Walgreens 2005 Annual Report Download - page 29

2005 Annual Report 27
Stock-Based Compensation Plans
As permitted under SFAS No.123, the company applies Accounting Principles
Board (APB) Opinion No. 25 and related interpretations in accounting for its
stock-based compensation plans. Under APB Opinion No. 25, compensation
expense is recognized for stock option grants if the exercise price is below the
fair value of the underlying stock at the measurement date.
The company complies with the disclosure provisions of SFAS No. 123, which
requires presentation of pro forma information applying the fair value based
method of accounting. Had compensation costs been determined consistent with
the fair value based method of SFAS No. 123 for options granted in fiscal 2005,
2004 and 2003, pro forma net earnings and net earnings per common share
would have been as follows (In Millions, except per share data):
2005 2004 2003
Net earnings $1,559.5 $1,349.8 $1,165.1
Add: Stock-based employee
compensation expenses
included in reported
net income, net of
related tax effects .2 .4 .7
Deduct: Total stock-based employee
compensation expense
determined under fair value
based method for all awards,
net of related tax effects (72.5) (44.1) (57.0)
Pro forma net income $1,487.2 $1,306.1 $1,108.8
Earnings per share:
Basic – as reported $ 1.53 $ 1.32 $ 1.14
Basic – pro forma 1.46 1.27 1.08
Diluted – as reported 1.52 1.31 1.13
Diluted – pro forma 1.45 1.27 1.07
Income Taxes
The company provides for federal and state income taxes on items included in the
Consolidated Statements of Earnings regardless of the period when such taxes are
payable. Deferred taxes are recognized for temporary differences between financial
and income tax reporting based on enacted tax laws and rates.
Earnings Per Share
In fiscal years 2004 and 2003, the diluted earnings per share calculation excluded
stock options with an exercise price greater than the average market price of the
common shares for the year. If such options were included, anti-dilution would have
resulted. At August 31, 2004, and August 31, 2003, outstanding options to purchase
2,902,996 and 10,716,109 common shares granted at a price ranging from
$35.67 to $45.625 and $30.76 to $45.625 per share were excluded from the
fiscal year 2004 and 2003 calculations, respectively.
Interest Expense
The company capitalized $4.2 million, $1.1 million and $1.6 million of interest
expense as part of significant construction projects during fiscal 2005, 2004
and 2003, respectively. Interest paid, net of amounts capitalized, was $.8 million
in 2005, $.2 million in 2004 and $.2 million in 2003.
The company capitalizes application stage development costs for significant
internally developed software projects, including “SIMS Plus,” a strategic inventory
management system, and “Basic Department Management,” a marketing system.
These costs are amortized over a five-year period. Amortization was $20.4 million
in 2005, $19.0 million in 2004 and $19.4 million in 2003. Unamortized costs as
of August 31, 2005 and 2004, were $90.1 million and $76.6 million, respectively.
Revenue Recognition
For all sales other than third party pharmacy sales, the company recognizes revenue
at the time of the sale. For third party sales, revenue is recognized at the time the
prescription is filled, adjusted by an estimate for those that have not yet been
claimed by customers at the end of the period. Customer returns are immaterial.
Impaired Assets and Liabilities for Store Closings
The company tests long-lived assets for impairment whenever events or
circumstances indicate. Store locations that have been open at least five years
are periodically reviewed for impairment indicators. Once identified, the amount
of the impairment is computed by comparing the carrying value of the assets
to the fair value, which is based on the discounted estimated future cash flows.
Included in selling, occupancy and administration expense were impairment
charges of $14.5 million in 2005, $9.2 million in 2004 and $19.5 million in 2003.
The company also provides for future costs related to closed locations. The liability
is based on the present value of future rent obligations and other related costs
(net of estimated sublease rent) to the first lease option date.
Insurance
The company obtains insurance coverage for catastrophic exposures as well
as those risks required by law to be insured. It is the company’s policy to retain
a significant portion of certain losses related to workers’ compensation, property
losses, business interruptions relating from such losses and comprehensive
general, pharmacist and vehicle liability. Provisions for these losses are recorded
based upon the company’s estimates for claims incurred. The provisions are
estimated in part by considering historical claims experience, demographic
factors and other actuarial assumptions.
Pre-Opening Expenses
Non-capital expenditures incurred prior to the opening of a new or remodeled
store are expensed as incurred.
Advertising Costs
Advertising costs, which are reduced by the portion funded by vendors,
are expensed as incurred. Net advertising expenses, which are included in
selling, occupancy and administration expense, were $260.3 million in 2005,
$230.9 million in 2004 and $174.0 million in 2003. Included in net advertising
expenses were vendor advertising allowances of $180.2 million in 2005,
$163.6 million in 2004 and $184.3 million in 2003. In fiscal 2003 the company
adopted EITF Issue No. 02-16, “Accounting by a Customer (including a Reseller)
for Certain Consideration Received from a Vendor,” which shifted a portion of
vendor allowances from advertising expense to cost of sales. The fiscal 2003
impact resulted in an increase to advertising costs of $75.0 million (.23% of
total sales), a reduction to cost of sales of $56.2 million (.17% of total sales),
and a reduction to pre-tax earnings and inventory of $18.8 million.