Walgreens 2007 Annual Report Download - page 32

Notes to Consolidated Financial Statements (continued)
These pro forma statements have been prepared for comparative purposes only
and are not intended to be indicative of what the company’s results would have
been had the acquisition occurred at the beginning of the periods presented or
the results which may occur in the future.
During the fiscal year, the company also completed the following other acquisi-
tions: 100% ownership of Take Care Health Systems, Inc. and LLC, a convenient
care clinic operator; selected assets of Familymeds Group, Inc., a pharmacy chain;
and the remaining minority interest of SeniorMed LLC, an institutional pharmacy,
resulting in 100% ownership as well as selected other assets (primarily prescrip-
tion files). These business acquisitions have been included in the company’s
operating statements since their respective acquisition dates.
The aggregate purchase price of all business and intangible asset acquisitions,
excluding Option Care, Inc. and affiliated companies, was $370.7 million. These
acquisitions added $93.8 million to prescription files, $44.8 million to other
amortizable intangibles, $9.5 million to trade name and $172.8 million to goodwill
($14.8 million is expected to be deductible for tax purposes). The remaining fair
value relates to tangible assets less liabilities assumed. The results of operations
of the company for fiscal years 2007, 2006 and 2005 would not be materially
different as a result of the other acquisitions and are therefore not presented.
5. Goodwill and Other Intangible Assets
Goodwill is evaluated annually during the fourth quarter of the company’s fiscal year.
The impairment calculation compares the implied fair value of reporting unit goodwill
with the carrying amount of that goodwill. If the carrying amount of reporting unit
goodwill exceeds the implied fair value of that goodwill, an impairment loss is recog-
nized in an amount equal to that excess. No impairment related to goodwill occurred
in either fiscal 2007 or fiscal 2006.
The carrying amount and accumulated amortization of goodwill and intangible assets
consists of the following (In Millions):
2007 2006
Purchased prescription files $ 302.4 $224.0
Purchasing and payor contracts 175.1 55.0
Trade name 25.9 31.3
Other amortizable intangible assets 86.9 26.1
Goodwill 1,060.2 168.4
Gross carrying amount 1,650.5 504.8
Accumulated amortization – prescription files (83.3) (55.4)
Purchasing and payor contracts (8.4) (3.4)
Trade name (5.8) (1.1)
Accumulated amortization – other (16.4) (10.2)
Total accumulated amortization (113.9) (70.1)
Total intangible assets, net $1,536.6 $434.7
Changes to goodwill for fiscal 2007 of $891.8 million and fiscal 2006 of $158.1
million were all additions related to acquisitions.
Amortization expense for intangible assets was $61.9 million in 2007, $45.6 mil-
lion in 2006 and $18.5 million in 2005. The weighted-average amortization period
for purchased prescription files was six years for fiscal 2007 and fiscal 2006.
The weighted-average amortization period for purchasing and payor contracts
was ten years for fiscal 2007 and fiscal 2006. The weighted-average amortization
period for trade names was revised to three years for fiscal 2007 from a prelimi-
nary estimate of ten years for fiscal 2006. The weighted-average amortization
period for other intangible assets was eleven years for fiscal 2007 and nine years
for fiscal 2006.
Expected amortization expense for intangible assets recorded at August 31, 2007,
is as follows (In Millions):
2008 2009 2010 2011 2012
$86.3 $81.5 $68.7 $54.4 $36.6
6. Income Taxes
The provision for income taxes consists of the following (In Millions):
2007 2006 2005
Current provision –
Federal $1,027.9 $ 970.1 $841.4
State 96.7 137.4 125.5
1,124.6 1,107.5 966.9
Deferred provision –
Federal 18.3 (88.8) (57.8)
State 4.9 (15.2) (13.0)
23.2 (104.0) (70.8)
$1,147.8 $1,003.5 $896.1
The deferred tax assets and liabilities included in the Consolidated Balance Sheets
consist of the following (In Millions):
2007 2006
Deferred tax assets –
Compensation and benefits $ 203.7 $177.8
Insurance 191.5 178.4
Postretirement benefits 179.4 126.1
Accrued rent 135.3 130.5
Inventory 44.7 41.0
Legal 44.1 18.8
Other 159.7 103.0
958.4 775.6
Deferred tax liabilities –
Accelerated depreciation 702.6 643.7
Inventory 199.0 142.1
Intangible assets 85.5 —
Other 72.2 30.9
1,059.3 816.7
Net deferred tax liabilities $ 100.9 $ 41.1
Income taxes paid were $1.204 billion, $1.111 billion and $928.2 million during
the fiscal years ended August 31, 2007, 2006 and 2005, respectively.
The differences between the statutory federal income tax rate of 35% and the
effective tax rates of 36.0%, 36.4% and 36.5% are principally due to state income
tax provisions of 2.5%, 2.9% and 2.9%, in fiscal years 2007, 2006 and 2005,
respectively. Other differences include the resolution of a multistate tax matter in
fiscal 2007, the settlement of prior year’s Internal Revenue Service matters in fiscal
2006, foreign tax credits in fiscal 2005 and other insignificant matters.
7. Short-Term Borrowings
The company had no short-term borrowings in fiscal 2006. In fiscal 2007, the
company issued commercial paper to support working capital needs. In connection
with the purchase of Option Care, Inc. and affiliated companies, $146.8 million of
convertible debt was acquired. Prior to year-end, $118.3 million of convertible
debt was retired while $28.5 million remained outstanding at August 31, 2007.
On September 6, 2007, the $28.5 million was retired. The short-term debt under
the commercial paper program was as follows (In Millions):
2007 2006
Balance outstanding at fiscal year-end $850.0 $—
Maximum outstanding at any month-end 850.0 —
Average daily short-term borrowings 32.1 —
Weighted-average interest rate 5.36% -%
The carrying value of the debt approximates the fair value.
Page 30 2007 Walgreens Annual Report