WALGREENS BOOTS ALLIANCE, INC. of operations 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 Condensed 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, 2020 . 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", and in item 1A, risk factors, in our Form 10-K for the fiscal year endedAugust 31, 2020 . 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 six months endedFebruary 28, 2021 andFebruary 29, 2020 .
INTRODUCTION AND SEGMENTS
Walgreens Boots Alliance, Inc. and its subsidiaries ("Walgreens Boots Alliance ") is a global leader in retail pharmacy. Its operations are conducted through two reportable segments: •United States; and •International
See Note 15 Segment reporting and Note 16 Sales to the Consolidated Condensed Financial Statements for further information.
RECENT DEVELOPMENTS
Pharmaceutical Wholesale Transaction OnJanuary 6, 2021 , the Company entered into a Share Purchase Agreement with AmerisourceBergen. Pursuant to the terms and subject to the conditions set forth in the Share Purchase Agreement, AmerisourceBergen will purchase the majority of the Company's Alliance Healthcare business as well as a portion of the Company's retail pharmacy international businesses inEurope for approximately$6.5 billion , comprised of$6.275 billion in cash, subject to certain purchase price adjustments, and 2 million shares of AmerisourceBergen common stock. Alliance Healthcare's investment inChina andItaly and its operations inGermany are not part of the Transaction. The Company's retail pharmacy international operations inThe Netherlands ,Norway andLithuania are part of the Transaction. The Transaction is subject to the satisfaction of customary closing conditions, including receipt of applicable regulatory approvals. The Company will account for the Transaction as a business disposition and is expected to close by end of fiscal 2021.The Disposal Group met the criteria to be reported as discontinued operations. Therefore, the related assets, liabilities and operating results of theDisposal Group are reported as discontinued operations for all periods presented. In connection with the Transaction, the Company and AmerisourceBergen also agreed to a (i) three-year extension through 2029 of theU.S. pharmaceutical distribution agreement pursuant to which branded and generic pharmaceutical products are sourced from AmerisourceBergen in theU.S. , (ii) a three-year extension of the agreement, that provides AmerisourceBergen the ability to access generics pharmaceutical products throughWalgreens Boots Alliance Development GmbH , the Company's global sourcing enterprise, (iii) a distribution agreement pursuant to which AmerisourceBergen will supply branded and generic pharmaceutical products to the Company's BootsUK business following the closing of the Transaction and (iv) explore a series of strategic initiatives designed to create incremental growth and efficiencies in sourcing, logistics and distribution.
See Note 2 Discontinued operations to the Consolidated Condensed Financial Statements for additional information.
VillageMD investment OnJanuary 6, 2021 , the Company andVillageMD announced that the Company had accelerated its investment inVillageMD to support the opening of 600 to 700 Village Medical atWalgreens primary care clinics in more than 30 U.S. markets within the next four years, with the intent to build hundreds more thereafter. WBA Q2 2021 Form 10-Q 38
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS InJuly 2020 , the Company andVillageMD announced an expansion of their partnership and the intent to open 500 to 700 clinics over a five-year period, supported by the Company's investment inVillageMD over three years of$1.0 billion in equity and convertible debt, which included an initial$250 million equity investment. The Company completed the remaining$750 million investment during the three months endedFebruary 28, 2021 , which allows the Company to increase the minimum number of clinics to 600 and expand the rollout at a faster pace. iA acquisition OnDecember 29, 2020 , the Company acquired a majority equity interest inInnovation Associates, Inc. for a cash consideration of$451 million .Innovation Associates, Inc. is a leading-edge provider of software enabled automation solutions for retail, hospital and federal healthcare and mail-order pharmacy markets. The Company accounted for this acquisition as a business combination and consolidatesInnovation Associates, Inc. withinthe United States segment in its financial statements. See Note 3 Acquisitions to the Consolidated Condensed Financial Statements for further information. Considering the contractual terms related to the remaining noncontrolling interest, it is classified as redeemable noncontrolling interest in the Consolidated Condensed Balance Sheets. See Note 19 Supplemental information for more details on redeemable noncontrolling interest. The goodwill arising from this acquisition reflects the expected operational synergies and cost savings to be derived as a result of this acquisition. Pharmaceutical Wholesale business inGermany OnNovember 1, 2020 , the Company and McKesson Corporation closed a transaction to form a combined pharmaceutical wholesale business inGermany , as part of a strategic alliance. The Company owns a 70% controlling equity interest in the combined business which is consolidated by the Company and reported within the International segment in its financial statements. The Company accounted for this acquisition as a business combination involving noncash purchase consideration of$296 million consisting of the issuance of an equity interest in the combined business. See Note 3 Acquisitions to the Consolidated Condensed Financial Statements 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 COVID-19 pandemic ("COVID-19") on our operations and financial results; the financial performance of our equity method investees, including AmerisourceBergen; the influence of certain holidays; seasonality; foreign currency rates; changes in vendor, payer and customer relationships and terms and associated reimbursement pressure; strategic transactions and acquisitions, dispositions, joint ventures and other strategic collaborations; changes in laws, includingU.S. tax law changes; changes in trade, tariffs, including trade relations between theU.S. andChina , and international relations, including theUK's withdrawal from theEuropean Union and its impact on our operations and prospects and those of our customers and counterparties; the timing and magnitude of cost reduction initiatives, including under our Transformational Cost Management Program (as defined below); the timing and severity of the cough, cold and flu season; fluctuations in variable costs; the impacts of looting, natural disasters, war, terrorism and other catastrophic events, and changes in general economic conditions in the markets in which the Company operates. 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 COVID-19 has severely impacted, and is expected to continue to impact, the economies of theU.S. , theUK and other countries around the world. COVID-19 has created significant public health concerns as well as significant volatility, uncertainty and economic disruption in every region in which we operate, 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 again experience volatility. Policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, temporary closure or reduced hours of operation of certain store locations inU.S. , theUK and other countries, reduced customer traffic and sales in our retail pharmacies and the adoption of work-from-home policies. COVID-19 continued to affect global economic conditions during the three months endedFebruary 28, 2021 . 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 developments in our business. As COVID-19 impacts the economies of theU.S. , theUK 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.
WBA Q2 2021 Form 10-Q 39
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS During the three months endedFebruary 28, 2021 , we experienced certain adverse impacts of COVID-19. Sales were negatively impacted mainly withinthe United States segment driven by low level of flu incidences as social distancing measures continued to remain in place across theU.S. as well as globally due to lockdowns in theUK . The Company took measures to keep stores open, incurring incremental selling, general and administrative expenses to safeguard store environments as well as preparing for the rollout of mass vaccinations. The Company also took certain actions during the three months endedFebruary 28, 2021 to partly mitigate the impact of COVID-19 through cost containment across the Company including reducing rent at some locations and decreasing store hours. However, operating income was significantly and adversely impacted during the three months endedFebruary 28, 2021 as a result of COVID-19. In response to COVID-19, various domestic and foreign federal, state and local governmental legislation, regulations, orders, policies and initiatives have been implemented that are designed to reduce the transmission of COVID-19, as well as to help address economic and market volatility and instability resulting from COVID-19. The Company has assessed and will continue to assess the impact of these governmental actions on the Company. It has participated in certain of these programs, including for example availing itself to certain tax deferrals which were introduced by the CARES Act in theU.S. and certain tax deferral and benefit and employee wage support in theUK , and may continue to do so in the future. The Company continues to play a critical role in fighting the COVID-19 pandemic. To continue to work with customers and manage through the pandemic, the Company launched a new COVID-19 testing program for businesses in fiscal 2020. Since the launch of the program, the Company has administered more than 5 million COVID-19 tests in theU.S. and supported more than 2.6 million in theUK . The Company has worked with theCenters for Disease Control and Prevention ("CDC"),U.S. Department of Health and Human Services ("HHS") and theU.S. government to help administer COVID-19 vaccines to high priority groups, including long-term care facility residents and staff. As of March to date, theU.S. has provided more than 8 million COVID-19 vaccinations, including more than 4 million in March. More than 59,000 immunizers have been trained. BootsUK has worked closely with the National Health Service ("NHS") to launch 25 major vaccination hubs at Boots stores. 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 and consumer, customer and health care utilization patterns depends upon the evolving factors and future developments related to COVID-19. As a result, the financial and/or operational impact 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 impact, singularly or collectively, could be material and adverse.
