Full Press Release Details
INDEPENDENT AUDITORS' REPORT
To the shareholders and the Board of Directors of Walgreens Boots Alliance, Inc.:
We have audited the accompanying combined financial statements of certain Pharmaceutical Wholesale and Retail Pharmacy International businesses of Walgreens Boots Alliance, Inc. (the "Business"), which comprise the combined balance sheet as of August 31, 2020 and 2019, and the related combined statements of equity, earnings, comprehensive income and cash flows for the years then ended, and the related notes to the combined financial statements.
Management's Responsibility for the Combined Financial Statements
Management is responsible for the preparation and fair presentation of these combined financial statements in accordance with accounting principles generally accepted in the United States of America; this includes the design, implementation, and maintenance of internal control relevant to the preparation and fair presentation of financial statements that are free from material misstatement, whether due to fraud or error.
Auditors' Responsibility
Our responsibility is to express an opinion on these combined financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the combined financial statements are free from material misstatement.
An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the combined financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the combined financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the Business's preparation and fair presentation of the combined financial statements in order to design audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Business's internal control. Accordingly, we express no such opinion. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of significant accounting estimates made by management, as well as evaluating the overall presentation of the combined financial statements.
We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our audit opinion.
In our opinion, the combined financial statements referred to above present fairly, in all material respects, the financial position of certain Pharmaceutical Wholesale and Retail Pharmacy International businesses of Walgreens Boots Alliance, Inc. as of August 31, 2020 and 2019, and the results of their operations and their cash flows for the years then ended in accordance with accounting principles generally accepted in the United States of America.
Emphasis of Matter
As described in Note 1, the accompanying combined financial statements have been derived from the accounting records of Walgreens Boots Alliance, Inc. The combined financial statements include the allocation of certain assets, liabilities, expenses and income that have historically been held at the Walgreens Boots Alliance corporate level but which are specifically identifiable or attributable to the Business. The combined financial statements also include expense allocations for certain corporate functions historically provided by Walgreens Boots Alliance, Inc. These costs and allocations may not be reflective of the actual expense which would have been incurred had the Business operated as a separate unaffiliated entity apart from Walgreens Boots Alliance, Inc.
Change in Accounting Principle
As described in Note 2 to the financial statements, effective September 1, 2019, the Business adopted Financial Accounting Standards Board Accounting Standards Update 2016-02, Leases (Topic 842) , using the modified retrospective approach which does not require prior periods to be restated.
December 22, 2020
WALGREENS BOOTS ALLIANCE WHOLESALE AND RETAIL BUSINESSES COMBINED BALANCE SHEETS
At August 31, 2020 and 2019 (in millions)
| 2020 | 2019 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 143 | $ | 175 | ||||
| Accounts receivable, net | 3,022 | 2,968 | ||||||
| Due from Parent (see Note 12) | 1,557 | 1,419 | ||||||
| Inventories | 1,535 | 1,331 | ||||||
| Other current assets | 376 | 233 | ||||||
