Walgreen Co. Reports Fiscal 2013 Second Quarter Results

  Walgreen Co. Reports Fiscal 2013 Second Quarter Results

  *Company reports adjusted second quarter earnings per diluted share of 96
    cents, compared with adjusted earnings per diluted share of 88 cents in
    year-ago quarter; GAAP earnings per diluted share of 79 cents compared
    with 78 cents in last year’s second quarter
  *Cash flow from operations reaches second-quarter record $1.2 billion
  *Alliance Boots and joint synergy program on track to deliver first-year
    targets
  *Walgreens and Alliance Boots form strategic, long-term relationship with
    AmerisourceBergen; includes 10-year comprehensive agreement for
    AmerisourceBergen to handle pharmaceutical distribution for Walgreens

Business Wire

DEERFIELD, Ill. -- March 19, 2013

Walgreen Co. (NYSE, NASDAQ: WAG) today announced earnings and sales results
for the second quarter and first half of fiscal year 2013 ended Feb. 28.

Net earnings determined in accordance with generally accepted accounting
principles (GAAP) for the fiscal 2013 second quarter were $756 million or 79
cents per diluted share, compared with $683 million or 78 cents per diluted
share in the year-ago quarter. Last year’s results benefited from one extra
day versus the current year because of leap year.

Adjusted fiscal 2013 second quarter net earnings were $915 million or 96 cents
per diluted share, compared with adjusted net earnings of $767 million or 88
cents per diluted share in the year-ago quarter. This year’s adjusted second
quarter results exclude the negative impacts of 12 cents per diluted share in
acquisition related items, and 5 cents per diluted share from the quarter’s
LIFO provision.

“We are pleased with the quarter’s results as we saw substantial strength in
our pharmacy performance, leading to strong earnings growth,” said Walgreens
President and CEO Greg Wasson. “With our Balance™ Rewards program now totaling
more than 60 million enrollments, our preferred status with four national
Medicare Part D plan sponsors and our very successful flu shot program this
year, our customers are responding to our purpose to help them get, stay and
live well.”

Net earnings for the first half of fiscal 2013 ended Feb. 28 determined in
accordance with GAAP were $1.17 billion or $1.23 per diluted share, compared
with $1.24 billion or $1.41 per diluted share in the first half of fiscal
2012.

Adjusted net earnings for the first half of fiscal 2013 were $1.47 billion or
$1.54 per diluted share, compared with adjusted net earnings of $1.39 billion
or $1.59 per diluted share in the first half of fiscal 2012. This year’s
adjusted first-half results exclude the negative impacts of 18 cents per
diluted share in acquisition related items and 8 cents per diluted share from
the first half’s LIFO provision. Special items in the first half of the year
included 3 cents per diluted share in costs related to Hurricane Sandy and 3
cents per diluted share in acquisition-related costs, offset by 1-cent per
diluted share in additional proceeds from the 2011 sale of the company’s
pharmacy benefit manager business.

Walgreens joint synergy program with its strategic partner, Alliance Boots,
continues to be on track to deliver its first-year target of $100-$150 million
in combined synergies. “Alliance Boots contribution to our results was in line
with our expectations this quarter, and we anticipate that to continue in the
second half of our fiscal year,” said Wasson.

The two companies also announced earlier today a strategic, long-term
relationship with AmerisourceBergen, one of North America’s largest
pharmaceutical services companies. Under the agreement, Walgreens will expand
its existing relationship with AmerisourceBergen into a 10-year comprehensive
primary distribution agreement for branded and generic pharmaceutical
products. In addition, Walgreens and Alliance Boots will collaborate with
AmerisourceBergen on global supply chain opportunities and will have rights to
acquire a minority equity position in AmerisourceBergen.

Wasson said, “We believe this relationship will create a wide range of
opportunities and innovations in the rapidly changing U.S. and global health
care environment that we expect will benefit all of our stakeholders.”

