Walgreens 2006 Annual Report Download - page 30

Notes to Consolidated Financial Statements
Hurricane Katrina
In fiscal 2005, the company provided for $54.7 million of pre-tax expenses related
to Hurricane Katrina. During fiscal 2006, the company recorded a $12.3 million
downward adjustment of the Hurricane Katrina expenses.
Leases
The company owns 18.3% of its locations; the remaining locations are leased
premises. Initial terms are typically 20 to 25 years, followed by additional terms
containing cancellation options at five-year intervals, and may include rent escala-
tion clauses. The commencement date of all lease terms is the earlier of the date
the company becomes legally obligated to make rent payments or the date the
company has the right to control the property. Additionally, the company recognizes
rent expense on a straight-line basis over the term of the lease. In addition to mini-
mum fixed rentals, most leases provide for contingent rentals based upon a portion
of sales.
Minimum rental commitments at August 31, 2006, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
2007 $ 1,495.8
2008 1,549.6
2009 1,537.6
2010 1,515.3
2011 1,492.4
Later 18,879.8
Total minimum lease payments $26,470.5
The above minimum lease payments include minimum rental commitments related
to capital leases of $69.5 million at August 31, 2006. This capital lease amount
includes $31.7 million of executory costs and imputed interest. Total minimum lease
payments have not been reduced by minimum sublease rentals of approximately
$43.5 million on leases due in the future under non-cancelable subleases.
The company remains secondarily liable on 22 assigned leases. The maximum
potential of undiscounted future payments is $6.7 million as of August 31, 2006.
Lease option dates vary, with some extending to 2014.
Rental expense was as follows (In Millions):
2006 2005 2004
Minimum rentals $1,428.5 $1,300.7 $1,152.1
Contingent rentals 15.9 18.7 20.3
Less: Sublease rental income (12.5) (12.5) (11.9)
$1,431.9 $1,306.9 $1,160.5
Goodwill and Other Intangible Assets
The carrying amount and accumulated amortization of goodwill and intangible
assets consists of the following (In Millions):
2006 2005
Purchased prescription files $224.0 $ 86.9
Purchasing and payor contracts 55.0 —
Trade name 31.3 —
Other amortizable intangible assets 26.1 21.7
Goodwill 168.4 10.3
Gross carrying amount 504.8 118.9
Accumulated amortization – prescription files (55.4) (25.6)
Purchasing and payor contracts (3.4) —
Trade name (1.1) —
Accumulated amortization – other (10.2) (9.3)
Total accumulated amortization (70.1) (34.9)
Total intangible assets, net $434.7 $ 84.0
The company completed a merger with Happy Harry’s, a drugstore chain, on July 1,
2006. In addition, the company acquired 100% ownership of Schraft’s and
Medmark, both of which are specialty pharmacies, on November 3, 2005 and
August 1, 2006, respectively. These business acquisitions have been included in the
company’s operating statements since their respective acquisition dates. Happy
Harry’s will add to the company’s drugstore presence in the Northeast while Schraft’s
and Medmark are part of the expansion into the specialty pharmacy industry.
The aggregate purchase price of all business acquisitions was $485.4 million. These
acquisitions added $137.1 million to prescription files, $55.0 million to purchasing
and payor contracts, $31.3 million to trade names, $4.4 million to other amortizable
intangibles and $158.1 million to goodwill ($21.3 million is expected to be
deductible for tax purposes). The remaining fair value relates to tangible assets.
Pro forma results of operations of the company for fiscal years 2006, 2005 and
2004 would not be materially different as a result of these acquisitions and are
therefore not presented.
Amortization expense for intangible assets was $45.6 million in 2006, $18.5 million
in 2005 and $8.8 million in 2004. The weighted-average amortization period for pur-
chased prescription files was five years for fiscal 2006 and fiscal 2005. The weighted-
average amortization period for purchasing and payor contracts and trade names was
ten years in fiscal 2006. The weighted-average amortization period for other intangible
assets was nine years for fiscal 2006 and eleven years for fiscal 2005. Goodwill
is evaluated annually during the fourth quarter of the company’s fiscal year. No
impairment loss related to goodwill occurred in either fiscal 2006 or fiscal 2005.
Expected amortization expense for intangible assets recorded at August 31, 2006,
is as follows (In Millions):
2007 2008 2009 2010 2011
$56.4 $53.6 $49.6 $40.6 $24.6
Income Taxes
The provision for income taxes consists of the following (In Millions):
2006 2005 2004
Current provision –
Federal $ 970.1 $841.4 $632.5
State 137.4 125.5 111.4
1,107.5 966.9 743.9
Deferred provision –
Federal (88.8) (57.8) 65.3
State (15.2) (13.0) .7
(104.0) (70.8) 66.0
$1,003.5 $896.1 $809.9
The deferred tax assets and liabilities included in the Consolidated Balance Sheets
consist of the following (In Millions):
2006 2005
Deferred tax assets –
Employee benefit plans $303.9 $263.5
Insurance 178.4 157.5
Accrued rent 130.5 118.5
Inventory 41.0 40.8
Bad debt 37.0 14.3
Stock compensation expense 35.0 —
Other 49.8 61.4
775.6 656.0
Deferred tax liabilities –
Accelerated depreciation 643.7 663.4
Inventory 142.1 112.8
Other 30.9 25.9
816.7 802.1
Net deferred tax liabilities $ 41.1 $146.1
Page 28 2006 Walgreens Annual Report