Walgreens 2008 Annual Report Download - page 32

Notes to Consolidated Financial Statements (continued)
The preliminary allocation of the purchase price of I-trax, Inc. and Whole Health
Management was accounted for under the purchase method of accounting
with the company as the acquirer in accordance with SFAS No. 141, “Business
Combinations.” Any adjustments to the preliminary purchase price allocation are
not expected to be material. Goodwill and other intangible assets recorded in
connection with the acquisition totaled $372 million and $50 million, respectively.
Operating results of the businesses acquired have been included in the consolidated
statements of income for their respective acquisition dates forward. Pro forma results
of the company, assuming all of the acquisitions had occurred at the beginning of
each period presented, would not be materially different from the results reported.
4. Goodwill and Other Intangible Assets
Goodwill is evaluated annually during the fourth quarter of the company’s fiscal
year or when indications of potential impairment exist. 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 recognized in an amount
equal to that excess. During fiscal 2008 we recorded an impairment of $9 million
to our Institutional Pharmacy reporting unit. The impairment was the result of lower
financial projections of the reporting unit. No impairment related to goodwill
occurred in fiscal 2007.
The carrying amount and accumulated amortization of goodwill and intangible assets
consists of the following (In millions):
2008 2007
Purchased prescription files $444 $ 302
Purchasing and payor contracts 263 175
Trade name 40 26
Other amortizable intangible assets 108 83
Goodwill 1,438 1,060
Gross carrying amount 2,293 1,646
Accumulated amortization – prescription files (145) (83)
Purchasing and payor contracts (25) (9)
Trade name (17) (6)
Accumulated amortization – other (25) (16)
Total accumulated amortization (212) (114)
Total intangible assets, net $2,081 $1,532
Changes to goodwill for fiscal 2008 included additions related to acquisitions, an
impairment to our Institutional Pharmacy reporting unit and the final purchase price
allocation of our acquisition of Option Care, Inc. which decreased goodwill and
increased intangible assets by $60 million. The change in goodwill for fiscal 2007
was all related to acquisitions.
Amortization expense for intangible assets was $107 million in 2008, $62 million
in 2007 and $46 million in 2006. The weighted-average amortization period for
purchased prescription files was six years for fiscal 2008 and fiscal 2007. The
weighted-average amortization period for purchasing and payor contracts was
thirteen years for fiscal 2008 and fiscal 2007. The weighted-average amortization
period for trade names was three years for fiscal 2008 and fiscal 2007. The
weighted-average amortization period for other intangible assets was eleven years
for fiscal 2008 and fiscal 2007.
Expected amortization expense for intangible assets recorded at August 31, 2008,
is as follows (In millions):
2009 2010 2011 2012 2013
$121 $106 $91 $71 $45
5. Income Taxes
The provision for income taxes consists of the following (In millions):
2008 2007 2006
Current provision –
Federal $1,201 $1,028 $ 970
State 133 97 137
1,334 1,125 1,107
Deferred provision –
Federal (59) 18 (89)
State (2) 5 (15)
(61) 23 (104)
$1,273 $1,148 $1,003
The difference between the statutory federal income tax rate and the effective tax
rate is as follows: (In millions):
2008 2007 2006
Federal statutory rate 35.0 % 35.0% 35.0%
State income taxes, net of federal benefit 2.4 2.5 2.9
Other (0.3) (1.5) (1.5)
Effective income tax rate 37.1 % 36.0% 36.4%
The deferred tax assets and liabilities included in the Consolidated Balance Sheets
consist of the following (In millions):
2008 2007
Deferred tax assets –
Compensation and benefits $189 $ 204
Insurance 184 191
Postretirement benefits 196 179
Accrued rent 138 135
Stock compensation 80 22
Inventory 54 45
Other 146 140
987 916
Deferred tax liabilities –
Accelerated depreciation 796 703
Inventory 177 199
Intangible assets 37 43
Other 69 72
1,079 1,017
Net deferred tax liabilities $92 $ 101
Income taxes paid were $1,235 million, $1,204 million and $1,111 million during
the fiscal years ended August 31, 2008, 2007 and 2006, respectively.
FIN No. 48 provides guidance regarding the recognition, measurement, presenta-
tion and disclosure in the financial statements of tax positions taken or expected to
be taken on a tax return, including the decision whether to file or not to file in a
particular jurisdiction. The adoption of FIN No. 48 resulted in the reclassification of
$55 million of certain tax liabilities from current to long-term and a $2 million
decrease in our liability for unrecognized tax benefits, which was accounted for as
an increase to the August 31, 2007 retained earnings balance. All unrecognized
benefits at August 31, 2008, were classified as long-term liabilities on our
consolidated balance sheet.
Page 30 2008 Walgreens Annual Report