Item 7. Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis of the Company’s financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and the description of the Company’s business and reportable segments in item 1 above. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under cautionary note regarding forward-looking statements below and in risk factors in part I, item 1A of this Form 10-K. References herein to the “Company,” “we,” “us,” or “our” refer to Walgreens Boots Alliance, Inc. and its subsidiaries, and in each case do not include unconsolidated partially-owned entities, except as otherwise indicated or the context otherwise requires.
Certain amounts in the Consolidated Financial Statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts for fiscal 2019.
INTRODUCTION AND SEGMENTS
Walgreens Boots Alliance, Inc. (“Walgreens Boots Alliance”) and its subsidiaries are a global leader in retail and wholesale pharmacy. Its operations are conducted through three reportable segments:
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•
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Retail Pharmacy International; and
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•
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Pharmaceutical Wholesale
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See note 16, segment reporting and note 17, sales further information.
FACTORS AFFECTING OUR RESULTS AND COMPARABILITY
The Company has been, and we expect it to continue to be, affected by a number of factors that may cause actual results to differ from our current expectations. These factors include: financial performance of our equity method investees, including AmerisourceBergen; the influence of certain holidays; seasonality; foreign currency rates; changes in vendor, payer and customer relationships and terms and associated reimbursement pressure; strategic transactions and acquisitions, including the acquisition of stores and other assets from Rite Aid; joint ventures and other strategic collaborations; changes in laws, including the U.S. tax law changes; changes in trade, tariffs, including trade relations between the United States and China, and international relations, including the UK's proposed withdrawal from the European Union and its impact on our operations and prospects and those of our customers and counterparties; the timing and magnitude of cost reduction initiatives, including under our Transformational Cost Management Program (as defined below); fluctuations in variable costs; and general economic conditions in the markets in which the Company operates. These and other factors can affect the Company’s operations and net earnings for any period and may cause such results not to be comparable to the same period in previous years. The results presented in this report are not necessarily indicative of future operating results.
TRANSFORMATIONAL COST MANAGEMENT PROGRAM
On December 20, 2018, the Company announced a transformational cost management program that is expected to deliver in excess of $1.5 billion of annual cost savings by fiscal 2022 (the “Transformational Cost Management Program”). As of the date of this report, the Company now expects to deliver in excess of $1.8 billion of annual cost savings by fiscal 2022. The Transformational Cost Management Program, which is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and the transformation of the Company’s information technology (IT) capabilities, is designed to help the Company achieve increased cost efficiencies. To date, the Company has taken initial actions across all aspects of the Transformational Cost Management Program. The actions under the Transformational Cost Management Program focus on all reportable segments and the Company’s global functions. Divisional optimization within each of the Company’s segments includes activities such as optimization of stores which includes plans to close approximately 200 stores in the United Kingdom and approximately 200 locations in the United States.
The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its GAAP financial results of approximately $1.9 billion to $2.4 billion, of which $1.6 billion to $2.0 billion are expected to be recorded as exit and disposal activities. The Company estimates that approximately 80% of the cumulative pre-tax charges relating to the Transformational Cost Management Program will result in future cash expenditures, primarily related to lease and other real estate payments, employee severance and technology costs related to the Company’s IT transformation.
The Company currently estimates that it will recognize aggregate pre-tax charges to its GAAP financial results related to Transformational Cost Management Program as follows:
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Transformational Cost Program Activities
|
Range of Charges
|
Lease obligations and other real estate costs
|
$200 to 300 million
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Asset impairments1
|
$400 to 500 million
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Employee severance and business transition costs
|
$600 to 700 million
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Information technology transformation and other exit costs
|
$400 to 500 million
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Total cumulative pre-tax exit and disposal charges
|
$1.6 to 2.0 billion
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Other IT transformation costs
|
$300 to 400 million
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Total estimated pre-tax charges
|
$1.9 to 2.4 billion
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1 Primarily related to asset write-offs from store closures, information technology and other asset write-offs.
In addition to the impacts discussed above, as a result of the actions related to store closures taken under the Transformational Cost Management Program, the Company expects to record $508 million of transition adjustments to decrease retained earnings due to the adoption of the new lease accounting standard (Topic 842) that became effective on September 1, 2019. See note 1, summary of major accounting policies, for additional information.
Since the approval of the Transformational Cost Management Program, the Company has recognized aggregate cumulative pre-tax charges to its financial results in accordance with GAAP of $477 million, of which $432 million are recorded as exit and disposal activities. See note 3, exit and disposal activities, for additional information.
Costs under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses and included in the fiscal year ended August 31, 2019 were as follows (in millions):
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Twelve Months Ended August 31, 2019
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Retail Pharmacy USA
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Retail Pharmacy International
|
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Pharmaceutical Wholesale
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Walgreens Boots Alliance, Inc.
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Lease obligations and other real estate costs
|
$
|
5
|
|
|
$
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19
|
|
|
$
|
1
|
|
|
$
|
25
|
|
Asset impairments1
|
95
|
|
|
67
|
|
|
98
|
|
|
260
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|
Employee severance and business transition costs
|
42
|
|
|
34
|
|
|
49
|
|
|
125
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|
Information technology transformation and other exit costs
|
5
|
|
|
10
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|
|
7
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|
|
22
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|
Total pre-tax exit and disposal charges
|
$
|
147
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|
$
|
130
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$
|
154
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$
|
432
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Other IT transformation costs
|
42
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|
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3
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|
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1
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|
|
45
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Total pre-tax charges
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$
|
189
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$
|
133
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$
|
155
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|
$
|
477
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1 Primarily includes write down of leasehold improvements, certain software and inventory.
Transformational Cost Management Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Transformational Cost Management Program as special items impacting comparability of results in its earnings disclosures.
The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.
ACQUISITION OF CERTAIN RITE AID ASSETS
On September 19, 2017, the Company announced it had secured regulatory clearance for an amended and restated asset purchase agreement to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion in cash and other consideration. The Company has completed the acquisition of all 1,932 Rite Aid stores and the first distribution center and related inventory, while the transition of the remaining two distribution centers and related inventory remains subject to closing conditions set forth in the amended and restated asset purchase agreement.
The Company expects to complete integration of the acquired stores and related assets by the end of fiscal 2020, at an estimated total cost of approximately $850 million, which is reported as acquisition-related costs. The Company has recognized cumulative pre-tax charges for the fiscal year 2019 and 2018 of $295 million and $221 million, respectively, related to integration of the acquired stores and related assets. In addition, the Company expects to spend approximately $500 million on store conversions and related activities. The Company expects annual synergies from the transaction of more than $325 million,
which are expected to be fully realized within four years of the initial closing of this transaction and derived primarily from procurement, cost savings and other operational matters.
The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.
STORE OPTIMIZATION PROGRAM
On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) to optimize store locations through the planned closure of approximately 600 stores and related assets within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. As of the date of this report, the Company expects to close approximately 750 stores, of which the majority have been closed as part of this program. The actions under the Store Optimization Program commenced in March 2018 and are expected to be complete by the end of fiscal 2020. The Store Optimization Program is expected to result in cost savings of approximately $350 million per year to be fully delivered by the end of fiscal 2020.
The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $350 million, including costs associated with lease obligations and other real estate costs and employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately $160 million for lease obligations and other real estate costs and approximately $190 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.
Since approval of the Store Optimization Program, the Company has recognized cumulative pre-tax charges to its GAAP financial results of $296 million, including $100 million for fiscal 2018 and $196 million for fiscal 2019, which were primarily recorded within selling, general and administrative expenses. Cumulative pre-tax charges included $138 million related to lease obligations and other real estate costs and $158 million in employee severance and other exit costs.
Store Optimization Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Store Optimization Program as special items impacting comparability of results in its earnings disclosures.
The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.
U.S. TAX LAW CHANGES
In connection with the U.S. tax law changes enacted in December 2017 and in accordance with SEC Staff Accounting Bulletin 118, the Company completed its analysis of the income tax effects of the U.S. tax law changes during the three months ended February 28, 2019. The incremental net tax benefit recorded upon completion of the analysis of the income tax effects of the U.S. tax law changes was not material to our Consolidated Financial Statements.
While the Company completed its analysis of the income tax effects of the U.S. tax law changes, the final impact of the U.S. tax law changes may differ from this analysis, due to, among other things, technical clarifications from the U.S. Department of the Treasury and the Internal Revenue Service (“IRS”), interpretations of the U.S. tax law changes and actions the Company may take. The Company will continue to evaluate the impact of any future authoritative guidance with respect to the U.S. tax law changes.
During 2019, the U.S. Treasury Department issued regulations to apply retroactively covering certain components of the 2017 U.S. tax law changes. Certain guidance included in these regulations is inconsistent with the Company’s interpretation that led to the recognition of $247 million of tax benefits in prior periods. Despite this new guidance, the Company remains confident in its interpretation of the U.S. tax law changes and intends to defend this position through litigation, if necessary. However, if the Company is ultimately unsuccessful in defending its position, it may be required to reverse all or a portion of the benefits previously recorded.
As the Company repatriates the undistributed earnings of our foreign subsidiaries for use in the United States, the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax. The Company continuously evaluates the amount of foreign earnings that are not necessary to be permanently reinvested in our foreign subsidiaries.
INVESTMENT IN AMERISOURCEBERGEN
As of August 31, 2019, the Company owned 56,854,867 shares of AmerisourceBergen common stock (representing approximately 27% of its outstanding common stock) and may, subject to certain conditions, acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market.
The Company accounts for its investment in AmerisourceBergen using the equity method of accounting, subject to a two-month reporting lag, with the net earnings attributable to the investment classified within the operating income of the Company’s Pharmaceutical Wholesale segment. The financial performance of AmerisourceBergen, including any charges which may arise relating to its ongoing opioid litigation, will impact the Company’s results of operations. Additionally, a substantial and sustained decline in the price of AmerisourceBergen’s common stock could trigger an impairment evaluation of our investment. These considerations may materially and adversely affect the Company’s financial condition and results of operations.
For more information, see “Business - Relationship with AmerisourceBergen” and note 5, equity method investments to the Consolidated Financial Statements.
THE IMPACT OF BREXIT
In June 2016, voters in the United Kingdom approved an advisory referendum to withdraw from the European Union, which proposed exit (and the political, economic and other uncertainties it has raised) is commonly referred to as “Brexit”. Since the Brexit vote in June 2016, there has been significant volatility in the global stock markets and currency exchange rates, as well as challenging market conditions in the United Kingdom. In March 2017, the United Kingdom formally started the process to leave the European Union. An original exit date was set for March 29, 2019 but following the UK parliament’s rejection of a negotiated outcome, the leaders of the member countries of the European Union have agreed to multiple extensions of the deadline for Brexit and there can be no assurance regarding the terms, timing or consummation of any such arrangements. Although we continue to actively monitor the ongoing potential impacts of Brexit and will seek to minimize its impact on our business, if the UK’s membership in the European Union terminates without an agreement, these conditions could continue and there could be increased costs from tariffs on trade between the United Kingdom and European Union and disruptions to the free movement of goods, services and people between the United Kingdom and the European union and other parties. Further, uncertainty around and developments regarding these and related issues has contributed to deteriorating market conditions and could further adversely impact consumer and investor confidence and the economy of the United Kingdom and the economies of other countries in which we operate and cause significant volatility in currency exchange rates. Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of the United Kingdom from the European Union will have on our business, particularly European operations; however, Brexit and its related effects could have a material impact on the Company’s consolidated financial position or operating results. For more information relating to this topic, see “Risk Factors-Our substantial international business operations subject us to a number of operating, economic, political, regulatory and other international business risks.”
EXECUTIVE SUMMARY
The following table presents certain key financial statistics for the Company for fiscal 2019, 2018 and 2017:
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(in millions, except per share amounts)
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2019
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2018
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2017
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Sales
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$
|
136,866
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|
|
$
|
131,537
|
|
|
$
|
118,214
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|
Gross profit
|
|
30,076
|
|
|
30,792
|
|
|
29,162
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|
Selling, general and administrative expenses1
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|
25,242
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|
|
24,694
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|
|
23,813
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|
Equity earnings in AmerisourceBergen
|
|
164
|
|
|
191
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|
|
135
|
|
Operating income1
|
|
4,998
|
|
|
6,289
|
|
|
5,484
|
|
Adjusted operating income (Non-GAAP measure)2
|
|
6,942
|
|
|
7,679
|
|
|
7,467
|
|
Earnings before interest and income tax provision
|
|
5,231
|
|
|
6,591
|
|
|
5,546
|
|
Net earnings attributable to Walgreens Boots Alliance, Inc.
|
|
3,982
|
|
|
5,024
|
|
|
4,078
|
|
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)2
|
|
5,529
|
|
|
5,985
|
|
|
5,503
|
|
Net earnings per common share – diluted
|
|
4.31
|
|
|
5.05
|
|
|
3.78
|
|
Adjusted net earnings per common share – diluted (Non-GAAP measure)2
|
|
5.99
|
|
|
6.02
|
|
|
5.10
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increases (decreases)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
4.1
|
|
11.3
|
|
0.7
|
Gross profit
|
|
(2.3)
|
|
5.6
|
|
(2.4)
|
Selling, general and administrative expenses1
|
|
2.2
|
|
3.7
|
|
(0.1)
|
Operating income1
|
|
(20.5)
|
|
14.7
|
|
(9.7)
|
Adjusted operating income (Non-GAAP measure)2
|
|
(9.6)
|
|
2.8
|
|
2.6
|
Earnings before interest and income tax provision
|
|
(20.6)
|
|
18.8
|
|
(3.4)
|
Net earnings attributable to Walgreens Boots Alliance, Inc.
|
|
(20.7)
|
|
23.2
|
|
(2.3)
|
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)2
|
|
(7.6)
|
|
8.8
|
|
9.9
|
Net earnings per common share – diluted
|
|
(14.6)
|
|
33.6
|
|
(1.0)
|
Adjusted net earnings per common share – diluted (Non-GAAP measure)2
|
|
(0.5)
|
|
18.0
|
|
11.1
|
|
|
|
|
|
|
|
|
|
|
Percent to sales
|
|
|
2019
|
|
2018
|
|
2017
|
Gross margin
|
|
22.0
|
|
23.4
|
|
24.7
|
Selling, general and administrative expenses1
|
|
18.4
|
|
18.8
|
|
20.1
|
|
|
1
|
The Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715) as of September 1, 2018 (fiscal 2019) on a retrospective basis. The impact on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income of $125 million and $73 million, for the fiscal years ended August 31, 2018 and 2017, respectively. See note 1, summary of major accounting policies, for additional information.
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|
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2
|
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
|
WALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS
The following information summarizes our results of operations for fiscal 2019 compared to fiscal 2018. For discussion related to the results of operations by segment for fiscal 2018 compared to fiscal 2017, refer to Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission on October 11, 2018.
Fiscal 2019 compared to fiscal 2018
Fiscal 2019 net earnings attributable to Walgreens Boots Alliance decreased 20.7 percent to $4.0 billion, while diluted net earnings per share decreased 14.6 percent to $4.31 compared with the prior year. The decrease primarily reflects operating performance, including costs related to the Company’s Transformational Cost Management Program, partially offset by certain legal and regulatory accruals in the prior year. Diluted net earnings per share was positively affected by a lower number of shares outstanding compared with the prior year. Net earnings and diluted earnings per share were negatively by 0.8 percentage points and 0.9 percentage points, respectively, as a result of currency translation.
Other income for fiscal 2019 was $233 million compared to $302 million for fiscal 2018. Other income for fiscal 2019 primarily reflects gains resulting from the termination of the option granted to Rite Aid to become a member of the Company’s group purchasing organization. Results for fiscal 2018 primarily reflect the gain on sale of the Company’s equity interest in Premise Health Holding Corp, partially offset by the impairment of the Company's equity method investment in Guangzhou Pharmaceuticals Corporation in the prior year period.
Interest was a net expense of $704 million and $616 million in fiscal 2019 and 2018, respectively.
The effective tax rate for fiscal 2019 and 2018 was 13.0% and 16.7%, respectively. The net decrease in the effective tax rate was primarily attributable to the reduced U.S. statutory tax rate as a result of the U.S tax law changes.
Adjusted diluted net earnings per share (Non-GAAP measure) fiscal 2019 compared to fiscal 2018
Adjusted net earnings attributable to Walgreens Boots Alliance in fiscal 2019 decreased 7.6 percent to $5.5 billion compared with the prior year. Adjusted diluted net earnings per share in fiscal 2019 decreased 0.5 percent to $5.99 compared with the prior year. Adjusted net earnings and adjusted diluted earnings per share were negatively impacted by 0.9 percentage points and 1.0 percentage points, respectively, as a result of currency translation.
Excluding the impact of currency translation, the decrease in adjusted net earnings for fiscal 2019 primarily reflects a decrease in operating performance, partly offset by a decrease in the adjusted effective tax rate. Adjusted diluted net earnings per share was positively affected by a lower number of shares outstanding compared with the prior year. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
RESULTS OF OPERATIONS BY SEGMENT
The following information summarizes our results of operations by segment for fiscal 2019 compared to fiscal 2018. For discussion related to the results of operations by segment for fiscal 2018 compared to fiscal 2017, refer to Part II, Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our fiscal 2018 Form 10-K, which was filed with the United States Securities and Exchange Commission on October 11, 2018.
Retail Pharmacy USA
This division comprises the retail pharmacy business operating in the United States.
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|
|
|
|
|
|
|
|
|
|
|
|
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(in millions, except location amounts)
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|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
$
|
104,532
|
|
|
$
|
98,392
|
|
|
$
|
87,302
|
|
Gross profit
|
|
23,511
|
|
|
23,758
|
|
|
22,450
|
|
Selling, general and administrative expenses1
|
|
19,424
|
|
|
18,971
|
|
|
18,356
|
|
Operating income1
|
|
4,088
|
|
|
4,787
|
|
|
4,094
|
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
5,255
|
|
|
5,814
|
|
|
5,606
|
|
|
|
|
|
|
|
|
Number of prescriptions3
|
|
843.7
|
|
|
823.1
|
|
|
764.4
|
|
30-day equivalent prescriptions3,4
|
|
1,150.1
|
|
|
1,094.4
|
|
|
989.7
|
|
Number of locations at period end
|
|
9,285
|
|
|
9,569
|
|
|
8,109
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increases (decreases)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
6.2
|
|
12.7
|
|
4.2
|
Gross profit
|
|
(1.0)
|
|
5.8
|
|
0.6
|
Selling, general and administrative expenses1
|
|
2.4
|
|
3.4
|
|
2.5
|
Operating income1
|
|
(14.6)
|
|
16.9
|
|
(7.3)
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
(9.6)
|
|
3.7
|
|
4.4
|
Comparable store sales5
|
|
2.0
|
|
1.5
|
|
2.8
|
Pharmacy sales
|
|
8.6
|
|
17.2
|
|
7.3
|
Comparable pharmacy sales5
|
|
4.0
|
|
3.4
|
|
4.7
|
Retail sales
|
|
—
|
|
2.4
|
|
(2.4)
|
Comparable retail sales5
|
|
(2.4)
|
|
(2.4)
|
|
(1.0)
|
Comparable number of prescriptions4,5
|
|
(0.1)
|
|
0.8
|
|
4.0
|
Comparable 30-day equivalent prescriptions3,4,5
|
|
3.0
|
|
3.5
|
|
7.1
|
|
|
|
|
|
|
|
|
|
|
Percent to sales
|
|
|
2019
|
|
2018
|
|
2017
|
Gross margin
|
|
22.5
|
|
24.1
|
|
25.7
|
Selling, general and administrative expenses1
|
|
18.6
|
|
19.3
|
|
21.0
|
|
|
1
|
The Company adopted ASU 2017-07 Topic 715 as of September 1, 2018 (fiscal 2019) on a retrospective basis. The impact for Retail Pharmacy USA on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income (expense) of $109 million and $101 million, for the fiscal years ended August 31, 2018 and 2017, respectively. See note 1, summary of major accounting policies, for additional information.
|
|
|
2
|
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
|
|
|
3
|
Includes immunizations.
|
|
|
4
|
Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.
|
|
|
5
|
Comparable stores 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 being subject to a natural disaster in the past twelve months. Relocated stores are not included as comparable stores for the first twelve months after the relocation. Acquired stores are not included as comparable stores for the first twelve months after acquisition or conversion, when applicable, whichever is later. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers’ methods.
|
Sales fiscal 2019 compared to fiscal 2018
The Retail Pharmacy USA division’s sales for fiscal 2019 increased by 6.2% to $104.5 billion. Sales in comparable stores increased by 2.0% in fiscal 2019. The Company operated 9,285 locations (9,277 retail stores) as of August 31, 2019, compared to 9,569 locations (9,560 retail stores) a year earlier.
Pharmacy sales increased by 8.6% in fiscal 2019 and represented 73.8% of the division’s sales. The increase in fiscal 2019 is due to higher brand inflation and growth in central specialty and reflects the impact of the acquired Rite Aid stores. In fiscal 2018, pharmacy sales increased 17.2% and represented 72.2% of the division’s sales. Comparable pharmacy sales increased 4.0% in fiscal 2019 compared to an increase of 3.4% in fiscal 2018. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 1.2% in fiscal 2019 compared to a reduction of 1.4% in fiscal 2018. The effect of generics on division sales was a reduction of 0.8% in fiscal 2019 compared to a reduction of 0.9% for fiscal 2018. Third-party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.1% of prescription sales for fiscal 2019 compared to 98.3% for fiscal 2018. The total number of prescriptions (including immunizations) filled in fiscal 2019 was 843.7 million compared to 823.1 million in fiscal 2018. Prescriptions (including immunizations) adjusted to 30-day equivalents were 1,150.1 million in fiscal 2019 compared to 1,094.4 million in fiscal 2018.
Retail sales were flat in fiscal 2019 and were 26.2% of the division’s sales. In comparison, fiscal 2018 retail sales increased 2.4% and comprised 27.8% of the division’s sales. Comparable retail sales decreased 2.4% in each of fiscal 2019 and fiscal 2018. The decrease in comparable retail sales in fiscal 2019 was primarily due to the continued de-emphasis of tobacco.
Operating income fiscal 2019 compared to fiscal 2018
Retail Pharmacy USA division’s operating income for fiscal 2019 decreased 14.6% to $4.1 billion. The decrease was primarily due to lower gross margin partially offset by a reduction in selling, general and administrative expenses as a percentage of sales.
Gross margin was 22.5% in fiscal 2019 compared to 24.1% in fiscal 2018. Gross margin was negatively impacted in the current fiscal year by pharmacy margins, which were negatively impacted by reimbursement pressure. The decrease in pharmacy margins was partially offset by the favorable impact of procurement efficiencies.
Selling, general and administrative expenses as a percentage of sales were 18.6% in fiscal 2019 compared to 19.3% in fiscal 2018. As a percentage of sales, expenses in the current fiscal year were lower primarily due to a higher mix of specialty sales and lower expenses related to certain legal and regulatory accruals in the prior year.
Adjusted operating income (Non-GAAP measure) fiscal 2019 compared to fiscal 2018
Retail Pharmacy USA division’s adjusted operating income for fiscal 2019 decreased 9.6% to $5.3 billion. The decrease was primarily due to lower gross margins partially offset by a reduction in selling, general, and administrative expenses as a percentage of sales. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Retail Pharmacy International
This division comprises retail pharmacy businesses operating in countries outside of the United States and in currencies other than the U.S. dollar, including the British pound sterling, Euro, Chilean peso and Mexican peso. Therefore, the division’s results are impacted by movements in foreign currency exchange rates. See item 7A, quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk, for further information on currency risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions, except location amounts)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
$
|
11,462
|
|
|
$
|
12,281
|
|
|
$
|
11,813
|
|
Gross profit
|
|
4,522
|
|
|
4,958
|
|
|
4,753
|
|
Selling, general and administrative expenses1
|
|
4,084
|
|
|
4,134
|
|
|
3,982
|
|
Operating income1
|
|
438
|
|
|
824
|
|
|
771
|
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
747
|
|
|
929
|
|
|
939
|
|
Number of locations at period end
|
|
4,605
|
|
|
4,767
|
|
|
4,722
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increases (decreases)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
(6.7)
|
|
4.0
|
|
(10.9)
|
Gross profit
|
|
(8.8)
|
|
4.3
|
|
(12.5)
|
Selling, general and administrative expenses1
|
|
(1.2)
|
|
3.8
|
|
(8.4)
|
Operating income1
|
|
(46.8)
|
|
6.9
|
|
(29.1)
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
(19.6)
|
|
(1.1)
|
|
(22.6)
|
Comparable store sales3
|
|
(6.4)
|
|
4.7
|
|
(10.6)
|
Comparable store sales in constant currency3,4
|
|
(1.7)
|
|
(1.4)
|
|
(0.2)
|
Pharmacy sales
|
|
(6.4)
|
|
4.3
|
|
(10.5)
|
Comparable pharmacy sales3
|
|
(5.7)
|
|
4.7
|
|
(10.7)
|
Comparable pharmacy sales in constant currency3,4
|
|
(0.9)
|
|
(1.2)
|
|
(1.0)
|
Retail sales
|
|
(6.8)
|
|
3.8
|
|
(11.1)
|
Comparable retail sales3
|
|
(6.8)
|
|
4.7
|
|
(10.6)
|
Comparable retail sales in constant currency3,4
|
|
(2.2)
|
|
(1.5)
|
|
0.2
|
|
|
|
|
|
|
|
|
|
|
Percent to sales
|
|
|
2019
|
|
2018
|
|
2017
|
Gross margin
|
|
39.5
|
|
40.4
|
|
40.2
|
Selling, general and administrative expenses1
|
|
35.6
|
|
33.7
|
|
33.7
|
|
|
1
|
The Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715) as of September 1, 2018 (fiscal 2019) on a retrospective basis. The impact for Retail Pharmacy International on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income (expense) of $18 million and $(30) million, for the fiscal years ended August 31, 2018 and 2017, respectively. See note 1, summary of major accounting policies, for additional information.
|
|
|
2
|
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
|
|
|
3
|
Comparable stores 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 being subject to a natural disaster in the past twelve months. Relocated stores are not included as comparable stores for the first twelve months after the relocation. Acquired stores are not included as comparable stores for the first twelve months after acquisition or conversion, when applicable, whichever is later. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers’ methods.
|
|
|
4
|
The Company presents certain information related to current period operating results in “constant currency,” which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of the United States reporting in currencies other than the U.S. dollar and this presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations. See “--Non-GAAP Measures” below.
|
Sales fiscal 2019 compared to fiscal 2018
Retail Pharmacy International division’s sales for fiscal 2019 decreased 6.7% to $11.5 billion. Sales in comparable stores decreased 6.4%. The negative impact of currency translation on sales and comparable sales was 4.6 percentage points, and 4.7 percentage points, respectively, and comparable store sales in constant currency decreased 1.7%.
