TORONTO, Nov. 8 /CNW/ - Shoppers Drug Mart Corporation (TSX: SC) today
announced its financial results for the third quarter ended October 7, 2006.
Third Quarter Results (16 Weeks)
Third quarter sales increased 8.9% to $2.329 billion, with the Company
continuing to experience strong sales growth in all regions of the country. On
a same-store basis, sales increased 6.6% during the third quarter of 2006.
Prescription sales increased 9.7% in the third quarter to $1.116 billion,
accounting for 47.9% of the Company's sales mix compared to 47.6% in the same
period last year. On a same-store basis, prescription sales increased 8.2%.
Front store sales increased 8.3% in the third quarter to $1.213 billion,
driven by sales gains in all core categories. On a same-store basis, front
store sales increased 5.2% during the third quarter of 2006.
Strong sales growth, combined with an enhanced product mix, contributed
to growth in net earnings. Third quarter net earnings increased 15.1% to
$124 million or 57 cents per share (diluted) from $108 million or 50 cents per
share (diluted) a year ago.
Commenting on the quarter, Glenn Murphy, Chairman and CEO stated, "We are
pleased with our results in the third quarter, a good quarter for us both
operationally and strategically. Our sales and earnings growth is a testament
to strong execution at store-level, while at the same time, we opened a number
of new stores and completed the acquisitions of MediSystem Technologies and
Therapy Supplies."
Year-to-date Results (40 Weeks)
Sales for the first three quarters of 2006 increased 8.5% to
$5.768 billion, with prescription sales up 8.9% and front store sales up 8.1%.
On a same-store basis, sales increased 6.5%, with prescription sales up 7.8%
and front store sales up 5.3%. During the first three quarters of 2006,
prescription sales accounted for 47.8% of the Company's sales mix compared to
47.6% in the same period last year.
Net earnings for the first three quarters of 2006 increased 16.3% to $290
million or $1.34 per share (diluted) from $249 million or $1.15 per share
(diluted) a year ago.
Business Development
During the third quarter, 30 drug stores were opened or acquired, 14 of
which were relocations, and three drug stores were closed. The Company also
added one home health care store to its network during the quarter. At
quarter-end, there were 1,028 stores in the system, comprised of 974 drug
stores and 54 Shoppers Home Health Care stores. Drug store sales per square
foot (annualized) were $990 at the end of the third quarter compared to $1,001
a year ago.
The Company also completed two acquisitions of note in the third quarter.
MediSystem Technologies Inc., a provider of pharmaceutical products and
services to long-term care facilities in Ontario and Alberta, was acquired for
$90 million, comprised of $47 million in cash and $43 million in common shares
(926,735) issued by the Company. Therapy Supplies & Rental Limited, an
Ontario-based business engaged in the sales and service of durable mobility
equipment to the institutional market, was acquired for $19 million in cash.
Dividend
The Company also announced today that its Board of Directors has declared
a dividend of twelve cents per common share, payable January 15, 2007 to
shareholders of record as of the close of business on December 29, 2006.
Normal Course Issuer Bid
On September 6, 2006, the Company announced that its Board of Directors
authorized the purchase of up to 5,350,000 of its common shares, representing
approximately 2.5% of its common shares then outstanding, by way of normal
course purchases on the Toronto Stock Exchange (the "TSX"). The Company was
able to commence purchases under the program on September 8, 2006. The program
will terminate on September 7, 2007, or on such earlier date as the Company
may complete its purchases pursuant to a Notice of Intention filed with the
TSX. Purchases will be made by the Company in accordance with the requirements
of the TSX and the price which the Company will pay for any such common shares
will be the market price of any such common shares at the time of acquisition.
Purchased common shares will be cancelled.
During the third quarter, the Company repurchased, for cancellation,
913,600 of its common shares at a cost of $42 million, effectively offsetting
any dilution from the issuance of common shares in conjunction with the
acquisition of MediSystem Technologies Inc.
Other Information
The Company will hold an analyst call at 3:30 p.m. (Eastern Standard
Time) today to discuss its third quarter results. The call may be accessed by
dialing 416-641-6114 from within the Toronto area, or 1-866-696-5895 outside
of Toronto. The call will also be simulcast on the Company's website for all
interested parties. The webcast can be accessed via the Investor Relations
section of the Shoppers Drug Mart website at www.shoppersdrugmart.ca. The
conference call will be archived in the Investor Relations section of the
Shoppers Drug Mart website until the Company's next analyst call. A playback
of the call will also be available by telephone until 11:59 p.m. (Eastern
Standard Time) on November 23, 2006. The call playback can be accessed after
5:30 p.m. (Eastern Standard Time) on Wednesday, November 8, 2006 by dialing
416-695-5800 from within the Toronto area, or 1-800-408-3053 outside of
Toronto. The seven-digit passcode number is 3199782.
Shoppers Drug Mart Corporation is one of the most recognized and trusted
names in Canadian retailing. The Company is the licensor of full-service
retail drug stores operating under the name Shoppers Drug Mart (Pharmaprix in
QuDebec). With more than 974 Shoppers Drug Mart and Pharmaprix stores operating
in prime locations in each province and two territories, the Company is one of
the most convenient retailers in Canada. The Company also owns and operates 54
Shoppers Home Health Care stores, making it the largest Canadian retailer of
home health care products and services.
This news release, including the Management's Discussion and Analysis,
contains forward-looking statements regarding, among other things, the
Company's beliefs, plans, objectives, estimates, intentions and expectations,
including as they relate to its operating and financial results, capital
expenditures, dividend policy and the ability to execute on its operating,
investing and financing strategies. These forward-looking statements are based
on certain assumptions by management, certain of which are set out in this
news release. Inherent in these forward-looking statements are known and
unknown risks, uncertainties and other factors beyond the Company's ability to
control or predict. Actual results or developments may differ materially from
those contemplated by these statements depending on, among others, such
factors as changes in the regulatory environment as it relates to the sale of
prescription drugs, competition from other retailers, exposure to interest
rate fluctuations, foreign currency risks, certain property and casualty
risks, the ability to attract and retain pharmacists, risks in connection with
third party service providers, the availability of suitable store locations,
seasonality risks, changes in federal and provincial laws, rules and
regulations relating to the Company's business and environmental matters,
changes in tax regulations and accounting pronouncements, the success of the
Company's Associate-owned stores, supplier and brand reputations and the
accuracy of management's assumptions. This list is not exhaustive of the
factors that may affect any of the Company's forward-looking statements.
Investors and others should carefully consider these and other factors and not
place undue reliance on these forward-looking statements. Further information
regarding these and other factors is included in the Company's public filings
with provincial securities regulatory authorities including, without
limitation, the section entitled "Risks and Risk Management" in the Company's
Management's Discussion and Analysis for the 52 week period ended December 31,
2005 and the section entitled "Risk Factors" in the Company's Annual
Information Form for the same period. The forward-looking statements contained
in this news release represent the Company's views only as of the date of this
release. While the Company anticipates that subsequent events and developments
may cause the Company's views to change, the Company does not undertake to
update any forward-looking statements.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.
<<
SHOPPERS DRUG MART CORPORATION
MANAGEMENT'S DISCUSSION AND ANALYSIS
As at October 31, 2006
>>
The following is a discussion of the consolidated financial condition and
results of operations of Shoppers Drug Mart Corporation (the "Company") for
the periods indicated and of certain factors that the Company believes may
affect its prospective financial condition, cash flows and results of
operations. This discussion and analysis should be read in conjunction with
the unaudited interim period consolidated financial statements of the Company
and the notes thereto for the 16 and 40 week periods ended October 7, 2006.
The Company's unaudited interim period consolidated financial statements and
the notes thereto have been prepared in accordance with Canadian generally
accepted accounting principles ("GAAP") and are reported in Canadian dollars.