The Company's current expectations described above are forward-looking
statements and our actual results may differ. Factors that might cause a
difference include, but are not limited to, those discussed below under
"Cautionary note regarding forward-looking statements" and in Item 1A, Risk
factors, in our Form 10-K for the fiscal year ended
The potential impacts of Brexit As a result of a referendum inJune 2016 , theUK withdrew from theEuropean Union ("Brexit") onJanuary 31, 2020 . It began a transition period in which to negotiate a new trading relationship for goods and services that ended onDecember 31, 2020 . OnDecember 24, 2020 , the EU andUK agreed to a trade deal with no tariffs nor quotas on products, regulatory and customs cooperation mechanisms as well as provisions ensuring a level playing field for open and fair competition. Given the lack of comparable precedent, it is uncertain what financial, trade, regulatory and legal implications the agreed Brexit trade deal will have on our business, particularly ourUK and other European operations; however, Brexit and its related effects could have a material adverse impact on the Company's consolidated financial position and results of operations. TRANSFORMATIONAL COST MANAGEMENT PROGRAM OnDecember 20, 2018 , the Company announced a transformational cost management program that was expected to deliver in excess of$2.0 billion of annual cost savings by fiscal 2022 (the "Transformational Cost Management Program"). The Company continues to expect to deliver in excess of$2.0 billion of annual cost savings by fiscal 2022 from continuing operations, after excluding amounts related to theDisposal Group . 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 WBA Q2 2021 Form 10-Q 40
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Management Program focus on all reportable segments and the Company's corporate and global functions. Divisional optimization within each of the Company's segments includes activities such as optimization of stores including current plans to close approximately 200 Boots stores in theUK and approximately 250 stores in theU.S. The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its generally accepted accounting principles in theU.S. ("GAAP") financial results of approximately$2.1 billion to$2.3 billion , subject to approval pending close of the Pharmaceutical Wholesale Transaction, of which$1.8 billion to$2.0 billion are expected to be recorded as exit and disposal activities. The Company estimates that approximately 85% 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 in continuing operations related to Transformational Cost Management Program as follows:
Transformational Cost Management Program Activities Range of
Charges3
Lease obligations and other real estate costs1$450 to 500 million Asset impairments2$275 to 300 million Employee severance and business transition costs$800 to 850 million Information technology transformation and other exit costs$275 to 300 million Total cumulative pre-tax exit and disposal costs$1.8 to 2.0 billion Other IT transformation costs$300 to 350 million Total estimated pre-tax costs$2.1 to
2.3 billion
1Includes impairments relating to operating lease right-of-use and finance lease assets. 2Primarily related to asset write-offs from store closures and other asset write-offs. 3Subject to approval pending close of the Pharmaceutical Wholesale Transaction. 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) onSeptember 1, 2019 . Since the inception of the Transformational Cost Management Program toFebruary 28, 2021 , the Company has recognized aggregate cumulative pre-tax charges to its financial results in accordance with GAAP of$1.3 billion , of which$1.2 billion are recorded as exit and disposal activities. See Note 4 Exit and disposal activities, for additional information. These charges included$271 million related to lease obligations and other real estate costs,$231 million in asset impairments,$519 million in employee severance and business transition costs,$142 million of information technology transformation and other exit costs and$160 million other IT costs. Costs from continuing operations under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses for the three and six months endedFebruary 28, 2021 andFebruary 29, 2020 , were as follows (in millions): Corporate andWalgreens Boots
Three months ended
Other Alliance, Inc.
Lease obligations and other real estate
costs $ 18 $ - $ - $ 18
Asset impairments 1 3 - 4
Employee severance and business transition
costs 99 6 17 122
Information technology transformation and
other exit costs 4 7 - 11
Total pre-tax exit and disposal costs $ 122 $
16 $ 17 $ 154
Other IT transformation costs 18 5 - 23
Total pre-tax costs $ 140 $ 21 $ 17 $ 178
WBA Q2 2021 Form 10-Q 41
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Corporate and Walgreens Boots Six months ended February 28, 2021 United States International Other Alliance, Inc. Lease obligations and other real estate costs $ 40 $ - $ - $ 40 Asset impairment 5 - - 5 Employee severance and business transition costs 111 34 29 174 Information technology transformation and other exit costs 14 2 - 15
Total pre-tax exit and disposal charges $ 170 $
36 $ 29 $ 235
Other IT transformation costs 31 11 - 43
Total pre-tax charges $ 201 $ 47 $ 30 $ 278
Corporate and Walgreens Boots
Three months ended
Other Alliance, Inc.
Lease obligations and other real estate
costs $ 9 $ 1 $ - $ 10
Asset impairments 3 - - 3
Employee severance and business transition
costs 34 32 6 71
Information technology transformation and
other exit costs 1 7 13 21
Total pre-tax exit and disposal costs $ 47 $ 40 $ 18 $ 105
Other IT transformation costs 9 4 - 13
Total pre-tax costs $ 56 $ 44 $ 18 $ 118
Corporate and Walgreens Boots
Six months ended February 29, 2020 United States International Other Alliance, Inc.
Lease obligations and other real estate
costs $ 10 $ 3 $ - $ 13
Asset impairment 11 3 - 14
Employee severance and business transition
costs 65 34 7 106
Information technology transformation and
other exit costs 9 10 13 31
Total pre-tax exit and disposal charges $ 95 $ 50 $ 20 $ 164
Other IT transformation costs 26 7 - 33
Total pre-tax charges $ 121 $ 57 $ 20 $ 198
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 of February 28, 2021 , the Company owned 56,854,867 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 (loss) attributable to the investment classified within the operating
income of the Company's United States segment. During the six months ended
February 28, 2021 , the Company recognized equity losses in AmerisourceBergen of
$1,293 million , which included a loss of $1,373 million recognized during the
three months ended November 30, 2020 . These equity losses were primarily due to
AmerisourceBergen recognition of $5.6 billion , net of tax, charges related to
its ongoing opioid litigation in its financial statements for the three months
period ended September 30, 2020 .
