WALGREENS BOOTS ALLIANCE, INC. The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and the Consolidated Financial Statements, accompanying notes and management's discussion and analysis of financial condition and results of operations and other disclosures contained in theWalgreens Boots Alliance, Inc. Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed below under "Cautionary note regarding forward-looking statements", in item 1A, risk factors, in our Form 10-K for the fiscal year endedAugust 31, 2019 and in item 1A, risk factors, in this report. References herein to the "Company", "we", "us", or "our" refer toWalgreens Boots Alliance, Inc. and its subsidiaries, except as otherwise indicated or the context otherwise requires. Certain amounts in the management's discussion and analysis of financial condition and results of operations may not add due to rounding. All percentages have been calculated using unrounded amounts for the three and nine months endedMay 31, 2020 andMay 31, 2019 . INTRODUCTION AND SEGMENTSWalgreens Boots Alliance, Inc. ("Walgreens Boots Alliance ") and its subsidiaries are a global leader in retail and wholesale pharmacy. Its operations are conducted through three reportable segments: •Retail PharmacyUSA ; •Retail Pharmacy International; and •Pharmaceutical Wholesale.
See note 14, segment reporting and note 15, sales for further information.
FACTORS AFFECTING OUR RESULTS AND COMPARABILITYThe Company has been, and we expect it to continue to be affected by a number of factors that may cause actual results to differ from our historical results or current expectations. These factors include: the impact of the coronavirus COVID-19 ("COVID-19") pandemic 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, including the acquisition of stores and other assets from Rite Aid; joint ventures and other strategic collaborations; changes in laws, including theU.S. tax law changes; changes in trade, tariffs, including trade relations betweenthe United States 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. 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.
Estimated COVID-19 impacts and uncertainties
InDecember 2019 , a novel strain of coronavirus, which causes the infectious disease known as COVID-19, was reported. TheWorld Health Organization declared COVID-19 a "Public Health Emergency of International Concern" onJanuary 30, 2020 and a global pandemic onMarch 11, 2020 . COVID-19 has severely impacted, and is expected to continue to severely impact, the economies of theU.S. , theUK and other countries around the world. COVID-19 has created significant public health concerns as well as significant volatility, uncertainty and economic disruption in every region in which we operate, all of which have adversely affected and may continue to adversely affect our industries and our business operations. Further, financial and credit markets have experienced and may continue to experience volatility and turmoil. Policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, temporary closure or reduced hours of operation of certain store locations inU.S. ,UK and other countries, reduced customer traffic and sales in our retail pharmacies and the adoption of work-from-home policies. The Company expects that COVID-19 will continue to adversely affect global economic conditions at least throughout 2020 and into 2021 and possibly longer. The situation surrounding COVID-19 remains fluid, and we are actively managing our response in collaboration with customers, government officials, team members and business partners and assessing potential impacts to our financial position and operating results, as well as adverse developments in our business. As COVID-19 - 35 - -------------------------------------------------------------------------------- continues to spread and impact the economies of theU.S. and other countries around the world, the Company has put preparedness plans in place at our facilities to maintain continuity of our operations, while also taking steps to keep our team members healthy and safe. During the three months endedMay 31, 2020 , we experienced certain adverse impacts of COVID-19. Sales were adversely impacted with the majority of the decline within theRetail Pharmacy International division. This reflected a significant reduction in footfall in BootsUK stores as consumers were advised to leave home only for food and medicine. While most Boots stores remained open throughout theUK lockdown to provide communities with pharmacy and essential healthcare, our largest premium beauty and fragrance counters were effectively closed. More than 100 Boots stores, mainly in high street, station and airport locations, were temporarily closed as were nearly all of the 600 Boots Opticians stores. Globally pharmacy volume was impacted by a decline in doctor visits and hospital patient admissions. Additionally, gross margin was adversely impacted by sales mix, with a shift from higher margin discretionary categories to lower margin categories, and by higher supply chain costs. The Company took measures to keep stores open during COVID-19, incurring incremental selling, general and administrative expenses, including higher employee costs and store expenses related to social distancing and incremental cleaning. Operating income was significantly and adversely impacted as a result of the foregoing factors. In addition, due to the significant impact of COVID-19 on the financial performance of theRetail Pharmacy International division, the company completed a quantitative impairment analysis for goodwill and certain intangibles in BootsUK , which resulted in the recording of non-cash pre-tax impairment charges of$2.0 billion . In an effort to strengthen our liquidity position while navigating COVID-19, we have taken a number of proactive steps sinceMarch 2020 , including the issuance of$1.5 billion of debt securities, entry into new and extended credit facilities and suspending activity under our 2018 stock repurchase program, as described in Liquidity and Capital Resources below. In response to COVID-19, various domestic and foreign federal, state and local governmental legislation, regulations, orders, policies and initiatives have been implemented designed to reduce the transmission of COVID-19, as well as to help address economic and market volatility and instability resulting from COVID-19. The Company has assessed and will continue to assess the impact of these governmental actions on the Company. It has participated in certain of these programs, including for example availing itself to certain tax deferrals allowed pursuant to the CARES Act in theU.S. and certain tax deferral and benefit and employee wage support in theUK , and may continue to do so in the future. The Company has also taken a number of proactive actions consistent with regulatory directives, such as digital 'order ahead' drive-thru with an increased range of products available for drive-thru pick-up, and put in place new delivery options. The Company also took certain actions during the three months endedMay 31, 2020 to partly mitigate the impact of COVID-19 through cost containment across the Company including temporary store closures, furloughing approximately 16,000UK employees at the peak of the crisis, decreasing store hours and reducing rent at some locations. As a result of COVID-19, our global workforce, including employees and extended workforce, rapidly shifted to a working from home environment beginning inMarch 2020 . While our system of internal controls were not specifically designed and implemented to accommodate for this shift, we have evaluated and concluded that these changes to the working environment did not have a material effect on the Company's internal control over financial reporting during the most recent quarter as described in Item 4. Controls and procedures below. The Company will continue to monitor and assess the COVID-19 situation and its internal controls and seek to mitigate any impact on their design and operating effectiveness. The Company anticipates additional mandates and directives, including revisions thereto, from foreign, federal, state, county and city authorities throughout the continuation of the COVID-19 pandemic and for some time thereafter. The impact of this activity on theU.S. and global economies, consumer, customer and health care utilization patterns depends upon the evolving factors and future developments. As a result, the financial and/or operational impact these COVID-19 related governmental actions and inactions will have on our businesses, operating results, cash flows and/or financial condition is uncertain, but the collective impact could be material and adverse. We will continue to closely monitor the impact of COVID-19 on our business and geographies, including how it is impacting our customers, team members, suppliers, vendors, business partners and distribution channels. However, the future impact that COVID-19 will have on our financial position and operating results may be affected by numerous uncertainties, including the severity of the virus, the duration of the outbreak, governmental, business or other actions, impacts on our supply chain, the effect on customer demand, store closures or changes to our operations. The health of our workforce, and our ability to meet staffing needs in our stores, distribution facilities, wholesale operations and other critical functions cannot be predicted and is vital to our operations. The impacts of a potential worsening of global economic conditions and the continued disruptions to, and volatility in, the credit and financial markets, consumer spending as well as other unanticipated consequences remain unknown. Further, a second wave of COVID-19 later in 2020 or beyond would cause many of the impacts described herein to - 36 - -------------------------------------------------------------------------------- return or be exacerbated. In addition, we cannot predict with certainty the impact that COVID-19 will have on our customers, vendors, suppliers and other business partners; however, any material effect on these parties could adversely impact us. For further information, please see item 1A, risk factors in this report, which is incorporated herein by reference. 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", in item 1A, risk factors, in our Form 10-K for the fiscal year endedAugust 31, 2019 and in item 1A, risk factors, in this report.
InMay 2020 , significant looting impacted certain stores with varying degrees of damage throughoutthe United States . As a result, the Company recognized$75 million charge during the three months endedMay 31, 2020 for estimated store damage and inventory losses. The resulting store closures adversely affected sales. As these events inthe United States continued beyondMay 2020 , the Company continues to monitor developments and assess the degree of the damage and expects additional charges to be incurred in subsequent periods associated with these events.
Store damage and inventory losses related to these recent events are recognized as the costs are incurred in accordance with GAAP. The Company treats these charges as special items impacting comparability of results in its earnings disclosures.
The impact of Brexit
As a result of theJune 2016 referendum, theUnited Kingdom withdrew from theEuropean Union ("Brexit") onJanuary 1, 2020 . It began a transition period untilDecember 31, 2020 in which to negotiate a new trading relationship for goods and services. Failure to complete negotiations by the deadline could result in theUnited Kingdom becoming subject to trade agreements with theEuropean Union that are less favorable than those currently in effect. In addition, since the referendum, there has been periods of significant volatility in the global stock markets and currency exchange rates, as well as challenging market condition in theUnited Kingdom . Given the lack of comparable precedent, it is unclear what financial, trade, regulatory and legal implications the withdrawal of theUnited Kingdom from theEuropean Union will have on our business, particularlyUnited Kingdom and other European operations; however, Brexit and its related effects could have a material impact on the Company's consolidated financial position or operating results. TRANSFORMATIONAL COST MANAGEMENT PROGRAM OnDecember 20, 2018 , the Company announced a transformational cost management program that was expected to deliver in excess of$1.0 billion of annual cost savings by fiscal 2022 (the "Transformational Cost Management Program"). As of the date of this report, the Company expects annual cost savings to be in excess of$2.0 billion by fiscal 2022, an increase from the previously reported expectations of annual cost savings in excess of$1.8 billion inOctober 2019 and$1.5 billion inApril 2019 . The Transformational Cost Management Program, which is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and the transformation of the Company's information technology (IT) capabilities, is designed to help the Company achieve increased cost efficiencies. To date, the Company has taken actions across all aspects of the Transformational Cost Management Program. The actions under the Transformational Cost Management Program focus on all reportable segments and the Company's global functions. Divisional optimization within each of the Company's segments includes activities such as optimization of stores which includes plans to close approximately 200 Boots stores in theUnited Kingdom and approximately 200 stores inthe United States . The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its generally accepted accounting principles inthe United States ("GAAP") financial results of approximately$2.1 billion to$2.4 billion , of which$1.8 billion to$2.1 billion are expected to be recorded as exit and disposal activities. The Company estimates that approximately 80% of the cumulative pre-tax charges will be associated with cash expenditures, primarily related to employee severance and business transition costs, IT transformation costs and lease and real estate payments.
