior Vice President since August 2008
|
||||
|
Vice President – April 2008 to August 2008
|
||||
|
Chairman, Take Care Health Systems, Inc. –
October 2004 to April 2008
|
||||
|
Chairman and Chief Executive Officer,
Rosenbluth International through
November 2003
|
||||
|
Timothy J. Theriault
|
49
|
Senior Vice President and Chief
Information Officer
|
||
|
Senior Vice President since October 2009
|
|
|||
|
President, Corporate and Institutional
Services, Northern Trust Corporation –
January 2006 to October 2009
|
||||
|
President, Worldwide Operations and
Technology, Northern Trust Corporation –
February 2002 to January 2006
|
||||
|
Thomas J. Connolly
|
50
|
Vice President
|
||
|
Vice President since March 2009
|
||||
|
Divisional Vice President – March 2000 to
March 2009
|
||||
|
Kimberly L. Feil
|
50
|
Vice President and Chief Marketing
Officer
|
||
|
Vice President and Chief Marketing Officer since
September 2008
|
|
|||
|
Senior Vice President and Chief Marketing
Officer, Sara Lee North America –
September 2005 to May 2008
|
||||
|
Vice President and Senior Marketing Officer,
Kimberly-Clark Corporation – February
2005 to September 2005
|
||||
|
Chief Executive Officer, Mosaic InfoForce –
March 2003 to February 2005
|
||||
|
W. Bryan Pugh
|
46
|
Vice President
|
||
|
Vice President since February 2009
|
||||
|
Chief Retail Operations Officer, Fresh & Easy
Neighborhood Markets, USA, Tesco PLC –
March 2005 to December
2008
|
||||
|
Chief Operations Officer, Tesco Lotus Stores,
Thailand, Tesco PLC – May 2001 to February 2005
|
||||
|
Mia M. Scholz
|
43
|
Vice President, Controller and
Chief Accounting Officer
|
||
|
Vice President since October 2007
|
|
|||
|
Controller and Chief Accounting Officer since
January 2004
|
||||
|
Divisional Vice President – January 2004 to
October 2007
|
||||
|
Director, Internal Audit – November 1999 to
January 2004
|
||||
|
|
||||
|
John W. Spina
|
50
|
Vice President
|
||
|
Vice President since April 2007
|
||||
|
Treasurer – April 2007 to August 2009
|
||||
|
Vice President, Operations – April 2005 to
April 2007
|
||||
|
Director, Drug Store Administration – April
2003 to April 2005
|
||||
|
David A. Van Howe
|
51
|
Vice President
|
||
|
Vice President since April 2007
|
||||
|
Divisional Vice President – January 2004 to
April 2007
|
||||
|
Denise K. Wong
|
51
|
Vice President
|
||
|
Vice President since May 2007
|
||||
|
Chief Information Officer – May 2007 to
October 2009
|
||||
|
Divisional Vice President December 2001 to
May 2007
|
||||
|
Robert G. Zimmerman
|
57
|
Vice President
|
||
|
Vice President since September 2007
|
||||
|
Vice President and Chief Financial Officer,
Walgreens Health Services – September
2001 to September 2007
|
||||
|
Jason M. Dubinsky
|
36
|
Treasurer
|
||
|
Treasurer since August 2009
|
||||
|
Vice President, Investment Banking, The
Goldman Sachs Group, Inc. – March 2006
to April 2009
|
||||
|
Vice President, Investment Banking, Lehman
Brothers, Inc. – January 2003 to March
2006
|
||||
|
Chester G. Young
|
64
|
General Auditor
|
||
|
Divisional Vice President since January 1995
|
||||
Stewart B. Wasson, Vice President, Operations, is Gregory D. Wasson’s brother.
PART II
|
Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
|
The company's common stock is listed on the New York Stock Exchange, Chicago Stock Exchange and The Nasdaq Stock Market LLC under the symbol WAG. As of September 30, 2009 there were approximately 94,722 record holders of company common stock.
The range of the sales prices of the company's common stock by quarters during the years ended August 31, 2009 and August 31, 2008 are incorporated herein by reference to the caption "Common Stock Prices" on page 21 of the 2009 Annual Report.
The company's cash dividends per common share during the two fiscal years ended August 31 are as follows:
|
Quarter Ended
|
2009
|
2008
|
||||||
|
November
|
$ | .1125 | $ | .0950 | ||||
|
February
|
.1125 | .0950 | ||||||
|
May
|
.1125 | .0950 | ||||||
|
August
|
.1375 | .1125 | ||||||
|
Fiscal Year
|
$ | .4750 | $ | .3975 | ||||
The following table provides information about purchases by the company during the quarter ended August 31, 2009 of equity securities that are registered by the company pursuant to Section 12 of the Exchange Act:
|
Issuer Purchases of Equity Securities
|
||||||||||||||||
|
Period
|
Total Number of Shares Purchased (1)
|
Average Price Paid per Share
|
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2)
|
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs (2)
|
||||||||||||
|
06/01/2009 - 06/30/2009
|
- | - | - | $ | 655,123,821 | |||||||||||
|
07/01/2009- 07/31/2009
|
- | - | - | $ | 655,123,821 | |||||||||||
|
08/01/2009-08/31/2009
|
4,500,000 | $ | 30.9654 | - | $ | 655,123,821 | ||||||||||
|
Total
|
4,500,000 | $ | 30.9654 | - | $ | 655,123,821 | ||||||||||
|
(1)
|
The company repurchased an aggregate of 4,500,000 shares of its common stock in open-market transactions to satisfy the requirements of the company's employee stock purchase and option plans, as well as the company's Nonemployee Director Stock Plan. These share repurchases were not made pursuant to a publicly announced repurchase
plan or program.
|
|
(2)
|
On January 10, 2007, the Board of Directors approved a stock repurchase program ("2007 repurchase program"), pursuant to which up to $1,000 million of the company's common stock may be purchased prior to the expiration date of the program on January 10, 2011. The total remaining authorization under the repurchase program was $655,123,821
as of August 31, 2009. On October 14, 2009 the Board of Directors approved a new stock repurchase program (“2009 repurchase program”) which replaced the 2007 repurchase program. The 2009 repurchase program authorizes the repurchase of up to $2,000 million of the company’s common stock prior to the expiration date of the program on December 31, 2013.
|
Item 6.
Selected Financial Data
The information in response to this item is incorporated herein by reference to the caption "Five-Year Summary of Selected Consolidated Financial Data" on page 1 of the 2009 Annual Report.
|
Management's Discussion and Analysis of Financial Condition and Results of Operations
|
The information in response to this item is incorporated herein by reference to the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" on pages 2 through 7 of the 2009 Annual Report.
Item 7A.
Qualitative and Quantitative Disclosures about Market Risk
In July 2009, we entered into five interest rate swap transactions converting our $1,300 million 4.875% fixed rate bonds to a floating interest rate tied to the one month LIBOR plus a constant spread. These financial instruments are sensitive to changes in interest rates. On August 31, 2009, we had $1,047 million
in long-term debt obligations that had fixed interest rates. A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense by approximately $13 million.
|
Financial Statements and Supplementary Data
|
See Item 15.
|
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
|
None.
|
Controls and Procedures
|
Based on their evaluation as of August 31, 2009 pursuant to Exchange Act Rule 13a-15(b), the company's management, including its Chief Executive Officer and Chief Financial Officer, conclude the company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-15(e)) are effective.
Management's report on internal control and the attestation report of Deloitte & Touche LLP, the company's independent registered public accounting firm, are included in our 2009 Annual Report and are incorporated in this Item 9A by reference.
In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by the company's management, including its Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended August 31, 2009 were identified
that have materially affected, or are reasonably likely to materially affect, the company's internal control over financial reporting.
|
Other Information
|
None.
