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 Part I, Item 1. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements that involve risks and uncertainties. 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 ("Walgreens Boots Alliance " or the "Company") is a global leader in retail pharmacy and is positioning itself to become a leading provider of healthcare services. Its operations are conducted through three reportable segments: •U.S. Retail Pharmacy, •International, and •U.S. Healthcare. In the fourth quarter of fiscal 2022, the Company changed the name of two reportable segments to better align with the Company's business activities, structure and strategy.The "United States " segment was renamed to "U.S. Retail Pharmacy " and the "Walgreens Health " segment was renamed to "U.S. Healthcare ". The segment name changes did not result in any change to the composition of the segments and therefore no change to the historical results of segment operations. The information for these segments for all periods included in these consolidated financial statements has been presented using the new names. See Note 17. Segment reporting and Note 18. Sales, to the Consolidated Financial Statements included in Part II, Item 8 for further 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 COVID-19 ("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 , the Company 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 sought to align pharmacy, PBM and health plans to coordinate patient care, improve health outcomes and deliver cost of care opportunities. OnDecember 31, 2021 , the Company purchased Prime's portion of the joint venture and now wholly own the joint venture, which was renamed AllianceRxWalgreens . Certain clients of AllianceRxWalgreens are not obligated to contract through AllianceRxWalgreens , and have in the past, and may in the future, enter into specialty pharmacy and other agreements without involving AllianceRxWalgreens . Certain clients have chosen not to renew their contracts through AllianceRxWalgreens which impacts gross sales. However, considering the relatively low margin nature of this business, the Company does not anticipate this will have a material impact on operating income. InJanuary 2022 , the Company announced a strategic review of its Boots business, including the No7 beauty company. InJune 2022 , the Company announced the conclusion of the strategic review and decision to retain existing ownership in these businesses. WBA Fiscal 2022 Form 10-K 35
--------------------------------------------------------------------------------
Table of Contents OnMay 5, 2022 , the Company entered into an agreement with theState of Florida to resolve all claims related to the distribution and dispensing of prescription opioid medications across the Company's pharmacies in theState of Florida . The settlement amount of$683 million includes$620 million to be paid in equal installments to theState of Florida over 18 years and will be applied as remediation of past and future opioid damages, as well as a one-time payment of$63 million for attorneys' fees. The Company made the first annual settlement payment of$97.4 million into escrow onJune 17, 2022 . 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
Since the beginning of 2020, COVID-19 has severely impacted, and may continue to directly and indirectly impact, the economies of theU.S. , theUK and other countries around the world. COVID-19 created significant public health concerns as well as significant volatility, uncertainty and economic and supply chain disruption in every region in which we operate, which has adversely affected our industries and our business operations. Further, financial and credit markets experienced volatility and could continue to experience volatility due to COVID-19 and other factors. As COVID-19 and its direct and indirect consequences continue to evolve, COVID-19 has impacted, and may again impact our business operations. In response to COVID-19 and emerging variants, various domestic and foreign, federal, state and local governmental legislation, regulations, orders, policies and initiatives were implemented that were 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 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. The Company continues to play a critical role in fighting COVID-19. 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 vaccinations to the general public and to high priority groups, including long-term care facility residents and staff.The U.S. Retail Pharmacy 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, 2022 , the Company has administered more than 69 million COVID-19 vaccinations, including 23 million booster vaccinations, and more than 45 million COVID-19 tests in theU.S. In fiscal 2022, the Company has administered approximately 35 million COVID-19 vaccinations and more than 31 million COVID-19 tests in theU.S. In fiscal 2022, theU.S. Retail Pharmacy segment comparable 30-day equivalent prescriptions filled increased 1.3%, including a positive impact of 12 basis points from COVID-19 vaccinations. Comparable retail sales increase was aided by at-home COVID-19 test sales. The Company continues to monitor COVID-19 and its potential future impacts on the consumer, customer and healthcare utilization patterns, as well as theU.S. and global economies, including supply chains and the labor force. 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.
U.S. Healthcare In fiscal 2022, 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 retail pharmacy network to deliver value-based care. The Company's goal is to provide better consumer experiences, improve health outcomes and lower costs. The Company'sU.S. Healthcare segment, created at the beginning of fiscal 2022, is a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omni-channel experience across the care journey.The U.S. Healthcare segment delivers improved health outcomes and lower costs for payors and providers by delivering care through owned and partnered assets. WBA Fiscal 2022 Form 10-K 36
--------------------------------------------------------------------------------
Table of ContentsThe U.S. Healthcare segment currently consists of a majority position inVillage Practice Management Company, LLC ("VillageMD"), a leading, national provider of value-based primary care services; a majority position inShields Health Solutions Parent, LLC ("Shields"), a specialty pharmacy integrator and accelerator for hospitals, a majority position inCCX Next, LLC ("CareCentrix"), a leading player in the post-acute and home care management sectors; and theWalgreens Health organic business that contracts with payors and providers to deliver clinical healthcare services to their members and members' caregivers through both digital and physical channels. OnSeptember 20, 2022 , the Company announced that it entered into a definitive agreement to acquire the remaining 30% equity interest in Shields, not currently owned.
The Company is now aligned into three reportable segments:
See Note 17. Segment reporting to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.
RECENT TRANSACTIONS
Shields acquisition OnOctober 29, 2021 , the Company completed the acquisition of a majority interest in Shields. Pursuant to the terms and subject to the conditions set forth in the Securities Purchase Agreement, the Company purchased additional outstanding equity interests of Shields, increasing the Company's total beneficial ownership in Shields' outstanding equity interests from 25% to approximately 70%, for cash consideration of$969 million . The Company accounted for this acquisition as a business combination resulting in consolidation of Shields within theU.S. Healthcare segment in its financial statements.
See Note 3. Acquisitions and other investments, and Note 6. Equity method investments to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.
OnSeptember 20, 2022 , the Company announced the acceleration of its plans for full ownership of Shields. The Company entered into a definitive agreement to acquire the remaining 30% equity interest for approximately$1.37 billion of cash consideration. The transaction is expected to close in the second quarter of fiscal 2023. See Note 21. Subsequent events to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.VillageMD acquisition OnNovember 24, 2021 , the Company completed the acquisition of a majority interest inVillageMD . Pursuant to the terms and subject to the conditions set forth in the Unit Purchase Agreement, the Company purchased additional outstanding equity interests ofVillageMD , increasing the Company's total beneficial ownership inVillageMD's outstanding equity interests from approximately 30% to approximately 63%, on a fully diluted basis, for a purchase price of$5.2 billion . The total purchase price is comprised of cash consideration of$4.0 billion and a promissory note of$1.2 billion .
