Walgreens 2010 Annual Report Download - page 33

The capital lease amount includes $31 million of executory costs and imputed
interest. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $23 million on leases due in the future under
non-cancelable subleases.
The Company provides for future costs related to closed locations. The liability is
based on the present value of future rent obligations and other related costs (net of
estimated sublease rent) to the first lease option date. In fiscal 2010 and 2009, the
Company recorded charges of $90 million and $67 million, respectively, for facilities
that were closed or relocated under long-term leases. These charges are reported
in selling, general and administrative expenses on the Consolidated Statements
of Earnings.
The changes in reserve for facility closings and related lease termination charges
include the following (In millions):
Twelve Months Ended August 31,
2010 2009
Balance — beginning of period $ 99 $ 69
Provision for present value of non-cancellable lease
payments of closed facilities 77 38
Assumptions about future sublease income, terminations,
and changes in interest rates (9) 8
Interest accretion 22 21
Cash payments, net of sublease income (45) (37)
Reserve acquired through acquisition 7 —
Balance — end of period $ 151 $ 99
The Company remains secondarily liable on 28 assigned leases. The maximum
potential undiscounted future payments are $33 million at August 31, 2010.
Lease option dates vary, with some extending to 2027.
Rental expense was as follows (In millions):
2010 2009 2008
Minimum rentals $ 2,218 $ 1,973 $ 1,784
Contingent rentals 9 11 13
Less: Sublease rental income (9) (9) (10)
$ 2,218 $ 1,975 $ 1,787
4. Acquisitions
On April 9, 2010, the Company completed the stock acquisition of Duane Reade
Holdings, Inc., and Duane Reade Shareholders, LLC (Duane Reade), which consisted
of 258 Duane Reade stores located in the New York City metropolitan area, as well
as the corporate office and two distribution centers. Total purchase price was
$1,132 million, which included the assumption of debt. Included in the purchase price
is a fair market value adjustment to increase debt assumed by $81 million. This
acquisition increased the Company’s presence in the New York metropolitan area.
The preliminary allocation of the purchase price of Duane Reade was accounted for
under the purchase method of accounting with the Company as the acquirer in
accordance with ASC Topic 805, Business Combinations. Goodwill, none of which is
deductible for tax purposes, and other intangible assets recorded in connection with
the acquisition totaled $418 million and $438 million, respectively. Goodwill consists
of expected purchasing synergies, consolidation of operations and reductions in
selling, general and administrative expenses. Intangible assets consist of $297 million
of favorable lease interests (10-year weighted average useful life), $74 million in
customer relationships (10-year useful life), $38 million in trade name (5-year useful
life) and $29 million in other intangible assets (10-year useful life).
Assets acquired and liabilities assumed in the transaction were recorded at their
acquisition date fair values while transaction costs associated with the acquisition
were expensed as incurred. The Company’s allocation was based on an evaluation
of the appropriate fair values and represented management’s best estimate based
on available data. The final purchase accounting has not yet been completed.
Any adjustments to the preliminary purchase price allocation are not expected
to be material. The preliminary estimated fair values of assets acquired and
liabilities assumed on April 9, 2010, are as follows (In millions):
Accounts receivable $ 52
Inventory 232
Other current assets 23
Property and equipment 219
Other non-current assets 4
Intangible assets 438
Goodwill 418
Total assets acquired 1,386
Liabilities assumed 254
Debt assumed 574
Net cash paid $ 558
We assumed federal net operating losses of $261 million and state net operating
losses of $252 million, both which begin to expire in 2018, in conjunction with the
Duane Reade acquisition.
The unaudited pro forma consolidated statements of earnings for fiscal 2010 and fiscal
2009 (assuming the acquisition of Duane Reade as of the beginning of each fiscal
period) are as follows (In millions, except per share amounts):
Twelve Months Ended August 31,
2010 2009
Net sales $ 68,603 $ 65,161
Net earnings 2,084 1,997
Net earnings per common share:
Basic 2.12 2.02
Diluted 2.11 2.01
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.
The Company incurred $71 million in costs related to the acquisition, all of which
was included in selling, general and administrative expenses. Actual results from
Duane Reade operations included in the Consolidated Statements of Earnings since
the date of acquisition are as follows (In millions, except per share amounts):
Twelve Months Ended August, 31, 2010
Net sales $ 732
Net loss (56)
Net earnings per common share:
Basic (0.06)
Diluted (0.06)
2010 Walgreens Annual Report Page 31