WALGREENS BOOTS ALLIANCE, INC. 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 toWalgreens 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 each of the periods presented.
INTRODUCTION AND SEGMENTSWalgreens Boots Alliance, Inc. and its subsidiaries is a global leader in retail pharmacy. Its operations are conducted through two reportable segments: •United States; and •International
See Note 17 Segment reporting and Note 18 Sales, to the Consolidated Financial Statements included in Part II, Item 8 below for additional information.
FACTORS, TRENDS AND UNCERTAINTIES AFFECTING OUR RESULTS AND COMPARABILITYThe 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 historical results or current expectations. These factors include: the impact of the COVID-19 pandemic ("COVID-19") on our operations and financial results; the 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, dispositions, joint ventures and other strategic collaborations; changes in laws, includingU.S. tax law changes; changes in trade tariffs, including trade relations between theU.S. andChina , and international relations, including theUK's withdrawal from theEuropean 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); the timing and severity of the cough, cold and flu season; fluctuations in variable costs; the impacts of looting, natural disasters, war, terrorism and other catastrophic events, and changes in general economic conditions in the markets in which the Company operates. Specialty pharmacy represents a significant and growing proportion of prescription drug spending in theU.S. , a significant portion of which is dispensed outside of traditional retail pharmacies. To better serve the evolving specialty pharmacy market, inMarch 2017 , we andPrime Therapeutics LLC , a PBM, closed a transaction to form a combined central specialty pharmacy and mail services company, AllianceRxWalgreens Prime, using an innovative model that seeks to align pharmacy, PBM and health plans to coordinate patient care, improve health outcomes and deliver cost of care opportunities. Certain clients of our joint venture were and are not obligated to contract through our joint venture, and have in the past, and may in the future, enter into specialty pharmacy and other agreements without involving our joint venture. Over the last year, certain clients have chosen not to renew their contracts through our joint venture which will impact gross sales. However, considering the relatively low margin nature of this business, we do not anticipate this having a material impact on operating income. 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.
COVID-19
COVID-19 has severely impacted, and may continue to impact, the economies of theU.S. , theUK and other countries around the world. COVID-19 has created significant public health concerns as well as significant volatility, uncertainty and economic disruption in every region in which we operate, which has adversely affected, and may again adversely affect, our industries and our business operations. Further, financial and credit markets experienced, and may again experience, volatility. Policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, temporary closure or reduced hours of operation of certain store locations in theU.S. , theUK and other countries, reduced customer traffic and sales in our retail pharmacies and the adoption of work-from-home policies. WBA Fiscal 2021 Form 10-K 29
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Table of Con t e n t In response to COVID-19, various domestic and foreign federal, state and local governmental legislation, regulations, orders, policies and initiatives have been implemented that are designed to reduce the transmission of COVID-19, as well as to help address economic and market volatility and instability resulting from COVID-19. The Company has assessed and will continue to assess the impact of these governmental actions on the Company. The Company has participated in certain of these programs, including for example availing itself to certain tax deferrals which were introduced by the CARES Act in theU.S. and certain tax deferral and benefit and employee wage support in theUK , and if available, may continue to do so in the future. During the first half of fiscal 2021, the Company experienced certain adverse impacts of COVID-19. Sales were negatively impacted withinthe United States segment driven by low level of flu incidences as social distancing measures continued to remain in place across theU.S. Sales were also negatively impacted within the International segment, which reflected a reduction in footfall in BootsUK stores as a second national lockdown was declared inNovember 2020 . The Company took measures to keep stores open, incurring incremental selling, general and administrative expenses including higher employee costs and store expenses related to social distancing and incremental cleaning, COVID-19 drive-through testing sites expenses, safeguarding store environments as well as preparing for the rollout of mass vaccinations. In the beginning of fiscal 2021, the Company also took certain actions to partly mitigate the impact of COVID-19 through cost containment across the Company including temporary store closures and decreasing store hours and reducing rent at some locations. The Company's operating income was significantly and adversely impacted during the first half of fiscal 2021 as a result of COVID-19. During the second half of fiscal 2021, the Company experienced sequential improvement compared to the first half of fiscal 2021 as sales and comparable scripts were positively impacted withinthe United States segment due to the acceleration of COVID-19 vaccination rollout and a recovery in retail.The United States segment's operating income was also positively impacted as a result of COVID-19 vaccines administered, net of incremental labor and other costs related to the vaccination program. The International segment experienced a rebound in retail sales and operating income during the second half of fiscal 2021 resulting from the phased reopening of theUK high street and less severe COVID-19 restrictions. However, despite these improvements during the second half of fiscal 2021, store footfall in theUK remained below pre-COVID-19 levels. The Company has taken a number of proactive actions consistent with regulatory directives, such as digital 'order ahead' drive-through offering services with an increased range of products available for drive-through pick-up and curbside collection and put in place new delivery options available nationwide in theU.S during fiscal 2021. To continue to work with customers and manage operations through the pandemic, the Company launched a new COVID-19 testing program for businesses in fiscal 2020. As ofAugust 31, 2021 , the Company has administered 12.9 million COVID-19 tests in theU.S. as part of its Test & Protect efforts. In the International segment, Boots administered more than 3.7 million COVID-19 tests in theUK , mostly undertaken in partnership with theNational Health Service ("NHS"). BootsUK has a growing private test offering with several at home and in-store tests available, in addition to testing partnerships with several major airlines. The Company has worked with theCenters for Disease Control and Prevention ("CDC"),U.S. Department of Health and Human Services ("HHS") and theU.S. government to help administer COVID-19 vaccines to high priority groups, including long-term care facility residents and staff.The United States segment also expanded vaccination models to ensure convenient access, including same-day and walk-in appointments, mobile clinics, employer partnerships and extended hours. As ofAugust 31, 2021 ,the United States segment had administered approximately 34.6 million COVID-19 vaccinations, including 13.5 million in the three months endedAugust 31, 2021 . The situation surrounding COVID-19 remains fluid, and could result in additional mandates and directives, including revisions thereto, from foreign, federal, state, county and city authorities throughout the continuation of the COVID-19 pandemic and for some time thereafter. The impact on theU.S. and global economies and consumer, customer and health care utilization patterns depends upon the evolving factors and future developments related to COVID-19. As a result, the financial and/or operational impact on the Company, operating results, cash flows and/or financial condition is uncertain, but the impact, singularly or collectively, could be material and adverse.
The Company's current expectations described above are forward-looking statements and our actual results may differ. Factors that might cause a difference include, but are not limited to, those discussed below under "Cautionary note regarding forward-looking statements" and in Item 1A, Risk factors.
STRATEGIC UPDATE InOctober 2021 , the Company announced the launch of its new healthcare strategy. The Company plans to become a leading provider of local clinical care services by leveraging its consumer-centric technology and pharmacy network to deliver value-based care. The Company also plans to continue to transform its core pharmacy and retail business. The Company's goal is to provide better consumer experiences, improve health outcomes and lower costs. At the center of the Company's healthcare strategy isWalgreens Health , a technology-enabled care model powered by a nationally scaled, locally delivered healthcare
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Table of Con t e n t platform. To advance its strategy, the Company announced majority investments inVillage Practice Management Company, LLC ("VillageMD") andCareCentrix , which it believes will strengthenWalgreens Health capabilities in primary care, post-acute care and home care.
See Note 21. Subsequent events to the Consolidated Financial Statements included in Part II. Item 8 herein for further information.
RECENT TRANSACTIONS
Pharmaceutical Wholesale Transaction OnJune 1, 2021 , the Company completed the Alliance Healthcare Sale. See Item 1. Business. Recent Transactions for further details on the Alliance Healthcare Sale.
See Note 2 Discontinued operations, to the Consolidated Financial Statements included in Part II, Item 8 below for additional information.
