Attached files

file filename
EXCEL - IDEA: XBRL DOCUMENT - WALGREEN COFinancial_Report.xls
EX-12 - RATIO OF EARNINGS TO FIXED CHARGES - WALGREEN COexhibit_12.htm
EX-10.1 - WALGREEN COexhibit_10-1.htm
EX-32.1 - CEO SECTION 906 CERTIFICATION - WALGREEN COexhibit_32-1.htm
EX-31.1 - CEO SECTION 302 CERTIFICATION - WALGREEN COexhibit_31-1.htm
EX-32.2 - CFO SECTION 906 CERTIFICATION - WALGREEN COexhibit_32-2.htm
EX-31.2 - CFO SECTION 302 CERTIFICATION - WALGREEN COexhibit_31-2.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED MAY 31, 2010

OR

 
¨
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
1-604
 

WALGREEN CO.
(Exact name of registrant as specified in its charter)

 
 
Illinois
36-1924025
(State of Incorporation)
(I.R.S. Employer Identification No.)

200 Wilmot Road, Deerfield, Illinois
60015
(Address of principal executive offices)
(Zip Code)

(847) 914-2500
(Registrant's telephone number, including area code)

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 þ        No ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of "large accelerated filer”, “accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ                                                                                        Accelerated Filer ¨ 
Non-accelerated filer ¨ (Do not check if a smaller reporting company)                Smaller reporting company ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes ¨        No þ

The number of shares outstanding of the registrant's Common Stock, $.078125 par value, as of May 31, 2010 was 973,178,093.




WALGREEN CO.

FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2010

TABLE OF CONTENTS



PART I.                      FINANCIAL INFORMATION

Item 1.
Consolidated Condensed Financial Statements (Unaudited)
 
a)
Balance Sheets
 
 
b)
Statements of Earnings
 
 
c)
Statements of Cash Flows
 
 
d)
Notes to Financial Statements
 
Item 2.
Management’s Discussion and Analysis of Results of Operations and Financial Condition
 
Item 3.
Qualitative and Quantitative Disclosure about Market Risk
 
Item 4.
Controls and Procedures
 


PART II.  OTHER INFORMATION

Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 6.
Exhibits
 





PART 1. FINANCIAL INFORMATION


Item 1.
WALGREEN CO. AND SUBSIDIARIES CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

The consolidated condensed financial statements included herein have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission.  The Consolidated Condensed Balance Sheets as of May 31, 2010, August 31, 2009 and May 31, 2009, the Consolidated Condensed Statements of Earnings for the three and nine months ended May 31, 2010 and 2009, and the Consolidated Condensed Statements of Cash Flows for the nine months ended May 31, 2010 and 2009, have been prepared without audit.  Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading.  It is suggested that these consolidated condensed financial statements be read in conjunction with the financial statements and the notes thereto included in the Company's latest annual report on Form 10-K.

In the opinion of the Company, the consolidated condensed statements for the unaudited interim periods presented include all adjustments, consisting of normal recurring adjustments, necessary to present a fair statement of the results for such interim periods.  Because of the influence of certain holidays, seasonal and other factors on the Company's operations, net earnings for any interim period may not be comparable to the same interim period in previous years or necessarily indicative of earnings for the full year.



 




WALGREEN CO. AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED BALANCE SHEETS
 
(UNAUDITED)
 
(In millions, except per share amounts)
 
                   
   
May 31,
   
August 31,
   
May 31,
 
   
2010
   
2009
   
2009
 
Assets
                 
Current Assets:
                 
Cash and cash equivalents
  $ 1,712     $ 2,087     $ 2,300  
Short-term investments
    600       500       100  
Accounts receivable, net
    2,729       2,496       2,797  
Inventories
    7,110       6,789       6,891  
Other current assets
    185       177       164  
Total Current Assets
    12,336       12,049       12,252  
Non-Current Assets:
                       
Property and equipment, at cost, less accumulated depreciation and amortization
    11,154       10,802       10,595  
Goodwill
    1,894       1,461       1,463  
Other non-current assets
    1,323       830       833  
Total Non-Current Assets
    14,371       13,093       12,891  
Total Assets
  $ 26,707     $ 25,142     $ 25,143  
                         
Liabilities & Shareholders' Equity
                       
Current Liabilities:
                       
Short-term borrowings
  $ 9     $ 15     $ 10  
Trade accounts payable
    4,584       4,308       4,599  
Accrued expenses and other liabilities
    2,531       2,406       2,312  
Income taxes
    217       40       52  
Total Current Liabilities
    7,341       6,769       6,973  
Non-Current Liabilities:
                       
Long-term debt
    2,359       2,336       2,338  
Deferred income taxes
    268       265       316  
Other non-current liabilities
    1,627       1,396       1,329  
Total Non-Current Liabilities
    4,254       3,997       3,983  
Commitments and Contingencies (see Note 13)
                       
Shareholders' Equity:
                       
Preferred stock $.0625 par value; authorized 32 million shares, none issued
    -       -       -  
Common stock $.078125 par value; authorized 3.2 billion shares; issued 1,025,400,000 at May 31, 2010, August 31, 2009 and May 31, 2009
    80       80       80  
Paid-in capital
    669       605       591  
Employee stock loan receivable
    (101 )     (140 )     (155 )
Retained earnings
    16,543       15,327       15,027  
Accumulated other comprehensive income
    35       37       59  
Treasury stock, at cost; 52,221,907 shares at May 31, 2010, 36,838,610 at August 31, 2009 and 33,019,914 at May 31, 2009
    (2,114 )     (1,533 )     (1,415 )
Total Shareholders' Equity
    15,112       14,376       14,187  
Total Liabilities & Shareholders' Equity
  $ 26,707     $ 25,142     $ 25,143  

The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.




WALGREEN CO. AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
 
(UNAUDITED)
 
(In millions, except per share amounts)
 
                   
   
Three Months Ended
   
Nine Months Ended
 
   
May 31, 2010
   
May 31, 2009
   
May 31, 2010
   
May 31, 2009
 
                         
Net sales
  $ 17,199     $ 16,210     $ 50,550     $ 47,632  
Cost of sales
    12,450       11,751       36,366       34,365  
Gross Profit
    4,749       4,459       14,184       13,267  
                                 
Selling, general and administrative expenses
    3,920       3,613       11,474       10,722  
Operating Income
    829       846       2,710       2,545  
                                 
Interest expense, net
    24       25       67       60  
                                 
Earnings Before Income Tax Provision
    805       821       2,643       2,485  
Income tax provision
    342       299       1,022       915  
Net Earnings
  $ 463     $ 522     $ 1,621     $ 1,570  
                                 
Net earnings per common share – basic
  $ .47     $ .53     $ 1.65     $ 1.59  
Net earnings per common share – diluted
  $ .47     $ .53     $ 1.64     $ 1.58  
                                 
 Dividends declared   $ .1375     $ .1125     $ .4125     $ .3375  
                                 
 Average shares outstanding     976.4       992.0       984.5       989.6  
 Dilutive effect of stock options     5.6       1.0       6.1       1.4  
 Average shares outstanding assuming dilution     982.0       993.0       990.6       991.0  
                                 
The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.

 



WALGREEN CO. AND SUBSIDIARIES
 
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 
(UNAUDITED)
 
(In millions)
 
             
   
Nine Months Ended May 31,
 
   
2010
   
2009
 
             
Cash Flows from Operating Activities:
           
Net earnings
  $ 1,621     $ 1,570  
Adjustments to reconcile net earnings to net cash provided by operating activities -
               
Depreciation and amortization
    768       741  
Deferred income taxes
    (19 )     253  
Stock compensation expense
    64       67  
Income tax savings from employee stock plans
    6       -  
Other
    28       9  
Changes in operating assets and liabilities -
               
Accounts receivable, net
    (139 )     (298 )
Inventories
    (37 )     426  
Other assets
    41       -  
Trade accounts payable
    163       303  
Accrued expenses and other liabilities
    64       55  
Income taxes
    139       116  
Other non-current liabilities
    120       17  
Net cash provided by operating activities
    2,819       3,259  
                 
Cash Flows from Investing Activities:
               
Purchases of short-term investments held to maturity
    (2,400 )     (1,400 )
Proceeds from sale of short-term investments held to maturity
    2,300       1,300  
Additions to property and equipment
    (786 )     (1,534 )
Proceeds from sale of assets
    29       35  
Business and intangible asset acquisitions, net of cash received
    (764 )     (348 )
Other
    (31 )     11  
Net cash used for investing activities
    (1,652 )     (1,936 )
                 
Cash Flows from Financing Activities:
               
Net payments from short-term borrowings
    -       (70 )
Net proceeds from issuance of long-term debt
    -       987  
Payments of debt
    (576 )     -  
Stock purchases
    (754 )     (140 )
Proceeds related to employee stock plans
    206       106  
Cash dividends paid
    (407 )     (334 )
Other
    (11 )     (15 )
Net cash (used for) provided by financing activities
    (1,542 )     534  
                 
Changes in Cash and Cash Equivalents:
               
Net (decrease) increase in cash and cash equivalents
    (375 )     1,857  
Cash and cash equivalents at September 1
    2,087       443  
Cash and cash equivalents at May 31
  $ 1,712     $ 2,300  


The accompanying Notes to Consolidated Condensed Financial
Statements are an integral part of these Statements.