| Total current assets | 6,633 | 6,126 | ||||||
| Non-current assets: | ||||||||
| Property, plant and equipment, net | 546 | 530 | ||||||
| Operating lease right-of-use asset | 271 | - | ||||||
| Goodwill | 3,274 | 3,035 | ||||||
| Intangible assets, net | 681 | 712 | ||||||
| Equity method investments | 134 | 127 | ||||||
| Other non-current assets | 97 | 42 | ||||||
| Total non-current assets | 5,003 | 4,446 | ||||||
| Total assets | $ | 11,636 | $ | 10,572 | ||||
| Liabilities and equity | ||||||||
| Current liabilities: | ||||||||
| Short-term debt | $ | 368 | $ | 354 | ||||
| Due to Parent (see Note 12) | 60 | 46 | ||||||
| Trade accounts payable | 4,313 | 4,101 | ||||||
| Operating lease obligation | 68 | - | ||||||
| Accrued expenses and other liabilities | 679 | 442 | ||||||
| Income taxes | 17 | 37 | ||||||
| Total current liabilities | 5,505 | 4,980 | ||||||
| Non-current liabilities: | ||||||||
| Operating lease obligation | 209 | - | ||||||
| Due to Parent (see Note 12) | 864 | 801 | ||||||
| Deferred income taxes | 131 | 133 | ||||||
| Other non-current liabilities | 73 | 85 | ||||||
| Total non-current liabilities | 1,277 | 1,019 | ||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Equity: | ||||||||
| Net Parent investment | 5,814 | 5,848 | ||||||
| Accumulated other comprehensive loss | (1,022 | ) | (1,333 | ) | ||||
| Total equity attributable to the Business | 4,792 | 4,515 | ||||||
| Noncontrolling interests | 62 | 58 | ||||||
| Total equity | 4,854 | 4,573 | ||||||
| Total liabilities and equity | $ | 11,636 | $ | 10,572 |
The accompanying notes to Combined Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE WHOLESALE AND RETAIL BUSINESSES COMBINED STATEMENTS OF EQUITY For the years ended August 31, 2020 and 2019 (in millions)
| Equity attributable to the Business | ||||||||||||||||
| Accumulated | ||||||||||||||||
| other | ||||||||||||||||
| Net Parent | comprehensive | Noncontrolling | Total | |||||||||||||
| investment | income (loss) | interests | equity | |||||||||||||
| August 31, 2018 | $ | 6,007 | $ | (1,093 | ) | $ | 50 | $ | 4,964 | |||||||
| Net earnings | 98 | - | 6 | 104 | ||||||||||||
| Other comprehensive income (loss), net of tax | - | (240 | ) | 2 | (238 | ) | ||||||||||
| Net transfers to Parent | (257 | ) | - | - | (257 | ) | ||||||||||
| August 31, 2019 | 5,848 | (1,333 | ) | 58 | 4,573 | |||||||||||
| Net earnings | 198 | - | 9 | 207 | ||||||||||||
| Other comprehensive income (loss), net of tax | - | 311 | 2 | 313 | ||||||||||||
| Net transfers to Parent | (232 | ) | - | - | (232 | ) | ||||||||||
| Distribution to Noncontrolling interests | - | - | (7 | ) | (7 | ) | ||||||||||
| August 31, 2020 | $ | 5,814 | $ | (1,022 | ) | $ | 62 | $ | 4,854 |
The accompanying notes to Combined Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE WHOLESALE AND RETAIL BUSINESSES COMBINED STATEMENTS OF EARNINGS For the years ended August 31, 2020 and 2019 (in millions)
| 2020 | 2019 | |||||||
| Sales | $ | 17,290 | $ | 16,547 | ||||
| Related party sales (see Note 12) | 1,779 | 1,813 | ||||||
| Total Sales | 19,069 | 18,360 | ||||||
| Cost of sales | 17,130 | 16,443 | ||||||
| Gross profit | 1,939 | 1,917 | ||||||
| Selling, general and administrative expenses | 1,620 | 1,708 | ||||||
| Operating income | 319 | 209 | ||||||
| Other expense | (2 | ) | (2 | ) | ||||
| Earnings before interest and income tax provision | 317 | 207 | ||||||
| Interest expense, net | 49 | 77 | ||||||
| Earnings before income tax provision | 268 | 131 | ||||||
| Income tax provision | 71 | 42 | ||||||
| Post tax earnings from equity method investments | 10 | 15 | ||||||
| Net earnings | 207 | 104 | ||||||
| Net earnings attributable to noncontrolling interests | 9 | 6 | ||||||
| Net earnings attributable to the Business | $ | 198 | $ | 98 |
The accompanying notes to Combined Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE
WHOLESALE AND RETAIL BUSINESSES
COMBINED STATEMENTS OF COMPREHENSIVE INCOME For the years ended August 31, 2020 and 2019
