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 October 28, 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)

(925) 937-1170

Registrant’s telephone number, including area code:

N/A

(Former name, former address, and former fiscal year, if changed since last report)

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 37,695,000 shares of common stock outstanding as of November 25, 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 pharmacy benefit management companies;

•

The growth of mail order pharmacies, and changes in some third-party health plans requiring mail order fulfillment of certain medications;

•

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 businesses;

•

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;

•

Changes to 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 6	Exhibits and Reports on Form 8-K	20
Signatures			21

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 39 weeks ended
	October 28, 2004			October 30, 2003			October 28, 2004			October 30, 2003
	*Thousands Except Per Share Amounts*
Sales	$	1,100,897		$	1,087,293		$	3,411,075		$	3,299,886
Cost of sales		813,185			813,289			2,535,011			2,452,736

Gross profit		287,712			274,004			876,064			847,150
Operating and administrative expenses		254,487			241,984			760,903			744,106
Depreciation and amortization		20,748			20,066			64,518			63,753
Legal settlements and other disputes, net		—			—			10,773			—
Provision for store closures and asset impairments		—			—			—			2,543

Operating income		12,477			11,954			39,870			36,748
Interest expense		3,589			3,648			11,031			10,904
Interest income		(126	)		(76	)		(406	)		(315	)

Income before income taxes		9,014			8,382			29,245			26,159
Income taxes		2,785			3,152			10,391			9,836

Net income	$	6,229		$	5,230		$	18,854		$	16,323

Earnings per common share:
Basic	$	0.17		$	0.14		$	0.51		$	0.44
Diluted		0.17			0.14			0.50			0.44
Dividends per common share	$	0.14		$	0.14		$	0.42		$	0.42

Weighted average number of shares outstanding:
Basic		37,252			37,144			37,193			37,210
Diluted		37,577			37,413			37,457			37,411

See accompanying notes to condensed consolidated financial statements.

LONG DRUG STORES CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)


	October 28, 2004			October 30, 2003			January 29, 2004
	*Thousands Except Share Information*
Assets
Current Assets:
Cash and cash equivalents	$	67,093		$	55,088		$	40,222
Pharmacy and other receivables, net		160,373			148,090			163,950
Merchandise inventories, net		476,979			478,209			477,122
Deferred income taxes		38,798			33,395			41,848
Prepaid expenses and other current assets		13,253			11,500			13,373

Total current assets		756,496			726,282			736,515

Property:
Land		108,074			104,761			106,326
Buildings and leasehold improvements		573,041			542,069			547,128
Equipment and fixtures		559,165			526,739			531,855

Total		1,240,280			1,173,569			1,185,309
Less accumulated depreciation		621,357			567,211			571,889

Property, net		618,923			606,358			613,420

Goodwill		82,085			82,085			82,085
Intangible assets, net		6,378			6,446			6,428
Other non-current assets		4,069			3,719			3,664

Total	$	1,467,951		$	1,424,890		$	1,442,112

Liabilities and Stockholders’ Equity
Current Liabilities:
Accounts payable and accrued expenses	$	320,419		$	333,958		$	296,741
Employee compensation and benefits		115,970			94,314			109,386
Taxes payable		36,248			45,454			64,941
Current maturities of debt		41,870			63,923			91,870

Total current liabilities		514,507			537,649			562,938

Long-term debt		175,688			147,558			114,558
Deferred income taxes and other long-term liabilities		57,961			35,914			50,695
Commitments and Contingencies
Stockholders’ Equity:
Common stock: par value $0.50 per share, 120,000,000 shares authorized, 37,600,000 shares outstanding at October 28, 2004, 37,481,000 shares outstanding at October 30, 2003 and 37,544,000 shares outstanding at January 29, 2004		18,800			18,740			18,772
Additional capital		177,614			168,843			170,321
Unearned compensation		(1,846	)		(2,972	)		(2,525	)
Retained earnings		525,227			519,158			527,353

Total stockholders’ equity		719,795			703,769			713,921

Total	$	1,467,951		$	1,424,890		$	1,442,112

See accompanying notes to condensed consolidated financial statements.

LONG DRUG STORES CORPORATION

CONDENSED STATEMENTS OF CONSOLIDATED CASH FLOWS (unaudited)


	For the 39 weeks ended
	October 28, 2004		October 30, 2003
	*Thousands*
Operating Activities:
Net income	$	18,854	$	16,323
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization		64,518		63,753
Provision for store closures and asset impairments		—		2,543
Deferred income taxes and other		9,143

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