WBA Q2 2021 Form 10-Q 42
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OnJanuary 6, 2021 , the Company entered into a Share Purchase Agreement with AmerisourceBergen pursuant to which AmerisourceBergen will purchase the majority of the Company's pharmaceutical wholesale operations, among other assets, for$6.275 billion in cash (subject to customary purchase price adjustments) and 2 million shares of common stock of AmerisourceBergen. See Recent developments above and Note 2 Discontinued operations to the Consolidated Condensed Financial Statements for additional information. The financial performance of AmerisourceBergen will impact the Company's results of operations. Additionally, a substantial and sustained decline in the price of AmerisourceBergen's common stock could trigger an impairment evaluation of our investment. These considerations may materially and adversely affect the Company's financial condition and results of operations.
For more information, see Note 6 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)
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2021 2020 2021 2020
Sales $ 32,779 $ 31,336 $ 64,217 $ 61,247
Gross profit 6,781 7,017 13,411 13,794
Selling, general and administrative expenses 6,029 5,909 11,820 11,778
Equity earnings (loss) in AmerisourceBergen 80 28 (1,293) 41
Operating income 832 1,136 298 2,057
Adjusted operating income (Non-GAAP measure)1 1,225 1,582 2,422 2,926
Earnings before interest and income tax
provision 1,083 1,164 611 2,121
Net earnings attributable to Walgreens Boots
Alliance, Inc. - continuing operations (GAAP) 922 867 531 1,636
Adjusted net earnings attributable to Walgreens
Boots Alliance, Inc. - continuing operations
(Non-GAAP measure)1 1,095 1,246 2,043 2,367
Diluted net earnings per common share -
continuing operations (GAAP) 1.06 0.98 0.61 1.84
Adjusted diluted net earnings per common share -
continuing operations (Non-GAAP measure)1 1.26 1.41 2.36 2.66
WBA Q2 2021 Form 10-Q 43
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Percentage increases (decreases) Three months ended Six months ended February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020 Sales 4.6 3.3 4.8 2.1 Gross profit (3.4) (3.6) (2.8) (4.5) Selling, general and administrative expenses 2.0 1.3 0.4 0.5 Operating income (26.8) (25.5) (85.5) (27.5) Adjusted operating income (Non-GAAP measure)1 (22.5) (13.5) (17.2)
(15.2)
Earnings before interest and income tax provision (7.0) (24.8) (71.2)
(26.5)
Net earnings attributable toWalgreens Boots Alliance, Inc. - continuing operations (GAAP) 6.3 (25.6) (67.5)
(26.3)
Adjusted net earnings attributable toWalgreens Boots Alliance, Inc. - continuing operations (Non-GAAP measure)1 (12.1) (13.2) (13.7)
(13.5)
Diluted net earnings per common share - continuing operations (GAAP) 8.7 (21.8) (66.7)
(22.0)
Adjusted diluted net earnings per common share -
continuing operations (Non-GAAP measure)1 (10.1) (8.8) (11.4) (8.4)
Percent to sales
Three months ended Six months ended
February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020
Gross margin 20.7 22.4 20.9 22.5
Selling, general and administrative expenses 18.4 18.9 18.4 19.2
1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Net earnings from continuing operations Net earnings attributable to the Company for the three months endedFebruary 28, 2021 was$922 million compared to net earnings of$867 million for the prior year quarter. Diluted net earnings per share was$1.06 compared to diluted net earnings per share of$0.98 for the prior year quarter. The increases in net earnings and diluted net earnings per share reflecting a gain from the partial sale of its equity method investment in Option Care Health, and a lower effective tax rate driven by discrete items, partly offset by decline in operating income. Net earnings attributable to the Company for the six months endedFebruary 28, 2021 was$531 million compared to net earnings of$1.6 billion for the prior year period. Diluted net earnings per share was$0.61 compared to diluted net earnings per share of$1.84 for the prior year period. The decreases in net earnings and diluted net earnings per share are primarily due to the charges reflected in the Company's equity earnings (loss) in AmerisourceBergen. Other income for the three months endedFebruary 28, 2021 was$251 million compared to income of$28 million for the prior year quarter, primarily reflect$191 million in Other income due to a partial sale of the Company's equity method investment in Option Care Health. Other income for the six months endedFebruary 28, 2021 was$313 million compared to income of$64 million for the prior year period. Interest was a net expense of$137 million and$272 million for the three and six months endedFebruary 28, 2021 , respectively, compared to$156 million and$315 million for the three and six months endedFebruary 29, 2020 , respectively. WBA Q2 2021 Form 10-Q 44
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS The effective tax rate for the three months endedFebruary 28, 2021 was 4.4%, compared to 14.8% for the three months endedFebruary 29, 2020 . The decrease in the effective tax rate for the three months endedFebruary 28, 2021 was primarily due to discrete tax benefits recorded from the reduction of a valuation allowance on net deferred tax assets and tax benefits from internal restructuring. The effective tax rate for the six months endedFebruary 28, 2021 was a benefit of 48.6%, primarily due to the discrete tax effect of equity losses in AmerisourceBergen. The effective tax rate for the six months endedFebruary 29, 2020 was an expense of 9.5%, primarily due to discrete tax benefits recorded from the reduction of a valuation allowance on net deferred tax assets. Adjusted net earnings from continuing operations (Non-GAAP measure) Adjusted net earnings attributable to the Company for the three months endedFebruary 28, 2021 decreased 12.1% compared with the prior year quarter to$1.1 billion . Adjusted diluted net earnings per share decreased 10.1% compared with the year-ago quarter to$1.26 . Adjusted diluted net earnings and adjusted diluted net earnings per share were both positively impacted by 0.7 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 endedFebruary 28, 2021 primarily reflect COVID-19 impacts and lowerU.S. pharmacy reimbursement, partially offset by cost savings from the Transformational Cost Management Program,U.S. pharmacy procurement savings and lower effective tax rate. Adjusted diluted net earnings per share for the three months endedFebruary 28, 2021 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 to the Company for the six months endedFebruary 28, 2021 decreased 13.7% compared with the prior year period to$2.0 billion . Adjusted diluted net earnings per share decreased compared with the year-ago period 11.4% to$2.36 . Adjusted diluted net earnings and adjusted diluted net earnings per share were both positively impacted by 0.6 percentage points as a result of currency translation. The decreases in adjusted net earnings and adjusted diluted net earnings per share for the six months endedFebruary 28, 2021 primarily reflect COVID-19 impacts and lowerU.S. pharmacy reimbursement, partially offset by cost savings from the Transformational Cost Management Program,U.S. pharmacy procurement savings andU.S. retail gross margin. Adjusted diluted net earnings per share for the six months endedFebruary 28, 2021 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.