PART III
|
Directors, Executive Officers and Corporate Governance
|
The information required by Item 10, with the exception of the information relating to the executive officers of the company, which is presented in Part I above under the heading "Executive Officers of the Registrant," is incorporated herein by reference to the following sections of the company's 2009 Proxy Statement: Proposal
1, Election of Directors; Information Concerning Corporate Governance, the Board of Directors and its Committees; and Section 16(a) Beneficial Ownership Reporting Compliance.
|
Executive Compensation
|
The information required by Item 11 is incorporated herein by reference to the following sections of the company's 2009 Proxy Statement: Director Compensation; and Executive Compensation.
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|
The information required by Item 12 is incorporated herein by reference to the following sections of the company's 2009 Proxy Statement: Security Ownership of Certain Beneficial Owners; and Management and Equity Plan Information.
|
Certain Relationships and Related Transactions and Director Independence
|
The information required by Item 13 is incorporated herein by reference to the following sections of the company's 2009 Proxy Statement: Certain Relationships and Related Party Transactions; and Information Concerning Corporate Governance, the Board of Directors and its Committees.
|
Principal Accounting Fees and Services
|
The information required by Item 14 is incorporated herein by reference to the following sections of the company's 2009 Proxy Statement: Independent Registered Public Accounting Firm Fees and Services.
PART IV
|
Exhibits and Financial Statement Schedules
|
|
(a)
|
Documents filed as part of this report:
|
|
|
(1)
|
The following financial statements, supplementary data, and report of independent public accountants appearing in the 2009 Annual Report are incorporated herein by reference.
|
|
2009 Annual Report Page Number
|
|
|
Consolidated Statements of Earnings and Shareholders' Equity for the years ended August 31, 2009, 2008 and 2007
|
8 – 9
|
|
Consolidated Balance Sheets at August 31, 2009 and 2008
|
10
|
|
Consolidated Statements of Cash Flows for the years ended August 31, 2009, 2008 and 2007
|
11
|
|
Notes to Consolidated Financial Statements
|
12 – 20
|
|
Management's Report on Internal Control
|
22
|
|
Report of Independent Registered Public Accounting Firm
|
22
|
|
|
(2)
|
The following financial statement schedule and related report of the independent registered public accounting firm is included herein.
|
|
10-K Page Number
|
|
|
Schedule II Valuation and Qualifying Accounts
|
12
|
|
Report of Independent Registered Public Accounting Firm
|
13
|
Schedules I, III, IV and V are not submitted because they are not applicable or not required or because the required information is included in the Financial Statements in (1) above or notes thereto.
Other Financial Statements -
Separate financial statements of the registrant have been omitted because it is primarily an operating company, and all of its subsidiaries are included in the consolidated financial statements.
|
|
(3)
|
Exhibits 10.1 through 10.59 constitute management contracts or compensatory plans or arrangements required to be filed as exhibits pursuant to Item 15(b) of this Form 10-K.
|
|
(b)
|
Exhibits
|
|
2.1
|
Agreement and Plan of Merger, dated as of July 2, 2007, by and among Walgreen Co., Bison Acquisition Sub Inc. and Option Care, Inc., filed with the Securities and Exchange Commission on July 3, 2007 as Exhibit 2.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
2.2
|
Agreement and Plan of Merger dated March 14, 2008 by and among Walgreen Co., Putter Acquisition Sub, Inc. and I-trax, Inc., filed with the Securities and Exchange Commission on March 17, 2008 as Exhibit 2.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
3.1
|
Articles of Incorporation of Walgreen Co., as amended, filed with the Securities and Exchange Commission as Exhibit 3(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1999 (File No. 1-00604), and incorporated by reference herein.
|
|
|
3.2
|
Amended and Restated By-Laws of Walgreen Co., as amended effective as of September 1, 2008, filed with the Securities and Exchange Commission on September 5, 2008 as Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
4.1
|
Form of 4.875% Note due 2013, filed with the Securities and Exchange Commission on July 17, 2008 as Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
4.2
|
Form of 5.25% Note due 2019, filed with the Securities and Exchange Commission on January 13, 2009 as Exhibit 4.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
4.3
|
Form of Indenture between Walgreen Co. and Wells Fargo Bank, National Association, filed with the Securities and Exchange Commission on July 14, 2008 as Exhibit 4.3 to the Walgreen Co.’s registration statement on Form S-3ASR (File No. 333-152315), and incorporated by reference herein.
|
|
|
10.1
|
Top Management Long-Term Disability Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1990 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.2
|
Executive Short-Term Disability Plan Description, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1990 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.3
|
Walgreen Co. Management Incentive Plan (as amended and restated effective September 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.3 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.4
|
Walgreen Co. Long-Term Performance Incentive Plan (amendment and restatement of the Walgreen Co. Restricted Performance Share Plan), filed with the Securities and Exchange Commission on January 11, 2007 as Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.5
|
Walgreen Co. Long-Term Performance Incentive Plan Amendment No. 1 (effective January 10, 2007), filed with the Securities and Exchange Commission as Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2007 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.6
|
Walgreen Co. Executive Stock Option Plan (effective January 11, 2006), as amended and restated, filed with the Securities and Exchange Commission on January 17, 2006 as Exhibit 10.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.7
|
Walgreen Co. Executive Stock Option Plan Amendment No. 1 (effective October 11, 2006), filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.8
|
Walgreen Co. Executive Stock Option Plan Amendment No. 2 (effective September 1, 2007), filed with the Securities and Exchange Commission as Exhibit 10(e)(iii) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2007, and incorporated by reference herein.
|
|
|
10.9
|
Form of Stock Option Agreement (Grades 12 through 17), filed with the Securities and Exchange Commission as Exhibit 10(e)(ii) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.10
|
Form of Stock Option Agreement (Grades 18 and above), filed with the Securities and Exchange Commission as Exhibit 10(e)(iii) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2004 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.11
|
Form of Stock Option Agreement (Grades 12 through 17) (effective September 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.11 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein..
