LONGS DRUG STORES CORP - 10-Q Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the quarterly period ended July 29, 2004

¨	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the transition period from to

Commission file number 1-8978

LONGS DRUG STORES CORPORATION

(Exact name of registrant as specified in its charter)

Maryland

68-0048627

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification No.)


141 North Civic Drive Walnut Creek, California		94596
(Address of principal executive offices)		(Zip Code)

Registrant’s telephone number, including area code: (925) 937-1170

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨

There were 37,428,792 shares of common stock outstanding as of August 26, 2004.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

This quarterly report contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such statements relate to, among other things, pharmacy and front-end sales and gross profits; cost reductions; changes in supply chain practices; workers’ compensation costs; liquidity and cash requirements; working capital reductions; the number of store openings, closures and remodels; the level of capital expenditures; contractual commitments; third-party sales as a percentage of total pharmacy sales; and our effective tax rate and are indicated by words or phrases such as “continuing,” “expects,” “estimates,” “believes,” “plans,” “anticipates,” “will” and other similar words or phrases.

These forward-looking statements are based on our current plans and expectations and involve risks and uncertainties that could cause actual events and results to vary materially from those included in or contemplated by forward-looking statements we make. These risks and uncertainties include, but are not limited to, those set forth below:

•

Changes in economic conditions generally or in the markets we serve;

•

Economic softness and unemployment;

•

Consumer preferences and spending patterns;

•

Competition from other drugstore chains, supermarkets, mass merchandisers, discount retailers, on-line retailers, other retailers and mail order companies;

•

The frequency and rate of introduction of successful new prescription drugs;

•

The introduction of lower priced generic drugs;

•

The efforts of third-party payers to reduce prescription drug costs;

•

The impact of rising gasoline prices on consumer spending and the economy in general;

•

The effects of war and terrorism on economic conditions and consumer spending patterns;

•

Continued good relationships with our employees;

•

Labor unrest in the same or competitive industries;

•

The impact of rising workers’ compensation, health and welfare and energy costs on our operations;

•

The success of planned advertising and merchandising strategies;

•

Interest rate fluctuations and changes in capital market conditions or other events affecting our ability to obtain necessary financing on favorable terms;

•

Consumer reaction to our remodeled stores;

•

Our relationships with our suppliers;

•

Our ability to obtain adequate insurance coverage;

•

Our ability to hire and retain pharmacists and other store and management personnel;

•

The availability and cost of real estate for new stores;

•

The impact of pending or future litigation;

•

The impact of state and federal budget deficits on government healthcare spending and on economic conditions generally;

•

The impact of Medicare, Medi-Cal and similar government-sponsored health plans on our pharmacy sales and profitability;

•

The effectiveness of workers’ compensation reform efforts, especially in California;

•

Changes in state or federal legislation or regulations affecting our business;

•

Our ability to execute our previously announced initiatives;

•

Changes in internal business processes associated with supply chain and other initiatives;

•

Our ability to successfully implement new computer systems and technology, including a perpetual inventory system;

•

Disruption in our supply chain due to system conversions;

•

Our ability to improve our purchasing of front-end and pharmacy products;

•

Accounting policies and practices; and

•

Other factors discussed in this quarterly report under “Risk Factors” and elsewhere or in any of our other SEC filings.

In addition, because we lack a perpetual inventory system, our ability to accurately forecast and track our gross profits and inventory levels during periods between our quarterly physical inventories is limited. Therefore, our actual gross profits and inventory levels may vary materially from the gross profits and inventory levels included in or contemplated by forward-looking statements we make.

We assume no obligation to update our forward-looking statements to reflect subsequent events or circumstances.