The Company currently estimates that it will recognize aggregate pre-tax charges to its GAAP financial results related to Transformational Cost Management Program as follows:
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Transformational Cost Management Program Activities Range of Charges
Lease obligations and other real estate costs1 $350 to 400 million
Asset impairments2 $350 to 400 million
Employee severance and business transition costs $800 to 900 million
Information technology transformation and other exit costs $300 to 350 million
Total cumulative pre-tax exit and disposal costs $1.8 to 2.1 billion
Other IT transformation costs $300 to 350 million
Total estimated pre-tax costs 1Includes impairments relating to operating lease right-of-use and finance lease assets. 2Primarily related to asset write-offs from store closures, information technology and other asset write-offs. In addition to the impacts discussed above, as a result of the actions related to store closures taken under the Transformational Cost Management Program, the Company recorded$508 million of transition adjustments to decrease retained earnings due to the adoption of the new lease accounting standard (Topic 842) that became effective onSeptember 1, 2019 . See note 17, new accounting pronouncements, for additional information. Since the inception of the Transformational Cost Management Program toMay 31, 2020 , the Company has recognized aggregate cumulative pre-tax charges to its financial results in accordance with GAAP of$1.0 billion , of which$899 million are recorded as exit and disposal activities. See note 3, exit and disposal activities, for additional information. These charges included$209 million related to lease obligations and other real estate costs,$305 million in asset impairments,$293 million in employee severance and business transition costs,$92 million of information technology transformation and other exit costs and$101 million other information technology costs. Costs under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses for the three and nine months endedMay 31, 2020 , respectively, were as follows (in millions): Retail Pharmacy Retail Pharmacy Walgreens
Boots
Three months ended May 31, 2020 USA International Pharmaceutical Wholesale Alliance, Inc. Lease obligations and other real estate costs1$ 170 $ 3 $ -$ 173 Asset impairments 19 10 1 30 Employee severance and business transition costs 51 2 3 57 Information technology transformation and other exit costs 21 13 - 34 Total pre-tax exit and disposal costs$ 261 $ 27 $ 5$ 294 Other IT transformation costs 16 4 1 21 Total pre-tax costs$ 278 $ 31 $ 6$ 315
1Includes
Retail Pharmacy Retail Pharmacy Pharmaceutical Walgreens Boots
Nine months ended May 31, 2020 USA International Wholesale Alliance, Inc.
Lease obligations and other real estate
costs1 $ 179 $ 4 $ 1 $ 184
Asset impairments 31 13 1 45
Employee severance and business transition
costs 124 32 12 168
Information technology transformation and
other exit costs 37 30 2 70
Total pre-tax exit and disposal costs $ 371 $ 80 $ 17 $ 467
Other IT transformation costs 43 11 3 56
Total pre-tax costs $ 414 $ 90 $ 20 $ 524 1Includes
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Costs under the Transformational Cost Management Program, which were primarily
recorded in selling, general and administrative expenses for the nine months
ended May 31, 2019 , were $265 million , of which $235 million are recorded as
exit and disposal activities. See note 3, exit and disposal activities, for
additional information. Transformational Cost Management Program charges were
primarily recorded within selling, general and administrative expenses and
relate to actions taken across all divisions.
Transformational Cost Management Program charges are recognized as the costs are
incurred over time in accordance with GAAP. The Company treats charges related
to the Transformational Cost Management Program as special items impacting
comparability of results in its earnings disclosures.
The amounts and timing of all estimates are subject to change until finalized.
The actual amounts and timing may vary materially based on various factors. See
"cautionary note regarding forward-looking statements" below.
RITE AID TRANSACTION
As of May 31, 2020 , the Company has completed the acquisition of all 1,932 Rite
Aid stores and three distribution centers and related inventory from Rite Aid
Corporation for $4.375 billion in cash and other consideration pursuant to an
amended and restated asset purchase agreement entered into in September 2017 .
The Company expects to incur approximately
Integration of acquired stores and related assets The Company substantially completed the integration of the acquired stores and related assets during the three months endedMay 31, 2020 . The Company expects total cost of approximately$800 million , which is reported as acquisition-related costs and is treated as special items impacting comparability of results in its earnings disclosures. Since fiscal 2018, the Company has recognized cumulative pre-tax charges of$800 million , which includes pre-tax charges of$283 million for the nine months endedMay 31, 2020 related to integration of the acquired stores and related assets. The Company expects annual synergies from the transaction of more than$325 million , which are expected to be fully realized within four years of the initial closing of this transaction and derived primarily from procurement, cost savings and other operational matters. In addition, the Company expects to spend approximately$500 million on store conversions and related activities. The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See "cautionary note regarding forward-looking statements" below. Store Optimization Program OnOctober 24, 2017 , the Company's Board of Directors approved a plan to implement a program (the "Store Optimization Program") to optimize store locations through the planned closure of approximately 600 stores and related assets within the Company'sRetail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Company continues to expect to close approximately 750 stores and related assets, of which substantially all have been closed as part of this program. The actions under the Store Optimization Program commenced inMarch 2018 and are substantially completed with remaining activities expected to complete by the end of fiscal 2020. The Store Optimization Program is expected to result in cost savings of approximately$350 million per year to be fully delivered by the end of fiscal 2020. The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately$375 million , compared to the Company's previously stated expectation of$400 million inApril 2020 , of which$345 million have been recorded to date, primarily within selling, general and administrative expenses, including costs associated with lease obligations and other real estate costs and employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately$185 million for lease obligations and other real estate costs, of which$162 million have been recorded to date and approximately$190 million for employee severance and other exit costs of which$183 million have been recorded to date. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures. Store Optimization Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Store Optimization Program as special items impacting comparability of results in its earnings disclosures. - 39 - -------------------------------------------------------------------------------- The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See "cautionary note regarding forward-looking statements" below. INVESTMENT IN AMERISOURCEBERGEN As ofMay 31, 2020 , the Company owned 56,854,868 shares of AmerisourceBergen common stock (representing approximately 28% of its outstanding common stock based on most recent share count publicly reported by AmerisourceBergen) and may, subject to certain conditions, acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market. The Company accounts for its investment in AmerisourceBergen using the equity method of accounting, subject to a two-month reporting lag, with the net earnings attributable to the investment classified within the operating income of the Company's Pharmaceutical Wholesale segment. The financial performance of AmerisourceBergen, including any charges which may arise relating to its ongoing opioid litigation, will impact the Company's results of operations. Additionally, a substantial and sustained decline in the price of AmerisourceBergen's common stock could trigger an impairment evaluation of our investment. These considerations may materially and adversely affect the Company's financial condition and results of operations.
For more information, see note 5, equity method investments to the Consolidated Condensed Financial Statements.
EXECUTIVE SUMMARY
The following table presents certain key financial statistics.