VillageMD investment InJuly 2020 , the Company andVillageMD announced an expansion of their partnership and the intent to open 500 to 700 "Village Medical atWalgreens " physician-led primary care clinics over a five-year period. This expanded partnership was supported by the Company's investment inVillageMD over three years of$1.0 billion in equity and convertible debt, which included an initial$250 million equity investment. OnJanuary 6, 2021 , the Company andVillageMD announced the acceleration of the Company's investment inVillageMD . The Company completed the remaining$750 million investment during the twelve months endedAugust 31, 2021 , which will support the opening of 600 to 700 clinics in more than 30 U.S. markets over a four-year period, with the intent to build hundreds more thereafter. The Company held approximately 22% ownership interest inVillageMD as ofAugust 31, 2021 and accounted for it using the equity method of accounting. It was anticipated, assuming full conversion of the debt, that the Company would hold approximately 30% ownership interest inVillageMD upon conversion. OnOctober 14, 2021 the Company announced that it has agreed to make an additional$5.2 billion investment inVillageMD to advance its strategic position in the delivery of value-based primary care. The incremental investment increases the Company's ownership stake inVillageMD to approximately 63% from approximately 30% on a fully diluted basis, and increases the number of co-located clinics from 600 primary care clinics to 1,000 by the year 2027. The investment will be comprised of$4.0 billion in cash, to be paid by the Company toVillageMD at the closing of the transaction, and a promissory note in the principal amount of$1.2 billion toVillageMD at the closing of the transaction. The Company expects to fund the cash portion of the investment through a combination of cash on hand and available credit facilities
See Note 21. Subsequent events to the Consolidated Financial Statements included in Part II. Item 8 herein for further information.
iA acquisition OnDecember 29, 2020 , the Company acquired a majority equity interest inInnovation Associates, Inc. ("iA") for a cash consideration of$451 million . iA is a leading-edge provider of software enabled automation solutions for retail, hospital, federal healthcare and mail-order pharmacy markets. The Company accounted for this acquisition as a business combination and consolidates iA withinthe United States segment in its financial statements. Pharmaceutical Wholesale business inGermany OnNovember 1, 2020 , the Company and McKesson Corporation closed a transaction to form a combined pharmaceutical wholesale business inGermany , as part of a strategic alliance. The Company owns a 70% controlling equity interest in the combined business which is consolidated by the Company and reported within the International segment in its financial statements. The Company accounted for this acquisition as a business combination involving noncash purchase consideration of$296 million consisting of the issuance of an equity interest in the combined business. See Note 3 Acquisitions, to the Consolidated Financial Statements included in Part II, Item 8 below for additional information.
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Table of Con t e n t
TRANSFORMATIONAL COST MANAGEMENT PROGRAM OnDecember 20, 2018 , the Company announced a transformational cost management program that was expected to deliver in excess of$2.0 billion of annual cost savings by fiscal 2022 (the "Transformational Cost Management Program"). At the end of fiscal 2021, the Company had delivered this annual cost savings goal. Building on the successful implementation of the Transformational Cost Management Program to date and as part of the Company's strategic realignment to create even greater focus on the Company's core business, onOctober 12, 2021 , the Company's Board of Directors approved an expansion and extension of the Transformational Cost Management Program through the end of fiscal 2024. The expanded Transformational Cost Management Program is expected to deliver incremental savings from existing programs and a comprehensive funnel of new initiatives which are intended to improve operating effectiveness and better position the core business for the future. The expansion of the program reflects further strategic initiatives to optimize real estate, implement a global business and centralized services model, as well as leverage technology and new business models to streamline processes across the organization. As a result, the Company is increasing its annual savings target to$3.3 billion of annual cost savings by fiscal 2024. 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 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. As a result of the expanded program, the Company now plans to reduce its presence by up to 150 Boots stores in theUK and up to 150 stores inthe United States over the next three years, which are incremental to the previously planned reduction of approximately 200 Boots stores in theUK and approximately 250 stores inthe 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$3.6 billion to$3.9 billion , of which$3.3 billion to$3.6 billion are expected to be recorded as exit and disposal activities. The Company estimates that approximately 85% of the cumulative pre-tax charges relating to the Transformational Cost Management Program represent current or future cash expenditures, primarily related to employee severance and business transition costs, IT transformation and lease and other real estate payments. The Company currently estimates that it will recognize aggregate pre-tax charges to its GAAP financial results related to the Transformational Cost Management Program as follows: Transformational Cost Program Activities Range of Charges Lease obligations and other real estate costs1$1,250 to 1,350 million Asset impairments2$525 to 575 million Employee severance and business transition costs$1,150 to 1,200 million Information technology transformation and other exit costs$400 to 450 million Total cumulative pre-tax exit and disposal charges$3.3 to 3.6 billion Other IT transformation costs$275 to 325 million Total estimated pre-tax charges$3.6 to 3.9 billion 1Includes impairments relating to operating lease right-of-use and finance lease assets. 2Primarily related to store closures and other asset impairments. 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 recorded$508 million of transition adjustments to decrease retained earnings due to the adoption of the new lease accounting standard (Topic 842) that became effective onSeptember 1, 2019 . See Note 1 Summary of major accounting policies, to the Consolidated Financial Statements additional information. Since the inception of the Transformational Cost Management Program toAugust 31, 2021 , the Company has recognized aggregate cumulative pre-tax charges to its financial results in accordance with GAAP of$1.5 billion , of which$1.3 billion is recorded as exit and disposal activities. See Note 4 Exit and disposal activities, to the Consolidated Financial Statements included in Part II. Item 8 below for additional information. These charges included$353 million related to lease obligations and other real estate costs,$252 million in asset impairments,$513 million in employee severance and business transition costs,$163 million of information technology transformation and other exit costs, and$200 million in other information technology costs.
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Table of Con t e n t
Costs under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses and included in the fiscal year endedAugust 31, 2021 , 2020 and 2019, respectively were as follows (in millions): Corporate andWalgreens Boots
Twelve Months Ended
Other Alliance, Inc.
Lease obligations and other real estate
costs $ 103 $ 6 $ - $ 108
Asset impairments 15 9 - 24
Employee severance and business
transition costs 79 40 45 165
Information technology transformation and
other exit costs 20 17 - 38
Total pre-tax exit and disposal charges $ 217 $
72 $ 46 $ 335
Other IT transformation costs 63 19 - 82
Total pre-tax charges $ 279 $ 91 $ 46 $ 417
Corporate and Walgreens Boots
Twelve Months Ended
Other Alliance, Inc.
Lease obligations and other real estate
costs $ 191 $ 9 $ 14 $ 215
Asset impairments 51 19 2 72
Employee severance and business
transition costs 132 93 45 270
Information technology transformation and
other exit costs 70 42 (4) 108
Total pre-tax exit and disposal charges $ 444 $
163 $ 58 $ 665
Other IT transformation costs 55 18 - 73
Total pre-tax charges $ 498 $ 182 $ 58 737
Walgreens Boots
Twelve Months Ended
Corporate and Other Alliance, Inc.