Pharmacy sales decreased 6.4% in fiscal 2019 and represented 35.6% of the division’s sales. Comparable pharmacy sales decreased 5.7%. The negative impact of currency translation on pharmacy sales and comparable pharmacy sales was 4.8 percentage points and 4.8 percentage points, respectively. Comparable pharmacy sales in constant currency decreased 0.9 percentage points mainly due to lower National Health Service funding levels and lower volume in Boots UK.
Retail sales decreased 6.8% for fiscal 2019 and represented 64.4% of the division’s sales. Comparable retail sales decreased 6.8%. The negative impact of currency translation on each of retail sales and comparable retail sales was 4.5 percentage points and 4.6 percentage points respectively. Comparable retail sales in constant currency decreased 2.2% reflecting lower Boots UK retail sales in a challenging market place.
Operating income fiscal 2019 compared to fiscal 2018
Retail Pharmacy International division’s operating income for fiscal 2019 decreased 46.8% to $438 million. Operating income was negatively impacted by 2.8 percentage points ($23 million) of currency translation. Excluding the impact of currency translation, the decrease in operating income was primarily due to lower sales and gross margin. The remaining decrease is due to higher selling, general and administrative expenses as a percentage of sales, which includes $89 million of Transformational Cost Management Program expenses and $73 million of impairment for indefinite-lived pharmacy licenses.
Gross profit decreased 8.8% in fiscal 2019. Gross profit was negatively impacted by 4.4 percentage points ($219 million) of currency translation, the remaining decrease was mainly due lower sales and gross margin.
Selling, general and administrative expenses decreased 1.2% from fiscal 2018. Expenses were positively impacted by 4.7 percentage points ($196 million) as a result of currency translation. As a percentage of sales, selling, general and administrative expenses were 35.6% in fiscal 2019, compared to 33.7% in the prior fiscal year.
Adjusted operating income (Non-GAAP measure) fiscal 2019 compared to fiscal 2018
Retail Pharmacy International division’s adjusted operating income for fiscal 2019 decreased 19.6% to $747 million. Adjusted operating income was negatively impacted by 3.4 percentage points ($31 million) of currency translation. Excluding the impact of currency translation, the decrease in adjusted operating income was primarily due to lower gross margin and higher selling, general and administrative expenses as a percentage of sales and lower sales. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Pharmaceutical Wholesale
This division includes pharmaceutical wholesale businesses operating in currencies other than the U.S. dollar including the British pound sterling, Euro and Turkish lira. Therefore, the division’s results are impacted by movements in foreign currency exchange rates. See item 7A, quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk, for further information on currency risk.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
$
|
23,053
|
|
|
$
|
23,006
|
|
|
$
|
21,188
|
|
Gross profit
|
|
2,041
|
|
|
2,081
|
|
|
1,965
|
|
Selling, general and administrative expenses1
|
|
1,734
|
|
|
1,594
|
|
|
1,481
|
|
Equity earnings from AmerisourceBergen
|
|
164
|
|
|
191
|
|
|
135
|
|
Operating income1
|
|
471
|
|
|
678
|
|
|
619
|
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
939
|
|
|
936
|
|
|
922
|
|
|
|
|
|
|
|
|
|
|
|
Percentage increases (decreases)
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
0.2
|
|
8.6
|
|
(6.1)
|
Gross profit
|
|
(1.9)
|
|
5.9
|
|
(7.8)
|
Selling, general and administrative expenses1
|
|
8.8
|
|
7.6
|
|
(6.7)
|
Equity earnings from AmerisourceBergen
|
|
(14.2)
|
|
41.5
|
|
264.9
|
Operating income1
|
|
(30.4)
|
|
9.5
|
|
6.7
|
Adjusted operating income (Non-GAAP measure)1,2
|
|
0.4
|
|
1.5
|
|
30.0
|
Comparable sales3
|
|
0.2
|
|
8.6
|
|
(3.9)
|
Comparable sales in constant currency3,4
|
|
8.0
|
|
4.2
|
|
4.7
|
|
|
|
|
|
|
|
|
|
|
Percent to sales
|
|
|
2019
|
|
2018
|
|
2017
|
Gross margin
|
|
8.9
|
|
9.0
|
|
9.3
|
Selling, general and administrative expenses1
|
|
7.5
|
|
6.9
|
|
7.0
|
|
|
1
|
The Company adopted ASU 2017-07, Compensation - Retirement Benefits (Topic 715) as of September 1, 2018 (fiscal 2019) on a retrospective basis. The impact for Pharmaceutical Wholesale on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income (expense) of $(2) million and $2 million, for the fiscal years ended August 31, 2018 and 2017, respectively. See note 1, summary of major accounting policies, for additional information.
|
|
|
2
|
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
|
|
|
3
|
Comparable Sales are defined as sales excluding acquisitions and dispositions.
|
|
|
4
|
The Company presents certain information related to current period operating results in “constant currency,” which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of the United States reporting in currencies other than the U.S. dollar and this presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations. See “--Non-GAAP Measures” below.
|
Sales fiscal 2019 compared to fiscal 2018
Pharmaceutical Wholesale division’s sales for the fiscal 2019 increased 0.2% to $23.1 billion. Comparable sales, which exclude acquisitions and dispositions, increased 0.2%.
Sales and comparable sales were negatively impacted by 7.8 percentage points as a result of currency translation. Comparable sales in constant currency increased 8.0%, reflecting a customer contract change in the UK and growth in emerging markets.
Operating income fiscal 2019 compared to fiscal 2018
Pharmaceutical Wholesale division’s operating income for fiscal 2019, which included $164 million from the Company’s share of equity earnings in AmerisourceBergen, decreased 30.4% to $471 million. Operating income was negatively impacted by 6.1 percentage points ($41 million) as a result of currency translation. The remaining decrease was due to costs related to the Transformational Cost Management Program in fiscal 2019.
Gross profit decreased 1.9% from the prior fiscal year. Gross profit was negatively impacted by 7.2 percentage points ($149 million) as a result of currency translation. Excluding the impact of currency translation, the increase in gross profit was primarily due to sales growth, partially offset by lower gross margin.
Selling, general and administrative expenses increased 8.8% from the prior fiscal year. Selling, general and administrative expenses were positively impacted by 6.8 percentage points ($108 million) as a result of currency translation. Excluding the impact of currency translation, the increase in selling, general and administrative expenses was primarily due to costs related to the Transformational Cost Management Program. As a percentage of sales, selling, general and administrative expenses were 7.5% in fiscal 2019, compared to 6.9% in fiscal 2018.
Adjusted operating income (Non-GAAP measure) fiscal 2019 compared to fiscal 2018
Pharmaceutical Wholesale division’s adjusted operating income for fiscal 2019, which included $397 million from the Company’s share of adjusted equity earnings in AmerisourceBergen, increased 0.4% to $939 million. Adjusted operating income was negatively impacted by 5.5 percentage points ($51 million) as a result of currency translation.
Excluding the contribution from the Company’s share of adjusted equity earnings in AmerisourceBergen and the negative impact of currency translation, adjusted operating income increased 4.3% ($25 million) over the prior fiscal year, primarily due to higher sales and lower selling, general and administrative expenses as a percentage of sales, partially offset by lower gross margin. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
NON-GAAP MEASURES
The following information provides reconciliations of the supplemental non-GAAP financial measures, as defined under the rules of the Securities and Exchange Commission, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP.
These supplemental non-GAAP financial measures are presented because the Company’s management has evaluated its financial results both including and excluding the adjusted items or the effects of foreign currency translation, as applicable, and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company from period to period and trends in its historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented.
The Company also presents certain information related to current period operating results in “constant currency,” which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of the United States reporting in currencies other than the U.S. dollar and such presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Twelve months ended August 31, 2019
|
|
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Eliminations
|
|
Walgreens Boots Alliance, Inc.
|
Operating income (GAAP)1
|
|
$
|
4,088
|
|
|
$
|
438
|
|
|
$
|
471
|
|
|
$
|
1
|
|
|
$
|
4,998
|
|
Acquisition-related amortization and impairment2
|
|
315
|
|
|
173
|
|
|
78
|
|
|
—
|
|
|
567
|
|
Transformational cost management
|
|
189
|
|
|
133
|
|
|
155
|
|
|
—
|
|
|
477
|
|
Acquisition-related costs
|
|
300
|
|
|
3
|
|
|
1
|
|
|
—
|
|
|
303
|
|
Adjustments to equity earnings in AmerisourceBergen
|
|
—
|
|
|
—
|
|
|
233
|
|
|
—
|
|
|
233
|
|
Store optimization
|
|
196
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
196
|
|
LIFO provision
|
|
136
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
136
|
|
Certain legal and regulatory accruals and settlements3
|
|
31
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Adjusted operating income (Non-GAAP measure)1
|
|
$
|
5,255
|
|
|
$
|
747
|
|
|
$
|
939
|
|
|
$
|
1
|
|
|
$
|
6,942
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Twelve months ended August 31, 2018
|
|
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Eliminations
|
|
Walgreens Boots Alliance, Inc.
|
Operating income (GAAP)1
|
|
$
|
4,787
|
|
|
$
|
824
|
|
|
$
|
678
|
|
|
$
|
—
|
|
|
$
|
6,289
|
|
Acquisition-related amortization
|
|
260
|
|
|
105
|
|
|
83
|
|
|
—
|
|
|
448
|
|
Acquisition-related costs
|
|
231
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
231
|
|
Adjustments to equity earnings in AmerisourceBergen
|
|
—
|
|
|
—
|
|
|
175
|
|
|
—
|
|
|
175
|
|
Store optimization
|
|
100
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
100
|
|
LIFO provision
|
|
84
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
84
|
|
Certain legal and regulatory accruals and settlements3
|
|
284
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
284
|
|
Asset recovery
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
Hurricane-related costs
|
|
83
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
83
|
|
Adjusted operating income (Non-GAAP measure)1
|
|
$
|
5,814
|
|
|
$
|
929
|
|
|
$
|
936
|
|
|
$
|
—
|
|
|
$
|
7,679
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
Twelve months ended August 31, 2017
|
|
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Eliminations
|
|
Walgreens Boots Alliance, Inc.
|
Operating income (GAAP)1
|
|
$
|
4,094
|
|
|
$
|
771
|
|
|
$
|
619
|
|
|
$
|
—
|
|
|
$
|
5,484
|
|
Acquisition-related amortization
|
|
152
|
|
|
101
|
|
|
79
|
|
|
—
|
|
|
332
|
|
Acquisition-related costs
|
|
474
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
474
|
|
Adjustments to equity earnings in AmerisourceBergen
|
|
—
|
|
|
—
|
|
|
187
|
|
|
—
|
|
|
187
|
|
LIFO provision
|
|
166
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
166
|
|
Asset recovery
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(11
|
)
|
Cost transformation
|
|
731
|
|
|
67
|
|
|
37
|
|
|
—
|
|
|
835
|
|
Adjusted operating income (Non-GAAP measure)1
|
|
$
|
5,606
|
|
|
$
|
939
|
|
|
$
|
922
|
|
|
$
|
—
|
|
|
$
|
7,467
|
|
|
|
1
|
The Company adopted new accounting guidance in Accounting Standards Update 2017-07 as of September 1, 2018 (fiscal 2019) on a retrospective basis for the Consolidated Statements of Earnings presentation. This change resulted in reclassification of all the other net cost components (excluding service cost component) of net pension cost and net postretirement benefit cost from selling, general and administrative expenses to other income (expense) with no impact on the Company’s net earnings.
|
|
|
2
|
Includes impairment of $73 million for indefinite-lived pharmacy licenses intangible asset recorded during the three months ended August 31, 2019, in the Boots reporting unit within the Retail Pharmacy International segment.
|
|
|
3
|
Beginning in the quarter ended August 31, 2018, management reviewed and refined its practice to include all charges related to the matters included in certain legal and regulatory accruals and settlements. This non-GAAP measure is presented on a consistent basis for fiscal year 2019.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in millions)
|
|
|
2019
|
|
2018
|
|
2017
|
Net earnings attributable to Walgreens Boots Alliance, Inc. (GAAP)
|
|
$
|
3,982
|
|
|
$
|
5,024
|
|
|
$
|
4,078
|
|
|
|
|
|
|
|
|
Adjustments to operating income:
|
|
|
|
|
|
|
Acquisition-related amortization and impairment1
|
|
567
|
|
|
448
|
|
|
332
|
|
Transformational cost management
|
|
477
|
|
|
—
|
|
|
—
|
|
Acquisition-related costs
|
|
303
|
|
|
231
|
|
|
474
|
|
Adjustments to equity earnings in AmerisourceBergen
|
|
233
|
|
|
175
|
|
|
187
|
|
Store optimization
|
|
196
|
|
|
100
|
|
|
—
|
|
LIFO provision
|
|
136
|
|
|
84
|
|
|
166
|
|
Certain legal and regulatory accruals and settlements2
|
|
31
|
|
|
284
|
|
|
—
|
|
Asset recovery
|
|
—
|
|
|
(15
|
)
|
|
—
|
|
Hurricane-related costs
|
|
—
|
|
|
83
|
|
|
(11
|
)
|
Cost Transformation
|
|
—
|
|
|
—
|
|
|
835
|
|
Total adjustments to operating income
|
|
1,944
|
|
|
1,390
|
|
|
1,983
|
|
|
|
|
|
|
|
|
Adjustments to other income (expense):
|
|
|
|
|
|
|
|
|
Net investment hedging loss (gain)
|
|
18
|
|
|
(21
|
)
|
|
48
|
|
Gain on sale of equity method investment
|
|
—
|
|
|
(322
|
)
|
|
—
|
|
Impairment of equity method investment
|
|
—
|
|
|
178
|
|
|
—
|
|
Termination of option granted to Rite Aid
|
|
(173
|
)
|
|
—
|
|
|
—
|
|
Total adjustments to other income (expense)
|
|
(155
|
)
|
|
(165
|
)
|
|
48
|
|
|
|
|
|
|
|
|
Adjustments to interest expense, net:
|
|
|
|
|
|
|
|
|
Prefunded acquisition financing costs
|
|
—
|
|
|
29
|
|
|
203
|
|
Total adjustments to interest expense, net
|
|
—
|
|
|
29
|
|
|
203
|
|
|
|
|
|
|
|
|
Adjustments to income tax provision:
|
|
|
|
|
|
|
|
|
Equity method non-cash tax
|
|
18
|
|
|
25
|
|
|
23
|
|
U.S. tax law changes3
|
|
(8
|
)
|
|
(125
|
)
|
|
—
|
|
Tax impact of adjustments4
|
|
(291
|
)
|
|
(193
|
)
|
|
(755
|
)
|
UK tax rate change3
|
|
—
|
|
|
—
|
|
|
(77
|
)
|
Total adjustments to income tax provision
|
|
(281
|
)
|
|
(293
|
)
|
|
(809
|
)
|
|
|
|
|
|
|
|
Adjustments to post tax equity earnings from other equity method investments:
|
|
|
|
|
|
|
Adjustments to equity earnings in other equity method investments5
|
|
40
|
|
|
—
|
|
|
—
|
|
Total adjustments to post tax equity earnings from other equity method investments
|
|
40
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)
|
|
$
|
5,529
|
|
|
$
|
5,985
|
|
|
$
|
5,503
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Diluted net earnings per common share (GAAP)
|
|
$
|
4.31
|
|
|
$
|
5.05
|
|
|
$
|
3.78
|
|
|
|
|
|
|
|
|
Adjustments to operating income
|
|
2.10
|
|
|
1.40
|
|
|
1.84
|
|
Adjustments to other income (expense)
|
|
(0.17
|
)
|
|
(0.17
|
)
|
|
0.04
|
|
Adjustments to interest expense, net
|
|
—
|
|
|
0.03
|
|
|
0.19
|
|
Adjustments to income tax provision
|
|
(0.30
|
)
|
|
(0.29
|
)
|
|
(0.75
|
)
|
Adjustments to post tax equity earnings from other equity method investments
|
|
0.04
|
|
|
—
|
|
|
—
|
|
Adjusted diluted net earnings per common share (Non-GAAP measure)
|
|
$
|
5.99
|
|
|
$
|
6.02
|
|
|
$
|
5.10
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding, diluted
|
|
923.5
|
|
|
995.0
|
|
|
1,078.5
|
|
|
|
1
|
Includes impairment of $73 million for indefinite-lived pharmacy licenses intangible asset recorded during the three months ended August 31, 2019, in the Boots reporting unit within the Retail Pharmacy International segment.
|
|
|
2
|
Beginning in the quarter ended August 31, 2018, management reviewed and refined its practice to include all charges related to the matters included in certain legal and regulatory accruals and settlements. This non-GAAP measure is presented on a consistent basis for fiscal year 2019.
|
|
|
3
|
Discrete tax-only items.
|
|
|
4
|
Represents the adjustment to the GAAP basis tax provision commensurate with non-GAAP adjustments.
|
|
|
5
|
Beginning in the quarter ended May 31, 2019, management reviewed and refined its practice to reflect the proportionate share of certain equity method investees’ non-cash items or unusual or infrequent items consistent with the Company’s non-GAAP measures in order to provide investors with a comparable view of performance across periods. These adjustments include acquisition-related amortization and acquisition-related costs and were immaterial for the prior periods presented. Although the Company may have shareholder rights and board representation commensurate with its ownership interests in these equity method investees, adjustments relating to equity method investments are not intended to imply that the Company has direct control over their operations and resulting revenue and expenses. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all revenue and expenses of these equity method investees.
|
LIQUIDITY AND CAPITAL RESOURCES
Cash and cash equivalents were $1.0 billion (including $0.4 billion in non-U.S. jurisdictions) as of August 31, 2019, compared to $0.8 billion (including $0.2 billion in non-U.S. jurisdictions) at August 31, 2018. Short-term investment objectives are primarily to minimize risk and maintain liquidity. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally in U.S. Treasury money market funds and AAA-rated money market funds.
The Company’s long-term capital policy is to maintain a strong balance sheet and financial flexibility, reinvest in its core strategies, invest in strategic opportunities that reinforce its core strategies and meet return requirements and return surplus cash flow to stockholders in the form of dividends and share repurchases over the long term. In July 2019, the Company’s Board of Directors reviewed and refined the Company’s dividend policy to set forth the Company’s current intention to increase its dividend each year.
Cash provided by operations and the incurrence of debt are the principal sources of funds for expansion, investments, acquisitions, remodeling programs, dividends to stockholders and stock repurchases. Net cash provided by operating activities was $5.6 billion in fiscal 2019 compared to $8.3 billion in fiscal 2018 and $7.3 billion in fiscal 2017. The $2.7 billion decrease in cash provided by operating activities includes cash outflows relating to the integration of Rite Aid stores, timing of certain legal and regulatory settlements and higher income taxes paid. Changes in income taxes paid are mainly due to the impact of U.S. tax law changes. Changes in accrued expenses and other liabilities, trade accounts payable and trade accounts receivables include cash outflows relating to the integration of Rite Aid stores. Changes in accrued expenses and other liabilities also include the impact of certain legal and regulatory settlements.
Net cash used for investing activities was $2.3 billion in fiscal 2019 compared to $5.5 billion in fiscal 2018 and $0.8 billion in fiscal 2017. Business, investment and asset acquisitions in fiscal 2019 were $0.7 billion compared to $4.8 billion in fiscal 2018. Business, investment and asset acquisitions in fiscal 2018 include the acquisition of Rite Aid assets and the investment in GuoDa. Additions to property, plant and equipment in fiscal 2019 were $1.7 billion compared to $1.4 billion in each of fiscal 2018 and fiscal 2017. Capital expenditures by reporting segment were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Retail Pharmacy USA
|
|
$
|
1,323
|
|
|
$
|
1,022
|
|
|
$
|
860
|
|
Retail Pharmacy International
|
|
275
|
|
|
241
|
|
|
384
|
|
Pharmaceutical Wholesale
|
|
104
|
|
|
104
|
|
|
107
|
|
Total
|
|
$
|
1,702
|
|
|
$
|
1,367
|
|
|
$
|
1,351
|
|
Significant capital expenditures primarily relate to investments in our stores, integration of Rite Aid and information technology projects.
Net cash used for financing activities in fiscal 2019 was $3.0 billion compared to $5.3 billion in fiscal 2018 and $12.9 billion in fiscal 2017. The Company repurchased shares as part of the stock repurchase programs described below and to support the needs of the employee stock plans totaling $4.2 billion in fiscal 2019 compared to $5.2 billion in each of fiscal 2018 and fiscal 2017. Proceeds related to employee stock plans were $174 million in each of fiscal 2019 and fiscal 2018 compared to $217 million in fiscal 2017. Cash dividends paid were $1.6 billion in fiscal 2019 compared to $1.7 billion in each of fiscal 2018 and fiscal 2017. In fiscal 2019 there were $12.4 billion in proceeds compared to $5.9 billion in proceeds in fiscal 2018 primarily from revolving facilities described below and commercial paper debt. There were no proceeds from debt in fiscal 2017. In fiscal 2019 there were $10.5 billion payments of debt made primarily for revolving facilities and commercial paper debt compared to $4.9 billion in fiscal 2018 and $6.2 billion in fiscal 2017.
The Company believes that cash flow from operations, availability under existing credit facilities and arrangements, current cash and investment balances and the ability to obtain other financing, if necessary, will provide adequate cash funds for the foreseeable working capital needs, capital expenditures at existing facilities, pending acquisitions, dividend payments and debt service obligations for at least the next 12 months. The Company’s cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that the Company may complete may also impact its cash requirements.
See item 7A, qualitative and quantitative disclosures about market risk, below for a discussion of certain financing and market risks.
Stock repurchase programs
In April 2017, Walgreens Boots Alliance authorized a stock repurchase program (the “April 2017 stock repurchase program”), which authorized the repurchase of up to $1.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on December 31, 2017. In May 2017, the Company completed the April 2017 stock repurchase program, purchasing 11.8 million shares. In June 2017, Walgreens Boots Alliance authorized a stock repurchase program, which authorized the repurchase of up to $5.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on August 31, 2018, which authorization was increased by an additional $1.0 billion in October 2017 (as expanded, the “June 2017 stock repurchase program”). In October 2017, the Company completed the June 2017 stock repurchase program, purchasing 77.4 million shares. In June 2018, Walgreens Boots Alliance authorized a stock repurchase program (the “June 2018 stock repurchase program”), which authorized the repurchase of up to $10.0 billion of Walgreens Boots Alliance common stock of which the Company had repurchased $6.5 billion as of August 31, 2019. The June 2018 stock repurchase program has no specified expiration date.
The Company purchased 57 million and 72 million shares under stock repurchase programs in fiscal 2019 and 2018 at a cost of $3.8 billion and $4.9 billion, respectively. The Company determines the timing and amount of repurchases, including repurchases to offset anticipated dilution from equity incentive plans, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. The Company has repurchased, and may from time to time in the future repurchase, shares on the open market through Rule 10b5-1 plans, which enable the Company to repurchase shares at times when it otherwise might be precluded from doing so under federal securities laws.
Commercial paper
The Company periodically borrows under its commercial paper program and may continue to borrow under it in future periods. The Company had $2,400 million commercial paper outstanding as of August 31, 2019 and $430 million as of August 31, 2018. The Company had average daily commercial paper outstanding of $2.7 billion and $1.4 billion at a weighted average interest rate of 3.07% and 2.11% for the fiscal years ended August 31, 2019 and 2018 respectively. The Company had no activity under its commercial paper program during fiscal year 2017.
Financing actions
On June 1, 2016, Walgreens Boots Alliance issued in an underwritten public offering $1.2 billion of 1.750% notes due 2018 (the “2018 notes”), $1.5 billion of 2.600% notes due 2021 (the “2021 notes”), $0.8 billion of 3.100% notes due 2023 (the “2023 notes”), $1.9 billion of 3.450% notes due 2026 (the “2026 notes”) and $0.6 billion of 4.650% notes due 2046 (the “2046 notes”). Because the merger with Rite Aid was not consummated on or prior to June 1, 2017, the 2018 notes, the 2021 notes and the 2023 notes were redeemed on June 5, 2017 under the special mandatory redemption terms of the indenture governing such notes. The 2026 notes and 2046 notes remain outstanding in accordance with their respective terms.
On February 1, 2017, Walgreens Boots Alliance entered into a $1.0 billion revolving credit facility (as amended, the “February 2017 Revolving Credit Agreement”) with the lenders from time to time party thereto and, on August 1, 2017, Walgreens Boots Alliance entered into an amendment agreement thereto. On January 31, 2019, the February 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.
On August 24, 2017, Walgreens Boots Alliance entered into a $1.0 billion revolving credit agreement with the lenders from time to time party thereto (the “August 2017 Revolving Credit Agreement”) and a $1.0 billion term loan credit agreement with Sumitomo Mitsui Banking Corporation (the “2017 Term Loan Credit Agreement”). On November 30, 2018, in connection with the entrance into the November 2018 Credit Agreement (described below), Walgreens Boots Alliance terminated the 2017 Term Loan Credit Agreement in accordance with its terms and as of such date paid all amounts due in connection therewith. On January 31, 2019, the August 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.