RESULTS OF OPERATIONS BY SEGMENT
United States The Company'sUnited States segment includes theWalgreens business which includes the operations of retail drugstores, health and wellness services, and mail and central specialty pharmacy services, and its equity method investment in AmerisourceBergen. Sales for the segment are principally derived from the sale of prescription drugs and a wide assortment of retail products, including health and wellness, beauty, personal care and consumables and general merchandise. WBA Q2 2021 Form 10-Q 45
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS FINANCIAL PERFORMANCE (in
millions, except location amounts)
Three months ended Six months ended
February 29, February 28, February 29,
February 28, 2021 2020 2021 2020
Sales $ 27,344 $ 27,245 $ 54,507 $ 53,377
Gross profit 5,702 5,827 11,341 11,541
Selling, general and administrative
expenses 4,954 4,796 9,723 9,605
Equity earnings (loss) in
AmerisourceBergen 80 28 (1,293) 41
Operating income 828 1,059 324 1,977
Adjusted operating income (Non-GAAP
measure)1 1,163 1,422 2,318 2,725
Number of prescriptions2 195.3 213.3 399.8 426.3
30-day equivalent prescriptions2,3 288.5 296.8 585.8 590.9
Number of locations at period end 8,993 9,165 8,993 9,165
Percentage increases (decreases)
Three months ended Six months ended
February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020
Sales 0.4 3.8 2.1 2.7
Gross profit (2.2) (4.4) (1.7) (4.8)
Selling, general and administrative expenses 3.3 (0.3) 1.2 (0.1)
Operating income (21.8) (22.5) (83.6) (25.0)
Adjusted operating income (Non-GAAP measure)1 (18.2) (11.4) (14.9) (12.9)
Comparable sales4 2.0 2.7 2.8 2.2
Pharmacy sales 3.0 5.3 4.4 4.1
Comparable pharmacy sales4 4.5 3.7 4.8 3.1
Retail sales (6.6) (0.3) (4.6) (1.2)
Comparable retail sales4 (3.5) 0.6 (1.7) 0.1
Comparable number of prescription2,4 (6.9) 2.0 (4.7) 1.0
Comparable 30-day equivalent prescriptions2,3,4 (1.1) 4.9 0.7 3.8
Percent to sales
Three months ended Six months ended
February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020
Gross margin 20.9 21.4 20.8 21.6
Selling, general and administrative expenses 18.1 17.6 17.8 18.0
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.
WBA Q2 2021 Form 10-Q 46
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS 4Comparable sales are defined as sales from stores that have been open for at least twelve consecutive months without closure for seven or more consecutive days, including due to looting or store damage, and without a major remodel or being subject to a natural disaster, in the past twelve months as well as e-commerce sales. E-commerce sales include digitally initiated sales online or through mobile applications. Relocated stores are not included as comparable sales for the first twelve months after the relocation. Acquired stores are not included as comparable sales for the first twelve months after acquisition or conversion, when applicable, whichever is later. Comparable sales, comparable pharmacy sales, comparable retail sales, comparable number of prescriptions and comparable number of 30-day equivalent prescriptions refer to total sales, pharmacy sales, retail sales, number of prescriptions and number of 30-day equivalent prescriptions, respectively. Comparable retail sales for previous periods have been restated to include e-commerce sales. The method of calculating comparable sales varies across the retail industry. As a result, our method of calculating comparable sales may not be the same as other retailers' methods. Sales for the three months endedFebruary 28, 2021 andFebruary 29, 2020 The United States segment's sales for the three months endedFebruary 28, 2021 increased 0.4% compared with the year-ago quarter to$27.3 billion . Sales in comparable stores increased 2.0% compared with the year-ago quarter. Comparable store data has been adjusted to remove the effects ofFebruary 29, 2020 due to theleap year . Pharmacy sales increased 3.0% for the three months endedFebruary 28, 2021 and represented 74.9% of the segment's sales. The increase is primarily due to higher brand inflation and specialty sales partially offset by COVID-19 prescription volume impact and pharmacy reimbursement. In the year-ago quarter, pharmacy sales increased 5.3% and represented 73.0% of the segment's sales. Comparable pharmacy sales increased 4.5% for the three months endedFebruary 28, 2021 compared to increase of 3.7% in the year-ago quarter. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 0.3% in the three months endedFebruary 28, 2021 compared to a reduction of 2.7% in the year-ago quarter. The effect of generics mix on segment sales caused a reduction of 0.2% for the three months endedFebruary 28, 2021 compared to a reduction of 1.8% for the year-ago quarter. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.5% of prescription sales for the three months endedFebruary 28, 2021 compared to 97.1% in the year-ago quarter. The total number of prescriptions filled for the three months endedFebruary 28, 2021 was 195.3 million compared to 213.3 million in the year-ago quarter. Prescriptions filled adjusted to 30-day equivalents were 288.5 million in the three months endedFebruary 28, 2021 compared to 296.8 million in the year-ago quarter. Retail sales for the three months endedFebruary 28, 2021 decreased 6.6%, including the impact of the store closures, and were 25.1% of the segment's sales. In the year-ago quarter, retail sales decreased 0.3% and comprised 27.0% of the segment's sales. Comparable retail sales decreased 3.5% in the three months endedFebruary 28, 2021 compared to increase of 0.6% in the year-ago quarter. The decrease in the current quarter is driven by weaker cough, cold and flu season and decline in beauty partially offset by increase of health and wellness categories excluding cough, cold and flu. Operating income for the three months endedFebruary 28, 2021 andFebruary 29, 2020 The United States segment's operating income for the three months endedFebruary 28, 2021 decreased 21.8% to$828 million including$80 million from the Company's share of equity earnings in AmerisourceBergen. The decrease was primarily due to COVID-19 impacts and pharmacy reimbursement pressure partially offset by savings from Transformational Cost Management program and pharmacy procurement. Gross margin was 20.9% for the three months endedFebruary 28, 2021 compared to 21.4% in the year-ago quarter. Gross margin was negatively impacted in the current quarter by reimbursement pressure including product mix partially offset by higher retail margin. Selling, general and administrative expenses as a percentage of sales were 18.1% in the three months endedFebruary 28, 2021 compared to 17.6% 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, including vaccines and testing, partially offset by savings from Transformational Cost Management Program. Adjusted operating income (Non-GAAP measure) for the three months endedFebruary 28, 2021 andFebruary 29, 2020 The United States segment's adjusted operating income, which included$125 million from the Company's share of adjusted earnings in AmerisourceBergen, was$1.2 billion for the three months endedFebruary 28, 2021 , a decrease of 18.2% from the year-ago quarter. The decrease was due to COVID-19 related impacts and pharmacy reimbursement pressure, partly offset by
WBA Q2 2021 Form 10-Q 47
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS cost savings from the Transformational Cost Management Program and pharmacy procurement. 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 six months ended
Pharmacy sales increased 4.4% for the six months endedFebruary 28, 2021 and represented 75.9% of the segment's sales. The increase is primarily due to higher brand and generic inflation, specialty pharmacy and lower generic utilization partially offset by COVID-19 prescription volume impact and reimbursement pressure. In the year-ago period, pharmacy sales increased 4.1% and represented 74.2% of the segment's sales. Comparable pharmacy sales increased 4.8% for the six months endedFebruary 28, 2021 compared to increase of 3.1% in the year-ago period. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 0.3% in the six months endedFebruary 28, 2021 compared to a reduction of 2.6% in the year-ago period. The effect of generics mix on segment sales caused a reduction of 0.2% for the six months endedFebruary 28, 2021 compared to a reduction of 1.8% for the year-ago period. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.5% of prescription sales for the six months endedFebruary 28, 2021 compared to 97.0% in the year-ago period. The total number of prescriptions (including immunizations) filled for the six months endedFebruary 28, 2021 was 399.8 million compared to 426.3 million in the year-ago period. Prescriptions (including immunizations) filled adjusted to 30-day equivalents were 585.8 million in the six months endedFebruary 28, 2021 compared to 590.9 million in the year-ago period. Retail sales for the six months endedFebruary 28, 2021 decreased 4.6% and were 24.1% of the segment's sales. In the year-ago period, retail sales decreased 1.2% and comprised 25.8% of the segment's sales. Comparable retail sales decreased 1.7% in the six months endedFebruary 28, 2021 compared to increase of 0.1% in the year-ago period. The decrease in the current period was driven by beauty and personal care categories. Operating income for the six months endedFebruary 28, 2021 andFebruary 29, 2020 The United States segment's operating income for the six months endedFebruary 28, 2021 decreased 83.6% compared to the year-ago period to$324 million , including a loss of$1,293 million from the Company's share of equity earnings in AmerisourceBergen. Excluding the Company's share of equity earnings in AmerisourceBergen, the decrease was primarily due to pharmacy reimbursement pressure and COVID-19 impacts.