WALGREEN CO. AND SUBSIDIARIES
NOTES TO CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

(1) The consolidated condensed financial statements include the accounts of the Company and its subsidiaries.  All intercompany transactions have been eliminated.  The consolidated condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management’s prudent judgments and estimates.  Actual results may differ from these estimates.  For a complete discussion of all our significant accounting policies please see our 2009 annual report on Form 10-K.

(2) On October 30, 2008, we announced a series of strategic initiatives, approved by the Board of Directors, to enhance shareholder value.  One of these initiatives was a program designed to reduce cost and improve productivity through strategic sourcing of indirect spend, reducing corporate overhead and work throughout our stores, rationalization of inventory categories, and transforming the community pharmacy.

We have recorded the following pre-tax charges associated with our restructuring initiatives within the Consolidated Condensed Statements of Earnings (In millions):


   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Severance and other benefits
  $ 3     $ 6     $ 15     $ 65  
Project cancellation settlements
    -       8       -       8  
Inventory charges
    -       33       19       44  
     Restructuring expense
    3       47       34       117  
Consulting
    10       20       34       57  
     Restructuring and restructuring related expenses
  $ 13     $ 67     $ 68     $ 174  
                                 
Cost of sales
  $ -     $ 33     $ 19     $ 44  
Selling, general and administrative expenses
    13       34       49       130  
    $ 13     $ 67     $ 68     $ 174  

Severance and other benefits include the charges associated with employees who were separated from the Company.  In the current fiscal year, 179 employees have been separated from the Company.  Since inception, a total of 876 employees have been separated from the Company as a result of these initiatives.

Inventory charges relate to on-hand inventory that has been reduced from cost to a selling price below cost.

Additionally, as a part of our Customer Centric Retailing (CCR) initiative, we are enhancing the store format to ensure we have the proper assortments, better category layouts and adjacencies, better shelf height and sight lines and brand and private brand layout, all of which are designed to positively enhance the shopper experience and increase customer frequency and purchase size.  This format will be rolled out to approximately 5,500 to 6,000 existing stores.  As of May 31, 2010, in total, we have remodeled 915 stores and plan to enhance approximately 500 stores in the next three months of fiscal 2010, with the remaining store remodels during fiscal 2011 and 2012.  Although we will continue to refine our estimates as the rollout progresses, based on our experience with the first 915 stores, we expect the total cost, which includes both selling, general and administrative expenses and capital, to be $40 thousand to $55 thousand per store.  For the three months ended May 31, 2010, we incurred $29 million in total program costs, of which $20 million was included in selling, general and administrative expenses and $9 million in capital costs.  For the nine months ended May 31, 2010, we incurred $41 million in total program costs, of which $28 million was included in selling, general and administrative expenses and $13 million in capital costs.

We have recorded the following balances in accrued expenses and other liabilities on our Consolidated Condensed Balance Sheets (In millions):

   
August 31, 2009 Reserve Balance
   
Charges
   
Cash Payments
   
May 31, 2010 Reserve Balance
 
Severance and other benefits
  $ 4     $ 17     $ (21 )   $ -  

(3) Short-term investments at May 31, 2010, include Treasury Bills totaling $600 million maturing in June and July 2010.  The interest rate on the Treasury Bills is less than one percent.  The investments are held to maturity and recorded at cost in accordance with ASC topic 320 (formerly SFAS No. 115, Accounting for Certain Investments in Debt and Equity Securities).  The fair value of the Treasury Bills at May 31, 2010, approximated cost.

(4) Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis.  At May 31, 2010, August 31, 2009 and May 31, 2009, inventories would have been greater by $1,318 million, $1,239 million and $1,191 million respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis.  LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated. Inventory includes product cost, inbound freight, warehousing costs and vendor allowances not included as a reduction of advertising expense.

(5) The Company provides for future costs related to closed locations.  The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date.  During the three and nine month periods ended May 31, 2010, the Company recorded charges of $11 million and $35 million for facilities that were closed or relocated under long-term leases.  This compares to $22 million and $43 million for the three and nine month periods ended May 31, 2009, respectively.

The changes in reserve for facility closings and related lease termination charges include the following (In millions):

   
Nine Months Ended
May 31
 
   
2010
   
2009
 
Balance – beginning of period
  $ 99     $ 69  
Provision for present value of non-cancellable lease
     payments of closed facilities
    27       26  
Assumptions about future sublease income, terminations, and changes in interest rates
    (9 )     2  
Interest accretion
    17       15  
Cash payments, net of sublease income
    (32 )     (27 )
Reserve acquired through acquisitions
    7       -  
Balance – end of period
  $ 109     $ 85  

(6) The principal retirement plan for employees is the Walgreen Profit-Sharing Retirement Trust to which both the Company and participating employees contribute.  The Company's contribution, which has historically related to pre-tax income and a portion of which is in the form of a guaranteed match, is determined annually at the discretion of the Board of Directors.  The profit-sharing provision was $72 million for the current quarter and $235 million for the nine month period compared to $73 million and $221 million in the same periods last year.  The Company’s contributions, which are made annually in the second quarter, were $293 million during the nine month period ended May 31, 2010.  This compares to $301 million for the prior year.

(7) The Company granted 119,620 and 7,546,259 stock options under the Walgreen Co. Executive Stock Option Plan and the Walgreen Co. Stock Purchase/Option Plan (Share Walgreens) for the quarter and nine month period ended May 31, 2010.  This compares to 234,716 and 16,906,061 stock options granted in the quarter and nine month period ended May 31 under the plans last year.  Total stock-based compensation expense was $20 million for the quarter and $64 million for the nine month period ended May 31, 2010 compared to $19 million and $67 million for the same periods last year.  In accordance with ASC topic 718 (formerly SFAS No. 123(R), Share-Based Payment), compensation expense is recognized on a straight-line basis over the employee's vesting period or to the employee's retirement eligible date, if earlier.  There was no fully recognized retiree eligible expense recorded in the quarter and $6 million recorded for the first nine months.  This compares to $1 million of fully recognized retiree eligible expense for the quarter and $15 million for the nine month period ended May 31, 2009.  Therefore, compensation expense for the quarter and nine month periods are not representative of compensation expense for the entire fiscal year.  There have been no material changes in the assumptions used to compute compensation expense during the current quarter.

The Company granted 12,752 and 700,187 restricted stock units under the Walgreen Co. Restricted Stock Unit Award Program for the quarter and nine months ended May 31, 2010 compared to 15,423 and 514,470 in the same periods last year.  The Company also granted 9,759 and 629,082 performance shares under the Walgreen Co. Performance Share Program for the quarter and nine months ended May 31, 2010 versus 17,443 and 546,096 shares in the same periods last year.  In accordance with ASC topic 718, compensation expense is recognized on a straight line basis based on a three year cliff vesting schedule for the Restricted Stock Unit Award Program and straight line over a three year performance period for the Performance Share Program.  For the quarter and nine month period ended May 31, 2010 the Company recognized $6 million and $16 million of expense related to these plans, respectively.  In the same periods last year, the Company recognized $3 million and $13 million.

(8) The dilutive effect of outstanding stock options on earnings per share is calculated using the treasury stock method.  Stock options are anti-dilutive and excluded from the earnings per share calculation if the exercise price exceeds the average market price of the common shares for the periods presented.  At May 31, 2010 and 2009, outstanding options to purchase common shares of 25,196,994 and 49,354,716, respectively were excluded from the calculation.

(9) The Company provides certain health insurance benefits for retired employees who meet eligibility requirements, including age, years of service and date of hire.  The costs of these benefits are accrued over the service life of the employee. The Company's postretirement health benefit plans are not funded.