(in millions, except per share amounts)
Nine months ended May
Three months ended May 31, 31,
2020 2019 2020 2019
Sales $ 34,631 $ 34,591 $ 104,791 $ 102,912
Gross profit 6,438 7,453 21,214 22,849
Selling, general and administrative expenses 8,265 6,235 20,835 18,834
Equity earnings (loss) in AmerisourceBergen 243 (16) 284 105
Operating income (loss) (1,584) 1,203 662 4,120
Adjusted operating income (Non-GAAP measure)1 919 1,717 4,085 5,384
Earnings (loss) before interest and income tax
provision (1,618) 1,385 689 4,347
Net earnings (loss) attributable to
(1,708) 1,025 83 3,305
Adjusted net earnings attributable to
723 1,338 3,288 4,246
Net earnings (loss) per common share - diluted (1.95) 1.13 0.09 3.55
Adjusted net earnings per common share - diluted
(Non-GAAP measure)1 0.83 1.47 3.72 4.56
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Percentage increases (decreases)
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Sales 0.1 0.7 1.8 4.9
Gross profit (13.6) (4.2) (7.2) (1.6)
Selling, general and administrative expenses 32.6 - 10.6 2.0
Operating income (loss) (231.7) (24.7) (83.9) (15.8)
Adjusted operating income (Non-GAAP measure)1 (46.5) (11.7) (24.1) (8.9)
Earnings (loss) before interest and income tax
provision (216.9) (13.3) (84.2) (8.9)
Net earnings (loss) attributable to Walgreens
Boots Alliance, Inc. (266.6) (23.6) (97.5) (5.9)
Adjusted net earnings attributable to Walgreens
Boots Alliance, Inc. (Non-GAAP measure)1 (45.9) (12.1) (22.6) (6.4)
Net earnings (loss) per common share - diluted (273.4) (16.5) (97.3) 1.1
Adjusted net earnings per common share - diluted
(Non-GAAP measure)1 (43.8) (4.0) (18.5) 0.6
Percent to sales
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Gross margin 18.6 21.5 20.2 22.2
Selling, general and administrative expenses 23.9 18.0 19.9 18.3
1 See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Net earnings Net loss attributable toWalgreens Boots Alliance for the three months endedMay 31, 2020 was$1.7 billion compared to net earnings of$1.0 billion for the prior year quarter. Diluted net loss per share was$1.95 compared to diluted net earnings per share of$1.13 for the prior year quarter. The decreases in net earnings and diluted earnings per share primarily reflect non-cash impairment charges related to goodwill and intangible assets in the Boots reporting unit due to deteriorated business conditions, including the adverse impact of COVID-19 and resulting future uncertainty, operating performance including lower gross margins in theU.S. andUK and increased costs related to the Transformational Cost Management Program. Net earnings attributable toWalgreens Boots Alliance for the nine months endedMay 31, 2020 was$83.0 million compared to$3.3 billion for the prior year period. Diluted net earnings per share was$0.09 compared to$3.55 for the prior year period. The decreases in net earnings and diluted earnings per share primarily reflect the third quarter non-cash impairment charges related to goodwill and intangible assets in the Boots reporting unit, operating performance including lower gross margins in theU.S. andUK and costs related to the Transformational Cost Management Program. Diluted net earnings per share was positively affected by a lower number of shares outstanding compared to the prior year period. Other expense for the three months endedMay 31, 2020 was$34 million compared to income of$182 million for the prior year quarter. Other income for the nine months endedMay 31, 2020 was$26 million compared to income of$227 million for the prior year period. The decreases primarily reflect a prior year gain from the termination of the group purchasing organization option granted to Rite Aid. Interest was a net expense of$155 million and$482 million for the three and nine months endedMay 31, 2020 , respectively, compared to$187 million and$529 million for the three and nine months endedMay 31, 2019 , respectively. The effective tax rate for the three and nine months endedMay 31, 2020 was 2.3% and 73.8%, respectively, compared to 13.0% and 14.7% for the three and nine months endedMay 31, 2019 , respectively. The decrease in the effective tax rate for the three - 41 - -------------------------------------------------------------------------------- months endedMay 31, 2020 reflects a tax benefit on a pretax loss and was primarily due to non-deductible goodwill impairment charge. The increase in the effective tax rate for the nine months endedMay 31, 2020 reflects a tax expense on pretax income and was primarily due to non-deductible goodwill impairment charge. Adjusted diluted net earnings (Non-GAAP measure) Adjusted net earnings attributable toWalgreens Boots Alliance for the three months endedMay 31, 2020 decreased 45.9% to$723 million compared with the prior year quarter. Adjusted diluted net earnings per share decreased 43.8% to$0.83 compared with the year-ago quarter. Adjusted diluted net earnings and adjusted diluted net earnings per share were negatively impacted by 0.3 percentage points and 0.4 percentage points, respectively, as a result of currency translation. The decreases in adjusted net earnings and adjusted diluted net earnings per share for the three months endedMay 31, 2020 primarily reflect lowerU.S. pharmacy reimbursement and COVID-19 impacts across the Company, including lower retail margins in theU.S. andUK . Adjusted diluted net earnings per share for the three months endedMay 31, 2020 benefited from a lower number of shares outstanding compared with the prior year quarter. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. Adjusted net earnings attributable toWalgreens Boots Alliance for the nine months endedMay 31, 2020 decreased 22.6% to$3.3 billion compared with the prior year period. Adjusted diluted net earnings per share decreased 18.5% to$3.72 compared with the year-ago period. Adjusted diluted net earnings and adjusted diluted net earnings per share were both negatively impacted by 0.2 percentage points as a result of currency translation. The decreases in adjusted net earnings and adjusted diluted net earnings per share for the nine months endedMay 31, 2020 primarily reflect lowerU.S. pharmacy reimbursement and COVID-19 impacts across the Company, including lower retail margins in theU.S. andUK , partially offset by cost savings from the Transformational Cost Management Program. Adjusted diluted net earnings per share for the nine months endedMay 31, 2020 benefited from a lower number of shares outstanding compared with the prior year period. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. - 42 - --------------------------------------------------------------------------------
RESULTS OF OPERATIONS BY SEGMENT
Retail Pharmacy USA This division comprises the retail pharmacy business operating inthe United States .
(in millions, except location amounts)
Nine months ended May
Three months ended May 31, 31,
2020 2019 2020 2019
Sales $ 27,357 $ 26,513 $ 80,734 $ 78,491
Gross profit 5,258 5,813 16,755 17,880
Selling, general and administrative expenses 5,032 4,818 14,718 14,492
Operating income 226 995 2,037 3,388
Adjusted operating income (Non-GAAP measure)1 792 1,286 3,215 4,119
Number of prescriptions2* 196.9 212.3 623.2 640.8
30-day equivalent prescriptions2,3* 287.0 290.7 877.7 866.9
Number of locations at period end* 9,095 9,390 9,095 9,390
Percentage increases (decreases)
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Sales 3.2 2.3 2.9 7.7
Gross profit (9.6) (3.6) (6.3) (0.1)
Selling, general and administrative expenses 4.4 0.9 1.6 2.7
Operating income (77.3) (20.6) (39.9) (10.5)
Adjusted operating income (Non-GAAP measure)1 (38.4) (13.8) (21.9) (8.9)
Comparable store sales4* 3.0 3.8 2.5 1.6
Pharmacy sales 4.6 4.3 4.3 10.2
Comparable pharmacy sales4* 3.5 6.0 3.3 3.6
Retail sales (0.7) (2.9) (1.0) 1.3
Comparable retail sales4* 1.9 (1.1) 0.7 (2.7)
Comparable number of prescriptions2,4* (5.8) 1.4 (1.2) (0.1)
Comparable 30-day equivalent prescriptions2,3,4* 0.4 4.7 2.7 2.8
Percent to sales
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Gross margin 19.2 21.9 20.8 22.8
Selling, general and administrative expenses 18.4 18.2 18.2 18.5
1See "--Non-GAAP Measures" below for a reconciliation to the most directly
comparable financial measure calculated in accordance with GAAP and related
disclosures.
2Includes immunizations.
3Includes the adjustment to convert prescriptions greater than 84 days to the
equivalent of three 30-day prescriptions. This adjustment reflects the fact that
these prescriptions include approximately three times the amount of product days
supplied compared to a normal prescription.
4Comparable stores are defined as those that have been open for at least twelve
consecutive months without closure for seven or more consecutive days and
without a major remodel or being subject to a natural disaster in the past
twelve
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months. Relocated stores are not included as comparable stores for the first
twelve months after the relocation. Acquired stores are not included as
comparable stores for the first twelve months after acquisition or conversion,
when applicable, whichever is later. Comparable store 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, in such stores. The method of
calculating comparable sales varies across the retail industry. As a result, our
method of calculating comparable sales may not be the same as other retailers'
methods. The nine months ended May 31, 2020 figures include an adjustment to
remove February 29, 2020 results due to the leap year .
*The Company considers these items 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 may not be
comparable to similarly-titled performance indicators used by other companies.
Sales for the three months ended
Pharmacy sales increased 4.6% for the three months endedMay 31, 2020 and represented 74.9% of the division's sales. The increase is primarily due to higher brand inflation and specialty sales partially offset by COVID-19 prescription volume impact. In the year-ago quarter, pharmacy sales increased 4.3% and represented 73.9% of the division's sales. Comparable pharmacy sales increased 3.5% for the three months endedMay 31, 2020 compared to an increase of 6.0% in the year-ago quarter. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.7% in the three months endedMay 31, 2020 compared to a reduction of 1.2% in the year-ago quarter. The effect of generics mix on division sales caused a reduction of 1.9% for the three months endedMay 31, 2020 compared to a reduction of 0.8% for the year-ago quarter. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 95.4% of prescription sales for the three months endedMay 31, 2020 compared to 97.1% in the year-ago quarter. The total number of prescriptions (including immunizations) filled for the three months endedMay 31, 2020 was 196.9 million compared to 212.3 million in the year-ago quarter. Prescriptions (including immunizations) filled adjusted to 30-day equivalents were 287.0 million in the three months endedMay 31, 2020 compared to 290.7 million in the year-ago quarter. Retail sales for the three months endedMay 31, 2020 decreased 0.7%, including the impact of the store closures, and were 25.1% of the division's sales. In the year-ago quarter, retail sales decreased 2.9% and comprised 26.1% of the division's sales. Comparable retail sales increased 1.9% in the three months endedMay 31, 2020 compared to a decrease of 1.1% in the year-ago quarter. The increase in the current quarter is driven by health and wellness categories, including higher sales in vitamins and personal protective equipment products, and increase of sales in personal care categories and grocery, offsets by lower sales in discretionary areas such as photo and beauty.