FINANCIAL HIGHLIGHTS

Sales

Second quarter sales were flat compared with the prior-year quarter at $18.65
billion, while first half sales decreased 2.3 percent to $35.96 billion.
Front-end comparable store sales (those open at least a year) decreased 2.6
percent in the second quarter, customer traffic in comparable stores decreased
5.2 percent and basket size increased 2.8 percent, while total sales in
comparable stores decreased 2.6 percent. All second-quarter comparable store
sales and prescription figures include 29 days in February 2012.

Prescription sales, which accounted for 61.1 percent of sales in the quarter,
were flat, while prescription sales in comparable stores decreased 2.7
percent. The company filled 208 million prescriptions in the quarter, an
increase of 6.0 percent over last year’s second quarter. Prescriptions filled
in comparable stores increased 4.3 percent in the quarter. As of Feb. 28,
Walgreens increased its retail prescription market share 50 basis points from
the end of its fiscal 2013 first quarter on Nov. 30, 2012, to 19.2 percent.

Flu shots administered at pharmacies and clinics this flu season through Feb.
28 totaled 7.0 million compared with 5.5 million a year ago.

Gross Profit and SG&A

Total gross profit dollars increased $218 million, or 4.0 percent, compared
with the year-ago second quarter, with gross profit margins increasing 1.2
percentage points versus the year-ago quarter to 30.1 as a percentage of
sales. The growth in margins was driven primarily by an increase in generic
prescription drugs dispensed. Front-end margins also increased as the company
progressed on its pricing and promotion strategy. The LIFO provision was $72
million this year, the same as the year-ago quarter.

Selling, general and administrative expense dollars increased $213 million, or
5.0 percent, compared with the year-ago quarter, including 0.5 percentage
point for acquisition-related costs and 0.3 percentage point for other
acquisition-related amortization.

In the second quarter, the company opened or acquired 29 new drugstores
compared with 35 in the year-ago quarter.

Walgreens also delivered operating and free cash flow of $1.2 billion and $953
million, respectively, in the second quarter.

Other second quarter highlights

  *Walgreens began participation Jan. 1 as part of the preferred pharmacy
    network of four national Medicare Part D plan sponsors.
  *Walgreens announced it has formed accountable care organizations (ACO)
    with three leading physician groups in Texas, Florida and New Jersey.
  *Walgreens completed a transaction in December giving the company and the
    Cystic Fibrosis Foundation joint ownership of two businesses: CF Services,
    a specialty pharmacy for CF patients and their families; and Pharma
    Dynamics Inc., a provider of new product launch support and call center
    services for drug manufacturers.
  *Walgreens and the Accreditation Association for Ambulatory Health Care
    (AAAHC) announced that half of the primary care worksite health centers
    managed by Walgreens Employer Solutions Group have received Medical Home
    accreditation, with plans to have all of its employer-based primary care
    centers accredited in the first half of calendar 2013.
  *For the third time in four years, Walgreens was selected by Fast Company
    magazine as one of the health care industry’s most innovative companies,
    as part of the magazine’s “Fast 50” issue celebrating the world’s most
    innovative companies.

At Feb. 28, Walgreens operated 8,537 locations in all 50 states, the District
of Columbia, Puerto Rico and Guam. The company has 8,072 drugstores
nationwide, 231 more than a year ago. Walgreens also operates worksite health
and wellness centers, infusion and respiratory services facilities, specialty
pharmacies and mail service facilities. Its Take Care Health Systems
subsidiary manages more than 700 in-store convenient care clinics and worksite
health and wellness centers.

Walgreens will hold a one-hour conference call to discuss the second quarter
results beginning at 8:30 a.m. Eastern time today, March 19. 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, March 19
through March 26 by calling 855-859-2056 within the U.S. and Canada, or
404-537-3406 outside the U.S. and Canada, using replay code 24758159.

Also, please refer to today’s separate release for additional information on
Walgreens and Alliance Boots new, strategic long-term relationship with
AmerisourceBergen that expands Walgreens existing relationship, provides for
collaboration between AmerisourceBergen, Walgreens and Alliance Boots on
global supply chain opportunities and gives Walgreens and Alliance Boots
rights to acquire a minority equity position in AmerisourceBergen.