   
Three Months Ended May 31,
   
Nine Months Ended
May 31,
 
Components of Net Periodic Benefit Costs (In millions):
 
2010
   
2009
   
2010
   
2009
 
Service cost
  $ 3     $ 3     $ 9     $ 10  
Interest cost
    5       7       15       20  
Amortization of actuarial loss
    2       1       6       3  
Amortization of prior service cost
    (3 )     (1 )     (9 )     (3 )
Special retirement benefit
    -       -       -       4  
Curtailment gain
    -       (16 )     -       (16 )
Total postretirement benefit cost
  $ 7     $ (6 )   $ 21     $ 18  
 
 
In May 2009, we amended the Company’s postretirement health benefit plans to change eligibility requirements.  As a result of this amendment we recognized curtailment income of $16 million for the quarter ended May 31, 2009.

Additionally in the second quarter of fiscal 2009, the Company recognized a special retirement benefit expense of $4 million related to accelerating eligibility for certain employees who elected special early retirement as a part of our initiative to increase shareholder value.

(10) Short-term borrowings and long-term debt consists of the following at May 31, 2010, August 31, 2009 and May 31, 2009 (In millions):

   
May 31,
2010
   
August 31, 2009
   
May 31,
2009
 
Short-Term Borrowings -
                 
Current maturities of loans assumed through the purchase of land, buildings and equipment; various interest rates from 5.00% to 8.75%; various maturities from 2010 to 2035
  $ 4     $ 10     $ 5  
Other
    5       5       5  
Total short-term borrowings
  $ 9     $ 15     $ 10  
                         
Long-Term Debt -
                       
4.875% unsecured notes due 2013 net of unamortized discount and interest rate swap fair market value adjustment (see Note 11)
  $ 1,318     $ 1,294     $ 1,296  
5.250% unsecured notes due 2019 net of unamortized discount
    995       995       995  
Loans assumed through the purchase of land, buildings and equipment; various interest rates from 5.00% to 8.75%; various maturities from 2010 to 2035
    50       57       52  
      2,363       2,346       2,343  
Less current maturities
    (4 )     (10 )     (5 )
Total-long term debt
  $ 2,359     $ 2,336     $ 2,338  

Short-term borrowings under the Company’s commercial paper program had the following characteristics (In millions):

   
May 31,
2010
   
August 31, 2009
   
May 31,
2009
 
Balance outstanding at end of period
  $ -     $ -     $ -  
Maximum outstanding at any month-end
    -       1,068       1,068  
Average daily short-term borrowings
    -       272       364  
Weighted-average interest rate
    -       1.51 %     1.97 %

We had no commercial paper outstanding at May 31, 2010.  In connection with our commercial paper program, we maintain two unsecured backup syndicated lines of credit that total $1,200 million.  The first $600 million facility expires on August 9, 2010, and allows for the issuance of up to $400 million in letters of credit, which reduces the amount available for borrowing.  The second $600 million facility expires on August 12, 2012.  Our ability to access these facilities is subject to our compliance with the terms and conditions of the credit facilities, including financial covenants.  The covenants require us 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.  As of May 31, 2010, we were in compliance with all such covenants.  The Company pays a facility fee to the financing banks to keep these lines of credit active.  As of May 31, 2010, there was $194 million in letters of credit issued against these credit facilities.  We do not expect borrowings under these facilities, together with our outstanding commercial paper, to exceed $1,200 million.

On July 17, 2008, we 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. We may redeem the notes, at any time in whole or from time to time in part, at our 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 thereon (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) 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 we have exercised our option to redeem the notes, we 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 May 31, 2010, was $1,438 million.  Fair value for these notes was determined based upon discounted future cash flows using available market data.

On January 13, 2009, we 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. We may redeem the notes, at any time in whole or from time to time in part, at our 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 thereon (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) 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 we have exercised our option to redeem the notes, we 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 May 31, 2010, was $1,116 million.  Fair value for these notes was determined based upon discounted future cash flows using available market data.

(11) We use a derivative instrument to manage our interest rate exposure associated with some of our fixed-rate borrowings.  We do not use derivative instruments for trading or speculative purposes.  All derivative instruments are recognized in the consolidated condensed balance sheets at fair value.  We designate 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, we formally document the hedge relationship and the risk management objective for undertaking the hedge.  In addition, we assess 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 us to credit-related losses in the event of nonperformance, but we currently do not expect any counterparties to fail to meet their obligations given their high credit ratings.

Fair Value Hedges
For derivative instruments that are designated and qualify as fair value hedges, the gain or loss on the derivative, as well as the offsetting gain or loss on the hedged item attributable to the hedged risk, are recognized in current earnings.

On January 27, 2010, we terminated all of our existing one month future LIBOR swaps.  Upon termination, we received payment from our counterparty which consisted of accrued interest and an amount representing the fair value of our swaps.  The related fair value benefit attributed to our debt will be amortized over the life of the debt.  We then entered into six month LIBOR in arrears swaps with two counterparties.  As of May 31, 2010, we had net unamortized fair value benefit attributed to our debt of $21 million.

The notional amounts of derivative instruments outstanding as of May 31, 2010, were as follows (In millions):

   
Notional Amount
 
Derivatives designated as hedges:
     
     Interest rate swaps
  $ 1,300  

The changes in fair value of the notes attributable to the hedged risk are included in long-term debt on our Consolidated Condensed Balance Sheets (see Note 10), and amortized through maturity.  

The fair value and balance sheet presentation of derivative instruments as of May 31, 2010, were as follows (In millions):

 
Location in Consolidated Condensed Balance Sheet
 
Fair Value
 
Asset derivatives designated as hedges:
       
     Interest rate swaps
Other non-current assets
  $ 12  

Gains and losses on derivative instruments are recorded in interest expense on our consolidated condensed statement of earnings.  The amount recorded for the quarter ended May 31, 2010, was a gain of $1 million.

(12) In the first quarter of fiscal 2010, we adopted the full provisions of ASC topic 820 (formerly SFAS No. 157, Fair Value Measurements) for assets and liabilities.  ASC topic 820 defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1 -
Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 -
Observable inputs other than quoted prices in active markets.
Level 3 -
Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis were as follows (In millions):

   
May 31, 2010
 
Level 1
 
Level 2
 
Level 3
Assets:
               
     Interest rate swaps
  $ 12   -   $ 12     -

Interest rate swaps are valued using six month LIBOR in arrears rates.
 
Our debt instruments are not reported at fair value in our statement of financial position and as a result, we will continue to report under the guidance of ASC topic 825 (formerly SFAS No. 107, Disclosures about Fair Value of Financial Instruments) that requires us to disclose the fair value of our debt in the footnotes.
 
 
(13) The Company is involved in legal proceedings, and is subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, incidental to the normal course of the Company’s business.

On April 16, 2008, the Plumbers and Steamfitters Local No. 7 Pension Fund filed a putative class action suit against the Company and its former and current chief executive officers in the United States District Court for the Northern District of Illinois.  The plaintiffs amended the complaint on October 16, 2008, which upon the Company’s motion the District Court dismissed on September 24, 2009.  Subsequently, the plaintiffs moved for the District Court to reconsider the dismissal and to allow plaintiffs leave to further amend the complaint.  The District Court granted plaintiffs’ motion on November 11, 2009.   The second amended complaint was then filed on behalf of purchasers of Company common stock during the period between June 25, 2007 and October 1, 2007.  As in the first amended complaint, the second amended complaint charges the Company and its former and current chief executive officers with violations of Section 10(b) of the Securities Exchange Act of 1934, claiming that the Company misled investors by failing to disclose (i) declining rates of growth in generic drug sales and (ii) increasing selling, general and administrative expenses in the fourth quarter of 2007, which allegedly had a negative impact on earnings.  The Company is vigorously contesting these charges.  On February 1, 2010, the Company filed a motion to dismiss the second amended complaint.

