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Walgreen Co. Reports Fiscal 2013 Third Quarter Results

Walgreens will hold a one-hour conference call to discuss the third quarter results beginning at 8:30 a.m. Eastern time today, June 25. The conference call will be simulcast through Walgreens investor relations website at: http://investor.walgreens.com. A replay of the conference call will be archived on the website for 12 months after the call. A podcast also will be available on the investor relations website.

The replay also will be available from 11:30 a.m. Eastern time, June 25 through July 2 by calling 855-859-2056 within the U.S. and Canada, or 404-537-3406 outside the U.S. and Canada, using replay code 69672856.

Cautionary Note Regarding Forward-Looking Statements. Statements in this release that are not historical, including, without limitation, estimates of future financial and operating performance, including the amounts and timing of future accretion and synergies, are forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Words such as "expect," "likely," "outlook," "forecast, "would," "could," "should," "can," "will," "project," "intend," "plan," "goal," “target,” "continue," "sustain," "synergy," "on track," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and involve risks, assumptions and uncertainties, including, but not limited to, those relating to our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and Alliance Boots and their possible effects, the Purchase and Option Agreement and other agreements relating to our strategic partnership with Alliance Boots, the arrangements and transactions contemplated thereby and their possible effects, the parties' ability to realize anticipated synergies and achieve anticipated financial results, the risks associated with transitions in supply arrangements, the risks associated with international business operations, the risks associated with governance and control matters, whether the option to acquire the remainder of the Alliance Boots equity interest will be exercised and the financial ramifications thereof, the risks associated with potential equity investments in AmerisourceBergen including whether the warrants to invest in AmerisourceBergen will be exercised and the financial ramifications thereof, changes in vendor, payer and customer relationships and terms, changes in network participation, levels of business with Express Scripts customers, the implementation, operation and growth of our customer loyalty program, changes in economic and market conditions, competition, risks associated with new business areas and activities, risks associated with acquisitions, joint ventures and strategic investments, the ability to realize anticipated results from capital expenditures and cost reduction initiatives, outcomes of legal and regulatory matters, and changes in legislation or regulations. These and other risks, assumptions and uncertainties are described in Item 1A (Risk Factors) of our most recent Annual Report on Form 10-K and Quarterly Report on Form 10-Q, each of which is incorporated herein by reference, and in other documents that we file or furnish with the Securities and Exchange Commission. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, Walgreens does not undertake, and expressly disclaims, any duty or obligation to update publicly any forward-looking statement after the initial distribution of this release, whether as a result of new information, future events, changes in assumptions or otherwise.

Please refer to the supplemental information presented below for reconciliations of the non-GAAP financial measures used in this release to the most comparable GAAP financial measure and related disclosures.

WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(In Millions, Except Per Share Amounts)
 
  Three Months Ended   Nine Months Ended
May 31,   May 31, May 31,   May 31,
2013 2012 2013 2012
 
Net sales $ 18,313 $ 17,752 $ 54,276 $ 54,560
Cost of sales (1)   13,091   12,738   38,348   39,053
Gross Profit 5,222 5,014 15,928 15,507
Selling, general and administrative expenses 4,362 4,141 13,257 12,629
Equity earnings in Alliance Boots (2) 131 - 220 -
Gain on sale of business   -   -   20   -
Operating Income 991 873 2,911 2,878
 
Interest expense, net 50 17 110 51
Other income   77   -   77   -
Earnings Before Income Tax Provision 1,018 856 2,878 2,827
Income tax provision   394   319   1,085   1,053
Net Earnings   624   537   1,793   1,774
Net earnings per common share:
  Basic $ .66 $ .63 $ 1.90 $ 2.04
Diluted $ .65 $ .62 $ 1.88 $ 2.03
 
Dividends declared $ .2750 $ .2250 $ .8250 $ .6750
 
Average shares outstanding 947.7 859.8 947.7 869.6
Dilutive effect of stock options   11.3   5.4   6.8   5.4
Average Diluted Shares   959.0   865.2   954.5   875.0
 
 
Percent of Sales Percent of Sales
 
Net sales 100.0% 100.0% 100.0% 100.0%
Cost of sales   71.5   71.8   70.6   71.6
Gross Margin 28.5 28.2 29.4 28.4
Selling, general and administrative expenses 23.8 23.3 24.3 23.1
Equity earnings in Alliance Boots 0.7 - 0.3 -
Gain on sale of business   -   -   -   -
Operating Income 5.4 4.9 5.4 5.3
 
Interest expense, net 0.3 0.1 0.2 0.1
Other income   0.5   -   0.1   -
Earnings Before Income Tax Provision 5.6 4.8 5.3 5.2
Income tax provision   2.2   1.8   2.0   1.9
Net Earnings   3.4%   3.0%   3.3%   3.3%
 

(1) Fiscal 2013 third quarter includes a LIFO provision of $120 million versus $60 million in the previous year. Fiscal 2013 nine month period includes a LIFO provision of $247 million versus $177 million in the previous year.

(2) Equity earnings in Alliance Boots exclude the results of Walgreens Boots Alliance Development GmbH, which is consolidated into the company’s results.