TABLE OF CONTENTS


		Page
PART I	FINANCIAL INFORMATION
Item 1	Condensed Consolidated Financial Statements	1
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3	Quantitative and Qualitative Disclosures About Market Risk	19
Item 4	Controls and Procedures	19

PART II	OTHER INFORMATION
Item 1	Legal Proceedings	20
Item 4	Submission of Matters to a Vote of Security Holders	20
Item 6	Exhibits and Reports on Form 8-K	21
Signatures		22

PART I - FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED INCOME (unaudited)


	For the 13 weeks ended						For the 26 weeks ended
	July 29, 2004			July 31, 2003			July 29, 2004			July 31, 2003
	*Thousands Except Per Share Amounts*
Sales	$	1,150,482		$	1,109,463		$	2,310,178		$	2,212,593
Cost of sales		855,087			821,424			1,721,826			1,639,447

Gross profit		295,395			288,039			588,352			573,146
Operating and administrative expenses		253,393			251,602			506,416			502,122
Depreciation and amortization		22,253			21,891			43,770			43,687
Legal settlements and other disputes, net		10,773			—			10,773			—
Provision for store closures and asset impairments		—			2,543			—			2,543

Operating income		8,976			12,003			27,393			24,794
Interest expense		3,692			3,697			7,442			7,256
Interest income		(128	)		(124	)		(280	)		(239	)

Income before income taxes		5,412			8,430			20,231			17,777
Income taxes		2,034			3,170			7,606			6,684

Net income	$	3,378		$	5,260		$	12,625		$	11,093

Earnings per common share:
Basic	$	0.09		$	0.14		$	0.34		$	0.30
Diluted		0.09			0.14			0.34			0.30

Dividends per common share	$	0.14		$	0.14		$	0.28		$	0.28

Weighted average number of shares outstanding:
Basic		37,311			37,038			37,163			37,243
Diluted		37,555			37,219			37,398			37,410

See notes to condensed consolidated financial statements.

LONGS DRUG STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


	July 29, 2004			July 31, 2003			January 29, 2004
	*Thousands Except Share Information*
Assets
Current Assets:
Cash and cash equivalents	$	44,979		$	65,519		$	40,222
Pharmacy and other receivables, net		178,172			134,815			163,950
Merchandise inventories, net		430,702			409,058			477,122
Deferred income taxes		41,089			32,283			41,848
Prepaid expenses and other current assets		9,397			9,484			13,373

Total current assets		704,339			651,159			736,515

Property:
Land		107,053			104,761			106,326
Buildings and leasehold improvements		563,908			536,510			547,128
Equipment and fixtures		555,150			512,223			531,855

Total		1,226,111			1,153,494			1,185,309
Less accumulated depreciation		609,464			552,218			571,889

Property, net		616,647			601,276			613,420

Goodwill		82,085			82,085			82,085
Intangible assets, net		6,546			6,602			6,428
Other non-current assets		3,255			5,762			3,664

Total	$	1,412,872		$	1,346,884		$	1,442,112

Liabilities and Stockholders' Equity
Current Liabilities:
Accounts payable and accrued expenses	$	283,642		$	289,116		$	296,741
Employee compensation and benefits		118,174			93,779			109,386
Taxes payable		46,261			35,547			64,941
Current maturities of debt		41,870			4,974			91,870

Total current liabilities		489,947			423,416			562,938

Long-term debt		164,688			186,558			114,558
Deferred income taxes and other long-term liabilities		44,772			35,096			50,695
Commitments and Contingencies
Stockholders’ Equity:
Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,370,000, 37,418,000 and 37,544,000 shares outstanding		18,685			18,709			18,772
Additional capital		172,326			167,696			170,321
Unearned compensation		(1,784	)		(3,762	)		(2,525	)
Retained earnings		524,238			519,171			527,353

Total stockholders’ equity		713,465			701,814			713,921

Total	$	1,412,872		$	1,346,884		$	1,442,112

See notes to condensed consolidated financial statements.

LONGS DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)


	For the 26 weeks ended
	July 29, 2004			July 31, 2003
	*Thousands*
Operating Activities:
Net income	$	12,625		$	11,093
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		43,770			43,687
Provision for store closures and asset impairments		—			2,543
Deferred income taxes and other		(5,866	)		(753	)
Stock awards and options, net

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