Lease obligations and other real estate
costs $ 5 $ 26 $ - $ 30
Asset impairments 95 61 - 156
Employee severance and business
transition costs 41 37 1 78
Information technology transformation and
other exit costs 6 10 - 17
Total pre-tax exit and disposal charges $ 147 $
134 $ 1 $ 282 Other IT transformation costs 42 3 - 45 Total pre-tax charges $ 189 $ 137 $ 1 327 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. STORE OPTIMIZATION PROGRAM OnOctober 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'sUnited States segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Company closed 769 stores and related assets. The actions under the Store Optimization Program commenced inMarch 2018 and were completed in the fourth quarter of fiscal 2020. WBA Fiscal 2021 Form 10-K 33
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Costs related to Store Optimization Program for the twelve months endedAugust 2020 were$22 million for lease obligation and other real estate costs and$31 million for employee severance and other exit costs, respectively. The liabilities related to Store Optimization Program as ofAugust 31, 2021 andAugust 31, 2020 were not material. INVESTMENT IN AMERISOURCEBERGEN As ofAugust 31, 2021 andAugust 31, 2020 , respectively, the Company owned 58,854,867 and 56,854,867 shares of AmerisourceBergen common stock, representing approximately 28.5% and 27.9% of its outstanding common stock based on the share count publicly reported by AmerisourceBergen in its most recent Quarterly Report on Form 10-Q. The Company has a shareholders agreement with AmerisourceBergen, which was most recently amended and restated in connection with the Alliance Healthcare Sale (the "A&R Shareholders Agreement"). Pursuant to the A&R Shareholders Agreement, the Company has designated one member of AmerisourceBergen's board of directors. The Company is also permitted, subject to certain conditions, to acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market, and thereafter to designate another member of AmerisourceBergen's board of directors. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances. 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 (loss) attributable to the investment classified within the operating income of the Company'sUnited States segment. During the twelve months endedAugust 31, 2021 , the Company recognized equity losses in AmerisourceBergen of$1,139 million , which included a loss of$1,373 million recognized during the three months endedNovember 30, 2020 . These equity losses were primarily due to AmerisourceBergen's recognition of a$5.6 billion , net of tax charge related to its ongoing opioid litigation in its financial statements for the three month period endedSeptember 30, 2020 . As discussed above in Item 1, Recent Transactions, onJune 1, 2021 the Company completed the previously announced Alliance Healthcare Sale per the Share Purchase Agreement with AmerisourceBergen. See Note 2 Discontinued operations, to the Consolidated Financial Statements included in Part II. Item 8 below for additional information. The financial performance of AmerisourceBergen 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 Part I. Item 1. Business "Relationship with AmerisourceBergen" and Note 6 Equity method investments, to the Consolidated Financial Statements included in Part II. Item 8. EXECUTIVE SUMMARY The following table presents certain key financial statistics for the Company for fiscal 2021, 2020 and 2019:
(in millions, except per share amounts)
2021 2020 2019
Sales $ 132,509 $ 121,982 $ 120,074
Gross profit 28,067 26,078 28,159
Selling, general and administrative expenses 24,586 25,436 23,557
Equity earnings (loss) in AmerisourceBergen (1,139) 341 164
Operating income 2,342 982 4,766
Adjusted operating income (Non-GAAP measure)1 5,117 4,730 6,481
Earnings (loss) before interest and income tax provision 2,900 1,060 5,009
Net earnings attributable to
1,994 180 3,816
Adjusted net earnings attributable to
4,256 3,772 5,169
Diluted net earnings (loss) per common share - continuing operations (GAAP)
2.30 0.20 4.13
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)1
4.91 4.28 5.60
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Percentage increases (decreases)
2021 2020 2019
Sales 8.6 1.6 6.1
Gross profit 7.6 (7.4) (2.3)
Selling, general and administrative expenses (3.3) 8.0 1.8
Operating income 138.4 (79.4) (18.7)
Adjusted operating income (Non-GAAP measure)1 8.2 (27.0) (9.7)
Earnings before interest and income tax provision 173.7 (78.8) (10.5)
Net earnings attributable to
NM (95.3) (18.6)
Adjusted net earnings attributable to
12.8 (27.0) (7.1)
Diluted net earnings per common share - continuing operations (GAAP)
NM (95.1) (12.3)
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)1
14.6 (23.5) 0.1
Percent to sales
2021 2020 2019
Gross margin 21.2 21.4 23.5
Selling, general and administrative expenses 18.6 20.9 19.6
1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
NM - Not meaningful. Percentage increases above 200% or when one period includes income and other period includes loss are considered not meaningful.
WALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS The following information summarizes our results of operations for fiscal 2021 compared to fiscal 2020 and fiscal 2020 compared to fiscal 2019. In fiscal 2021, the Company completed the Alliance Healthcare Sale, pursuant to which theDisposal Group is reported as discontinued operations for all periods presented. The Company also eliminated the Pharmaceutical Wholesale segment and aligned into two reportable segments:United States and International, as further described below. Net earnings from continuing operations fiscal 2021 compared to fiscal 2020 Fiscal 2021 net earnings attributable to the Company was$2.0 billion compared to$180 million for the prior year period. Diluted net earnings per share was$2.30 compared to$0.20 for the prior year period. The increase in net earnings and diluted net earnings per share are primarily due to$2.0 billion non-cash impairment charges in the International segment, related to goodwill and intangible assets in the prior year period, earnings related to the Company's equity method investeeHC Group Holdings I, LLC ("HC Group Holdings ") and gain on partial sale of ownership interest in Option Care Health by the Company's equity method investeeHC Group Holdings , partially offset by equity losses in AmerisourceBergen during the three months endedNovember 30, 2020 . Diluted net earnings per share was positively affected by a lower number of shares outstanding compared with the prior year. Other income for fiscal 2021 was$558 million compared to$77 million for fiscal 2020. The increase in other income is mainly due to a partial sale of ownership interest in Option Care Health by the Company's equity method investee HC Group Holdings. Net Interest expense was$905 million and$613 million in fiscal 2021 and 2020, respectively. The increase in interest expense included$414 million related to the early extinguishment of debt related to the Company's cash tender offer to partially purchase and retire$3.3 billion of long-term debt in advance of its maturity. The Company's effective tax rate for fiscal 2021 and 2020 was 33.4% and 76.0%, respectively. The net decrease in the effective tax rate was primarily attributable to prior year non-deductible goodwill impairment charge and the discrete tax effect of equity losses in AmerisourceBergen, partially offset by the tax effect of equity earnings ofHC Group Holdings . WBA Fiscal 2021 Form 10-K 35
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Table of Con t e n t Adjusted diluted net earnings per share from continuing operations (Non-GAAP measure) fiscal 2021 compared to fiscal 2020 Adjusted net earnings attributable to the Company in fiscal 2021 increased 12.8 percent to$4.3 billion compared with the prior year. Adjusted diluted net earnings per share in fiscal 2021 increased 14.6 percent to$4.91 compared with the prior year. Adjusted net earnings and adjusted diluted earnings per share were both positively impacted by 0.9 percentage points as a result of currency translation. Excluding the impact of currency translation, the increase in adjusted net earnings for fiscal 2021 primarily reflects increased adjusted operating income acrossthe United States and International segments, and cost savings from the Transformational Cost Management Program. 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. Net earnings from continuing operations fiscal 2020 compared to fiscal 2019 Fiscal 2020 net earnings attributable to the Company decreased 95.3 percent to$180 million , while diluted net earnings per share decreased 95.1 percent to$0.20 compared with the prior year. The decrease primarily reflects third quarter non-cash impairment charges, adverse COVID-19 impacts, lowerU.S. pharmacy gross profit, and year on year bonus changes partially offset by savings from Transformational Cost Management Program. Diluted net earnings per share was positively affected by a lower number of shares outstanding compared with the prior year. Other income for fiscal 2020 was$77 million compared to$243 million for fiscal 2019. The decrease 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 in fiscal 2019.