The Company accounted for this acquisition as a business combination resulting
in consolidation of
See Note 3. Acquisitions and other investments, and Note 6. Equity method investments to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.
Sale of AmerisourceBergen common stock OnMay 11, 2022 , the Company sold 6.0 million shares of AmerisourceBergen Corporation ("AmerisourceBergen") common stock pursuant to Rule 144 at a price of$150 per share for a total consideration of$900 million . This decreased the Company's ownership of AmerisourceBergen's common stock from 58,854,867 shares, held atAugust 31, 2021 to 52,854,867 shares held as ofAugust 31, 2022 , representing approximately 25.4% of AmerisourceBergen common stock, based on the share count publicly reported by AmerisourceBergen in its most recent Quarterly Report on Form 10-Q. The transaction resulted in the Company recording a pre-tax gain of$417 million in Other income, net in the Consolidated Statements of Earnings, including a$32 million loss reclassified from within Accumulated other comprehensive income in the Consolidated Balance Sheets.
See Note 6. Equity method investments, to the Consolidated Financial Statements included in Part II, Item 8 for further information.
WBA Fiscal 2022 Form 10-K 37
--------------------------------------------------------------------------------
Table of ContentsCareCentrix acquisition OnAugust 31, 2022 , the Company completed the acquisition of a majority interest inCareCentrix . Pursuant to the terms and subject to the conditions set forth in the Membership Interest Purchase Agreement, the Company acquired approximately 55% controlling equity interest inCareCentrix , a leading player in the post-acute and home care management sectors, for cash consideration of$332 million .
The Company accounted for this acquisition as a business combination resulting
in consolidation of
See Note 3. Acquisitions and other investments to the Consolidated Financial Statements included in Part II, Item 8 herein for further information
OnOctober 11, 2022 , the Company announced the acceleration of its plans for full ownership ofCareCentrix . The Company entered into a definitive agreement to acquire the remaining 45% equity interest for approximately$392 million of cash consideration. The acquisition is subject to limited customary closing conditions and is expected to close byMarch 2023 . See Note 21. Subsequent events to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.
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"). The Company achieved this goal at the end of fiscal 2021. OnOctober 12, 2021 , the Company expanded and extended the Transformational Cost Management Program through the end of fiscal 2024 and increased its annual cost savings target to$3.3 billion by the end of fiscal 2024. In fiscal 2022, the Company increased its annual cost savings target from$3.3 billion to$3.5 billion by the end of fiscal 2024. The Company is currently on track to achieve the savings target. 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 which focus on theU.S. Retail Pharmacy and International reportable segments along with the Company's global functions. Divisional optimization within the Company's segments includes activities such as optimization of stores, including plans to close approximately 350 stores in theUK and approximately 450 to 500 stores in theU.S. As ofAugust 31, 2022 , the Company has closed 235 and 287 stores in theUK andU.S. , respectively. 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. 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 . The Company estimates that approximately 80% 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 750 to 800 million Employee severance and business transition costs 1,025 to 1,075 million Information technology transformation and other exit costs 300 to 350 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 WBA Fiscal 2022 Form 10-K 38
--------------------------------------------------------------------------------
Table of Contents 1Includes impairments relating to operating lease right-of-use and finance lease assets. 2Primarily related to store closures and other asset impairments. From the inception of the Transformational Cost Management Program toAugust 31, 2022 , the Company has recognized cumulative pre-tax charges to its financial results in accordance with GAAP of$2.2 billion , of which$2.0 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 for further information. These charges included$603 million related to lease obligations and other real estate costs,$443 million in asset impairments,$723 million in employee severance and business transition costs,$203 million of information technology transformation and other exit costs, and$272 million in other information technology costs. Costs under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses, were as follows (in millions): U.S. Retail Corporate and Walgreens Boots Fiscal 2022 Pharmacy International Other Alliance, Inc. Lease obligations and other real estate costs$ 247 $ 2 $ - $ 249 Asset impairments 132 58 - 190 Employee severance and business transition costs 156 29 25 210 Information technology transformation and other exit costs 12 29 - 40 Total pre-tax exit and disposal charges$ 546 $ 118 $ 25 $ 690 Other IT transformation costs 57 15 - 73 Total pre-tax charges$ 603 $ 134 $ 26 $ 763 U.S. Retail Corporate and Walgreens Boots Fiscal 2021 Pharmacy International 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 U.S. Retail Corporate and Walgreens Boots Fiscal 2020 Pharmacy International 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 WBA Fiscal 2022 Form 10-K 39
--------------------------------------------------------------------------------
Table of Contents
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". INVESTMENT IN AMERISOURCEBERGEN As ofAugust 31, 2022 and 2021, respectively, the Company owns approximately 25.4% and 28.5% of AmerisourceBergen outstanding common stock, based on the share count publicly reported by AmerisourceBergen in its most recent Quarterly Report on Form 10-Q. OnMay 11, 2022 , the Company sold 6.0 million shares of AmerisourceBergen common stock pursuant to Rule 144 at a price of$150 per share for a total consideration of$900 million , decreasing the Company's ownership of AmerisourceBergen's common stock from 58,854,867 shares, held atAugust 31, 2021 to 52,854,867 shares held as ofAugust 31, 2022 . The transaction resulted in the Company recording a pre-tax gain of$417 million in Other income, net in the Consolidated Statements of Earnings, including a$32 million loss reclassified from within Accumulated other comprehensive income in the Consolidated Balance Sheets. The Company has a shareholders agreement with AmerisourceBergen, which was most recently amended and restated (the "A&R Shareholders Agreement") in connection with the Company's sale of its Alliance Healthcare business to AmerisourceBergen (the "Alliance Healthcare Sale"). 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 12,398,752 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'sU.S. Retail Pharmacy segment. In fiscal 2022, 2021 and 2020, the Company recognized equity earnings (losses) in AmerisourceBergen of$418 million ,$(1.1) billion , and$341 million , respectively. The equity losses for fiscal 2021 were primarily due to AmerisourceBergen's recognition of a loss of$5.6 billion , net of tax, related to its ongoing opioid litigation in its financial statements for the three months endedSeptember 30, 2020 . The Company completed the Alliance Healthcare Sale inJune 2021 per the Share Purchase Agreement with AmerisourceBergen. See Note 2. Discontinued operations, to the Consolidated Financial Statements included in Part II, Item 8 for further 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. WBA Fiscal 2022 Form 10-K 40
--------------------------------------------------------------------------------
Table of Contents
EXECUTIVE SUMMARY
The following table presents certain key financial statistics for the Company
for fiscal 2022, 2021 and 2020:
(in millions, except per share amounts)
2022 2021 2020
Sales $ 132,703 $ 132,509 $ 121,982
Gross profit 28,265 28,067 26,078
Selling, general and administrative expenses 27,295 24,586 25,436
Equity earnings (loss) in AmerisourceBergen 418 (1,139) 341
Operating income 1,387 2,342 982
Adjusted operating income (Non-GAAP measure) 1 5,133 5,117 4,730
Earnings before interest and income tax provision 4,385 2,900 1,060
Net earnings attributable to
4,337 1,994 180
Adjusted net earnings attributable to
4,360 4,256 3,772
Diluted net earnings per common share - continuing operations (GAAP)
5.01 2.30 0.20
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)1
5.04 4.91 4.28
Percentage increases (decreases)
2022 2021 2020
Sales 0.1 8.6 1.6
Gross profit 0.7 7.6 (7.4)
Selling, general and administrative expenses 11.0 (3.3) 8.0
Operating income (40.8) 138.4 (79.4)
Adjusted operating income (Non-GAAP measure)1 0.3 8.2 (27.0)
Earnings before interest and income tax provision 51.2 173.7 (78.8)
Net earnings attributable to
117.5 NM (95.3)
Adjusted net earnings attributable to
2.5 12.8 (27.0)
Diluted net earnings per common share - continuing operations (GAAP)
117.6 NM (95.1)
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)1
2.5 14.6 (23.5)
Percent to sales
2022 2021 2020
Gross margin 21.3 21.2 21.4
Selling, general and administrative expenses 20.6 18.6 20.9
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.