|
|
|
10.12
|
Form of Stock Option Agreement (Grades 18 and above) (effective September 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.12 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.13
|
Form of Restricted Stock Unit Award Agreement (effective September 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.13 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.14
|
Form of Performance Share Contingent Award Agreement (effective September 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.14 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.15
|
Form of Restricted Stock Award Agreement (effective June 2008), filed with the Securities and Exchange Commission as Exhibit 10.15 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.16
|
Walgreen Co. 1986 Director’s Deferred Fee/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1986 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.17
|
Walgreen Co. 1987 Director’s Deferred Fee/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1986 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.18
|
Walgreen Co. 1988 Director’s Deferred Fee/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1987 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.19
|
Walgreen Co. 1992 Director’s Deferred Retainer Fee/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.20
|
Walgreen Co. 1986 Executive Deferred Compensation/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1986 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.21
|
Walgreen Co. 1988 Executive Deferred Compensation/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1987 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.22
|
Amendments to Walgreen Co. 1986 and 1988 Executive Deferred Compensation/Capital Accumulation Plans, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1988 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.23
|
Walgreen Co. 1992 Executive Deferred Compensation/Capital Accumulation Plan Series 1, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.24
|
Walgreen Co. 1992 Executive Deferred Compensation/Capital Accumulation Plan Series 2, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1992 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.25
|
Walgreen Co. 1997 Executive Deferred Compensation/Capital Accumulation Plan Series 1, filed with the Securities and Exchange Commission as Exhibit 10(c) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1997 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.26
|
Walgreen Co. 1997 Executive Deferred Compensation/Capital Accumulation Plan Series 2, filed with the Securities and Exchange Commission as Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1997 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.27
|
Walgreen Co. 2001 Executive Deferred Compensation/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10(g) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2001 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.28
|
Walgreen Co. 2002 Executive Deferred Compensation/Capital Accumulation Plan, filed with the Securities and Exchange Commission as Exhibit 10(g) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2002 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.29
|
Walgreen Co. 2006 Executive Deferred Compensation/Capital Accumulation Plan (effective January 1, 2006), filed with the Securities and Exchange Commission as Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2005 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.30
|
Share Walgreens Stock Purchase/Option Plan (effective October 1, 1992), as amended, filed with the Securities and Exchange Commission as Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.31
|
Share Walgreens Stock Purchase/Option Plan Amendment No. 4 (effective July 15, 2005), as amended, filed with the Securities and Exchange Commission as Exhibit 10(h)(ii) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2005 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.32
|
Share Walgreens Stock Purchase/Option Plan Amendment No. 5 (effective October 11, 2006), filed with the Securities and Exchange Commission as Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.33
|
Walgreen Select Senior Executive Retiree Medical Expense Plan, filed with the Securities and Exchange Commission as Exhibit 10(j) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1996 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.34
|
Walgreen Select Senior Executive Retiree Medical Expense Plan Amendment No. 1 (effective August 1, 2002), filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.35
|
Walgreen Co. Profit-Sharing Restoration Plan (as restated effective January 1, 2003), filed with the Securities and Exchange Commission as Exhibit 10(b) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.36
|
Walgreen Co. Profit-Sharing Restoration Plan Amendment No. 1 (effective January 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10.36 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2008 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.37
|
Walgreen Co. Retirement Plan for Outside Directors, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1989 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.38
|
Walgreen Section 162(m) Deferred Compensation Plan (effective October 12, 1994), filed with the Securities and Exchange Commission as Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 1994 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.39
|
Walgreen Section 162(m) Deferred Compensation Plan Amendment No. 1 (effective July 9, 2003), filed with the Securities and Exchange Commission as Exhibit 10(n) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.40
|
Walgreen Section 162(m) Deferred Compensation Plan Amendment No. 2 (effective January 1, 2008), filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2007 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.41
|
Walgreen Co. Nonemployee Director Stock Plan, as amended and restated (effective January 14, 2004), filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 29, 2004 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.42
|
Walgreen Co. Nonemployee Director Stock Plan Amendment No. 1 (effective October 12, 2005), filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2005 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.43
|
Walgreen Co. Nonemployee Director Stock Plan Amendment No. 2 (effective October 11, 2006), filed with the Securities and Exchange Commission as Exhibit 10(f) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.44
|
Walgreen Co. Option 3000 Plan (effective May 2, 2000), filed with the Securities and Exchange Commission as Exhibit 10(e) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.45
|
Walgreen Co. Option 3000 Plan Amendment No. 1 (effective October 11, 2006), filed with the Securities and Exchange Commission as Exhibit 10(d) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.46
|
Walgreen Co. Broad-Based Stock Option Plan (effective July 10, 2002), filed with the Securities and Exchange Commission as Exhibit 10(p) to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 2002 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.47
|
Walgreen Co. Broad-Based Employee Stock Option Plan Amendment No. 1 (effective April 1, 2003), filed with the Securities and Exchange Commission as Exhibit 10(c) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended May 31, 2003 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.48
|
Walgreen Co. Broad-Based Employee Stock Option Plan Amendment No. 2 (effective October 11, 2006), filed with the Securities and Exchange Commission as Exhibit 10(e) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended November 30, 2006 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.49
|
Form of Memorandum Summarizing Executive Retirement Benefits, filed with the Securities and Exchange Commission as Exhibit 10(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2005 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.50
|
Form of Change of Control Employment Agreements, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Current Report on Form 8-K dated October 18, 1988 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.51
|
Amendment to Employment Agreements adopted July 12, 1989, filed with the Securities and Exchange Commission as Exhibit 10 to Walgreen Co.’s Annual Report on Form 10-K for the fiscal year ended August 31, 1989 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.52
|
Separation and Release Agreement entered into between Walgreen Co. and Trent E. Taylor, dated February 27, 2008, filed with the Securities and Exchange Commission on March 4, 2008 as Exhibit 99.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.53
|
Retirement and Non-Competition Agreement effective as of October 10, 2008 between Jeffrey A. Rein and Walgreen Co., filed with the Securities and Exchange Commission on October 17, 2008 as Exhibit 99.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.54
|
Executive Stock Option Plan – Stock Option Agreement made as of October 10, 2008 between Alan G. McNally and Walgreen Co, filed with the Securities and Exchange Commission as Exhibit 10.8 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008 (File No. 1-00604), and incorporated by reference
herein.
|
|
|
10.55
|
Long-Term Performance Incentive – Plan Restricted Stock Unit Award Agreement made as of October 10, 2008 between Alan G. McNally and Walgreen Co., filed with the Securities and Exchange Commission as Exhibit 10.9 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2008 (File No. 1-00604), and
incorporated by reference herein.
|
|
|
10.56
|
Form of Amendment to Restricted Stock Unit Award Agreement (effective January 1, 2009), filed with the Securities and Exchange Commission as Exhibit 10.1 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.57
|
Form of Amendment to Change of Control Employment Agreements (effective January 1, 2009), filed with the Securities and Exchange Commission as Exhibit 10.2 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February 28, 2009 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.58
|
Amendment to the Walgreen Co. 1986, 1988, 1992 (Series 1), 1992 (Series 2), 1997 (Series 1), 1997 (Series 2), 2001 and 2002 Executive Deferred Compensation/Capital Accumulation Plans, filed with the Securities and Exchange Commission as Exhibit 10.3 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended February
28, 2009 (File No. 1-00604), and incorporated by reference herein.
|
|
|
10.59
|
Separation and Release Agreement effective as of March 31, 2009 between Walgreen Co. and William M. Rudolphsen, filed with the Securities and Exchange Commission as Exhibit 10.1 to Walgreen Co.’s Quarterly Report on Form 10-Q for the fiscal quarter ended May 31, 2009 (File No. 1-00604), and incorporated by reference herein.
|
|
|
11.
|
The required information for this Exhibit is contained in the Consolidated Statements of Earnings and Shareholders Equity for the years ended August 31, 2009, 2008 and 2007 and also in the Notes to Consolidated Financial Statements, each appearing in the Annual Report and previously referenced in Part IV, Item 15, Section (a)(1).
|
|
|
12.
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
|
13.
|
Annual Report to shareholders for the fiscal year ended August 31, 2009. This report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is being furnished for the information of the Securities and Exchange Commission and is not deemed to be "filed" as a part of the filing of this
Form 10-K.
|
|
|
21.
|
Subsidiaries of the Registrant.
|
|
|
23.
|
Consent of Independent Registered Accounting Firm.
|
|
|
31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
32.2
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
WALGREEN CO. AND SUBSIDIARIES
SCHEDULE II--VALUATION AND QUALIFYING ACCOUNTS
FOR THE YEARS ENDED AUGUST 31, 2009, 2008 AND 2007
(Dollars in Millions)
|
Classification
|
Balance at Beginning of
Period
|
Additions Charged to Costs and
Expenses
|
Deductions
|
Balance at End
of Period
|
||||||||||||
|
Allowances deducted from receivables for doubtful accounts -
|
||||||||||||||||
|
Year Ended August 31, 2009
|
$ | 96 | $ | 116 | $ | (102 | ) | $ | 110 | |||||||
|
Year Ended August 31, 2008
|
$ | 69 | $ | 88 | $ | (61 | ) | $ | 96 | |||||||
|
Year Ended August 31, 2007
|
$ | 57 | $ | 72 | $ | (60 | ) | $ | 69 | |||||||
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders of Walgreen Co.:
We have audited the consolidated financial statements of Walgreen Co. and Subsidiaries (the "Company") as of August 31, 2009 and 2008, and for each of the three years in the period ended August 31, 2009, and the Company's internal control over financial reporting as of August 31, 2009, and have issued our report thereon dated October 26, 2009
(which report expresses an unqualified opinion and includes an explanatory paragraph related to the adoption of Financial Accounting Standards Board Interpretation No. 48,
Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement No. 109,
and Statement of Financial Accounting Standards No. 158,
Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans
– an amendment of FASB Statements No. 87, 88, 106, and 132(R)
); such consolidated financial statements and report are included in your 2009 Annual Report to Shareholders and are incorporated herein by reference. Our audits also included the consolidated financial statement schedule of the Company listed in Item 15. This consolidated financial statement schedule is the responsibility of the Company's management. Our responsibility is to express an opinion based on our audits.