Net interest expense was
The Company's effective tax rate for fiscal 2020 and 2019 was 76.0% and 13.2%, respectively. The net increase in the effective tax rate was primarily attributable to third quarter fiscal 2020 non-tax deductible impairment charges and deferred tax impact of theUK rate change. Adjusted diluted net earnings per share from continuing operations (Non-GAAP measure) fiscal 2020 compared to fiscal 2019 Adjusted net earnings attributable to the Company in fiscal 2020 decreased 27.0 percent to$3.8 billion compared with the prior year. Adjusted diluted net earnings per share in fiscal 2020 decreased 23.5 percent to$4.28 compared with the prior year. Adjusted net earnings and adjusted diluted earnings per share were both negatively impacted by 8.7 and 9.1 percentage points, respectively, as a result of currency translation. Excluding the impact of currency translation, the decrease in adjusted net earnings for fiscal 2020 was primarily due to COVID-19 adverse impacts, lowerU.S. pharmacy gross profit and year on year bonus changes partially offset by savings from the Transformational Cost Management Program. 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 In fiscal year endedAugust 31, 2021 , the Company eliminated the Pharmaceutical Wholesale segment and aligned into two reportable segments:United States and International. The following information summarizes our results of operations by segment for fiscal 2021 compared to fiscal 2020 and fiscal 2020 compared to fiscal 2019.United States The Company'sUnited States segment includes theWalgreens business which includes the operations of retail drugstores, health and wellness services, and mail and central specialty pharmacy services, and its equity method investment in AmerisourceBergen. 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, personal care and consumables and general merchandise. WBA Fiscal 2021 Form 10-K 36
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Table of Con t e n t
FINANCIAL PERFORMANCE
(in millions, except location amounts)
2021 2020 2019
Sales $ 112,005 $ 107,701 $ 104,532
Gross profit 23,736 22,302 23,618
Selling, general and administrative expenses 20,042 19,331 19,307
Equity earnings (loss) in AmerisourceBergen (1,139) 341 164
Operating income 2,554 3,312 4,475
Adjusted operating income (Non-GAAP measure)1 5,019 4,761 5,873
Number of prescriptions2 827.5 818.0 843.7
30-day equivalent prescriptions2,3 1,210.6 1,165.3 1,150.1
Number of locations at period end 8,973 9,028 9,285
Percentage increases (decreases)
2021 2020 2019
Sales 4.0 3.0 6.2
Gross profit 6.4 (5.6) (1.0)
Selling, general and administrative expenses 3.7 0.1 2.9
Operating income (22.9) (26.0) (15.3)
Adjusted operating income (Non-GAAP measure)1 5.4 (18.9) (9.0)
Comparable sales4 5.1 2.8 2.0
Pharmacy sales 5.5 4.3 8.6
Comparable pharmacy sales4 6.7 3.2 4.0
Retail sales (0.4) (0.4) -
Comparable retail sales4 1.2 1.6 (2.4)
Comparable number of prescriptions2,4 2.4 (1.3) (0.1)
Comparable 30-day equivalent prescriptions2,3,4 5.0 2.9 3.0
Percent to sales
2021 2020 2019
Gross margin 21.2 20.7 22.6
Selling, general and administrative expenses 17.9 17.9 18.5
1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. 2Includes vaccinations, including COVID-19. 3Includes 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. 4Comparable sales are defined as sales from stores that have been open for at least twelve consecutive months without closure for seven or more consecutive days, including due to looting or store damage, and without a major remodel or being subject to a natural disaster, in the past twelve months as well as e-commerce sales. E-commerce sales include digitally initiated sales online or through mobile applications. Relocated stores are not included as comparable sales for the first twelve months after the relocation. Acquired stores are not included as comparable sales for the first twelve months after acquisition or conversion, when applicable, whichever is later. Comparable sales, comparable pharmacy sales, comparable retail sales, comparable number of prescriptions and comparable number of 30-day equivalent prescriptions refer to total sales, pharmacy sales, retail sales, number of prescriptions and number of 30-day equivalent prescriptions, respectively. Comparable retail sales for previous periods have been restated to include e-commerce sales. The method of calculating comparable sales varies across the retail industry and our method of calculating comparable sales may not be the same as other retailers' methods. WBA Fiscal 2021 Form 10-K 37
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Table of Con t e n t
Sales fiscal 2021 compared to fiscal 2020The United States segment's sales for fiscal 2021 increased by 4.0% to$112.0 billion . Comparable sales increased by 5.1% in fiscal 2021. Pharmacy sales increased by 5.5% in fiscal 2021 and represented 75.8% of the segment's sales. The increase in fiscal 2021 is due to higher brand inflation and favorable COVID-19 vaccines and testing. In fiscal 2020, pharmacy sales increased 4.3% and represented 74.7% of the segment's sales. Comparable pharmacy sales increased 6.7% in fiscal 2021 compared to an increase of 3.2% in fiscal 2020. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 0.5% in fiscal 2021 compared to a reduction of 2.4% in fiscal 2020. The effect of generics on segment sales was a reduction of 0.4% in fiscal 2021 compared to a reduction of 1.7% for fiscal 2020. Third-party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.4% of prescription sales for fiscal 2021 compared to 97.2% for fiscal 2020. The total number of prescriptions (including vaccinations) filled in fiscal 2021 was 827.5 million compared to 818.0 million in fiscal 2020. Prescriptions (including vaccinations) adjusted to 30-day equivalents were 1,210.6 million in fiscal 2021 compared to 1,165.3 million in fiscal 2020. Retail sales decreased by 0.4% in fiscal 2021 and were 24.2% of the segment's sales. In comparison, fiscal 2020 retail sales decreased by 0.4% and comprised 25.3% of the segment's sales. Comparable retail sales increased 1.2% in fiscal 2021 and increased 1.6% in fiscal 2020. The increase in comparable retail sales in fiscal 2021 was primarily driven by health & wellness, including favorable vitamins and at-home COVID-19 tests, and beauty categories partially offset by the continued de-emphasis of tobacco. Operating income fiscal 2021 compared to fiscal 2020The United States segment's operating income for fiscal 2021 decreased 22.9% to$2.6 billion . The decrease was primarily due to the Company's share of equity loss in AmerisourceBergen and pharmacy reimbursement pressure, partially offset by COVID-19 vaccines and testing, and savings related to the Company's Transformational Cost Management Program. Gross margin was 21.2% in fiscal 2021 compared to 20.7% in fiscal 2020. Gross margin was positively impacted in fiscal 2021 by pharmacy margins, primarily due to COVID-19 vaccines and testing. The increase in pharmacy margins was partially offset by reimbursement pressure. Selling, general and administrative expenses as a percentage of sales were flat at 17.9% in fiscal 2021 and fiscal 2020. Savings related to the Company's Transformational Cost Management Program were offset by incremental COVID-19 related costs, mainly related to the vaccination program, as well as higher growth investments. Adjusted operating income (Non-GAAP measure) fiscal 2021 compared to fiscal 2020United States segment's adjusted operating income for fiscal 2021 increased 5.4% to$5.0 billion . The increase was primarily due to COVID-19 vaccines and testing, savings related to the Company's Transformational Cost Management Program and retail performance, partially offset by pharmacy reimbursement pressure and COVID-19 related costs.
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Sales fiscal 2020 compared to fiscal 2019The United States segment's sales for fiscal 2020 increased by 3.0% to$107.7 billion . Comparable sales increased by 2.8% in fiscal 2020. Pharmacy sales increased by 4.3% in fiscal 2020 and represented 74.7% of the segment's sales. The increase in fiscal 2020 was due to higher brand inflation and growth in specialty sales. In fiscal 2019, pharmacy sales increased 8.6% and represented 73.8% of the segment's sales. Comparable pharmacy sales increased 3.2% in fiscal 2020 compared to an increase of 4.0% in fiscal 2019. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.4% in fiscal 2020 compared to a reduction of 1.2% in fiscal 2019. The effect of generics on segment sales was a reduction of 1.7% in fiscal 2020 compared to a reduction of 0.8% for fiscal 2019. Third-party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.2% of prescription sales for fiscal 2020 compared to 97.1% for fiscal 2019. The total number of prescriptions (including vaccinations) filled in fiscal 2020 was 818.0 million compared to 843.7 million in fiscal 2019. Prescriptions (including vaccinations) adjusted to 30-day equivalents were 1,165.3 million in fiscal 2020 compared to 1,150.1 million in fiscal 2019. WBA Fiscal 2021 Form 10-K 38
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Table of Con t e n t Retail sales decreased by 0.4% in fiscal 2020 and were 25.3% of the segment's sales. In comparison, fiscal 2019 retail sales were flat and comprised 26.2% of the segment's sales. Comparable retail sales increased 1.6% in fiscal 2020 and decreased 2.4% in fiscal 2019. The increase in comparable retail sales in fiscal 2020 was primarily driven by health & wellness, including a favorable cough cold and flu season and personal care categories partially offset by the continued de-emphasis of tobacco.
Operating income fiscal 2020 compared to fiscal 2019
Gross margin was 20.7% in fiscal 2020 compared to 22.6% in fiscal 2019. Gross margin was negatively impacted in fiscal 2020 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 17.9% in fiscal 2020 compared to 18.5% in fiscal 2019. As a percentage of sales, expenses were lower in fiscal 2020 primarily due to savings related to the Transformational Cost Management Program and gains on sale-leaseback transactions in fiscal 2020, partially offset by costs related to the Company's Transformational Cost Management Program and year-on-year bonus impact. Adjusted operating income (Non-GAAP measure) fiscal 2020 compared to fiscal 2019The United States segment's adjusted operating income for fiscal 2020 decreased 18.9% to$4.8 billion . The decrease was primarily due to lower pharmacy margins, which were negatively impacted by reimbursement pressure, and COVID-19 adverse impacts 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.
International
The Company's International segment consists of pharmacy-led health and beauty retail businesses outside theU.S. and the Company's pharmaceutical wholesaling and distribution business inGermany . Pharmacy-led health and beauty retail businesses include Boots branded stores in theUK , theRepublic of Ireland andThailand , the Benavides brand inMexico and the Ahumada brand inChile . Sales for these businesses are principally derived from the sale of prescription drugs and health and wellness, beauty, personal care and other consumer products. The International segment operates in currencies other than theU.S. dollar, including the British pound sterling, Euro, Chilean peso and Mexican peso and therefore the segment's results are impacted by movements in foreign currency exchange rates. See Item 3, "Quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk", for further information on currency risk. The Company presents certain information related to operating results in "constant currency," which is a non-GAAP financial measure. Comparable sales in constant currency, comparable pharmacy sales in constant currency and comparable retail sales in constant currency exclude the effects of fluctuations in foreign currency exchange rates. See "--Non-GAAP Measures."