These financial statements do not contain all disclosures required by Canadian
GAAP for annual financial statements and, accordingly, should be read in
conjunction with the most recently prepared annual consolidated financial
statements for the 52 week period ended December 31, 2005.
FORWARD-LOOKING STATEMENTS
This discussion of the consolidated financial condition and results of
operations of the Company contains forward-looking statements regarding, among
other things, the Company's beliefs, plans, objectives, estimates, intentions
and expectations, including as they relate to its operating and financial
results, capital expenditures, dividend policy and the ability to execute on
its operating, investing and financing strategies. These forward-looking
statements are based on certain assumptions by management, certain of which
are set out herein. Inherent in these forward-looking statements are known and
unknown risks, uncertainties and other factors beyond the Company's ability to
control or predict. Actual results or developments may differ materially from
those contemplated by these statements depending on, among others, such
factors as changes in the regulatory environment as it relates to the sale of
prescription drugs, competition from other retailers, exposure to interest
rate fluctuations, foreign currency risks, certain property and casualty
risks, the ability to attract and retain pharmacists, risks in connection with
third party service providers, the availability of suitable store locations,
seasonality risks, changes in federal and provincial laws, rules and
regulations relating to the Company's business and environmental matters,
changes in tax regulations and accounting pronouncements, the success of the
Company's Associate-owned stores, supplier and brand reputations and the
accuracy of management's assumptions. This list is not exhaustive of the
factors that may affect any of the Company's forward-looking statements.
Investors and others should carefully consider these and other factors and not
place undue reliance on these forward-looking statements. Further information
regarding these and other factors is included in the Company's public filings
with provincial securities regulatory authorities including, without
limitation, the section entitled "Risks and Risk Management" in the Company's
management's discussion and analysis for the 52 week period ended December 31,
2005 and the section entitled "Risk Factors" in the Company's Annual
Information Form for the same period. The forward-looking statements contained
in this discussion of the consolidated financial condition and results of
operations of the Company represent the Company's views only as of the date
hereof. While the Company anticipates that subsequent events and developments
may cause the Company's views to change, the Company does not undertake to
update any forward-looking statements.
Additional information about the Company, including the Annual
Information Form, can be found at www.sedar.com.
OVERVIEW
The Company is the licensor of full service retail drug stores operating
under the name Shoppers Drug Mart(R) (Pharmaprix(R) in QuDebec). As at
October 7, 2006, there were 974 Shoppers Drug Mart/Pharmaprix retail drug
stores owned and operated by the Company's licensees ("Associates"). An
Associate is a pharmacist-owner of a corporation that is licensed to operate a
retail drug store at a specific location using the Company's trademarks. The
Company's licensed stores are located in prime locations in each province and
two territories, making Shoppers Drug Mart/Pharmaprix stores among the most
convenient retail outlets in Canada. In addition to its drug store network,
the Company also owns and operates 54 Shoppers Home Health Care(R) stores.
These stores sell medical equipment and assisted-living devices to
institutional and retail customers and provide solutions for
mobility-challenged patients.
The Company has successfully leveraged its leadership position in
pharmacy and its convenient store locations to capture a significant share of
the market in front store merchandise. Front store merchandise categories
include over-the-counter medications, health and beauty aids, cosmetics and
fragrances (including prestige brands), everyday household needs and seasonal
products. The Company also offers a broad range of high quality private label
products marketed under the Life Brand(R) and Quo(R) trademarks, and
value-added services such as the HealthWatch(R) program, which offers patient
counselling on medications and disease management, and the Shoppers
Optimum(TM) program, one of the largest retail loyalty card programs in
Canada. In fiscal 2005, the Company recorded consolidated sales of
approximately $7.2 billion.
Under the licensing arrangement with Associates, the Company provides the
capital and financial support to enable Associates to operate Shoppers Drug
Mart(R) and Pharmaprix(R) stores without any initial investment. The Company
also provides a package of services to facilitate the growth and profitability
of each Associate's business. These services include the use of trademarks,
operational support, marketing and advertising, purchasing and distribution,
information technology and accounting. In return for being provided these and
other services, Associates pay fees to the Company. Fixtures, leasehold
improvements and equipment are purchased by the Company and leased to
Associates over periods ranging from two to ten years, with title retained by
the Company. The Company also provides its Associates with assistance in
meeting their working capital and long-term financing requirements through the
provision of loans and loan guarantees. In addition, the Company also provides
a standby letter of credit to an independent trust (the "Trust") which
provides additional financing to Associates to facilitate their purchase of
inventory and to fund their working capital requirements. (See notes 1 and 7
to the accompanying unaudited consolidated financial statements of the
Company.)
Under the licensing arrangement, the Company receives a substantial share
of Associate store profits. The Company's share of Associate store profits is
reflective of its investment in, and commitment to, the operations of the
Associates' stores.
The Company operates in QuDebec under the Pharmaprix(R) trade name. Under
QuDebec law, profits generated from the prescription area or dispensary may
only be earned by a pharmacist or a corporation controlled by a pharmacist. As
a result of these restrictions, the licence agreement used for QuDebec
Associates differs from the Associate agreement used in other provinces.
Pharmaprix(R) stores and their Associates benefit from the same infrastructure
and support provided to all other Shoppers Drug Mart(R) stores and Associates.
The Company has determined that the individual Associate-owned stores
that comprise its store network are deemed to be variable interest entities
and that the Company is the primary beneficiary in accordance with Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15"). As
such, the Associate-owned stores are subject to consolidation by the Company.
However, as the Associate-owned stores remain separate legal entities from the
Company, consolidation of these stores has no impact on the underlying risks
facing the Company. (See note 1 to the accompanying unaudited consolidated
financial statements of the Company.)
OVERALL FINANCIAL PERFORMANCE
Key Operating, Investing and Financial Metrics
The following provides an overview of the Company's operating performance
for the 16 and 40 week periods ended October 7, 2006 compared to the 16 and
40 week periods ended October 8, 2005, as well as certain other metrics with
respect to investing activities for the 16 and 40 week periods ended
October 7, 2006 and financial position as at October 7, 2006.
<<
- Third quarter sales of $2.329 billion, an increase of 8.9%.
- Year-to-date sales of $5.768 billion, an increase of 8.5%.
- Third quarter comparable store sales growth of 6.6%, comprised of
comparable prescription sales growth of 8.2% and comparable front
store sales growth of 5.2%.
- Year-to-date comparable store sales growth of 6.5%, comprised of
comparable prescription sales growth of 7.8% and comparable front
store sales growth of 5.3%.
- Drug store sales per square foot (annualized) of $990 as at
October 7, 2006 compared to $1,001 a year ago.
- Third quarter EBITDA(1) of $244 million, an increase of 14.5%.
- Year-to-date EBITDA of $581 million, an increase of 14.4%.
- Third quarter EBITDA margin(2) of 10.48%, an increase of 51 basis
points.
- Year-to-date EBITDA margin of 10.07%, an increase of 52 basis
points.
- Third quarter net earnings of $124 million or $0.57 per share
(diluted), an increase of 15.1%.
- Year-to-date net earnings of $290 million or $1.34 per share
(diluted), an increase of 16.3%.
- Third quarter capital expenditures of $214 million compared to
$81 million in the prior year. Includes the acquisition of MediSystem
Technologies Inc. ($90 million) and Therapy Supplies & Rental Limited
($19 million). Opened or acquired 30 new drug stores, 14 of which
were relocations, and added one home health care store.
- Year-to-date capital expenditures of $305 million compared to
$186 million in the prior year. Opened or acquired 55 new drug
stores, 24 of which were relocations, and added three home health
care stores.
- Net debt to total capitalization ratio of 0.27:1 at October 7, 2006
compared to 0.30:1 a year ago.
