Walgreens 2007 Annual Report Download - page 31

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. A valuation
allowance is recorded to reduce the carrying amounts of deferred tax assets if it is
more likely than not that such assets will not be realized. Discrete events such as
audit settlements, tax litigation resolutions or changes in tax laws are recognized in
the period in which they occur.
Earnings Per Share
The dilutive effect of outstanding stock options on earnings per share is calculated
using the treasury stock method. Stock options are anti-dilutive and excluded from
the earnings per share calculation if the exercise price exceeds the market price of
the common shares. At August 31, 2007, and August 31, 2006, outstanding options
to purchase 6,943,454 and 3,505,834 common shares were excluded from fiscal
year 2007 and 2006 calculations, respectively. There were no anti-dilutive shares
related to stock options in fiscal 2005.
Interest Expense
The company capitalized $6.0 million, $3.3 million and $4.2 million of interest
expense as part of significant construction projects during fiscal 2007, 2006 and
2005, respectively. Interest paid, net of amounts capitalized was $.7 million in
fiscal 2007, zero in 2006 and $.8 million in 2005.
Accumulated Other Comprehensive Loss
In August 2007, the company adopted SFAS No. 158, “Employers’ Accounting for
Defined Benefit Pension and Other Postretirement Plans – an Amendment of FASB
Statements No. 87, 88, 106 and 132(R).” In accordance with SFAS No.158, the
amount included in accumulated other comprehensive loss related to the company’s
postretirement plan was $49.4 million pre-tax as of August 31, 2007. The minimum
postretirement liability totaled $370.0 million as of August 31, 2007.
2. 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.
3. Leases
The company owns 19.1% of its operating 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 escalation
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 minimum
fixed rentals, most leases provide for contingent rentals based upon a portion of sales.
Minimum rental commitments at August 31, 2007, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In Millions):
2008 $ 1,647.3
2009 1,723.5
2010 1,711.3
2011 1,687.7
2012 1,661.7
Later 20,704.4
Total minimum lease payments $29,135.9
The above minimum lease payments include minimum rental commitments related
to capital leases of $69.8 million at August 31, 2007. This capital lease amount
includes $30.1 million of executory costs and imputed interest. Total minimum lease
payments have not been reduced by minimum sublease rentals of approximately
$39.8 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 $14.1 million as of August 31, 2007.
Lease option dates vary, with some extending to 2015.
Rental expense was as follows (In Millions) :
2007 2006 2005
Minimum rentals $1,614.3 $1,428.5 $1,300.7
Contingent rentals 15.6 15.9 18.7
Less: Sublease rental income (11.3) (12.5) (12.5)
$1,618.6 $1,431.9 $1,306.9
4. Acquisitions
During August 2007, the company acquired 100% of the outstanding shares of
Option Care, Inc. in a cash transaction for $19.50 per share. The company’s operating
statements include Option Care, Inc.’s and affiliated companies’ results since
acquiring the controlling interest on August 14, 2007. This acquisition will increase
national access to specialty pharmacy and home infusion services for patients
and payors as the combined organizations will provide a national network of more
than 100 locations in 34 states.
The preliminary allocation of the purchase price of Option Care, Inc. and affiliated
companies was accounted for under the purchase method of accounting with the
company as the acquirer in accordance with SFAS No. 141,
“B usiness Combinations.”
Any adjustments are not expected to be material. Goodwill, none of which is
deductible for tax purposes, and other intangible assets recorded in connection
with the acquisition totaled $682.5 million and $120.0 million, respectively.
The preliminary estimated fair values of assets acquired and liabilities assumed
are as follows (In Millions):
Current assets $ 172.2
Property and equipment 26.6
Other assets 7.4
Intangible assets 120.0
Goodwill 682.5
Total assets acquired 1,008.7
Total liabilities assumed 288.4
Net assets acquired $ 720.3
The unaudited condensed pro forma consolidated statements of income for 2007 and
2006 (assuming the acquisition of Option Care, Inc. and affiliated companies as of the
beginning of fiscal 2006) are as follows (In Millions, except per share amounts):
2007 2006
Net sales $54,500.0 $48,007.0
Net earnings 1,972.0 1,772.0
Net earnings per common share:
Basic 1.97 1.75
Diluted 1.96 1.74
Fiscal 2007’s results for Option Care, Inc. and affiliated companies prior to acquisition
include the following expenses driven by the tender offer: $62.1 million in convertible
bond expenses, $26.1 million in expenses related to SFAS No.123(R) for accelerated
vesting and $13.6 million in investment banking expenses.
2007 Walgreens Annual Report Page 29