FINANCIAL PERFORMANCE
(in millions, except location amounts)
2021 2020 2019
Sales $ 20,505 $ 14,281 $ 15,542
Gross profit 4,328 3,774 4,540
Selling, general and administrative expenses 4,101 5,863 4,091
Operating income (loss) 227 (2,090) 448
Adjusted operating income (loss) (Non-GAAP measure)1 466 157 759
Number of locations at period end 4,031 4,192 4,360
WBA Fiscal 2021 Form 10-K 39
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Table of Con t e n t
Percentage increases (decreases)
2021 2020 2019
Sales 43.6 (8.1) (5.9)
Gross profit 14.7 (16.9) (8.5)
Selling, general and administrative expenses (30.1) 43.3 (1)
Operating income (loss) 110.9 NM (46.1)
Adjusted operating income (loss) (Non-GAAP measure)1 197.2 (79.4) (19.2)
Comparable sales in constant currency2 3.9 (8.8) (1.6)
Pharmacy sales 8.7 (4.1) (6.4)
Comparable pharmacy sales in constant currency2 6.7 - (0.9)
Retail sales 5.5 (17.8) (6.8)
Comparable retail sales in constant currency2 2.0 (13.9) (2.0)
Percent to sales
2021 2020 2019
Gross margin 21.1 26.4 29.2
Selling, general and administrative expenses 20.0 41.1 26.3
1See "--Non-GAAP Measures" below for a reconciliation to the most directly
comparable financial measure calculated in accordance with GAAP and related
disclosures.
2Comparable sales in constant currency are defined as sales from stores that
have been open for at least twelve consecutive months without closure for seven
or more consecutive days, including due to looting or store damage, and without
a major remodel or being subject to a natural disaster, in the past twelve
months as well as e-commerce sales. Comparable sales in constant currency
exclude wholesale sales. E-commerce sales include digitally initiated sales
online or through mobile applications. Relocated stores are not included as
comparable sales for the first twelve months after the relocation. Acquired
stores are not included as comparable sales for the first twelve months after
acquisition or conversion, when applicable, whichever is later. Comparable sales
in constant currency, comparable pharmacy sales in constant currency and
comparable retail sales in constant currency refer to total sales, pharmacy
sales and retail sales, respectively. Comparable retail sales in constant
currency for previous periods have been restated to include e-commerce sales.
The method of calculating comparable sales in constant currency varies across
the retail industry and our method of calculating comparable sales in constant
currency may not be the same as other retailers' methods.
NM - Not meaningful. Percentage increases/decreases when one period includes income and other period includes loss are considered not meaningful.
Sales fiscal 2021 compared to fiscal 2020 The International segment's sales for fiscal 2021 increased 43.6% to$20.5 billion . The favorable impact of currency translation on sales was 9.5 percentage points. Comparable sales in constant currency, which excludes sales from the Company's pharmaceutical wholesale combined business inGermany , increased 3.9 percent mainly due to higher sales in BootsUK as well as higher sales inLatin America andIreland . Following the adverse impact of COVID-19 restrictions in theUK during the first half of the year, sales in the second half recovered, reflecting increased store foot traffic. Pharmacy sales increased 8.7% in fiscal 2021 and represented 18.6% of the segment's sales. The favorable impact of currency translation on pharmacy sales was 6.8 percentage points. Comparable pharmacy sales in constant currency increased 6.7 percent primarily in theUK due to stronger pharmacy services (notably COVID-19 testing) and favorable National Health Service ("NHS") reimbursement levels, partially offset by lower prescription volume in theUK . In addition,Latin America showed strong pharmacy volume growth.
Retail sales increased 5.5% for fiscal 2021 and represented 30.4% of the
segment's sales. The favorable impact of currency translation on retail sales
was 6.5 percentage points. Comparable retail sales in constant currency
increased 2.0 percent reflecting higher retail sales in the
WBA Fiscal 2021 Form 10-K 40
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Table of Con t e n t Operating income fiscal 2021 compared to fiscal 2020 The International segment's operating income for fiscal 2021 was$227 million , compared to an operating loss of$2.1 billion in fiscal 2020. Operating income was favorably impacted by 1.0 percentage points ($21 million ) of currency translation. Excluding the impact of currency translation, the increase in operating income was primarily in theUK , due to goodwill and intangible asset impairment charges in the Boots reporting unit in the prior fiscal year, as well as the recovery in theUK in the second half of the year following the easing of COVID-19 restrictions supported by operational improvements. Gross profit increased 14.7% in fiscal 2021. Gross profit was favorably impacted by 7.3 percentage points ($277 million ) of currency translation. The remaining increase was primarily due to incremental gross profit associated with the formation of the Company's pharmaceutical wholesale combined business inGermany , higher gross profit in BootsUK pharmacy services together with pharmacy growth inLatin America and volume growth inIreland , partially offset by the impact of lowerUK store foot traffic compared to the prior fiscal year. Selling, general and administrative expenses decreased 30.1% in fiscal 2021 compared to fiscal 2020. Expenses were adversely impacted by 4.4 percentage points ($256 million ) as a result of currency translation. Excluding the impact of currency translation, the decrease was almost entirely due to goodwill and intangible asset impairment charges in the Boots reporting unit in the prior fiscal year. Incremental selling, general and administrative expenses associated with the formation of the Company's combined business inGermany were largely offset by cost savings from the Transformational Cost Management Program. As a percentage of sales, selling, general and administrative expenses were 20.0% in fiscal 2021, compared to 41.1% in the prior fiscal year. Adjusted operating income (Non-GAAP measure) fiscal 2021 compared to fiscal 2020 The International segment's adjusted operating income for fiscal 2021 increased$309 million to$466 million . Adjusted operating income was positively impacted by 17.9 percentage points ($28 million ) of currency translation. Excluding the impact of currency translation, the increase in adjusted operating income was primarily due to sales growth in theUK during the second half of the year, supported by operational improvements in a recoveringUK market. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. Sales fiscal 2020 compared to fiscal 2019 The International segment's sales for fiscal 2020 decreased 8.1% to$14.3 billion . The negative impact of currency translation on sales was 1.5 percentage points. Comparable sales in constant currency decreased 8.8% mainly due to lower retail sales in BootsUK , driven by a reduction in store foot traffic due to the impact of COVID-19. Pharmacy sales decreased 4.1% in fiscal 2020 and represented 24.5% of the segment's sales. The negative impact of currency translation on pharmacy sales was 2.2 percentage points. Comparable pharmacy sales in constant currency were flat as favorable National Health Service reimbursement levels mitigated the impact of lower prescription volume and reduced demand for services during the COVID-19 pandemic in BootsUK . Retail sales decreased 17.8% for fiscal 2020 and represented 41.3% of the segment's sales. The negative impact of currency translation on retail sales was 0.8 percentage points. Comparable retail sales in constant currency decreased 13.9% reflecting lower BootsUK retail sales, as footfall in stores in the second half of the year was significantly reduced due to COVID-19, particularly in major high street, train station and airport locations. Operating income fiscal 2020 compared to fiscal 2019 The International segment's operating loss for fiscal 2020 was$2.1 billion , compared to an operating income of$448 million in fiscal 2019. Operating income was positively impacted by 2.3 percentage points ($10 million ) of currency translation. Excluding the impact of currency translation, the decrease in operating income was primarily in theUK , due to goodwill and intangible asset impairment charges in the Boots reporting unit and lower gross profit reflecting lower sales from COVID-19 restrictions in BootsUK and Opticians.