In our opinion, such consolidated financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
October 26, 2009
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
|
||||||
|
By
|
||||||
|
/s/
|
Wade D. Miquelon
|
Executive Vice President and Chief Financial Officer
|
Date: October 23, 2009
|
|||
|
Wade D. Miquelon
|
||||||
SIGNATURES
Pursuant to the requirements of the Securities and Exchange Act of 1934 this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated.
|
Name
|
Title
|
Date
|
||||
|
/s/
|
Gregory D. Wasson
|
President and Chief Executive Officer
|
October 23, 2009 | |||
|
Gregory D. Wasson
|
(Principal Executive Officer)
|
|||||
|
/s/
|
Wade D. Miquelon
|
Chief Financial Officer
|
October 23, 2009 | |||
|
Wade D. Miquelon
|
(Principal Financial Officer)
|
|||||
|
/s/
|
Mia M. Scholz
|
Vice President and Controller
|
October 23, 2009 | |||
|
Mia M. Scholz
|
(Principal Accounting Officer)
|
|||||
|
/s/
|
Steven A. Davis
|
Director
|
October 23, 2009 | |||
|
Steven A. Davis
|
||||||
|
/s/
|
William C. Foote
|
Director
|
October 23, 2009 | |||
|
William C. Foote
|
||||||
|
/s/
|
Mark P. Frissora
|
Director
|
October 23, 2009 | |||
|
Mark P. Frissora
|
||||||
|
/s/
|
Alan G. McNally
|
Chairman of the Board
|
October 23, 2009 | |||
|
Alan G. McNally
|
||||||
|
/s/
|
Cordell Reed
|
Director
|
October 23, 2009 | |||
|
Cordell Reed
|
||||||
|
/s/
|
Nancy M. Schlichting
|
Director
|
October 23, 2009 | |||
|
Nancy M. Schlichting
|
||||||
|
/s/
|
David Y. Schwartz
|
Director
|
October 23, 2009 | |||
|
David Y. Schwartz
|
||||||
|
/s/
|
Alejandro Silva
|
Director
|
October 23, 2009 | |||
|
Alejandro Silva
|
||||||
|
/s/
|
James A. Skinner
|
Director
|
October 23, 2009 | |||
|
James A. Skinner
|
||||||
|
/s/
|
Marilou M. von Ferstel
|
Director
|
October 23, 2009 | |||
|
Marilou M. von Ferstel
|
||||||
|
/s/
|
C.R. Walgreen III
|
Director
|
October 23, 2009 | |||
|
C.R. Walgreen III
|
INDEX
|
11.
|
The required information for this Exhibit is contained in the Consolidated Statements of Earnings and Shareholders Equity for the years ended August 31, 2009, 2008 and 2007 and also in the Notes to Consolidated Financial Statements, each appearing in the Annual Report and previously referenced in Part IV, Item 15, Section (a)(1).
|
|
|
12.
|
Computation of Ratio of Earnings to Fixed Charges.
|
|
|
13.
|
Annual Report to shareholders for the fiscal year ended August 31, 2009. This report, except for those portions thereof which are expressly incorporated by reference in this Form 10-K, is being furnished for the information of the Securities and Exchange Commission and is not deemed to be "filed" as a part of the filing of this
Form 10-K.
|
|
|
21.
|
Subsidiaries of the Registrant.
|
|
|
23.
|
Consent of Independent Registered Accounting Firm.
|
|
|
31.1
|
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
31.2
|
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|
|
|
32.1
|
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
|
|
32.2
|
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
|
| Fiscal Years Ended August 31, | ||||||||
|
2009
|
2008
|
|||||||
|
Income before income taxes and minority interest
|
$ | 3,164 | $ | 3,430 | ||||
|
Add:
|
||||||||
|
Minority interest
|
- | - | ||||||
|
Fixed charges
|
996 | 842 | ||||||
|
Less: Capitalized interest
|
(16 | ) | (19 | ) | ||||
|
Earnings as defined
|
$ | 4,144 | $ | 4,253 | ||||
|
Interest expense, net of capitalized interest
|
$ | 91 | $ | 18 | ||||
|
Capitalized interest
|
16 | 19 | ||||||
|
Portions of rentals representative of the interest factor
|
889 | 805 | ||||||
|
Fixed charges as defined
|
$ | 996 | $ | 842 | ||||
|
Ratio of earnings to fixed charges
|
4.16 | 5.05 | ||||||
ANNUAL REPORT
FOR THE YEAR ENDED AUGUST, 31, 2009
Walgreen Co. and Subsidiaries
(Dollars in Millions, except per share amounts)
|
Fiscal Year
|
2009
|
2008
|
2007
|
2006
|
2005
|
|||||||||||||||
|
Net Sales
|
$ | 63,335 | $ | 59,034 | $ | 53,762 | $ | 47,409 | $ | 42,202 | ||||||||||
|
Cost of sales (1)
|
45, 722 | 42,391 | 38,518 | 34,240 | 30,414 | |||||||||||||||
|
Gross profit
|
17,613 | 16,643 | 15,244 | 13,169 | 11,788 | |||||||||||||||
|
Selling, general and administrative (1) (2)
|
14,366 | 13,202 | 12,093 | 10,467 | 9,364 | |||||||||||||||
|
Operating income
|
3,247 | 3,441 | 3,151 | 2,702 | 2,424 | |||||||||||||||
|
Other income (expense)
|
(83 | ) | (11 | ) | 38 | 52 | 32 | |||||||||||||
|
Earnings Before Income Tax Provision
|
3,164 | 3,430 | 3,189 | 2,754 | 2,456 | |||||||||||||||
|
Income tax provision
|
1,158 | 1,273 | 1,148 | 1,003 | 896 | |||||||||||||||
|
Net Earnings
|
$ | 2,006 | $ | 2,157 | $ | 2,041 | $ | 1,751 | $ | 1,560 | ||||||||||
|
Per Common Share
|
||||||||||||||||||||
|
Net earnings
|
||||||||||||||||||||
|
Basic
|
$ | 2.03 | $ | 2.18 | $ | 2.04 | $ | 1.73 | $ | 1.53 | ||||||||||
|
Diluted
|
2.02 | 2.17 | 2.03 | 1.72 | 1.52 | |||||||||||||||
|
Dividends declared
|
. 48 | .40 | .33 | .27 | .22 | |||||||||||||||
|
Book value
|
14.54 | 13.01 | 11.20 | 10.04 | 8.77 | |||||||||||||||
|
Non-Current Liabilities
|
||||||||||||||||||||
|
Long-term debt
|
$ | 2,336 | $ | 1,337 | $ | 22 | $ | 3 | $ | 12 | ||||||||||
|
Deferred income taxes
|
265 | 150 | 158 | 141 | 240 | |||||||||||||||
|
Other non-current liabilities
|
1,396 | 1,410 | 1,285 | 1,116 | 986 | |||||||||||||||
|
Assets and Equity
|
||||||||||||||||||||
|
Total assets
|
$ | 25,142 | $ | 22,410 | $ | 19,314 | $ | 17,131 | $ | 14,609 | ||||||||||
|
Shareholders' equity
|
14,376 | 12,869 | 11,104 | 10,116 | 8,890 | |||||||||||||||
|
Return on average shareholders' equity
|
14.7 | % | 18.0 | % | 19.2 | % | 18.4 | % | 18.3 | % | ||||||||||
|
Locations
|
||||||||||||||||||||
|
Year-end (3)
|
7,496 | 6,934 | 5,997 | 5,461 | 4,985 | |||||||||||||||
|
(1)
|
Fiscal 2009 included a pre-tax restructuring and restructuring related charge of $257 million ($.16 per share, diluted), $95 million included in cost of sales and $162 million in selling, general and administrative.