On August 29, 2018, Walgreens Boots Alliance entered into a revolving credit agreement (the “August 2018 Revolving Credit Agreement”) with the lenders and letter of credit issuers from time to time party thereto. The August 2018 Revolving Credit Agreement is an unsecured revolving credit facility with an aggregate commitment in the amount of $3.5 billion, with a letter of credit subfacility commitment amount of $500 million. The facility termination date is the earlier of (a) August 29, 2023, subject to extension thereof pursuant to the August 2018 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the August 2018 Revolving Credit Agreement. Borrowings under the August 2018 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on Walgreens Boots Alliance’s credit ratings. As of August 31, 2019, there were no borrowings under the August 2018 Revolving Credit Agreement.
On November 30, 2018, Walgreens Boots Alliance entered into a credit agreement (as amended the “November 2018 Credit Agreement”) with the lenders from time to time party thereto and, on March 25, 2019, the Company entered into an amendment to such credit agreement reflecting certain changes to the borrowing notice provisions thereto. The November 2018 Credit Agreement includes a $500 million senior unsecured revolving credit facility and a $500 million senior unsecured term loan facility. The facility termination date is, with respect to the revolving credit facility, the earlier of (a) May 30, 2020 and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the November 2018 Credit Agreement and, with respect to the term loan facility, the earlier of (a) May 30, 2020 and (b) the date of acceleration of all term loans pursuant to the November 2018 Credit Agreement. Borrowings under the November 2018 Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on Walgreens Boots Alliance’s credit ratings. As of August 31, 2019, there were $0.5 billion of borrowings under the November 2018 Credit Agreement.
On December 5, 2018, Walgreens Boots Alliance entered into a $1.0 billion term loan credit agreement (as amended, the “December 2018 Credit Agreement”) with the lenders from time to time party thereto and, on August 9, 2019, the Company entered into an amendment to such credit agreement to permit the Company to borrow, repay and reborrow amounts borrowed thereunder prior to the maturity date. The December 2018 Credit Agreement is a senior unsecured revolving credit facility with a facility termination date of the earlier of (a) January 29, 2021, subject to extension thereof pursuant to the December 2018 Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the December 2018 Credit Agreement. Borrowings under the December 2018 Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 0.75% in the case of Eurocurrency rate loans. As of August 31, 2019, there were $0.8 billion of borrowings outstanding under the December 2018 Credit Agreement.
On December 21, 2018, the Company entered into a $1.0 billion revolving credit agreement (the “December 2018 Revolving Credit Agreement”) with the lenders from time to time party thereto. The December 2018 Revolving Credit Agreement is a senior unsecured revolving credit facility with a facility termination date of the earlier of (a) 18 months following January 28, 2019, the date of the effectiveness of the commitments pursuant to the December 2018 Revolving Credit Agreement, subject to extension thereof pursuant to the December 2018 Revolving Credit Agreement and (b) the date of termination in whole of the
aggregate amount of the commitments pursuant to the December 2018 Revolving Credit Agreement. Borrowings under the December 2018 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 0.75% in the case of Eurocurrency rate loans. As of August 31, 2019, there were $0.3 billion borrowings outstanding under the December 2018 Revolving Credit Agreement.
On January 18, 2019, the Company entered into a $2.0 billion 364-day revolving credit agreement (the “January 2019 364-Day Revolving Credit Agreement”) with the lenders from time to time party thereto. The January 2019 364-Day Revolving Credit Agreement is a senior unsecured 364-day revolving credit facility, with a facility termination date of the earlier of (a) 364 days following January 31, 2019, the date of the effectiveness of the commitments pursuant to the January 364- Day Revolving Credit Agreement, subject to extension thereof pursuant to the January 2019 364-Day Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the January 2019 364-Day Revolving Credit Agreement. Borrowings under the January 2019 364-Day Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on the Company’s credit ratings. As of August 31, 2019, there were no borrowings outstanding under the January 364-Day Revolving Credit Agreement.
On August 30, 2019, the Company entered into three $500 million revolving credit agreements (together, the “August 2019 Revolving Credit Agreements” and each individually, an “August 2019 Revolving Credit Agreement”) with the lenders from time to time party thereto. Each of the August 2019 Revolving Credit Agreements are senior unsecured revolving credit facilities, with facility termination dates of the earlier of (a) 18 months following August 30, 2019, subject to extension thereof pursuant to the applicable August 2019 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the applicable August 2019 Revolving Credit Agreement. Borrowings under each of the August 2019 Revolving Credit Agreements will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 0.95% in the case of Eurocurrency rate loans. As of August 31, 2019, there were no borrowings outstanding under the August 2019 Revolving Credit Agreements.
From time to time, the Company may also enter into other credit facilities or financing arrangements.
Debt covenants
Each of the Company’s credit facilities described above contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60:1.00, subject to increase in certain circumstances set forth in the applicable credit agreement. The credit facilities contain various other customary covenants. As of August 31, 2019, the Company was in compliance with all such applicable covenants.
Credit ratings
As of October 25, 2019, the credit ratings of Walgreens Boots Alliance were:
|
|
|
|
|
Rating Agency
|
Long-Term Debt Rating
|
Commercial
Paper Rating
|
Outlook
|
Fitch
|
BBB
|
F2
|
Negative
|
Moody’s
|
Baa2
|
P-2
|
Stable
|
Standard & Poor’s
|
BBB
|
A-2
|
Stable
|
In assessing the Company’s credit strength, each rating agency considers various factors including the Company’s business model, capital structure, financial policies and financial performance. There can be no assurance that any particular rating will be assigned or maintained. The Company’s credit ratings impact its borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold the Company’s debt securities or commercial paper. Each rating may be subject to revision or withdrawal at any time by the assigning rating agency and should be evaluated independently of any other rating.
AmerisourceBergen relationship
As of August 31, 2019, the Company owned 56,854,867 AmerisourceBergen common shares representing approximately 27% of the outstanding AmerisourceBergen common stock and had designated one member of AmerisourceBergen’s board of directors. As of August 31, 2019, the Company can acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market and thereafter designate another member of AmerisourceBergen’s board of directors, subject in each case to applicable legal and contractual requirements. The amount of permitted open market purchases is subject to increase or
decrease in certain circumstances. Subject to applicable legal and contractual requirements, share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1. See note 5, equity method investments, to the Consolidated Financial Statements included herein for further information.
COMMITMENTS AND CONTINGENCIES
The information set forth in note 10, commitments and contingencies, to the Consolidated Financial Statements included in part II, item 8 of this Form 10-K is incorporated herein by reference.
CRITICAL ACCOUNTING POLICIES
The Consolidated 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 Consolidated Statements of Earnings and corresponding Consolidated Balance Sheets accounts would be necessary. These adjustments would be made in future periods. Some of the more significant estimates include business combinations, goodwill and indefinite-lived intangible asset impairment, cost of sales and inventory, equity method investments, pension and postretirement benefits and income taxes. The Company uses the following methods to determine its estimates:
Business combinations – The Company accounts for business combinations using the acquisition method of accounting, which requires that once control is obtained, all the assets acquired and liabilities assumed, including amounts attributable to noncontrolling interests, be recorded at their respective fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when market value is not readily available.
For intangible assets, the Company generally uses the income approach to determine fair value. The income approach requires management to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: discount rates, terminal growth rates, royalty rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. The discount rates applied to the projections reflect the risk factors associated with those projections.
Although the Company believes its 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 the determination of the fair value of the intangible assets acquired.
Judgment is also required in determining the intangible asset’s useful life.
Goodwill and indefinite-lived intangible asset impairment – Goodwill and indefinite-lived intangible assets are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit or intangible asset below its carrying value. As part of the Company’s impairment analysis, fair value of a reporting unit is determined 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 requires the Company 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, discount rates, terminal growth rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. 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 any goodwill impairment charge, or both.
The Company also compares the sum of estimated fair values of reporting units to the Company’s fair value as implied by the market value of its equity securities. This comparison provides an indication that, in total, assumptions and estimates are reasonable. Future declines in the overall market value of the Company’s equity securities may provide an indication that the fair value of one or more reporting units has declined below its carrying value.
The fair values of the Company’s reporting units exceeded their carrying amounts ranging from approximately 9% to approximately 269% as of June 1, 2019 valuation date. The fair value of the Boots reporting unit, in the Retail Pharmacy International division, is in excess of its carrying value by approximately 9%. As at August 31, 2019, the carrying value of the goodwill of the Boots reporting unit is $2.6 billion.
The Company continues to closely monitor industry and market trends and the impact it may have on the Boots reporting unit and indefinite-lived intangibles as the challenging market conditions in the UK continued to impact the operating performance of the Boots reporting unit during the three months ended August 31, 2019.
Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the asset is written down to its estimated fair value. Indefinite-lived intangible assets fair values are estimated using the relief from royalty method and excess earnings method of the income approach. These estimates can be affected by a number of factors including, but not limited to, general economic conditions, availability of market information as well as our profitability. The fair values of indefinite-lived intangibles within the Boots reporting unit exceeded their carrying value amounts ranging from approximately 3% to approximately 29%, except for the pharmacy licenses. As at August 31, 2019, the carrying value of these indefinite-lived intangibles within the Boots reporting unit is $6.9 billion. During the fiscal year ended August 31, 2019, the Company recorded an impairment of $73 million on its pharmacy licenses in the Boots reporting unit, which was included in selling, general, and administrative expenses in the Consolidated Statement of Earnings.
See note 6, goodwill and other intangible assets, to the Consolidated Financial Statements for additional information.
Cost of sales and inventory – Cost of sales includes the purchase price of goods and cost of services rendered, store and warehouse inventory loss, inventory obsolescence and supplier rebates. In addition to product costs, cost of sales includes warehousing costs for retail operations, purchasing costs, freight costs, cash discounts and vendor allowances.
Cost of sales for our Retail Pharmacy USA segment is derived based upon point-of-sale scanning information with an estimate for shrinkage and is adjusted based on periodic inventory counts. Inventories are valued at the lower of cost or market determined by the last-in, first-out (“LIFO”) method for the Retail Pharmacy USA segment and primarily on a first-in first-out (“FIFO”) basis for inventory in the Retail Pharmacy International and Pharmaceutical Wholesale segments.
Equity method investments – The Company uses the equity method of accounting for equity investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of these companies is included in consolidated net earnings. Judgment regarding the level of influence over each equity method investment includes considering key factors such as the Company’s ownership interest, legal form of the investee (e.g. limited liability partnership), representation on the board of directors, participation in policy-making decisions and material intra-entity transactions
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.
Pension and postretirement benefits – The Company has various defined benefit pension plans that cover some of its non-U.S. employees. The Company also has a postretirement healthcare plan that covers qualifying U.S. employees. Eligibility and the level of benefits for these plans vary depending on participants’ status, date of hire and or length of service. Pension and postretirement plan expenses and valuations are dependent on assumptions used by third-party actuaries in calculating those amounts. These assumptions include discount rates, healthcare cost trends, long-term return on plan assets, retirement rates, mortality rates and other factors.
In determining long-term rate of return on plan assets assumption, the Company considers both the historical performance of the investment portfolio as well as the long-term market return expectations based on the investment mix of the portfolio. A change in any of these assumptions would have an effect on its pension expense. A 25 basis point increase in the discount rate would result in a decline of $368.1 million to the Company’s pension benefit obligation. A 25 basis point decrease on the expected return on plan assets assumption would increase the Company’s pension expense by $19.1 million.
The Company funds its pension plans in accordance with applicable regulations. The postretirement healthcare plan is not funded.
Income taxes –The Company is subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state, local and foreign tax authorities raise questions regarding the Company’s 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 the various tax filing positions, the Company records 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 the liability for unrecognized tax benefits in the period in which the Company determines 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. The liability for unrecognized tax benefits, including accrued penalties and interest, is primarily included in other non-current liabilities and current income taxes on the Company’s Consolidated Balance Sheets and in income tax provision in its Consolidated Statements of Earnings.
In determining its provision for income taxes, the Company uses income, permanent differences between book and tax income and enacted statutory income tax rates. The provision for income taxes rate also reflects its assessment of the ultimate outcome of tax audits in addition to any foreign-based income deemed to be taxable in the United States. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS
The following table lists the Company’s contractual obligations and commitments at August 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
Total
|
|
Less than 1 year
|
|
1-3 years
|
|
3-5 years
|
|
Over 5 years
|
Operating leases1
|
|
$
|
32,268
|
|
|
$
|
3,484
|
|
|
$
|
6,447
|
|
|
$
|
5,714
|
|
|
$
|
16,623
|
|
Purchase obligations:
|
|
3,231
|
|
|
2,359
|
|
|
224
|
|
|
100
|
|
|
548
|
|
Open inventory purchase orders
|
|
1,708
|
|
|
1,707
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Real estate development
|
|
179
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other obligations
|
|
1,344
|
|
|
474
|
|
|
223
|
|
|
100
|
|
|
548
|
|
Short-term debt and long-term debt*
|
|
16,916
|
|
|
5,752
|
|
|
1,741
|
|
|
1,200
|
|
|
8,223
|
|
Interest payment on short-term debt and long-term debt
|
|
4,704
|
|
|
430
|
|
|
761
|
|
|
635
|
|
|
2,878
|
|
Retirement benefit obligations
|
|
695
|
|
|
42
|
|
|
81
|
|
|
83
|
|
|
489
|
|
Closed location obligations1
|
|
1,613
|
|
|
211
|
|
|
359
|
|
|
286
|
|
|
757
|
|
Capital lease obligations*1
|
|
1,093
|
|
|
59
|
|
|
118
|
|
|
115
|
|
|
801
|
|
Finance lease obligations
|
|
311
|
|
|
21
|
|
|
41
|
|
|
40
|
|
|
209
|
|
Other liabilities reflected on the balance sheet*2
|
|
1,216
|
|
|
122
|
|
|
529
|
|
|
185
|
|
|
380
|
|
Total
|
|
$
|
62,047
|
|
|
$
|
12,480
|
|
|
$
|
10,302
|
|
|
$
|
8,358
|
|
|
$
|
30,908
|
|
|
|
*
|
Recorded on balance sheet.
|
|
|
1
|
Amounts do not include certain operating expenses under these leases such as common area maintenance, insurance and real estate taxes, where appropriate. These expenses were $569 million for the fiscal year ended August 31, 2019.
|
|
|
2
|
Includes $502 million ($88 million in less than 1 year, $385 million in 1-3 years and $29 million in 3-5 years) of unrecognized tax benefits recorded under Accounting Standards Codification Topic 740, Income Taxes. Includes $352 million ($67 million in 1-3 years, $96 million in 3-5 years and $189 million in over 5 years) of noncurrent income taxes payable as a result of the U.S tax law changes enacted in December 2017.
|
The information in the foregoing table is presented as of August 31, 2019 and accordingly does not reflect obligations under agreements the Company entered into after that date.
OFF-BALANCE SHEET ARRANGEMENTS
The Company does not have any unconsolidated special purpose entities and, except as described herein, the Company does not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with the Company is a party, under which the Company has: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
At August 31, 2019, the Company had $51 million of guarantees outstanding and no amounts issued under letters of credit.
RECENT ACCOUNTING PRONOUNCEMENTS
See “new accounting pronouncements” within note 1, summary of major accounting policies, to the Consolidated Financial Statements for information regarding recent accounting pronouncements.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
This report and other documents that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications. Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future
financial and operating performance as well as forward-looking statements concerning the expected execution and effect of our business strategies, our cost-savings and growth initiatives, pilot programs, strategic partnerships and initiatives, and restructuring activities and the amounts and timing of their expected impact and delivery of estimated cost savings, our amended and restated asset purchase agreement with Rite Aid and the transactions contemplated thereby and their possible timing and effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, estimates of the impact of developments on our earnings, earnings per share and other financial and operating metrics, cough, cold and flu season, prescription volume, pharmacy sales trends, prescription margins and reimbursement rates, changes in generic prescription drug prices, retail margins, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, the proposed withdrawal of the United Kingdom from the European Union and its possible effects, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, impairment or other charges, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. All statements in the future tense and all statements accompanied by words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” “pilot,” “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “guidance,” “target,” “aim,” “continue,” “sustain,” “synergy,” “transform,” “accelerate,” “model,” “long-term,” “on track,” “on schedule,” “headwind,” “tailwind,” “believe,” “seek,” “estimate,” “anticipate,” “upcoming,” “to come,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to, those relating to the impact of private and public third-party payers’ efforts to reduce prescription drug reimbursements, fluctuations in foreign currency exchange rates, the timing and magnitude of the impact of branded to generic drug conversions and changes in generic drug prices, our ability to realize synergies and achieve financial, tax and operating results in the amounts and at the times anticipated, the inherent risks, challenges and uncertainties associated with forecasting financial results of large, complex organizations in rapidly evolving industries, particularly over longer time periods, supply arrangements including our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, the risks associated with our equity method investment in AmerisourceBergen, circumstances that could give rise to the termination, cross-termination or modification of any of our contractual obligations, the amount of costs, and charges incurred with strategic transactions, whether the costs and charges associated with restructuring initiatives, including the Transformational Cost Management Program and Store Optimization Program, will exceed estimates, our ability to realize expected savings and benefits from cost-savings initiatives, including the Transformational Cost Management Program and Store Optimization Program, restructuring activities and acquisitions and joint ventures in the amounts and at the times anticipated, the timing and amount of any impairment or other charges, the timing and severity of cough, cold and flu season, risks related to pilot programs and new business initiatives and ventures generally, including the risks that anticipated benefits may not be realized, changes in management’s plans and assumptions, the risks associated with governance and control matters, the ability to retain key personnel, changes in economic and business conditions generally or in particular markets in which we participate, changes in financial markets, credit ratings and interest rates, the risks relating to the terms, timing and magnitude of any share repurchase activity, the risks associated with international business operations, including the risks associated with the proposed withdrawal of the United Kingdom from the European Union and international trade policies, tariffs, including tariff negotiations between the United States and China, and relations, the risks associated with cybersecurity or privacy breaches related to customer information, changes in vendor, customer and payer relationships and terms, including changes in network participation and reimbursement terms and the associated impacts on volume and operating results, risks related to competition including changes in market dynamics, participants, product and service offerings, retail formats and competitive positioning, risks associated with new business areas and activities, risks associated with acquisitions, divestitures, joint ventures and strategic investments, including those relating to the asset acquisition from Rite Aid, the risks associated with the integration of complex businesses, the impact of regulatory restrictions and outcomes of legal and regulatory matters and risks associated with changes in laws, including those related to the December 2017 U.S. tax law changes, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A, Risk factors, above and in other documents that we file or furnish with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date of this report, whether as a result of new information, future events, changes in assumptions or otherwise.
Item 8. Financial statements and supplementary data
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
At August 31, 2019 and 2018
(in millions, except shares and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Assets
|
|
|
|
|
Current assets:
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
1,023
|
|
|
$
|
785
|
|
Accounts receivable, net
|
|
7,226
|
|
|
6,573
|
|
Inventories
|
|
9,333
|
|
|
9,565
|
|
Other current assets
|
|
1,118
|
|
|
923
|
|
Total current assets
|
|
18,700
|
|
|
17,846
|
|
Non-current assets:
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
13,478
|
|
|
13,911
|
|
Goodwill
|
|
16,560
|
|
|
16,914
|
|
Intangible assets, net
|
|
10,876
|
|
|
11,783
|
|
Equity method investments (see note 5)
|
|
6,851
|
|
|
6,610
|
|
Other non-current assets
|
|
1,133
|
|
|
1,060
|
|
Total non-current assets
|
|
48,899
|
|
|
50,278
|
|
Total assets
|
|
$
|
67,598
|
|
|
$
|
68,124
|
|
|
|
|
|
|
Liabilities and equity
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
Short-term debt
|
|
$
|
5,738
|
|
|
$
|
1,966
|
|
Trade accounts payable (see note 18)
|
|
14,341
|
|
|
13,566
|
|
Accrued expenses and other liabilities
|
|
5,474
|
|
|
5,862
|
|
Income taxes
|
|
216
|
|
|
273
|
|
Total current liabilities
|
|
25,769
|
|
|
21,667
|
|
Non-current liabilities:
|
|
|
|
|
|
|
Long-term debt
|
|
11,098
|
|
|
12,431
|
|
Deferred income taxes
|
|
1,785
|
|
|
1,815
|
|
Other non-current liabilities
|
|
4,795
|
|
|
5,522
|
|
Total non-current liabilities
|
|
17,678
|
|
|
19,768
|
|
Commitments and contingencies (see note 10)
|
|
|
|
|
|
|
Equity:
|
|
|
|
|
|
|
Preferred stock $.01 par value; authorized 32 million shares, none issued
|
|
—
|
|
|
—
|
|
Common stock $.01 par value; authorized 3.2 billion shares; issued 1,172,513,618 at August 31, 2019 and 2018
|
|
12
|
|
|
12
|
|
Paid-in capital
|
|
10,639
|
|
|
10,493
|
|
Retained earnings
|
|
35,815
|
|
|
33,551
|
|
Accumulated other comprehensive loss
|
|
(3,897
|
)
|
|
(3,002
|
)
|
Treasury stock, at cost; 277,126,116 shares at August 31, 2019 and 220,380,200 shares at August 31, 2018
|
|
(19,057
|
)
|
|
(15,047
|
)
|
Total Walgreens Boots Alliance, Inc. shareholders’ equity
|
|
23,512
|
|
|
26,007
|
|
Noncontrolling interests
|
|
641
|
|
|
682
|
|
Total equity
|
|
24,152
|
|
|
26,689
|
|
Total liabilities and equity
|
|
$
|
67,598
|
|
|
$
|
68,124
|
|
The accompanying notes to Consolidated Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
For the years ended August 31, 2019, 2018 and 2017
(in millions, except shares)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity attributable to Walgreens Boots Alliance, Inc.
|
|
|
|
Common stock
shares
|
Common
stock
amount
|
Treasury
stock
amount
|
Paid-in
capital
|
Employee
stock
loan
receivable
|
Accumulated
other
comprehensive
income (loss)
|
Retained
earnings
|
Noncontrolling
interests
|
Total
equity
|
August 31, 2016
|
1,082,986,591
|
|
$
|
12
|
|
$
|
(4,934
|
)
|
$
|
10,111
|
|
$
|
(1
|
)
|
$
|
(2,992
|
)
|
$
|
27,684
|
|
$
|
401
|
|
$
|
30,281
|
|
Net earnings
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
4,078
|
|
23
|
|
4,101
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(59
|
)
|
—
|
|
(36
|
)
|
(95
|
)
|
Dividends declared and distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,625
|
)
|
(98
|
)
|
(1,723
|
)
|
Treasury stock purchases
|
(64,589,677
|
)
|
—
|
|
(5,220
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,220
|
)
|
Employee stock purchase and option plans
|
5,452,156
|
|
—
|
|
183
|
|
34
|
|
1
|
|
—
|
|
—
|
|
—
|
|
218
|
|
Stock-based compensation
|
—
|
|
|
—
|
|
91
|
|
—
|
|
—
|
|
—
|
|
—
|
|
91
|
|
Noncontrolling interests acquired and arising on business combinations
|
—
|
|
—
|
|
—
|
|
103
|
|
—
|
|
—
|
|
—
|
|
518
|
|
621
|
|
August 31, 2017
|
1,023,849,070
|
|
$
|
12
|
|
$
|
(9,971
|
)
|
$
|
10,339
|
|
$
|
—
|
|
$
|
(3,051
|
)
|
$
|
30,137
|
|
$
|
808
|
|
$
|
28,274
|
|
Net earnings
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
5,024
|
|
7
|
|
5,031
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
49
|
|
—
|
|
1
|
|
50
|
|
Dividends declared and distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,610
|
)
|
(138
|
)
|
(1,748
|
)
|
Treasury stock purchases
|
(76,069,557
|
)
|
—
|
|
(5,228
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(5,228
|
)
|
Employee stock purchase and option plans
|
4,353,905
|
|
—
|
|
152
|
|
22
|
|
—
|
|
—
|
|
—
|
|
—
|
|
174
|
|
Stock-based compensation
|
—
|
|
—
|
|
—
|
|
130
|
|
—
|
|
—
|
|
—
|
|
—
|
|
130
|
|
Noncontrolling interests contribution and other
|
—
|
|
—
|
|
—
|
|
2
|
|
—
|
|
—
|
|
—
|
|
4
|
|
6
|
|
August 31, 2018
|
952,133,418
|
|
$
|
12
|
|
$
|
(15,047
|
)
|
$
|
10,493
|
|
$
|
—
|
|
$
|
(3,002
|
)
|
$
|
33,551
|
|
$
|
682
|
|
$
|
26,689
|
|
Net earnings
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
3,982
|
|
(20
|
)
|
3,962
|
|
Other comprehensive income (loss), net of tax
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(896
|
)
|
—
|
|
(13
|
)
|
(909
|
)
|
Dividends declared and distributions
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(1,629
|
)
|
(3
|
)
|
(1,632
|
)
|
Treasury stock purchases
|
(61,723,456
|
)
|
—
|
|
(4,160
|
)
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(4,160
|
)
|
Employee stock purchase and option plans
|
4,977,540
|
|
—
|
|
150
|
|
24
|
|
—
|
|
—
|
|
—
|
|
—
|
|
174
|
|
Stock-based compensation
|
—
|
|
—
|
|
—
|
|
119
|
|
—
|
|
—
|
|
—
|
|
—
|
|
119
|
|
Adoption of new accounting standards
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
—
|
|
(88
|
)
|
—
|
|
(88
|
)
|
Noncontrolling interests contribution and other
|
—
|
|
—
|
|
—
|
|
3
|
|
—
|
|
—
|
|
(1
|
)
|
(5
|
)
|
(3
|
)
|
August 31, 2019
|
895,387,502
|
|
$
|
12
|
|
$
|
(19,057
|
)
|
$
|
10,639
|
|
$
|
—
|
|
$
|
(3,897
|
)
|
$
|
35,815
|
|
$
|
641
|
|
$
|
24,152
|
|
The accompanying notes to Consolidated Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
For the years ended August 31, 2019, 2018 and 2017
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
|
$
|
136,866
|
|
|
$
|
131,537
|
|
|
$
|
118,214
|
|
Cost of sales
|
|
106,790
|
|
|
100,745
|
|
|
89,052
|
|
Gross profit
|
|
30,076
|
|
|
30,792
|
|
|
29,162
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
|
25,242
|
|
|
24,694
|
|
|
23,813
|
|
Equity earnings in AmerisourceBergen
|
|
164
|
|
|
191
|
|
|
135
|
|
Operating income
|
|
4,998
|
|
|
6,289
|
|
|
5,484
|
|
|
|
|
|
|
|
|
Other income
|
|
233
|
|
|
302
|
|
|
62
|
|
Earnings before interest and income tax provision
|
|
5,231
|
|
|
6,591
|
|
|
5,546
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
704
|
|
|
616
|
|
|
693
|
|
Earnings before income tax provision
|
|
4,527
|
|
|
5,975
|
|
|
4,853
|
|
Income tax provision
|
|
588
|
|
|
998
|
|
|
760
|
|
Post tax earnings from other equity method investments
|
|
23
|
|
|
54
|
|
|
8
|
|
Net earnings
|
|
3,962
|
|
|
5,031
|
|
|
4,101
|
|
Net (loss) earnings attributable to noncontrolling interests
|
|
(20
|
)
|
|
7
|
|
|
23
|
|
Net earnings attributable to Walgreens Boots Alliance, Inc.