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, 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               Six Months Ended
                   February 28,    February 29,     February 28,  February
                                                                    29,
                   2013             2012             2013           2012
                                                                    
Net sales          $  18,647        $  18,651        $  35,963      $ 36,808
Cost of sales        13,040         13,262         25,257      26,315 
(1)
Gross Profit          5,607            5,389            10,706        10,493
Selling,
general and           4,497            4,284            8,895         8,488
administrative
expenses
Equity earnings
in Alliance           85               -                89            -
Boots
Gain on sale of      20             -              20          -      
business
Operating             1,215            1,105            1,920         2,005
Income
                                                                    
Interest             23             17             60          34     
expense, net
                                                                    
Earnings Before
Income Tax            1,192            1,088            1,860         1,971
Provision
Income tax           436            405            691         734    
provision
Net Earnings         756            683          $  1,169      $ 1,237  
Net earnings
per common
share:
Basic              $  .80          $  .79          $  1.24       $ 1.41   
Diluted            $  .79          $  .78          $  1.23       $ 1.41   
                                                                    
Dividends          $  .2750        $  .2250        $  .5500      $ .4500  
declared
                                                                    
Average shares        945.4            869.3            945.4         874.5
outstanding
Dilutive effect
of stock             8.0            5.4            6.9         5.5    
options
Average Diluted      953.4          874.7          952.3       880.0  
Shares
                                                                    
                                                                    
                   Percent of Sales                  Percent of Sales
                                                                    
Net sales             100.0   %        100.0   %        100.0   %     100.0  %
Cost of sales        69.9           71.1           70.2        71.5   
Gross Margin          30.1             28.9             29.8          28.5
Selling,
general and           24.1             23.0             24.7          23.1
administrative
expenses
Equity earnings
in Alliance           0.4              -                0.2           -
Boots
Gain on sale of      0.1            -              0.1         -      
business
Operating             6.5              5.9              5.4           5.4
Income
                                                                    
Interest             0.1            0.1            0.2         0.1    
expense, net
                                                                    
Earnings Before
Income Tax            6.4              5.8              5.2           5.3
Provision
Income tax           2.3            2.2            1.9         2.0    
provision
Net Earnings         4.1     %       3.6     %       3.3     %    3.3    %
                                                                    
(1) Second quarter fiscal 2013 and 2012 includes a LIFO provision of $72
million. Fiscal 2013 six month period includes a LIFO provision of $127
million versus $117 million in the previous year.


WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED AND SUBJECT TO RECLASSIFICATION)
(In Millions)
                                                         
                                             February 28,   February 29,
                                             2013           2012
Assets
Current Assets:
Cash and cash equivalents                    $   2,431      $   1,084
Accounts receivable, net                         2,481          2,509
Inventories                                      7,253          7,347
Other current assets                            267           270
Total Current Assets                             12,432         11,210
Non-Current Assets:
Property and Equipment, at cost, less
                                                 12,048         11,705
accumulated depreciation and amortization
Equity investment in Alliance Boots              6,181          -
Alliance Boots call option                       884            -
Goodwill                                         2,387          2,078
Other non-current assets                        1,632         1,629
Total Non-Current Assets                        23,132        15,412
Total Assets                                 $   35,564     $   26,622
Liabilities and Shareholders' Equity
Current Liabilities:
Short-term borrowings                        $   1,299      $   12
Trade accounts payable                           4,388          4,203
Accrued expenses and other liabilities           3,229          2,773
Income taxes                                    109           266
Total Current Liabilities                        9,025          7,254
Non-Current Liabilities:
Long-term debt                                   5,058          2,381
Deferred income taxes                            517            295
Other non-current liabilities                   1,991         1,876
Total Non-Current Liabilities                   7,566         4,552
Shareholders' Equity                            18,973        14,816
Total Liabilities and Shareholders' Equity   $   35,564     $   26,622
                                                                