On August 31, 2009, a Walgreen Co. shareholder named Dan Himmel filed a lawsuit, purportedly on the Company’s behalf, against several current and former officers and directors (each, an “Individual Defendant”).  The case is captioned Himmel v. Wasson, et. al. and was filed in the Circuit Court of Lake County, Illinois.  The allegations in the lawsuit are similar to the securities fraud lawsuit described above.  Himmel alleges that the Company’s management: (i) knew, or was reckless in not knowing, that selling, general and administrative expenses in the fourth quarter of 2007 were too high, in light of decreased profits from generic drug sales; (ii) knew, or was reckless in not knowing, that the Company would not realize gross profits near what many Wall Street analysts were predicting; and (iii) the directors and officers had a duty both to prevent the drop in gross profits and to disclose the expected drop to the public and failed to do either.  The Company’s investigation to date suggests that the allegations are without merit, and that the Individual Defendants acted in good faith, exercised prudent business judgment and acted in a manner that they reasonably believed to be in the Company’s best interests during the period at issue.  The Company intends to vigorously contest the allegations.  The Individual Defendants’ time to file a responsive pleading to the complaint was extended by agreement until 30 days after the District Court in the Plumbers case rules on the pending motion to dismiss.
 
Although the outcome in the Himmel suit, the Plumbers and Steamfitters suit, and other legal proceedings and investigations to which the Company is subject, cannot be forecast with certainty, management believes the final disposition of these matters will not have a material adverse effect on the Company’s consolidated financial position or results of operations.

The Company guarantees a credit agreement on behalf of SureScripts-RxHub, LLC, which provides electronic prescription data services.  This credit agreement, for which SureScripts-RxHub, LLC is primarily liable, has an expiration date of June 30, 2011.  The liability was $10 million at May 31, 2010, August 31, 2009 and May 31, 2009.  The maximum amount of future payments that could be required under the guaranty is $25 million, of which $13 million may be recoverable from another guarantor.  In addition, under certain circumstances the Company may be required to provide an additional guarantee of up to $10 million, of which $8 million may be recoverable from other guarantors.  This guarantee arose as a result of a business decision between parties to ensure that the operations of SureScripts-RxHub, LLC would have additional support to access financing.  Should SureScripts-RxHub, LLC default or become unable to pay its debts, the Company would be required to fulfill its portion of this guarantee.

(14)  On April 9, 2010, the Company completed the stock acquisition of Duane Reade Holdings, Inc., and Duane Reade Shareholders, LLC, (Duane Reade) which consisted of 258 Duane Reade stores located in the New York City metropolitan area, as well as the corporate office and two distribution centers.  Total purchase price was $1,075 million, which included the assumption of debt.  The Company’s operating statements include Duane Reade’s' results since the date of acquisition, which were immaterial. This acquisition will increase the Company’s presence in the New York metropolitan area.

The preliminary allocation of the purchase price of Duane Reade was accounted for under the purchase method of accounting with the Company as the acquirer in accordance with ASC Topic 805, Business Combinations.  Goodwill, none of which is deductible for tax purposes, and other intangible assets recorded in connection with the acquisition totaled $409 million and $474 million, respectively.  Goodwill consists of expected purchasing synergies, consolidation of operations and reductions in selling, general and administrative expenses.  Intangible assets consist of $291 million of favorable lease interests (10 year weighted average useful life), $115 million in customer relationships (10 year useful life), $46 million in trade name (5 year useful life) and $22 million in other intangible assets (3 year weighted average useful life).

The following table summarizes the allocation of the purchase price to the estimated fair value of the assets acquired and liabilities assumed as of the acquisition date, April 9, 2010.  Assets acquired and liabilities assumed in the transaction were recorded at their acquisition date fair values while transaction costs associated with the acquisition were expensed as incurred.  The Company’s allocation was based on an evaluation of the appropriate fair values and represented management’s best estimate based on available data.  The final purchase accounting has not yet been completed.

The preliminary estimated fair values of assets acquired and liabilities assumed on April 9, 2010 are as follows (In millions):

Cash
  $ 6  
Accounts receivable
    52  
Inventory
    240  
Other current assets
    23  
Property and equipment
    248  
Other non-current assets
    4  
Intangible assets
    474  
Goodwill
    409  
Total assets acquired
    1,456  
Liabilities assumed
    316  
Debt assumed
    574  
Net assets acquired
  $ 566  

We assumed federal net operating losses of $261 million and state net operating losses of $252 million, both which begin to expire in 2018, in conjunction with the Duane Reade acquisition.

The unaudited condensed pro forma consolidated statements of income for 2010 and 2009 (assuming the acquisition of Duane Reade as of the beginning of each fiscal period) are as follows (In millions, except per share amounts):

   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Net sales
  $ 17,459     $ 16,681     $ 51,733     $ 49,001  
Net earnings
    463       525       1,613       1,564  
Net earnings per common share:
                               
     Basic
    .47       .53       1.64       1.58  
     Diluted
    .47       .53       1.63       1.58  

These pro forma statements have been prepared for comparative purposes only and are not intended to be indicative of what the Company's results would have been had the acquisition occurred at the beginning of the periods presented or the results which may occur in the future.

The aggregate purchase price of all business acquisitions, excluding Duane Reade, was $204 million for the nine month period ended May 31, 2010.  These acquisitions added $34 million to goodwill and $144 million to intangible assets, primarily prescription files.  The remaining fair value relates to immaterial amounts of tangible assets, less liabilities assumed.  Operating results of the businesses acquired have been included in the consolidated statements of earnings from their respective acquisition dates forward.  Pro forma results of the Company, assuming all of the acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported.

 (15) We have recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (In millions):

   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Depreciation expense
  $ 200     $ 216     $ 605     $ 603  
Intangible asset amortization
    52       38       129       108  
System development costs amortization
    11       10       34       30  
Total depreciation and amortization expense
  $ 263     $ 264     $ 768     $ 741  

(16)  Cash interest paid for the nine month period ended May 31, 2010 was $46 million compared to $33 million in the prior year’s nine month period.  Cash paid for income taxes was $896 million and $523 million for the nine months ended May 31, 2010 and 2009, respectively.

(17) There were no non-cash transactions in the current nine month period.  Non-cash transactions in the nine month prior fiscal period include $97 million due to the reduction in the liability for postretirement health benefit plans and $19 million in deferred tax assets related to the identification of net operating losses in acquired businesses.
 
 
(18) In June 2009, the Financial Accounting Standards Board (FASB) issued ASC topic 810 (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under ASC topic 810. The application of the new provisions under this topic, which will be effective for the first quarter of fiscal 2011, is not expected to have a material impact on our consolidated financial position or results of operations.


 
Item 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION


INTRODUCTION

Walgreens is principally a retail drugstore chain that sells prescription and non-prescription drugs and general merchandise.  General merchandise includes, among other things, household items, personal care, convenience foods, beauty care, photofinishing, candy and seasonal items.  Customers can have prescriptions filled in retail pharmacies, as well as through the mail, and order refills by telephone and via the Internet.  As of May 31, 2010, we operated 8,019 locations in 50 states, the District of Columbia, Guam and Puerto Rico.  Total locations do not include 359 convenient care clinics operated by Take Care Health Systems, Inc.

   
Number of Locations
 
Location Type
 
May 31, 2010
   
May 31, 2009
 
Drugstores
    7,522       6,857  
Worksite Facilities
    378       373  
Home Care Facilities
    103       112  
Specialty Pharmacies
    14       17  
Mail Service Facilities
    2       2  
Total
    8,019       7,361  

The drugstore industry is highly competitive.  In addition to other drugstore chains, independent drugstores and mail order prescription providers, we compete with various other retailers including grocery stores, convenience stores, mass merchants and dollar stores.

The Company’s sales, gross profit margin and gross profit dollars are impacted by both the percentage of prescriptions that we fill that are generic and the rate at which new generic versions are introduced to the market.  In general, generic versions of drugs generate lower total sales dollars per prescription, but higher gross profit margins and gross profit dollars, as compared with patent-protected brand name drugs.  The positive impact on gross profit margins and gross margin dollars are particularly significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a "generic conversion."  In any given year, the number of blockbuster drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on our sales, gross profit margins and gross profit dollars.  And, because any number of factors outside of the Company’s control or ability to foresee can affect timing for a generic conversion, we face substantial uncertainty in predicting when such conversions will occur and what effect they will have on particular future periods.

The long-term outlook for prescription utilization is strong due in part to the aging population, the increasing utilization of multi-source (i.e., generic) drugs, the continued development of innovative drugs that improve quality of life and control health care costs, and the expansion of healthcare insurance coverage under the Patient Protection and Affordable Care Act signed into law on March 23, 2010 (the ACA).