| 2020 | 2019 | |||||||
| Comprehensive income: | ||||||||
| Net earnings | $ | 207 | $ | 104 | ||||
| Other comprehensive income (loss), net of tax: | ||||||||
| Pension/postretirement obligations | (3 | ) | (5 | ) | ||||
| Currency translation adjustments | 316 | (233 | ) | |||||
| Total other comprehensive income (loss) | 313 | (238 | ) | |||||
| Total comprehensive income (loss) | 520 | (134 | ) | |||||
| Comprehensive income attributable to noncontrolling interests | 11 | 8 | ||||||
| Comprehensive income (loss) attributable to the Business | $ | 509 | $ | (142 | ) |
The accompanying notes to Combined Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE
WHOLESALE AND RETAIL BUSINESSES COMBINED STATEMENTS OF CASH FLOWS For the years ended August 31, 2020 and 2019 (in millions)
| 2020 | 2019 | |||||||
| Cash flows from operating activities: | ||||||||
| Net earnings | $ | 207 | $ | 104 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: | ||||||||
| Depreciation and amortization | 141 | 143 | ||||||
| Deferred income taxes | (11 | ) | (22 | ) | ||||
| Earnings from equity method investments | (10 | ) | (15 | ) | ||||
| Asset impairment | 19 | 97 | ||||||
| Other | 17 | 15 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Accounts receivable, net | (41 | ) | (367 | ) | ||||
| Inventories | (182 | ) | (99 | ) | ||||
| Other current assets | (108 | ) | (6 | ) | ||||
| Trade accounts payable | 113 | 325 | ||||||
| Accrued expenses and other liabilities | 185 | 67 | ||||||
| Income taxes | (20 | ) | (15 | ) | ||||
| Other non-current assets and liabilities | (58 | ) | 13 | |||||
| Accounts receivable from Parent, net | 75 | (7 | ) | |||||
| Net cash provided by operating activities | 327 | 233 | ||||||
| Cash flows from investing activities: | ||||||||
| Additions to property, plant and equipment | (86 | ) | (104 | ) | ||||
| Net change in cash pool receivable from Parent | (64 | ) | (32 | ) | ||||
| Net change in loan receivable from Parent | (14 | ) | - | |||||
| Other | 6 | 7 | ||||||
| Net cash used for investing activities | (158 | ) | (129 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Net change in short-term debt with maturities of 3 months or less | 27 | 121 | ||||||
| Other | (5 | ) | (1 | ) | ||||
| Net distribution to Parent | (201 | ) | (222 | ) | ||||
| Net cash used for financing activities | (179 | ) | (102 | ) | ||||
| Effect of exchange rate changes on cash, cash equivalents and restricted cash | 2 | (18 | ) | |||||
| Changes in cash, cash equivalents and restricted cash | ||||||||
| Net (decrease) in cash, cash equivalents, and restricted cash | (8 | ) | (16 | ) | ||||
| Cash, cash equivalents and restricted cash at beginning of period | 319 | 335 | ||||||
| Cash, cash equivalents and restricted cash at end of period | $ | 311 | $ | 319 |
The accompanying notes to Combined Financial Statements are an integral part of these Statements.
WALGREENS BOOTS ALLIANCE
WHOLESALE AND RETAIL BUSINESSES
NOTES TO COMBINED FINANCIAL STATEMENTS
Note 1. Organization, operations and basis of presentation
These combined financial statements comprise certain pharmaceutical wholesale and retail pharmacy operations (the "Business") of Walgreens Boots Alliance, Inc. ("WBA").
Pharmaceutical wholesale operations comprise businesses located in the United Kingdom, France, Turkey, Spain, the Netherlands, Egypt, Norway, Romania, Czech Republic and Lithuania. Sales within these businesses are principally derived from wholesaling and distribution of a comprehensive offering of brand name and generic pharmaceuticals, health and beauty products, home healthcare supplies and equipment and related services to pharmacies, doctors, health centers and hospitals.
Retail pharmacy operations comprise retail stores in Norway, the Netherlands and Lithuania. Sales within these businesses are principally derived from pharmacy led sales of prescription drugs and health and wellness, beauty and personal care and other consumer products.