Operating income for the three months ended
Gross margin was 19.2% for the three months endedMay 31, 2020 compared to 21.9% in the year-ago quarter. Gross margin was negatively impacted in the current quarter by reimbursement pressure and COVID-19 impacts including pharmacy volume and product mix. Selling, general and administrative expenses as a percentage of sales were 18.4% in the three months endedMay 31, 2020 compared to 18.2% in the year-ago quarter. As a percentage of sales, expenses were higher in the current quarter primarily due to costs related to Transformational Cost Management Program and incremental COVID-19 costs partially offset by savings from Transformational Cost Management Program and short-term actions to help mitigate the COVID-19 impact. Adjusted operating income (Non-GAAP measure) for the three months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy USA division's adjusted operating income was$792 million for the three months endedMay 31, 2020 , a decrease of 38.4% from the year-ago quarter. The decrease was primarily due to pharmacy margins which were negatively impacted by year-on-year reimbursement pressure and COVID-19 impacts partially offset by savings from Transformational Cost Management Program. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. - 44 - --------------------------------------------------------------------------------
Sales for the nine months ended
Pharmacy sales increased 4.3% for the nine months endedMay 31, 2020 and represented 74.4% of the division's sales. The increase is primarily due to higher brand inflation and specialty sales. In the year-ago period, pharmacy sales increased 10.2% and represented 73.4% of the division's sales. Comparable pharmacy sales increased 3.3% for the nine months endedMay 31, 2020 compared to an increase of 3.6% in the year-ago period. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 2.6% in the nine months endedMay 31, 2020 compared to a reduction of 1.0% in the year-ago period. The effect of generics mix on division sales caused a reduction of 1.8% for the nine months endedMay 31, 2020 compared to a reduction of 0.7% for the year-ago period. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.2% of prescription sales for the nine months endedMay 31, 2020 compared to 97.1% in the year-ago period. The total number of prescriptions (including immunizations) filled for the nine months endedMay 31, 2020 was 623.2 million compared to 640.8 million in the year-ago period. Prescriptions (including immunizations) filled adjusted to 30-day equivalents were 877.7 million in the nine months endedMay 31, 2020 compared to 866.9 million in the year-ago period. Retail sales for the nine months endedMay 31, 2020 decreased 1.0% and were 25.6% of the division's sales. In the year-ago period, retail sales increased 1.3% and comprised 26.6% of the division's sales. Comparable retail sales increased 0.7% in the nine months endedMay 31, 2020 compared to a decrease of 2.7% in the year-ago period. The increase in the current period was driven by health and wellness, including a favorable cough cold and flu season.
Operating income for the nine months ended
Gross margin was 20.8% for the nine months endedMay 31, 2020 compared to 22.8% in the year-ago period. Gross margin was negatively impacted in the current fiscal year by pharmacy margins, which were negatively impacted by year-on-year reimbursement pressure and COVID-19 impacts. Selling, general and administrative expenses as a percentage of sales were 18.2% in the nine months endedMay 31, 2020 compared to 18.5% in the year-ago period. As a percentage of sales, expenses were lower in the current period primarily due to savings related to the Transformational Cost Management Program and gains on sale-leaseback transactions partially offset by costs related to the Company's Transformational Cost Management Program and year-on-year bonus impact. Adjusted operating income (Non-GAAP measure) for the nine months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy USA division's adjusted operating income was$3.2 billion for the nine months endedMay 31, 2020 , a decrease of 21.9% from the year-ago period. The decrease was primarily due to lower pharmacy margin which were negatively impacted by 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. - 45 - --------------------------------------------------------------------------------Retail Pharmacy International This division comprises retail pharmacy businesses operating in countries outsidethe United States and in currencies other than theU.S. dollar, including the British pound sterling, Euro, Chilean peso and Mexican peso and therefore the division's results are impacted by movements in foreign currency exchange rates. See item 3, quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk, for further information on currency risk. (in
millions, except location amounts)
Nine months ended May
Three months ended May 31, 31,
2020 2019 2020 2019
Sales $ 1,903 $ 2,776 $ 7,704 $ 8,759
Gross profit 672 1,112 2,910 3,418
Selling, general and administrative expenses 2,832 993 4,894 3,029
Operating income (loss) (2,160) 119 (1,984) 389
Adjusted operating income (loss) (Non-GAAP
measure)1 (143) 165 133 553
Number of locations at period end* 4,502 4,612 4,502 4,612
Percentage increases (decreases)
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Sales (31.5) (7.3) (12.0) (6.8)
Gross profit (39.6) (8.5) (14.9) (8.4)
Selling, general and administrative expenses 185.3 (5.3) 61.6 (3.5)
Operating income (loss) (1,912.5) (28.6) (609.9) (34.5)
Adjusted operating income (loss) (Non-GAAP
measure)1 (187.1) (14.9) (76.0) (18.0)
Comparable store sales2* (25.2) (1.0) (9.2) (1.6)
Pharmacy sales (11.4) (5.9) (4.6) (6.5)
Comparable pharmacy sales2* (1.6) 1.0 0.2 (0.8)
Retail sales (43.6) (8.1) (16.1) (6.9)
Comparable retail sales2* (41.8) (2.3) (14.9) (2.1)
Percent to sales
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Gross margin 35.3 40.0 37.8 39.0
Selling, general and administrative expenses 148.8 35.8 63.5 34.6
1See "--Non-GAAP Measures" below for a reconciliation to the most directly
comparable financial measure calculated in accordance with GAAP and related
disclosures.
2Comparable stores are defined as those that have been open for at least twelve
consecutive months without closure for seven or more consecutive days and
without a major remodel or being subject to a natural disaster in the past
twelve months. Relocated stores are not included as comparable stores for the
first twelve months after the relocation. Acquired stores are not included as
comparable stores for the first twelve months after acquisition or conversion,
when applicable, whichever is later. Comparable store sales, comparable pharmacy
sales and comparable retail sales refer to total sales, pharmacy sales and
retail sales, respectively, in such stores. The method of calculating comparable
sales varies across the retail industry. As a result, our method of calculating
comparable sales may not be the same as other retailers' methods. With respect
to the Retail Pharmacy International division, comparable store sales,
comparable pharmacy sales and comparable retail sales are presented on a
constant currency basis, which are non-GAAP financial measures. Refer to the
discussion below in "--Non-GAAP Measures" for further details on constant
currency calculations. The nine months ended May 31, 2020 figures include an
adjustment to remove February 29, 2020 results due to the leap year .
- 46 -
--------------------------------------------------------------------------------
*The Company considers these items 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 may not be
comparable to similarly-titled performance indicators used by other companies.
Sales for the three months ended May 31, 2020 and May 31, 2019
Retail Pharmacy International division's sales for the three months ended May
31, 2020 decreased 31.5% to $1.9 billion from the year-ago quarter. The negative
impact of currency translation was 5.3 percentage points. Comparable store sales
decreased 25.2%, mainly due to lower retail sales in Boots UK driven by
reduction in store foot traffic from COVID-19 restrictions.
Pharmacy sales decreased 11.4% in the three months ended
Retail sales decreased 43.6% for the three months ended
Operating income for the three months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy International division's operating loss for the three months endedMay 31, 2020 was$2.2 billion , compared to an operating income of$119 million in the year-ago quarter. The decrease was primarily due to goodwill and intangible asset impairment charges related to the Boots reporting unit and lower retail gross profit attributable to lower sales from COVID-19 restrictions in BootsUK and Opticians.
Gross profit decreased 39.6% from the year-ago quarter. Gross profit was
negatively impacted by 4.3 percentage points (
Selling, general and administrative expenses increased 185.3% from the year-ago quarter. Expenses were positively impacted by 5.8 percentage points ($57 million ) as a result of currency translation. Excluding the impact of currency translation, the increase was mainly due to goodwill and intangible asset impairment charges in the Boots reporting unit, partially offset by short term COVID-19 cost mitigation efforts and savings from Transformational Cost Management Program initiatives. As a percentage of sales, selling, general and administrative expenses were 148.8% in the three months endedMay 31, 2020 compared to 35.8% in the year-ago quarter. Adjusted operating income (Non-GAAP measure) for the three months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy International division's adjusted operating income for the three months endedMay 31, 2020 decreased$308 million or 187.1% to an adjusted operating loss of$143 million . Adjusted operating loss was positively impacted by 4.7 percentage points ($8 million ) of currency translation. Excluding the impact of currency translation, the decrease in adjusted operating loss was primarily due to lower BootsUK and Opticians retail sales as a result of reduction in store foot traffic from COVID-19 restrictions, partially offset by short term cost mitigation efforts and savings from Transformational Cost Management Program initiatives.
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Sales for the nine months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy International division's sales for the nine months endedMay 31, 2020 decreased 12.0% to$7.7 billion from the year-ago period. The negative impact of currency translation was 2.3 percentage points. Comparable store sales decreased 9.2%, mainly due to lower retail sales in BootsUK andThailand , including the impact of COVID-19.
Pharmacy sales decreased 4.6% in the nine months ended
- 47 ---------------------------------------------------------------------------------
0.2% from the year-ago period primarily due to the
Retail sales decreased 16.1% for the nine months ended
Operating income for the nine months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy International division's operating loss for the nine months endedMay 31, 2020 was$2.0 billion , compared to an operating income of$389 million in the year-ago period. The decrease was primarily in theUK , due to goodwill and intangible asset impairment charges in the Boots reporting unit and additional COVID-19 impacts.
Gross profit decreased 14.9% from the year-ago period. Gross profit was
negatively impacted by 2.0 percentage points (
Selling, general and administrative expenses increased 61.6% from the year-ago period. Expenses were positively impacted by 2.6 percentage points ($78 million ) as a result of currency translation. Excluding the impact of currency translation, the increase was almost entirely due to goodwill and intangible asset impairment charges in the Boots reporting unit, higher year-on-year bonus impact and technology investments, partially offset by savings from Transformational Cost Management Program initiatives and COVID-19 cost mitigation efforts. As a percentage of sales, selling, general and administrative expenses were 63.5% in the nine months endedMay 31, 2020 compared to 34.6% in the year-ago period. Adjusted operating income (Non-GAAP measure) for the nine months endedMay 31, 2020 andMay 31, 2019 Retail Pharmacy International division's adjusted operating income for the nine months endedMay 31, 2020 decreased$420 million or 76.0% to$133 million . Adjusted operating income was positively impacted by 1.6 percentage points ($9 million ) of currency translation. Excluding the impact of currency translation, the decrease in adjusted operating income was mainly due to lower retail sales in theUK including the impact of COVID-19.