|
|
(2)
|
Fiscal 2008 included a positive pre-tax adjustment of $79 million ($.05 per share, diluted), which corrected for historically over-accruing the company’s vacation liability.
|
|
(3)
|
Locations include drugstores, worksite facilities, home care facilities, specialty pharmacies and mail service facilities.
|
|
|
Introduction
Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise. General merchandise includes, among other things, household items, personal care, convenience foods, beauty care, photofinishing, candy and seasonal items. Customers can have prescriptions filled
in retail pharmacies, as well as through the mail, by telephone and via the Internet. As of August 31, 2009, we operated 7,496 locations in 50 states, the District of Columbia, Guam and Puerto Rico. Total locations do not include 337 convenient care clinics operated by Take Care Health Systems, Inc.
|
Number of Locations
|
||||||||||||
|
Location Type
|
2009
|
2008
|
2007
|
|||||||||
|
Drugstores
|
6,997 | 6,443 | 5,882 | |||||||||
|
Worksite Facilities
|
377 | 364 | 3 | |||||||||
|
Home Care Facilities
|
105 | 115 | 101 | |||||||||
|
Specialty Pharmacies
|
15 | 10 | 8 | |||||||||
|
Mail Service Facilities
|
2 | 2 | 3 | |||||||||
|
Total
|
7,496 | 6,934 | 5,997 | |||||||||
The drugstore industry is highly competitive. In addition to other drugstore chains, independent drugstores and mail order prescription providers, we compete with various other retailers including grocery stores, convenience stores, mass merchants and dollar stores.
The long-term outlook for prescription utilization is strong due in part to the aging population and the continued development of innovative drugs that improve quality of life and control health care costs. Certain provisions of the Deficit Reduction Act of 2005 seek to reduce federal spending by altering the Medicaid reimbursement
formula for multi-source (i.e., generic) drugs. These changes are expected to result in reduced Medicaid reimbursement rates for prescription drugs. Also, in conjunction with a recently approved class action settlement with two entities that publish the average wholesale price (AWP) of pharmaceuticals, the methodology used to calculate the AWP, a pricing reference widely used in the pharmacy industry, reduced the AWP for many brand-name prescription drugs effective September 26, 2009. The
company has reached understandings with most of its third-party payors to adjust reimbursements to correct for this change in methodology, but state Medicaid programs that utilize AWP as a pricing reference have not taken action to make similar adjustments, which is expected to result in reduced Medicaid reimbursement levels in fiscal 2010. In addition, the federal government has been considering proposals to reform the U.S. heath care system. These proposals may increase government involvement
in health care, increase regulation of pharmacy services, result in changes to pharmacy reimbursement rates or otherwise change the way we do business. The effect of these proposals could have an impact on our results of operations.
Front-end sales have continued to grow due to new store openings and strengthening core categories, such as over-the-counter non-prescription drugs, household items, convenience foods and personal care products. Walgreens strong name recognition continues to drive private brand sales, which are included in these core categories.
We continue to expand into new markets and increase penetration in existing markets. To support our growth, we are investing in prime locations, technology and customer service initiatives. Retail organic growth continues to be our primary growth vehicle; however, consideration is given to retail and other acquisitions
that provide unique opportunities and fit our business strategies, such as the acquisitions of select locations of Drug Fair to our drugstore operations and McKesson Specialty and IVPCARE to our specialty pharmacy operations.
Restructuring Charges
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, realignment of pharmacy operations and transforming the community pharmacy. In conjunction with these initiatives approximately $300 million to $400 million of pre-tax costs were anticipated over fiscal 2009 and 2010.
As of August 31, 2009, we have recorded the following pre-tax charges associated with our restructuring initiatives within the Consolidated Statement of Earnings (in millions):
|
Twelve Months Ended
August 31, 2009
|
||||
|
Severance and other benefits
|
$ | 74 | ||
|
Project cancellation settlements
|
7 | |||
|
Inventory charges
|
63 | |||
|
Restructuring expense
|
144 | |||
|
Consulting
|
76 | |||
|
Restructuring and restructuring related costs
|
$ | 220 | ||
|
Cost of sales
|
$ | 63 | ||
|
Selling, general and administrative expenses
|
157 | |||
| $ | 220 | |||
The $74 million of severance and other benefits includes the charges associated with 432 employees who participated in the voluntary separation program and 265 employees who were involuntarily separated from the company. Prior to their last day of service, 143 people who were previously notified that their positions had been eliminated
subsequently found open positions within the company. All severance and benefits associated with these people have been reversed.
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. In addition, as a part of our restructuring efforts we sold an incremental amount of inventory below traditional retail prices. The dilutive effect of these
sales on gross profit for the year ended August 31, 2009, was $32 million.
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 5,000 to 5,500 stores. Fiscal 2009 included 202 stores; we plan to enhance approximately 2,600 stores in fiscal 2010 and the remaining stores in fiscal 2011. Although we will continue to refine our estimates as the rollout progresses, based on our current experience with the first 202 stores, we expect the total cost to be $30 thousand to $50 thousand per store. As
of August 31, 2009, we incurred selling, general and administrative expenses of $5 million related to this program.
We incurred pre-tax costs of $257 million ($220 million of restructuring and restructuring related costs, $32 million of gross profit dilution and $5 million of CCR store remodel costs) in fiscal 2009. We anticipate approximately $140 million of pre-tax restructuring and restructuring related costs and gross profit dilution
in fiscal 2010. Additionally, we anticipate between $78 million and $130 million in pre-tax CCR store remodel costs in fiscal 2010.
2
As of August 31, 2009, we have recorded the following balances within the accrued expenses and other liabilities section of our Consolidated Balance Sheets (in millions):
|
August 31, 2008
Reserve Balance
|
Charges
|
Cash Payments
|
August 31, 2009 Reserve Balance
|
|||||||||||||
|
Severance and other benefits
|
$ | - | $ | 82 | $ | 78 | $ | 4 | ||||||||
We have realized savings related to these initiatives of approximately $250 million for the year. The savings, which are included in selling, general and administrative expenses, are primarily the result of reduced store labor and other position reductions. We anticipate achieving net annual pre-tax savings of approximately
$500 million in fiscal 2010 and $1 billion by fiscal 2011 related to these initiatives.
Operating Statistics
|
Percentage Increases/(Decreases)
|
||||||||||||
|
Fiscal Year
|
2009
|
2008
|
2007
|
|||||||||
|
Net Sales
|
7.3 | 9.8 | 13.4 | |||||||||
|
Net Earnings
|
(7.0 | ) | 5.7 | 16.6 | ||||||||
|
Comparable Drugstore Sales
|
2.0 | 4.0 | 8.1 | |||||||||
|
Prescription Sales
|
7.8 | 9.7 | 14.7 | |||||||||
|
Comparable Drugstore Prescription Sales
|
3.5 | 3.9 | 9.5 | |||||||||
|
Front-End Sales
|
6.3 | 10.0 | 12.2 | |||||||||
|
Comparable Drugstore Front-End Sales
|
(0.5 | ) | 4.2 | 5.8 | ||||||||
|
Gross Profit
|
5.8 | 9.2 | 15.8 | |||||||||
|
Selling, General and Administrative Expenses
|
8.8 | 9.2 | 15.5 | |||||||||
|
Percent to Net Sales
|
||||||||||||
|
Fiscal Year
|
2009
|
2008
|
2007
|
|||||||||
|
Gross Margin
|
27.8 | 28.2 | 28.4 | |||||||||
|
Selling, General and Administrative Expenses
|
22.7 | 22.4 | 22.5 | |||||||||
|
Other Statistics
|
||||||||||||
|
Fiscal Year
|
2009
|
2008
|
2007
|
|||||||||
|
Prescription Sales as a % of Net Sales
|
65.3 | 64.9 | 65.0 | |||||||||
|
Third-Party Sales as a % of Total Prescription Sales
|
95.4 | 95.3 | 94.8 | |||||||||
|
Total Number of Prescriptions (in millions)
|
651 | 617 | 583 | |||||||||
|
30-Day Equivalent Prescriptions (in millions) *
|
723 | 677 | 636 | |||||||||
|
Total Number of Locations
|
7,496 | 6,934 | 5,997 | |||||||||
|
* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
|
Results of Operations
Fiscal year 2009 net earnings decreased 7.0% to $2,006 million, or $2.02 per share (diluted), versus last year's earnings of $2,157 million, or $2.17 per share (diluted). The reduction in net earnings resulted from increased selling, general and administrative expenses that included restructuring and restructuring related costs,
reduced gross margins and higher interest expense, which were partially offset by improved sales. Additionally, the prior year was benefited by a positive adjustment of $79 million, which corrected for historically over-accruing the company’s vacation liability.
