Walgreens 2009 Annual Report Download - page 32

Notes to Consolidated Financial Statements (continued)
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. Outstanding options to purchase common shares of
44,877,558 in 2009, 12,962,745 in 2008 and 6,943,454 in 2007 were excluded
from the earnings per share calculations.
Interest Expense
The Company capitalized $16 million, $19 million and $6 million of interest expense
as part of significant construction projects during fiscal 2009, 2008 and 2007,
respectively. Interest paid, which is net of capitalized interest, was $89 million in
fiscal 2009, $11 million in 2008 and $1 million in 2007.
Accumulated Other Comprehensive Income
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 income related to the
Company’s postretirement plan was $37 million pre-tax ($37 million after-tax) as
of August 31, 2009. The minimum postretirement liability totaled $328 million
as of August 31, 2009.
2. Restructuring
On October 30, 2008, we announced a series of strategic initiatives, approved by
the Board of Directors, to enhance shareholder value. One of these initiatives was
aprogram designed to reduce cost and improve productivity through strategic
sourcing of indirect spend, reducing corporate overhead and work throughout our
stores, rationalization of inventory categories, realignment of pharmacy operations
and transforming the community pharmacy.
As of August 31, 2009, we have recorded the following pre-tax charges associated
with our restructuring initiatives within the Consolidated Statement of Earnings:
Twelve Months Ended August 31, 2009
Severance and other benefits $ 74
Project cancellation settlements 7
Inventory charges 63
Restructuring expense 144
Consulting 76
Restructuring and restructuring related costs $220
Cost of sales $ 63
Selling, general and administrative expense 157
$220
The $74 million of severance and other benefits includes the charges associated
with 432 employees who participated in the voluntary separation program and 265
employees who were involuntarily separated from the Company. Prior to their last day
of service, 143 people who were previously notified that their positions had been
eliminated subsequentlyfound open positions within the Company. All severance and
benefits associated with these people have been reversed.
Inventory charges consist of on-hand inventory that has been reduced from cost to
current selling prices and the loss we incurred on the sale of inventorybelow cost.
Additionally, in conjunction with our Customer Centric Retailing (CCR) initiative, we
are enhancing the store format to ensure we have the proper assortments, better
category layouts and adjacencies, better shelf height and sight lines and better
assortment and brand layout, all of which are designed to positively enhance the
shopper experience and increase customer frequency and purchase size. This format
will be rolled out to approximately 5,000 to 5,500 stores. Fiscal 2009 included
202 stores; we plan to enhance approximately 2,600 stores in fiscal 2010 and the
remaining stores in fiscal 2011. Although we will continue to refine our estimates
as the rollout progresses, based on our current experience with the first 202
stores, we expect the cost to be $30 thousand to $50 thousand per store. As of
August 31, 2009, we incurred selling, general and administrative expenses of
$5 million related to this program.
As of August 31, 2009, we have recorded the following balances within the accrued
expenses and other liabilities section of our Consolidated Balance Sheets:
August 31, 2008 Cash August 31, 2009
Reserve Balance Charges Payments Reserve Balance
Severance and
other benefits $ — $82 $78 $4
3. Leases
The Company owns 20.7% 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
Companybecomes 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, 2009, under all leases having an
initial or remaining non-cancelable term of more than one year are shown below
(In millions):
Capital Lease Operating Lease
2010 $ 5 $ 2,024
2011 4 2,101
2012 3 2,085
2013 4 2,044
2014 4 2,002
Later 45 24,696
Total minimum lease payments $65 $34,952
The capital lease amount includes $25 million of executorycosts and imputed
interest. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately$33 million on leases due in the future under
non-cancelable subleases.
The Company remains secondarily liable on 20 assigned leases. The maximum
potential of undiscounted future payments is $11 million as of August 31, 2009.
Lease option dates vary, with some extending to 2014.
Rental expense was as follows (In millions) :
2009 2008 2007
Minimum rentals $1,973 $1,784 $1,614
Contingent rentals 11 13 16
Less: Sublease rental income (9) (10) (11)
$1,975 $1,787 $1,619
4. Acquisitions
Business acquisitions in 2009 included McKesson Specialty and IVPCARE, which were
added to our specialty pharmacy operations; select locations of Drug Fair into our retail
drugstore operations; and selected other assets (primarily prescription files).
The aggregate purchase price of all business and intangible asset acquisitions in
fiscal 2009 was $405 million. These acquisitions added $170 million to prescription
files, $23 million to other amortizable intangibles, and $47 million to goodwill
Page 30 2009 Walgreens Annual Report