Basis of presentation
The Business's Combined Financial Statements have been prepared on a stand-alone basis and reflect a combination of entities and portions of certain entities under common control that have been "carved out" of and derived from the WBA historical Consolidated Financial Statements and accounting records. Accordingly, WBA's net investment in this Business ("Net Parent Investment") is presented in lieu of a controlling interest's equity in the Combined Financial Statements. Therefore, the Combined Financial Statements reflect the Business's historical combined financial position, results of operations and cash flows as the Business was historically operated as part of WBA. As a result, the Business's Combined Financial Statements may not be indicative of the Business's future performance and do not necessarily reflect what the Business's combined results of operations, financial condition and cash flows would have been had the Business operated as a separate Business during the periods presented.
The Business is comprised of certain stand-alone legal entities for which discrete financial information is available, as well as portions of legal entities for which discrete financial information is not available (shared legal entities). For the shared legal entities for which discrete financial information was not available, allocation methodologies were applied to certain accounts to allocate amounts to the Business as discussed further in Note 12 - Related parties. The Combined Statements of Earnings include all sales and costs directly attributable to the Business, including costs for facilities, functions and services used by the Business. Certain shared costs and benefits have been directly charged to the Business based on direct usage or other allocation methods.
The Business participates in certain shared cash pool arrangements with WBA but retains a legal right to cash balances swept by WBA. WBA funds the Business's operating and investing activities as needed. This arrangement is not reflective of the manner in which the Business would have been able to finance its operations had it been a stand-alone business separate from WBA during the periods presented. Cash pooling arrangements along with transfers to and from WBA's cash management accounts are reflected in the Combined Balance Sheets as current amounts Due to and Due from Parent, and in the Combined Statements of Cash Flows as net investing activities. These Due to and Due from Parent balances are expected to be settled in the ordinary course of business.
The Combined Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("US GAAP"). The Business 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 transactions between the entities comprising the Business have been eliminated. As described in Note 12 - Related parties, all significant transactions between the Business and WBA have been included in these Combined Financial Statements.
The combined operations of the Business are treated as if it was a separate taxpayer following the separate return methodology. See Note 9 - Income taxes.
The preparation of the Combined Financial Statements in accordance with GAAP requires management to use judgment in the application of accounting policies, including making estimates and assumptions. These estimates are based on the information available at the time, historical experience and various other assumptions believed to be reasonable under the circumstances including estimates of the impact of coronavirus COVID-19 ("COVID-19"). Significant estimates inherent in the preparation of these Combined Financial Statements include, but are not limited to, accounting for inventory, evaluation of goodwill and other assets for impairment, income taxes and other contingencies .
To the extent to which COVID-19 impacts the Business's financial results will depend on numerous evolving factors including, but not limited to, the severity and duration of COVID-19, the extent to which it will impact the Business's customers, team members, suppliers, vendors, business partners, and distribution channels.
Management of the Business have evaluated subsequent events through December, 22, 2020 which is the date of issuance or the date on which the financial statements were available to be issued.
Certain amounts in the Combined Financial Statements and associated notes may not foot due to rounding.
Note 2. Summary of major accounting policies
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.
Restricted cash
The Business is required to maintain certain cash deposits with banks mainly consisting of deposits restricted under contractual agency agreements and cash restricted by law and other obligations. At August 31, 2020 and 2019, the amount of such restricted cash was $168 million and $144 million, respectively, and is reported in other current assets on the Combined Balance Sheets.
The following represents a reconciliation of cash and cash equivalents in the Combined Balance Sheets to total cash, cash equivalents and restricted cash in the Combined Statements of Cash Flows as of August 31, 2020 and 2019, (in millions):
| August 31, 2020 | August 31, 2019 | |||||||
| Cash and cash equivalents | $ | 143 | $ | 175 | ||||
| Restricted cash (included in other current assets) | 168 | 144 | ||||||
| Cash, cash equivalents and restricted cash | $ | 311 | $ | 319 |
Accounts receivable
Accounts receivable are stated net of allowances for doubtful accounts. Accounts receivable balances primarily consist of trade receivables due from customers, clients and members. Trade receivables were $2.9 billion at August 31, 2020 and August 31, 2019. Other accounts receivable balances consist primarily of receivables from vendors and manufacturers. The carrying values of trade accounts receivable and trade accounts payable approximated their respective fair values due to their short-term nature.
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, 2020 and August 31, 2019 was $35 million and $28 million, respectively.