Net sales increased by 7.3% to $63,335 million in fiscal 2009 compared to increases of 9.8% in 2008 and 13.4% in 2007. 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. Sales in comparable
drugstores were up 2.0% in 2009, 4.0% in 2008 and 8.1% in 2007. Comparable drugstores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. We operated 7,496 locations (6,997 drugstores) as of August
31, 2009, compared to 6,934 (6,443 drugstores) at August 31, 2008, and 5,997 (5,882 drugstores) at August 31, 2007.
Prescription sales increased 7.8% in 2009, 9.7% in 2008 and 14.7% in 2007. Comparable drugstore prescription sales were up 3.5% in 2009 compared to increases of 3.9% in 2008 and 9.5% in 2007. Prescription sales as a percent of total net sales were 65.3% in 2009, 64.9% in 2008 and 65.0% in 2007. The effect of
generic drugs introduced during the fiscal year, which replaced higher priced retail brand name drugs, reduced prescription sales by 3.0% for 2009, 3.5% for 2008 and 4.2% for 2007, while the effect on total sales was 1.9% for 2009, 2.2% for 2008 and 2.5% for 2007. Third-party sales, where reimbursement is received from managed care organizations, the government or private insurers, were 95.4% of prescription sales in 2009, 95.3% in 2008 and 94.8% in 2007. The total number of prescriptions
filled was approximately 651 million in 2009, 617 million in 2008 and 583 million in 2007. Adjusted to 30-day equivalents, prescriptions filled were 723 million in 2009, 677 million in 2008 and 636 million in 2007.
Front-end sales increased 6.3% in 2009, 10.0% in 2008 and 12.2% in 2007. Front-end sales were 34.7% of total sales in fiscal 2009, 35.1% in 2008 and 35.0% in 2007. The increase is due in part to new store openings and improved sales dollars related to non-prescription drugs, household items, convenience foods, and personal
care products. Comparable drugstore front-end sales decreased 0.5% in 2009 compared to increases of 4.2% and 5.8% in fiscal years 2008 and 2007, respectively. The decrease in fiscal 2009 comparable front-end sales was primarily due to seasonal items and photofinishing.
Gross margin as a percent of sales decreased to 27.8% in 2009 from 28.2% in 2008. Overall margins were negatively impacted by non-retail businesses, including specialty pharmacy, which have lower margins and are becoming a greater part of the total business, lower front-end margins due to product mix, a higher provision for LIFO
and restructuring and restructuring related costs. This was partially offset by an improvement in retail pharmacy margins, which were positively influenced by generic drug sales, but to a lesser extent negatively influenced by the growth in third party pharmacy sales. Gross margin as a percent of sales was 28.2% in 2008 as compared to 28.4% in 2007. Overall margins were negatively impacted by non-retail businesses, but partially offset by improvements in retail pharmacy margins. Front-end
margins remained essentially flat from 2007 as a positive shift in sales mix was offset by increased promotions.
We use the last-in, first-out (LIFO) method of inventory valuation. The LIFO provision is dependent upon inventory levels, inflation rates and merchandise mix. The effective LIFO inflation rates were 2.00% in 2009, 1.28% in 2008 and 1.04% in 2007, which resulted in charges to cost of sales of $172 million in 2009, $99
million in 2008 and $69 million in 2007. Inflation on prescription inventory was 2.40% in 2009, 2.65% in 2008 and .71% in 2007. In all three fiscal years, we experienced deflation in some non-prescription inventories.
Gross profit increased 5.8% in 2009 compared to increases of 9.2% in 2008 and 15.8% in 2007. The decrease in the rate of growth in the current year is due to lower sales growth and lower front-end gross margins. The decrease in 2008 from 2007 was due to lower sales growth and lower gross profit contribution from generic
versions of the name brand drugs Zocor and Zoloft.
3
S
elling, general and administrative expenses were 22.7% of sales in fiscal 2009, 22.4% in fiscal 2008 and 22.5% in fiscal 2007. As a percentage of sales, the increase in the current year was due to higher restructuring and restructuring related expenses
and occupancy. Additionally, in fiscal 2008 we recorded a positive adjustment of $79 million, which corrected for historically over-accruing the company’s vacation liability. These items were partially offset by restructuring savings, primarily in store payroll. The decrease in fiscal 2008 as compared to fiscal 2007 was due to the positive vacation adjustment and lower provisions for legal matters, partially offset by higher store level expenses as a percentage of sales.
Selling, general and administrative expenses increased 8.8% in fiscal 2009, 9.2% in fiscal 2008 and 15.5% in fiscal 2007. The decrease in the rate of growth is attributed to restructuring savings, primarily in store payroll. Store level salaries increased at a lower rate of growth than sales, contrary to the prior years
where the rate of growth was higher than sales. Partially offsetting the current year decrease was restructuring and restructuring related expenses, which increased the rate of growth by 1.2 percentage points. Additionally, fiscal 2008 results included a positive adjustment which corrected for historically over-accruing the company’s vacation liability. Lower provisions for legal matters and insurance also contributed to the improvement for fiscal 2008 over fiscal 2007.
Interest was a net expense of $83 million and $11 million for fiscal 2009 and 2008, respectively, as compared to net interest income of $38 million for fiscal 2007. The change in net interest over the prior year is attributed to the issuance of long-term debt. Interest expense for the current year is net of $16 million
that was capitalized to construction projects. Last year, we capitalized $19 million of interest to construction projects. The increase in net interest expense from fiscal 2007 to fiscal 2008 was due to higher short-term borrowings, the issuance of long-term debt and lower short-term investments for sale.
The effective income tax rate was 36.6% for fiscal 2009, 37.1% for 2008 and 36.0% for 2007. Fiscal 2009 reflects an increase in federal permanent deductions as compared to the prior year. Fiscal 2007 reflects the favorable resolution of a multiyear state tax matter and a lower effective state tax rate.
Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management's prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation from
those judgments and estimates would not have a material impact on our consolidated financial position or results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future statements. Some of the more significant estimates include goodwill and other intangible asset impairment, allowance for doubtful accounts,
vendor allowances, liability for closed locations, liability for insurance claims, cost of sales and income taxes. We use the following methods to determine our estimates:
Goodwill and other intangible asset impairment
– Goodwill and other indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than
not reduce the fair value of a reporting unit below its carrying value. As part of our impairment analysis for each reporting unit, we engaged a third-party appraisal firm to assist in the determination of estimated fair value for each unit. This determination included estimating the fair value using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results,
economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping.
The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires us to make significant estimates and assumptions. Theses estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group
companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures. The allocation requires several analyses to determine fair value of assets and liabilities including, among other, purchased prescription files, customer relationships and trade names. Although we believe our estimates of fair value are reasonable, actual
financial results could fifer from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both. We also compared the sum of the estimated fair values of the reporting units to the company’s total value as implied by the market value of the
company’s equi9ty and debt securities. This comparison indicated that, in total, our assumptions and estimates were reasonable. However, future declines in the overall market value of the company’s equity and debt securities may indicate that the fair value of one or more reporting units has declined below its carrying value.