|
|
$
|
3,982
|
|
|
$
|
5,024
|
|
|
$
|
4,078
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
4.32
|
|
|
$
|
5.07
|
|
|
$
|
3.80
|
|
Diluted
|
|
$
|
4.31
|
|
|
$
|
5.05
|
|
|
$
|
3.78
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding:
|
|
|
|
|
|
|
|
|
|
Basic
|
|
921.5
|
|
|
991.0
|
|
|
1,073.5
|
|
Diluted
|
|
923.5
|
|
|
995.0
|
|
|
1,078.5
|
|
The accompanying notes to Consolidated Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
For the years ended August 31, 2019, 2018 and 2017
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Comprehensive income:
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,962
|
|
|
$
|
5,031
|
|
|
$
|
4,101
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax:
|
|
|
|
|
|
|
Pension/postretirement obligations
|
|
(149
|
)
|
|
240
|
|
|
73
|
|
Unrealized gain on cash flow hedges
|
|
60
|
|
|
3
|
|
|
4
|
|
Unrecognized (loss) on available-for-sale investments
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
Share of other comprehensive income (loss) of equity method investments
|
|
(1
|
)
|
|
5
|
|
|
(1
|
)
|
Currency translation adjustments
|
|
(820
|
)
|
|
(198
|
)
|
|
(169
|
)
|
Total other comprehensive income (loss)
|
|
(909
|
)
|
|
50
|
|
|
(95
|
)
|
Total comprehensive income
|
|
3,053
|
|
|
5,081
|
|
|
4,006
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) attributable to noncontrolling interests
|
|
(33
|
)
|
|
8
|
|
|
(13
|
)
|
Comprehensive income attributable to Walgreens Boots Alliance, Inc.
|
|
$
|
3,086
|
|
|
$
|
5,073
|
|
|
$
|
4,019
|
|
The accompanying notes to Consolidated Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended August 31, 2019, 2018 and 2017
(in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net earnings
|
|
$
|
3,962
|
|
|
$
|
5,031
|
|
|
$
|
4,101
|
|
Adjustments to reconcile net earnings to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
2,038
|
|
|
1,770
|
|
|
1,654
|
|
Gain on previously held equity interest
|
|
—
|
|
|
(337
|
)
|
|
—
|
|
Deferred income taxes
|
|
100
|
|
|
(322
|
)
|
|
(434
|
)
|
Stock compensation expense
|
|
119
|
|
|
130
|
|
|
91
|
|
Equity earnings from equity method investments
|
|
(187
|
)
|
|
(244
|
)
|
|
(143
|
)
|
Other
|
|
302
|
|
|
296
|
|
|
364
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Accounts receivable, net
|
|
(789
|
)
|
|
(391
|
)
|
|
(153
|
)
|
Inventories
|
|
141
|
|
|
331
|
|
|
98
|
|
Other current assets
|
|
(112
|
)
|
|
(22
|
)
|
|
—
|
|
Trade accounts payable
|
|
954
|
|
|
1,352
|
|
|
1,684
|
|
Accrued expenses and other liabilities
|
|
(374
|
)
|
|
287
|
|
|
(128
|
)
|
Income taxes
|
|
(406
|
)
|
|
694
|
|
|
44
|
|
Other non-current assets and liabilities
|
|
(154
|
)
|
|
(311
|
)
|
|
77
|
|
Net cash provided by operating activities
|
|
5,594
|
|
|
8,263
|
|
|
7,255
|
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
|
|
|
|
Additions to property, plant and equipment
|
|
(1,702
|
)
|
|
(1,367
|
)
|
|
(1,351
|
)
|
Proceeds from sale leaseback transactions
|
|
3
|
|
|
—
|
|
|
444
|
|
Proceeds from sale of other assets
|
|
117
|
|
|
655
|
|
|
59
|
|
Business, investment and asset acquisitions, net of cash acquired
|
|
(741
|
)
|
|
(4,793
|
)
|
|
(88
|
)
|
Other
|
|
16
|
|
|
4
|
|
|
93
|
|
Net cash used for investing activities
|
|
(2,307
|
)
|
|
(5,501
|
)
|
|
(843
|
)
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
|
Net change in short-term debt with maturities of 3 months or less
|
|
536
|
|
|
586
|
|
|
33
|
|
Proceeds from debt
|
|
12,433
|
|
|
5,900
|
|
|
—
|
|
Payments of debt
|
|
(10,461
|
)
|
|
(4,890
|
)
|
|
(6,196
|
)
|
Stock purchases
|
|
(4,160
|
)
|
|
(5,228
|
)
|
|
(5,220
|
)
|
Proceeds related to employee stock plans
|
|
174
|
|
|
174
|
|
|
217
|
|
Cash dividends paid
|
|
(1,643
|
)
|
|
(1,739
|
)
|
|
(1,723
|
)
|
Other
|
|
75
|
|
|
(98
|
)
|
|
(45
|
)
|
Net cash used for financing activities
|
|
(3,047
|
)
|
|
(5,295
|
)
|
|
(12,934
|
)
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
|
(9
|
)
|
|
11
|
|
|
26
|
|
Changes in cash, cash equivalents and restricted cash
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash, cash equivalents, and restricted cash
|
|
232
|
|
|
(2,522
|
)
|
|
(6,496
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
|
975
|
|
|
3,496
|
|
|
9,992
|
|
Cash, cash equivalents and restricted cash at end of period
|
|
$
|
1,207
|
|
|
$
|
975
|
|
|
$
|
3,496
|
|
The accompanying notes to Consolidated Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Summary of major accounting policies
Organization
Walgreens Boots Alliance and its subsidiaries are a global leader in retail and wholesale pharmacy. Its operations are conducted through three reportable segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. See note 16, segment reporting and note 17, sales, for further information.
Basis of presentation
The Consolidated Financial Statements include all subsidiaries in which the Company holds a controlling interest. The Company uses the equity-method of accounting for equity investments in less than majority-owned companies if the investment provides the ability to exercise significant influence. All intercompany transactions have been eliminated.
The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) requires management to use judgment in the application of accounting policies, including making estimates and assumptions. The Company bases its estimates on the information available at the time, its experience and various other assumptions believed to be reasonable under the circumstances. Adjustments may be made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Actual results may differ.
The influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms, strategic transactions including acquisitions, changes in laws and general economic conditions in the markets in which the Company operates and other factors on the Company’s operations and net earnings for any period may not be comparable to the same period in previous years.
Certain amounts in the Consolidated Financial Statements and associated notes may not add due to rounding. All percentages have been calculated using unrounded amounts for fiscal 2019.
Cash and cash equivalents
Cash and cash equivalents include cash on hand and highly liquid investments with an original maturity of three months or less. Credit and debit card receivables, which generally settle within two to seven business days, of $90 million and $127 million were included in cash and cash equivalents at August 31, 2019 and 2018, respectively.
Restricted cash
The Company is required to maintain cash deposits with certain banks which consist of deposits restricted under contractual agency agreements and cash restricted by law and other obligations. At August 31, 2019 and 2018, the amount of such restricted cash was $184 million and $190 million, respectively, and is reported in other current assets on the Consolidated Balance Sheets.
Accounts receivable
Accounts receivable are stated net of allowances for doubtful accounts. Accounts receivable balances primarily consist of trade receivables due from customers, including amounts due from third-party payers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), clients and members. Trade receivables were $6.0 billion and $5.4 billion at August 31, 2019 and August 31, 2018, respectively. Other accounts receivable balances, which consist primarily of receivables from vendors and manufacturers, including receivables from AmerisourceBergen (see note 18, related parties), were $1.2 billion at August 31, 2019 and 2018.
Charges to allowance for doubtful accounts are based on estimates of recoverability using both historical write-offs and specifically identified receivables. The allowance for doubtful accounts for trade receivables at August 31, 2019 and August 31, 2018 was $95 million and $75 million, respectively.
Inventories
The Company values inventories on a lower of cost and net realizable value or market basis. Inventories include product costs, inbound freight, direct labor, warehousing costs for retail pharmacy operations, overhead costs relating to the manufacture and distribution of products and vendor allowances not classified as a reduction of advertising expense.
The Company’s Retail Pharmacy USA segment inventory is accounted for using the last-in-first-out (“LIFO”) method. The total carrying value of the segment inventory accounted for under the LIFO method was $6.6 billion and $6.7 billion at
August 31, 2019 and 2018, respectively. At August 31, 2019 and 2018, Retail Pharmacy USA segment inventory would have been greater by $3.2 billion and $3.0 billion, respectively, if they had been valued on a lower of first-in-first-out (“FIFO”) cost and net realizable value.
The Company’s Retail Pharmacy International and Pharmaceutical Wholesale segments’ inventory is primarily accounted for using the FIFO method. The total carrying value of the inventory for Retail Pharmacy International and Pharmaceutical Wholesale segments was $2.7 billion and $2.8 billion at August 31, 2019 and 2018, respectively.
Property, plant and equipment
Property, plant and equipment are stated at cost less accumulated depreciation. Major repairs, which extend the useful life of an asset, are capitalized; routine maintenance and repairs are charged against earnings. Depreciation is provided on a straight-line basis over the estimated useful lives of owned assets. Leasehold improvements, equipment under capital lease and capital lease properties are amortized over their respective estimate of useful life or over the term of the lease, whichever is shorter. The majority of the Company’s fixtures and equipment uses the composite method of depreciation. Therefore, gains and losses on retirement or other disposition of such assets are included in earnings only when an operating location is closed, substantially remodeled or impaired. The following table summarizes the Company’s property, plant and equipment (in millions) and estimated useful lives (in years):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated useful life
|
|
2019
|
|
2018
|
Land and land improvements
|
|
20
|
|
$
|
3,507
|
|
|
$
|
3,593
|
|
Buildings and building improvements
|
|
3 to 50
|
|
8,023
|
|
|
7,874
|
|
Fixtures and equipment
|
|
3 to 20
|
|
9,786
|
|
|
9,750
|
|
Capitalized system development costs and software
|
|
3 to 8
|
|
2,770
|
|
|
2,464
|
|
Capital lease properties
|
|
|
|
703
|
|
|
743
|
|
|
|
|
|
24,789
|
|
|
24,424
|
|
Less: accumulated depreciation and amortization
|
|
|
|
11,310
|
|
|
10,513
|
|
Balance at end of year
|
|
|
|
$
|
13,478
|
|
|
$
|
13,911
|
|
The Company capitalizes application development stage costs for internally developed software. These costs are amortized over a three to eight year period. Amortization expense for capitalized system development costs and software was $273 million in fiscal 2019, $254 million in fiscal 2018 and $245 million in fiscal 2017. Unamortized costs were $1.5 billion at August 31, 2019 and 2018.
Depreciation and amortization expense for property, plant and equipment including capitalized system development costs and software was $1.5 billion in fiscal 2019, $1.4 billion in fiscal 2018 and $1.3 billion in fiscal 2017.
Leases
Initial terms for leased premises in the U.S. are typically 15 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. Non-U.S. leases are typically for shorter terms and may include cancellation clauses or renewal options. The commencement date of all lease terms is the earlier of the date the Company becomes legally obligated to make rent payments or the date the Company has the right to control the property. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales.
Capital leases are recognized within property, plant and equipment and as a capital lease liability within accrued expenses and other liabilities and other non-current liabilities. Operating leases are expensed on a straight line basis over the lease term.
See note 4, leases, for further information.
Business combinations
The Company allocates the fair value of purchase consideration to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets acquired and liabilities assumed requires estimates and the use of valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. If the Company obtains new information about facts and circumstances that existed as of the acquisition date during the measurement period, which may be up to one year from the acquisition date, the Company may record adjustments to the assets acquired and liabilities assumed.
Goodwill and other intangible assets
Goodwill represents the excess of the purchase price over the fair value of assets acquired and liabilities assumed in business combinations. Acquired intangible assets are recorded at fair value.
Goodwill and indefinite-lived intangible assets are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit or intangible asset below its carrying value. As part of the Company’s impairment analysis, fair value of a reporting unit is determined 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.
Finite-lived intangible assets are amortized on a straight-line basis over their estimated useful lives. See note 6, goodwill and other intangible assets, for additional disclosure regarding the Company’s intangible assets.
Equity method investments
The Company uses the equity method of accounting for equity investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial policies of the investee. The Company’s proportionate share of the net income or loss of these companies is included in consolidated net earnings. Judgment regarding the level of influence over each equity method investment includes considering key factors such as the Company’s ownership interest, legal form of the investee (e.g. limited liability partnership), representation on the board of directors, participation in policy-making decisions and material intra-entity transactions.
The Company evaluates equity method investments for impairment whenever events or changes in circumstances indicate that the carrying amount of the investment might not be recoverable. Factors considered by the Company when reviewing an equity method investment for impairment include the length of time (duration) and the extent (severity) to which the fair value of the equity method investment has been less than cost, the investee’s financial condition and near-term prospects and the intent and ability to hold the investment for a period of time sufficient to allow for anticipated recovery. An impairment that is other-than-temporary is recognized in the period identified.
See note 5, equity method investments, for further information.
Financial instruments
The Company uses derivative instruments to hedge its exposure to interest rate and currency risks arising from operating and financing activities. In accordance with its risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes.
Derivatives are recognized on the Consolidated Balance Sheets at their fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, it formally documents the hedge relationship and the risk management objective for undertaking the hedge which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value of a derivative instrument depends on whether the Company had designated it in a qualifying hedging relationship and on the type of hedging relationship. The Company applies the following accounting policies:
|
|
•
|
Changes in the fair value of a derivative designated as a fair value hedge, along with the gain or loss on the hedged asset or liability attributable to the hedged risk, are recorded in the Consolidated Statements of Earnings in the same line item, generally interest expense, net.
|
|
|
•
|
Changes in the fair value of a derivative designated as a cash flow hedge are recorded in accumulated other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income and reclassified into earnings in the period or periods during which the hedged item affects earnings and is presented in the same line item as the earnings effect of the hedged item.
|
|
|
•
|
Changes in the fair value of a derivative designated as a hedge of a net investment in a foreign operation are recorded in cumulative translation adjustments within accumulated other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income. Recognition in earnings of amounts previously recorded in cumulative translation adjustments is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged investments in foreign operations.
|
|
|
•
|
Changes in the fair value of a derivative not designated in a hedging relationship are recognized in the Consolidated Statements of Earnings.
|
Cash receipts or payments on a settlement of a derivative contract are reported in the Consolidated Statements of Cash Flows consistent with the nature of the underlying hedged item.
For derivative instruments designated as hedges, the Company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between 80% and 125% of the cumulative changes in the fair value of the hedged item. In addition, when the Company determines that a derivative is not highly effective as a hedge, hedge accounting is discontinued. When it is probable that a hedged forecasted transaction will not occur, the Company discontinues hedge accounting for the affected portion of the forecasted transaction and reclassifies any gains or losses in accumulated other comprehensive income (loss) to earnings in the Consolidated Statement of Earnings. When a derivative in a hedge relationship is terminated or the hedged item is sold, extinguished or terminated, hedge accounting is discontinued prospectively.
Liabilities for facility closings
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. The liability for facility closings, including locations closed under the Company’s restructuring actions, was $993 million as of August 31, 2019 and $964 million as of August 31, 2018. See note 4, leases, for further information.
Pension and postretirement benefits
The Company has various defined benefit pension plans that cover some of its non-U.S. employees. The Company also has a postretirement healthcare plan that covers qualifying U.S. employees. Eligibility and the level of benefits for these plans vary depending on participants’ status, date of hire and or length of service. Pension and postretirement plan expenses and valuations are dependent on assumptions used by third-party actuaries in calculating those amounts. These assumptions include discount rates, healthcare cost trends, long-term return on plan assets, retirement rates, mortality rates and other factors.
The Company funds its pension plans in accordance with applicable regulations. The Company records the service cost component of net pension cost and net postretirement benefit cost in selling, general and administrative expenses. The Company records all other net cost components of net pension cost and net postretirement benefit cost in other income (expense). The postretirement healthcare plan is not funded.
See note 13, retirement benefits, for further information.
Noncontrolling interests
The Company presents noncontrolling interests as a component of equity on its Consolidated Balance Sheets and reports the portion of its earnings or loss for noncontrolling interest as net earnings attributable to noncontrolling interests in the Consolidated Statements of Earnings.
Currency
Assets and liabilities of non-U.S. dollar functional currency operations are translated into U.S. dollars at end-of-period exchange rates while revenues, expenses and cash flows are translated at average monthly exchange rates over the period. Equity is translated at historical exchange rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss) in the Consolidated Balance Sheets.
Assets and liabilities not denominated in the functional currency are remeasured into the functional currency at end-of-period exchange rates, except for nonmonetary balance sheet amounts, which are remeasured at historical exchange rates. Revenues and expenses are recorded at average monthly exchange rates over the period, except for those expenses related to nonmonetary balance sheet amounts, which are remeasured at historical exchange rates. Gains or losses from foreign currency remeasurement are generally included in selling, general and administrative expenses within the Consolidated Statements of Earnings. For all periods presented, there were no material operational gains or losses from foreign currency transactions.
Commitments and contingencies
On a quarterly basis, the Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case-by-case basis for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be
complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company may be unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company’s Consolidated Financial Statements in a future fiscal period. Management’s assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management’s assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved. See note 10, commitments and contingencies, for further information.
Revenue recognition
Sales are recognized at an amount that reflects the consideration to which the Company expects to be entitled in exchange for transferring control of goods or services to the customer. Sales are reported on the gross amount billed to a customer less discounts if it has earned revenue as a principal from the sale of goods and services. Sales are reported on the net amount retained (that is, the amount billed to the customer less the amount paid to a vendor) if it has earned a commission or a fee as an agent.
Retail Pharmacy USA and Retail Pharmacy International
The Company recognizes revenue, net of taxes and expected returns, at the time it sells merchandise or dispenses prescription drugs to the customer. The Company estimates revenue based on expected reimbursements from third-party payers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) for dispensing prescription drugs. The estimates are based on all available information including historical experience and are updated to actual reimbursement amounts.
Pharmaceutical Wholesale
Wholesale revenue is recognized, net of taxes and expected returns, upon shipment of goods, which is generally also the day of delivery.
Loyalty programs and gift cards
The Company’s loyalty rewards programs represent a separate performance obligation and are accounted for using the deferred revenue approach. When goods are sold, the transaction price is allocated between goods sold and loyalty points awarded based upon the relative standalone selling price. The revenue allocated to the loyalty points is recognized upon redemption. Loyalty programs breakage is recognized as revenue based on the redemption pattern.
Customer purchases of gift cards are not recognized as revenue until the card is redeemed. Gift card breakage (i.e., unused gift card) is recognized as revenue based on the redemption pattern.
Cost of sales
Cost of sales includes the purchase price of goods and cost of services rendered, store and warehouse inventory loss, inventory obsolescence and supplier rebates. In addition to product costs, cost of sales includes warehousing costs for retail operations, purchasing costs, freight costs, cash discounts and vendor allowances.
Vendor allowances and supplier rebates
Vendor allowances are principally received as a result of purchases, 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. 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 costs incurred, with the excess treated as a reduction of inventory costs.
Rebates or refunds received by the Company from its suppliers, mostly in cash, are considered as an adjustment of the prices of the supplier’s products purchased by the Company.
Selling, general and administrative expenses
Selling, general and administrative expenses mainly consist of salaries and employee costs, occupancy costs, depreciation and amortization, credit and debit card fees and expenses directly related to stores. In addition, other costs included are headquarters’ expenses, advertising costs (net of vendor advertising allowances), wholesale warehousing costs and insurance.
Advertising costs
Advertising costs, which are reduced by the portion funded by vendors, are expensed as incurred or when services have been received. Net advertising expenses, which are included in selling, general and administrative expenses, were $585 million in fiscal 2019, $665 million in fiscal 2018 and $571 million in fiscal 2017.
Impairment of long-lived assets
The Company tests long-lived assets for impairment whenever events or circumstances indicate that a certain asset or asset group may be impaired. Once identified, the amount of the impairment is computed by comparing the carrying value of the assets to the fair value, which is primarily based on the discounted estimated future cash flows. Impairment charges included in selling, general and administrative expenses were $260 million in fiscal 2019. Impairment charges recognized in fiscal 2018 and 2017 were $57 million and $234 million, respectively.
Stock compensation plans
Stock based compensation is measured at fair value at the grant date. The Company grants stock options, performance shares and restricted units to the Company’s non-employee directors, officers and employees. The Company recognizes compensation expense on a straight-line basis over the substantive service period. See note 12, stock compensation plans, for more information on the Company’s stock-based compensation plans.
Insurance
The Company obtains insurance coverage for catastrophic exposures as well as those risks required by law to be insured. In general, the Company’s U.S. subsidiaries retain a significant portion of losses related to workers’ compensation, property, comprehensive general, pharmacist and vehicle liability, while non-U.S. subsidiaries manage their exposures through insurance coverage with third-party carriers. Management regularly reviews the probable outcome of claims and proceedings, the expenses expected to be incurred, the availability and limits of the insurance coverage and the established accruals for liabilities. Liabilities for losses are recorded based upon the Company’s estimates for both claims incurred and claims incurred but not reported. The provisions are estimated in part by considering historical claims experience, demographic factors and other actuarial assumptions.
Income taxes
The Company accounts for income taxes according to the asset and liability method. Under this method, deferred tax assets and liabilities are recognized based upon the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured pursuant to tax laws using rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.
In determining the provision for income taxes, the Company uses income, permanent differences between book and tax income, the relative proportion of foreign and domestic income, enacted statutory income tax rates, projections of income subject to Subpart F rules and unrecognized tax benefits related to current year results. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to lapsing of the applicable statute of limitations, recognizing or de-recognizing benefits of deferred tax assets due to future year financial statement projections and changes in tax laws are recognized in the period in which they occur.
The Company is subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state, local and foreign tax authorities raise questions regarding the Company’s 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 the various tax filing positions, the Company records 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 the liability for unrecognized tax benefits in the period in which the Company determines 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.
Earnings per share
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. Outstanding options to purchase common shares that were anti-dilutive and excluded from earnings per share totaled 14.9 million, 10.1 million and 3.9 million in fiscal 2019, 2018 and 2017, respectively.
New accounting pronouncements
Adoption of new accounting pronouncements
Presentation of net periodic pension cost and net periodic postretirement benefit cost
In March 2017, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update ("ASU") 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement benefit cost in the same line item in the statement of earnings as other compensation costs arising from services rendered by the related employees during the period. All other net cost components are required to be presented in the statement of earnings separately from the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the statement of earnings to present the other net cost components must be disclosed in the notes to the financial statements. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) on a retrospective basis and the adoption did not have a material impact on the Company's results of operations, cash flows or financial position. The impact on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income (expense) of $125 million and $73 million for the fiscal years ended August 31, 2018 and 2017, respectively.
The following is a reconciliation of the effect of the reclassification of all other net cost components (excluding service cost component) of net pension cost and net postretirement benefit cost from selling, general and administrative expenses to other income (expense) in the Company’s Consolidated Statements of Earnings (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
As revised
|
Twelve months ended August 31, 2018
|
|
|
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
24,569
|
|
|
$
|
125
|
|
|
$
|
24,694
|
|
Operating income
|
6,414
|
|
|
(125
|
)
|
|
6,289
|
|
Other income (expense)
|
177
|
|
|
125
|
|
|
302
|
|
Twelve months ended August 31, 2017
|
|
|
|
|
|
Selling, general and administrative expenses
|
$
|
23,740
|
|
|
$
|
73
|
|
|
$
|
23,813
|
|
Operating income
|
5,557
|
|
|
(73
|
)
|
|
5,484
|
|
Other income (expense)
|
(11
|
)
|
|
73
|
|
|
62
|
|
Restricted cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the Statement of Cash Flows. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) on a full retrospective basis and the adoption did not have a material impact on the Company’s Statement of Cash Flows.