 
WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND SUBJECT TO RECLASSIFICATION)
(In Millions)
   
 
 
May 31, May 31,
2013 2012
Assets
Current Assets:
Cash and cash equivalents $ 2,994 $ 1,995
Accounts receivable, net 2,418 2,294
Inventories 6,881 7,004
Other current assets   278   277
Total Current Assets 12,571 11,570
Non-Current Assets:

Property and Equipment, at cost, less accumulated depreciation and amortization

12,075 11,790
Equity investment in Alliance Boots 6,205 -
Alliance Boots call option 837 -
Goodwill 2,400 2,168
Other non-current assets   1,753   1,671
Total Non-Current Assets   23,270   15,629
Total Assets $ 35,841 $ 27,199
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings $ 1,865 $ 13
Trade accounts payable 4,530 4,433
Accrued expenses and other liabilities 3,221 2,851
Income taxes   74   204
Total Current Liabilities 9,690 7,501
Non-Current Liabilities:
Long-term debt 4,501 2,387
Deferred income taxes 577 368
Other non-current liabilities   2,093   1,903
Total Non-Current Liabilities   7,171   4,658
Shareholders' Equity   18,980   15,040
Total Liabilities and Shareholders' Equity $ 35,841 $ 27,199
 
WALGREEN CO. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED AND SUBJECT TO RECLASSIFICATION)
(In Millions)
   
Nine Months Ended
      May 31, May 31,
2013 2012
 

Cash flows from operating activities:

 

 

Net earnings $ 1,793 $ 1,774
Adjustments to reconcile net earnings to net cash provided by operating activities -
Depreciation and amortization 958 856
Change in fair value of warrants and related amortization (77) -
Deferred income taxes 33 92
Stock compensation expense 70 77
Equity earnings in Alliance Boots (220) -
Other 60 27
Changes in operating assets and liabilities -
Accounts receivable, net (214) 230
Inventories 288 1,106
Other current assets 38 33
Trade accounts payable 78 (389)
Accrued expenses and other liabilities 203 (248)
Income taxes 98 13
Other non-current assets and liabilities   70   92
Net cash provided by operating activities   3,178   3,663
 
Cash flows from investing activities:
Additions to property and equipment (874) (1,102)
Business and intangible asset acquisitions, net of cash received (588) (421)
Purchases of short term investments held to maturity (55) -
Proceeds from short term investments held to maturity 5 -
Proceeds from sale of assets 27 40
Proceeds (payments) related to sale of business 20 (45)
Other   (40)   (22)
Net cash used for investing activities   (1,505)   (1,550)
 
Cash flows from financing activities:
Net proceeds from issuance of debt 4,000 -
Payments of long-term debt (3,000) -
Stock purchases (567) (1,191)
Proceeds related to employee stock plans 391 120
Cash dividends paid (780) (593)
Other   (20)   (10)
Net cash provided by (used for) financing activities   24   (1,674)
 
Changes in cash and cash equivalents:
Net increase in cash and cash equivalents 1,697 439
Cash and cash equivalents at beginning of period   1,297   1,556
Cash and cash equivalents at end of period $ 2,994 $ 1,995
 
WALGREEN CO. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION (UNAUDITED)
RECONCILIATION OF NON-GAAP FINANCIAL MEASURES
(In millions, except per share amounts)
 

The following information provides reconciliations of the supplemental non-GAAP financial measures, as defined under SEC rules, presented in this press release to the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles in the United States (GAAP). The company has provided these non-GAAP financial measures in the press release, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because management has evaluated the company’s financial results both including and excluding the adjusted items and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company’s business from period to period and trends in the company’s historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented in the press release.

   
Three months ended Nine months ended
May 31,   May 31, May 31,   May 31,
2013 2012 2013 2012
Net earnings (GAAP) $ 624 $ 537 $ 1,793 $ 1,774
Acquisition-related amortization 52 41 182 117
Alliance Boots related tax 44 - 86 -
LIFO provision 76 38 156 111
Hurricane Sandy costs - - 24 -
Acquisition-related costs 17 12 53 12
DEA settlement costs 47 - 47 -
Change in fair value of warrants and related amortization (48) - (48) -
Gain on sale of Walgreen Health Initiatives, Inc.   -   -   (13)   -
Adjusted net earnings $ 812 $ 628 $ 2,280 $ 2,014
 
Net earnings per common share – diluted (GAAP) $ 0.65 $ 0.62 $ 1.88 $ 2.03
Acquisition-related amortization 0.05 0.05 0.19 0.15
Alliance Boots related tax 0.05 0.09 -
LIFO provision 0.08 0.04 0.16 0.12
Hurricane Sandy costs - - 0.03 -
Acquisition-related costs 0.02 0.01 0.05 0.01
DEA settlement costs 0.05 - 0.05 -
Change in fair value of warrants and related amortization (0.05) - (0.05) -
Gain on sale of Walgreen Health Initiatives, Inc.   -   -   (0.01)   -
Adjusted net earnings per common share – diluted $ 0.85 $ 0.72 $ 2.39 $ 2.31
         
Three months
ended
    May 31,
2013
Net cash provided by operating activities (GAAP) $ 1,379
Less: Additions to property and equipment   293
Free cash flow(1) $ 1,086

(1) Free cash flow is defined as net cash provided by operating activities in a period minus additions to property and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.

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