Factoring arrangement s
The Business entered into factoring agreements with various European financial institutions to sell accounts receivable under non-recourse agreements, transferring effective control and risk related to the receivables. These transactions are treated as a sale and were accounted for as a reduction in accounts receivable. The cost of factoring such accounts receivable, is reflected in the Combined Statement of Earnings within Selling, general and administrative expenses. The Business expects to continue to use this factoring arrangement periodically to assist with our general working capital requirements.
The Business values inventories on a lower of cost and net realizable value basis. Inventories include product costs, inbound freight, warehousing costs for retail pharmacy operations, direct labor and distribution of products and vendor allowances not classified as a reduction of advertising expense. Substantially all of the Business's inventory is accounted for using the first in first out method.
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 finance lease and finance lease properties are amortized over their respective estimate of useful life or over the term of the lease, whichever is shorter.
The following table summarizes the Business's property, plant and equipment (in millions) and estimated useful lives (in years):
| Estimated useful life | 2020 | 2019 | ||||||||||
| Land and land improvements | 20 | $ | 96 | $ | 93 | |||||||
| Buildings and building improvements | 3 to 50 | 208 | 192 | |||||||||
| Fixtures and equipment | 3 to 20 | 374 | 327 | |||||||||
| Capitalized system development costs and software | 3 to 8 | 201 | 178 | |||||||||
| 879 | 790 | |||||||||||
| Less: accumulated depreciation and amortization | 333 | 260 | ||||||||||
| Balance at end of year | $ | 546 | $ | 530 |
The Business 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 $14 million in fiscal 2020 and $15 million in fiscal 2019. Unamortized costs were $111 million at August 31, 2020 and $103 million at August 31, 2019. The Business impaired $16 million and $96 million of previously capitalized system development costs in fiscal 2020 and 2019, respectively, relating to write down of certain software as part of a transformational cost management program (the "Transformational Cost Management Program"), as discussed in Note 3 - Exit and disposal activities.
Depreciation and amortization expense for property, plant and equipment, including capitalized system development costs and software, was $64 million in fiscal 2020 and fiscal 2019.
The Business determines if an arrangement contains a lease at the inception of a contract. The lease classification is determined at the commencement date. Right-of-use assets represent the Business's right to use an underlying asset for the lease term and lease liabilities represent the Business's obligation to make lease payments arising from the lease during the lease term. Right-of-use assets and lease liabilities are recognized at the commencement date based on the present value of the remaining future minimum lease payments during the lease term. The commencement date of all lease terms is the earlier of the date the Business becomes legally obligated to make rent payments or the date the Business has the right to control the property. The Business utilizes its incremental borrowing rate to discount the lease payments. The incremental borrowing rate is based on the Business's estimated rate of interest for a collateralized borrowing over a similar term as the lease term. The operating lease right-of-use assets also include lease payments made before commencement, lease incentives and are recorded net of impairment. Operating leases are expensed on a straight-line basis over the lease term.
Initial terms for leased premises are typically 5 to 15 years. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheet.
The Business accounts for lease components and non-lease components as a single lease component. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the right-of-use assets or lease liabilities. These are expensed as incurred. The Business has real estate leases which require additional payments for reimbursement of real estate taxes, common area maintenance and insurance, which are expensed as incurred as variable lease costs and hence are not included in the lease payments used to calculate lease liability. Other real estate leases contain one fixed lease payment that includes real estate taxes, common area maintenance and insurance. These fixed payments are considered part of the lease payment and included in the right- of-use assets and lease liabilities. The Business does not separately account for the land portion of the leases involving land and building.
Finance leases are recognized within property, plant and equipment and as a finance lease liability within accrued expenses and other liabilities and other noncurrent liabilities. Finance lease obligations as of August 31, 2020 and 2019 was $10 million and $13 million respectively.
See Note 4 - Leases for further information.
Goodwill and indefinite-lived 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 Business'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. Indefinite-lived intangible assets are tested for impairment 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.
See Note 6 - Goodwill and other intangible assets, for additional disclosure regarding the Business's intangible assets.
Equity method investments