The following is a reconciliation of the effect on the relevant line items on the Consolidated Statements of Cash Flows for the twelve months ended August 31, 2018 and 2017 as a result of adopting this new accounting guidance (in millions):
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|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
As revised
|
Twelve months ended August 31, 2018
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
1,323
|
|
|
$
|
29
|
|
|
$
|
1,352
|
|
Accrued expenses and other liabilities
|
281
|
|
|
6
|
|
|
287
|
|
Other non-current assets and liabilities
|
(275
|
)
|
|
(36
|
)
|
|
(311
|
)
|
Net cash provided by operating activities
|
8,265
|
|
|
(2
|
)
|
|
8,263
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
15
|
|
|
(4
|
)
|
|
11
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(2,516
|
)
|
|
(6
|
)
|
|
(2,522
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
3,301
|
|
|
195
|
|
|
3,496
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
785
|
|
|
$
|
190
|
|
|
$
|
975
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As reported
|
|
Adjustments
|
|
As revised
|
Twelve months ended August 31, 2017
|
|
|
|
|
|
|
|
|
Trade accounts payable
|
$
|
1,690
|
|
|
$
|
(6
|
)
|
|
$
|
1,684
|
|
Accrued expenses and other liabilities
|
(128
|
)
|
|
—
|
|
|
(128
|
)
|
Other non-current assets and liabilities
|
67
|
|
|
10
|
|
|
77
|
|
Net cash provided by operating activities
|
7,251
|
|
|
4
|
|
|
7,255
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash, cash equivalents and restricted cash
|
20
|
|
|
6
|
|
|
26
|
|
Net increase (decrease) in cash, cash equivalents and restricted cash
|
(6,506
|
)
|
|
10
|
|
|
(6,496
|
)
|
Cash, cash equivalents and restricted cash at beginning of period
|
9,807
|
|
|
185
|
|
|
9,992
|
|
Cash, cash equivalents and restricted cash at end of period
|
$
|
3,301
|
|
|
$
|
195
|
|
|
$
|
3,496
|
|
Tax accounting for intra-entity asset transfers
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. This ASU prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes. To more faithfully represent the economics of intra-entity asset transfers, the amendments in this ASU require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. This ASU does not change the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) on a modified retrospective basis and the adoption did not have a material impact on the Company's results of operations.
Classification of certain cash receipts and cash payments
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayments or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims, and distributions received from equity method investees. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and adoption did not have a material impact on the Company’s Statement of Cash Flows.
Revenue recognition on contracts with customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). Subsequently, the FASB issued additional ASUs, which further clarify this guidance. This ASU provides a single principles-based revenue recognition model with a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects
the consideration to which the entity expects to be entitled in exchange for those goods or services. The Company adopted this new accounting guidance on September 1, 2018 (fiscal 2019) using the modified retrospective transition approach for all contracts and the adoption did not have a material impact on the Company’s results of operations. The adoption mainly resulted in changes to recognition of revenues related to loyalty programs and gift cards breakage. Prior to adoption, the Company used the cost approach to account for loyalty programs. Upon adoption, the Company uses the deferred revenue approach. Prior to adoption, gift card breakage was primarily recognized at point of sale. Upon adoption, all gift card breakage is recognized based on the redemption pattern. The changes in accounting for loyalty programs and gift card breakage resulted in a cumulative transition adjustment of $98 million in retained earnings. See note 17, sales, for additional disclosures. See the updated accounting policy for revenue recognition and loyalty programs in the revenue recognition section above.
Classification and measurement of financial instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequently, the FASB issued additional ASUs, which further clarify this guidance. This ASU requires equity investments (except those under the equity method of accounting or those that result in the consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost less impairment, if any, and changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This simplifies the impairment assessment of equity investments previously held at cost. Separate presentation of financial assets and liabilities by measurement category is required. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and adoption did not have a material impact on the Company’s results of operations, cash flows or financial position. The new guidance was applied on a modified retrospective basis, with the exception of the amendments related to the measurement alternative for equity investments without readily determinable fair values, which was applied on a prospective basis.
New accounting pronouncements not yet adopted
Investments - equity securities
In April 2019, the FASB issued ASU 2019-04, Codification Improvements to Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Financial Instruments (Topic 825). This extensive ASU provides clarifications for three topics related to financial instruments accounting, some of which apply to the Company. For example, this ASU clarifies the disclosure requirements that apply to equity securities without a readily determinable fair value for which the measurement alternative is elected. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021). The adoption of this ASU is not expected to have a significant impact on the Company's results of operations, cash flows or financial position.
Collaborative arrangements
In November 2018, the FASB issued ASU 2018-18, Collaborative Arrangements (Topic 808). This ASU clarifies the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021). The adoption of this ASU is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.
Financial instruments - hedging and derivatives
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a prospective basis. The adoption of this ASU is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.
Intangibles – goodwill and other – internal-use software
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021), and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.
Compensation – retirement benefits – defined benefit plans
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement benefits (Topic 715-20). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This ASU is effective for fiscal years ending after December 15, 2020 (fiscal 2022) and must be applied on a retrospective basis. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's financial position.
Fair value measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021), and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's disclosures.
Contributions made
In June 2018, the FASB issued ASU 2018-08, Clarifying the Scope and the Accounting Guidance for Contributions Received and Contributions Made (Topic 958). This ASU clarifies and improves guidance about whether a transfer of assets (or reduction of liabilities) is a contribution or an exchange transaction, and whether a contribution is conditional. The ASU applies to all entities, including business entities, that receive or make contributions of cash or other assets, including promises to give. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020) and must be applied on a prospective basis in the period of adoption. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.
Compensation – stock compensation
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This ASU eliminated most of the differences between accounting guidance for share-based compensation granted to nonemployees and the guidance for share-based compensation granted to employees. The ASU supersedes the guidance for nonemployees and expands the scope of the guidance for employees to include both. This ASU is effective for annual periods beginning after December 15, 2018 (fiscal 2020), and interim periods within those years. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's financial position.
Accounting for reclassification of certain tax effects from accumulated other comprehensive income
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the income tax effects of items in accumulated other comprehensive income (“AOCI”) which were originally recognized in other comprehensive income, rather than in income from continuing operations. Specifically, it permits a reclassification from AOCI to retained earnings for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the U.S. tax law changes enacted in December 2017. It also requires certain disclosures about these reclassifications. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. tax law changes are recognized. The Company does not expect this adoption will have a material impact on the Company’s financial position.
Financial instruments - credit losses
In June 2016, the FASB issued ASU 2016-13: Measurement of Credit Losses on Financial Instruments (Topic 326), which amends the Board’s guidance on the impairment of financial instruments. The ASU adds to U.S. GAAP an impairment model that is based on expected losses rather than incurred losses, which is known as the current expected credit loss (“CECL”) model. The CECL model applies to most debt instruments (other than those measured at fair value), trade and other receivables, financial guarantee contracts, and loan commitments. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021), and interim periods within those fiscal years, with early adoption permitted. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.
Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. Subsequently, the FASB has issued additional ASUs which further clarify this guidance. This ASU increases the transparency and comparability of organizations by requiring the capitalization of substantially all leases on the balance sheet and disclosures of key information about leasing arrangements. Under this new guidance, at the lease commencement date, a lessee recognizes a right- of-use asset and lease liability, which is initially measured at the present value of the future lease payments. For income statement purposes, a dual model was retained for lessees, requiring leases to be classified as either operating or finance leases. Under the operating lease model, lease expense is recognized on a straight-line basis over the lease term. Under the finance lease model, interest on the lease liability is recognized separately from amortization of the right-of-use asset. In addition, a new ASU was issued in July 2018, to provide relief to companies from restating the comparative periods.
The Company adopted this new accounting standard on September 1, 2019 on a modified retrospective basis and applied the new standard to all leases through a cumulative-effect adjustment to beginning retained earnings. As a result, comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods. The Company elected a package of practical expedients permitted under the transition guidance, which among other things, allows the carryforward of historical lease classification. The adoption of this new accounting standard is expected to result in recognition of lease liabilities of approximately $24 billion and recognition of right-of-use assets of approximately $22 billion net of liabilities for facility closing, deferred rent, favorable lease interest intangible asset, unfavorable lease interest liability, lease incentives and prepaid rent as of August 31, 2019. The adoption is also expected to result in a decrease to retained earnings of approximately $0.4 billion due to transition date impairment of right-of-use assets related to previously impaired long-lived assets of approximately $0.8 billion net of tax, partially offset by de-recognition of deferred gains on historical sale and leaseback transactions of approximately $0.4 billion net of tax.
Note 2. Acquisitions
Acquisition of certain Rite Aid assets
On September 19, 2017, the Company announced that it had secured regulatory clearance for an amended and restated asset purchase agreement to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion in cash and other consideration. The purchases of these stores have been accounted for as business combinations and occurred in waves during fiscal 2018. The Company purchased 1,932 stores for total cash consideration of $4.2 billion for the fiscal year ended August 31, 2018.
As of May 31, 2019, the Company completed the analysis to assign fair values for assets acquired and liabilities assumed for the acquired stores. During the fiscal year ended August 31, 2019, the Company recorded certain measurement period adjustments based on additional information primarily to other non-current liabilities, intangible assets and deferred income taxes, which did not have a material impact on goodwill. The following table summarizes the consideration paid and the amounts of identified assets acquired and liabilities assumed for purchase of 1,932 stores as of the fiscal year ended August 31, 2019.
|
|
|
|
|
Consideration
|
$
|
4,330
|
|
|
|
Identifiable assets acquired and liabilities assumed
|
|
Inventories
|
$
|
1,171
|
|
Property, plant and equipment
|
490
|
|
Intangible assets
|
2,039
|
|
Accrued expenses and other liabilities
|
(55
|
)
|
Deferred income taxes
|
291
|
|
Other non-current liabilities
|
(937
|
)
|
Total identifiable net assets
|
$
|
2,999
|
|
Goodwill
|
$
|
1,331
|
|
The identified definite-lived intangible assets were as follows:
|
|
|
|
|
|
Definite-lived intangible assets
|
Weighted-average useful life (in years)
|
Amount (in millions)
|
Customer relationships
|
12
|
$
|
1,800
|
|
Favorable lease interests
|
10
|
219
|
|
Trade names
|
2
|
20
|
|
Total
|
|
$
|
2,039
|
|
Consideration includes cash of $4,157 million and the fair value of the option granted to Rite Aid to become a member of the Company’s group purchasing organization, Walgreens Boots Alliance Development GmbH. The fair value for this option was determined using the income approach methodology. The fair value estimates are based on the market compensation for such services and appropriate discount rate, as relevant, that market participants would consider when estimating fair values. During fiscal 2019, this option was terminated resulting in recognition of a gain in other income (expense).
The goodwill of $1,331 million arising from the business combinations primarily reflects the expected operational synergies and cost savings generated from the Store Optimization Program as well as the expected growth from new customers. See note 3, exit and disposal activities, for additional information. The goodwill was allocated to the Retail Pharmacy USA segment. Substantially all of the goodwill recognized is expected to be deductible for income tax purposes.
The fair value for customer relationships was determined using the multi-period excess earnings method, a form of the income approach. Real property fair values were determined using primarily the income approach and sales comparison approach. The fair value measurements of the intangible assets are based on significant inputs not observable in the market and thus represent Level 3 measurements. The fair value estimates for the intangible assets are based on projected discounted cash flows, historical and projected financial information and attrition rates, as relevant, that market participants would consider when estimating fair values.
The following table presents supplemental unaudited pro forma consolidated sales for the fiscal year ended 2018 and 2017 as if all 1,932 stores were acquired on September 1, 2016. Pro forma net earnings of the Company, assuming these purchases had occurred at the beginning of each period presented, would not be materially different from the results reported. See note 3, exit and disposal activities, for additional information. The unaudited pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the purchases occurred at the beginning of the periods presented or results which may occur in the future.
|
|
|
|
|
|
|
|
|
(in millions)
|
20181
|
|
2017
|
Sales
|
$
|
135,503
|
|
|
$
|
127,893
|
|
|
|
1
|
Impacted by store closures due to the Store Optimization Program.
|
Actual sales from acquired Rite Aid stores for the fiscal year ended 2018 included in the Consolidated Statement of Earnings are as follows:
|
|
|
|
|
(in millions)
|
2018
|
Sales
|
$
|
5,112
|
|
The 1,932 Rite Aid stores acquired did not have a material impact on net earnings of the Company for the fiscal year ended 2018.
The Company acquired the first distribution center and related inventory for cash consideration of $61 million during the twelve months ended August 31, 2019. The transition of the remaining two distribution centers and related inventory remains subject to closing conditions set forth in the amended and restated asset purchase agreement.
AllianceRx Walgreens Prime
On March 31, 2017, Walgreens Boots Alliance and pharmacy benefit manager Prime Therapeutics LLC (“Prime”) closed a transaction to form a combined central specialty pharmacy and mail services company AllianceRx Walgreens Prime, as part of a strategic alliance. AllianceRx Walgreens Prime is consolidated by Walgreens Boots Alliance and reported within the Retail Pharmacy USA division in its financial statements. The Company accounted for this acquisition of Prime’s specialty pharmacy
and mail services business as a business combination involving noncash purchase consideration of $720 million consisting of the issuance of an equity interest in AllianceRx Walgreens Prime.
The Company has completed the purchase accounting for the AllianceRx Walgreens Prime transaction. The following table summarizes the consideration for the acquisition and the amounts of identified assets acquired and liabilities assumed at the date of the transaction (in millions).
|
|
|
|
|
Total consideration
|
$
|
720
|
|
|
|
Identifiable assets acquired and liabilities assumed
|
|
Accounts receivable
|
$
|
217
|
|
Inventories
|
149
|
|
Property, plant and equipment
|
11
|
|
Intangible assets
|
331
|
|
Trade accounts payable
|
(90
|
)
|
Accrued expenses and other liabilities
|
(1
|
)
|
Total identifiable net assets
|
617
|
|
Goodwill
|
$
|
103
|
|
The identified intangible assets primarily include payer contracts. These contracts are estimated to have a weighted average useful life of 15 years. The goodwill of $103 million arising from the transaction consists of expected purchasing synergies, operating efficiencies by benchmarking performance and applying best practices across the combined company, consolidation of operations, reductions in selling, general and administrative expenses and combining workforces. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes.
In accordance with ASC Topic 810, Consolidation, the noncontrolling interest was recognized based on its proportionate interest in the identifiable net assets of AllianceRx Walgreens Prime. The difference between the carrying amount of the noncontrolling interest and the fair value recognized as consideration in the business combination is recognized as additional paid in capital.
Pro forma net earnings and sales of the Company, assuming the acquisition had occurred at the beginning of each period presented, would not be materially different from the results reported. The acquisition did not have a material impact on net earnings or sales of the Company for fiscal 2017.
Other acquisitions
The Company acquired certain prescription files and related pharmacy inventory in Retail Pharmacy USA for the aggregate purchase price of $304 million during the twelve months ended August 31, 2019.
Note 3. Exit and disposal activities
Transformational Cost Management Program
On December 20, 2018, the Company announced a transformational cost management program that is expected to deliver in excess of $1.5 billion of annual cost savings by fiscal 2022 (the “Transformational Cost Management Program”). As of the date of this report, the Company now expects to deliver in excess of $1.8 billion of annual cost savings by fiscal 2022. The Transformational Cost Management Program, which is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and the transformation of the Company’s information technology (IT) capabilities, is designed to help the Company achieve increased cost efficiencies. To date, the Company has taken initial actions across all aspects of the Transformational Cost Management Program. The actions under the Transformational Cost Management Program focus on all reportable segments and the Company’s global functions. Divisional optimization within each of the Company’s segments includes activities such as optimization of stores which includes plans to close approximately 200 stores in the United Kingdom and approximately 200 locations in the United States.
The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its GAAP financial results of approximately $1.9 billion to $2.4 billion, of which $1.6 billion to $2.0 billion are expected to be recorded as exit and disposal activities.
Costs related to exit and disposal activities under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses included in the fiscal year ended August 31, 2019 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Twelve Months Ended August 31, 2019
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Walgreens Boots Alliance, Inc.
|
Lease obligations and other real estate costs
|
$
|
5
|
|
|
$
|
19
|
|
|
$
|
1
|
|
|
$
|
25
|
|
Asset impairment1
|
95
|
|
|
67
|
|
|
98
|
|
|
260
|
|
Employee severance and business transition costs
|
42
|
|
|
34
|
|
|
49
|
|
|
125
|
|
Information technology transformation and other exit costs
|
5
|
|
|
10
|
|
|
7
|
|
|
22
|
|
Total pre-tax exit and disposal charges
|
$
|
147
|
|
|
$
|
130
|
|
|
$
|
154
|
|
|
$
|
432
|
|
|
|
1
|
Primarily includes write down of leasehold improvements, certain software and inventory.
|
The changes in liabilities and assets related to the exit and disposal activities under Transformational Cost Management Program include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee severance and other exit costs
|
|
Asset Impairments
|
|
Lease obligations and other real estate costs
|
|
Information technology transformation and other exit costs
|
|
Total
|
Balance at August 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs
|
|
125
|
|
|
260
|
|
|
25
|
|
|
22
|
|
|
432
|
|
Payments
|
|
(69
|
)
|
|
—
|
|
|
(8
|
)
|
|
(13
|
)
|
|
(90
|
)
|
Other - non cash
|
|
—
|
|
|
(260
|
)
|
|
—
|
|
|
(6
|
)
|
|
(265
|
)
|
Currency translation adjustments
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Balance at August 31, 2019
|
|
$
|
57
|
|
|
$
|
—
|
|
|
$
|
17
|
|
|
$
|
4
|
|
|
$
|
78
|
|
Store Optimization Program
On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) to optimize store locations through the planned closure of approximately 600 stores and related assets within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. As of the date of this report, the Company expects to close approximately 750 stores, of which the majority have been closed as part of this program. The actions under the Store Optimization Program commenced in March 2018 and are expected to be complete by end of fiscal 2020.
The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $350 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately $160 million for lease obligations and other real estate costs and approximately $190 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.
Since approval of the Store Optimization Program, the Company has recognized cumulative pre-tax charges to its financial results in accordance with GAAP totaling $296 million, which were primarily recorded within selling, general and administrative expenses. These charges included $138 million related to lease obligations and other real estate costs and $158 million employee severance and other exit costs.
Costs related to the Store Optimization Program, which were primarily recorded in selling, general and administrative expenses for the Company's Retail Pharmacy USA segment included in the fiscal years ended August 31, 2019 and 2018, are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Lease obligations and other real estate costs
|
$
|
119
|
|
|
$
|
19
|
|
Employee severance and other exit costs
|
77
|
|
|
81
|
|
Total costs
|
$
|
196
|
|
|
$
|
100
|
|
The changes in liabilities related to the Store Optimization Program for the fiscal years ended August 31, 2019 and 2018 include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Lease obligations and other real estate costs
|
|
Employee severance and other exit costs
|
|
Total
|
Balance at August 31, 2017
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Costs
|
19
|
|
|
81
|
|
|
100
|
|
Payments
|
(18
|
)
|
|
(60
|
)
|
|
(78
|
)
|
Other - non cash1
|
307
|
|
|
—
|
|
|
307
|
|
Balance at August 31, 2018
|
$
|
308
|
|
|
$
|
21
|
|
|
$
|
329
|
|
Costs
|
119
|
|
|
77
|
|
|
196
|
|
Payments
|
(171
|
)
|
|
(69
|
)
|
|
(240
|
)
|
Other - non cash1
|
152
|
|
|
(7
|
)
|
|
144
|
|
Balance at August 31, 2019
|
$
|
407
|
|
|
$
|
22
|
|
|
$
|
429
|
|
|
|
1
|
Primarily represents unfavorable lease liabilities from acquired Rite Aid stores.
|
Cost Transformation Program
On April 8, 2015, the Walgreens Boots Alliance Board of Directors approved a plan to implement a restructuring program (the “Cost Transformation Program”) as part of an initiative to reduce costs and increase operating efficiencies. The Cost Transformation Program implemented and built on the cost-reduction initiative previously announced by the Company on August 6, 2014 and included plans to close stores across the United States; reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions. The actions under the Cost Transformation Program focused primarily on the Retail Pharmacy USA segment, but included activities from all segments. The Company completed the Cost Transformation Program in the fourth quarter of fiscal 2017.
The changes in liabilities related to the Cost Transformation Program include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate costs
|
|
Severance and other business transition and exit costs
|
|
Total
|
Balance at August 31, 2017
|
$
|
521
|
|
|
$
|
79
|
|
|
$
|
600
|
|
Payments
|
(139
|
)
|
|
(68
|
)
|
|
(207
|
)
|
Other - non cash
|
32
|
|
|
(3
|
)
|
|
29
|
|
Currency translation adjustments
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Balance at August 31, 2018
|
$
|
414
|
|
|
$
|
7
|
|
|
$
|
421
|
|
Payments
|
(86
|
)
|
|
(4
|
)
|
|
(90
|
)
|
Other - non cash
|
59
|
|
|
—
|
|
|
59
|
|
Balance at August 31, 2019
|
$
|
387
|
|
|
$
|
3
|
|
|
$
|
390
|
|
Total costs by segment, which were primarily recorded in selling, general and administrative expenses included in the fiscal year ended August 31, 2017 are as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal year ended 2017
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Walgreens Boots Alliance, Inc.
|
Asset impairments
|
$
|
272
|
|
|
$
|
21
|
|
|
$
|
2
|
|
|
$
|
295
|
|
Real estate costs
|
372
|
|
|
—
|
|
|
—
|
|
|
372
|
|
Severance and other business transition and exit costs
|
87
|
|
|
46
|
|
|
35
|
|
|
168
|
|
Total costs
|
$
|
731
|
|
|
$
|
67
|
|
|
$
|
37
|
|
|
$
|
835
|
|
Note 4. Leases
The following table is a summary of the future minimum lease payments as of August 31, 2019 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Finance lease obligation
|
|
Capital lease
|
|
Operating lease1
|
2020
|
$
|
21
|
|
|
$
|
59
|
|
|
$
|
3,484
|
|
2021
|
21
|
|
|
60
|
|
|
3,323
|
|
2022
|
20
|
|
|
58
|
|
|
3,124
|
|
2023
|
20
|
|
|
57
|
|
|
2,943
|
|
2024
|
20
|
|
|
58
|
|
|
2,771
|
|
Later
|
209
|
|
|
801
|
|
|
16,623
|
|
Total minimum lease payments
|
$
|
311
|
|
|
$
|
1,093
|
|
|
$
|
32,268
|
|
|
|
1
|
Includes $1.6 billion of minimum rental commitments on closed locations
|
The capital and finance lease amounts include $683 million of imputed interest. Total minimum lease payments have not been reduced by minimum sublease rentals of $344 million due in the future under non-cancelable subleases.
The Company continuously evaluates its real estate portfolio in conjunction with its capital needs. Historically, the Company has entered into several sale-leaseback transactions. In fiscal 2019, proceeds from sale-leaseback transactions were not material. In fiscal 2018, the Company did not record any proceeds from sale-leaseback transactions. In fiscal 2017, the Company recorded proceeds from sale-leaseback transactions of $444 million.
In fiscal 2019, 2018 and 2017, the Company recorded charges of $185 million, $129 million and $394 million, respectively, for closed or relocated facilities. These charges are reported in selling, general and administrative expenses in the Consolidated Statements of Earnings.
The changes in liability for facility closings and related lease termination charges include the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Balance at beginning of period
|
|
$
|
964
|
|
|
$
|
718
|
|
Provision for present value of non-cancelable lease payments on closed facilities
|
|
90
|
|
|
52
|
|
Changes in assumptions
|
|
56
|
|
|
19
|
|
Accretion expense
|
|
39
|
|
|
58
|
|
Other - non cash1
|
|
160
|
|
|
338
|
|
Cash payments, net of sublease income
|
|
(316
|
)
|
|
(221
|
)
|
Balance at end of period
|
|
$
|
993
|
|
|
$
|
964
|
|
1 Primarily unfavorable lease liabilities from acquired Rite Aid stores.
Rental expense, which includes common area maintenance, insurance and taxes, where appropriate, was as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Minimum rentals
|
|
$
|
3,622
|
|
|
$
|
3,447
|
|
|
$
|
3,259
|
|
Contingent rentals
|
|
74
|
|
|
68
|
|
|
59
|
|
Less: sublease rental income
|
|
(66
|
)
|
|
(67
|
)
|
|
(55
|
)
|
|
|
$
|
3,631
|
|
|
$
|
3,448
|
|
|
$
|
3,263
|
|
Note 5. Equity method investments
Equity method investments as of August 31, 2019 and 2018 were as follows (in millions, except percentages):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
|
Carrying value
|
|
Ownership percentage
|
|
Carrying value
|
|
Ownership percentage
|
AmerisourceBergen
|
|
$
|
5,211
|
|
|
27%
|
|
$
|
5,138
|
|
|
26%
|
Others
|
|
1,640
|
|
|
8% - 50%
|
|
1,472
|
|
|
8% - 50%
|
Total
|
|
$
|
6,851
|
|
|
|
|
$
|
6,610
|
|
|
|
AmerisourceBergen Corporation (“AmerisourceBergen”) investment
As of August 31, 2019 and 2018, the Company owned 56,854,867 AmerisourceBergen common shares, representing approximately 27% and 26% of the outstanding AmerisourceBergen common stock, respectively. The Company accounts for its equity investment in AmerisourceBergen using the equity method of accounting, with the net earnings attributable to the Company’s investment being classified within the operating income of its Pharmaceutical Wholesale segment. Due to the timing and availability of financial information of AmerisourceBergen, the Company accounts for this equity method investment on a financial reporting lag of two months. Equity earnings from AmerisourceBergen are reported as a separate line in the Consolidated Statements of Earnings. The financial performance of AmerisourceBergen, including any charges which may arise relating to its ongoing opioid litigation, will impact the Company’s results of operations.
The Level 1 fair market value of the Company’s equity investment in AmerisourceBergen common stock at August 31, 2019 and 2018 were $4.7 billion and $5.1 billion, respectively. As of August 31, 2019, the Company’s investment in AmerisourceBergen carrying value exceeded its proportionate share of the net assets of AmerisourceBergen by $4.4 billion. This premium of $4.4 billion was recognized as part of the carrying value in the Company’s equity investment in AmerisourceBergen. The difference was primarily related to goodwill and the fair value of AmerisourceBergen intangible assets.