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Pharmaceutical Wholesale This division includes pharmaceutical wholesale businesses operating in currencies other than theU.S. dollar including the British pound sterling, Euro and Turkish lira, and thus the division's results are impacted by movements in foreign currency exchange rates. See item 3, quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk, for further information on currency risk. (in millions) Nine months ended May Three months ended May 31, 31, 2020 2019 2020 2019 Sales$ 5,899 $ 5,865 $ 17,971 $ 17,311 Gross profit 509 527 1,548 1,549 Selling, general and administrative expenses 402 424 1,224 1,313 Equity earnings (loss) in AmerisourceBergen 243 (16) 284 105 Operating income 350 87 608 342 Adjusted operating income (Non-GAAP measure)1 271 265 735 710 - 48 -
--------------------------------------------------------------------------------
Percentage increases (decreases)
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Sales 0.6 (1.7) 3.8 (0.7)
Gross profit (3.4) (1.9) (0.1) (2.6)
Selling, general and administrative expenses (5.2) 2.9 (6.8) 7.9
Operating income 303.9 (51.1) 77.8 (33.6)
Adjusted operating income (Non-GAAP measure)1 2.0 2.6 3.5 (0.5)
Comparable sales2* 5.3 8.3 7.2 8.0
Percent to sales
Three months ended May 31, Nine months ended May 31,
2020 2019 2020 2019
Gross margin 8.6 9.0 8.6 9.0
Selling, general and administrative expenses 6.8 7.2 6.8 7.6
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 are defined as sales excluding acquisitions and dispositions.
With respect to the Pharmacy Wholesale division, comparable sales are presented
on a constant currency basis, which is a non-GAAP financial measure. Refer to
the discussion below in "--Non-GAAP Measures" for further details on constant
currency calculations.
*The Company considers these items 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 may not be
comparable to similarly-titled performance indicators used by other companies.
Sales for the three months ended May 31, 2020 and May 31, 2019
Pharmaceutical Wholesale division's sales for the three months ended May 31,
2020 increased 0.6% to $5.9 billion . Sales were negatively impacted by 4.8
percentage points as a result of currency translation. Comparable sales
increased 5.3%, led by the UK and Germany , reflecting higher sales in March, at
the start of the COVID-19 pandemic, followed by a slowdown in April and May.
Operating income for the three months ended May 31, 2020 and May 31, 2019
Pharmaceutical Wholesale division's operating income for the three months ended
May 31, 2020 was $350 million , including a $243 million gain from the company's
equity earnings in AmerisourceBergen. This compared with operating income of $87
million in the year-ago quarter, including a $16 million loss from the company's
equity earnings in AmerisourceBergen. Operating income was negatively impacted
by $7 million as a result of currency translation.
Gross profit decreased 3.4% from the year-ago quarter. Gross profit was
negatively impacted by 4.4 percentage points (
Selling, general and administrative expenses decreased 5.2% from the year-ago quarter. Expenses were positively impacted by 3.9 percentage points ($16 million ) as a result of currency translation. Excluding the currency translation impact, the decrease was primarily due to lower Transformational Cost Management expenses compared with the year-ago quarter. As a percentage of sales, selling, general and administrative expenses for the three months endedMay 31, 2020 were 6.8% compared to 7.2% in the year-ago quarter. Adjusted operating income (Non-GAAP measure) for the three months endedMay 31, 2020 andMay 31, 2019 Pharmaceutical Wholesale division's adjusted operating income for the three months endedMay 31, 2020 , which included$138 million from the Company's share of adjusted equity earnings in AmerisourceBergen, increased 2.0% to$271 million . Adjusted operating income was negatively impacted by 3.0 percentage points ($8 million ) as a result of currency translation. Excluding - 49 - -------------------------------------------------------------------------------- the impact of currency translation, the increase in adjusted operating income was primarily due to higher sales and a higher contribution from AmerisourceBergen, partially offset by lower gross margin. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Sales for the nine months ended
Operating income for the nine months endedMay 31, 2020 andMay 31, 2019 Pharmaceutical Wholesale division's operating income for the nine months endedMay 31, 2020 increased 77.8% to$608 million primarily due to higher sales, a higher contribution from the Company's share of equity earnings from AmerisourceBergen and lower Transformational Cost Management expenses compared with the year-ago period, partially offset by lower gross margin. Operating income was negatively impacted by$10 million as a result of currency translation.
Gross profit decreased 0.1% from the year-ago period. Gross profit was
negatively impacted by 2.9 percentage points (
Selling, general and administrative expenses decreased 6.8% from the year-ago period. Expenses were positively impacted by 2.7 percentage points ($36 million ) as a result of currency translation. Excluding the currency translation impact, the decrease was due to lower Transformational Cost Management expenses compared with the year-ago period. As a percentage of sales, selling, general and administrative expenses for the nine months endedMay 31, 2020 were 6.8% compared to 7.6% in the year-ago period. Adjusted operating income (Non-GAAP measure) for the nine months endedMay 31, 2020 andMay 31, 2019 Pharmaceutical Wholesale division's adjusted operating income for the nine months endedMay 31, 2020 , which included$331 million from the Company's share of adjusted equity earnings in AmerisourceBergen, increased 3.5% to$735 million . Adjusted operating income was negatively impacted by 1.6 percentage points ($11 million ) as a result of currency translation. Excluding the impact of currency translation, the increase in adjusted operating income was primarily due to higher sales, and a higher contribution from AmerisourceBergen, partially offset by lower gross margin and higher selling, general and administrative expenses. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. NON-GAAP MEASURES The following information provides reconciliations of the supplemental non-GAAP financial measures, as defined under the rules of theSecurities and Exchange Commission , presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. These supplemental non-GAAP financial measures are presented because the Company's management has evaluated its financial results both including and excluding the adjusted items or the effects of foreign currency translation, as applicable, and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company from period to period and trends in its historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. The Company also presents certain information related to current period operating results in "constant currency," which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside ofthe United States reporting in currencies other than theU.S. dollar and such presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations. - 50 - --------------------------------------------------------------------------------
(in millions)
Three months ended May 31, 2020
Retail Pharmacy Retail Pharmacy Pharmaceutical Walgreens Boots
USA International Wholesale Eliminations Alliance, Inc.
Operating income (loss) (GAAP) $ 226 $ (2,160) $ 350 $ - $ (1,584)
Impairment of goodwill and intangible assets 32 1,969 - - 2,001
Transformational cost management 278 31 6 -
315
Acquisition-related amortization 77 16 19 - 112 Acquisition-related costs 66 - 1 - 68 LIFO provision 29 - - - 29 Store damage and inventory losses1 75 - - - 75 Store optimization 10 - - - 10 Adjustments to equity earnings (loss) in AmerisourceBergen - - (105) -
(105)
Adjusted operating income (loss) (Non-GAAP measure)$ 792 $ (143) $ 271 $ -$ 919 1Store damage and inventory losses as a result of looting in theU.S. duringMay 2020 . (in millions) Three months ended May 31, 2019 Retail Retail Pharmacy Pharmaceutical Walgreens Boots Pharmacy USA International Wholesale Eliminations Alliance, Inc. Operating income (GAAP)$ 995 $ 119 $ 87$ 1 $ 1,203 Transformational cost management 43 21 22 -
86
Acquisition-related amortization 82 25 20 - 127 Acquisition-related costs 80 - - - 80 LIFO provision 29 - - - 29 Store optimization 49 - - - 49 Adjustments to equity earnings (loss) in AmerisourceBergen - - 137 -
137
Certain legal and regulatory accruals and settlements 7 - - -
7
Adjusted operating income (Non-GAAP measure)
165 $ 265 $ 1 $ 1,717
- 51 -
--------------------------------------------------------------------------------
(in millions)
Nine months ended May 31, 2020
Retail Retail Pharmacy Pharmaceutical Walgreens Boots
Pharmacy USA International Wholesale Eliminations Alliance, Inc.