(1) Earnings before interest, taxes, depreciation and amortization. (See
reconciliation to the most directly comparable GAAP measure under
"Results of Operations" in this Management's Discussion and
Analysis.)
(2) EBITDA divided by sales.
Results of Operations
The following table presents a summary of certain selected consolidated
financial information for the Company for the periods indicated.
16 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
($000's, except October 7, October 8, October 7, October 8,
per share data) 2006 2005 2006 2005
-------------------------------------------------------------------------
(unaudited) (unaudited) (unaudited) (unaudited)
Sales $ 2,329,051 $ 2,138,085 $ 5,768,369 $ 5,317,788
Cost of goods sold
and other operating
expenses 2,084,896 1,924,874 5,187,210 4,809,941
------------------------- -------------------------
EBITDA(1) 244,155 213,211 581,159 507,847
Amortization 44,295 37,536 106,466 91,276
------------------------- -------------------------
Operating income 199,860 175,675 474,693 416,571
Interest expense 14,632 13,762 38,977 38,326
------------------------- -------------------------
Earnings before
income taxes 185,228 161,913 435,716 378,245
Income taxes 61,348 54,241 145,725 128,876
------------------------- -------------------------
Net earnings $ 123,880 $ 107,672 $ 289,991 $ 249,369
------------------------- -------------------------
------------------------- -------------------------
Per common share
- Basic net earnings $ 0.58 $ 0.51 $ 1.36 $ 1.18
- Diluted net
earnings $ 0.57 $ 0.50 $ 1.34 $ 1.15
(1) Earnings before interest, taxes, depreciation and amortization.
>>
Sales
Sales represent the combination of sales to external customers of the
retail drug stores owned by the Associates and of the home health care stores
owned by the Company.
Sales in the third quarter were $2.329 billion compared to $2.138 billion
in the same period last year, an increase of $191 million or 8.9%, with
continued strong sales growth experienced in all regions of the country. On a
same-store basis, sales increased 6.6% during the third quarter of 2006.
Year-to-date, sales increased 8.5% to $5.768 billion. The Company's capital
investment program, which has resulted in a 10.3% increase in selling square
footage versus a year ago, combined with innovative marketing initiatives and
solid in-store execution, have resulted in an enhanced sales mix and market
share gains in the Company's core categories. On a same-store basis, sales
increased 6.5% during the first three quarters of 2006.
Prescription sales were $1.116 billion in the third quarter compared to
$1.018 billion in the third quarter of 2005, an increase of $98 million or
9.7%. On a same-store basis, prescription sales increased 8.2% during the
third quarter of 2006. Prescription sales represented 47.9% of the Company's
sales mix during the third quarter of 2006 compared to 47.6% in the same
period last year. Year-to-date, prescription sales increased 8.9% to
$2.759 billion, accounting for 47.8% of the Company's sales mix compared to
47.6% in the same period last year. On a same-store basis, prescription sales
increased 7.8% during the first three quarters of 2006.
Front store sales were $1.213 billion in the third quarter compared to
$1.120 billion in the third quarter of 2005, an increase of $93 million or
8.3%. On a same-store basis, front store sales increased 5.2% during the third
quarter of 2006. Year-to-date, front store sales increased 8.1% to
$3.010 billion. On a same-store basis, front store sales increased 5.3% during
the first three quarters of 2006.
Cost of Goods Sold and Other Operating Expenses
Cost of goods sold is comprised of the cost of goods sold at the retail
drug stores owned by the Associates and the Shoppers Home Health Care(R)
stores owned by the Company. Other operating expenses include corporate
selling, general and administrative expenses, operating expenses at the retail
drug stores owned by the Associates, including Associates' earnings, and
operating expenses at the Shoppers Home Health Care(R) stores owned by the
Company.
Total cost of goods sold and other operating expenses were $2.085 billion
in the third quarter compared to $1.925 billion in the same period last year,
an increase of $160 million or 8.3%. Expressed as a percentage of sales, cost
of goods sold declined by 81 basis points in the third quarter of 2006 versus
the comparative prior year period, reflecting improvements in cost of goods, a
better sales mix and reduced shrink, partially offset by a higher investment
in the Shoppers Optimum(TM) loyalty card program. Other operating expenses,
expressed as a percentage of sales, increased by 30 basis points in the third
quarter of 2006 versus the comparative prior year period. This increase is
primarily attributable to higher Associate earnings as a result of growth in
drug store network profitability, increased operating expenses from additional
investments in new and relocated stores and additional costs incurred at the
Company's Mississauga, Ontario distribution centre stemming from the
commencement of self-distribution of fresh and frozen consumable products from
this recently expanded facility.
Year-to-date, total cost of goods and other operating expenses increased
7.8% to $5.187 billion. Expressed as a percentage of sales, cost of goods sold
declined by 65 basis points in the first three quarters of 2006 versus the
comparative prior year period, while other operating expenses increased by
13 basis points.
Amortization
Amortization of capital assets and other intangible assets was
$44 million in the third quarter compared to $38 million in the same period
last year, an increase of $6 million or 18.0%. Expressed as a percentage of
sales, amortization increased 14 basis points in the third quarter of 2006
versus the comparative prior year period, reflecting the continued growth of
the Company's capital investment program.
Year-to-date, amortization of capital assets and other intangible assets
increased 16.6% to $106 million. Expressed as a percentage of sales,
amortization increased 13 basis points in the first three quarters of 2006
versus the comparative prior year period.
Operating Income
Operating income was $200 million in the third quarter compared to
$176 million in the same period last year, an increase of $24 million or
13.8%. An enhanced sales mix and the resultant better gross margin rate,
partially offset by increased amortization, resulted in a higher operating
margin (operating income divided by sales). In 2006, third quarter operating
margin improved by 36 basis points to 8.58% compared to 8.22% in the third
quarter of last year. The Company's EBITDA margin (EBITDA divided by sales)
was 10.48% in the third quarter of 2006, a 51 basis point improvement over the
EBITDA margin of 9.97% posted in the third quarter of last year.
Year-to-date, operating income increased 14.0% to $475 million and
operating margin improved by 40 basis points to 8.23%. During the first three
quarters of 2006, EBITDA margin was 10.07%, a 52 basis point improvement over
the EBITDA margin of 9.55% posted during the first three quarters of 2005.
Interest Expense
Interest expense was $15 million in the third quarter of 2006 compared to
$14 million in the same period last year, an increase of $1 million or 6.3%.
This increase versus the comparative prior year period can be attributed to a
market-driven increase in short-term interest rates, partially offset by a
reduction in the amount of consolidated net debt outstanding.
Year-to-date interest expense of $39 million is essentially unchanged
from the amount of $38 million recorded in the comparative prior year period.
Year-to-date interest expense for the current and prior year includes
amounts for the amortization of deferred financing costs of $1 million and
$2 million, respectively. (See note 3 to the accompanying unaudited
consolidated financial statements of the Company.)
Income Taxes
The Company's effective income tax rate in the third quarter of 2006 was
33.1% compared to 33.5% in the same period last year. Year-to-date, the
Company's effective income tax rate was 33.4% compared to 34.1% during the
first three quarters of the prior year. These quarterly and year-to-date
decreases in the effective income tax rate can be attributed primarily to a
reduction in statutory rates in certain jurisdictions and revisions to the
Company's internal capital structure, combined with favourable outcomes of a
recent tax audit and the recognition of the tax benefit related to available
capital losses, all of which was partially offset by an income tax
reassessment in one provincial jurisdiction.
Net Earnings
Third quarter net earnings were $124 million compared to $108 million in
the same period last year, an increase of $16 million or 15.1%. On a diluted
basis, earnings per share were $0.57 in the third quarter compared to $0.50 in
the same period last year.