Other investments
The Company’s other equity method investments include its investments in Guangzhou Pharmaceuticals Corporation (“Guangzhou Pharmaceuticals”) and Nanjing Pharmaceutical Corporation Limited, the Company’s pharmaceutical wholesale investments in China; its investment in Sinopharm Holding Guoda Drugstores Co., Ltd., the Company's retail pharmacy investment in China, the Company’s investment in BioScrip (resulting from its merger with Option Care Inc.) and PharMerica Corporation in the United States.
The Company reported $23 million, $53 million and $8 million of post-tax equity earnings from other equity method investments, including equity method investments classified as operating, for the fiscal years ended 2019, 2018 and 2017, respectively.
During the fiscal year ended August 31, 2018, the Company recorded an impairment of $170 million in its equity interest in Guangzhou Pharmaceuticals, which was included in other income (expense) in the Consolidated Statement of Earnings. The fair value of the Company’s equity interest in Guangzhou Pharmaceuticals was determined using the proposed sale price and thus represents Level 3 measurement. During the fiscal year ended August 31, 2018, the Company completed the sale of a 30 percent interest in Guangzhou Pharmaceuticals to its joint venture partner Guangzhou Baiyunshan Pharmaceutical Holdings resulting in a $172 million reduction in carrying value and a $8 million cumulative translation adjustment loss. In July 2018, the Company completed the sale of its minority equity interest in Premise Health Holding Corp., resulting in an after-tax gain on disposition of $245 million and a reduction in carrying value of $76 million.
Summarized financial information
Summarized financial information for the Company’s equity method investments in aggregate is as follows:
Balance sheet (in millions)
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2019
|
|
2018
|
Current assets
|
$
|
36,523
|
|
|
$
|
34,493
|
|
Non-current assets
|
15,710
|
|
|
14,971
|
|
Current liabilities
|
35,857
|
|
|
34,055
|
|
Non-current liabilities
|
9,633
|
|
|
8,759
|
|
Shareholders’ equity1
|
6,743
|
|
|
6,650
|
|
Statements of earnings (in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended August 31,
|
|
2019
|
|
2018
|
|
2017
|
Sales
|
$
|
197,237
|
|
|
$
|
179,887
|
|
|
$
|
164,844
|
|
Gross profit
|
7,516
|
|
|
6,875
|
|
|
5,958
|
|
Net earnings
|
1,037
|
|
|
1,315
|
|
|
1,040
|
|
Share of earnings from equity method investments
|
187
|
|
|
245
|
|
|
143
|
|
|
|
1
|
Shareholders’ equity at August 31, 2019 and 2018 includes $411 million and $445 million, respectively, related to noncontrolling interests.
|
The summarized financial information for equity method investments has been included on an aggregated basis for all investments as reported at the end of each fiscal year end.
Note 6. Goodwill and other intangible assets
Goodwill and indefinite-lived intangible assets are evaluated for impairment annually or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit or intangible asset below its carrying value. Based on this annual evaluation as of June 1, 2019 valuation date, the fair values of the Company’s reporting units exceeded their carrying amounts ranging from approximately 9% to approximately 269%. The fair value of the Boots reporting unit, within the Retail Pharmacy International segment, is in excess of its carrying value by approximately 9%. As at August 31, 2019, the carrying value of the goodwill of the Boots reporting unit is $2.6 billion. The fair values of certain indefinite-lived intangibles within the Boots reporting unit exceeded their carrying amounts ranging from approximately 3% to approximately 29%, except for the pharmacy licenses. As at August 31, 2019, the carrying value of these indefinite-lived intangibles within the Boots reporting unit is $6.9 billion. As a result of an annual evaluation, during the three months ended August 31, 2019, the Company recorded an impairment of $73 million on its pharmacy licenses in the Boots reporting unit, which was included in selling, general and administrative expenses in the Consolidated Statement of Earnings. The fair value of pharmacy licenses was determined using excess earnings method and thus represents Level 3 measurement.
The Company continues to closely monitor industry and market trends and the impact it may have on the Boots reporting unit and indefinite-lived intangibles as the challenging market conditions in the UK continued to impact the operating performance of the Boots reporting unit during the three months ended August 31, 2019.
The fair value for each reporting unit is estimated 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 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, discount rates, terminal growth rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. Indefinite-lived intangible assets fair values are estimated using the relief from royalty method and excess earnings method of the income approach. These estimates can be affected by a number of factors including, but not
limited to, general economic conditions, availability of market information as well as our profitability. Although the Company believes its 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.
Changes in the carrying amount of goodwill by reportable segment consist of the following activity (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail Pharmacy USA
|
|
Retail Pharmacy International
|
|
Pharmaceutical Wholesale
|
|
Walgreens Boots Alliance, Inc.
|
August 31, 2017
|
|
$
|
9,139
|
|
|
$
|
3,392
|
|
|
$
|
3,101
|
|
|
$
|
15,632
|
|
Acquisitions
|
|
1,344
|
|
|
—
|
|
|
4
|
|
|
1,348
|
|
Currency translation adjustments
|
|
—
|
|
|
(22
|
)
|
|
(44
|
)
|
|
(66
|
)
|
August 31, 2018
|
|
$
|
10,483
|
|
|
$
|
3,370
|
|
|
$
|
3,061
|
|
|
$
|
16,914
|
|
Acquisitions
|
|
8
|
|
|
—
|
|
|
—
|
|
|
8
|
|
Dispositions
|
|
—
|
|
|
(9
|
)
|
|
—
|
|
|
(9
|
)
|
Currency translation adjustments
|
|
—
|
|
|
(182
|
)
|
|
(171
|
)
|
|
(353
|
)
|
August 31, 2019
|
|
$
|
10,491
|
|
|
$
|
3,179
|
|
|
$
|
2,890
|
|
|
$
|
16,560
|
|
In fiscal 2019, the Company completed the analysis to assign fair values for assets acquired and liabilities assumed for the acquired Rite Aid stores resulting in decreases to goodwill of $13 million. In fiscal 2018, the Company purchased 1,932 stores from Rite Aid for total consideration of $4.3 billion, resulting in an increase of $1,344 million to goodwill and $2,054 million to intangible assets during the year. See note 2, acquisitions, for additional information.
The carrying amount and accumulated amortization of intangible assets consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
Gross amortizable intangible assets
|
|
|
|
Customer relationships and loyalty card holders1
|
$
|
4,290
|
|
|
$
|
4,235
|
|
Favorable lease interests and non-compete agreements
|
654
|
|
|
680
|
|
Trade names and trademarks
|
461
|
|
|
489
|
|
Purchasing and payer contracts
|
382
|
|
|
390
|
|
Total gross amortizable intangible assets
|
5,787
|
|
|
5,794
|
|
|
|
|
|
Accumulated amortization
|
|
|
|
|
|
Customer relationships and loyalty card holders1
|
$
|
1,262
|
|
|
$
|
997
|
|
Favorable lease interests and non-compete agreements
|
410
|
|
|
359
|
|
Trade names and trademarks
|
250
|
|
|
206
|
|
Purchasing and payer contracts
|
99
|
|
|
78
|
|
Total accumulated amortization
|
2,021
|
|
|
1,640
|
|
Total amortizable intangible assets, net
|
$
|
3,766
|
|
|
$
|
4,154
|
|
|
|
|
|
Indefinite-lived intangible assets
|
|
|
|
|
|
Trade names and trademarks
|
$
|
5,232
|
|
|
$
|
5,557
|
|
Pharmacy licenses
|
1,878
|
|
|
2,072
|
|
Total indefinite-lived intangible assets
|
$
|
7,110
|
|
|
$
|
7,629
|
|
|
|
|
|
Total intangible assets, net
|
$
|
10,876
|
|
|
$
|
11,783
|
|
1 Includes purchased prescription files.
Amortization expense for intangible assets was $552 million, $493 million and $385 million in fiscal 2019, 2018 and 2017, respectively.
Estimated future annual amortization expense for the next five fiscal years for intangible assets recorded at August 31, 2019 is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2020
|
|
2021
|
|
2022
|
|
2023
|
|
2024
|
Estimated annual amortization expense
|
|
$
|
478
|
|
|
$
|
433
|
|
|
$
|
412
|
|
|
$
|
378
|
|
|
$
|
357
|
|
Note 7. Debt
Debt consists of the following (all amounts are presented in millions of U.S. dollars and debt issuances are denominated in U.S. dollars, unless otherwise noted)
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
August 31, 2018
|
Short-term debt 1
|
|
|
|
Commercial paper
|
$
|
2,400
|
|
|
$
|
430
|
|
Credit facilities2
|
1,624
|
|
|
999
|
|
$8 billion note issuance3,4
|
|
|
|
2.700% unsecured notes due 2019
|
1,250
|
|
|
—
|
|
$1 billion note issuance5
|
|
|
|
|
|
5.250% unsecured notes due 20196
|
—
|
|
|
249
|
|
Other7
|
464
|
|
|
288
|
|
Total short-term debt
|
$
|
5,738
|
|
|
$
|
1,966
|
|
|
|
|
|
|
|
|
|
|
Long-term debt 1
|
|
|
|
|
|
$6 billion note issuance3,4
|
|
|
|
3.450% unsecured notes due 2026
|
$
|
1,890
|
|
|
$
|
1,888
|
|
4.650% unsecured notes due 2046
|
591
|
|
|
590
|
|
$8 billion note issuance3,4
|
|
|
|
2.700% unsecured notes due 2019
|
—
|
|
|
1,248
|
|
3.300% unsecured notes due 2021
|
1,247
|
|
|
1,245
|
|
3.800% unsecured notes due 2024
|
1,992
|
|
|
1,990
|
|
4.500% unsecured notes due 2034
|
495
|
|
|
495
|
|
4.800% unsecured notes due 2044
|
1,492
|
|
|
1,492
|
|
£700 million note issuance3,4
|
|
|
|
2.875% unsecured Pound sterling notes due 2020
|
488
|
|
|
517
|
|
3.600% unsecured Pound sterling notes due 2025
|
365
|
|
|
387
|
|
€750 million note issuance3,4
|
|
|
|
2.125% unsecured Euro notes due 2026
|
824
|
|
|
868
|
|
$4 billion note issuance3,5
|
|
|
|
3.100% unsecured notes due 2022
|
1,197
|
|
|
1,196
|
|
4.400% unsecured notes due 2042
|
493
|
|
|
492
|
|
Other8
|
25
|
|
|
23
|
|
Total long-term debt, less current portion
|
$
|
11,098
|
|
|
$
|
12,431
|
|
|
|
1
|
Carrying values are presented net of unamortized discount and debt issuance costs, where applicable, and foreign currency denominated debt has been translated using the spot rates at August 31, 2019 and 2018, respectively.
|
|
|
2
|
Credit facilities primarily include debt outstanding under the various credit facilities described in more detail below.
|
|
|
3
|
The $6 billion, $8 billion, £0.7 billion, €0.75 billion, and $4 billion note issuances as of August 31, 2019 had a fair value and carrying value of $2.6 billion and $2.5 billion, $6.8 billion and $6.5 billion, $0.9 billion and $0.9 billion, $0.9 billion and $0.8 billion, $1.7 billion and $1.7 billion, respectively. The fair values of the notes outstanding are Level 1 fair value
|
measures and determined based on quoted market price and translated at the August 31, 2019 spot rate, as applicable. The fair values and carrying values of these issuances do not include notes that have been redeemed or repaid as of August 31, 2019.
|
|
4
|
Notes are unsubordinated debt obligations of Walgreens Boots Alliance and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance from time to time outstanding.
|
|
|
5
|
Notes are senior debt obligations of Walgreen Co. and rank equally with all other unsecured and unsubordinated indebtedness of Walgreen Co. On December 31, 2014, Walgreens Boots Alliance fully and unconditionally guaranteed the outstanding notes on an unsecured and unsubordinated basis. The guarantee, for so long as it is in place, is an unsecured, unsubordinated debt obligation of Walgreens Boots Alliance and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance.
|
|
|
6
|
Includes interest rate swap fair market value adjustments. See note 9, fair value measurements, for additional fair value disclosures.
|
|
|
7
|
Other short-term debt represents a mix of fixed and variable rate debt with various maturities and working capital facilities denominated in various currencies.
|
|
|
8
|
Other long-term debt represents a mix of fixed and variable rate debt in various currencies with various maturities.
|
At August 31, 2019, the future maturities of short-term and long-term debt, excluding debt discounts and issuance costs and financing and capital lease obligations (see note 4, leases, for the future lease obligation maturities), consisted of the following (in millions):
|
|
|
|
|
|
Amount
|
2020
|
$
|
5,752
|
|
2021
|
491
|
|
2022
|
1,250
|
|
2023
|
1,200
|
|
2024
|
—
|
|
Later
|
8,223
|
|
Total estimated future maturities
|
$
|
16,916
|
|
August 2019 Revolving Credit Agreements
On August 30, 2019, the Company entered into three $500 million revolving credit agreements (together, the “August 2019 Revolving Credit Agreements” and each individually, an “August 2019 Revolving Credit Agreement”) with the lenders from time to time party thereto. Each of the August 2019 Revolving Credit Agreements are senior unsecured revolving credit facilities, with facility termination dates of the earlier of (a) 18 months following August 30, 2019, subject to extension thereof pursuant to the applicable August 2019 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the applicable August 2019 Revolving Credit Agreement. As of August 31, 2019, there were no borrowings outstanding under the August 2019 Revolving Credit Agreements.
January 2019 364-Day Revolving Credit Agreement
On January 18, 2019, the Company entered into a $2.0 billion 364-day revolving credit agreement (the “January 2019 364-Day Revolving Credit Agreement”) with the lenders from time to time party thereto. The January 2019 364-Day Revolving Credit Agreement is a senior unsecured 364-day revolving credit facility, with a facility termination date of the earlier of (a) 364 days following January 31, 2019, the date of the effectiveness of the commitments pursuant to the January 364-Day Revolving Credit Agreement, subject to extension thereof pursuant to the January 2019 364-Day Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the January 2019 364-Day Revolving Credit Agreement. As of August 31, 2019, there were no borrowings outstanding under the January 364-Day Revolving Credit Agreement.
December 2018 Revolving Credit Agreement
On December 21, 2018, the Company entered into a $1.0 billion revolving credit agreement (the “December 2018 Revolving Credit Agreement”) with the lenders from time to time party thereto. The December 2018 Revolving Credit Agreement is a senior unsecured revolving credit facility with a facility termination date of the earlier of (a) 18 months following January 28, 2019, the date of the effectiveness of the commitments pursuant to the December 2018 Revolving Credit Agreement, subject to extension thereof pursuant to the December 2018 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the December 2018 Revolving Credit Agreement. As of August 31, 2019, there were $0.3 billion borrowings outstanding under the December 2018 Revolving Credit Agreement.
December 2018 Credit Agreement
On December 5, 2018, Walgreens Boots Alliance entered into a $1.0 billion term loan credit agreement (as amended, the “December 2018 Credit Agreement”) with the lenders from time to time party thereto and, on August 9, 2019, the Company entered into an amendment to such credit agreement to permit the Company to borrow, repay and reborrow amounts borrowed thereunder prior to the maturity date. The December 2018 Credit Agreement is a senior unsecured revolving facility with a facility termination date of the earlier of (a) January 29, 2021, subject to extension thereof pursuant to the December 2018 Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the December 2018 Credit Agreement. As of August 31, 2019, there were $0.8 billion of borrowings outstanding under the December 2018 Credit Agreement.
November 2018 Credit Agreement
On November 30, 2018, the Company entered into a credit agreement (as amended, the “November 2018 Credit Agreement”) with the lenders from time to time party thereto and, on March 25, 2019, the Company entered into an amendment to such credit agreement reflecting certain changes to the borrowing notice provisions thereto. The November 2018 Credit Agreement includes a $500 million senior unsecured revolving credit facility and a $500 million senior unsecured term loan facility. The facility termination date is, with respect to the revolving credit facility, the earlier of (a) May 30, 2020 and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the November 2018 Credit Agreement and, with respect to the term loan facility, the earlier of (a) May 30, 2020 and (b) the date of acceleration of all term loans pursuant to the November 2018 Credit Agreement. As of August 31, 2019, there were $0.5 billion borrowings outstanding under the November 2018 Credit Agreement.
August 2018 Revolving Credit Agreement
On August 29, 2018, the Company entered into a revolving credit agreement (the “August 2018 Revolving Credit Agreement”) with the lenders and letter of credit issuers from time to time party thereto. The August 2018 Revolving Credit Agreement is an unsecured revolving credit facility with an aggregate commitment in the amount of $3.5 billion, with a letter of credit subfacility commitment amount of $500 million. The facility termination date is the earlier of (a) August 29, 2023, subject to extension thereof pursuant to the August 2018 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the August 2018 Revolving Credit Agreement. As of August 31, 2019, there were no borrowings outstanding under the August 2018 Revolving Credit Agreement.
August 2017 Credit Agreements
On August 24, 2017, the Company entered into a $1.0 billion revolving credit agreement with the lenders from time to time party thereto (the “August 2017 Revolving Credit Agreement”) and a $1.0 billion term loan credit agreement with Sumitomo Mitsui Banking Corporation (the “2017 Term Loan Credit Agreement”). On November 30, 2018, in connection with the entrance into the November 2018 Credit Agreement, the Company terminated the 2017 Term Loan Credit Agreement in accordance with its terms and as of such date paid all amounts due in connection therewith. On January 31, 2019, the August 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.
February 2017 Revolving Credit Agreement
On February 1, 2017, the Company entered into a $1.0 billion revolving credit facility (as amended, the “February 2017 Revolving Credit Agreement”) with the lenders from time to time party thereto and, on August 1, 2017, the Company entered into an amendment agreement thereto. On January 31, 2019, the February 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.
Debt covenants
Each of the Company’s credit facilities described above contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60:1.00, subject to increase in certain circumstances set forth in the applicable credit agreement. The credit facilities contain various other customary covenants.
Commercial paper
The Company periodically borrows under its commercial paper program and may borrow under it in future periods. The Company had average daily commercial paper outstanding of $2.7 billion at a weighted average interest rate of 3.07% for the fiscal year ended August 31, 2019. The Company had average daily commercial paper outstanding of $1.4 billion at a weighted average interest rate of 2.11% for the fiscal year ended August 31, 2018.
Interest
Interest paid was $676 million in fiscal 2019, $577 million in fiscal 2018 and $643 million in fiscal 2017.
Note 8. Financial instruments
The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.
The Company has non-U.S. dollar denominated net investments and uses foreign currency denominated financial instruments, specifically foreign currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.
The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge significant committed and highly probable future transactions and cash flows denominated in currencies other than the functional currency of the Company or its subsidiaries.
The Company uses interest rate swaps from time to time to manage the interest rate exposure associated with some of its fixed-rate debt and designates them as fair value hedges. From time to time, the Company uses forward starting interest rate swaps to hedge its interest rate exposure of some of its anticipated debt issuances.
The notional amount and fair value of derivative instruments outstanding were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
Notional
|
|
Fair value
|
|
Location in Consolidated Balance Sheets
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
Cross currency interest rate swap
|
|
$
|
800
|
|
|
$
|
73
|
|
|
Other non-current assets
|
Foreign currency forwards
|
|
18
|
|
|
1
|
|
|
Other current assets
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency forwards
|
|
3,485
|
|
|
87
|
|
|
Other current assets
|
Foreign currency forwards
|
|
707
|
|
|
6
|
|
|
Other current liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
Notional
|
|
Fair value
|
|
Location in Consolidated Balance Sheets
|
Derivatives designated as hedges:
|
|
|
|
|
|
|
Interest rate swaps
|
|
$
|
250
|
|
|
$
|
1
|
|
|
Other non-current liabilities
|
Foreign currency forwards
|
|
$
|
15
|
|
|
—
|
|
|
Other current assets
|
Derivatives not designated as hedges:
|
|
|
|
|
|
|
|
|
Foreign currency forwards
|
|
3,273
|
|
|
52
|
|
|
Other current assets
|
Foreign currency forwards
|
|
825
|
|
|
4
|
|
|
Other current liabilities
|
Net investment hedges
The Company uses cross currency interest rate swaps as hedges of net investments in subsidiaries with non-U.S. dollar functional currencies. For qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the currency translation adjustment within accumulated other comprehensive income (loss).
Derivatives not designated as hedges
The Company enters into derivative transactions that are not designated as accounting hedges. These derivative instruments are economic hedges of foreign currency risks. The income and (expense) due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Location in Consolidated Statements of Earnings
|
|
2019
|
|
2018
|
|
2017
|
Foreign currency forwards
|
|
Selling, general and administrative expense
|
|
$
|
139
|
|
|
$
|
17
|
|
|
$
|
11
|
|
Foreign currency forwards
|
|
Other income (expense)
|
|
(18
|
)
|
|
22
|
|
|
(48
|
)
|
Derivatives credit risk
Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of counterparty nonperformance, and the Company regularly monitors the credit worthiness of each counterparty.
Derivatives offsetting
The Company does not offset the fair value amounts of derivative instruments subject to master netting agreements in the Consolidated Balance Sheets.
Note 9. Fair value measurements
The Company measures certain assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, which 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):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds1
|
|
$
|
217
|
|
|
$
|
217
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Investments in equity securities2
|
|
5
|
|
|
5
|
|
|
—
|
|
|
—
|
|
Foreign currency forwards3
|
|
88
|
|
|
—
|
|
|
88
|
|
|
—
|
|
Cross Currency interest rate swaps4
|
|
73
|
|
|
—
|
|
|
73
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency forwards3
|
|
6
|
|
|
—
|
|
|
6
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Assets:
|
|
|
|
|
|
|
|
|
Money market funds1
|
|
$
|
227
|
|
|
$
|
227
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Available-for-sale investments2
|
|
1
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Foreign currency forwards3
|
|
52
|
|
|
—
|
|
|
52
|
|
|
—
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Interest rate swaps4
|
|
1
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Foreign currency forwards3
|
|
4
|
|
|
—
|
|
|
4
|
|
|
—
|
|
|
|
1
|
Money market funds are valued at the closing price reported by the fund sponsor.
|
|
|
2
|
Fair values of quoted investments are based on current bid prices as of August 31, 2019 and 2018.
|
|
|
3
|
The fair value of forward currency contracts is estimated by discounting the difference between the contractual forward price and the current available forward price for the residual maturity of the contract using observable market rates.
|
|
|
4
|
The fair value of interest rate swaps and cross currency interest rate swaps is calculated by discounting the estimated future cash flows based on the applicable observable yield curves. See note 8, financial instruments, for additional information.
|
There were no transfers between Levels in fiscal 2019 or 2018.
The Company reports its debt instruments under the guidance of ASC Topic 825, Financial Instruments, which requires disclosure of the fair value of the Company’s debt in the footnotes to the Consolidated Financial Statements. Unless otherwise noted, the fair value for all notes was determined based upon quoted market prices and therefore categorized as Level 1. See note 7, debt, for further information. The carrying values of accounts receivable and trade accounts payable approximated their respective fair values due to their short-term nature.
Note 10. Commitments and contingencies
The Company is involved in legal proceedings, including litigation, arbitration and other claims, and investigations, inspections, subpoenas, audits, claims, inquiries and similar actions by pharmacy, healthcare, tax and other governmental authorities, arising in the normal course of the Company’s business, including the matters described below. Legal proceedings, in general, and securities, class action and multi-district litigation, in particular, can be expensive and disruptive. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company is
also involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property and other matters. Gain contingencies, if any, are recognized when they are realized.
Like other companies in the retail pharmacy and pharmaceutical wholesale industries, the Company is subject to extensive regulation by national, state and local government agencies in the United States and other countries in which it operates. There continues to be a heightened level of review and/or audit by regulatory authorities of, and increased litigation regarding, the Company’s and the rest of the health care and related industry’s business, compliance and reporting practices. As a result, the Company regularly is the subject of government actions of the types described above. The Company also may be named from time to time in qui tam actions initiated by private third parties. In such actions, the private parties purport to act on behalf of federal or state governments, allege that false claims have been submitted for payment by the government and may receive an award if their claims are successful. After a private party has filed a qui tam action, the government must investigate the private party's claim and determine whether to intervene in and take control over the litigation. These actions may remain under seal while the government makes this determination. If the government declines to intervene, the private party may nonetheless continue to pursue the litigation on his or her own purporting to act on behalf of the government.
The results of legal proceedings, including government investigations, are often uncertain and difficult to predict, and the costs incurred in these matters can be substantial, regardless of the outcome. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company is unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company believes that its defenses and assertions in pending legal proceedings have merit and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s consolidated financial position. However, substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, the Company could from time to time incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid. In addition, as a result of governmental investigations or proceedings, the Company may be subject to damages, civil or criminal fines or penalties, or other sanctions, including the possible suspension or loss of licensure and/or suspension or exclusion from participation in government programs.
On December 29, 2014, a putative shareholder filed a derivative action in federal court in the Northern District of Illinois against certain current and former directors and officers of Walgreen Co., and Walgreen Co. as a nominal defendant, arising out of certain public statements the Company made regarding its former fiscal 2016 goals. The action asserts claims for breach of fiduciary duty, waste and unjust enrichment. On April 10, 2015, the defendants filed a motion to dismiss. On May 18, 2015, the case was stayed in light of a securities class action that was filed on April 10, 2015. After a ruling issued on September 30, 2016 in the securities class action, which is described below, on November 3, 2016, the Court entered a stipulation and order extending the stay until the resolution of the securities class action.