Certain provisions of the Deficit Reduction Act of 2005 (the DRA) sought to reduce federal spending by altering the Medicaid reimbursement formula (AMP) for multi-source drugs.  Those reductions did not go into effect.  The ACA enacted a modified reimbursement formula for multi-source drugs, which, when implemented, is expected to reduce Medicaid reimbursements.  Also, in conjunction with a class action settlement with two entities that publish the average wholesale price (AWP) of pharmaceuticals, the methodology used to calculate the AWP, a pricing reference widely used in the pharmacy industry, was changed in a way that reduced the AWP for many brand-name prescription drugs effective September 26, 2009.  The Company has reached understandings with most of its third-party payors to adjust reimbursements to correct for this change in methodology however, most state Medicaid programs that utilize AWP as a pricing reference have not taken action to make similar adjustments, resulting in reduced Medicaid reimbursement for drugs affected by the change.

Total front-end sales have continued to grow due primarily to new store openings.  However, total front-end sales continue to be negatively impacted by lower demand for discretionary goods such as household, seasonal and beauty products primarily due to the overall economic impact of the recession and high unemployment rates.

We continue to expand into new markets and increase penetration in existing markets. To support our growth, we are investing in prime locations, technology and customer service initiatives.  We continue to focus on retail organic growth; however, consideration is given to retail and other acquisitions that provide unique opportunities and fit our business strategies.

RESTRUCTURING CHARGES

On October 30, 2008, we announced a series of strategic initiatives, approved by the Board of Directors, to enhance shareholder value.  One of these initiatives was a program designed to reduce cost and improve productivity through strategic sourcing of indirect spend, reducing corporate overhead and work throughout our stores, rationalization of inventory categories, and transforming the community pharmacy.  

We have recorded the following pre-tax charges associated with our restructuring initiatives within the Consolidated Condensed Statements of Earnings (In millions):

   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Severance and other benefits
  $ 3     $ 6     $ 15     $ 65  
Project cancellation settlements
    -       8       -       8  
Inventory charges
    -       33       19       44  
     Restructuring expense
    3       47       34       117  
Consulting
    10       20       34       57  
     Restructuring and restructuring related expenses
  $ 13     $ 67     $ 68     $ 174  
                                 
Cost of sales
  $ -     $ 33     $ 19     $ 44  
Selling, general and administrative expenses
    13       34       49       130  
    $ 13     $ 67     $ 68     $ 174  

Severance and other benefits include the charges associated with employees who were separated from the Company.  In the current fiscal year, 179 employees have been separated from the Company.  Since inception, a total of 876 employees have been separated from the Company as a result of these initiatives.

Inventory charges relate to on-hand inventory that has been reduced from cost to a selling price below cost.  In addition, as a part of our restructuring efforts we sold an incremental amount of inventory below traditional retail prices.  The dilutive effect of these sales on gross profit was $4 million in the current quarter and $19 million for the nine month period ended May 31, 2010.  For the quarter and nine month period ended May 31, 2009 we reported a dilutive effect on sales of $32 million.

We incurred pre-tax costs of $17 million ($13 million restructuring and restructuring related expenses and $4 million of gross profit dilution) in the third quarter and $87 million ($68 million of restructuring and restructuring related expenses, and $19 million of gross profit dilution) for the nine month period ended May 31, 2010.   Since inception, we have incurred $339 million ($288 million of restructuring and restructuring related expenses, and $51 million of gross profit dilution).  We anticipate approximately $70 million of pre-tax restructuring and restructuring related expenses and gross profit dilution in the remaining months of fiscal 2010.  
 
We have recorded the following balances in accrued expenses and other liabilities on our Consolidated Condensed Balance Sheets (In millions):

   
August 31, 2009 Reserve Balance
   
Charges
   
Cash Payments
   
May 31, 2010 Reserve Balance
 
Severance and other benefits
  $ 4     $ 17     $ (21 )   $ -  

We have realized incremental savings related to these initiatives of approximately $73 million in the quarter and $335 million for the nine month period ended May 31, 2010.  Selling general and administrative expenses realized incremental savings of $56 million and $275 million in the quarter and nine month period, respectively, while cost of sales benefited by $17 million and $60 million in the same periods.  Since inception, we have realized total savings related to these initiatives of approximately $585 million.  Selling, general and administrative expenses realized total savings of $525 million, while cost of sales benefited by approximately $60 million.  The savings are primarily the result of reduced store labor, expense initiatives and personnel reductions.

Additionally, as a part of our Customer Centric Retailing (CCR) initiative, we are enhancing the store format to ensure we have the proper assortments, better category layouts and adjacencies, better shelf height and sight lines and brand and private brand layout, all of which are designed to positively enhance the shopper experience and increase customer frequency and purchase size.  This format will be rolled out to approximately 5,500 to 6,000 existing stores.  As of May 31, 2010, in total, we have remodeled 915 stores and plan to enhance approximately 500 stores in the next three months of fiscal 2010, with the remaining store remodels during fiscal 2011 and 2012.  In addition, through May 31, 2010 we have opened 295 new stores with the CCR format and we expect to open approximately 50 new stores with the CCR format in the remaining fiscal year.  We expect to remodel approximately 1,600 stores and open approximately 400 new stores with the CCR format in the 2010 calendar year.  Although we will continue to refine our estimates as the rollout progresses, based on our experience with the first 915 stores, we expect the total cost, which includes both selling, general and administrative expenses and capital, to be $40 thousand to $55 thousand per store.  For the three months ended May 31, 2010, we incurred $29 million in total program costs, of which $20 million was included in selling, general and administrative expenses and $9 million in capital costs.  For the nine months ended May 31, 2010, we incurred $41 million in total program costs, of which $28 million was included in selling, general and administrative expenses and $13 million in capital costs.


OPERATING STATISTICS

   
Percentage Increases/(Decreases)
 
   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Net Sales
    6.1       8.0       6.1       7.2  
Net Earnings
    (11.4 )     (8.8 )     3.2       (8.4 )
Comparable Drugstore Sales
    0.7       2.8       1.7       1.9  
Prescription Sales
    5.7       8.2       6.2       7.4  
Comparable Drugstore Prescription Sales
    1.0       3.8       2.5       3.1  
Front-End Sales
    6.9       7.4       6.0       6.7  
Comparable Drugstore Front-End Sales
    0.1       0.9       0.3       (0.2 )
Gross Profit
    6.5       5.0       6.9       5.2  
Selling, General and Administrative Expenses
    8.6       8.4       7.0       8.5  


   
Percent to Net Sales
 
   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Gross Margin
    27.6       27.5       28.1       27.9  
Selling, General and Administrative Expenses
    22.8       22.3       22.7       22.6  


   
Other Statistics
 
   
Three Months Ended
May 31,
   
Nine Months Ended
May 31,
 
   
2010
   
2009
   
2010
   
2009
 
Prescription Sales as a % of Net Sales
    65.4       65.6       64.9       64.9  
Third Party Sales as a % of Total Prescription Sales
    95.7       95.4       95.3       95.4  
Total Number of Prescriptions (in millions)
    177       168       522       488  
30 Day Equivalent Prescriptions (in millions) *
    198       187       583       541  
Total Number of Locations
                    8,019       7,361  
                                 

* Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.


RESULTS OF OPERATIONS

Net earnings for the third quarter ended May 31, 2010 were $463 million or $.47 per share (diluted).  This was an 11.4% decrease over the same quarter last year.  The net earnings decrease in the quarter was attributable to a lower rate of sales growth, higher income tax expense primarily related to the Patient Care Act and higher selling, general and administrative expenses as a percentage of sales, partially offset by improved gross margins.  For the nine month period ended May 31, 2010, net earnings increased 3.2% to $1,621 million or $1.64 per share (diluted).  The net earnings increase for the nine months ended May 31, 2010 was primarily attributable to higher gross margins partially offset by lower sales growth, higher selling, general and administrative expenses as a percentage of sales and higher income tax expense primarily related to the Patient Care Act.  The dilutive effect of Duane Reade net earnings was approximately $.02 per share (diluted) for the current quarter and nine month period ended May, 31 2010, primarily due to one-time charges related to the acquisition.  In the current quarter we recorded $13 million in restructuring and restructuring related expenses and $4 million in margin dilution as compared to the prior year’s restructuring and restructuring related expenses of $67 million and $32 million in margin dilution.  For the nine month period we recorded $68 million in restructuring and restructuring related expenses and $19 million in margin dilution related to our restructuring activities.  This compares to $174 million in restructuring and restructuring related expenses and $32 million in margin dilution in the prior year’s period.