Gross profit decreased 16.9% in fiscal 2020. Gross profit was negatively
impacted by 1.1 percentage points (
Selling, general and administrative expenses increased 43.3 percent from fiscal 2019. Expenses were positively impacted by 1.5 percentage points ($61 million ) as a result of currency translation. Excluding the impact of currency translation, the increase was almost entirely due to goodwill and intangible asset impairment charges in the Boots reporting unit partially offset by short term cost mitigation initiatives. As a percentage of sales, selling, general and administrative expenses were 41.1% in fiscal 2020, compared to 26.3% in the prior fiscal year. WBA Fiscal 2021 Form 10-K 41
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Table of Con t e n t
Adjusted operating income (Non-GAAP measure) fiscal 2020 compared to fiscal 2019 The International segment's adjusted operating income for fiscal 2020 decreased 79.4% to$157 million . Adjusted operating income was positively impacted by 1.1 percentage points ($9 million ) of currency translation. Excluding the impact of currency translation, the decrease in adjusted operating income was primarily due to lower retail sales in theUK including the impact of COVID-19. 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 underSEC rules, presented herein to the most directly comparable financial measures calculated and presented in accordance with generally accepted accounting principles inthe United States (GAAP). The Company has provided the non-GAAP financial measures herein, 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 management has evaluated the Company's 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's business from period to period and trends in the Company's 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 herein. The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various items that have not yet occurred, are out of the Company's control or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking GAAP financial measure. For the same reasons, the Company is unable to address the probable significance of the unavailable information. Forward-looking non-GAAP financial measures may vary materially from the corresponding GAAP financial measures.
NON-GAAP RECONCILIATIONS
Operating income to Adjusted operating income by segments
(in millions)
Twelve months ended August 31, 2021
Corporate and Walgreens Boots
United States International Other Alliance, Inc.
Operating income (GAAP) $ 2,554 $ 227 $ (439) $ 2,342
Adjustments to equity (loss) earnings in
AmerisourceBergen 1,645 - - 1,645
Acquisition-related amortization 448 75 - 523
Transformational cost management 279 91 46 417
Certain legal and regulatory accruals and
settlements 75 - - 75
Acquisition-related costs 6 24 24 54
Impairment of goodwill and intangible assets - 49 - 49
LIFO provision 13 - - 13
Adjusted operating income (Non-GAAP measure) $ 5,019 $ 466 $ (368) $ 5,117
WBA Fiscal 2021 Form 10-K 42
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Table of Con t e n t
(in millions)
Twelve months ended August 31, 2020
Corporate and Walgreens Boots
United States International Other Alliance, Inc.
Operating income (GAAP) $ 3,312 $ (2,090) $ (239) $ 982
Adjustments to equity (loss) earnings in
AmerisourceBergen 97 - - 97
Acquisition-related amortization 309 75 - 384
Transformational cost management 498 182 40 719
Acquisition-related costs 296 6 12 315
LIFO provision 95 - - 95
Store damage and inventory losses 68 - - 68
Store optimization 53 - - 53
Impairment of goodwill and intangible assets 32 1,984 - 2,016
Adjusted operating income (Non-GAAP measure) $ 4,761 $ 157 $ (187) $ 4,730
(in millions)
Twelve months ended August 31, 2019
Corporate and Walgreens Boots
United States International Other Alliance, Inc.
Operating income (GAAP) $ 4,475 $ 448 $ (157) $ 4,766
Adjustments to equity (loss) earnings in
AmerisourceBergen 233 - - 233
Acquisition-related amortization 315 101 - 416
Transformational cost management 189 137 1 327
Certain legal and regulatory accruals and
settlements 31 - - 31
Acquisition-related costs 299 - 5 303
Impairment of goodwill and intangible assets - 73 - 73
LIFO provision 136 - - 136
Store optimization 196 - - 196
Adjusted operating income (Non-GAAP measure) $ 5,873 $ 759 $ (152) $ 6,481
WBA Fiscal 2021 Form 10-K 43
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Table of Con t e n t
Net Earnings to Adjusted net earnings & Earnings per share to Adjusted Earnings
per share
(in millions)
2021 2020 2019
Net Earnings From Continuing Operations (GAAP) $
1,994
Adjustments to operating income: Adjustments to equity (loss) earnings in AmerisourceBergen 1 1,645 97 233 Acquisition-related amortization 2 523 384 416 Transformational cost management 3 417 719 327 Certain legal and regulatory accruals and settlements 4 75 - 31 Acquisition-related costs 5 54 315 303 Impairment of goodwill and intangible assets 6 49 2,016 73 LIFO provision 7 13 95 136 Store damage and inventory losses 8 - 68 - Store optimization 3 - 53 196 Total adjustments to operating income 2,775 3,747 1,715 Adjustments to other income: Net investment hedging (gain) loss 9 8 (11) 18 Impairment of equity method investment - 71 - Termination of option granted to Rite Aid 14 - - (173) Gain on sale of equity method investment 10 (290) (1) - Total adjustments to other income (281) 59 (155) Adjustments to interest expense, net: Early debt extinguishment 11 414 - - Total adjustments to interest expense, net 414 - - Adjustments to income tax provision: UK tax rate change 12 378 139 - U.S. tax law changes 12 - (6) (8) Equity method non-cash tax 12 (161) 60 18 Tax impact of adjustments 12 (283) (433) (257) Total adjustments to income tax provision (65) (240) (247)
Adjustments to post-tax equity earnings from other equity method investments: Adjustments to equity earnings in other equity method investments 13
(504) 54 40
Total adjustments to post-tax equity earnings from other equity method investments
(504) 54 40
Adjustments to net earnings (loss) attributable to noncontrolling interests: Acquisition-related amortization 2
(75) (4) -
Transformational cost management 3 1 (10) -
Impairment of goodwill and intangible assets 6 - (14) -
LIFO provision 7 (2) (1) -
Total adjustments to net earnings (loss) attributable to noncontrolling interests
(77) (29) -
Adjusted net earnings attributable to Continuing Operations
(Non-GAAP measure) $ 4,256 $ 3,772 $ 5,169
WBA Fiscal 2021 Form 10-K 44
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Table of Con t e n t
2021 2020 2019
Net earnings attributable to
$ 548 $ 277 $ 166 Acquisition-related amortization 2 28 76 78 Transformational cost management 3 1 73 151 Acquisition-related costs 5 92 1 - Gain on disposal of discontinued operations (322) - - Tax impact of adjustments 12 (6) (25) (34)
Total adjustments to net earnings attributable to
$ (206) 126 195
Adjusted net earnings attributable to
$
342
Adjusted net earnings attributable to
$
4,598
Diluted net earnings per common share - continuing operations (GAAP)
$ 2.30 $ 0.20 $ 4.13 Adjustments to operating income 3.20 4.26 1.86 Adjustments to other income (expense) (0.32) 0.07 (0.17) Adjustments to interest expense, net 0.48 - - Adjustments to income tax provision (0.08) (0.27) (0.27) Adjustments to earnings from other equity method investments 13 (0.58) 0.06 0.04
Adjustments to net earnings (loss) attributable to noncontrolling interests
(0.09) (0.03) -
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)
$
4.91
Diluted net earnings per common share - discontinued operations (GAAP)
0.63 0.31 0.18
Total adjustments to net earnings attributable to
(0.24) 0.14 0.21
Adjusted diluted net earnings per common share - discontinued operations (Non-GAAP measure)
$
0.39
Adjusted diluted net earnings per common share (Non-GAAP measure) $
5.31
Weighted average common shares outstanding, diluted (in millions) 866.4 880.3 923.5 WBA Fiscal 2021 Form 10-K 45
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Table of Con t e n t 1 Adjustments to equity earnings (loss) in AmerisourceBergen consist of the Company's
proportionate share of non-GAAP adjustments reported by AmerisourceBergen consistent with
the Company's non-GAAP measures. The Company recognized equity losses in AmerisourceBergen
of
primarily due to AmerisourceBergen's recognition of
related to its ongoing opioid litigation in its financial statements for the three months
period ended
assets and inventory valuation adjustments. Amortization of acquisition-related intangible
assets includes amortization of intangibles assets such as customer relationships, trade
names, trademarks and contract intangibles. Intangible asset amortization excluded from the
related non-GAAP measure represents the entire amount recorded within the Company's GAAP
financial statements. The revenue generated by the associated intangible assets has not
been excluded from the related non-GAAP measures. Amortization expense, unlike the related
revenue, is not affected by operations of any particular period unless an intangible asset
becomes impaired or the estimated useful life of an intangible asset is revised. These
charges are primarily recorded within selling, general and administrative expenses.