On April 10, 2015, a putative shareholder filed a securities class action in federal court in the Northern District of Illinois against Walgreen Co. and certain former officers of Walgreen Co. The action asserts claims for violation of the federal securities laws arising out of certain public statements the Company made regarding its former fiscal 2016 goals. On June 16, 2015, the Court entered an order appointing a lead plaintiff. Pursuant to the Court’s order, lead plaintiff filed a consolidated class action complaint on August 17, 2015, and defendants moved to dismiss the complaint on October 16, 2015. On September 30, 2016, the Court issued an order granting in part and denying in part defendants’ motion to dismiss. Defendants filed their answer to the complaint on November 4, 2016 and filed an amended answer on January 16, 2017. Plaintiff filed its motion for class certification on April 21, 2017. The Court granted plaintiffs’ motion on March 29, 2018 and merits discovery is proceeding. On December 19, 2018, plaintiffs filed a first amended complaint and defendants moved to dismiss the new complaint on February 19, 2019. On September 23, 2019, the Court issued an order granting in part and denying in part defendants’ motion to dismiss.
On December 11, 2017, purported Rite Aid shareholders filed an amended complaint in a putative class action lawsuit in the United States District Court for the Middle District of Pennsylvania (the “M.D. Pa. action”) arising out of transactions contemplated by the merger agreement between the Company and Rite Aid. The amended complaint alleged that the Company and certain of its officers made false or misleading statements regarding the transactions. The Court denied the Company’s motion to dismiss the amended complaint on April 15, 2019. The Company filed an answer and affirmative defenses, discovery commenced, and plaintiffs have filed a motion for class certification. The Company’s response to that motion is due on November 21, 2019.
In June 2019, a Fred’s, Inc. shareholder filed a nearly identical lawsuit to the M.D. Pa. action in the United States District Court for the Western District of Tennessee, except naming Fred’s, Inc. and one of its former officers along with the Company and certain of its officers. Lead plaintiffs will file an amended complaint on or before November 4, 2019.
As previously disclosed, the Company was also named as a defendant in a putative class action lawsuit similar to the M.D. Pa. action filed in State of Pennsylvania in the Court of Common Pleas of Cumberland County, which was terminated by the court for lack of prosecution in November 2018.
In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against an array of defendants by various plaintiffs such as counties, cities, hospitals, Indian tribes and others, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation (“MDL”), captioned In re National Prescription Opiate Litigation (MDL No. 2804), is pending in the U.S. District Court for the Northern District of Ohio. The Company is named as a defendant in a subset of the cases included in this MDL. The first trial in the MDL that had been scheduled for October 2019 was terminated. The MDL court will address next steps in a scheduling conference that has not yet been set. The Company also has been named as a defendant in numerous lawsuits brought in state courts relating to opioid matters. The relief sought by various plaintiffs is compensatory and punitive damages, as well as injunctive relief. Additionally, the Company has received from the Attorney Generals of several states subpoenas, civil investigative demands, and/or other requests concerning opioid matters.
On September 28, 2018, the Company announced that it had reached an agreement with the SEC to fully resolve an investigation into certain forward-looking financial goals and related disclosures by Walgreens. The disclosures at issue were made prior to the strategic combination with Alliance Boots and the merger pursuant to which Walgreens Boots Alliance became the parent holding company on December 31, 2014. The settlement does not involve any of the Company’s current officers or executives, nor does it allege intentional or reckless conduct by the Company. In agreeing to the settlement, the Company neither admitted nor denied the SEC’s allegations. Pursuant to the agreement with the SEC, the Company consented to the SEC’s issuance of an administrative order, and the Company paid a $34.5 million penalty, which was fully reserved for in the Company’s Consolidated Financial Statements as of August 31, 2018.
On January 22, 2019, the Company announced that it had reached an agreement to resolve a civil investigation involving allegations under the False Claims Act by a United States Attorney’s Office, working in conjunction with several states, regarding certain dispensing practices. Pursuant to the agreement, the Company paid $209.2 million to the United States and the various states involved in the matter, substantially all of which was reserved for in the Company’s Consolidated Financial Statements as of November 30, 2018.
Note 11. Income taxes
U.S. tax law changes
In connection with the U.S. tax law changes enacted in December 2017 and in accordance with SEC Staff Accounting Bulletin 118 (SAB 118), the Company completed its analysis of the income tax effects of the U.S. tax law changes during the three months ended February 28, 2019. The incremental net tax benefit recorded upon completion of the analysis of the income tax effects of the U.S. tax law changes was not material to our Consolidated Financial Statements.
In fiscal 2018, as a direct result of the U.S. tax law changes, the Company performed preliminary analysis and recorded a provisional estimated net tax benefit of $125 million. This provisional net tax benefit arose from a benefit of $648 million from re-measuring the Company’s net U.S. deferred tax liabilities, partially offset by the Company’s accrual for the transition tax and other U.S. tax law changes of $523 million. In fiscal 2019, the Company finalized its provisional estimates and recognized incremental net income tax expense, which was not material to our Consolidated Financial Statements, upon completing the accounting related to the U.S. tax law changes, primarily related to the refinement of the transition tax expense on the one-time mandatory repatriation of previously untaxed earnings of foreign subsidiaries.
The U.S. tax law changes include broad and complex changes. Among other things, the U.S. tax law changes reduced the federal corporate tax rate from 35% to 21% effective January 1, 2018 and required companies to immediately accrue for a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries, which is generally payable over an eight-year period. The U.S. tax law changes modified the taxation of foreign earnings, repealed the deduction for domestic production activities, limited interest deductibility and established a global intangible low tax income (GILTI) regime.
The lower corporate income tax rate of 21% became effective January 1, 2018 and was phased in as a result of our August 31 fiscal year-end. This resulted in a blended U.S. statutory federal tax rate of approximately 26% for fiscal 2018. This statutory
federal tax rate is 21% for fiscal 2019 and subsequent fiscal years, which provided a benefit to the Company’s fiscal 2019 tax provision of approximately $89 million.
During 2019, the U.S. Treasury Department issued regulations to apply retroactively covering certain components of the 2017 U.S. tax law changes. Certain guidance included in these regulations is inconsistent with the Company’s interpretation that led to the recognition of $247 million of tax benefits in prior periods. Despite this new guidance, the Company remains confident in its interpretation of the U.S. tax law changes and intends to defend this position through litigation, if necessary. However, if the Company is ultimately unsuccessful in defending its position, it may be required to reverse all or a portion of the benefits previously recorded.
By establishing the GILTI regime, the Act created a minimum tax on certain foreign sourced earnings. The taxability of the foreign earnings and the applicable tax rates are dependent on future events. The Company’s accounting policy for the minimum tax on foreign sourced earnings is to report the tax effects on the basis that the minimum tax will be recognized in tax expense in the year it is incurred as a period expense.
As the Company repatriates the undistributed earnings of its foreign subsidiaries for use in the United States, the earnings from its foreign subsidiaries will generally not be subject to U.S. federal tax. The Company continuously evaluates the amount of foreign earnings that are not necessary to be permanently reinvested in its foreign subsidiaries.
The components of earnings before income tax provision were (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
U.S.
|
|
$
|
1,898
|
|
|
$
|
3,292
|
|
|
$
|
1,953
|
|
Non–U.S.
|
|
2,629
|
|
|
2,683
|
|
|
2,900
|
|
Total
|
|
$
|
4,527
|
|
|
$
|
5,975
|
|
|
$
|
4,853
|
|
The provision for income taxes consists of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Current provision
|
|
|
|
|
|
|
Federal
|
|
$
|
201
|
|
|
$
|
866
|
|
|
$
|
759
|
|
State
|
|
46
|
|
|
103
|
|
|
45
|
|
Non–U.S.
|
|
241
|
|
|
353
|
|
|
390
|
|
|
|
488
|
|
|
1,322
|
|
|
1,194
|
|
Deferred provision
|
|
|
|
|
|
|
|
|
|
Federal – tax law change
|
|
—
|
|
|
(648
|
)
|
|
—
|
|
Federal – excluding tax law change
|
|
151
|
|
|
304
|
|
|
(306
|
)
|
State
|
|
4
|
|
|
78
|
|
|
(24
|
)
|
Non–U.S. – tax law change
|
|
—
|
|
|
—
|
|
|
(80
|
)
|
Non–U.S. – excluding tax law change
|
|
(55
|
)
|
|
(58
|
)
|
|
(24
|
)
|
|
|
100
|
|
|
(324
|
)
|
|
(434
|
)
|
Income tax provision
|
|
$
|
588
|
|
|
$
|
998
|
|
|
$
|
760
|
|
The difference between the statutory federal income tax rate and the effective tax rate is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Federal statutory rate
|
|
21.0
|
%
|
|
25.7
|
%
|
|
35.0
|
%
|
State income taxes, net of federal benefit
|
|
0.9
|
|
|
2.3
|
|
|
0.3
|
|
Foreign income taxed at non-U.S. rates
|
|
(2.1
|
)
|
|
(12.2
|
)
|
|
(11.8
|
)
|
Non-taxable income
|
|
(3.5
|
)
|
|
(5.2
|
)
|
|
(5.3
|
)
|
Non-deductible expenses
|
|
0.5
|
|
|
2.1
|
|
|
1.5
|
|
Transition tax
|
|
—
|
|
|
12.4
|
|
|
—
|
|
Tax law changes
|
|
(0.4
|
)
|
|
(10.9
|
)
|
|
(1.6
|
)
|
Change in valuation allowance1
|
|
1.9
|
|
|
8.7
|
|
|
0.7
|
|
Tax credits
|
|
(4.8
|
)
|
|
(6.9
|
)
|
|
(2.9
|
)
|
Other
|
|
(0.5
|
)
|
|
0.7
|
|
|
(0.2
|
)
|
Effective income tax rate
|
|
13.0
|
%
|
|
16.7
|
%
|
|
15.7
|
%
|
1 Net of changes in related tax attributes.
The deferred tax assets and liabilities included in the Consolidated Balance Sheets consist of the following (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Deferred tax assets:
|
|
|
|
|
Compensation and benefits
|
|
133
|
|
|
152
|
|
Insurance
|
|
90
|
|
|
74
|
|
Accrued rent
|
|
219
|
|
|
271
|
|
Allowance for doubtful accounts
|
|
13
|
|
|
27
|
|
Tax attributes
|
|
6,687
|
|
|
2,351
|
|
Stock compensation
|
|
45
|
|
|
44
|
|
Deferred income
|
|
115
|
|
|
110
|
|
Other
|
|
78
|
|
|
44
|
|
|
|
7,380
|
|
|
3,073
|
|
Less: valuation allowance
|
|
6,638
|
|
|
2,226
|
|
Total deferred tax assets
|
|
742
|
|
|
847
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
Accelerated depreciation
|
|
475
|
|
|
603
|
|
Inventory
|
|
394
|
|
|
301
|
|
Intangible assets
|
|
1,116
|
|
|
1,234
|
|
Equity method investment
|
|
481
|
|
|
459
|
|
|
|
2,466
|
|
|
2,597
|
|
Net deferred tax liabilities
|
|
$
|
1,724
|
|
|
$
|
1,750
|
|
As of August 31, 2019, the Company has recorded deferred tax assets for tax attributes of $6.7 billion, primarily reflecting the benefit of $3.1 billion in U.S. federal, $159 million in state and $23.7 billion in non-U.S. ordinary and capital losses. In addition, these deferred tax assets include $61 million of income tax credits. Of these deferred tax assets, $6.4 billion will expire at various dates from 2020 through 2036. The residual deferred tax assets of $248 million have no expiry date.
The Company believes it is more likely than not that the benefit from certain deferred tax assets will not be realized. In recognition of this risk, the Company has recorded a valuation allowance of $6.6 billion against those deferred tax assets as of August 31, 2019.
Income taxes paid, net of refunds were $0.9 billion, $0.6 billion and $1.1 billion for fiscal years 2019, 2018 and 2017, respectively.
ASC Topic 740, Income Taxes, provides guidance regarding the recognition, measurement, presentation and disclosure in the financial statement of tax positions taken or expected to be taken on a tax return, including the decision whether to file in a particular jurisdiction. As of August 31, 2019, unrecognized tax benefits of $499 million were reported as long-term liabilities on the Consolidated Balance Sheets while an immaterial amount is reported as current tax liabilities. Both of these amounts include interest and penalties, when applicable.
The following table provides a reconciliation of the total amounts of unrecognized tax benefits (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Balance at beginning of year
|
|
$
|
456
|
|
|
$
|
409
|
|
|
$
|
269
|
|
Gross increases related to tax positions in a prior period
|
|
33
|
|
|
123
|
|
|
151
|
|
Gross decreases related to tax positions in a prior period
|
|
(53
|
)
|
|
(15
|
)
|
|
(36
|
)
|
Gross increases related to tax positions in the current period
|
|
26
|
|
|
29
|
|
|
33
|
|
Settlements with taxing authorities
|
|
(2
|
)
|
|
(87
|
)
|
|
(2
|
)
|
Currency
|
|
—
|
|
|
—
|
|
|
(1
|
)
|
Lapse of statute of limitations
|
|
(5
|
)
|
|
(3
|
)
|
|
(5
|
)
|
Balance at end of year
|
|
$
|
455
|
|
|
$
|
456
|
|
|
$
|
409
|
|
At August 31, 2019, 2018 and 2017, $311 million, $331 million and $286 million, respectively, of unrecognized tax benefits would favorably impact the effective tax rate if recognized. During the next twelve months, based on current knowledge, it is reasonably possible the amount of unrecognized tax benefits could decrease by up to $16 million due to anticipated tax audit settlements and the expirations of statutes of limitations associated with tax positions related to multiple tax jurisdictions.
The Company recognizes interest and penalties in the income tax provision in its Consolidated Statements of Earnings. At August 31, 2019 and August 31, 2018, the Company had accrued interest and penalties of $47 million and $87 million, respectively. For the year ended August 31, 2019, the amount reported in income tax expense related to interest and penalties was $40 million income tax benefit.
The Company files a consolidated U.S. federal income tax return as well as income tax returns in various states and multiple foreign jurisdictions. It is generally no longer under audit examinations for U.S. federal income tax purposes for any years prior to fiscal 2014. With few exceptions, it is no longer subject to state and local income tax examinations by tax authorities for years before fiscal 2007. In foreign tax jurisdictions, the Company is generally no longer subject to examination by the tax authorities in the United Kingdom prior to 2015, Luxembourg prior to 2013, in Germany prior to 2014, in France prior to 2008 and in Turkey prior to 2014.
The Company has received tax holidays from Swiss cantonal income taxes relative to certain of its Swiss operations. The income tax holidays are expected to extend through September 2022. The holidays had a beneficial impact of $127 million and $127 million (inclusive of capital GILTI tax cost) during fiscal 2019 and 2018, respectively. This benefit is primarily included as part of the foreign income taxed at non-U.S. rates line in the effective tax rate reconciliation table above.
At August 31, 2019, it is not practicable for the Company to determine the amount of the unrecognized deferred tax liability it has with respect to temporary differences related to investments in foreign subsidiaries and foreign corporate joint ventures that are essentially permanent in duration.
Note 12. Stock compensation plans
The Walgreens Boots Alliance, Inc. 2013 Omnibus Incentive Plan (the “Omnibus Plan”), which became effective in fiscal 2013, provides for incentive compensation to the Company’s non-employee directors, officers and employees and consolidates several previously existing equity compensation plans into a single plan.
The Company grants stock options, performance shares and restricted units under the Omnibus Plan. Performance shares issued under the Omnibus Plan offer performance-based incentive awards and equity-based awards to key employees. The fair value of each performance share granted assumes that performance goals will be achieved at 100 percent. If such goals are not met, no compensation expense is recognized and any recognized compensation expense is reversed. Restricted stock units are also equity-based awards with performance requirements that are granted to key employees. The performance shares and restricted stock unit awards are both subject to restrictions as to continuous employment except in the case of death, normal retirement or total and permanent disability.
Total stock-based compensation expense for fiscal 2019, 2018 and 2017 was $119 million, $130 million and $91 million, respectively. The recognized tax benefit was $43 million, $43 million and $78 million for fiscal 2019, 2018 and 2017, respectively. Unrecognized compensation cost related to non-vested awards at August 31, 2019 was $172 million, which will be recognized over three years.
Note 13. Retirement benefits
The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.
Defined benefit pension plans (non-U.S. plans)
The Company has various defined benefit pension plans outside the United States. The principal defined benefit pension plan is the Boots Pension Plan (the “Boots Plan”), which covers certain employees in the United Kingdom. The Boots Plan is a funded final salary defined benefit plan providing pensions and death benefits to members. The Boots Plan was closed to future accrual effective July 1, 2010, with pensions calculated based on salaries up until that date. The Boots Plan is governed by a trustee board, which is independent of the Company. The plan is subject to a full funding actuarial valuation on a triennial basis.
The investment strategy of the principal defined benefit pension plan is to hold approximately 85% of its assets in a diverse portfolio which aims to broadly match the characteristics of the plan’s liabilities by investing in bonds, derivatives and other fixed income assets, with the remainder invested in predominantly return-seeking assets. Interest rate and inflation rate swaps are also employed to complement the role of fixed and index-linked bond holdings in liability risk management.
The following tables present classes of defined benefit pension plan assets by fair value hierarchy (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2019
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Equity securities:
|
|
|
|
|
|
|
|
|
Equity securities1
|
|
$
|
1,006
|
|
|
$
|
—
|
|
|
$
|
1,005
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest government bonds2
|
|
489
|
|
|
148
|
|
|
341
|
|
|
—
|
|
Index linked government bonds2
|
|
3,861
|
|
|
3,824
|
|
|
37
|
|
|
—
|
|
Corporate bonds3
|
|
2,390
|
|
|
1
|
|
|
2,389
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
Real estate4
|
|
471
|
|
|
—
|
|
|
—
|
|
|
471
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments5
|
|
914
|
|
|
63
|
|
|
516
|
|
|
335
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
9,131
|
|
|
$
|
4,036
|
|
|
$
|
4,288
|
|
|
$
|
806
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
August 31, 2018
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
Equity securities:
|
|
|
|
|
|
|
|
|
Equity securities1
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
$
|
1,030
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
Debt securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed interest government bonds2
|
|
901
|
|
|
—
|
|
|
901
|
|
|
—
|
|
Index linked government bonds2
|
|
2,880
|
|
|
—
|
|
|
2,880
|
|
|
—
|
|
Corporate bonds3
|
|
2,542
|
|
|
—
|
|
|
2,536
|
|
|
6
|
|
|
|
|
|
|
|
|
|
|
Real estate:
|
|
|
|
|
|
|
|
|
|
|
|
|
Real estate4
|
|
501
|
|
|
—
|
|
|
—
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
Other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Other investments5
|
|
822
|
|
|
64
|
|
|
531
|
|
|
227
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
8,676
|
|
|
$
|
64
|
|
|
$
|
7,878
|
|
|
$
|
734
|
|
|
|
1
|
Equity securities, which mainly comprise investments in commingled funds, are valued based on quoted prices and are primarily exchange-traded. Securities for which official close or last trade pricing on an active exchange is available are classified as Level 1 investments. If closing prices are not available, or the investments are in a commingled fund,
|
securities are valued at the last quoted bid price and typically are categorized as Level 2 investments.
|
|
2
|
Debt securities: government bonds comprise fixed interest and index linked bonds issued by central governments and are valued based on quotes received from independent pricing services or from dealers who make markets in such securities. Pricing services utilize pricing which considers readily available inputs such as the yield or price of bonds of comparable quality, coupon, maturity and type, as well as dealer-supplied prices. Certain government bonds which were categorized as Level 2 investments in fiscal 2018 were deemed to be classified as Level 1 in fiscal 2019.
|
|
|
3
|
Debt securities: corporate bonds comprise bonds issued by corporations in both segregated and commingled funds
|
and are valued using recently executed transactions, or quoted market prices for similar assets and liabilities in active markets, or for identical assets and liabilities in markets that are not active. If there have been no market transactions in a particular fixed income security, its fair value is calculated by pricing models that benchmark the security against other securities with actual market prices. Certain corporate bonds which were categorized as Level 2 investments in fiscal 2018 were deemed to be classified as Level 1 in fiscal 2019.
|
|
4
|
Real estate comprises investments in certain property funds which are valued based on the underlying properties. These properties are valued using a number of standard industry techniques such as cost, discounted cash flows, independent appraisals and market based comparable data. Real estate investments are categorized as Level 3 investments. Changes in Level 3 investments during fiscal 2019 were driven by actual return on plan assets still held at August 31, 2019 and purchases during the year.
|
|
|
5
|
Other investments mainly comprise cash and cash equivalents, derivatives and direct private placements. Cash is categorized as a Level 1 investment and cash in commingled funds is categorized as Level 2 investments. Cash equivalents are valued using observable yield curves, discounting and interest rates and are categorized as Level 2 investments. Derivatives which are exchange-traded and for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market, or exchange on which they are traded, and are categorized as Level 1 investments. Over-the-counter derivatives typically are valued by independent pricing services and are categorized as Level 2 investments. Direct private placements are typically bonds valued by reference to comparable bonds and are categorized as Level 3 investments. Changes in Level 3 investments during fiscal 2019 were primarily driven by purchases during the year.
|
Components of net periodic pension costs for the defined benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Boots and other pension plans
|
|
|
2019
|
|
2018
|
|
2017
|
Service costs
|
|
$
|
4
|
|
|
$
|
5
|
|
|
$
|
5
|
|
Interest costs
|
|
196
|
|
|
193
|
|
|
174
|
|
Expected returns on plan assets/other
|
|
(246
|
)
|
|
(209
|
)
|
|
(146
|
)
|
Total net periodic pension (income) cost
|
|
$
|
(46
|
)
|
|
$
|
(11
|
)
|
|
$
|
33
|
|
Change in benefit obligations for the defined benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Benefit obligation at beginning of year
|
|
$
|
8,293
|
|
|
$
|
8,880
|
|
Service costs
|
|
4
|
|
|
5
|
|
Interest costs
|
|
196
|
|
|
193
|
|
Amendments/other
|
|
22
|
|
|
(4
|
)
|
Net actuarial loss (gain)
|
|
1,212
|
|
|
(466
|
)
|
Benefits paid
|
|
(363
|
)
|
|
(398
|
)
|
Currency translation adjustments
|
|
(530
|
)
|
|
83
|
|
Benefit obligation at end of year
|
|
$
|
8,834
|
|
|
$
|
8,293
|
|
Change in plan assets for the defined benefit pension plans (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Plan assets at fair value at beginning of year
|
|
$
|
8,676
|
|
|
$
|
8,980
|
|
Employer contributions
|
|
38
|
|
|
65
|
|
Benefits paid
|
|
(363
|
)
|
|
(398
|
)
|
Return on assets/other
|
|
1,333
|
|
|
(55
|
)
|
Currency translation adjustments
|
|
(552
|
)
|
|
84
|
|
Plan assets at fair value at end of year
|
|
$
|
9,131
|
|
|
$
|
8,676
|
|
Amounts recognized in the Consolidated Balance Sheets (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Other non-current assets
|
|
$
|
486
|
|
|
$
|
554
|
|
Accrued expenses and other liabilities
|
|
(6
|
)
|
|
(7
|
)
|
Other non-current liabilities
|
|
(183
|
)
|
|
(164
|
)
|
Net asset (liability) recognized at end of year
|
|
$
|
297
|
|
|
$
|
383
|
|
Cumulative pre-tax amounts recognized in accumulated other comprehensive (income) loss (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Net actuarial (gain) loss
|
|
$
|
92
|
|
|
$
|
(27
|
)
|
Prior service cost
|
|
24
|
|
|
—
|
|
Total
|
|
116
|
|
|
(27
|
)
|
The projected benefit obligation, accumulated benefit obligation and fair value of plan assets for all pension plans, including accumulated benefit obligations in excess of plan assets, at August 31 were as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Projected benefit obligation
|
|
$
|
8,834
|
|
|
$
|
8,293
|
|
Accumulated benefit obligation
|
|
8,823
|
|
|
8,285
|
|
Fair value of plan assets
|
|
9,131
|
|
|
8,676
|
|
Pension plans with projected benefit obligation and accumulated benefit obligations in excess of plan assets were not material for periods presented.
Estimated future benefit payments for the next 10 years from defined benefit pension plans to participants are as follows (in millions):
|
|
|
|
|
|
Estimated future benefit payments
|
2020
|
$
|
261
|
|
2021
|
253
|
|
2022
|
265
|
|
2023
|
276
|
|
2024
|
288
|
|
2025-2029
|
1,629
|
|
The assumptions used in accounting for the defined benefit pension plans were as follows:
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
Weighted-average assumptions used to determine benefit obligations
|
|
|
|
|
Discount rate
|
|
1.80
|
%
|
|
2.67
|
%
|
Rate of compensation increase
|
|
2.91
|
%
|
|
2.68
|
%
|
|
|
|
|
|
Weighted-average assumptions used to determine net periodic benefit cost
|
|
|
|
|
|
|
Discount rate
|
|
1.58
|
%
|
|
2.12
|
%
|
Expected long-term return on plan assets
|
|
3.10
|
%
|
|
2.27
|
%
|
Rate of compensation increase
|
|
2.68
|
%
|
|
2.64
|
%
|
Based on current actuarial estimates, the Company plans to make contributions of $27 million to its defined benefit pension plans in fiscal 2020 and expects to make contributions beyond 2020, which will vary based upon many factors, including the performance of the defined benefit pension plan assets.
Defined contribution plans
The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing Retirement Trust, to which both the Company and participating employees contribute. The Company’s contribution is in the form of a guaranteed match which is made pursuant to the applicable plan document approved by the Walgreen Co. Board of Directors. Plan activity is reviewed periodically by certain Committees of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of $239 million, $217 million and $221 million in fiscal 2019, 2018 and 2017, respectively. The Company’s contributions were $234 million, $366 million and $220 million in fiscal 2019, 2018 and 2017, respectively.
The Company also has certain contract based defined contribution arrangements. The principal one is the Alliance Healthcare & Boots Retirement Savings Plan, which is United Kingdom based and to which both the Company and participating employees contribute. The cost recognized in the Consolidated Statement of Earnings was $124 million in fiscal 2019, $142 million in fiscal 2018 and $112 million in fiscal 2017.