WBA Fiscal 2022 Form 10-K 41
--------------------------------------------------------------------------------
Table of ContentsWALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS The following information summarizes our results of operations for fiscal 2022 compared to fiscal 2021. For discussion related to the results of operations by segment for fiscal 2021 compared to fiscal 2020, refer to Part II, Item 7. Management's discussion and analysis of financial condition and results of operations in our fiscal 2021 Form 10-K, as amended by Form 10-K/A which was filed with theUnited States Securities and Exchange Commission onNovember 24, 2021 . Net earnings from continuing operations fiscal 2022 compared to fiscal 2021 Fiscal 2022 net earnings attributable to the Company were$4.3 billion compared to$2.0 billion for the prior year period. Diluted net earnings per share were$5.01 compared to$2.30 for the prior year period. The increases in net earnings and diluted net earnings per share reflect a$2.5 billion after-tax gain during the three months endedNovember 30, 2021 due to the remeasurement of the Company's previously held minority equity and debt investments inVillageMD and Shields to fair value, and a$1.2 billion charge, net of tax, from the Company's equity earnings in AmerisourceBergen in the prior fiscal year offset by the fiscal 2022 impairment charges related to intangible assets in BootsUK , and the charge related to the opioid settlement with theState of Florida in fiscal 2022. Other income, net in fiscal 2022 was$3.0 billion compared to$558 million in fiscal 2021. The increase in other income is mainly due to the remeasurement of the Company's previously held equity and debt investments inVillageMD and Shields to fair value, and the partial sale of the Company's equity method investments in AmerisourceBergen and Option Care Health. Net interest expense was$400 million and$905 million in fiscal 2022 and 2021, respectively. The decrease in interest expense was primarily the result of early debt extinguishments completed during fiscal 2021 and lower interest rates on remaining debt. The Company's effective tax rate for fiscal 2022 and 2021 was a 0.8% benefit and 33.4%, respectively. The net decrease in the effective tax rate was primarily attributable to pre-tax gains from the consolidation of the Company's investments inVillageMD and Shields, for which a majority of these gains were not subject to tax. Additionally, the Company recognized tax benefit due to the reduction of a valuation allowance previously recorded against deferred tax assets related to capital loss carryforwards. The reduction is primarily due to capital loss carryforwards utilized in the current year against capital gains recognized on the sale of shares in AmerisourceBergen and Option Care, capital gains recognized from internal restructuring, and based on forecasted capital gains. See Note 3. Acquisitions and other investments and Note 6. Equity method investments, to the Consolidated Financial Statement included in Part II, Item 8 for further information. Adjusted net earnings from continuing operations (Non-GAAP measure) fiscal 2022 compared to fiscal 2021 Adjusted net earnings attributable to the Company in fiscal 2022 increased 2.5 percent to$4.4 billion compared with the prior year period. Adjusted diluted net earnings per share in fiscal 2022 increased 2.5 percent to$5.04 compared with the year-ago period. Adjusted net earnings and adjusted diluted earnings per share were both negatively 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 2022 primarily reflects improved retail contributions in theU.S. Retail Pharmacy and a continued rebound in International segment sales and profitability, partly offset by a decrease inU.S. pharmacy operating results, and growth investments inU.S. Healthcare . See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. RESULTS OF OPERATIONS BY SEGMENT The following information summarizes our results of operations by segment for fiscal 2022 compared to fiscal 2021.U.S. Retail Pharmacy The Company'sU.S. Retail Pharmacy segment includes theWalgreens business which is comprised of the operations of retail drugstores, health and wellness services, specialty and home delivery 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 2022 Form 10-K 42
--------------------------------------------------------------------------------
Table of Contents
FINANCIAL PERFORMANCE
(in millions, except location amounts)
2022 2021 2020
Sales $ 109,078 $ 112,005 $ 107,701
Gross profit 23,669 23,736 22,302
Selling, general and administrative expenses 21,180 20,042 19,331
Equity earnings (loss) in AmerisourceBergen 418 (1,139) 341
Operating income 2,907 2,554 3,312
Adjusted operating income (Non-GAAP measure) 1 5,029 5,019 4,761
Number of prescriptions 2 819.6 827.5 818.0
30-day equivalent prescriptions 2,3 1,216.4 1,210.6 1,165.3
Number of locations at period end 8,901 8,973 9,028
Percentage increases (decreases)
2022 2021 2020
Sales (2.6) 4.0 3.0
Gross profit (0.3) 6.4 (5.6)
Selling, general and administrative expenses 5.7 3.7 0.1
Operating income 13.8 (22.9) (26.0)
Adjusted operating income (Non-GAAP measure) 1 0.2 5.4 (18.9)
Comparable sales 4 5.1 5.1 2.8
Pharmacy sales (5.3) 5.5 4.3
Comparable pharmacy sales 4 4.7 6.7 3.2
Retail sales 5.6 (0.4) (0.4)
Comparable retail sales 4 6.1 1.2 1.6
Comparable number of prescriptions 2,4 (1.0) 2.4 (1.3)
Comparable 30-day equivalent prescriptions 2,3,4 1.3 5.0 2.9
Percent to sales
2022 2021 2020
Gross margin 21.7 21.2 20.7
Selling, general and administrative expenses 19.4 17.9 17.9
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.