Net sales for the quarter ended May 31, 2010 increased by 6.1% to $17,199 million. The impact of the Duane Reade acquisition increased total sales by 1.7% in the current quarter.  Drugstore sales increases resulted from gains in existing stores and added sales from new stores, each of which include an indeterminate amount of market-driven price changes.  Sales in comparable drugstores were up 0.7% in the current quarter and 1.7% for the nine month period ended May 31, 2010.  Comparable drugstores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months.  Remodels associated with our CCR initiative are not considered major and therefore do not affect comparable drugstore results.  Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition.  We have also excluded Duane Reade sales from comparable sales.  We operated 8,019 locations (7,522 drugstores) as of May 31, 2010, compared to 7,361 locations (6,857 drugstores) a year earlier.
 
 
Prescription sales increased by 5.7% for the third quarter and 6.2% for the first nine months and represented 65.4% and 64.9% of total sales, respectively.  The impact of the Duane Reade acquisition increased prescription sales by 1.1% in the quarter and 0.4% for the nine month period.  In the prior year, prescription sales increased 8.2% for the quarter and 7.4% year to date and represented 65.6% and 64.9% of total sales.  Comparable drugstore prescription sales were up 1.0% in the current quarter and 2.5% in the nine month period.  The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 1.9% in the quarter and 2.2% for the first nine months versus 3.8% in the previous quarter and 2.8% in the previous nine month period.  The effect of generics on total sales was a reduction of 1.2% in the current quarter and 1.3% year to date compared to 2.1% in the quarter and 1.5% in the nine month period in the prior year.  Third party sales, where reimbursement is received from managed care organizations as well as government and private insurance, were 95.7% of prescription sales for the quarter and 95.3% for the first nine months compared to 95.4% for the quarter and first nine months last year.  The total number of prescriptions filled for the third quarter was approximately 177 million compared to 168 million for the same period last year.  Prescriptions adjusted to 30 day equivalents were 198 million in the third quarter versus 187 million last year.

Front-end sales increased 6.9% for the current quarter and 6.0% for the first nine months and were 34.6% and 35.1% of total sales, respectively.  In comparison, prior year front end sales increased 7.4% and 6.7% and comprised 34.4% and 35.1% of total sales.  The impact of the Duane Reade acquisition increased front-end sales by 2.7% in the quarter and 0.9% for the nine month period.  Additionally, the increase is due in part to new store openings and increased sales dollars related to non-prescription drugs, convenience foods and personal care products.  Comparable drugstore front-end sales increased 0.1% for the current quarter and increased 0.3% year to date compared to the prior year, which increased 0.9% for the quarter and decreasing 0.2% year to date.  The increase in comparable front end sales in the quarter was primarily attributed to non-prescription drugs, which was partially offset by decreased sales in household and photo products.  The increase in year to date comparable front-end sales was attributed to non-prescription drugs and convenience foods which were partially offset by decreased sales in household, seasonal and beauty products.

Gross margin as a percent of sales was 27.6% in the current quarter and 28.1% for the first nine months compared to 27.5% and 27.9% last year.  Overall margins in the quarter and nine month period were positively impacted by higher front-end margins due to lower restructuring and restructuring related costs and decreased markdown activity.  Also, a lower provision for LIFO benefitted margins in the quarter and nine month period.  Partially offsetting the front-end margin increase in the quarter and nine month periods was a decrease in retail pharmacy margins, where market driven reimbursements offset the positive impact of generic drug sales.

We use the LIFO method of inventory valuation, which can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for the interim financial statements are estimated.  Cost of sales included a LIFO provision of $18 million and $79 million for the quarter and nine month period ended May 31, 2010 versus $32 million and $124 million a year ago.  This quarter, our estimated annual inflation rate was reduced to 1.25% from our estimate of 1.50% at February 28, 2010, primarily due to lower than projected non-prescription drug inflation.  Last year, during the third quarter the estimated annual inflation rate was reduced to 2.00% from 2.25%, due to lower than projected prescription drug inflation.

Selling, general and administrative expenses as a percentage of sales were 22.8% for the third quarter and 22.7% for the first nine months compared to 22.3% and 22.6% a year ago.  As a percentage of sales, the current quarter increase was due to  higher occupancy, Duane Reade operational expenses, transaction expenses associated with the Duane Reade acquisition and CCR remodeling expenses partially offset by lower advertising and restructuring and restructuring related costs.  The increase for the nine months, as a percentage of sales was attributed to higher occupancy expense, insurance and expenses related to the Duane Reade acquisition, partially offset by lower restructuring and restructuring related costs and advertising expense.  Also positively impacting selling, general and administrative expenses was incremental savings from our restructuring activities in the quarter and year to date periods.

Selling, general and administrative expenses increased 8.6% in the third quarter and 7.0% for the nine month period ended May 31, 2010 compared to 8.4% and 8.5% a year ago.  In the current quarter, Duane Reade operational expenses and transaction expenses associated with the acquisition were partially offset by savings from our restructuring activities primarily in store related salary and expenses and lower restructuring and restructuring related expenses as compared to the prior year.  The decrease in the nine month period rate of growth as compared to the prior period was due to savings from our restructuring activities, primarily in store related salary and expense and lower restructuring and restructuring related expenses.

Interest was a net expense of $24 million in the quarter and $67 million year to date compared to $25 million and $60 million for the prior quarter and year to date, respectively.  The increase in interest expense for the nine month period is primarily attributed to the issuance of long-term debt.  The current year’s interest expense is net of $3 million in the quarter and $9 million year to date, which was capitalized to construction projects, versus $3 million and $12 million capitalized for the prior quarter and year to date last year.  

The effective tax rate was 42.5% for the current quarter compared to 36.4% in the prior year’s quarter.  In conjunction with the ACA, one provision of which repealed the tax benefit for the Medicare Part D subsidy for retiree benefits, we recorded a charge of $43 million to deferred taxes in the current quarter.  Excluding this adjustment, the effective rate for the quarter was 37.1%.  The increase in the adjusted rate as compared to the prior period is primarily attributable to prior year additional permanent tax benefits.  For the current nine month period the effective tax rate was 38.7% compared to 36.8% in the prior year.  Excluding the ACA adjustment the rate was 37.0%.  The increase over the prior year was attributed to prior year additional permanent tax benefits.

CRITICAL ACCOUNTING POLICIES

The consolidated condensed financial statements are prepared in accordance with accounting principles generally accepted in the United States of America and include amounts based on management's prudent judgments and estimates.  Actual results may differ from these estimates.  Management believes that any reasonable deviation from those judgments and estimates would not have a material impact on our consolidated financial position or results of operations.  To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary.  These adjustments would be made in future statements.  For a complete discussion of all our significant accounting policies please see our 2009 annual report on Form 10-K.  Some of the more significant estimates include goodwill and other intangible asset impairment, allowance for doubtful accounts, vendor allowances, liability for closed locations, liability for insurance claims, cost of sales, and income taxes.  We use the following methods to determine our estimates:

Goodwill and other intangible asset impairment -
 
Goodwill and other indefinite-lived intangible assets are not amortized, but are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying value.  As part of our impairment analysis for each reporting unit, we engaged a third-party appraisal firm to assist in the determination of estimated fair value for each unit.  This determination included estimating the fair value using both the income and market approaches.  The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates.  The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping.
 
The determination of the fair value of the reporting units and the allocation of that value to individual assets and liabilities within those reporting units requires us to make significant estimates and assumptions.  These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies; control premiums appropriate for acquisitions in the industries in which we compete; the discount rate; terminal growth rates; and forecasts of revenue, operating income, depreciation and amortization and capital expenditures.  The allocation requires several analyses to determine fair value of assets and liabilities including, among other things, purchased prescription files, customer relationships and trade names.  Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates.  Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of the goodwill impairment charge, or both.  We also compared the sum of the estimated fair values of the reporting units to the Company’s total value as implied by the market value of the Company’s equity and debt securities. This comparison indicated that, in total, our assumptions and estimates were reasonable.  However, future declines in the overall market value of the Company’s equity and debt securities may indicate that the fair value of one or more reporting units has declined below its carrying value.
 
We have not made any material changes to the method of evaluating goodwill and intangible asset impairments during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine impairment.
 
Allowance for doubtful accounts -
 
The provision for bad debt is based on both specific receivables and historic write-off percentages.  We have not made any material changes to the method of estimating our allowance for doubtful accounts during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the allowance.
 
Vendor allowances -
 
Vendor allowances are principally received as a result of purchase levels, sales or promotion of vendors' products.   Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise is sold.  Those allowances received for promoting vendors' products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent of advertising incurred, with the excess treated as a reduction of inventory costs.  We have not made any material changes to the method of estimating our vendor allowances during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimate or assumptions used to determine vendor allowances.
 