Year-to-date, net earnings increased 16.3% to $290 million. On a diluted
basis, earnings per share were $1.34 in the first three quarters of 2006
compared to $1.15 in the same period last year.
Financial Position
The following table provides a summary of certain information with
respect to the Company's financial position at the end of the periods
indicated.
<<
October 7, December 31,
($000's) 2006 2005
-------------------------------------------------------------------------
Cash $ (18,368) $ (24,524)
Bank indebtedness 171,291 163,503
Commercial paper 518,750 469,850
Current portion of long-term debt 300 -
Long-term debt 307,738 325,000
--------------------------
Net debt 979,711 933,829
Shareholders' equity 2,615,332 2,386,508
--------------------------
Total capitalization $ 3,595,043 $ 3,320,337
--------------------------
--------------------------
Net debt:Shareholders' equity 0.37:1 0.39:1
Net debt:Total capitalization 0.27:1 0.28:1
Net debt:EBITDA(1) 1.23:1 1.30:1
EBITDA:Cash interest expense(1)(2) 16.79:1 15.62:1
(1) For purposes of calculating the ratios, EBITDA is comprised of EBITDA
for each of the 52 week periods then ended.
(2) Cash interest expense is comprised of interest expense for each of
the 52 week periods then ended and excludes the amortization of
deferred financing costs.
>>
Outstanding Share Capital
The Company's outstanding share capital is comprised of common shares. An
unlimited number of common shares is authorized and the Company had
214,861,050 common shares outstanding at October 31, 2006. As at this same
date, the Company had issued options to acquire 3,492,134 of its common shares
pursuant to its stock-based compensation plans, of which 2,501,703 were
exercisable.
Liquidity and Capital Resources
Sources of Liquidity
The Company has the following sources of liquidity: (i) cash provided by
operating activities; (ii) cash available from a committed $550 million
revolving bank credit facility maturing June 6, 2011, less what is currently
drawn and/or being utilized to support commercial paper issued and
outstanding; and (iii) up to $300 million in availability under its commercial
paper program, less what is currently issued. The Company's commercial paper
program is rated R-1 (low) by Dominion Bond Rating Service. In the event that
the Company's commercial paper program is unable to maintain this rating, the
program is supported by its $550 million revolving bank credit facility. The
Company does not currently foresee any reasonable circumstances under which
this credit rating would not be maintained.
The Company has also arranged for its Associates to obtain financing to
facilitate their purchase of inventory and fund their working capital
requirements from the following sources: (i) an independent trust (the
"Trust") whose activities are financed through the issuance of short-term,
asset-backed notes that are rated R-1 (middle) by Dominion Bond Rating Service
to third party investors; and (ii) by providing guarantees to various Canadian
chartered banks that support Associate loans. (See notes 1 and 7 to
accompanying unaudited consolidated financial statements of the Company.)
The Company has obtained additional long-term financing from the issuance
of $300 million of 5-year medium-term notes maturing October 24, 2008, which
bear interest at a fixed rate of 4.97% per annum (the "Notes"). The Notes were
issued pursuant to a short form base shelf prospectus dated October 10, 2003,
as supplemented by a pricing supplement dated October 20, 2003, and filed by
the Company with Canadian securities regulators in all of the provinces of
Canada. The Notes were assigned a rating of A (low) from Dominion Bond Rating
Service and BBB from Standard & Poor's.
At the end of the third quarter, $53 million of the Company's
$550 million revolving credit facility was utilized, including drawings of
$47 million in respect of outstanding letters of credit and trade finance
guarantees. At December 31, 2005, $48 million of the Company's then existing
$250 million revolving credit facility was utilized, all in respect of
outstanding letters of credit and trade finance guarantees. At October 7,
2006, the Company had $95 million of commercial paper issued and outstanding
under its commercial paper program compared to $50 million at the end of the
prior year. At the end of the third quarter, Associates had obtained an
aggregate amount of $424 million of Trust financing and had drawn an aggregate
amount of $175 million in the form of Associate loans from various Canadian
chartered banks compared to $420 million and $164 million, respectively, at
the end of the prior year.
In addition to the above, MediSystem Technologies Inc., a subsidiary of
the Company, has arranged for up to $1 million of revolving demand bank credit
facilities and for a $2 million non-revolving, amortizing bank credit facility
maturing May 3, 2010. At the end of the third quarter, no amounts were
outstanding on the aforementioned $1 million of revolving demand bank credit
facilities.
Cash Flows from Operating Activities
Cash flows from operating activities were $176 million in the third
quarter of 2006 compared to $141 million in the same period last year. This
increase is largely attributable to cash generated from non-cash working
capital balances as an increased investment in inventory in the third quarter
of 2006 was more than offset by a corresponding increase in accounts payable
and growth in the income taxes payable balance.
Year-to-date, the Company has generated $338 million of cash from
operating activities compared to $292 million in the first three quarters of
2005.
Cash Flows Used in Investing Activities
Cash flows used in investing activities were $176 million in the third
quarter of 2006 compared to $81 million in the same period last year, an
increase of $95 million. Of these totals, capital asset expenditures and
business acquisitions amounted to $99 million and $72 million, respectively,
in the third quarter of 2006 compared to $75 million and $5 million,
respectively, in the same period last year. Investments in other assets
increased by $5 million during the third quarter of 2006 compared to an
increase of $1 million in the same period last year.
As noted above, the Company invested $72 million in business acquisitions
in the third quarter of 2006. Of this total, $47 million (plus an additional
$43 million of common shares issued by the Company) was used to acquire all of
the common shares of MediSystem Technologies Inc., a provider of
pharmaceutical products and services to long-term care facilities in Ontario
and Alberta, and $19 million was used to acquire all of the common shares of
Therapy Supplies & Rental Limited, an Ontario-based business engaged in the
sales and service of durable mobility equipment to the institutional market.
(See note 2 to the accompanying unaudited consolidated financial statements of
the Company.)
Year-to-date, cash flows used in investing activities were $269 million
compared to $186 million in the first three quarters of 2005. Of these totals,
capital asset expenditures and business acquisitions amounted to $179 million
and $83 million, respectively, in the first three quarters of 2006 compared to
$164 million and $22 million, respectively, in the same period last year.
Investments in other assets have increased by $7 million thus far in 2006.
During the third quarter of 2006, 30 new drug stores were opened or
acquired, 14 of which were relocations, and three drug stores were closed. The
Company also added one home health care store to its network during the
quarter. Year-to-date, 55 new drug stores have been opened or acquired, 24 of
which were relocations, and seven drug stores have been closed. The Company
has also added three home health care stores to its network thus far in 2006.
At the end of the third quarter there were 1,028 stores in the system,
comprised of 974 drug stores and 54 Shoppers Home Health Care(R) stores.
Financing Activities
Cash flows used in financing activities were $4 million in the third
quarter of 2006. Cash inflows of $72 million were generated from a $65 million
increase in the amount of commercial paper issued and outstanding under the
Company's commercial paper programs (a $64 million increase in the amount of
commercial paper issued and outstanding by the Company and a $1 million
increase in the amount of Trust financing obtained by Associates), $5 million
of proceeds received from the issuance of common shares and loan repayments
under the Company's stock-based incentive plans and $2 million of additional
borrowings under the Company's $550 million revolving bank credit facility.
Offsetting these inflows were cash outflows of $76 million comprised of an
$8 million reduction in the amount of Associate investment, $26 million for
the payment of dividends and $42 million to repurchase, for cancellation,
913,600 of the Company's common shares pursuant to its Normal Course Issuer
Bid.
In the third quarter of 2006, the net result of the Company's operating,
investing and financing activities was a decrease in cash balances of
$4 million.
Year-to-date, cash flows used in financing activities were $75 million
and the net result of the Company's operating, investing and financing
activities was a decrease in cash balances of $6 million.