WBA Fiscal 2022 Form 10-K 43
--------------------------------------------------------------------------------
Table of Contents 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.
NM - Not meaningful. Percentage increases above 200% or when one period includes income and other period includes loss are considered not meaningful.
Sales fiscal 2022 compared to fiscal 2021The U.S. Retail Pharmacy segment's sales for fiscal 2022 decreased by 2.6 percent to$109.1 billion , including a 650 basis point impact of AllianceRxWalgreens sales decline. Comparable sales increased by 5.1 percent in fiscal 2022. Pharmacy sales decreased by 5.3 percent in fiscal 2022, including 8.6 percentage point of AllianceRxWalgreens sales decline and represented 73.7 percent of the segment's sales. Excluding AllianceRxWalgreens , pharmacy sales increased 4.2 percent in fiscal 2022. The increase is due to brand drug inflation and COVID-19 vaccinations and testing, partially offset by generic drug utilization and reimbursement pressure. In fiscal 2021, pharmacy sales increased 5.5 percent and represented 75.8 percent of the segment's sales. Comparable pharmacy sales increased 4.7 percent in fiscal 2022 compared to an increase of 6.7 percent in fiscal 2021. Within comparable sales, prescriptions filled in fiscal 2022 increased by 1.3 percent from a year earlier, including a positive impact of approximately 12 basis points from COVID-19 vaccinations. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 0.3 percent in fiscal 2022 compared to a reduction of 0.5 percent in fiscal 2021. The effect of generics on segment sales was a reduction of 0.2 percent in fiscal 2022 compared to a reduction of 0.4 percent for fiscal 2021. Third-party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.2 percent of prescription sales for fiscal 2022 compared to 97.5 percent for fiscal 2021. The total number of prescriptions (including vaccinations) filled in fiscal 2022 was 819.6 million compared to 827.5 million in fiscal 2021. Prescriptions (including vaccinations) adjusted to 30-day equivalents were 1,216.4 million in fiscal 2022 compared to 1,210.6 million in fiscal 2021. Retail sales increased by 5.6 percent in fiscal 2022 and were 26.3 percent of the segment's sales. In comparison, fiscal 2021 retail sales decreased by 0.4 percent and comprised 24.2 percent of the segment's sales. Comparable retail sales increased 6.1 percent in fiscal 2022 and increased 1.2 percent in fiscal 2021. The increase in comparable retail sales in fiscal 2022 was primarily driven by health and wellness, including favorable impact of at-home COVID-19 tests and cough, cold and flu, as well as personal care and beauty, partially offset by the planned decline in tobacco. Operating income fiscal 2022 compared to fiscal 2021The U.S. Retail Pharmacy segment's operating income for fiscal 2022 increased 13.8 percent to$2.9 billion , including income of$418 million from the Company's share of equity earnings in AmerisourceBergen. Excluding the impact of equity earnings in AmerisourceBergen, the year over year decrease in operating income was driven by higher Selling, general and administrative expenses, including charges related to the opioid settlement with theState of Florida in the third quarter, offset by COVID-19 testing and retail gross profit growth. Gross margin was 21.7 percent in fiscal 2022 compared to 21.2 percent in fiscal 2021. Gross margin was positively impacted in fiscal 2022 by retail margin, offset by pharmacy margin. The increase in retail margin was primarily due to favorable rate and product mix. The decrease in pharmacy margin was primarily driven by continued reimbursement pressure. Selling, general and administrative expenses as a percentage of sales were 19.4 percent in fiscal 2022 compared to 17.9 percent in fiscal 2021. The increase was driven by costs related to the opioid settlement with theState of Florida , COVID-19 vaccinations and testing and labor investments, partially offset by savings related to the Company's Transformational Cost Management Program. WBA Fiscal 2022 Form 10-K 44
--------------------------------------------------------------------------------
Table of Contents Adjusted operating income (Non-GAAP measure) fiscal 2022 compared to fiscal 2021U.S. Retail Pharmacy segment's adjusted operating income for fiscal 2022 increased 0.2 percent to$5.0 billion . The increase was primarily due to retail gross profit growth and COVID-19 vaccinations and testing, partially offset by pharmacy reimbursement pressure.
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 wholesale 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 7A. Quantitative and qualitative disclosure about market 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)
2022 2021 2020
Sales $ 21,830 $ 20,505 $ 14,281
Gross profit 4,618 4,328 3,774
Selling, general and administrative expenses 4,964 4,101 5,863
Operating (loss) income (346) 227 (2,090)
Adjusted operating income (Non-GAAP measure) 1 726 466 157
Number of locations at period end 3,989 4,031 4,192
Percentage increases (decreases)
2022 2021 2020
Sales 6.5 43.6 (8.1)
Gross profit 6.7 14.7 (16.9)
Selling, general and administrative expenses 21.0 (30.1) 43.3
Operating (loss) income NM 110.9 NM
Adjusted operating income (Non-GAAP measure) 1 55.7 197.2 (79.4)
Comparable sales in constant currency 2 11.3 3.9 (8.8)
Pharmacy sales (2.1) 8.7 (4.1)
Comparable pharmacy sales in constant currency 2 2.5 6.7 -
Retail sales 11.2 5.5 (17.8)
Comparable retail sales in constant currency 2 16.9 2.0 (13.9)
WBA Fiscal 2022 Form 10-K 45
--------------------------------------------------------------------------------
Table of Contents
Percent to sales
2022 2021 2020
Gross margin 21.2 21.1 26.4
Selling, general and administrative expenses 22.7 20.0 41.1
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 in Germany . 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. 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 above 200% or when one period includes income and other period includes loss are considered not meaningful.