Postretirement healthcare plan
The Company provides certain health insurance benefits to retired U.S. 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. An amendment to this plan during the fourth quarter of fiscal 2018 resulted in a reduction in the benefit plan obligation of $201 million and the recognition of a curtailment gain of $112 million. An amendment during the third quarter of fiscal 2017 resulted in the recognition of a curtailment gain of $109 million. The Company’s postretirement health benefit plan obligation was $161 million and $146 million in fiscal 2019 and 2018, respectively and is not funded. The expected benefit to be paid net of the estimated federal subsidy during fiscal year 2020 is $8 million.
Note 14. Capital stock
In connection with the Company’s capital policy, the Board of Directors has authorized share repurchase programs. In April 2017, Walgreens Boots Alliance authorized a stock repurchase program (the “April 2017 stock repurchase program”), which authorized the repurchase of up to $1.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on December 31, 2017. In May 2017, the Company completed the April 2017 stock repurchase program, purchasing 11.8 million shares. In June 2017, Walgreens Boots Alliance authorized a new stock repurchase program, which authorized the repurchase of up to $5.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on August 31, 2018, which
authorization was increased by an additional $1.0 billion in October 2017 (as expanded, the “June 2017 stock repurchase program”). The June 2017 stock repurchase program was completed in October 2017. In June 2018, Walgreens Boots Alliance authorized a new stock repurchase program, which authorized the repurchase of up to $10.0 billion of Walgreens Boots Alliance common stock, which program has no specified expiration date. The Company purchased 57 million and 72 million shares under stock repurchase programs in fiscal 2019 and 2018 at a cost of $3.8 billion and $4.9 billion, respectively.
The Company determines the timing and amount of repurchases based on its assessment of various factors including prevailing market conditions, alternate uses of capital, liquidity, the economic environment and other factors. The timing and amount of these purchases may change at any time and from time to time. The Company has repurchased, and may from time to time in the future repurchase, shares on the open market through Rule 10b5-1 plans, which enable a company to repurchase shares at times when it otherwise might be precluded from doing so under insider trading laws.
In addition, the Company continued to repurchase shares to support the needs of the employee stock plans. Shares totaling $339 million were purchased to support the needs of the employee stock plans during fiscal 2019 as compared to $289 million and $457 million in fiscal 2018 and fiscal 2017, respectively. At August 31, 2019, 25 million shares of common stock were reserved for future issuances under the Company’s various employee benefit plans.
Note 15. Accumulated other comprehensive income (loss)
The following is a summary of net changes in accumulated other comprehensive income by component and net of tax for fiscal 2019, 2018 and 2017 (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension/post-retirement obligations
|
|
Unrecognized gain (loss) on available-for-sale investments
|
|
Unrealized gain (loss) on cash flow hedges
|
|
Share of OCI of equity method investments
|
|
Cumulative translation adjustments
|
|
Total
|
Balance at August 31, 2016
|
$
|
(212
|
)
|
|
$
|
2
|
|
|
$
|
(37
|
)
|
|
$
|
(1
|
)
|
|
$
|
(2,744
|
)
|
|
$
|
(2,992
|
)
|
Other comprehensive income (loss) before reclassification adjustments
|
(34
|
)
|
|
(2
|
)
|
|
—
|
|
|
(1
|
)
|
|
(133
|
)
|
|
(170
|
)
|
Amounts reclassified from AOCI1
|
109
|
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
114
|
|
Tax benefit (provision)
|
(2
|
)
|
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
(3
|
)
|
Net change in other comprehensive income (loss)
|
73
|
|
|
(2
|
)
|
|
4
|
|
|
(1
|
)
|
|
(133
|
)
|
|
(59
|
)
|
Balance at August 31, 2017
|
$
|
(139
|
)
|
|
$
|
—
|
|
|
$
|
(33
|
)
|
|
$
|
(2
|
)
|
|
$
|
(2,877
|
)
|
|
$
|
(3,051
|
)
|
Other comprehensive income (loss) before reclassification adjustments
|
417
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
(207
|
)
|
|
206
|
|
Amounts reclassified from AOCI1
|
(120
|
)
|
|
—
|
|
|
4
|
|
|
11
|
|
|
8
|
|
|
(97
|
)
|
Tax benefit (provision)
|
(57
|
)
|
|
—
|
|
|
(1
|
)
|
|
(2
|
)
|
|
—
|
|
|
(60
|
)
|
Net change in other comprehensive income (loss)
|
240
|
|
|
—
|
|
|
3
|
|
|
5
|
|
|
(199
|
)
|
|
49
|
|
Balance at August 31, 2018
|
$
|
101
|
|
|
$
|
—
|
|
|
$
|
(30
|
)
|
|
$
|
3
|
|
|
$
|
(3,076
|
)
|
|
$
|
(3,002
|
)
|
Other comprehensive income (loss) before reclassification adjustments
|
(162
|
)
|
|
—
|
|
|
74
|
|
|
(1
|
)
|
|
(801
|
)
|
|
(889
|
)
|
Amounts reclassified from AOCI
|
(17
|
)
|
|
—
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
(12
|
)
|
Tax benefit (provision)
|
30
|
|
|
—
|
|
|
(19
|
)
|
|
—
|
|
|
(6
|
)
|
|
5
|
|
Net change in other comprehensive income (loss)
|
(149
|
)
|
|
—
|
|
|
60
|
|
|
(1
|
)
|
|
(807
|
)
|
|
(896
|
)
|
Balance at August 31, 2019
|
$
|
(48
|
)
|
|
$
|
—
|
|
|
$
|
31
|
|
|
$
|
3
|
|
|
$
|
(3,884
|
)
|
|
$
|
(3,897
|
)
|
|
|
1
|
Includes amendment to U.S. postretirement healthcare plan resulting in a curtailment gain. See note 13, retirement benefits.
|
Note 16. Segment reporting
The Company has aligned its operations into three reportable segments: Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale. The operating segments have been identified based on the financial data utilized by the Company’s Chief Executive Officer (the chief operating decision maker) to assess segment performance and allocate resources among the Company’s operating segments. The chief operating decision maker uses adjusted operating income to assess segment profitability. The chief operating decision maker does not use total assets by segment to make decisions regarding resources; therefore, the total asset disclosure by segment has not been included.
Retail Pharmacy USA
The Retail Pharmacy USA segment consists of the Walgreens business, which includes the operation of retail drugstores, convenient care clinics and mail and central specialty pharmacy services. Sales for the segment are principally derived from the sale of prescription drugs and a wide assortment of retail products, including health and wellness, beauty and personal care and consumables and general merchandise.
Retail Pharmacy International
The Retail Pharmacy International segment consists of pharmacy-led health and beauty retail businesses and optical practices. These businesses include Boots branded stores in the United Kingdom, Thailand, Norway, the Republic of Ireland and the Netherlands, Benavides in Mexico and Ahumada in Chile. Sales for the segment are principally derived from the sale of prescription drugs and health and wellness, beauty and personal care and other consumer products.
Pharmaceutical Wholesale
The Pharmaceutical Wholesale segment consists of the Alliance Healthcare pharmaceutical wholesaling and distribution businesses and an equity method investment in AmerisourceBergen. Wholesale operations are located in the United Kingdom, Germany, France, Turkey, Spain, the Netherlands, Egypt, Norway, Romania, Czech Republic and Lithuania. Sales for the segment are principally derived from wholesaling and distribution of a comprehensive offering of brand-name pharmaceuticals (including specialty pharmaceutical products) and generic pharmaceuticals, health and beauty products, home healthcare supplies and equipment and related services to pharmacies and other healthcare providers.
The results of operations for each reportable segment includes procurement benefits and an allocation of corporate-related overhead costs. The “Eliminations” column contains items not allocable to the reportable segments, as the information is not utilized by the chief operating decision maker to assess segment performance and allocate resources.
The following table reflects results of operations of the Company's reportable segments (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ending August 31,
|
|
2019
|
|
2018
|
|
2017
|
Sales:
|
|
|
|
|
|
Retail Pharmacy USA
|
$
|
104,532
|
|
|
$
|
98,392
|
|
|
$
|
87,302
|
|
Retail Pharmacy International
|
11,462
|
|
|
12,281
|
|
|
11,813
|
|
Pharmaceutical Wholesale
|
23,053
|
|
|
23,006
|
|
|
21,188
|
|
Eliminations1
|
(2,180
|
)
|
|
(2,142
|
)
|
|
(2,089
|
)
|
Walgreens Boots Alliance, Inc.
|
$
|
136,866
|
|
|
$
|
131,537
|
|
|
$
|
118,214
|
|
Adjusted Operating income:2
|
|
|
|
|
|
Retail Pharmacy USA
|
$
|
5,255
|
|
|
$
|
5,814
|
|
|
$
|
5,606
|
|
Retail Pharmacy International
|
747
|
|
|
929
|
|
|
939
|
|
Pharmaceutical Wholesale
|
939
|
|
|
936
|
|
|
922
|
|
Eliminations1
|
1
|
|
|
|
|
|
Walgreens Boots Alliance, Inc.
|
$
|
6,942
|
|
|
$
|
7,679
|
|
|
$
|
7,467
|
|
Depreciation and amortization:
|
|
|
|
|
|
Retail Pharmacy USA
|
$
|
1,459
|
|
|
$
|
1,196
|
|
|
$
|
1,090
|
|
Retail Pharmacy International
|
429
|
|
|
419
|
|
|
414
|
|
Pharmaceutical Wholesale
|
150
|
|
|
155
|
|
|
150
|
|
Walgreens Boots Alliance, Inc.
|
$
|
2,038
|
|
|
$
|
1,770
|
|
|
$
|
1,654
|
|
Capital expenditures:
|
|
|
|
|
|
Retail Pharmacy USA
|
$
|
1,323
|
|
|
$
|
1,022
|
|
|
$
|
860
|
|
Retail Pharmacy International
|
275
|
|
|
241
|
|
|
384
|
|
Pharmaceutical Wholesale
|
104
|
|
|
104
|
|
|
107
|
|
Walgreens Boots Alliance, Inc.
|
$
|
1,702
|
|
|
$
|
1,367
|
|
|
$
|
1,351
|
|
The following table reconciles adjusted operating income to operating income (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ending August 31,
|
|
2019
|
|
2018
|
|
2017
|
Adjusted operating income2
|
$
|
6,942
|
|
|
$
|
7,679
|
|
|
$
|
7,467
|
|
Acquisition-related amortization and impairment3
|
(567
|
)
|
|
(448
|
)
|
|
(332
|
)
|
Transformational cost management
|
(477
|
)
|
|
—
|
|
|
—
|
|
Acquisition-related costs
|
(303
|
)
|
|
(231
|
)
|
|
(474
|
)
|
Adjustments to equity earnings in AmerisourceBergen
|
(233
|
)
|
|
(175
|
)
|
|
(187
|
)
|
Store optimization
|
(196
|
)
|
|
(100
|
)
|
|
—
|
|
LIFO provision
|
(136
|
)
|
|
(84
|
)
|
|
(166
|
)
|
Certain legal and regulatory accruals and settlements4
|
(31
|
)
|
|
(284
|
)
|
|
—
|
|
Asset recovery
|
—
|
|
|
15
|
|
|
11
|
|
Hurricane-related costs
|
—
|
|
|
(83
|
)
|
|
—
|
|
Cost Transformation
|
—
|
|
|
—
|
|
|
(835
|
)
|
Operating income2
|
$
|
4,998
|
|
|
$
|
6,289
|
|
|
$
|
5,484
|
|
|
|
1
|
Eliminations relate to intersegment sales between the Pharmaceutical Wholesale and the Retail Pharmacy International segments.
|
|
|
2
|
The Company adopted new accounting guidance in Accounting Standards Update 2017-07 as of September 1, 2018 (fiscal 2019) on a retrospective basis for the Consolidated Statements of Earnings presentation. See note 1, summary of major accounting policies, for further information.
|
|
|
3
|
Includes impairment of $73 million for indefinite-lived pharmacy licenses intangible asset recorded during the three months ended August 31, 2019, in the Boots reporting unit within the Retail Pharmacy International segment.
|
|
|
4
|
Beginning in the quarter ended August 31, 2018, management reviewed and refined its practice to include all charges related to the matters included in certain legal and regulatory accruals and settlements. This non-GAAP measure is presented on a consistent basis for fiscal year 2019.
|
No single customer accounted for more than 10% of the Company’s consolidated sales for any of the periods presented. Substantially all of our retail pharmacy sales are to customers covered by third-party payers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) that agree to pay for all or a portion of a customer's eligible prescription purchases. In the Retail Pharmacy USA segment, two third-party payers, in the aggregate accounted for approximately 22% of the Company’s consolidated sales in fiscal 2019 and three third-party payers, in the aggregate accounted for approximately 32% of the Company’s consolidated sales in fiscal 2018. No third-party payer accounted for more than 10% of the Company’s consolidated sales in fiscal 2017.
Geographic data for sales is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
United States
|
$
|
104,532
|
|
|
$
|
98,392
|
|
|
$
|
87,302
|
|
United Kingdom
|
12,729
|
|
|
13,297
|
|
|
12,552
|
|
Europe (excluding the United Kingdom)
|
17,009
|
|
|
17,594
|
|
|
16,224
|
|
Other
|
2,597
|
|
|
2,254
|
|
|
2,136
|
|
Sales
|
$
|
136,866
|
|
|
$
|
131,537
|
|
|
$
|
118,214
|
|
Geographic data for long-lived assets, defined as property, plant and equipment, is as follows (in millions):
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
United States
|
$
|
10,598
|
|
|
$
|
10,678
|
|
United Kingdom
|
2,162
|
|
|
2,458
|
|
Europe (excluding the United Kingdom)
|
521
|
|
|
576
|
|
Other
|
197
|
|
|
199
|
|
Total long-lived assets
|
$
|
13,478
|
|
|
$
|
13,911
|
|
Note 17. Sales
The following table summarizes the Company’s sales by segment and by major source (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the years ending August 31,
|
|
|
2019
|
|
2018
|
|
2017
|
Retail Pharmacy USA
|
|
|
|
|
|
|
Pharmacy
|
|
$
|
77,192
|
|
|
$
|
71,055
|
|
|
$
|
60,608
|
|
Retail
|
|
27,340
|
|
|
27,337
|
|
|
26,695
|
|
Total
|
|
104,532
|
|
|
98,392
|
|
|
87,302
|
|
|
|
|
|
|
|
|
Retail Pharmacy International
|
|
|
|
|
|
|
Pharmacy
|
|
4,080
|
|
|
4,360
|
|
|
4,180
|
|
Retail
|
|
7,382
|
|
|
7,921
|
|
|
7,633
|
|
Total
|
|
11,462
|
|
|
12,281
|
|
|
11,813
|
|
|
|
|
|
|
|
|
Pharmaceutical Wholesale
|
|
23,053
|
|
|
23,006
|
|
|
21,188
|
|
|
|
|
|
|
|
|
Eliminations1
|
|
(2,180
|
)
|
|
(2,142
|
)
|
|
(2,089
|
)
|
|
|
|
|
|
|
|
Walgreens Boots Alliance, Inc.
|
|
$
|
136,866
|
|
|
$
|
131,537
|
|
|
$
|
118,214
|
|
|
|
1
|
Eliminations relate to intersegment sales between the Pharmaceutical Wholesale and the Retail Pharmacy International segments.
|
Contract balances with customers
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for example the Company’s Balance Rewards® and Boots Advantage Card loyalty programs. Under such programs, customers earn reward points on purchases for redemption at a later date. See note 1, summary of major accounting policies, for further information on receivables from contracts with customers.
Note 18. Related parties
The Company has a long-term pharmaceutical distribution agreement with AmerisourceBergen pursuant to which the Company sources branded and generic pharmaceutical products from AmerisourceBergen principally for its U.S. operations. Additionally, AmerisourceBergen receives sourcing services for generic pharmaceutical products.
Related party transactions with AmerisourceBergen (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2019
|
|
2018
|
|
2017
|
Purchases, net
|
|
$
|
57,429
|
|
|
$
|
53,161
|
|
|
$
|
43,571
|
|
|
|
|
|
|
|
|
Trade accounts payable, net
|
|
$
|
6,484
|
|
|
$
|
6,274
|
|
|
$
|
4,384
|
|
Note 19. Supplementary financial information
Summary of Quarterly Results (Unaudited)
(in millions, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter ended
|
|
|
|
|
|
November
|
|
February
|
|
May
|
|
August
|
|
Fiscal year
|
Fiscal 2019
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
33,793
|
|
|
$
|
34,528
|
|
|
$
|
34,591
|
|
|
$
|
33,954
|
|
|
$
|
136,866
|
|
Gross profit
|
|
7,641
|
|
|
7,754
|
|
|
7,453
|
|
|
7,228
|
|
|
30,076
|
|
Net earnings attributable to Walgreens Boots Alliance, Inc.
|
|
1,123
|
|
|
1,156
|
|
|
1,025
|
|
|
677
|
|
|
3,982
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
1.18
|
|
|
$
|
1.25
|
|
|
$
|
1.13
|
|
|
$
|
0.75
|
|
|
$
|
4.32
|
|
Diluted
|
|
1.18
|
|
|
1.24
|
|
|
1.13
|
|
|
0.75
|
|
|
4.31
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.440
|
|
|
$
|
0.440
|
|
|
$
|
0.440
|
|
|
$
|
0.458
|
|
|
$
|
1.778
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal 2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
|
|
$
|
30,740
|
|
|
$
|
33,021
|
|
|
$
|
34,334
|
|
|
$
|
33,442
|
|
|
$
|
131,537
|
|
Gross profit
|
|
7,341
|
|
|
8,096
|
|
|
7,780
|
|
|
7,575
|
|
|
30,792
|
|
Net earnings attributable to Walgreens Boots Alliance, Inc.
|
|
821
|
|
|
1,349
|
|
|
1,342
|
|
|
1,512
|
|
|
5,024
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
$
|
0.82
|
|
|
$
|
1.36
|
|
|
$
|
1.35
|
|
|
$
|
1.55
|
|
|
$
|
5.07
|
|
Diluted
|
|
0.81
|
|
|
1.36
|
|
|
1.35
|
|
|
1.55
|
|
|
5.05
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared per common share
|
|
$
|
0.400
|
|
|
$
|
0.400
|
|
|
$
|
0.400
|
|
|
$
|
0.440
|
|
|
$
|
1.640
|
|
Management’s Report on Internal Control
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). As permitted by the SEC, our assessment of internal controls over financial reporting excludes internal control over financial reporting of equity method investees. However, our assessment of internal control over financial reporting with respect to equity method investees did include controls over the recording of amounts related to our investment that are recorded in the Consolidated Financial Statements, including controls over the selection of accounting methods for our investments, the recognition of equity method earnings and losses and the determination, valuation and recording of our investment account balances.
Based on our evaluation, management concluded that our internal control over financial reporting was effective as of August 31, 2019. Deloitte & Touche LLP, the Company’s independent registered public accounting firm, has audited our internal control over financial reporting, as stated in its report which is included herein.
|
|
|
|
|
|
|
/s/
|
Stefano Pessina
|
|
/s/
|
James Kehoe
|
|
|
Stefano Pessina
|
|
|
James Kehoe
|
|
|
Executive Vice Chairman and Chief
Executive Officer
|
|
|
Executive Vice President and Global Chief
Financial Officer
|
|
October 28, 2019
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Walgreens Boots Alliance, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Walgreens Boots Alliance, Inc. and subsidiaries (the "Company") as of August 31, 2019 and 2018, the related consolidated statements of earnings, comprehensive income, equity, and cash flows for each of the three years in the period ended August 31, 2019, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of August 31, 2019 and 2018, and the results of its operations and its cash flows for each of the three years in the period ended August 31, 2019, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the Company's internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated October 28, 2019, expressed an unqualified opinion on the Company's internal control over financial reporting.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical Audit Matters
The critical audit matters communicated below are matters arising from the current-period audit of the financial statements that were communicated or required to be communicated to the audit committee and that (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.
Goodwill and Indefinite-Lived Intangible Assets Impairment Evaluation - Boots Reporting Unit and Boots Indefinite-lived Intangible Assets - Refer to Notes 1 and 6 to the financial statements
Critical Audit Matter Description
The Company’s evaluation of goodwill and indefinite-lived intangible assets for impairment involves the comparison of the fair value of each reporting unit or asset to its carrying value. The Company uses the income and the market approaches to estimate the fair value of its reporting units in its goodwill impairment analysis. The income approach requires management to make a number of assumptions for each reporting unit including annual assumptions on future revenue growth, earnings before interest, taxes, depreciation and amortization (EBITDA) margins and discount rates. The market approach requires management to estimate fair value using comparable marketplace fair value data from within a comparable industry group. The Company primarily uses the multi-period excess earnings model and the relief from royalty model to estimate the fair value of the indefinite-lived intangible assets. Changes in assumptions or the selection of companies in the comparable industry group could have a significant impact on the valuation of the reporting units and the amount of a goodwill or indefinite-lived intangible asset impairment charge, if any.
The Company’s goodwill balance was $16.6 billion as of August 31, 2019, of which $2.6 billion was allocated to the Boots Reporting Unit. Management’s estimate of the fair value of the Boots Reporting Unit is in excess of its carrying value by approximately 9% and, therefore, no impairment was recognized for the year ended August 31, 2019.
The Company’s indefinite-lived intangible assets balance was $7.1 billion as of August 31, 2019, of which $6.9 billion represented Boots indefinite-lived intangible assets. The fair value of the Boots indefinite-lived intangible assets is in excess of their carrying value by approximately 3% to approximately 29%, except for the Pharmacy License intangible, for which the Company recorded a $73 million impairment for the year ended August 31, 2019.
Management has made significant judgments to estimate the fair value of the Boots Reporting Unit and the Boots indefinite-lived intangible assets. Given the small difference between their fair values and carrying values, performing audit procedures to evaluate the reasonableness of management’s estimates and assumptions of future revenue growth, EBITDA margins, the selection of the discount rate, the selection of the royalty rates for the Boots trade name indefinite-lived intangible assets, and the market multiple selected for the Boots Reporting Unit, specifically due to the sensitivity of the Boots Reporting Unit and Boots indefinite-lived intangible assets to changes in the British economy, required a high degree of auditor judgment and an increased extent of effort, including the need to involve our fair value specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to the fair value of goodwill for the Boots Reporting Unit and the Boots indefinite-lived intangible assets included the following, among others:
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We tested the effectiveness of controls over the goodwill and intangible asset impairment analyses, including those over the development of forecasts of future revenues, EBITDA margins, and the selection of royalty rates, market multiples, and discount rates.
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We evaluated management’s ability to accurately forecast future revenues and EBITDA margins by comparing actual results to management’s historical forecasts.
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We evaluated the reasonableness of management’s forecasts of future revenues and EBITDA margins by performing certain procedures, including:
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Comparing the forecasts to internal communications to management and the Board of Directors.
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Comparing the forecasts to third-party economic research, including discussions with our economic and industry specialists.
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We performed sensitivity analyses to evaluate the risk of impairment if key assumptions are changed.
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We evaluated, with the assistance of our fair value specialists, the (1) valuation methodology used for the Boots Reporting Unit goodwill and the Boots indefinite-lived intangible assets and (2) the reasonableness of the related discount rates, by performing certain procedures, including:
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Comparing the valuation methodologies used to generally accepted valuation practices for each asset type.
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Evaluating the appropriateness of the Company’s selection of companies in its industry comparable group for comparability to the Boots Reporting Unit.
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Testing the source information underlying the determination of the discount rate and the mathematical accuracy of the calculation.
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Developing an independent discount rate and comparing it to the discount rate selected by management.
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Income Taxes - Uncertain Tax Positions - Refer to Notes 1 and 11 to the financial statements
Critical Audit Matter Description
The Company has a complex legal structure involving numerous domestic and foreign locations with constantly changing tax laws and regulations. The Company’s management is required to interpret and apply these tax laws and regulations in determining the amount of its income tax liability and provision. When an uncertain tax position is identified by management, the Company must evaluate whether it is more likely to be sustained than not on the basis of its technical merits. The Company recognizes a benefit for tax positions using the highest cumulative tax benefit that is more likely than not to be realized. The Company establishes a liability for unrecognized tax benefits that do not meet this threshold. The evaluation of each uncertain tax position requires management to apply specialized skill, knowledge, and significant judgment related to the identified position. The Company’s liability for unrecognized tax benefits as of August 31, 2019 was $455 million.
Because of the numerous taxing jurisdictions in which the Company files its tax returns and the complexity of tax laws and regulations, auditing uncertain tax positions and the determination of whether the more likely than not threshold was met requires a high degree of auditor judgment and increased extent of effort, including the involvement of our income tax specialists.
How the Critical Audit Matter Was Addressed in the Audit
Our audit procedures related to unrecognized tax benefits included the following, among others:
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We tested the effectiveness of controls over income taxes, including those over identifying uncertain tax positions and measuring liabilities.
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We evaluated, with the assistance of our tax specialists, a selection of underlying tax positions to evaluate the more likely than not principle as it applied to the specific underlying tax position.
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We evaluated, with the assistance of our tax specialists, the Company’s unrecognized tax positions by performing the following:
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Obtaining management and third-party opinions or memoranda regarding the analysis of uncertain tax positions and identifying the key judgments and evaluating whether the analysis was consistent with our interpretation of the relevant laws and regulations.
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Evaluating the basis for certain intercompany transactions, such as transfer pricing, by comparison to economic studies performed by management and third-party data.
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Evaluating the matters raised by tax authorities in former and ongoing tax audits and considering the implications of these matters on open tax years.
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Assessing changes and interpretation of applicable tax law.
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/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
October 28, 2019
We have served as the Company's auditor since 2002.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of Walgreens Boots Alliance, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Walgreens Boots Alliance, Inc. and subsidiaries (the “Company”) as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of August 31, 2019, based on criteria established in Internal Control - Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements as of and for the year ended August 31, 2019, of the Company and our report dated October 28, 2019, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ DELOITTE & TOUCHE LLP
Chicago, Illinois
October 28, 2019