Walgreens 2011 Annual Report Download - page 36

The Company recognizes interest and penalties in the income tax provision in its
Consolidated Statements of Earnings. At August 31, 2011, and August 31, 2010, the
Company had accrued interest and penalties of $24 million and $20 million, respectively.
The Company files a consolidated U.S. federal income tax return, as well as income tax
returns in various states. It is no longer subject to U.S. federal income tax examinations
for years before fiscal 2008, except for one issue related to fiscal 2006 and 2007
currently in appeals. With few exceptions, it is no longer subject to state and local
income tax examinations by tax authorities for years before fiscal 2006. The Company
anticipates that the Internal Revenue Service will complete its audit of fiscal years
2008 and 2009 in fiscal 2012.
It is reasonably possible that the amount of the unrecognized tax benefit with respect
to certain unrecognized tax positions will increase or decrease during the next 12
months; however, the Company does not expect the change to have a material effect
on its results of operations or its financial position.
7. Short-Term Borrowings and Long-Term Debt
Short-term borrowings and long-term debt consists of the following at August 31
(In millions) :
2011 2010
Short-Term Borrowings –
Current maturities of loans assumed through
the purchase of land and buildings; various
interest rates from 5.00% to 8.75%;
various maturities from 2012 to 2035 $ 8 $ 7
Other 5 5
Total short-term borrowings $ 13 $ 12
Long-Term Debt –
4.875% unsecured notes due 2013 net of
unamortized discount and interest rate swap
fair market value adjustment (see Note 8) $ 1,339 $ 1,348
5.250% unsecured notes due 2019 net of
unamortized discount and interest rate swap
fair market value adjustment (see Note 8) 1,011 995
Loans assumed through the purchase of land and buildings;
various interest rates from 5.00% to 8.75%; various
maturities from 2012 to 2035 54 53
2,404 2,396
Less current maturities (8) (7)
Total long-term debt $ 2,396 $ 2,389
The Company has had no activity or outstanding balances in its commercial paper
program since the second quarter of fiscal 2009. In connection with the commercial
paper program, the Company maintains two unsecured backup syndicated lines of
credit that total $1.1 billion. The first $500 million facility expires on July 20, 2015,
and allows for the issuance of up to $250 million in letters of credit, which reduces
the amount available for borrowing. The second $600 million facility expires on
August 13, 2012. The Company’s ability to access these facilities is subject to
compliance with the terms and conditions of the credit facilities, including financial
covenants. The covenants require the Company to maintain certain financial ratios
related to minimum net worth and priority debt, along with limitations on the sale
of assets and purchases of investments. At August 31, 2011, the Company was in
compliance with all such covenants. The Company pays a facility fee to the financing
banks to keep these lines of credit active. At August 31, 2011, there were no letters
of credit issued against these credit facilities and the Company does not anticipate
any future letters of credit to be issued against these facilities.
On July 17, 2008, the Company issued notes totaling $1,300 million bearing an
interest rate of 4.875% paid semiannually in arrears on February 1 and August 1
of each year, beginning on February 1, 2009. The notes will mature on August 1,
2013. The Company may redeem the notes, at any time in whole or from time to
time in part, at its option at a redemption price equal to the greater of: (1) 100% of
the principal amount of the notes to be redeemed; or (2) the sum of the present
values of the remaining scheduled payments of principal and interest, discounted to
the date of redemption on a semiannual basis at the Treasury Rate, plus 30 basis
points, plus accrued interest on the notes to be redeemed to, but excluding, the
date of redemption. If a change of control triggering event occurs, unless the
Company has exercised its option to redeem the notes, it will be required to offer to
repurchase the notes at a purchase price equal to 101% of the principal amount of
the notes plus accrued and unpaid interest to the date of redemption. The notes are
unsecured senior debt obligations and rank equally with all other unsecured senior
indebtedness of the Company. The notes are not convertible or exchangeable. Total
issuance costs relating to this offering were $9 million, which included $8 million in
underwriting fees. The fair value of the notes as of August 31, 2011 and 2010, was
$1,403 million and $1,446 million, respectively. Fair value for these notes was
determined based upon quoted market prices.
On January 13, 2009, the Company issued notes totaling $1,000 million bearing
an interest rate of 5.25% paid semiannually in arrears on January 15 and July 15
of each year, beginning on July 15, 2009. The notes will mature on January 15,
2019. The Company may redeem the notes, at any time in whole or from time to
time in part, at its option at a redemption price equal to the greater of: (1) 100%
of the principal amount of the notes to be redeemed; or (2) the sum of the present
values of the remaining scheduled payments of principal and interest, discounted to
the date of redemption on a semiannual basis at the Treasury Rate, plus 45 basis
points, plus accrued interest on the notes to be redeemed to, but excluding, the
date of redemption. If a change of control triggering event occurs, unless the
Company has exercised its option to redeem the notes, it will be required to offer
to repurchase the notes at a purchase price equal to 101% of the principal amount
of the notes plus accrued and unpaid interest to the date of redemption. The notes
are unsecured senior debt obligations and rank equally with all other unsecured
senior indebtedness of the Company. The notes are not convertible or exchangeable.
Total issuance costs relating to this offering were $8 million, which included
$7 million in underwriting fees. The fair value of the notes as of August 31, 2011
and 2010 was $1,173 million and $1,167 million, respectively. Fair value for these
notes was determined based upon quoted market prices.
8. Financial Instruments
The Company uses derivative instruments to manage its interest rate exposure
associated with some of its fixed-rate borrowings. The Company does not use
derivative instruments for trading or speculative purposes. All derivative instruments
are recognized in the Consolidated Balance Sheets at fair value. The Company
designates interest rate swaps as fair value hedges of fixed-rate borrowings.
For derivatives designated as fair value hedges, the change in the fair value of both
the derivative instrument and the hedged item are recognized in earnings in the
current period. At the inception of a hedge transaction, the Company formally
documents the hedge relationship and the risk management objective for undertaking
the hedge. In addition, it assesses both at inception of the hedge and on an ongoing
basis whether the derivative in the hedging transaction has been highly effective
in offsetting changes in fair value of the hedged item and whether the derivative
is expected to continue to be highly effective. The impact of any ineffectiveness
is recognized currently in earnings.
Counterparties to derivative financial instruments expose the Company to credit-
related losses in the event of nonperformance, but the Company regularly monitors
the creditworthiness of each counterparty.
Notes to Consolidated Financial Statements (continued)
Page 34 2011 Walgreens Annual Report