On June 6, 2006, the Company entered into a $550 million restated and
amended senior unsecured bank credit facility maturing June 6, 2011. The
restated and amended bank credit facility combined the Company's $250 million
revolving bank credit facility that was to mature February 2, 2007 with its
$300 million 364-day extendible revolving credit facility that was available
for general corporate purposes, including back-stopping the Company's
commercial paper program.
Normal Course Issuer Bid
On September 6, 2006, the Company announced that its Board of Directors
authorized the purchase of up to 5,350,000 of its common shares, representing
approximately 2.5% of its common shares then outstanding, by way of normal
course purchases on the Toronto Stock Exchange (the "TSX"). The Company was
able to commence purchases under the program on September 8, 2006. The program
will terminate on September 7, 2007, or on such earlier date as the Company
may complete its purchases pursuant to a Notice of Intention filed with the
TSX. Purchases will be made by the Company in accordance with the requirements
of the TSX and the price which the Company will pay for any such common shares
will be the market price of any such common shares at the time of acquisition.
Purchased common shares will be cancelled. (See note 8 to the accompanying
unaudited consolidated financial statements of the Company.)
Future Liquidity
The Company believes that its existing credit facility, commercial paper
program and financing programs available to its Associates, together with cash
generated from operating activities, will be sufficient to fund its
operations, including the operations of its Associate-owned store network,
investing activities and commitments for the foreseeable future. The Company
does not foresee any difficulty in obtaining long-term financing given its
current credit ratings and past experiences in the capital markets.
OFF-BALANCE SHEET ARRANGEMENTS
Derivative Financial Instruments
In the normal course of its business, the Company is exposed to financial
risks that have the potential to negatively impact its financial performance.
The Company may use derivative financial instruments to manage certain of
these risks. The Company does not use derivative financial instruments for
trading or speculative purposes. The Company may be exposed to losses should
any counterparty to its derivative financial instruments fail to fulfil its
obligations. The Company has sought to minimize counterparty risk by
transacting with counterparties that are large financial institutions.
The Company, including its Associate-owned store network, is exposed to
fluctuations in interest rates by virtue of its borrowings under its bank
credit facility, commercial paper program and financing programs available to
its Associates. Increases in interest rates will have an adverse effect on the
earnings of the Company. The Company may use interest rate derivatives to
manage its exposure to fluctuations in interest rates.
The Company has entered into various interest rate derivative agreements
converting an aggregate notional principal amount of $250 million of floating
rate short-term, asset-backed notes issued by the Trust into fixed rate debt.
The fixed rates payable by the Company under these agreements range from 4.03%
to 4.18%. These agreements mature as follows: $150 million in December 2008;
$50 million in December 2009; and $50 million in December 2010. Changes in the
underlying interest rates of the Company's interest rate derivative agreements
will result in market gains and losses. Based on market values at October 7,
2006, the Company would have realized gains of $1 million to terminate these
interest rate derivative agreements. Market values were determined based on
information received from the Company's counterparties to these agreements.
The Company is exposed to fluctuations in the market price of its common
shares by virtue of its obligations under its stock-based, long-term incentive
plan (the "Plan"). The Company has entered into a cash-settled equity forward
agreement to manage this exposure. Under this agreement, the Company has
hedged the variability in cash flows on forecasted payments under the Plan
arising from changes in the value of 147,403 of its common shares awarded
under the Plan between the "Award Date" and the "Final Vesting Date", as such
terms are defined in the Plan. This agreement matures in December 2008. (See
note 9 to the accompanying unaudited financial statements of the Company.)
Associate Loans
The Company has provided guarantees to various Canadian chartered banks
that support Associate loans. At the end of the third quarter of 2006, the
Company's maximum obligation in respect of such guarantees was $360 million
compared to $350 million at the end of the second quarter and prior year. At
October 7, 2006, an aggregate amount of $309 million in available lines of
credit had been allocated to the Associates by the various banks compared to
$304 million at the end of the second quarter and $299 million at the end of
the prior year. As at October 7, 2006, Associates had drawn an aggregate
amount of $175 million against these available lines of credit compared to
$170 million at the end of the second quarter and $164 million at the end of
the prior year. Any amounts drawn by the Associates are included in bank
indebtedness on the Company's consolidated balance sheets. As recourse in the
event that any payments are made under the guarantees, the Company holds a
first ranking security interest on all assets of Associate-owned stores,
excluding inventory. As the Company is involved in allocating the available
lines of credit to its Associates, it estimates that the net proceeds from
secured assets would exceed the amount of any payments required in respect of
the guarantees.
Associate Financing Trust
The Company has arranged for its Associates to obtain financing from the
Trust to facilitate their purchase of inventory and fund their working capital
requirements. At the end of the third quarter of 2006, the total amount of
loans outstanding from the Trust to the Company's Associates was $424 million
compared to $423 million at the end of the second quarter and $420 million at
the end of the prior year. The Company has determined that the Trust is a
variable interest entity and that the Company is the primary beneficiary. As
such, the Trust is subject to consolidation by the Company and these loans are
included in commercial paper on the Company's consolidated balance sheets. The
Company has arranged for a standby letter of credit for the benefit of the
Trust from a syndicate of banks that is equal to approximately 10% of the
aggregate principal amount of the loans, or $43 million, as a form of credit
enhancement which, in turn, enables the Trust to provide favourable financing
terms to the Company's Associates. (See notes 1 and 7 to the accompanying
unaudited consolidated financial statements of the Company.)
If at any time the Trust's cost of borrowing and applicable fees are
greater than the interest rate charged to Associates on their loans, the Trust
has the right to request payment from the Company for any shortfall. In the
opinion of the Company's management, the Company is unlikely to have to make
any such payment as it is involved in setting the rate that Associates are
charged on their loans. In the event that an Associate defaults on a loan from
the Trust, the Company has the right to purchase the Associate's loan from the
Trust, at which time the Trust will assign to the Company the Associate's loan
agreement and related security documentation. The assignment of this
documentation would provide the Company with first priority security over the
Associate's inventory, subject to certain prior ranking statutory claims. The
Company expects that the net proceeds from secured assets would cover any
payments made to purchase a defaulted loan from the Trust, including any
related expenses, as it is involved in setting the amount borrowed from the
Trust by its Associates. In the event that the Company does not elect to
purchase a defaulted loan from the Trust, the Trust may draw upon the standby
letter of credit or realize on its security. If the Trust draws against the
standby letter of credit, the Company has agreed to reimburse the issuing
syndicate of banks for the amount so drawn.
SELECTED QUARTERLY INFORMATION
Reporting Cycle
The annual reporting cycle of the Company is divided into four quarters
of 12 weeks each, except for the third quarter which is 16 weeks in duration.
The fiscal year of the Company consists of a 52 or 53 week period ending on
the Saturday closest to December 31. When a fiscal year consists of 53 weeks,
the fourth quarter is 13 weeks in duration.
<<
Summary of Quarterly Results
Third Quarter Second Quarter
------------------------- -------------------------
($000's, except
per share data 2006 2005 2006 2005
- unaudited) (16 Weeks) (16 Weeks) (12 Weeks) (12 Weeks)
-------------------------------------------------------------------------
Sales $ 2,329,051 $ 2,138,085 $ 1,768,199 $ 1,624,354
Net earnings $ 123,880 $ 107,672 $ 94,407 $ 80,011
Per common share
- Basic net earnings $ 0.58 $ 0.51 $ 0.44 $ 0.38
- Diluted net
earnings $ 0.57 $ 0.50 $ 0.44 $ 0.37
First Quarter Fourth Quarter
------------------------- -------------------------
($000's, except
per share data 2006 2005 2005 2004
- unaudited) (12 Weeks) (12 Weeks) (12 Weeks) (12 Weeks)
-------------------------------------------------------------------------
Sales $ 1,671,119 $ 1,555,349 $ 1,833,327 $ 1,685,275
Net earnings $ 71,704 $ 61,686 $ 115,125 $ 96,887
Per common share
- Basic net earnings $ 0.34 $ 0.29 $ 0.54 $ 0.46
- Diluted net
earnings $ 0.33 $ 0.29 $ 0.53 $ 0.45
>>
The selected quarterly information has been prepared in accordance with
Canadian generally accepted accounting principles.