Liability for closed locations -
 
The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date.  We have not made any material changes to the method of estimating our liability for closed locations during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
 
Liability for insurance claims -
 
The liability for insurance claims is recorded based on estimates for claims incurred and is not discounted.  The provisions are estimated in part by considering historical claims experience, demographic factors and other actuarial assumptions.  We have not made any material changes to the method of estimating our liability for insurance claims during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine the liability.
 
Cost of sales -
 
Drugstore cost of sales is derived based on point-of-sale scanning information with an estimate for shrinkage and adjusted based on periodic inventories.  Inventories are valued at the lower of cost or market determined by the last-in, first-out (LIFO) method.  We have not made any material changes to the method of estimating cost of sales during the last three years.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimates or assumptions used to determine cost of sales.  Cost of sales will continue to be impacted by our restructuring initiatives which include inventory rationalization and the subsequent write-down of inventory to the lower of cost or market.
 
Income taxes -
 
We are subject to routine income tax audits that occur periodically in the normal course of business.  U.S. federal, state and local and foreign tax authorities raise questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the tax benefits associated with our various tax filing positions, we record a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. Adjustments are made to our liability for unrecognized tax benefits in the period in which we determine the issue is effectively settled with the tax authorities, the statute of limitations expires for the return containing the tax position or when more information becomes available. Our liability for unrecognized tax benefits, including accrued penalties and interest, is included in other long-term liabilities on our consolidated balance sheets and in income tax expense in our consolidated statements of earnings.  
 
In determining our provision for income taxes, we use an annual effective income tax rate based on full year income, permanent differences between book and tax income, and statutory income tax rates. The effective income tax rate also reflects our assessment of the ultimate outcome of tax audits. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.  Based on current knowledge, we do not believe there is a reasonable likelihood that there will be a material change in the estimate or assumptions used to determine income taxes.


LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1,712 million at May 31, 2010, compared to $2,300 million at May 31, 2009.  Short-term investment objectives are to minimize risk, maintain liquidity and maximize after-tax yields.  To attain these objectives, investment limits are placed on the amount, type and issuer of securities.  Investments are principally in U.S. Treasury market funds and Treasury Bills.

Net cash provided by operating activities for the nine months ended May 31, 2010 was $2,819 million compared to $3,259 million a year ago.  The decrease is primarily attributed to reduced cash flows from working capital improvements.  For the nine months ended May 31, 2010, cash flows from working capital improvements was $231 million as compared to the prior year where working capital improvements generated $602 million of cash flows.  Partially offsetting the reduced working capital improvements was an increase in net earnings.  Cash provided by operations is the principal source of funds for expansion, acquisitions, remodeling programs, dividends to shareholders and stock repurchases.  In fiscal 2009 we supplemented cash provided by operations with long-term debt.

Net cash used for investing activities was $1,652 million versus $1,936 million last year.  In the current year, we invested $2,400 million in short-term Treasury Bills and $2,300 million matured.  Last year, we invested $1,400 million in short-term Treasury Bills and $1,300 million matured.  Additions to property and equipment were $786 million compared to $1,534 million last year.  During the first nine months we added a total of 601 locations (523 net) compared to 525 last year (427 net).  There were 74 owned locations added during the first nine months and 60 under construction at May 31, 2010 versus 140 owned locations added and 53 under construction last year.

   
Drugstores
   
Worksites
   
Home Care
   
Specialty Pharmacy
   
Mail Service
   
Total
 
August 31, 2009
    6,997       377       105       15       2       7,496  
   New/Relocated
    294       24       2       -       -       320  
   Acquired
    280       -       1       -       -       281  
   Closed/Replaced
    (49 )     (23 )     (5 )     (1 )     -       (78 )
May 31, 2010
    7,522       378       103       14       2       8,019  

Business acquisitions this year were $764 million versus $348 million in the prior year.  Business acquisitions in the current year primarily include the purchase of all 258 Duane Reade stores located in the New York City metropolitan area, as well as the corporate office and two distribution centers for $560 million net of assumed cash of $6 million.  The remaining business acquisitions of $204 million in the current year and $348 million in the prior year are primarily for the purchase of prescription files.
 
 
Capital expenditures throughout fiscal 2010 are expected to be $1.2 billion, excluding business acquisitions and prescription file purchases.  We expect new drugstore organic growth of between 4.5 percent and 5.0 percent in fiscal 2010 and between 2.5 percent and 3.0 percent in 2011.  In the first nine months, we added a total of 601 locations, of which 574 were new, relocated or acquired drugstores, with a net gain of 525 drugstores after relocations and closings. We are continuing to relocate stores to more convenient and profitable freestanding locations.  In addition to stores, expenditures are planned for distribution centers and technology.  Capital expenditures for fiscal 2011 are expected to be approximately $1.4 billion, excluding business acquisitions and prescription file purchases.

Net cash used for financing activities was $1,542 million compared to the prior year where financing activities provided net cash of $534 million.  Upon the closing of the Duane Reade acquisition we assumed debt of $574 million. Subsequent to closing, we retired all Duane Reade debt for $576 million. In the prior year we had net proceeds from the issuance of long term debt of $987 million and repayments of short term borrowing of $70 million.  On October 14, 2009, our Board of Directors approved a long-term capital policy.  Our long-term capital policy is to maintain a strong balance sheet and financial flexibility; reinvest in our core strategies; invest in strategic opportunities that reinforce our core strategies and meet return requirements; and return surplus cash flow to shareholders in the form of dividends and share repurchases over the long term.  In connection with our capital policy, our Board of Directors authorized a new stock repurchase program (“2009 repurchase program”) and set a long-term dividend payout ratio target between 30 and 35 percent.  The 2009 repurchase program allows for the repurchase of up to $2,000 million of the Company’s common stock prior to its expiration on December 31, 2013.  Shares totaling $638 million were purchased in conjunction with the 2009 repurchase program during the first nine months.  In addition, we will continue to repurchase shares to support the needs of the employee stock plans.  Shares totaling $116 million were purchased to support the needs of the employee stock plans during the current period as compared to $140 million a year ago.  In the first nine months of the current year, we had proceeds related to employee stock plans of $206 million versus $106 million for the same period last year.  Cash dividends paid were $407 million during the first nine months versus $334 million for the same period a year ago.

We had no commercial paper outstanding at May 31, 2010.  In connection with our commercial paper program, we maintain two unsecured backup syndicated lines of credit that total $1,200 million.  The first $600 million facility expires on August 9, 2010, and allows for the issuance of up to $400 million in letters of credit, which reduces the amount available for borrowing.  The second $600 million facility expires on August 12, 2012.  Our ability to access these facilities is subject to our compliance with the terms and conditions of the credit facilities, including financial covenants.  The covenants require us 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.  As of May 31, 2010, we were in compliance with all such covenants.  The Company pays a facility fee to the financing banks to keep these lines of credit active.  As of May 31, 2010, there was $194 million in letters of credit issued against these credit facilities.  We do not expect borrowings under these facilities, together with our outstanding commercial paper, to exceed $1,200 million.

Our current credit ratings are as follows:
Rating Agency
Long-Term Debt Rating
Outlook
Commercial Paper Rating
Outlook
Moody's
A2
Negative
P-1
Negative
Standard & Poor's
A
Stable
A-1
Stable





In assessing our credit strength, both Moody's and Standard & Poor's consider our business model, capital structure, financial policies and financial statements.  Our credit ratings impact our future borrowing costs, access to capital markets and operating lease costs.


CONTRACTUAL OBLIGATIONS AND COMMITMENTS

The following table lists our contractual obligations and commitments as of May 31, 2010:

   
Payments Due by Period (In millions)
 
   
Total
   
Less than 1 Year
   
1-3 Years
   
3-5 Years
   
Over 5 Years
 
Operating leases (1)
  $ 36,413     $ 2,229     $ 4,527     $ 4,364     $ 25,293  
Purchase obligations (2):
                                       
Open inventory purchase orders
    1,805       1,805       -       -       -  
Real estate development
    418       248       157       13       -  
Other corporate obligations
    523       206       193       100       24  
Long-term debt*(3)
    2,350       4       4       1,310       1,032  
Interest payment on long-term debt
    694       114       232       136       212  
Insurance*
    579       186       120       53       220  
Retiree health*
    345       10       24       28       283  
Closed location obligations*
    109       27       30       18       34  
Capital lease obligations *(1)
    50       4       5       5       36  
Other long-term liabilities reflected on the balance sheet*(4)
    836       65       163       152       456  
Total
  $ 44,122     $ 4,898     $ 5,455     $ 6,179     $ 27,590  
* Recorded on balance sheet.

