Walgreens 2007 Annual Report Download - page 34

A summary of information relative to the company’s stock option plans follows:
Weighted-
Weighted- Average Aggregate
Average Remaining Intrinsic
Exercise Contractual Value
Options Shares Price Term (Years) (In Millions)
Outstanding
at August 31, 2006 37,407,447 $32.45 5.95 $636.3
Granted 3,618,193 48.55
Exercised (5,373,134) 26.33
Expired/Forfeited (650,754) 33.85
Outstanding
at August 31, 2007 35,001,752 $35.04 5.57 $368.2
Vested or expected to vest
at August 31, 2007 34,925,923 $35.01 5.57 $368.2
Exercisable
at August 31, 2007 25,213,221 $31.46 4.58 $343.2
The intrinsic value for options exercised in fiscal 2007, 2006 and 2005 was
$105.2 million, $173.0 million and $89.3 million, respectively. The total fair value of
options vested in fiscal 2007, 2006 and 2005 was $102.2 million, $116.3 million
and $31.5 million, respectively.
Cash received from the exercise of options in fiscal 2007 was $141.5 million.
The related tax benefit realized was $40.0 million. The company has a practice
of repurchasing shares on the open market to satisfy share-based payment
arrangements and expects to repurchase approximately seven million shares
during fiscal 2008.
A summary of information relative to the company’s restricted stock awards follows:
Weighted-
Average
Grant-Date
Nonvested Shares Shares Fair Value
Nonvested at August 31, 2006 250,460 $44.71
Granted 140,427 45.11
Forfeited ——
Vested (111,213) 42.86
Nonvested at August 31, 2007 279,674 $45.63
The fair value of each option grant was determined using the Black-Scholes option
pricing model with weighted-average assumptions used in fiscal 2007, 2006
and 2005:
2007 2006 2005
Risk-free interest rate
(1) 4.71% 4.10% 3.80%
Average life of option (years)
(2) 7.2 7.2 7.2
Volatility
(3) 25.77% 32.12% 28.14%
Dividend yield
(4) .50% .45% .58%
Weighted-average grant-date fair value
Granted at market price $18.05 $18.82 $13.47
Granted below market price —— 12.78
(1) Represents the U.S. Treasury security rates for the expected term of the option.
(2) Represents the period of time that options granted are expected to be outstanding.
The company analyzed separate groups of employees with similar exercise behavior
to determine the expected term.
(3) Beginning with fiscal 2007, volatility was based on historical and implied
volatility of the company’s common stock. Prior to fiscal 2007, it was based
on historical volatility of the company’s common stock.
(4) Represents the company’s cash dividend for the expected term.
11. Retirement Benefits
The principal retirement plan for employees is the Walgreen Profit-Sharing
Retirement Plan to which both the company and the employees contribute. The
company’s contribution, which is determined annually at the discretion of the Board
of Directors, has historically related to pre-tax income. The profit-sharing provision
was $283.7 million in 2007, $245.0 million in 2006 and $218.5 million in 2005.
The company’s contributions were $253.0 million for 2007, $216.1 million for 2006
and $262.3 million for 2005.
The company provides certain health insurance benefits for retired employees who
meet eligibility requirements, including age, years of service and date of hire.
The costs of these benefits are accrued over the period earned. The company’s
postretirement health benefit plans are not funded.
In August 2007, the company adopted SFAS No.158. SFAS No.158 requires
companies to reflect the plans’ funded status on their balance sheet. The difference
between the plans’ funded status and the balance sheet position is recognized,
net of tax, as a component of Accumulated Other Comprehensive Loss as of the
measurement date of August 31, 2007.
The following table reflects the effect of the initial adoption of SFAS No.158 on the
company’s balance sheet (In Millions) :
Before Adoption SFAS No.158 After Adoption of
of SFAS No.158 Adjustment SFAS No.158
Total Assets $19,313.6 $ — $19,313.6
Deferred income taxes 203.7 (45.5) 158.2
Other non-current liabilities 1,257.4 49.4 1,306.8
Accumulated other
comprehensive loss — (3.9) (3.9)
Total Shareholders’ Equity 11,108.2 (3.9) 11,104.3
Total Liabilities and
Shareholders’ Equity $19,313.6 $ — $19,313.6
The deferred tax asset computed for the adoption of SFAS No.158 excludes the
Medicare Part D federal retiree subsidy that is non-taxable.
Components of net periodic benefit costs (In Millions):
2007 2006 2005
Service cost $13.7 $ 18.3 $22.0
Interest cost 22.0 21.4 23.6
Amortization of actuarial loss 5.7 8.8 10.6
Amortization of prior service cost (4.4) (4.1) (3.6)
Transition obligation —— 4.9
Total postretirement benefit cost $37.0 $ 44.4 $57.5
Change in benefit obligation (In Millions):
2007 2006
Benefit obligation at September 1 $356.0 $391.8
Service cost 13.7 18.3
Interest cost 22.0 21.4
Amendments (.1) (5.0)
Actuarial gains (13.9) (62.7)
Benefit payments (10.5) (8.8)
Participants contributions 2.8 1.0
Benefit obligation at August 31 $370.0 $356.0
Notes to Consolidated Financial Statements (continued)
Page 32 2007 Walgreens Annual Report