The Company experienced growth in sales and net earnings in each of the
four most recent quarters when compared to the same quarter of the prior year.
The Company continues to invest capital in expanded and relocated stores and
in new store development, which has allowed the Company to increase the
selling square footage of its store network, resulting in increased sales and
profitability.
The Company's core prescription drug operations are not typically subject
to seasonal fluctuations. The Company's front store operations include
seasonal promotions which may have an impact on quarterly results,
particularly when the season, notably Easter, does not fall in the same
quarter each year. Also, as the Company continues to expand its front store
product and service offerings, including seasonal promotions, its results of
operations may become subject to more seasonal fluctuations.
NEW ACCOUNTING PRONOUNCEMENTS
Accounting Standards Implemented in 2006
Discontinued Operations
In April 2006, the Emerging Issues Committee of the Canadian Institute of
Chartered Accountants issued EIC-161, "Discontinued Operations" ("EIC-161").
EIC-161 addresses the allocation of interest expense to discontinued
operations based on the principal amount of debt that will or could be paid
with the proceeds from the sale of such operations. EIC-161 also specifies
that general corporate overhead expenses may not be allocated to discontinued
operations. EIC-161 applies to all disposal transactions initiated after the
date of issuance of EIC-161 and may be applied prospectively or retroactively.
The implementation of EIC-161 did not have an impact on the Company's results
of operations or financial position.
RISKS AND RISK MANAGEMENT
Industry and Regulatory
On April 13, 2006, the Government of Ontario introduced, via first
reading, Bill 102, the Transparent Drug System for Patients Act, 2006 (the
"Act"), to the Ontario Legislature. The Act incorporated recommendations from
the Drug System Secretariat (the "Secretariat") which was established by the
provincial Ministry of Health and Long-Term Care (the "Ministry") to conduct
an objective, system-wide review of Ontario's entire drug system. The
Secretariat conducted research with experts worldwide, studied best practices
in other jurisdictions and consulted stakeholders from across the provincial
drug system, including patients, professional organizations, industry
associations, brand name and generic drug manufacturers, private insurers and
others.
Through the Secretariat's work, several concerns were raised by
stakeholders resulting in the development of a package of recommendations for
reform of the provincial drug system. The Act incorporated the necessary
legislative changes required to implement the drug system strategies, with the
desired result being a more aggressively managed provincial drug system
framework. The framework considers five key areas: pricing and reimbursement
of drug products; access to drug products; the need for more appropriate use
of partnerships; innovation; and, strengthening the governance and operations
of Ontario's drug system.
Based on statements made by the Government of Ontario, it was the
Company's belief that in its final form, Bill 102, when passed, would balance
the needs of all stakeholders, including retail pharmacy, drug manufacturers,
doctors, pharmacists and patients. Stakeholders participated in committee
hearings on Bill 102 and as a result of these hearings the Ministry announced,
on June 6, 2006, a number of proposed amendments to the Act and other
regulatory changes which it said would strengthen the legislation, ensure the
viability of pharmacies, provide Ontarians with better access to the drugs
they need and ensure that taxpayers get better value for their money. The
proposed changes included narrowing the scope of the legislation by permitting
pharmacies to receive defined professional allowances, under a new code of
conduct, with a cap of 20 per cent of the cost of generic drugs in the public
system. However, no percentage limit on the amount of professional allowances
on the cost of generic drugs in the private system was included in the
proposed changes.
On June 19, 2006, the Act passed third and final reading in the Ontario
Legislature and received Royal Assent on June 20, 2006. It is the Company's
belief that in its final form, Bill 102 establishes the framework for the
Government of Ontario to achieve its stated objectives, while at the same time
recognizing the valuable role that pharmacists and community pharmacy play in
providing patient care by permitting professional allowances, increasing
dispensing fees for prescriptions filled in the public system and by
establishing a mechanism that would permit payments to pharmacists for certain
professional services provided in the public system.
In conjunction with this initiative, a number of amendments to
regulations under the Ontario Drug Benefit Act (the "ODBA") and the Drug
Interchangeability and Dispensing Fee Act (the "DIDFA") were approved to
support the Government of Ontario's plan to reform the drug system as a result
of the Act. The proposed regulations were posted on the Ministry's website on
July 24, 2006 for a 30 day comment period and the Ministry reports having
received many submissions from various stakeholder groups respecting the draft
regulations. Based on this feedback, changes were made to the ODBA and DIDFA
regulations and on September 28, 2006, a copy of the amending regulations was
posted on the Ministry's website and can be found at www.health.gov.on.ca.
Highlights of these changes are summarized below.
Reimbursement
-------------
Effective October 1, 2006, the dispensing fee paid for Ontario Drug
Benefit prescriptions increased to $7.00 from $6.54.
The reduction in the mark-up permitted on the drug benefit price for
Ontario Drug Benefit prescriptions from 10% to 8% was deferred to April 1,
2007.
The Government of Ontario has indicated that it is planning to begin
paying pharmacists for certain professional services, to be prescribed in the
regulations, by no later than April 1, 2007. The Ministry has established a
$50 million fund for payment for these professional services.
Drug Pricing
------------
Effective October 1, 2006, the regulations require that the drug benefit
price of generic products listed in the Ontario Drug Benefit
Formulary/Comparative Drug Index be priced at generally no more than 50% of
the original listed comparator product (typically the brand product).
Code of Conduct
---------------
Effective October 1, 2006, a new schedule is added to the ODBA and DIDFA
regulations which establishes a Code of Conduct (the "Code"). The Code is
intended to establish system-wide guidance governing the use of professional
allowances. The Code sets out certain fundamental principles, prohibits
professional allowance funding for certain prescribed activities, outlines the
criteria for the calculation of professional allowances and outlines the
reporting requirements.
Professional Allowances
-----------------------
The definition and scope of professional allowances contained in the Code
has been expanded beyond the categories initially proposed in the draft
regulations. Subject to the restrictions in the definition of professional
allowances contained in the Code, professional allowances may be provided by a
manufacturer for the purpose of direct patient care for, among other things,
continuing education programs, clinic and education days (including any
related staffing costs), compliance packaging, disease management and
prevention initiatives such as patient information material, blood pressure
monitoring, blood glucose meter training, asthma management and private
counseling areas.
Professional allowances in the public system are capped at 20% of the
total generic drug costs reimbursed under the Ontario Drug Benefit program. A
similar cap has not been included for the private system.
To date, the Ministry's review has been a consultative process and the
Company, as a stakeholder, continues to be involved in discussions concerning
the implementation of the regulatory changes and any other proposed regulatory
changes to the provincial drug system framework. At this point in time the
Company continues to believe that the Act will not have a material impact,
positive or negative, on its results of operations or financial position.
NON-GAAP FINANCIAL MEASURES
The Company reports its financial results in accordance with Canadian
GAAP. However, the foregoing contains references to non-GAAP financial
measures, such as operating margin, EBITDA (earnings before interest, taxes,
depreciation and amortization), EBITDA margin and cash interest expense.
Non-GAAP financial measures do not have standardized meanings prescribed by
GAAP and therefore may not be comparable to similar measures presented by
other reporting issuers.