Business combination accounting principles require us to measure acquired inventory at fair
value. The fair value of the inventory reflects cost of acquired inventory and a portion of
the expected profit margin. The acquisition-related inventory valuation adjustments exclude
the expected profit margin component from cost of sales recorded under the business
combination accounting principles. 3 Transformational Cost Management Program and Store Optimization Program charges are costs
associated with a formal restructuring plan. These charges are primarily recorded within
selling, general and administrative expenses. These costs do not reflect current operating
performance and are impacted by the timing of restructuring activity. 4 Certain legal and regulatory accruals and settlements relate to significant charges
associated with certain legal proceedings. The Company excludes these charges when
evaluating operating performance because it does not incur such charges on a predictable
basis and exclusion of such charges enables more consistent evaluation of the Company's
operating performance. These charges are recorded within selling, general and
administrative expenses. 5 Acquisition-related costs are transaction and integration costs associated with certain
merger, acquisition and divestitures related activities. These costs include all charges
incurred on certain mergers, acquisition and divestitures related activities, for example,
including costs related to integration efforts for successful merger, acquisition and
divestitures activities. These charges are primarily recorded within selling, general and
administrative expenses. These costs are significantly impacted by the timing and
complexity of the underlying merger, acquisition and divestitures related activities and do
not reflect the Company's current operating performance.
6
the Company following the analysis to determine the fair value of consideration paid and
the assignment of fair values to all tangible and intangible assets acquired. Impairment of
goodwill and intangible assets do not relate to the ordinary course of the Company's
business. The Company excludes these charges when evaluating operating performance because
it does not incur such charges on a predictable basis and exclusion of such charges enables
more consistent evaluation of the Company's operating performance. These charges are
recorded within selling, general and administrative expenses.
7 The Company's
("LIFO") method. This adjustment represents the impact on cost of sales as if the United
States segment inventory is accounted for using first-in first-out ("FIFO") method. The
LIFO provision is affected by changes in inventory quantities, product mix, and
manufacturer pricing practices, which may be impacted by market and other external
influences. Therefore, the Company cannot control the amounts recognized or timing of these
items.
8 Store damage and inventory losses as a result of looting in the
recoveries.
9 Gain or loss on certain derivative instruments used as economic hedges of the Company's net
investments in foreign subsidiaries. These charges are recorded within other income
(expense). We do not believe this volatility related to mark-to-market adjustment on the
underlying derivative instruments reflects the Company's operational performance. 10 Includes significant gain on sale of equity method investment. During the fiscal year ended
partial sale of ownership interests in Option Care Health by the Company's equity method
investee
partially purchase and retire
excludes these charges to enable a more consistent evaluation of the Company's financial
performance.
12 Adjustments to income tax provision include adjustments to the GAAP basis tax provision
commensurate with non-GAAP adjustments and certain discrete tax items including tax law
changes and equity method non-cash tax. These charges are recorded within income tax
provision (benefit). 13 Adjustments to post tax equity earnings from other equity method investments consist of the
proportionate share of certain equity method investees' non-cash items or unusual or
infrequent items consistent with the Company's non-GAAP adjustments. These charges are
recorded within post tax earnings (loss) from other equity method investments. 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. In the three months ended
interests in Option Care Health, our equity method investee
ability to control Option Care Health and, therefore, deconsolidated Option Care Health in
its financial statements. As a result of this deconsolidation,
a gain of
Holdings of
organization was terminated during fiscal 2019, resulting in recognition of a gain in other
income (expense).
The Company considers certain metrics presented in this Annual Report on Form 10-K, such as comparable sales, comparable pharmacy sales, comparable retail sales, comparable number of prescriptions, and comparable 30-day equivalent prescriptions, to be key performance indicators because the Company's management has evaluated its results of operations using these metrics and believes that these key performance indicators 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 key performance indicators 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 herein. These measures, which are described in more detail in this Annual Report on Form 10-K, may not be comparable to similarly-titled performance indicators used by other companies.
WBA Fiscal 2021 Form 10-K 46
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Table of Con t e n t LIQUIDITY AND CAPITAL RESOURCES 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. InJune 2018 , 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. 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. Additionally, the Company's cash requirements, and its ability to generate cash flow, have been and may continue to be adversely affected by COVID-19 and the resulting market volatility and instability. The Company expects to fund its working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations from liquidity sources including cash flow from operations, availability under existing credit facilities, commercial paper programs, working capital financing arrangements and current cash and investment balances. The Company believes that these sources, and the ability to obtain other financing will provide adequate cash funds for the Company's foreseeable working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations for at least the next 12 months. See Part II. Item 7A, Qualitative and quantitative disclosures about market risk, below for a discussion of certain financing and market risks. Cash, cash equivalents and restricted cash were$1.3 billion (including$0.2 billion in non-U.S. jurisdictions) as ofAugust 31, 2021 , compared to$0.7 billion (including$0.4 billion in non-U.S. jurisdictions) as ofAugust 31, 2020 . 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 inU.S. Treasury money market funds. OnAugust 17, 2021 , the Company provided notice to the Trustee and the Holders of its 3.3% notes due 2021 issued by the Company onNovember 18, 2014 that it will redeem in full the$1.25 billion aggregate principal amount outstanding of the notes onSeptember 18, 2021 . These notes were redeemed in full as of that date. The Company has also announced its intention to make cash investments aggregating approximately$5.3 billion for certain acquisitions. Additionally, these acquisitions include certain put options which may be exercised in the future. The Company currently expects the incremental investment resulting from the exercise of the put options in future could be between approximately$1.3 billion and$1.6 billion . See Note 21. Subsequent events, to the Consolidated Financial Statements included in Part II. Item 8 herein for further information. As ofAugust 31, 2021 the Company had an aggregate borrowing capacity of$7 billion including funds already drawn. AtAugust 31, 2021 , the Company had no guarantees outstanding and no amounts issued under letters of credit. For details of the Company's debt instruments and its recent financing actions, see Note 8. Debt, to the Consolidated Financial Statements included in Part II. Item 8 herein. Cash flows from operating activities 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 2021 compared to$5.5 billion in fiscal 2020 and$5.6 billion in fiscal 2019. The$0.1 billion increase in cash provided by operating activities fiscal 2021 compared to fiscal 2020, is mainly due to higher cash inflows from trade accounts payable, net earnings, and inventory, partially offset by lower cash inflows from accounts receivable. Changes in trade accounts payable and inventory are mainly driven by working capital initiatives and timing of collections and payments. Changes in accounts receivable are mainly driven by timing of collections and payments. Cash flows from investing activities Net cash provided by (used for) investing activities was$4.1 billion in fiscal 2021 compared to$(1.3) billion in fiscal 2020 and$(2.3) billion in fiscal 2019. The increase in cash provided by investing activities in fiscal 2021 compared to fiscal 2020 was primarily driven by higher cash inflows from proceeds from sale of business and assets offset by investment and asset acquisitions. Proceeds from sale of business, net of cash in fiscal 2021 include net cash proceeds of$5.5 billion related to the disposition of Alliance Healthcare business. Proceeds from sale of assets in fiscal 2021 were$453 million compared to$90 million in fiscal 2020 and$117 million in fiscal 2019. Changes in proceeds from sale of assets in fiscal 2021 compared to fiscal 2020 was primarily driven by partial sale of ownership interest in Option Care Health by the Company's equity method investeeHC Group Holdings . Business, investment and asset acquisitions in fiscal 2021 were$1.4 billion compared to$0.7 billion in fiscal 2020 and$0.7 billion in fiscal 2019. The increase in business, investment and asset acquisitions in fiscal 2021 compared to fiscal 2020 was primarily driven by the Company's acquisition ofInnovation Associates and increased investment in WBA Fiscal 2021 Form 10-K 47
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Table of Con t e n tVillageMD . Additionally, investing activities for fiscal 2021 included proceeds related to sale leaseback transactions of$856 million , compared to$724 million in fiscal 2020 and$3 million in fiscal 2019. Capital Expenditure Capital expenditure includes information technology projects and other growth initiatives. Additions to property, plant and equipment were as follows (in millions): 2021 2020 2019 United States$ 1,030 $ 1,040 $ 1,318 International 243 235 272 Corporate and Other 39 12 8 Discontinued operations 67 86 104
Total additions to property, plant and equipment