Sales fiscal 2022 compared to fiscal 2021 The International segment's sales for fiscal 2022 increased 6.5 percent to$21.8 billion . The adverse impact of currency translation on sales was 6.9 percentage points. Comparable sales in constant currency, which excludes sales from the Company's pharmaceutical wholesale combined business inGermany , increased 11.3 percent, reflecting growth across all markets. Sales in the comparable year ago-period included the adverse impact of strict COVID-19 restrictions on theUK store footfall. Pharmacy sales decreased 2.1 percent in fiscal 2022 and represented 17.1 percent of the segment's sales. The negative impact of currency translation on pharmacy sales was 4.0 percentage points. Comparable pharmacy sales in constant currency increased 2.5 percent, primarily in theUK , reflecting stronger demand for pharmacy services, and pharmacy volumes inMexico andChile . Retail sales increased 11.2 percent for fiscal 2022 and represented 31.7 percent of the segment's sales. The negative impact of currency translation on retail sales was 5.2 percentage points. Comparable retail sales in constant currency increased 16.9 percent reflecting higher retail sales in theUK andIreland , including a recovery in store footfall compared to a year ago-period, as COVID-19 restrictions were less severe. Pharmaceutical wholesale sales increased 6.7 percent for fiscal 2022 and represented 51.2 percent of the segment's sales. The negative impact of currency translation on pharmaceutical wholesale sales was 8.9 percentage points. The increase in pharmaceutical wholesale sales reflects the full year of operations since the the formation of the combined business inGermany in fiscal 2021 Operating income fiscal 2022 compared to fiscal 2021 The International segment's operating loss for fiscal 2022 was$346 million , compared to an operating income of$227 million in fiscal 2021. Operating loss was favorably impacted by 33.0 percentage points ($75 million ) of currency translation. Excluding the impact of currency translation, the decrease in operating income is primarily due to non-cash impairment charges, related to intangible assets in BootsUK in the fourth quarter. Gross profit increased 6.7 percent in fiscal 2022. Gross profit was adversely impacted by 5.5 percentage points ($237 million ) of currency translation. Excluding the impact of currency translation, the increase was primarily due to higher retail sales, stronger demand for pharmacy services in theUK , and incremental gross profit associated with the Company's pharmaceutical wholesale business inGermany . This was partially offset by higherNHS reimbursement levels in the year ago period. Selling, general and administrative expenses increased 21.0 percent in fiscal 2022 compared to fiscal 2021. Expenses were favorably impacted by 7.6 percentage points ($312 million ) as a result of currency translation. Excluding the impact of currency translation, the increase reflects BootsUK intangible asset impairment charges in the fourth quarter, incremental expenses associated with the Company's wholesale business inGermany , increased labor costs, and the non-recurring COVID-19 related government support in the year ago period. This was partially offset by a gain inUK from a sale-leaseback transaction. WBA Fiscal 2022 Form 10-K 46
--------------------------------------------------------------------------------
Table of Contents As a percentage of sales, Selling, general and administrative expenses were 22.7 percent in fiscal 2022, compared to 20.0 percent in the prior fiscal year. Adjusted operating income (Non-GAAP measure) fiscal 2022 compared to fiscal 2021 The International segment's adjusted operating income for fiscal 2022 increased$260 million to$726 million . Adjusted operating income was negatively impacted by 9.8 percentage points ($46 million ) of currency translation. Excluding the impact of currency translation, the increase in adjusted operating income was primarily in theUK , reflecting higher retail sales following the easing of COVID-19 restrictions, and stronger demand for pharmacy services. This was partially offset by increased Selling, general and administrative expenses and higherNHS pharmacy reimbursement levels in the year ago period in theUK .
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
U.S. Healthcare The Company'sU.S. Healthcare segment, created at the beginning of fiscal 2022, is a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omni-channel experience across the care journey.The U.S. Healthcare segment delivers improved health outcomes and lower costs for payors and providers by delivering care through owned and partnered assets.The U.S. Healthcare segment currently consists of a majority position inVillageMD , a leading, national provider of value-based primary care services; a majority position in Shields, a specialty pharmacy integrator and accelerator for hospitals; a majority position inCareCentrix , a leading player in the post-acute and home care management sectors, and theWalgreens Health organic business that contracts with payors and providers to deliver clinical healthcare services and care management programs to their members and members' caregivers through both digital and physical channels.
FINANCIAL PERFORMANCE
(in millions, except location amounts)
2022 2021 2020
Sales $ 1,795 $ - $ -
Gross loss (22) - -
Selling, general and administrative expenses 806 57 -
Operating loss (829) (57) -
Adjusted operating loss (Non-GAAP measure) 1 (370) (57) -
Number of payor/provider partnerships at period end 3 1 -
Number of locations with Walgreens Health Corners at period end 65 37 -
Number of co-located VillageMD clinics at period end 146 55 5
Number of total VillageMD clinics at period end 2 334 252 155
1See "--Non-GAAP Measures" below for a reconciliation to the most directly
comparable financial measure calculated in accordance with GAAP and related
disclosures.
2The Company acquired VillageMD in the three months ended November 30, 2021 . The
number of VillageMD clinics presented for the prior periods is for comparative
purposes only. Clinics are defined as the primary care locations where the
Company or the Company's affiliates lease or license space and the providers are
employed by either the Company or one of the Company's affiliates. These clinics
are primarily branded as Village Medical where the Company employs the providers
but, in some instances, may operate under their own brands.
Sales fiscal 2022
Operating loss fiscal 2022 compared to fiscal 2021
WBA Fiscal 2022 Form 10-K 47
--------------------------------------------------------------------------------
Table of Contents Gross loss for fiscal 2022 was$22 million , reflecting results from Shields andVillageMD . Gross loss was driven by expansion atVillageMD , partly offset by further growth in existing partnerships and expanding margins at Shields. Selling, general and administrative expenses were$806 million in fiscal 2022 compared to$57 million in fiscal 2021. Selling, general and administrative expenses reflect the three acquisitions as well as continued investments in theWalgreens Health organic business. Adjusted operating loss (Non-GAAP measure) for fiscal 2022 compared to fiscal 2021The U.S. Healthcare segment's adjusted operating loss was$370 million for fiscal 2022, reflecting the three acquisitions as well as continued investments in theWalgreens Health organic business compared to a loss of$57 million in fiscal 2021. 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. WBA Fiscal 2022 Form 10-K 48
--------------------------------------------------------------------------------
Table of Contents NON-GAAP RECONCILIATIONS
Operating income to Adjusted operating income by segments (in millions)
Fiscal 2022
U.S. Retail International U.S. Healthcare Corporate and Walgreens Boots
Pharmacy Other Alliance, Inc.
Operating income (loss) (GAAP) $ 2,907 $ (346) $ (829) $ (345) $ 1,387
Adjustments to equity earnings (loss) in AmerisourceBergen 218 - - -
218
Acquisition-related amortization 398 66 392 -
855
Transformational cost management 604 133 - 26
763
Certain legal and regulatory accruals and settlements 768 - - - 768 Acquisition-related costs (2) 89 67 69 223 Impairment of goodwill and intangible assets - 783 - - 783 LIFO provision 135 - - - 135 Adjusted operating income (loss) (Non-GAAP measure)$ 5,029 $ 726 $ (370)$ (251) $ 5,133 Fiscal 2021 U.S. Retail International U.S. Healthcare Corporate and Walgreens Boots Pharmacy Other Alliance,
Inc.