Gross margin was 20.8% for the six months ended
Selling, general and administrative expenses as a percentage of sales were 17.8% in the six months endedFebruary 28, 2021 compared to 18.0% 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 COVID-19 related expenses, including vaccines and testing, and higher investments. Adjusted operating income (Non-GAAP measure) for the six months endedFebruary 28, 2021 andFebruary 29, 2020 The United States segment's adjusted operating income was$2.3 billion for the six months endedFebruary 28, 2021 , a decrease of 14.9% from the year-ago period. The decrease was primarily due to lower pharmacy margin which were negatively impacted by reimbursement pressure and COVID-19 impacts partially offset by pharmacy procurement. See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
WBA Q2 2021 Form 10-Q 48
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
International
The Company's International segment consists of pharmacy-led health and beauty retail businesses outside theU.S. and pharmaceutical wholesaling and distribution business inGermany . Pharmacy-led health and beauty retail businesses include Boots branded stores in theUK , theRepublic of Ireland andThailand , the Benavides brand inMexico and the Ahumada brand inChile . Sales for these businesses are principally derived from the sale of prescription drugs and health and wellness, beauty, personal care and other consumer products. The International segment operates in currencies other than theU.S. dollar, including the British pound sterling, Euro, Chilean peso and Mexican peso and therefore the segment's results are impacted by movements in foreign currency exchange rates. See Item 3, "Quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk", for further information on currency risk. FINANCIAL PERFORMANCE (in
millions, except location amounts)
Three months ended Six months ended
February 28, February 29, February 28, February 29,
2021 2020 2021 2020
Sales $ 5,425 $ 4,091 $ 9,709 $ 7,870
Gross profit 1,079 1,188 2,069 2,252
Selling, general and administrative expenses 973 1,048 1,925 2,060
Operating income 106 140 145 191
Adjusted operating income (Non-GAAP measure)1 146 203 232 290
Number of locations at period end 4,123 4,300 4,123 4,300
Percentage increases (decreases)
Three months ended Six months ended
February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020
Sales 32.6 0.1 23.4 (1.9)
Gross profit (9.2) 0.5 (8.1) (2.7)
Selling, general and administrative expenses (7.2) 6.3 (6.6) 1.2
Operating income (24.0) (28.7) (24.3) (31.2)
Adjusted operating income (Non-GAAP measure)1 (28.3) (22.4) (20.0) (27.0)
Comparable sales in constant currency2 (8.4) (2.2) (6.2) (1.8)
Pharmacy sales 1.6 1.5 0.7 (1.1)
Comparable pharmacy sales in constant currency2 4.6 1.3 4.2 1.0
Retail sales (17.6) (2.0) (14.2) (4.0)
Comparable retail sales in constant currency2 (15.3) (3.8) (12.0) (3.2)
Percent to sales
Three months ended Six months ended
February 28, 2021 February 29, 2020 February 28, 2021 February 29, 2020
Gross margin 19.9 29.0 21.3 28.6
Selling, general and administrative expenses 17.9 25.6 19.8 26.2
WBA Q2 2021 Form 10-Q 49
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS 1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. 2Comparable sales in constant currency are defined as sales from stores that have been open for at least twelve consecutive months without closure for seven or more consecutive days, including due to looting or store damage, and without a major remodel or being subject to a natural disaster, in the past twelve months as well as e-commerce sales. Comparable sales in constant currency exclude wholesale sales. E-commerce sales include digitally initiated sales online or through mobile applications. Relocated stores are not included as comparable stores for the first twelve months after the relocation. Acquired stores are not included as comparable sales for the first twelve months after acquisition or conversion, when applicable, whichever is later. Comparable sales in constant currency, comparable pharmacy sales in constant currency and comparable retail sales in constant currency refer to total sales, pharmacy sales and retail sales, respectively. Comparable retail sales in constant currency for previous periods have been restated to include e-commerce sales. The method of calculating comparable sales in constant currency varies across the retail industry. As a result, our method of calculating comparable sales in constant currency may not be the same as other retailers' methods. The Company presents certain information related to current period operating results in "constant currency," which is a non-GAAP financial measure. Comparable sales in constant currency, comparable pharmacy sales in constant currency and comparable retail sales in constant currency exclude the effects of fluctuations in foreign currency exchange rates. See "--Non-GAAP Measures." Sales for the three months endedFebruary 28, 2021 andFebruary 29, 2020 The International segment's sales for the three months endedFebruary 28, 2021 increased 32.6% from the year-ago quarter to$5.4 billion , resulting from an increase from the Company's combined wholesale and distribution business inGermany which were consolidated as ofNovember 2020 . The adverse impact of currency translation was 8.7 percentage points. Comparable sales, which exclude pharmaceutical wholesale sales inGermany , decreased 8.4%, mainly due to lower sales in BootsUK driven by reduction in store foot traffic from COVID-19 restrictions partially offset by growth inMexico . Comparable store data has been adjusted to remove the effects ofFebruary 29, 2020 due to theleap year . Pharmacy sales increased 1.6% in the three months endedFebruary 28, 2021 and represented 17.3% of the segment's sales. The positive impact of currency translation on pharmacy sales was 3.4 percentage points. Comparable pharmacy sales increased 4.6% from the year-ago quarter primarily due to favorable timing of National Health Service ("NHS") reimbursement and stronger pharmacy services in theUK which mitigated the impact of lower prescription volumes in theUK , as well as growth inMexico . Retail sales decreased 17.6% for the three months endedFebruary 28, 2021 and represented 30.1% of the segment's sales. The positive impact of currency translation on retail sales was 3.2 percentage points. Comparable retail sales decreased 15.3%, from the year-ago quarter reflecting lower BootsUK retail sales driven by reduction in store foot traffic from COVID-19 restrictions, partially offset by strong performance of Boots.com. Operating income for the three months endedFebruary 28, 2021 andFebruary 29, 2020 The International segment's operating income for the three months endedFebruary 28, 2021 was$106 million , compared to$140 million in the year-ago quarter. The decrease was primarily due to lower gross profit attributable to lower sales from COVID-19 restrictions in theUK , partly offset by decisive cost management actions and strong performance of Boots.com.