Cash flows from financing activities Net cash (used for) financing activities in fiscal 2021 was$(9.0) billion compared to$(4.6) billion in fiscal 2020 and$(3.0) billion in fiscal 2019. In fiscal 2021 we recognized$12.7 billion in net proceeds from financing activities compared to$20.4 billion in fiscal 2020 and$12.4 billion in fiscal 2019 primarily from revolving facilities and commercial paper debt. In fiscal 2021, the Company completed the Alliance Healthcare Sale and used a portion of the Alliance Healthcare Sale proceeds to repay certain borrowings. In fiscal 2021 the Company made$15.3 billion in payments of debt primarily for revolving facilities and commercial paper debt and retirement of$3.7 billion of long term debt (including$0.4 billion of charges on early debt extinguishment) compared to payments of debt made primarily for revolving facilities and commercial paper debt of$21.4 billion in fiscal 2020 and$10.5 billion in fiscal 2019. See Note 8. Debt, to the Consolidated Financial Statements included in Part II. Item 8 herein for further information. The Company repurchased shares as part of the stock repurchase programs described below and to support the needs of the employee stock plans totaling$0.1 billion in fiscal 2021 compared to$1.6 billion in fiscal 2020 and$4.2 billion in fiscal 2019. Proceeds related to employee stock plans were$59 million in fiscal 2021 compared to$55 million in fiscal 2020 and$174 million in fiscal 2019. Cash dividends paid were$1.6 billion in fiscal 2021 compared to$1.7 billion in fiscal 2020 and$1.6 billion in fiscal 2019. Stock repurchase program InJune 2018 , the Company authorized a stock repurchase program (the "June 2018 stock repurchase program"), which authorized the repurchase of up to$10.0 billion of the Company's common stock of which the Company had repurchased$8.0 billion as ofAugust 31, 2021 . TheJune 2018 stock repurchase program has no specified expiration date. InJuly 2020 , the Company announced that it was suspending activities under theJune 2018 stock repurchase program. The Company may continue to repurchase stock to offset anticipated dilution from its equity incentive plans. 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. Debt covenants Each of the Company's credit facilities described above contains 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. As ofAugust 31, 2021 , the Company was in compliance with all such applicable covenants. Credit ratings As ofOctober 13, 2021 , the credit ratings ofWalgreens Boots Alliance were: Commercial Rating agency Long-term debt rating paper rating Outlook Fitch BBB- F3 Negative Moody's Baa2 P-2 Negative Standard & Poor's BBB A-2 Negative WBA Fiscal 2021 Form 10-K 48
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Table of Con t e n t 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 OnJanuary 6, 2021 , the Company entered into a Share Purchase Agreement with AmerisourceBergen pursuant to which AmerisourceBergen agreed to purchase the majority of the Company's Alliance Healthcare business as well as a portion of the Company's retail pharmacy international businesses inEurope for approximately$6.5 billion , comprised of$6.275 billion in cash, subject to certain purchase price adjustments, and 2 million shares of AmerisourceBergen common stock. After giving effect to the Alliance Healthcare Sale and as ofAugust 31, 2021 , the Company beneficially owns approximately 28.5% of AmerisourceBergen's outstanding common stock, based on the share count publicly reported by AmerisourceBergen in its most recent Quarterly Report on Form 10-Q. See Part I . Item 1. Business "Recent Transactions" above and Note 2 Discontinued operations, to the Consolidated Financial Statements included in Part II. Item 8 below for additional information. OnJune 1, 2021 the Company completed the Alliance Healthcare Sale, for total consideration of$6.9 billion , which includes estimated cash consideration of$6.7 billion , subject to net working capital and net cash adjustments. The Company recorded a gain before currency translation adjustments of$1.1 billion and a net gain on disposal of$0.3 billion . The gain on sale was presented as part of results of the discontinued operations. As ofAugust 31, 2021 , 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 6 Equity method investments, to the Consolidated Financial Statements included in Part II. Item 8 herein for further information. COMMITMENTS AND CONTINGENCIES The information set forth in Note 11 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 ESTIMATES The Consolidated Financial Statements are prepared in accordance with accounting principles generally accepted inthe 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, leases, goodwill and indefinite-lived intangible asset impairment, long-lived assets 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 WBA Fiscal 2021 Form 10-K 49
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Table of Con t e n t 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.
Leases - The Company 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 Company's right to use an underlying asset for the lease term and lease liabilities represent the Company'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. Lease commencement is the date the Company has the right to control the property. The Company utilizes its incremental borrowing rate to discount the lease payments. The incremental borrowing rate is based on the Company'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. The lease term of real estate leases includes renewal options that are reasonably certain of being exercised. Options to extend are considered reasonably certain of being exercised based on evaluation if there are significant investments within the leased property which have useful lives greater than the non-cancelable lease term, performance of the underlying store and the Company's economic and strategic initiatives. Short-term leases with an initial term of 12 months or less are not recorded on the balance sheets. The Company 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 Company has real estate leases which require additional payments based on sales volume, as well as reimbursement for 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 Company 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.
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. 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. Indefinite-lived intangible assets fair values are estimated using the relief from royalty method and excess earnings method of the income approach. The determination of the fair value of the indefinite-lived intangibles requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: forecasts of revenue, the selection of appropriate royalty rate and discount rates. The determination of the fair value of the reporting units requires the Company to make significant estimates and assumptions with respect to the business and financial performance of the Company's reporting units, as well as how such performance may be impacted by COVID-19. 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, including considering the impact of COVID-19. 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, including the impact of COVID-19, could have a significant impact on either
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Table of Con t e n t the fair value of the reporting units and indefinite-lived intangibles, the amount of any goodwill and indefinite-lived intangible impairment charges, or both. These estimates can be affected by a number of factors including, but not limited to, the impact of COVID-19, its severity, duration and its impact on global economies, general economic conditions as well as our profitability. The Company will continue to monitor these potential impacts, including the impact of COVID-19 and economic, industry and market trends and the impact these may have on Boots and Other international reporting units. 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.
See Note 7
Impairment of long lived assets - The Company evaluates the recoverability of long-lived assets whenever events or changes in circumstances indicate that the carrying value of such an asset may not be recoverable. The evaluation of long-lived assets is performed at the lowest level of identifiable cash flows. Long-lived assets related to the Company's retail operations include property, plant and equipment, definite-lived intangibles, right of use asset as well as operating lease liability. If the asset group fails the recoverability test, then an impairment charge is determined based on the difference between the fair value of the asset group compared to its carrying value. Fair value of the asset group is generally determined using income approach based on cash flows expected from the use and eventual disposal of the asset group.
The determination of the fair value of the asset group requires management to estimate a number of factors including anticipated future cash flows and discount rates. Although we believe these estimates are reasonable, actual results could differ from those estimates due to the inherent uncertainty involved in making such estimates.
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 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 United States segment and on an average cost
and first-in first-out ("FIFO") basis for inventory in the International
segment.
Equity method investments - The Company uses the equity method of accounting for
equity investments 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 investees 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 healthcare 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
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Table of Con t e n t
would result in a decline of
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 theU.S. Discrete events such as audit settlements or changes in tax laws are recognized in the period in which they occur. RECENT ACCOUNTING PRONOUNCEMENTS See "new accounting pronouncements" within Note 1 Summary of major accounting policies, to the Consolidated Financial Statements included in Part II. Item 8 below for information regarding recent accounting pronouncements. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report and other documents that we file or furnish with theSEC contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These include, without limitation, any statements regarding the Company's future operations, financial or operating results, capital allocation, anticipated debt levels and ratios, future earnings, planned activities, anticipated growth, market opportunities, strategies, competition, and other expectations and targets for future periods. Words such as "expect," "likely," "outlook," "forecast," "preliminary," "pilot," "project," "intend," "plan," "goal," "target," "aim," "continue," " "believe," "seek," "anticipate," "upcoming," "may," "possible," and variations of such words and similar expressions are intended to identify such forward-looking statements. 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. These risks, assumptions and uncertainties include those described in Item 1A, Risk factors, above, which are incorporated herein by reference, and in other documents that we file or furnish with theSEC . If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. All forward-looking statements we make or that are made on our behalf are qualified by these cautionary statements. Accordingly, you should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. 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.
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