Operating income (loss) (GAAP)$ 2,554 $ 227 $ (57)$ (382) $ 2,342 Adjustments to equity earnings (loss) 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 (loss) (Non-GAAP measure)$ 5,019 $ 466 $ (57)$ (311) $ 5,117 Fiscal 2020 U.S. Retail International U.S. Healthcare Corporate and Walgreens Boots Pharmacy Other Alliance, Inc. Operating income (loss) (GAAP)$ 3,312 $ (2,090) $ -$ (239) $
982
Adjustments to equity earnings (loss) 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 (loss) (Non-GAAP measure)$ 4,761 $ 157 $ -$ (187) $ 4,730 WBA Fiscal 2022 Form 10-K 49
--------------------------------------------------------------------------------
Table of Contents
Net Earnings to Adjusted net earnings & Earnings per share to Adjusted Earnings
per share (in millions)
2022 2021 2020
Net earnings attributable to
$
4,337
Adjustments to operating income: Adjustments to equity earnings (loss) in AmerisourceBergen 1 218 1,645 97 Acquisition-related amortization 2 855 523 384 Transformational cost management 3 763 417 719 Certain legal and regulatory accruals and settlements 4 768 75 - Acquisition-related costs 5 223 54 315 Impairment of goodwill and intangible assets 6 783 49 2,016 LIFO provision 7 135 13 95 Store damage and inventory losses 8 - - 68 Store optimization 3 - - 53 Total adjustments to operating income 3,746 2,775 3,747 Adjustments to other income, net: Net investment hedging loss (gain) 9 1 8 (11)
Impairment of equity method investment and investment in equity securities 10
190 - 71
Adjustment to gain on disposal of discontinued operations 11 38 - -
Gain on sale of equity method investment 12 (559) (290) (1)
Gain on previously held investments 13 (2,576) - -
Total adjustments to other income, net (2,906) (281) 59
Adjustments to interest expense, net:
Early debt extinguishment 14 4 414 -
Total adjustments to interest expense, net 4 414 -
Adjustments to income tax (benefit) provision:
UK tax rate change 15 - 378 139
U.S. tax law changes 15 - - (6)
Equity method non-cash tax 15 70 (161) 60
Tax impact of adjustments 15 (752) (283) (433)
Total adjustments to income tax (benefit) provision (681) (65) (240)
Adjustments to post-tax earnings from other equity method investments: Adjustments to earnings in other equity method investments 16
58 (504) 54
Total adjustments to post-tax earnings from other equity method investments
58 (504) 54
Adjustments to net loss attributable to non-controlling interests - continuing operations: Acquisition-related amortization 2
(164) (75) (4)
Transformational cost management 3 (1) 1 (10)
Acquisition-related costs 5 (32) - -
Impairment of goodwill and intangible assets 6 - - (14)
LIFO provision 7 - (2) (1)
Early debt extinguishment 14 (1) - -
Total adjustments to net loss attributable to non-controlling interests - continuing operations
(198) (77) (29)
Adjusted net earnings attributable to
$ 4,360 $ 4,256 $ 3,772 WBA Fiscal 2022 Form 10-K 50
--------------------------------------------------------------------------------
Table of Contents
2022 2021 2020
Net earnings attributable to
$ - $ 548 $ 277
Acquisition-related amortization 2 - 28 76
Transformational cost management 3 - 1 73
Acquisition-related costs 5 - 92 1
Gain on disposal of discontinued operations11 - (322) -
Tax impact of adjustments 15 - (6) (25)
Total adjustments to net earnings attributable to
$ - (206) 126
Adjusted net earnings attributable to
$
-
Adjusted net earnings attributable to
$
4,360
Diluted net earnings per common share - continuing operations (GAAP)
$ 5.01 $ 2.30 $ 0.20 Adjustments to operating income 4.33 3.20 4.26 Adjustments to other income, net (3.36) (0.32) 0.07 Adjustments to interest expense, net 0.01 0.48 - Adjustments to income tax (benefit) provision (0.79) (0.08) (0.27)
Adjustments to post tax earnings from other equity method investments 16
0.07 (0.58) 0.06
Adjustments to net loss attributable to non-controlling interests (0.23)
(0.09) (0.03)
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)
$
5.04
Diluted net earnings per common share - discontinued operations (GAAP)
- 0.63 0.31
Total adjustments to net earnings attributable to
- (0.24) 0.14
Adjusted diluted net earnings per common share - discontinued operations (Non-GAAP measure)
$
-
Adjusted diluted net earnings per common share (Non-GAAP measure) $
5.04
Weighted average common shares outstanding, diluted (in millions) 865.9
866.4 880.3
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, inventory valuation adjustments and stock-based compensation fair valuation
adjustments. Amortization of acquisition-related intangible assets includes amortization of
intangible assets such as customer relationships, trade names, trademarks, developed
technology 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. The stock based compensation fair valuation adjustment
reflects the difference between the fair value based remeasurement of awards under purchase
accounting and the grant date fair valuation. Post-acquisition compensation expense
recognized in excess of the original grant date fair value of acquiree awards are excluded
from the related non-GAAP measures as these arise from acquisition-related accounting
requirements or agreements, and are not reflective of normal operating activities. 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.