Operating income (loss) (GAAP) $ 2,037 $ (1,984) $ 608 $ 2 $ 662
Impairment of goodwill and intangible assets 32 1,969 - -
2,001
Transformational cost management 414 90 20 -
524
Acquisition-related amortization 233 58 57 - 348 Acquisition-related costs 287 1 2 - 291 LIFO provision 90 - - - 90 Store damage and inventory losses1 75 - - - 75 Store optimization 49 - - - 49 Adjustments to equity earnings (loss) in AmerisourceBergen - - 47 -
47
Adjusted operating income (loss) (Non-GAAP measure)$ 3,215 $ 133 $ 735$ 2 $ 4,085 1Store damage and inventory losses as a result of looting in theU.S. duringMay 2020 . (in millions) Nine months ended May 31, 2019 Retail Retail Pharmacy Pharmaceutical Walgreens Boots Pharmacy USA International Wholesale Eliminations Alliance, Inc. Operating income (GAAP)$ 3,388 $ 389 $ 342$ 1 $ 4,120 Transformational cost management 59 88 119 -
265
Acquisition-related amortization 237 76 59 - 373 Acquisition-related costs 228 - - - 228 LIFO provision 77 - - - 77 Store optimization 99 - - - 99 Adjustments to equity earnings (loss) in AmerisourceBergen - - 191 -
191
Certain legal and regulatory accruals and settlements 31 - - -
31
Adjusted operating income (Non-GAAP measure)
553 $ 710 $ 1 $ 5,384
(in millions, except per share amounts)
Nine months ended May
Three months ended May 31, 31,
2020 2019 2020 2019
Net earnings (loss) attributable to
$ (1,708)
Adjustments to operating income (loss):
Impairment of goodwill and intangible assets 2,001 - 2,001 -
Transformational cost management 315 86 524 265
Acquisition-related amortization 112 127 348 373
Acquisition-related costs 68 80 291 228
LIFO provision 29 29 90 77
- 52 --------------------------------------------------------------------------------- Store damage and inventory losses1 75 - 75 - Store optimization 10 49 49 99 Adjustments to equity earnings (loss) in AmerisourceBergen (105) 137 47 191 Certain legal and regulatory accruals and settlements - 7 - 31 Total adjustments to operating income (loss) 2,504 515 3,423 1,264 Adjustments to other income (expense): Impairment of equity method investment 71 - 71 - Termination of option granted to Rite Aid - (173) - (173) Gain on sale of equity method investment - - (1) - Net investment hedging (gain) loss (2) 8 (6) 10 Total adjustments to other income (expense) 69 (165) 64 (163) Adjustments to income tax provision: Equity method non-cash tax 53 (10) 52 9 U.S. tax law changes2 - - (6) (3) Tax impact of adjustments3 (184) (50) (361) (189) Total adjustments to income tax provision (130) (60) (314) (183) Adjustments to post tax equity earnings from other equity method investments: Adjustments to equity earnings in other equity method investments4 3 23 47 23 Total adjustments to post tax equity earnings from other equity method investments 3 23 47 23 Adjustments to net earnings (loss) attributable to noncontrolling interests: Impairment of goodwill and intangible assets (14) - (14) - Total adjustments to net earnings (loss) attributable to noncontrolling interests (14) - (14) - Adjusted net earnings attributable toWalgreens Boots Alliance, Inc. (Non-GAAP measure)$ 723 $
1,338
Diluted net earnings (loss) per common share (GAAP)5$ (1.95) $
1.13
Adjustments to operating income (loss) 2.86 0.56 3.87 1.36 Adjustments to other income (expense) 0.08 (0.18) 0.07 (0.17) Adjustments to income tax provision (0.15) (0.07) (0.35) (0.20) Adjustments to equity earnings in other equity method investments4 - 0.02 0.05 0.02 Adjustments to net earnings (loss) attributable to noncontrolling interests (0.02) - (0.02) - Adjusted diluted net earnings per common share (Non-GAAP measure)6$ 0.83 $
1.47
Weighted average common shares outstanding,
diluted (in millions)6 876.1 911.2 884.7 931.1
- 53 --------------------------------------------------------------------------------- 1Store damage and inventory losses as a result of looting in theU.S. duringMay 2020 . 2Discrete tax-only items. 3Represents the adjustment to the GAAP basis tax provision commensurate with non-GAAP adjustments and the adjusted tax rate true-up. 4Beginning in the quarter endedMay 31, 2019 , management reviewed and refined its practice to reflect the proportionate share of certain equity method investees' non-cash items or unusual or infrequent items consistent with the Company's non-GAAP measures in order to provide investors with a comparable view of performance across periods. These adjustments include acquisition-related amortization and acquisition-related costs and were immaterial for the prior periods presented. Although the Company may have shareholder rights and board representation commensurate with its ownership interests in these equity method investees, adjustments relating to equity method investments are not intended to imply that the Company has direct control over their operations and resulting revenue and expenses. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all revenue and expenses of these equity method investees. 5Due to the anti-dilutive effect resulting from the reported net loss, the impact of potentially dilutive securities on the per share amounts has been omitted from the quarterly calculation of weighted-average common shares outstanding for diluted EPS for the three months endedMay 31, 2020 . The impact of these potentially dilutive securities has been included in the calculation of weighted-average common shares outstanding for diluted EPS for the nine months endedMay 31, 2020 . 6Includes impact of potentially dilutive securities in the quarterly calculation of weighted-average common shares, diluted for adjusted diluted net earnings per common share calculation purposes for the three and nine months endedMay 31, 2020 . LIQUIDITY AND CAPITAL RESOURCES Cash and cash equivalents were$0.8 billion (including$0.2 billion in non-U.S. jurisdictions) as ofMay 31, 2020 , compared to$0.8 billion (including$0.3 billion in non-U.S. jurisdictions) as ofMay 31, 2019 . Short-term investment objectives are primarily to minimize risk and maintain liquidity. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally inU.S. Treasury money market funds and AAA-rated money market funds. The Company's long-term capital policy is to: maintain a strong balance sheet and financial flexibility; reinvest in its core strategies; invest in strategic opportunities that reinforce its core strategies and meet return requirements; and return surplus cash flow to stockholders in the form of dividends and share repurchases over the long term. 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. 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 for the nine months endedMay 31, 2020 was$3.4 billion , compared to$3.2 billion for the year-ago period. The$0.2 billion increase in cash provided by operating activities includes higher cash inflows from accrued expenses and other liabilities and accounts receivable partially offset by higher cash outflows from trade accounts payable and lower cash inflows from net earnings. Changes in accounts receivable, net and trade accounts payable are mainly driven by timing of collections and payments and working capital initiatives. Changes in accrued expenses and other liabilities are mainly driven by prior year cash payments for certain legal and regulatory settlements and timing of accruals. Net cash used for investing activities was$0.7 billion for the nine months endedMay 31, 2020 compared to$1.6 billion for the year-ago period. This change in net cash used for investing activities includes$0.6 billion in proceeds from sale-leaseback transactions for the nine months endedMay 31, 2020 . Business, investment and asset acquisitions were$0.3 billion for the nine months endedMay 31, 2020 compared to$0.5 billion for the year-ago period.
For the nine months ended
Nine months ended May 31,
2020 2019
Retail Pharmacy USA $ 746 $ 968
Retail Pharmacy International 171 202
Pharmaceutical Wholesale 44 76
Total $ 962 $ 1,246
- 54 ---------------------------------------------------------------------------------
Significant capital expenditures primarily relate to investments in our stores and information technology projects.
Net cash used for financing activities for the nine months endedMay 31, 2020 was$3.0 billion , compared to$1.6 billion in the year-ago period. In the nine months endedMay 31, 2020 there were$16.5 billion in net proceeds primarily from revolving credit facilities described below and commercial paper debt compared to$10.6 billion in net proceeds in the year-ago period. In the nine months endedMay 31, 2020 there were$16.9 billion in payments of debt made primarily for revolving credit facilities and commercial paper debt compared to$7.3 billion in nine months endedMay 31, 2019 . The Company repurchased shares as part of the stock repurchase program described below and to support the needs of the employee stock plans totaling$1.4 billion compared to$3.7 billion in the year-ago period. Proceeds related to employee stock plans were$40 million during the nine months endedMay 31, 2020 , compared to$156 million during the nine months endedMay 31, 2019 . Cash dividends paid were$1.3 billion during the nine months endedMay 31, 2020 , compared to$1.2 billion for the same period a year-ago. The Company expects to fund its working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations from liquidity sources including cash flow from operations, availability under existing credit facilities, commercial paper programs, working capital financing arrangements and current cash and investment balances. The Company believes that these sources, and the ability to obtain other financing, if necessary, 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. 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. As described in more detail below, during the three months endedMay 31, 2020 , the Company took actions intended to increase its cash position and preserve financial flexibility in light of COVID-19 and uncertainty in the global markets, including issuing$1.0 billion of 4.10% notes due 2050 and$0.5 billion of 3.20% notes due 2030. Additionally, the Company entered into several new credit facilities totaling$3.6 billion , increasing its total undrawn committed credit facilities to$12.4 billion as ofMay 31, 2020 . The Company has total borrowings of approximately$3.3 billion outstanding under the credit facilities and commercial paper program described herein, of which$2.2 billion was commercial paper, as ofMay 31, 2020 . For further information regarding the impact of COVID-19 on the Company, including on its liquidity and capital resources, please see item 1A, risk factors in this report.
See item 3, qualitative and quantitative disclosures about market risk, below for a discussion of certain financing and market risks.
