Walgreens 2005 Annual Report Download - page 24

for stock options will reduce net income in the future. The amount of that expense
will depend on the number of stock options granted as well as the assumptions
used to value them.
In May 2005, the FASB issued Statement 154, “Accounting Changes and Error
Corrections,” which will be effective in the first quarter of fiscal year 2007. This
statement addresses the retrospective application of such changes and corrections
and will be followed if and when necessary.
In June 2005, the FASB ratified the consensus reached by the Emerging Issues
Task Force (EITF) on Issue 05-6, “Determining the Amortization Period for Leasehold
Improvements.” This consensus, which will be effective in the first quarter of
fiscal 2006, states that leasehold improvements acquired after the inception of
a lease should be amortized over the shorter of the useful life of the assets or
a term that includes renewals that are reasonably assured at the date of acquisition
of the leasehold improvements. We have evaluated this consensus and we are
already following this procedure.
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. Those risks and
uncertainties include changes in economic conditions generally or in the markets
served by the company; consumer preferences and spending patterns; changes in
or the introduction of new state or federal legislation or regulations; the availability
and cost of real estate and construction; competition; and risks associated with
new business endeavors. Please see Walgreen Co.’s Form 10-K for the period
ended August 31, 2005, for a discussion of certain other important factors as
they relate to forward-looking statements. Actual results could differ materially.
Off-Balance Sheet Arrangements
Letters of credit are issued to support purchase obligations and commitments
(as reflected on the Contractual Obligations and Commitments table) as
follows (In Millions):
Inventory obligations $ 66.2
Real estate development 1.7
Insurance 313.8
Total $ 381.7
We have no other off-balance sheet arrangements other than those disclosed
on the previous Contractual Obligations and Commitments table.
Both on- and off-balance sheet financing are considered when targeting debt to
equity ratios to balance the interest of equity and debt (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 November 2004, the Financial Accounting Standards Board (FASB) issued
Statement 151, “Inventory Costs – an Amendment of ARB No. 43, Chapter 4,”
which will be effective in the first quarter of fiscal year 2006. We have evaluated
this pronouncement and no material impact is anticipated.
In December 2004, the FASB issued Statement 123 (revised), “Share-Based
Payment,” which will be effective in the first quarter of fiscal year 2006. This
statement will eliminate the ability to account for share-based compensation
transactions using APB Opinion No. 25 (“Accounting for Stock Issued to Employees”)
and will require instead that compensation expense be recognized based on the
fair value on the date of the grant. The recognition of compensation expense
Management’s Discussion and Analysis of Results of Operations
and Financial Condition (continued)
program of up to $1 billion, which we plan to execute over four years. During
fiscal 2005 we purchased $345.1 million of company shares related to the stock
repurchase program. An additional $436.7 million of shares were purchased
to support the long-term needs of the employee stock plans. Comparable amounts
were $21.9 million and $277.3 million in fiscal 2004. There were no new
short-term borrowings during either period. At August 31, 2005, we had a
syndicated bank line of credit facility of $200 million to support our short-term
commercial paper program.
Capital expenditures for fiscal 2006 are expected to be approximately $1.4 billion.
We expect to open approximately 475 new stores in fiscal 2006, with a net
increase of approximately 390 stores, and anticipate having a total of 7,000
drugstores by the year 2010. 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. A new distribution
center is planned for South Carolina with an anticipated opening date in 2007.
Net cash used for financing activities was $804.4 million compared to $302.1 million
last year. On July 14, 2004, the Board of Directors announced a stock repurchase
22 2005 Annual Report
Contractual Obligations and Commitments
The following table lists our contractual obligations and commitments at August 31, 2005 (In Millions):
Payments Due by Period
Less Than
Total 1 Year 1-3 Years 3-5 Years Over 5 Years
Operating leases* $ 23,727.8 $1,349.4 $2,760.5 $ 2,663.1 $16,954.8
Purchase obligations:
Open inventory purchase orders* 1,383.4 1,383.4 — — —
Real estate development* 437.6 437.6 — — —
Other corporate obligations* 529.7 251.5 143.5 115.3 19.4
Insurance 412.3 137.8 109.0 58.3 107.2
Retiree health & life 254.9 6.4 15.4 20.2 212.9
Closed location obligations 89.7 20.4 33.1 19.5 16.7
Capital lease obligations 39.7 1.1 2.0 2.1 34.5
Other long-term liabilities reflected on the balance sheet 397.4 30.6 46.7 40.1 280.0
Total $ 27,272.5 $3,618.2 $ 3,110.2 $ 2,918.6 $17,625.5
* Not on balance sheet.