WBA Fiscal 2022 Form 10-K 51
--------------------------------------------------------------------------------
Table of Contents 4 Certain legal and regulatory accruals and settlements relate to significant charges
associated with certain legal proceedings, including legal defense costs. In fiscal 2022,
the Company recorded a
prescription opioid medications across the Company's pharmacies in the
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 charges
incurred related to certain mergers, acquisition and divestitures related activities
recorded in operating income, for example, costs related to integration efforts for
merger, acquisition and divestitures activities. Examples of such costs include deal
costs, severance and stock compensation. 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 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
last-in-first-out ("LIFO") method. This adjustment represents the impact on cost of sales
as if the
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,
net. We do not believe this volatility related to mark-to-market adjustment on the
underlying derivative instruments reflects the Company's operational performance. 10 Impairment of equity method investment and investment in equity securities includes
impairment of certain investments. The Company excludes these charges when evaluating
operating performance because these do not relate to the ordinary course of the Company's
business and it does not incur such charges on a predictable basis. Exclusion of such
charges enables more consistent evaluation of the Company's operating performance. These
charges are recorded within Other income, net. 11 In fiscal 2022, the Company finalized the working capital adjustments with
AmerisourceBergen related to the sale of the Alliance Healthcare business, resulting in a
Earnings. In fiscal 2021, the Company recorded a net gain of
of discontinued operations related to the sale of the Alliance Healthcare business. This
gain was excluded as it is not reflective of normal operating activities. 12 Includes significant gains on the sale of equity method investments. In fiscal 2022, the
Company recorded a gain of
partial sale of its equity method investments in AmerisourceBergen and Option Care
Health, respectively. In fiscal 2021, the Company recorded a gain of
Other income, net due to a partial sale of ownership interest in Option Care Health by
the Company's then equity method investee
previously held minority equity interests and debt securities to fair value. In fiscal
2022, the Company recorded such pre-tax gains of
extinguishment of debt related to the integration of Shields. In fiscal 2021, the Company
incurred a
purchase and retire
excludes these charges as related activities do not reflect the Company's ongoing
financial performance. 15 Adjustments to income tax provision (benefit) include adjustments to the GAAP basis tax
provision (benefit) commensurate with non-GAAP adjustments and certain discrete tax items
including
recorded within income tax provision (benefit). 16 Adjustments to post tax 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 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 fiscal 2021, due to partial sales of ownership interests in
Option Care Health, our then equity method investee
control Option Care Health and, therefore, deconsolidated Option Care Health in its
financial statements. As a result of this deconsolidation,
gain of
Holdings of
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, number of payor/ provider partnerships, number of locations ofWalgreens Health Corners, number of co-locatedVillageMD clinics and number of totalVillageMD clinics, at period end, 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 2022 Form 10-K 52
--------------------------------------------------------------------------------
Table of Contents 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. For further information regarding the impact of COVID-19 on the Company, including on its liquidity and capital resources, please see Part I, Item 1A, Risk factors. The Company expects to fund its working capital needs, capital expenditures, pending acquisitions, continuing obligations for recently announced or completed 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, debt offerings, sale of marketable securities and current cash and investment balances. OnJune 17, 2022 , the Company entered into a five-year$3.5 billion revolving credit agreement and an eighteen-month$1.5 billion revolving credit agreement. Simultaneously, with the entry into the credit agreements, the Company has terminated the Revolving Credit Agreements datedDecember 23, 2020 andAugust 29, 2018 . As ofAugust 31, 2022 , the Company had an aggregate borrowing capacity under committed revolving credit facilities of$5.0 billion , with no funds drawn under these facilities. OnJune 3, 2022 , a notice of redemption was given to holders of certain notes issued by the Company onSeptember 13, 2012 . As a result, onJuly 5, 2022 , the notes with aggregate principal amount of$731 million were redeemed in full. 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 disclosure about market risk, for a discussion of certain financing and market risks.
Cash, cash equivalents, marketable securities and restricted cash were
OnMay 5, 2022 , the Company entered into an agreement with theState of Florida to resolve all claims related to the distribution and dispensing of prescription opioid medications across the Company's pharmacies in theState of Florida . The settlement amount of$683 million million includes$620 million to be paid in equal installments to theState of Florida over 18 years, and will be applied as remediation of past and future opioid damages, as well as a one-time payment of$63 million for attorneys' fees. The Company made the first annual settlement payment of$97.4 million into escrow onJune 17, 2022 . OnAugust 5, 2022 , the Company entered into an agreement for the sale of its equity method investment inGuangzhou Pharmaceuticals Company Limited for approximately$150 million . The transaction is expected to close in the first quarter of fiscal 2023. OnSeptember 20, 2022 , the Company announced the acceleration of its plans for full ownership of Shields. The Company entered into a definitive agreement to acquire the remaining 30% equity interest for approximately$1.37 billion of cash consideration. The transaction is expected to close in the second quarter of fiscal 2023. OnOctober 11, 2022 , the Company announced the acceleration of its plans for full ownership ofCareCentrix . The Company entered into a definitive agreement to acquire the remaining 45% equity interest for approximately$392 million of cash consideration. The acquisition is subject to limited customary closing conditions and is expected to close byMarch 2023 . See Note 21. Subsequent events to the Consolidated Financial Statements included in Part II, Item 8 herein for further information.
At
See Note 8. Debt, to the Consolidated Financial Statements included in Part II, Item 8 for further information on the Company's debt instruments and its recent financing actions. WBA Fiscal 2022 Form 10-K 53
--------------------------------------------------------------------------------
Table of Contents 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$3.9 billion in fiscal 2022 compared to$5.6 billion in fiscal 2021 and$5.5 billion in fiscal 2020. The decrease in cash provided by operating activities in fiscal 2022 compared to fiscal 2021, reflects lower cash inflows from inventories, accounts payable, accrued expenses and other liabilities, partially offset by higher cash inflows from accounts receivable. Changes in inventory, accrued expenses and other liabilities are mainly driven by timing, absence of COVID-19 related government support, and payments for certain legal and regulatory settlements. Changes in accounts payable are mainly driven by impact of AllianceRxWalgreens sales decline and timing of payments. Changes in accounts receivable are mainly driven by lower COVID-19 volume and timing of collections. Cash flows from investing activities Net cash (used for) provided by investing activities was$(1.1) billion ,$4.1 billion and$(1.3) billion in fiscal 2022, 2021 and 2020. Net cash used for investing activities in fiscal 2022 includes cash outflows associated with business, investment and asset acquisitions, net of cash acquired ofVillageMD , Shields andCareCentrix for$0.8 billion ,$0.9 billion and$0.1 billion , respectively, offset by$900 million of sale proceeds related to the Company's sale of the 6.0 million shares of AmerisourceBergen common stock and$363 million related to the Company's sale of 11.0 million shares of Option Care Health common stock and proceeds from sale-leaseback transactions of$1.3 billion . See Note 6. Equity method investments and Note 3. Acquisitions and other investments, to the Consolidated Financial Statement included in Part II, Item 8 for further information. Net cash provided by investing activities in fiscal 2021 includes proceeds from sale of business, net of cash disposed of$5.5 billion , related to the disposition of Alliance Healthcare business, proceeds from sale of assets of$453 million driven by partial sale of ownership interest in Option Care Health by the Company's then equity method investeeHC Group Holdings and proceeds from sale-leaseback transactions of$856 million . Net cash provided by investing activities was offset by cash outflows associated with business, investment and asset acquisitions, net of cash, of$1.4 billion . Net cash used for investing activities in fiscal 2020, includes additions to property, plant and equipment of$1.4 billion , cash outflows associated with business, investment and asset acquisitions, net of cash, of$718 million , offset by proceeds from sale-leaseback transactions of$724 million . Capital Expenditure Capital expenditure includes information technology projects and other growth initiatives. Additions to property, plant and equipment were as follows (in millions): 2022 2021 2020 U.S. Retail Pharmacy$ 1,207 $ 1,030 $ 1,040 International 295 243 235 U.S. Healthcare 218 34 - Corporate and Other 15 5 12 Discontinued operations - 67 86