WALGREEN CO. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED AND SUBJECT TO RECLASSIFICATION)
(In Millions)
                                                               
                                                                  
                                                   Six Months Ended
                                                   February 28,   February 29,
                                                   2013           2012
                                                                  
Cash flows from operating activities:
Net earnings                                       $  1,169       $  1,237
Adjustments to reconcile net earnings to net
cash provided by operating activities -


Depreciation and amortization                         640            560
Deferred income taxes                                 (9      )      (7      )
Stock compensation expense                            45             53
Earnings in equity method investments                 (89     )      -
Other                                                 44             14
Changes in operating assets and liabilities -
Accounts receivable, net                              (292    )      36
Inventories                                           (93     )      724
Other current assets                                  43             37
Trade accounts payable                                (63     )      (618    )
Accrued expenses and other liabilities                228            (353    )
Income taxes                                          138            67
Other non-current assets and liabilities             38           66      
Net cash provided by operating activities            1,799        1,816   
                                                                  
Cash flows from investing activities:
Additions to property and equipment                   (581    )      (723    )
Business and intangible asset acquisitions, net       (552    )      (204    )
of cash received
Purchases of short term investments held to           (49     )      -
maturity
Proceeds from sale of assets                          18             35
Proceeds (payments) related to sale of business       20             (45     )
Other                                                (28     )     (14     )
Net cash used for investing activities               (1,172  )     (951    )
                                                                  
Cash flows from financing activities:
Net proceeds from issuance of debt                    4,000          -
Payments of long-term debt                            (3,000  )      -
Stock purchases                                       (116    )      (1,015  )
Proceeds related to employee stock plans              170            85
Cash dividends paid                                   (520    )      (398    )
Other                                                (27     )     (9      )
Net cash provided by (used for) financing            507          (1,337  )
activities
                                                                  
Changes in cash and cash equivalents:
Net increase (decrease) in cash and cash              1,134          (472    )
equivalents
Cash and cash equivalents at beginning of period     1,297        1,556   
Cash and cash equivalents at end of period         $  2,431      $  1,084   
                                                                  

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          Six months ended
                          February 28    February    February 28    February
                                          29                          29
                          2013            2012        2013            2012
Net earnings (GAAP)       $  756          $  683      $  1,169        $  1,237
Acquisition-related          71              39          130             76
amortization
Alliance Boots equity        42              -           42              -
earnings tax add-back
LIFO provision               46              45          80              73
Hurricane Sandy costs        -               -           24              -
Acquisition-related          13              -           36              -
costs
Gain on sale of
Walgreen Health             (13    )       -          (13    )       -
Initiatives, Inc.
Adjusted net earnings     $  915         $  767      $  1,468       $  1,386
                                                                      
Net earnings per
common share –            $  0.79         $  0.78     $  1.23         $  1.41
diluted (GAAP)
Acquisition-related          0.08            0.05        0.14            0.10
amortization
Alliance Boots equity        0.04            -           0.04            -
earnings tax add-back
LIFO provision               0.05            0.05        0.08            0.08
Hurricane Sandy              -               -           0.03            -
costs(1)
Acquisition-related          0.01            -           0.03            -
costs(1)
Gain on sale of
Walgreen Health             (0.01  )       -          (0.01  )       -
Initiatives, Inc.(1)
Adjusted net earnings
per common share –        $  0.96        $  0.88     $  1.54        $  1.59
diluted
                                                                         
(1) Reported as special items
                                                                         

                                              Three months     
                                                     ended
                                                     February 28
                                                     2013
Net cash provided
by operating                                         $      1,198
activities (GAAP)
Less: Additions
to property and                                            245
equipment
Free cash flow(2)                                    $      953
                                                                           
(2) 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.

Contact:

Walgreen Co.
Media:
Michael Polzin, 847-372-3502
Investors:
Rick Hans, CFA, 847-315-2385
Ashish Kohli, CFA, 847-315-3810
 
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