Gross profit decreased 9.2% from the year-ago quarter. Gross profit was
favorably impacted by 4.2 percentage points (
Selling, general and administrative expenses decreased 7.2% from the year-ago quarter. Expenses were adverse impacted by 4.2 percentage points ($44 million ) as a result of currency translation. Excluding the impact of currency translation, the decrease was mainly due to cost savings from the Transformational Cost Management Program and short term cost mitigation actions, partly offset by higher selling, general and administrative expenses associated with theGermany combined business. As a percentage of sales, selling, general and administrative expenses were 17.9% in the three months endedFebruary 28, 2021 compared to 25.6% in the year-ago quarter. Adjusted operating income (Non-GAAP measure) for the three months endedFebruary 28, 2021 andFebruary 29, 2020 International segment's adjusted operating income for the three months endedFebruary 28, 2021 decreased 28.3% to an adjusted operating income of$146 million . Adjusted operating income was positively impacted by 3.5 percentage points ($7 WBA Q2 2021 Form 10-Q 50
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS million) of currency translation. Excluding the impact of currency translation, the decrease in adjusted operating loss was primarily due to lowerUK sales as a result of reduction in store foot traffic from COVID-19 restrictions, partially offset by decisive cost mitigation actions and strong performance of Boots.com. 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 six months endedFebruary 28, 2021 andFebruary 29, 2020 The International segment's sales for the six months endedFebruary 28, 2021 , increased 23.4% compared to the prior year period to$9.7 billion , resulting from an increase from the Company's combined wholesale and distribution business inGermany which were consolidated as ofNovember 2020 . Sales were favorably impacted in the period by 6.7 percentage points ($527 million ) as a result of currency translation. Comparable sales in constant currency, which exclude pharmaceutical wholesale sales inGermany , decreased 6.2%, primarily due to lower retail sales in BootsUK , including COVID-19 impacts, partly offset by growth inMexico . Pharmacy sales increased 0.7% for the six months endedFebruary 28, 2021 compared to the prior year period and represented 18.9% of the segment's sales. The positive impact of currency translation on pharmacy sales in the period was 2.5 percentage points. Comparable pharmacy sales in constant currency increased 4.2% from the prior year period primarily due to timing ofNHS reimbursement in theUK and pharmacy volumes inMexico . This is partially offset by lowerUK prescription volume in theUK . Retail sales decreased 14.2% for the six months endedFebruary 28, 2021 compared to the prior year period and represented 32.5% of the segment's sales. The positive impact of currency translation on retail sales in the period was 2.8% percentage points. Comparable retail sales in constant currency decreased 12.0% from the prior year period reflecting lower retail sales in BootsUK , including COVID-19 impacts. Operating income for the six months endedFebruary 28, 2021 andFebruary 29, 2020 The International segment's operating income for the six months endedFebruary 28, 2021 decreased 24.3% compared to the prior year period to$145 million . The decrease reflects lower footfall from COVID-19 restrictions, partly offset by decisive cost management actions and strong performance of Boots.com. Gross profit decreased 8.1% from the prior year period. Gross profit in the period was favorable impacted by 3.5 percentage points ($79 million ) as a result of currency translation. Excluding the impact of currency translation, the decrease was primarily due to lower retail in BootsUK , partly offset by timing ofNHS reimbursement as well as incremental gross profit associated with theGermany combined business. Selling, general and administrative expenses decreased 6.6% from the prior year period. Expenses in the period were adversely impacted by 3.3 percentage points ($69 million ) as a result of currency translation. Excluding the impact of currency translation, the decrease was due to short term cost mitigation and cost savings from the Transformational Cost Management Program, partly offset by higher selling, general and administrative expenses associated with theGermany combined business. As a percentage of sales, selling, general and administrative expenses were 19.8% in the six months endedFebruary 28, 2021 compared to 26.2% in the prior year period. Adjusted operating income (Non-GAAP measure) for the six months endedFebruary 28, 2021 andFebruary 29, 2020 The International segment's adjusted operating income for the six months endedFebruary 28, 2021 decreased 20.0% compared to the prior year period to$232 million . Adjusted operating income in the period was positively impacted by 4.0 percentage points ($12 million ) as a result of currency translation. Excluding the impact of currency translation, the decrease was mainly due to the impact of lower footfall, partly offset by decisive cost management actions and strong performance of Boots.com. 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 theSEC , 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.
WBA Q2 2021 Form 10-Q 51
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS These supplemental non-GAAP financial measures are presented because the Company's management has evaluated its financial results both including and excluding the adjusted items or the effects of foreign currency translation, as applicable, and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company from period to period and trends in its historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented. The Company also presents certain information related to current period operating results in "constant currency", which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of theU.S. 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. NON-GAAP RECONCILIATION (in millions) Three months ended February 28, 2021 Corporate and Walgreens Boots United States International Other Alliance, Inc. Operating income (loss) (GAAP)$ 828
$ 106
45 - - 45
Transformational cost management 140 21 17 178
Acquisition-related amortization 96 17 - 114
Certain legal and regulatory accruals and
settlements 60 - - 60
LIFO provision 2 - - 2
Acquisition-related costs (9) 2 2 (5)
Adjusted operating income (loss) (Non-GAAP
measure) $ 1,163 $ 146 $ (83) $ 1,225
(in millions)
Three months ended
Corporate and Walgreens Boots
United States International Other Alliance, Inc.
Operating income (loss) (GAAP) $ 1,059 $ 140
73 - - 73
Transformational cost management 56 44 18 118
Acquisition-related amortization 79 19 - 98
LIFO provision 28 - - 28
Acquisition-related costs 98 - 1 99
Store optimization 30 - - 30
Adjusted operating income (loss) (Non-GAAP
measure) $ 1,422 $ 203 $ (43) $ 1,582
WBA Q2 2021 Form 10-Q 52
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS (in millions) Six months ended February 28, 2021 Corporate and Walgreens Boots United States International Other Alliance, Inc. Operating income (loss) (GAAP)$ 324
$ 145
1,526 - - 1,526
Transformational cost management 201 47 29 278
Acquisition-related amortization 173 36 - 209
Certain legal and regulatory accruals and settlements 60 - - 60
LIFO provision 35 - - 35
Acquisition-related costs (1) 4 13 16
Adjusted operating income (loss) (Non-GAAP measure) $ 2,318 $ 232 $ (129) $ 2,422
(in millions)
Six months ended February 29, 2020
Corporate and Walgreens Boots
United States International Other Alliance, Inc.