Total additions to property, plant and equipment
Cash flows from financing activities Net cash used for financing activities in fiscal 2022 was$1.5 billion compared to$9.0 billion in fiscal 2021 and$4.6 billion in fiscal 2020. WBA Fiscal 2022 Form 10-K 54
--------------------------------------------------------------------------------
Table of Contents In fiscal 2022, 2021 and 2020, there were proceeds from debt, primarily from revolving credit facilities, commercial paper and the issuance of notes of$11.9 billion ,$12.7 billion and$20.4 billion , respectively. In fiscal 2022, 2021 and 2020 there were payments of debt, primarily for revolving credit facilities and commercial paper of$8.4 billion ,$15.3 billion and$21.4 billion , respectively. Financing activities in fiscal 2022 include early debt extinguishment of$1.6 billion driven by the early redemption of the$731 million 3.100% notes due 2022 and early extinguishments of$458 million and$402 million of the debt related to the integration of Shields andCareCentrix , respectively. Financing activities in fiscal 2021 includes the partial purchase and retirement of$3.3 billion of long-term debt. See Note 8. Debt, to the Consolidated Financial Statements included in Part II, Item 8 for further information. The Company acquired$2.1 billion of non-controlling interests in fiscal 2022. See Note 3. Acquisitions and other investments, to the Consolidated Financial Statement included in Part II, Item 8 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
Cash dividends paid were
Stock repurchase program InJune 2018 , the Company'sBoard of Director's approved 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, 2022 . TheJune 2018 stock repurchase program has no specified expiration date. InJuly 2020 , the Company suspended repurchases under this program. The Company may continue to repurchase stock to offset anticipated dilution from 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 we otherwise might be precluded from doing so under federal securities laws. Debt covenants Each of the Company's credit facilities described in Note 8. Debt, to the Consolidated Financial Statements included in Part II, Item 8, 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, 2022 , the Company was in compliance with all such applicable covenants. Credit ratings As ofOctober 12, 2022 , the credit ratings ofWalgreens Boots Alliance were: Commercial Rating agency Long-term debt rating paper rating Outlook Moody's Baa2 P-2 Negative Standard & Poor's BBB A-2 Stable In assessing the Company's credit strength, each rating agency considers various factors including the Company's business model, capital structure, financial policies and financial performance. There can be no assurance that any particular rating will be assigned or maintained. The Company's credit ratings impact its borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold the Company's debt securities or commercial paper. Each rating may be subject to revision or withdrawal at any time by the assigning rating agency and should be evaluated independently of any other rating. 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. WBA Fiscal 2022 Form 10-K 55
--------------------------------------------------------------------------------
Table of Contents 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 post-retirement benefits, legal contingencies 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 non-controlling interests, be recorded at their respective fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when market value is not readily available. For intangible assets, the Company generally uses the income approach to determine fair value. The income approach requires management to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: discount rates, terminal growth rates, royalty rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. The discount rates applied to the projections reflect the risk factors associated with those projections. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on the determination of the fair value of the intangible assets acquired.
Judgment is also required in determining the intangible asset's useful life.
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.
WBA Fiscal 2022 Form 10-K 56
--------------------------------------------------------------------------------
Table of ContentsGoodwill 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 generally 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, as well as recent guideline transactions. 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. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which we compete, discount rates, terminal growth rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. Although the Company believes its estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions, could have a significant impact on either the fair value of the reporting units 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 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. 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, typically at the store level for retail pharmacy operations. Long-lived assets related to the Company's retail pharmacy 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 the 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 -
Retail, Pharmacy and Wholesale Cost of sales includes the purchase price of goods and cost of services rendered, store and warehouse inventory loss, inventory obsolescence, warehousing costs for retail operations, purchasing costs, freight costs, cash discounts, vendor allowances and supplier rebates. 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. The Company values inventories on a lower of cost and net realizable value or market basis. Inventories include product costs, inbound freight, direct labor, warehousing costs for retail pharmacy operations, distribution of products, and vendor allowances not classified as a reduction of advertising expense.The Company'sU.S. Retail Pharmacy segment inventory is accounted for using the last-in-first-out ("LIFO") method. The Company's International segment inventory is accounted for using average cost and the first-in-first-out ("FIFO") method. WBA Fiscal 2022 Form 10-K 57
--------------------------------------------------------------------------------
Table of Contents
Vendor allowances are principally received as a result of purchases, sales or promotion of vendors' products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise is sold. Allowances received for promoting vendors' products, if received for a specific, incremental, identifiable cost, are offset against advertising expense and result in a reduction of Selling, general and administrative expenses to the extent of advertising costs incurred, with the excess treated as a reduction of inventory costs. Rebates or refunds received by the Company from its suppliers, mostly in cash, are considered as an adjustment of the prices of the supplier's products purchased by the Company. Healthcare services For operations and activities related to the provision of healthcare, cost of services includes activities that are directly related to the provision of care, including medical claims expense, cost of care, clinic operating and support costs, and allocated depreciation and amortization. Medical claims expense represents medical claims expenses related to fee-for-service and value-based arrangements and primarily includes costs for third-party healthcare service providers that provide medical care to patients. Cost of care represents the cost of our employed providers and certain affiliated providers, including base compensation, quality incentive bonuses and provider benefits. Clinic operating and support costs include costs incurred to operate our clinics, including clinical care support staff, patient support staff, population health management employees, rent, utilities and supplies. 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 post-retirement benefits - The Company has various defined benefit pension plans that cover some of its non-U.S. employees. The Company also has a post-retirement healthcare plan that covers qualifyingU.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 post-retirement 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 would result in a decline of$213 million to the Company's pension benefit obligation. A 25 basis point decrease on the expected return on plan assets assumption would increase the Company's pension expense by$16 million .
The Company funds its pension plans in accordance with applicable regulations. The post-retirement healthcare plan is not funded.
WBA Fiscal 2022 Form 10-K 58
--------------------------------------------------------------------------------
Table of Contents Contingencies - The Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case-by-case basis for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company may be unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company's assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company's Consolidated Financial Statements in a future fiscal period. Management's assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management's assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved. 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 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," "outlook," "forecast," "would," "could," "should," "can," "will," "project," "intend," "plan," "goal," "guidance," "target," "aim," "continue," "transform," "accelerate," "model," "long-term," "believe," "seek," "estimate," "anticipate," "may," "possible," "assume," 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 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. WBA Fiscal 2022 Form 10-K 59
--------------------------------------------------------------------------------
Table of Contents
© Edgar Online, source