These non-GAAP financial measures have been included in this Management's
Discussion and Analysis as they are measures which management uses to assist
in evaluating the Company's operating performance against its expectations and
against other companies in the retail drug store industry. Management believes
that non-GAAP financial measures assist in identifying underlying operating
trends.
These non-GAAP financial measures, particularly EBITDA and EBITDA margin,
are also common measures used by investors, financial analysts and rating
agencies. These groups may use EBITDA and other non-GAAP financial measures to
value the Company and assess the Company's ability to service its debt.
<<
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Earnings
(unaudited)
(in thousands of dollars except per share amounts)
-------------------------------------------------------------------------
16 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
October 7, October 8, October 7, October 8,
2006 2005 2006 2005
-------------------------------------------------------------------------
Sales $ 2,329,051 $ 2,138,085 $ 5,768,369 $ 5,317,788
Operating expenses
Cost of goods sold
and other operating
expenses 2,084,896 1,924,874 5,187,210 4,809,941
Amortization 44,295 37,536 106,466 91,276
-------------------------------------------------------------------------
Operating income 199,860 175,675 474,693 416,571
Interest expense
(Note 3) 14,632 13,762 38,977 38,326
-------------------------------------------------------------------------
Earnings before
income taxes 185,228 161,913 435,716 378,245
Income taxes
Current 84,013 47,829 155,230 123,901
Future (22,665) 6,412 (9,505) 4,975
-------------------------------------------------------------------------
61,348 54,241 145,725 128,876
-------------------------------------------------------------------------
Net earnings $ 123,880 $ 107,672 $ 289,991 $ 249,369
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Net earnings per
common share:
Basic $ 0.58 $ 0.51 $ 1.36 $ 1.18
Diluted $ 0.57 $ 0.50 $ 1.34 $ 1.15
Weighted average
common shares
outstanding
- Basic (millions) 214.0 212.2 213.6 211.6
- Diluted (millions) 216.6 216.1 216.6 216.0
Actual common shares
outstanding
(millions) 214.9 213.2 214.9 213.2
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Retained Earnings
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
40 Weeks Ended
-------------------------
October 7, October 8,
2006 2005
-------------------------------------------------------------------------
Retained earnings, beginning of period $ 941,672 $ 662,437
Net earnings 289,991 249,369
Premium on common shares purchased for
cancellation (Note 8) (35,595) -
Dividends (77,157) (63,903)
-------------------------------------------------------------------------
Retained earnings, end of period $ 1,118,911 $ 847,903
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Balance Sheets
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
October 7, October 8, December 31,
2006 2005 2005
-------------------------------------------------------------------------
Assets
Current
Cash $ 18,368 $ 19,007 $ 24,524
Accounts receivable 285,830 259,382 256,504
Inventory 1,259,856 1,146,588 1,216,549
Future income taxes 42,946 38,043 38,316
Prepaid expenses 42,349 38,210 29,018
-------------------------------------------------------------------------
1,649,349 1,501,230 1,564,911
Property and equipment 830,436 691,925 748,840
Deferred costs 21,111 20,277 21,562
Goodwill 2,112,952 2,015,022 2,019,499
Other intangible assets 44,793 19,832 17,625
Other assets 10,243 3,011 2,946
-------------------------------------------------------------------------
Total assets $ 4,668,884 $ 4,251,297 $ 4,375,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
Liabilities
Current
Bank indebtedness $ 171,291 $ 164,848 $ 163,503
Commercial paper 518,750 444,725 469,850
Accounts payable and accrued
liabilities 702,674 674,277 697,945
Income taxes payable 32,371 8,709 39,860
Dividends payable 25,783 21,318 21,343
Current portion of long-term debt 300 - -
-------------------------------------------------------------------------
1,451,169 1,313,877 1,392,501
Long-term debt 307,738 400,000 325,000
Other long-term liabilities 169,440 127,347 140,758
Future income taxes 17,930 9,865 14,115
-------------------------------------------------------------------------
1,946,277 1,851,089 1,872,374
-------------------------------------------------------------------------
Associate interest 107,275 108,503 116,501
Shareholders' equity
Share capital 1,490,298 1,440,609 1,441,254
Contributed surplus 6,123 3,193 3,582
Retained earnings 1,118,911 847,903 941,672
-------------------------------------------------------------------------
2,615,332 2,291,705 2,386,508
-------------------------------------------------------------------------
Total liabilities and
shareholders' equity $ 4,668,884 $ 4,251,297 $ 4,375,383
-------------------------------------------------------------------------
-------------------------------------------------------------------------
SHOPPERS DRUG MART CORPORATION
Consolidated Statements of Cash Flows
(unaudited)
(in thousands of dollars)
-------------------------------------------------------------------------
16 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
October 7, October 8, October 7, October 8,
2006 2005 2006 2005
-------------------------------------------------------------------------
Operating activities
Net earnings $ 123,880 $ 107,672 $ 289,991 $ 249,369
Items not affecting
cash
Amortization 46,125 39,427 112,804 96,731
Future income taxes (22,665) 6,412 (9,505) 4,975
Loss on disposal of
property and
equipment 1,793 1,490 3,617 3,506
Stock-based
compensation 1,129 721 2,541 1,552
-------------------------------------------------------------------------
150,262 155,722 399,448 356,133
Net change in
non-cash working
capital balances
(Note 2) 13,071 (26,279) (81,297) (86,280)
Increase in long-term
liabilities 17,100 15,686 28,682 30,621
Store opening costs (4,269) (4,050) (9,052) (8,058)
-------------------------------------------------------------------------
Cash flows from
operating activities 176,164 141,079 337,781 292,416
-------------------------------------------------------------------------
Investing activities
Purchase of property
and equipment (99,102) (75,481) (178,887) (163,918)
Business acquisition
- MediSystem
(excluding shares
exchanged of $43,019
- Note 2) (46,808) - (46,808) -
Other business
acquisitions
(Note 2) (25,331) (5,453) (36,337) (21,796)
Other assets (5,047) (402) (7,297) 266
-------------------------------------------------------------------------
Cash flows used in
investing
activities (176,288) (81,336) (269,329) (185,448)
-------------------------------------------------------------------------
Financing activities
Bank indebtedness,
net 296 (19,904) 7,444 (37,884)
Commercial paper,
net 64,450 (43,825) 48,900 141,550
Repayment of long-
term debt - - (25,000) (175,000)
Revolving term debt,
net 2,199 - 6,013 (4,943)
Deferred financing
costs (49) - (452) -
Associate interest (8,456) 3,885 (9,226) (1,864)
Shares issued for
stock options
exercised 5,232 1,459 10,099 17,198
Repayment of share
purchase loans 145 129 2,120 1,431
Repurchase of share
capital (41,789) - (41,789) -
Dividends paid (25,689) (21,305) (72,717) (42,585)
-------------------------------------------------------------------------
Cash flows used in
financing activities (3,661) (79,561) (74,608) (102,097)
-------------------------------------------------------------------------
(Decrease) increase
in cash (3,785) (19,818) (6,156) 4,871
Cash, beginning of
period 22,153 38,825 24,524 14,136
-------------------------------------------------------------------------
Cash, end of period $ 18,368 $ 19,007 $ 18,368 $ 19,007
-------------------------------------------------------------------------
Supplemental cash
flow information
Interest paid $ 6,402 $ 4,947 $ 24,863 $ 28,489
Income taxes paid $ 48,815 $ 57,425 $ 164,277 $ 162,453
SHOPPERS DRUG MART CORPORATION
Notes to the Consolidated Financial Statements
(unaudited)
(in thousands of dollars except per share amounts)
------------------------------------------------------------------------
1. BASIS OF PRESENTATION
The unaudited interim consolidated financial statements have been
prepared in accordance with Canadian generally accepted accounting
principles ("GAAP") and follow the same accounting policies and methods
of application with those used in the preparation of the audited annual
consolidated financial statements for the 52 week period ended
December 31, 2005. These financial statements do not contain all
disclosures required by Canadian GAAP for annual financial statements
and, accordingly, should be read in conjunction with the most recently
prepared annual consolidated financial statements and the accompanying
notes included in the Company's 2005 Annual Report.