We have not made any material changes to the method of evaluating goodwill and intangible asset impairments during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment.
Allowance for doubtful accounts
– The provision for bad debt is based on both specific receivables and historic write-off percentages. We have not made any material changes to the method of estimating our allowance for doubtful accounts during the last three years. Based
on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.
Vendor allowances
– Vendor allowances are principally received as a result of purchase levels, sales or promotion of vendors' products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise
is sold. Those allowances received for promoting vendors' products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent of advertising incurred, with the excess treated as a reduction of inventory costs. We have not made any material changes to the method of estimating our vendor allowances during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be
a material change in the estimates or assumptions used to determine vendor allowances.
Liability for 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. We have not made any material changes to the method of estimating our liability
for closed locations during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
4
Liability for insurance claims
– The liability for insurance claims is recorded based on estimates for claims incurred and is not discounted. The provisions are estimated in part by considering historical claims experience, demographic factors and other actuarial assumptions. We
have not made any material changes to the method of estimating our liability for insurance claims during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
Cost of sales
– Drugstore cost of sales is derived based on point-of-sale scanning information with an estimate for shrinkage and adjusted based on periodic inventories. Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method. We
have not made any material changes to the method of estimating cost of sales during the last three years. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine cost of sales.
Income taxes
– We are subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state and local and foreign tax authorities raise questions regarding our tax filing positions, including the timing and amount of deductions
and the allocation of income among various tax jurisdictions. In evaluating the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. Adjustments are made to our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the return containing the tax position
or when more information becomes available. Our liability for unrecognized tax benefits, including accrued penalties and interest, is included in other long-term liabilities on our consolidated balance sheets and in income tax expense in our consolidated statements of earnings.
In determining our provision for income taxes, we use an annual effective income tax rate based on full-year income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. Discrete events such as audit settlements or
changes in tax laws are recognized in the period in which they occur.
We adopted the provisions of Financial Accounting Standards Board (FASB) Interpretation No. (FIN) 48,
Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109,
effective September 1, 2007. The adoption of FIN 48 resulted in the reclassification
of certain tax liabilities from current to long-term and a decrease in our liability for unrecognized tax benefits, which was accounted for as an increase to the August 31, 2007, retained earnings balance. Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimate or assumptions used to determine income taxes.
Liquidity and Capital Resources
Cash and cash equivalents were $2,087 million at August 31, 2009, compared to $443 million at August 31, 2008. Short-term investment objectives are to minimize risk, maintain liquidity and maximize after-tax yields. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments
are principally in U.S. Treasury market funds and Treasury Bills.
Net cash provided by operating activities improved $1,072 million to $4,111 million compared to $3,039 million a year ago. The increase is primarily attributable to working capital improvements. For the year, we generated $728 million in cash flow from working capital improvements, primarily through better inventory management. Working
capital improvements were partially offset by lower net earnings. Last year, working capital was a use of $87 million in cash. Cash provided by operations is the principal source of funds for expansion, acquisitions, remodeling programs, dividends to shareholders and stock repurchases. In fiscal 2009 and 2008, we supplemented cash provided by operations with long-term debt.
Net cash used for investing activities was $2,776 million versus $2,818 million last year. Using the proceeds from our issuance of long-term debt, we invested $2,600 million in short-term Treasury Bills, of which $500 million remained outstanding at August 31, 2009. Additions to property and equipment were $1,927 million
compared to $2,225 million last year. During the year, we added a total of 691 locations (562 net) compared to 1,031 last year (937 net). There were 183 owned locations added during the year and 42 under construction at August 31, 2009, versus 235 owned locations added and 69 under construction as of August 31, 2008.
|
|
Specialty
|
|
||||||||||||||||||||||
|
Drugstores
|
Worksites
|
Home Care
|
Pharmacy
|
Mail Service
|
Total
|
|||||||||||||||||||
|
August 31, 2007
|
5,882 | 3 | 101 | 8 | 3 | 5,997 | ||||||||||||||||||
|
New/Relocated
|
596 | 4 | 6 | 3 | (1 | ) | 608 | |||||||||||||||||
|
Acquired
|
32 | 362 | 27 | 2 | - | 423 | ||||||||||||||||||
|
Closed/Replaced
|
(67 | ) | (5 | ) | (19 | ) | (3 | ) | - | (94 | ) | |||||||||||||
|
August 31, 2008
|
6,443 | 364 | 115 | 10 | 2 | 6,934 | ||||||||||||||||||
|
New/Relocated
|
556 | 36 | 5 | 5 | - | 602 | ||||||||||||||||||
|
Acquired
|
70 | 3 | 11 | 5 | - | 89 | ||||||||||||||||||
|
Closed/Replaced
|
(72 | ) | (26 | ) | (26 | ) | (5 | ) | - | (129 | ) | |||||||||||||
|
August 31, 2009
|
6,997 | 377 | 105 | 15 | 2 | 7,496 | ||||||||||||||||||
Business acquisitions this year were $405 million versus $620 million in fiscal 2008. Business acquisitions in 2009 included select locations of Drug Fair to our retail drugstore operations; McKesson Specialty and IVPCARE to our specialty pharmacy operations; and selected other assets (primarily prescription files). Business
acquisitions in 2008 included the purchase of I-trax, Inc. and Whole Health Management, operators of worksite health centers, including primary and acute care, wellness, pharmacy and disease management services and health and fitness programming; 20 drugstores from Farmacias El Amal; CuraScript Infusion Pharmacy, Inc., a home infusion services provider; and selected other assets (primarily prescription files).
Capital expenditures for fiscal 2010 are expected to be approximately $1.6 billion, excluding business acquisitions and prescription file purchases. We expect new drugstore organic growth of between 4.5% and 5.0% in fiscal 2010 and between 2.5%and 3.0% annually beginning in 2011. During the current fiscal year we added
a total of 691 locations, of which 626 were new, relocated or acquired drugstores. We are continuing to relocate stores to more convenient and profitable freestanding locations. In addition to new stores, expenditures are planned for distribution centers and technology.
5
Net cash provided by financing activities was $309 million compared to a net cash use of $33 million last year. On January 13, 2009, we issued $1,000 million of 5.25% notes due 2019. The notes were issued at a discount. The net proceeds after deducting the discount, underwriting fees and issuance costs were
$987 million. These proceeds were used to pay down borrowings under our commercial paper program and purchase short-term Treasury Bills. Short-term borrowings paid during the current fiscal year were $70 million as compared to $802 million in the previous year. Shares totaling $279 million were purchased to support the needs of the employee stock plans during the current period as compared to $294 million a year ago. On January 10, 2007, a stock repurchase program (“2007
repurchase program”) of up to $1,000 million was announced, to be executed over four years. No repurchases were made during the current or prior year under this plan.
On October 14, 2009, our Board of Directors approved a long-term capital policy. Our long-term capital policy is to maintain a strong balance sheet that allows for financial flexibility; reinvesting in our core strategies; invest in strategic opportunities that reinforce our core strategies and meet return requirements; and return
surplus cash flow to shareholders in the form of dividends and share repurchases over the long term. In connection with our capital policy, our Board of Directors authorized a new stock repurchase program (“2009 repurchase program”) and set a long-term dividend payout ratio target between 30 and 35 percent. The 2009 repurchase program, which replaced the 2007 repurchase program, allows for the repurchase of up to $2,000 million of the company’s common stock prior to its
expiration on December 31, 2013. In addition, we will continue to repurchase shares to support the needs of the employee stock and option plans. We had proceeds related to employee stock plans of $138 million during the current fiscal year as compared to $210 million a year ago. Cash dividends paid were $446 million during the current fiscal year versus $376 million a year ago.
We had no commercial paper outstanding at August 31, 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 facility, 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 August 31, 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. While we are still able to access these lines of credit, as of August 31, 2009, there were no borrowings outstanding against these credit facilities. We do not expect any borrowings under this facility, together with our outstanding commercial paper, to exceed $1,200 million.