Operating income (loss) (GAAP) $ 1,977 $ 191
121 57 20 198
Acquisition-related amortization 156 41 - 197
LIFO provision 61 - - 61
Acquisition-related costs 220 1 2 223
Store optimization 39 - - 39
Adjustments to equity earnings (loss) in
AmerisourceBergen 152 - - 152
Adjusted operating income (loss) (Non-GAAP measure) $ 2,725 $ 290 $ (89) $ 2,926
WBA Q2 2021 Form 10-Q 53
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Three months ended Six months ended February 29, February 28, February 29, February 28, 2021 2020 2021 2020 Net earnings attributable toWalgreens Boots Alliance, Inc. - continuing operations (GAAP) $ 922
Adjustments to operating income: Adjustments to equity earnings (loss) in AmerisourceBergen1 45 73 1,526 152 Transformational cost management2 178 118 278 198 Acquisition-related amortization3 114 98 209 197 Certain legal and regulatory accruals and settlements4 60 - 60 - LIFO provision5 2 28 35 61 Acquisition-related costs6 (5) 99 16 223 Store optimization2 - 30 - 39 Total adjustments to operating income 393 445 2,124 869 Adjustments to other income: Net investment hedging (gain) loss7 (7) 7 1 (4) Gain on sale of equity method investment8 (191) - (191) (1) Total adjustments to other income (199) 6 (190) (5) Adjustments to income tax provision (benefit): U.S. tax law changes9 - - - (6) Tax impact of adjustments9 (52) (90) (113) (170) Equity method non-cash tax9 20 1 (326) (1) Total adjustments to income tax provision (benefit) (33) (89) (439) (177) Adjustments to post tax equity earnings from other equity method investments: Adjustments to equity earnings in other equity method investments10 24 15 37 43
Total adjustments to post tax equity earnings from other equity method investments
24 15 37 43Adjustments to net earnings (loss) attributable to noncontrolling interests: Transformational cost management2
3 - 2 -
LIFO provision5 (3) - (6) -
Acquisition-related amortization3 (12) - (16) -
Total adjustments to net earnings (loss)
attributable to noncontrolling interests (13) - (20) -
Adjusted net earnings attributable to Walgreens
Boots Alliance, Inc. - continuing operations
(Non-GAAP measure) $ 1,095 $ 1,246 $ 2,043 $ 2,367
WBA Q2 2021 Form 10-Q 54
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Net earnings attributable toWalgreens Boots Alliance, Inc. - discontinued operations (GAAP)$ 104 $ 79 $ 187 $ 155 Acquisition-related amortization3 7 19 28 38 Acquisition-related costs6 8 - 10 - Transformational cost management2 4 5 9 11 Tax impact of adjustments9 (6) (7) (11) (7) Total adjustments to net earnings (loss) attributable toWalgreens Boots Alliance , Inc. - discontinued operations$ 14 $
17
Adjusted net earnings attributable toWalgreens Boots Alliance, Inc. - discontinued operations (Non-GAAP measure)$ 119 $
97
Adjusted net earnings attributable toWalgreens Boots Alliance, Inc. (Non-GAAP measure)$ 1,214 $
1,343
Diluted net earnings per common share - continuing operations (GAAP)$ 1.06 $ 0.98 $ 0.61 $ 1.84 Adjustments to operating income 0.45 0.50 2.45 0.98 Adjustments to other income (0.23) 0.01 (0.22) (0.01) Adjustments to income tax provision (benefit) (0.04) (0.10) (0.51) (0.20) Adjustments to equity earnings in other equity method investments10 0.03 0.02 0.04 0.05 Adjustments to net earnings (loss) attributable to noncontrolling interests (0.01) - (0.02) - Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)$ 1.26 $
1.41
Diluted net earnings per common share - discontinued operations (GAAP)$ 0.12 $ 0.09 $ 0.22 $ 0.17 Total adjustments to net earnings attributable toWalgreens Boots Alliance , Inc. - discontinued operations 0.02 0.02 0.04 0.05 Adjusted diluted net earnings per common share - discontinued operations (Non-GAAP measure)$ 0.14 $
0.11
Adjusted diluted net earnings per common share (Non-GAAP measure)$ 1.40 $
1.52
Weighted average common shares outstanding, diluted (in millions) 865.6 885.5 865.7 889.1 1Adjustments to equity earnings (loss) in AmerisourceBergen consist of the Company's proportionate share of non-GAAP adjustments reported by AmerisourceBergen consistent with the Company's non-GAAP measures. The Company recognized equity losses in AmerisourceBergen of$1,373 million during the three months endedNovember 30, 2020 . These equity losses are primarily due to AmerisourceBergen recognition of$5.6 billion , net of tax, charges related to its ongoing opioid litigation in its financial statements for the three months period endedSeptember 30, 2020 . 2Transformational Cost Management Program and Store Optimization Program charges are costs associated with a formal restructuring plan. These charges are primarily recorded within selling, general and administrative expenses. These costs do not reflect current operating performance and are impacted by the timing of restructuring activity. 3Acquisition-related amortization includes amortization of acquisition-related intangible assets and inventory valuation adjustments. Amortization of acquisition-related intangible assets includes amortization of intangibles assets such as customer relationships, trade names, trademarks and contract intangibles. Intangible asset amortization excluded from the
WBA Q2 2021 Form 10-Q 55
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS related non-GAAP measure represents the entire amount recorded within the company's GAAP financial statements, the revenue generated by the associated intangible assets has not been excluded from the related non-GAAP measures. Amortization expense, unlike the related revenue, is not affected by operations of any particular period unless an intangible asset becomes impaired or the estimated useful life of an intangible asset is revised. These charges are primarily recorded within selling, general and administrative expenses. Business combination accounting principles require us to measure acquired inventory at fair value. The fair value of the inventory reflects cost of acquired inventory and a portion of the expected profit margin. The acquisition-related inventory valuation adjustments excludes the expected profit margin component from cost of sales recorded under the business combination accounting principles. 4Certain legal and regulatory accruals and settlements relate to significant charges associated with certain legal proceedings. The Company excludes these charges when evaluating operating performance because it does not incur such charges on a predictable basis and exclusion of such charges enables more consistent evaluation of the Company's operating performance. These charges are recorded within selling, general and administrative expenses. 5The company'sUnited States segment inventory is accounted for using the last-in-first-out ("LIFO") method. This adjustment represents the impact on cost of sales as ifthe United States segment inventory is accounted for using first-in first-out ("FIFO") method. The LIFO provision is affected by changes in inventory quantities, product mix, and manufacturer pricing practices, which may be impacted by market and other external influences. Therefore, the company cannot control the amounts recognized or timing of these items. 6Acquisition-related costs are transaction and integration costs associated with certain merger, acquisition and divestitures related activities. These costs include all charges incurred on certain mergers, acquisition and divestitures related activities, for example, including costs related to integration efforts for successful merger, acquisition and divestitures activities. These charges are primarily recorded within selling, general and administrative expenses. These costs are significantly impacted by the timing and complexity of the underlying merger, acquisition and divestitures related activities and do not reflect the company's current operating performance. 7Gain or loss on certain derivative instruments used as economic hedges of the company's net investments in foreign subsidiaries. These charges are recorded within other income (expense). We do not believe this volatility related to mark-to-market adjustment on the underlying derivative instruments reflects the company's operational performance. 8Includes significant gain on sale of equity method investment. During the three months endedFebruary 28, 2021 , the Company recorded a gain of$191 million in Other income due to a partial sale of its equity method investment in Option Care Health. 9Adjustments to income tax provision include adjustments to the GAAP basis tax provision commensurate with non-GAAP adjustments and certain discrete tax items includingU.S. tax law changes and equity method non-cash tax. These charges are recorded within income tax provision (benefit). 10Adjustments to post tax equity earnings from other equity method investments consist of the proportionate share of certain equity method investees' non-cash items or unusual or infrequent items consistent with the company's non-GAAP adjustments. These charges are recorded within post tax earnings (loss) from other equity method investments. Although the company may have shareholder rights and board representation commensurate with its ownership interests in these equity method investees, adjustments relating to equity method investments are not intended to imply that the company has direct control over their operations and resulting revenue and expenses. Moreover, these non-GAAP financial measures have limitations in that they do not reflect all revenue and expenses of these equity method investees. The Company considers certain metrics presented in this report, such as comparable sales, comparable pharmacy sales, comparable retail sales, comparable number of prescriptions, and comparable 30-day equivalent prescriptions, to be key performance indicators because the Company's management has evaluated its results of operations using these metrics and believes that these key performance indicators presented provide additional perspective and insights when analyzing the core operating performance of the Company from period to period and trends in its historical operating results. These key performance indicators should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. These measures, which are described in more detail in this report, may not be comparable to similarly-titled performance indicators used by other companies. LIQUIDITY AND CAPITAL RESOURCES Cash, cash equivalents and restricted cash were$1.3 billion (including$0.5 billion in non-U.S. jurisdictions) as ofFebruary 28, 2021 , compared to$1.0 billion (including$0.4 billion in non-U.S. jurisdictions) as ofFebruary 29, 2020 . Short-term investment objectives are primarily to minimize risk and maintain liquidity. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally inU.S. Treasury money market funds. WBA Q2 2021 Form 10-Q 56
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS 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 six months endedFebruary 28, 2021 was$2.6 billion , compared to$2.5 billion for the prior year period. The$72.0 million increase in cash provided by operating activities reflects higher cash inflows from income taxes and trade accounts payable, partially offset by higher cash outflows from accounts receivables. Changes in income taxes, trade accounts payables, and accounts receivables are mainly driven by timing of payments and receipts. Net cash used for investing activities was$1.4 billion for the six months endedFebruary 28, 2021 compared to$0.6 billion for the prior year period. The$0.7 billion increase in cash provided by investing activities is primarily driven by higher cash outflows from business, investment and asset acquisitions partially offset by higher cash inflows from proceeds from sale of assets. Changes in business, investment and asset acquisitions in the period was primarily driven by acquisition inInnovation Associates and increased investment inVillageMD . Changes in proceeds from sale of assets was primarily driven by the Company's partial sale of its equity method investment in Option Care Health. Proceeds from sale-leaseback transactions was$452 million for the six months endedFebruary 28, 2021 compared to$333 million for the prior year period. For the six months endedFebruary 28, 2021 , additions to property, plant and equipment were$692 million compared to$705 million in the prior year period. Capital expenditures were as follows (in millions): Six months ended February 28, 2021 2020 United States $ 532$ 549 International 109 122 Corporate 15 5 Discontinued operations 37 28 Total $ 692$ 705
Significant capital expenditures primarily relate to growth initiatives and information technology projects.