Stock repurchase program InJune 2018 , the Company authorized a stock repurchase program (the "June 2018 stock repurchase program"), which authorized the repurchase of up to$10.0 billion of the Company's common stock of which the Company had repurchased$7.8 billion as ofMay 31, 2020 . TheJune 2018 stock repurchase program has no specified expiration date. InJuly 2020 , the Company announced that it is suspending activities 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. Commercial paper The Company periodically borrows under its commercial paper program and may borrow under it in future periods. The Company had average daily commercial paper outstanding of$2.6 billion and$2.6 billion at a weighted average interest rate of 2.33% and 3.08% for the nine months endedMay 31, 2020 andMay 31, 2019 , respectively. Financing actions OnAugust 29, 2018 , the Company entered into a revolving credit agreement (the "August 2018 Revolving Credit Agreement") with the lenders and letter of credit issuers from time to time party thereto. TheAugust 2018 Revolving Credit Agreement is an unsecured revolving credit facility with an aggregate commitment in the amount of$3.5 billion , with a letter of credit subfacility commitment amount of$500 million . The facility termination date is the earlier of (a)August 29, 2023 , subject to - 55 - -------------------------------------------------------------------------------- extension thereof pursuant to theAugust 2018 Revolving Credit Agreement, and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to theAugust 2018 Revolving Credit Agreement. Borrowings under theAugust 2018 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on the Company's credit ratings. As ofMay 31, 2020 , there were no borrowings outstanding under theAugust 2018 Revolving Credit Agreement. OnNovember 30, 2018 , the Company entered into a credit agreement with the lenders from time to time party thereto, onMarch 25, 2019 , the Company entered into an amendment to such credit agreement (such credit agreement as so amended, the "November 2018 Credit Agreement") reflecting certain changes to the borrowing notice provisions thereto, and onApril 2, 2020 , the Company entered into a second amendment to theNovember 2018 Credit Agreement (such credit agreement as so further amended, the "AmendedNovember 2018 Credit Agreement"), which second amendment became effective as ofMay 29, 2020 . As ofMay 29, 2020 , the$500 million revolving credit facility portion of theNovember 2018 Credit Agreement was converted into a term loan facility, such that the AmendedNovember 2018 Credit Agreement consists of a$1.0 billion senior unsecured term loan facility. The facility termination date is the earlier of (a)May 29, 2021 and (b) the date of acceleration of all loans under the AmendedNovember 2018 Credit Agreement pursuant to its terms. Borrowings under the AmendedNovember 2018 Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 1.25% in the case of Eurocurrency rate loans and 0.125% in the case of alternative base rate loans. As ofMay 31, 2020 , there were$1.0 billion of borrowings outstanding under the AmendedNovember 2018 Credit Agreement. OnDecember 5, 2018 , the Company entered into a$1.0 billion term loan credit agreement with the lenders from time to time party thereto and, onAugust 9, 2019 , the Company entered into an amendment to such credit agreement (such credit agreement as so amended, the "December 2018 Credit Agreement") to permit the Company to borrow, repay and reborrow amounts borrowed thereunder prior to the maturity date. OnApril 2, 2020 , the Company amended and restated theDecember 2018 Credit Agreement (such credit agreement as so amended and restated, the "A&RDecember 2018 Credit Agreement"). The A&RDecember 2018 Credit Agreement governs a$2.0 billion senior unsecured revolving credit facility, consisting of the initial$1.0 billion senior unsecured revolving facility (the "Initial Facility") previously governed by theDecember 2018 Credit Agreement and a new$1.0 billion senior unsecured revolving credit facility (the "New Facility"). The facility termination date is the earlier of (a)January 29, 2021 (the "Initial Maturity Date") (which date shall be extended toFebruary 26, 2021 orJuly 31, 2021 pursuant to the terms of the A&RDecember 2018 Credit Agreement if the Company extends the maturity date of certain of its existing credit agreements or enters into new bank or bond financings with a certain maturity date and above an aggregate principal amount as described in the A&RDecember 2018 Credit Agreement) and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the A&RDecember 2018 Credit Agreement. Borrowings under the A&RDecember 2018 Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of (i) in the case of the Initial Facility fromApril 2, 2020 through and including the Initial Maturity Date, 0.75% in the case of Eurocurrency rate loans and 0.00% in the case of alternate base rate loans and (ii) in the case of the New Facility and the Initial Facility after the Initial Maturity Date, 1.50% in the case of Eurocurrency rate loans and 0.50% in the case of alternate base rate loans. As ofMay 31, 2020 , there were no borrowings outstanding under the A&RDecember 2018 Credit Agreement. OnDecember 21, 2018 , the Company entered into a$1.0 billion revolving credit agreement (the "December 2018 Revolving Credit Agreement") with the lenders from time to time party thereto. TheDecember 2018 Revolving Credit Agreement is a senior unsecured revolving credit facility with a facility termination date of the earlier of (a) 18 months followingJanuary 28, 2019 , the date of the effectiveness of the commitments pursuant to theDecember 2018 Revolving Credit Agreement, subject to extension thereof pursuant to theDecember 2018 Revolving Credit Agreement, and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to theDecember 2018 Revolving Credit Agreement. Borrowings under theDecember 2018 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 0.75% in the case of Eurocurrency rate loans. As ofMay 31, 2020 , there were$0.1 billion of borrowings outstanding under theDecember 2018 Revolving Credit Agreement. OnJanuary 18, 2019 , the Company entered into a$2.0 billion 364-day revolving credit agreement (as extended, the "January 2019 364-Day Revolving Credit Agreement") with the lenders from time to time party thereto. TheJanuary 2019 364-Day Revolving Credit Agreement is a senior unsecured 364-day revolving credit facility, with a facility termination date of the earlier of (a) 364 days followingJanuary 31, 2019 , the date of the effectiveness of the commitments pursuant to the January 364- Day Revolving Credit Agreement, subject to extension thereof pursuant to the January 2019 364-Day Revolving Credit Agreement, and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the January 2019 364-Day Revolving Credit Agreement. OnDecember 18, 2019 , the Company entered into an Extension Agreement (the - 56 - -------------------------------------------------------------------------------- "Extension Agreement") relating to the January 2019 364-Day Revolving Credit Agreement with the lenders party thereto and Mizuho, as administrative agent. The Extension Agreement extends the Maturity Date (as defined in the January 2019 364-Day Revolving Credit Agreement) for an additional period of 364 days toJanuary 28, 2021 . Such extension became effective onJanuary 30, 2020 . Borrowings under the January 2019 364-Day Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on the Company's credit ratings. As ofMay 31, 2020 , there were no borrowings outstanding under the January 364-Day Revolving Credit Agreement. OnAugust 30, 2019 , the Company entered into three$500 million revolving credit agreements (together, the "August 2019 Revolving Credit Agreements" and each individually, an "August 2019 Revolving Credit Agreement") with the lenders from time to time party thereto. Each of theAugust 2019 Revolving Credit Agreements are senior unsecured revolving credit facilities, with facility termination dates of the earlier of (a) 18 months followingAugust 30, 2019 , subject to extension thereof pursuant to the applicableAugust 2019 Revolving Credit Agreement, and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the applicableAugust 2019 Revolving Credit Agreement. Borrowings under each of theAugust 2019 Revolving Credit Agreements will bear interest at a fluctuating rate per annum equal to, at the Company's option, the alternate base rate or the Eurocurrency rate, plus an applicable margin of 0.95% in the case of Eurocurrency rate loans. As ofMay 31, 2020 , there were no borrowings outstanding under theAugust 2019 Revolving Credit Agreements. The Company entered into a$750 million revolving credit agreement onApril 1, 2020 (the "April 2020 Revolving Bilateral Credit Agreement") and a$1.325 billion revolving credit agreement onApril 2, 2020 (the "April 2020 Revolving Club Credit Agreement" and together with theApril 2020 Revolving Bilateral Credit Agreement, the "OtherApril 2020 Revolving Credit Agreements") with the lenders from time to time party thereto. Each of the OtherApril 2020 Revolving Credit Agreements is a senior unsecured revolving credit facility, with a facility termination dates of the earlier of (a)March 31, 2021 (which date shall be shortened pursuant to the terms of the applicable OtherApril 2020 Revolving Credit Agreement if the Company does not extend the maturity date of certain of its existing credit agreements or enter into new bank or bond financings with a certain maturity date and above an aggregate principal amount as described in the applicableApril 2020 Revolving Credit Agreement) and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the applicable OtherApril 2020 Revolving Credit Agreement. Borrowings under the OtherApril 2020 Revolving Credit Agreements will bear interest at a fluctuating rate per annum equal to, at the Company's option, the Eurocurrency rate or the alternate base rate, plus an applicable margin of 1.25% in the case of Eurocurrency rate loans. As ofMay 31, 2020 , there were no borrowings outstanding under the OtherApril 2020 Revolving Credit Agreements. OnApril 7, 2020 , the Company entered into a$500 million revolving credit agreement (the "April 7, 2020 Revolving Credit Agreement") withWBA Financial Services Limited , a private limited company incorporated under the laws ofEngland andWales ("WBAFSL"), and the lenders from time to time party thereto. TheApril 7, 2020 Revolving Credit Agreement is a senior unsecured revolving credit facility, with a facility termination date of the earlier of (a) 364-days fromApril 7, 2020 and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to theApril 7, 2020 Revolving Credit Agreement. The Company and WBAFSL will be the borrowers under theApril 7, 2020 Revolving Credit Agreement. Pursuant to the terms of theApril 7, 2020 Revolving Credit Agreement, the Company will provide a guarantee of any obligations of WBAFSL under theApril 7, 2020 Revolving Credit Agreement. Borrowings under theApril 7, 2020 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at the Company's option, the Eurocurrency rate or the alternate base rate, plus an applicable margin of 1.50% in the case of Eurocurrency rate loans. As ofMay 31, 2020 , there were no borrowings outstanding under theApril 7, 2020 Revolving Credit Agreement. OnApril 15, 2020 , the Company issued in an underwritten public offering$0.5 billion of 3.20% notes due 2030 and$1.0 billion of 4.10% notes due 2050. Total issuance costs relating to the notes, including underwriting discounts and estimated offering expenses were$13.3 million . Debt covenants Each of the Company's credit facilities described above contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60:1.00, subject to increase in certain circumstances set forth in the applicable credit agreement. As ofMay 31, 2020 , the Company was in compliance with all such applicable covenants. - 57 - -------------------------------------------------------------------------------- Credit ratings As ofJuly 8, 2020 , the credit ratings ofWalgreens Boots Alliance were: Rating agency Long-term debt rating Commercial paper rating Outlook Fitch BBB- F3 Stable Moody's Baa2 P-2 Stable Standard & Poor's BBB A-2 Stable In assessing the Company's credit strength, each rating agency considers various factors including the Company's business model, capital structure, financial policies and financial performance. There can be no assurance that any particular rating will be assigned or maintained. The Company's credit ratings impact its borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold the Company's debt securities or commercial paper. Each rating may be subject to revision or withdrawal at any time by the assigning rating agency and should be evaluated independently of any other rating. AmerisourceBergen relationship As ofMay 31, 2020 , the Company owned 56,854,868 AmerisourceBergen common shares representing approximately 28% of the outstanding common stock based on most recent share count publicly reported by AmerisourceBergen and had designated one member of AmerisourceBergen's board of directors. As ofMay 31, 2020 , the Company can acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market and thereafter designate another member of AmerisourceBergen's board of directors, subject in each case to applicable legal and contractual requirements. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances. Subject to applicable legal and contractual requirements, share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1. See note 5, equity method investments, to the Consolidated Condensed Financial Statements included herein for further information. OFF-BALANCE SHEET ARRANGEMENTS The Company does not have any unconsolidated special purpose entities and, except as described herein, the Company does not have significant exposure to any off-balance sheet arrangements. The term "off-balance sheet arrangement" generally means any transaction, agreement or other contractual arrangement to which an entity not consolidated by the Company is a party, under which we have: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.