The consolidated financial statements include the accounts of Shoppers
Drug Mart Corporation (the "Company"), its subsidiaries and entities
considered to be variable interest entities, as defined by Accounting
Guideline 15, "Consolidation of Variable Interest Entities" ("AcG-15").
Under AcG-15, the Company has consolidated the Associate-owned stores and
an independent trust.
The individual Associate-owned stores that comprise the Company's store
network are variable interest entities and the Company is the primary
beneficiary. As such, the Associate-owned stores are subject to
consolidation by the Company. The Associate-owned stores remain separate
legal entities and consolidation of the Associate-owned stores has no
impact on the underlying risks facing the Company.
The Company has an arrangement with an independent trust (the "Trust") to
provide loans to Associates to facilitate their purchase of inventory and
fund their working capital requirements. The Trust's activities are
financed through the issuance of short-term asset backed notes to third
party investors. The Trust is a variable interest entity and the Company
is the primary beneficiary. As such, the Trust is subject to
consolidation by the Company.
2. ACQUISITIONS
MediSystem Technologies Inc.
On September 20, 2006 the Company acquired 89.9% of the outstanding
common shares of MediSystem Technologies Inc. ("MediSystem"). MediSystem
provides pharmaceutical products and services to long-term care
facilities in Ontario and Alberta. The offer to purchase was extended to
October 6, 2006 at which point an additional 6.6% of MediSystem shares
were tendered, resulting in the Company acquiring 96.5% of MediSystem. On
October 6, 2006, the Company announced its intention to exercise its
statutory right under the Business Corporations Act (Ontario) to
compulsorily acquire the remaining MediSystem shares that had not been
deposited to the offer. The Company has accrued the cost of the remaining
3.5% of the shares and has recognized the acquisition of 100% of the
outstanding common shares of MediSystem using the purchase method of
accounting.
MediSystem results of operations have been included in the Company's
results of operations subsequent to the date of acquisition. The net
change in non-cash working capital balances reported on the consolidated
statement of cash flows does not include the working capital balances
acquired from MediSystem which are included in investing activities.
The total cost of the acquisition, including costs incurred in connection
with the acquisition, was $91,232 and was allocated to the net assets on
the basis of their fair value as follows:
Net working capital $ 2,986
Property and equipment 4,551
Goodwill 67,894
Other intangible assets 25,865
Long-term debt (2,025)
Future income taxes (8,039)
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Purchase price 91,232
Less: Cash included in working capital (1,405)
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Purchase price, net of cash acquired $ 89,827
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Cash and acquisition costs, net of cash acquired $ 46,808
926,735 Common shares of Shoppers Drug Mart Corporation 43,019
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Purchase price, net of cash acquired $ 89,827
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Since this acquisition was completed late in the third quarter of 2006,
the Company's determination of the fair values of the individual assets
and liabilities acquired is preliminary and may change.
The acquired intangible assets subject to amortization consist of the
following:
Developed technology $ 1,065
Customer relationships 24,600
Other 200
-----------------------------------------------
$ 25,865
-----------------------------------------------
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Other Business Acquisitions
Other business acquisitions include the acquisition of Therapy Supplies &
Rental Ltd. for $18,965.
3. INTEREST EXPENSE
The significant components of the Company's interest expense are as
follows:
16 Weeks Ended 40 Weeks Ended
------------------------- -------------------------
October 7, October 8, October 7, October 8,
2006 2005 2006 2005
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Interest on bank
indebtedness $ 2,400 $ 1,937 $ 6,151 $ 4,912
Interest on commercial
paper 7,078 5,056 18,702 14,437
Interest on long-
term debt 4,926 5,982 12,677 17,010
Amortization of
deferred financing
costs 228 787 1,447 1,967
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$ 14,632 $ 13,762 $ 38,977 $ 38,326
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4. LONG-TERM DEBT
On June 6, 2006 the Company amended its $300,000 364-day extendible
revolving credit facility and its $250,000 revolving term facility into
one $550,000 revolving term facility and extended the maturity until
June, 2011.
5. EMPLOYEE FUTURE BENEFITS
The net benefit expense included in the results for the 16 and 40 week
periods ended October 7, 2006 for benefits provided under pension plans
was $2,032 and $5,081 (2005 - $1,609 and $4,022), respectively, and for
benefits provided under other benefit plans was $41 and $103 (2005 - $32
and $80), respectively.
6. STOCK-BASED COMPENSATION
The Company uses the fair value method to account for stock options
issued after 2002 under its stock option programs. If compensation
expense under the fair value method of accounting had been recognized on
stock options issued in 2002, the Company's net earnings for the 16 and
40 week periods ended October 7, 2006 would have been reduced by $129 and
$496 (2005 - $286 and $985), respectively. For the 16 and 40 week periods
ended October 7, 2006, basic earnings per share and diluted earnings per
share would have been unchanged. For the 16 week period ended October 8,
2005, basic earnings per share and diluted earnings per share would have
been unchanged. For the 40 week period ended October 8, 2005, basic
earnings per share would have been $1.17 and diluted earnings per share
would have been unchanged.
For a description of the Company's stock option programs, see Note 11 to
the consolidated financial statements in the Company's 2005 Annual
Report.
7. FINANCING TRUST
The Company has arranged for a standby letter of credit from a syndicate
of banks for the benefit of the independent trust ("Trust") that is equal
to approximately 10% of the aggregate principal amount of the loans, or
$42,500, as a form of credit enhancement which, in turn, enables the
Trust to provide favourable financing terms to the Company's Associates.
As at October 7, 2006, $423,750 (2005 - $389,725) of the consolidated
commercial paper balance is commercial paper issued by the Trust.
8. NORMAL COURSE ISSUER BID
On September 8, 2006 the Company implemented a normal course issuer bid
to repurchase for cancellation up to 5,350,000 common shares,
representing approximately 2.5% of the Company's outstanding common
shares, over a 12-month period ending no later than September 7, 2007.
Repurchases are made at market prices through the Toronto Stock Exchange.
From September 8, 2006 to October 7, 2006, the Company purchased for
cancellation 913,600 common shares under the normal course issuer bid at
a cost of $41,780. The premium paid over the average book value of the
shares repurchased has been charged to retained earnings.
9. LONG-TERM INCENTIVE PLAN
During the first quarter, the Company issued awards under a long-term
incentive plan ("LTIP") to certain employees. Under the LTIP, the
employees are eligible to receive an award of share units equivalent in
value to common shares of the Company. On February 17, 2006, the Company
awarded 147,403 share units which vest equally over a three year period.
The Company has recorded compensation expense of $1,219 and $2,536 for
the 16 and 40 week periods ended October 7, 2006, respectively,
associated with the share units.
In order to limit the Company's exposure to future share price changes,
the Company has entered into an agreement with a counterparty to use a
cash-settled equity forward contract to hedge this exposure. The Company
has designated this derivative instrument as a hedge for accounting
purposes.
Earnings Coverage Exhibit to the Consolidated Financial Statements
52 Weeks Ended October 7, 2006
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Earnings coverage on long-term debt obligations 39.29 times
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The earnings coverage ratio on long-term debt (including any current
portion) is equal to net earnings (before interest and income taxes)
divided by interest expense on long-term debt (including any current
portion). Interest expense excludes any amounts in respect of
amortization that were included in interest expense as shown in the
consolidated statement of earnings of the Company for the period.
>>
%SEDAR: 00016987EF