Our current credit ratings are as follows:
|
Rating Agency
|
Long-Term Debt Rating
|
Commercial Paper Rating
|
Outlook
|
|
Moody's
|
A2
|
P-1
|
Stable
|
|
Standard & Poor's
|
A+
|
A-1
|
Negative
|
In assessing our credit strength, both Moody's and Standard & Poor's consider our business model, capital structure, financial policies and financial statements. Our credit ratings impact our borrowing costs, access to capital markets and operating lease costs.
Contractual Obligations and Commitments
The following table lists our contractual obligations and commitments at August 31, 2009 (in millions):
|
Payments Due by Period
|
||||||||||||||||||||
|
Total
|
Less Than 1 Year
|
1-3 Years
|
3-5 Years
|
Over 5 Years
|
||||||||||||||||
|
Operating leases (1)
|
$ | 34,582 | $ | 1,995 | $ | 4,121 | $ | 3,996 | $ | 24,470 | ||||||||||
|
Purchase obligations (2):
|
||||||||||||||||||||
|
Open inventory purchase orders
|
1,477 | 1,477 | - | - | - | |||||||||||||||
|
Real estate development
|
383 | 381 | 2 | - | - | |||||||||||||||
|
Other corporate obligations
|
508 | 287 | 140 | 47 | 34 | |||||||||||||||
|
Long-term debt*
|
2,358 | 10 | 4 | 1,304 | 1,040 | |||||||||||||||
|
Interest payment on long-term debt
|
752 | 113 | 232 | 168 | 239 | |||||||||||||||
|
Insurance*
|
494 | 164 | 154 | 72 | 104 | |||||||||||||||
|
Retiree health*
|
328 | 11 | 24 | 29 | 264 | |||||||||||||||
|
Closed location obligations*
|
99 | 21 | 28 | 16 | 34 | |||||||||||||||
|
Capital lease obligations*
|
40 | 3 | 4 | 3 | 30 | |||||||||||||||
|
Other long-term liabilities reflected on the balance sheet* (3)
|
685 | 52 | 123 | 129 | 381 | |||||||||||||||
|
Total
|
$ | 41,706 | $ | 4,514 | $ | 4,832 | $ | 5,764 | $ | 26,596 | ||||||||||
*Recorded on balance sheet.
|
(1)
|
Amounts for operating leases and capital leases do not include certain operating expenses under these leases such as common area maintenance, insurance and real estate taxes. These expenses for the company's most recent fiscal year were $335 million.
|
|
(2)
|
Purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.
|
|
(3)
|
Includes $58 million ($19 million due in 1-3 years, $30 million due in 3-5 years and $9 million due over 5 years) of unrecognized tax benefits recorded under FIN 48, which we adopted on September 1, 2007.
|
Letters of credit are issued to support purchase obligations and commitments (as reflected on the Contractual Obligations and Commitments table) as follows (in millions):
|
Insurance
|
$ | 265 | ||
|
Inventory obligations
|
69 | |||
|
Real estate development
|
13 | |||
|
Other
|
8 | |||
|
Total
|
$ | 355 |
We have no off-balance sheet arrangements other than those disclosed on the Contractual Obligations and Commitments table and a credit agreement guaranty on behalf of SureScripts-RxHub, LLC. This agreement is described more fully in Note 11 in the Notes to Consolidated Financial Statements.
Both on-balance sheet and off-balance sheet financing are considered when targeting debt to equity ratios to balance the interests of equity and debt (including real estate) investors. This balance allows us to lower our cost of capital while maintaining a prudent level of financial risk.
Recent Accounting Pronouncements
In December 2007, the FASB issued Statement of Financial Accounting Standard (SFAS) No. 141(R),
Business Combinations
. This statement establishes principles and requirements for how the acquirer recognizes and measures identifiable assets acquired, liabilities assumed and
any noncontrolling interest in a business combination. In addition, the statement provides a revised definition of a business, shifts from the purchase method to the acquisition method, expenses acquisition-related transaction costs, recognizes contingent consideration and contingent assets and liabilities at fair value and capitalizes acquired in-process research and development. This statement, which will be effective for the first quarter of fiscal 2010, will be applied prospectively to business
combinations.
We adopted the provisions of SFAS No. 157,
Fair Value Measurements,
for financial assets and liabilities beginning in the first quarter of fiscal 2009. FASB Staff Position (FSP) No. 157-2 deferred the effective date of nonfinancial assets and liabilities until fiscal year
2010. We do not expect to have a material impact in the first quarter of fiscal 2010, when we apply the statement to our nonfinancial assets and liabilities.
In December 2007, the FASB issued SFAS No. 160,
Noncontrolling Interest in Consolidated Financial Statements – an amendment of Accounting Research Bulletin
No. 51
. The objective of this statement is to improve
the relevance, comparability and transparency of the financial information that a reporting entity provides in its consolidated financial statements by establishing accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The statement significantly changes the accounting for transactions with minority interest holders. This statement, which will be effective for the first quarter of fiscal 2010, is not expected to have
a material impact on our consolidated financial position or results of operations.
In April 2009, the FASB issued FSP FAS 107-1 and Accounting Principles Board Opinion (APB) 28-1,
Interim Disclosures about Fair Value of Financial Instruments
. This FSP amends SFAS No. 107,
Disclosures about Fair Values of Financial
Instruments
, to require disclosures about fair value of financial instruments in interim financial statements as well as in annual financial statements. This FSP also amends APB Opinion No. 28,
Interim Financial Reporting
, to require those disclosures in all interim financial statements. We will adopt FSP FAS 107-1 and APB 28-1 and provide the additional required disclosures in the first quarter of fiscal 2010.
In June of 2009, the FASB approved its Accounting Standards Codification, or Codification, as the single source of authoritative United States accounting and reporting standards applicable for all non-governmental entities, with the exception of the SEC and its staff. The Codification, which changes the referencing of financial standards,
is effective for interim or annual financial periods ending after September 15, 2009. Therefore, in the first quarter of fiscal 2010, all references made to US GAAP will use the new Codification numbering system prescribed by the FASB. As the Codification is not intended to change or alter existing US GAAP, it is not expected to have any impact on our consolidated financial position or results of operations.
In June 2009, the FASB issued SFAS No. 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 FASB Interpretation No. 46(R).
This
statement, 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.
Cautionary Note Regarding Forward-Looking Statements
Certain statements and projections of future results made in this report constitute forward-looking information that is based on current market, competitive and regulatory expectations that involve risks and uncertainties. Please see Walgreen Co.'s Form 10-K for the period ended August 31, 2009, for a discussion of important factors
as they relate to forward-looking statements. Actual results could differ materially.
Walgreen Co. and Subsidiaries
For the years ended August 31, 2009, 2008 and 2007
(In millions, except shares and per share amounts)
|
2009
|
2008
|
2007
|
||||||||||
|
Net sales
|
$ | 63,335 | $ | 59,034 | $ | 53,762 | ||||||
|
Cost of sales
|
45,722 | 42,391 | 38,518 | |||||||||
|
Gross Profit
|
17,613 | 16,643 | 15,244 | |||||||||
|
Selling, general and administrative expenses
|
14,366 | 13,202 | 12,093 | |||||||||
|
Operating Income
|
3,247 | 3,441 | 3,151 | |||||||||
|
Interest (expense) income, net
|
(83 | ) | (11 | ) | 38 | |||||||
|
Earnings Before Income Tax Provision
|
3,164 | 3,430 | 3,189 | |||||||||
|
Income tax provision
|
1,158 | 1,273 | 1,148 | |||||||||
|
Net Earnings
|
$ | 2,006 | $ | 2,157 | $ | 2,041 | ||||||
|
Net earnings per common share - basic
|
$ | 2.03 | $ | 2.18 | $ | 2.04 | ||||||
|
Net earnings per common share - diluted
|
2.02 | 2.17 | ||||||||||