At
CONTRACTUAL OBLIGATIONS AND COMMITMENTS There have been no material changes, outside of the ordinary course of business, in the Company's outstanding contractual obligations disclosed in theWalgreens Boots Alliance Annual Report on Form 10-K for the year endedAugust 31, 2019 . CRITICAL ACCOUNTING POLICIES The Consolidated Condensed Financial Statements are prepared in accordance with GAAP 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 statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future periods. Some of the more significant estimates include goodwill and indefinite-lived intangible asset impairment, business combinations, cost of sales and inventory, equity method investments, pension and postretirement benefits and income taxes. For a discussion of our significant accounting policies, please see theWalgreens Boots Alliance Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 . See note 17, new accounting pronouncements, for additional information. The discussion and analysis presented below is a supplemental disclosure to the critical accounting policies disclosed in, and should be read in conjunction with, theWalgreens Boots Alliance Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 . - 58 - --------------------------------------------------------------------------------Goodwill and indefinite-lived intangible asset impairment -Goodwill and indefinite-lived intangible assets are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that could more likely than not reduce the fair value of a reporting unit or intangible asset below its carrying value. As part of the Company's impairment analysis, fair value of a reporting unit is determined using both the income and market approaches. The income approach requires management to estimate a number of factors for each reporting unit, including projected future operating results, economic projections, anticipated future cash flows and discount rates. The market approach estimates fair value using comparable marketplace fair value data from within a comparable industry grouping. The determination of the fair value of the reporting units requires the Company to make significant estimates and assumptions. These estimates and assumptions primarily include, but are not limited to: the selection of appropriate peer group companies, control premiums appropriate for acquisitions in the industries in which we compete, discount rates, terminal growth rates, forecasts of revenue, operating income, depreciation, amortization and capital expenditures. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates. Changes in assumptions concerning future financial results or other underlying assumptions could have a significant impact on either the fair value of the reporting units, the amount of any goodwill impairment charge, or both. The Company also compares the sum of estimated fair values of reporting units to the Company's fair value as implied by the market value of its equity securities. This comparison provides an indication that, in total, assumptions and estimates are reasonable. Future declines in the overall market value of the Company's equity securities may provide an indication that the fair value of one or more reporting units has declined below its carrying value. Indefinite-lived intangible assets are tested by comparing the estimated fair value of the asset to its carrying value. If the carrying value of the asset exceeds its estimated fair value, an impairment loss is recognized and the asset is written down to its estimated fair value. Indefinite-lived intangible assets fair values are estimated using the relief from royalty method and excess earnings method of the income approach. These estimates can be affected by a number of factors including, but not limited to, general economic conditions, availability of market information as well as our profitability. During the three months endedMay 31, 2020 , the Company completed a quantitative impairment analysis for goodwill and certain indefinite-lived intangible assets related to its two reporting units withinRetail Pharmacy International division, Boots and Other international, as a result of the significant impact of COVID-19 on their financial performance. Based on this analysis, the Company recorded impairment charges of$1.7 billion on Boots goodwill and$0.3 billion on certain indefinite-lived Boots tradename assets. As ofMay 31, 2020 , Other international reporting unit's fair value was in excess of its carrying value by approximately 6% compared to 16% based on theJune 1, 2019 valuation date. The fair values of the indefinite-lived tradename intangibles within the Boots reporting unit exceeded their carrying value amounts ranging from approximately 2.5% to approximately 26.5%, except for certain Boots tradename assets impaired during the three months endedMay 31, 2020 and pharmacy licenses impaired during the year endedAugust 31, 2019 . As ofMay 31, 2020 , the carrying values of goodwill were$1.0 billion and$0.5 billion for Boots reporting unit and Other international reporting unit, respectively. As ofMay 31, 2020 , the carrying value of the indefinite-lived intangibles within the Boots reporting unit was$6.7 billion .
See note 6, goodwill and other intangible assets, to the Consolidated Financial Statements for additional information.
NEW ACCOUNTING PRONOUNCEMENTS A discussion of new accounting pronouncements is described in note 17, new accounting pronouncements, to the Consolidated Condensed Financial Statements of this Quarterly Report on Form 10-Q and is incorporated herein by reference. CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS This report and other documents that we file or furnish with theSEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management's assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company's website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications. Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating performance as well as forward-looking statements concerning the potential impacts on our business of the spread and impact of COVID-19, the expected execution and effect of our business strategies, our cost-savings and growth initiatives, - 59 - -------------------------------------------------------------------------------- pilot programs, strategic partnerships and initiatives, and restructuring activities and the amounts and timing of their expected impact and delivery of estimated cost savings, our amended and restated asset purchase agreement with Rite Aid and the transactions contemplated thereby and their possible timing and effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, estimates of the impact of developments on our earnings, earnings per share and other financial and operating metrics, cough, cold and flu season, prescription volume, pharmacy sales trends, prescription margins and reimbursement rates, changes in generic prescription drug prices, retail margins, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, the withdrawal of theUnited Kingdom from theEuropean Union and its possible effects, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, impairment or other charges, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. All statements in the future tense and all statements accompanied by words such as "expect," "likely," "outlook," "forecast," "preliminary," "pilot," "would," "could," "should," "can," "will," "project," "intend," "plan," "goal," "guidance," "target," "aim," "continue," "sustain," "synergy," "transform," "accelerate," "model," "long-term," "on track," "on schedule," "headwind," "tailwind," "believe," "seek," "estimate," "anticipate," "upcoming," "to come," "may," "possible," "assume," and variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to, those relating to the impact of private and public third-party payers' efforts to reduce prescription drug reimbursements, risks relating to the spread and impact of COVID-19, including the adverse impact on the global economy as well as our business, fluctuations in foreign currency exchange rates, the timing and magnitude of the impact of branded to generic drug conversions and changes in generic drug prices, our ability to realize synergies and achieve financial, tax and operating results in the amounts and at the times anticipated, the inherent risks, challenges and uncertainties associated with forecasting financial results of large, complex organizations in rapidly evolving industries, particularly over longer time periods, and during periods with increased volatility and uncertainties, supply arrangements including our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, the risks associated with our equity method investment in AmerisourceBergen, circumstances that could give rise to the termination, cross-termination or modification of any of our contractual obligations, the amount of costs, fees, expenses and charges incurred in connection with strategic transactions, whether the costs and charges associated with restructuring initiatives, including the Transformational Cost Management Program and Store Optimization Program, will exceed estimates, our ability to realize expected savings and benefits from cost-savings initiatives, including the Transformational Cost Management Program and Store Optimization Program, restructuring activities and acquisitions and joint ventures in the amounts and at the times anticipated, the timing and amount of any impairment or other charges, the timing and severity of cough, cold and flu season, risks relating to looting and vandalism in regions in which we operate and the scope and magnitude of any property damage, inventory loss or other adverse impacts, risks related to pilot programs and new business initiatives and ventures generally, including the risks that anticipated benefits may not be realized, changes in management's plans and assumptions, the risks associated with governance and control matters, the ability to retain key personnel, changes in economic and business conditions generally or in particular markets in which we participate, changes in financial markets, credit ratings and interest rates, the risks relating to the terms, timing and magnitude of any share repurchase activity, the risks associated with international business operations, including the risks associated with the withdrawal of theUnited Kingdom from theEuropean Union and international trade policies, tariffs, including tariff negotiations betweenthe United States andChina , and relations, the risks associated with cybersecurity or privacy breaches related to customer information, changes in vendor, customer and payer relationships and terms, including changes in network participation and reimbursement terms and the associated impacts on volume and operating results, risks related to competition including changes in market dynamics, participants, product and service offerings, retail formats and competitive positioning, risks associated with new business areas and activities, risks associated with acquisitions, divestitures, joint ventures and strategic investments, including those relating to the asset acquisition from Rite Aid, the risks associated with the integration of complex businesses, the impact of regulatory restrictions and outcomes of legal and regulatory matters and risks associated with changes in laws, including those related to theDecember 2017 U.S. tax law changes, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A, Risk factors, in theWalgreens Boots Alliance Annual Report on Form 10-K for the fiscal year endedAugust 31, 2019 , in Item 1A. "Risk factors" in this report and in other documents that we file or furnish with theSEC . Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date of this report, whether as a result of new information, future events, changes in assumptions or otherwise. - 60 -
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