(1)
Amounts for operating leases and capital leases do not include certain operating expenses under the leases such as common area maintenance, insurance and real estate taxes.  These expenses for the Company's most recent fiscal year were $335 million.
(2)
The purchase obligations include agreements to purchase goods or services that are enforceable and legally binding and that specify all significant terms, including open purchase orders.
(3)
Total long-term debt on the Consolidated Condensed Balance Sheet includes a $21 million fair market value adjustment and $8 million of unamortized discount.
(4)
Includes $70 million ($21 million due in 1-3 years, $33 million due in 3-5 years and $16 million due in over 5 years) of unrecognized tax benefits recorded under ASC topic 740.


OFF-BALANCE SHEET ARRANGEMENTS

Letters of credit are issued to support purchase obligations and commitments (as reflected on the Contractual Obligations and Commitments table) as follows (In millions):

Insurance
  $ 234  
Inventory obligations
    96  
Real estate development
    20  
Other
    8  
Total
  $ 358  

At May 31, 2010, $194 million of insurance letters of credit were issued under the provisions of our $600 million credit facility that expires on August 9, 2010.

We have no off-balance sheet arrangements other than those disclosed on the Contractual Obligations and Commitments table and a credit agreement guaranty on behalf of SureScripts-RxHub, LLC.  This agreement is described more fully in Note 13 in the Notes to Consolidated Condensed Financial Statements.

Both on-balance sheet and off balance-sheet financing alternatives are considered when pursuing our capital structure and capital allocation objectives.


RECENT ACCOUNTING PRONOUNCEMENTS

In June 2009, the Financial Accounting Standards Board (FASB) issued ASC topic 810 (formerly SFAS No. 167, Amendments to FASB Interpretation No. 46(R)), which amends the consolidation guidance applicable to variable interest entities. The amendments will significantly affect the overall consolidation analysis under ASC topic 810. The application of the new provisions under this topic, which will be effective for the first quarter of fiscal 2011, is not expected to have a material impact on our consolidated financial position or results of operations.


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

Certain information in this quarterly report on Form 10-Q, as well as in other public filings, the Company website, press releases and oral statements made by our representatives, is forward-looking information based on the Company’s current expectations and plans which involve risks and uncertainties.  Forward-looking information includes statements concerning pharmacy sales trends, prescription margins, number and location of new store openings, outcomes of litigation, the level of capital expenditures, and demographic trends.  Forward looking information includes statements with words such as "expects," "estimates," "intends," "believes," "plans," "anticipates" or similar language.  For such statements, we claim the protection of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

Forward-looking statements involve risks and uncertainties, known or unknown to the Company that could cause results to differ materially from management expectations as projected in such forward-looking statements.  These risk and uncertainties are discussed in Item 1A of the Company’s annual report on Form 10-K for the fiscal year ended August 31, 2009 as well as other documents filed with the Securities and Exchange Commission.  Unless otherwise required by applicable securities laws, the Company assumes no obligation to update its forward-looking statements to reflect subsequent events or circumstances.


Item 3.  QUALITATIVE AND QUANTITATIVE DISCLOSURE ABOUT MARKET RISK

In January 2010, we entered into two interest rate swap transactions converting our $1,300 million 4.875% fixed rate notes to a floating interest rate tied to the six month LIBOR in arrears plus a constant spread.  These financial instruments are sensitive to changes in interest rates.  On May 31, 2010, we had $1,050 million in long-term debt obligations that had fixed interest rates.  A one percentage point increase or decrease in interest rates would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense by approximately $13 million.


Item 4.  CONTROLS AND PROCEDURES

Based on their evaluation as of May 31, 2010, pursuant to Exchange Act Rule 13a-15(b), the Company's management, including its Chief Executive Officer and Chief Financial Officer, has concluded that the Company's disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e)) are effective.

In connection with the evaluation pursuant to Exchange Act Rule 13a-15(d) of the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by the Company's management, including its Chief Executive Officer and Chief Financial Officer, no changes during the quarter ended May 31, 2010 were identified that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

In the second quarter of fiscal 2010 we signed an agreement to outsource select accounting transaction-processing activities.  This is part of an ongoing initiative to transform our accounting organization to a new model which includes shared services and multiple centers of excellence.  The Company’s management has concluded that the outsourcing agreement has not materially affected, and is not reasonably likely to materially affect, the Company’s internal control over financial reporting.


PART II.  OTHER INFORMATION

Item 1.    LEGAL PROCEEDINGS

The information in response to this item is incorporated herein by reference to Note 13 of the Consolidated Condensed Financial Statements of this Quarterly Report.

Item 1A. RISK FACTORS

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Part I, “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the year ended August 31, 2009 and in Part II, "Item 1A. Risk Factors" in our subsequent Quarterly Reports on Form 10-Q, which could materially affect our business, financial condition or future results.

We derive a significant portion of our sales from prescription drug sales reimbursed by pharmacy benefit management companies.

We derive a significant portion of our sales from prescription drug sales reimbursed through prescription drug plans administered by pharmacy benefit management (PBM) companies.    PBM companies typically administer multiple prescription drug plans that expire at various times and provide for varying reimbursement rates.  If our participation in the prescription drug programs administered by one or more of the large PBM companies is terminated, we expect that our sales would be adversely affected, at least in the short term.  If we are unable to replace any such lost sales, either through an increase in other sales or through a resumption of participation in those plans, our operating results may be materially adversely affected.


Item 2.    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

(c)
The following table provides information about purchases by the Company during the quarter ended May 31, 2010 of equity securities that are registered by the Company pursuant to Section 12 of the Exchange Act:

Issuer Purchases of Equity Securities
 
Period
 
Total Number of Shares Purchased (1)
   
Average Price Paid per Share
   
Total Number of Shares Purchased as Part of Publicly Announced $2,000 Million Stock Repurchase Program (2)
   
Approximate Dollar Value of Shares that May Yet Be Purchased Under the $2,000 Million Stock Repurchase Program (2)
 
3/1/2010 – 3/31/2010
    1,900,727     $ 35.25       1,900,727     $ 1,533,005,222  
4/1/2010 - 4/30/2010
    1,842,069     $ 36.37       1,842,069     $ 1,466,009,675  
5/1/2010 - 5/31/2010
    4,486,323     $ 35.05       2,986,323     $ 1,361,819,057  
Total
    8,229,119     $ 35.39       6,729,119     $ 1,361,819,057  
 
  (1)  
The Company purchased 1,500,000 shares of its common stock in open-market transactions to satisfy the requirements of the Company's employee stock purchase and option plans, as well as the Company's Nonemployee Director Stock Plan.
 
  (2)  
On October 14, 2009, the Board of Directors authorized a new stock repurchase program (“2009 repurchase program”) which replaced the 2007 repurchase program. The 2009 repurchase program allows for the repurchase of up to $2,000 million of the Company’s common stock prior to its expiration on December 31, 2013. The total remaining authorization under the repurchase program is $1,362 million as of May 31, 2010.
 


Item 6.   EXHIBITS

(a)  
Exhibits

 
3.1
Articles of Incorporation of Walgreen Co., as amended, filed with the Securities and Exchange Commission as Exhibit 3(a) to Walgreen Co.’s Quarterly Report on Form 10-Q for the quarter ended February 28, 1999 (File No. 1-00604), and incorporated by reference herein.
     
 
3.2
Amended and Restated By-Laws of Walgreen Co., as amended effective as of September 1, 2008, filed with the Securities and Exchange Commission on September 5, 2008 as Exhibit 3.1 to Walgreen Co.’s Current Report on Form 8-K (File No. 1-00604), and incorporated by reference herein.
     
 
10.1
Separation and Release Agreement, effective April, 2, 2010, between Stanley B. Blaylock and Walgreen Co.
     
 
12
Computation of Ratio of Earnings to Fixed Charges.
     
 
31.1
Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
31.2
Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
     
 
32.1
Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.
     
 
32.2
Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.


 

 

SIGNATURES

 
 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.





 
WALGREEN CO.
 
(Registrant)
   
Dated:  6/28/10
/s/ W.D. Miquelon
 
W.D. Miquelon
 
Executive Vice President
 
(Chief Financial Officer)
   
Dated:  6/28/10
/s/ M.M. Scholz
 
M.M. Scholz
 
Controller
 
(Chief Accounting Officer)