Walgreens 2011 Annual Report Download - page 33

includes both selling, general and administrative expenses and capital, to be
approximately $45 thousand per store. For the fiscal year ended August 31, 2011,
we incurred $144 million in total program costs, of which $84 million was included
in selling, general and administrative expenses and $60 million in capital costs. In
fiscal 2010, we incurred $71 million in total program costs, of which $45 million
was included in selling, general and administrative expenses and $26 million in
capital costs. The Company incurred $5 million in program costs, all of which was
included in selling, general and administrative expenses, in fiscal 2009.
3. Leases
The Company owns 21% 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 Company becomes 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, 2011, 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
2012 9 2,381
2013 11 2,379
2014 11 2,336
2015 10 2,277
2016 10 2,215
Later 168 24,617
Total minimum lease payments $219 $36,205
The capital lease amount includes $106 million of executory costs and imputed
interest. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $18 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 2011,
2010 and 2009, the Company recorded charges of $54 million, $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,
2011 2010
Balance – beginning of period $ 151 $ 99
Provision for present value of non-cancelable lease
payments of closed facilities 49 77
Assumptions about future sublease income, terminations
and changes in interest rates (19) (9)
Interest accretion 24 22
Cash payments, net of sublease income (60) (45)
Reserve acquired through acquisition — 7
Balance – end of period $ 145 $ 151
The Company remains secondarily liable on 27 assigned leases. The maximum
potential undiscounted future payments are $30 million at August 31, 2011.
Lease option dates vary, with some extending to 2041.
Rental expense was as follows (In millions):
2011 2010 2009
Minimum rentals $ 2,506 $ 2,218 $ 1,973
Contingent rentals 9 9 11
Less: Sublease rental income (15) (9) (9)
$ 2,500 $ 2,218 $ 1,975
4. Acquisitions
In June 2011, the Company completed its acquisition of drugstore.com, inc.
(drugstore.com) for cash proceeds of $398 million including the assumption of
$17 million of debt. Based on preliminary purchase accounting, the acquisition
added $132 million to goodwill and $122 million related to other intangible assets.
The addition of drugstore.com’s online business across its health, personal care,
beauty and vision categories better positions the Company as the most convenient
multi-channel retailer of health and daily living needs in America.
The aggregate purchase price of all business and intangible asset acquisitions
excluding drugstore.com was $232 million in fiscal 2011. These acquisitions added
$26 million to goodwill and $193 million to intangible assets, primarily prescription
files. The remaining fair value relates to immaterial amounts of tangible assets, less
liabilities assumed. Operating results of the businesses acquired have been included
in the Consolidated Statements of Earnings from their respective acquisition dates
forward and were not material. 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.
In June 2011, the Company completed the sale of its pharmacy benefit management
business, Walgreens Health Initiatives, Inc. (WHI), to Catalyst Health Solutions, Inc.
in a cash transaction for $525 million, $40 million of which was withheld in escrow.
Net cash proceeds related to the transaction were $442 million. The Company recorded
a pre-tax gain in the fourth fiscal quarter of $434 million on the transaction.
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
$1,134 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 allocation of the purchase price of Duane Reade was accounted for under the
purchase method of accounting 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 $401 million and
$445 million, respectively. Goodwill consists of expected purchasing synergies,
consolidation of operations and reductions in selling, general and administrative
expenses. Intangible assets consist of $303 million of favorable lease interests
(10-year weighted average useful life), $75 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. Final purchase accounting was completed in the first quarter of fiscal 2011. There
were no material adjustments to the preliminary purchase price allocation.
2011 Walgreens Annual Report Page 31