Net cash used for financing activities for the six months endedFebruary 28, 2021 was$0.6 billion , compared to$2.1 billion in the prior year period. In the six months endedFebruary 28, 2021 there were$6.9 billion in net debt proceeds primarily from revolving credit facilities described below and commercial paper debt compared to$9.9 billion in net proceeds in the prior year period. In the six months endedFebruary 28, 2021 there were$6.5 billion in payments of debt made primarily for revolving credit facilities and commercial paper debt compared to$10.1 billion in six months endedFebruary 29, 2020 . The Company repurchased shares totaling$110 million in the six months endedFebruary 28, 2021 to support the needs of its employee stock plans compared to$913 million in the prior year period which also included stock repurchase program described below. Proceeds related to employee stock plans were$21 million during the six months endedFebruary 28, 2021 , compared to$28 million during the six months endedFebruary 29, 2020 . Cash dividends paid were$808 million during the six months endedFebruary 28, 2021 , compared to$857 million for the prior year period. The Company expects to fund its working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations from liquidity sources including cash flow from operations, availability under existing credit facilities, commercial paper programs, working capital financing arrangements and current cash and investment balances. The Company believes that these sources, and the ability to obtain other financing will provide adequate cash funds for the Company's foreseeable working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations for at least the next 12 months. The Company's cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that the Company may complete may also impact its cash requirements. Additionally, the Company's cash requirements, and its ability to generate cash flow, have been and may continue to be adversely affected by COVID-19 and the resulting market volatility and instability. For further
WBA Q2 2021 Form 10-Q 57
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
information regarding the impact of COVID-19 on the Company, including on its
liquidity and capital resources, please see Item 1A, Risk factors in the
Company's Annual Report on Form 10-K for the fiscal year ended
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'sBoard of Director's approved a stock repurchase program (the "June 2018 stock repurchase program"), which authorized the repurchase of up to$10.0 billion of the Company's common stock of which the Company had repurchased$8.0 billion as ofFebruary 28, 2021 . TheJune 2018 stock repurchase program has no specified expiration date. InJuly 2020 , the Company announced that it was 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 dailyU.S. commercial paper outstanding of$2.2 billion and$3.0 billion at a weighted average interest rate of 0.51% and 2.42% for the six months endedFebruary 28, 2021 andFebruary 29, 2020 , respectively. A subsidiary of the Company had average daily commercial paper outstanding, which was issued under theJoint HM Treasury and Bank of England's COVID Corporate Financing Facility commercial paper program, of £300 million or approximately$418 million at a weighted average interest rate of 0.43% for the six months endedFebruary 28, 2021 . The subsidiary's repayment obligations are guaranteed by the Company. 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 aggregate commitment in the amount of$3.5 billion , with a letter of credit subfacility commitment amount of$500 million . The facility termination date is the earlier of (a)August 29, 2023 , subject to extension thereof pursuant to 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 ofFebruary 28, 2021 , there were no borrowings outstanding under theAugust 2018 Revolving Credit Agreement. OnNovember 30, 2018 , the Company entered into a$1.0 billion credit agreement, consisting of a$500 million senior unsecured revolving credit facility and a$500 million senior unsecured term loan facility, 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. 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 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 ofFebruary 28, 2021 , there were$925 million 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 WBA Q2 2021 Form 10-Q 58
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS 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. 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 an original facility termination date of 364 days followingJanuary 31, 2019 , subject to extension. OnDecember 18, 2019 , the Company entered into an Extension Agreement (the "Extension Agreement") relating to theJanuary 2019 364-Day Revolving Credit Agreement with the lenders party thereto and Mizuho, as administrative agent. The Extension Agreement extended the Maturity Date (as defined in theJanuary 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 theJanuary 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. TheJanuary 2019 364-Day Revolving Credit Agreement was partially terminated in accordance with its terms and conditions, reducing the amount available to$0.5 billion as ofDecember 23, 2020 , concurrently with the execution of the 2020 Revolving Credit Agreement described above. 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. This revolving credit agreement was terminated in full onDecember 23, 2020 . The Company entered into a$750 million revolving credit agreement onApril 1, 2020 (the "April 2020 Revolving Bilateral Credit Agreement") and a$1.3 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. This revolving credit agreement was terminated in full onDecember 23, 2020 . OnApril 7, 2020 , the Company and withWBA Financial Services Limited , a private limited company incorporated under the laws ofEngland andWales ("WBAFSL"), as co-borrowers, entered into a$500 million revolving credit agreement (the "April 7, 2020 Revolving Credit Agreement") with 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 from WBA Q2 2021 Form 10-Q 59
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSISApril 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 are co-borrowers under theApril 7, 2020 Revolving Credit Agreement. Pursuant to the terms of theApril 7, 2020 Revolving Credit Agreement, the Company provides 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. This revolving credit agreement was terminated in full onDecember 23, 2020 . 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 million . OnOctober 20, 2020 , the Company redeemed in full the £400 million aggregate principal amount outstanding of its 2.875% notes due 2020 issued by the Company onNovember 20, 2014 . OnDecember 23, 2020 , the Company entered into a$1.25 billion senior unsecured 364-day revolving credit agreement and a$2.25 billion senior unsecured 18-month revolving credit facility, with a swing line subfacility commitment amount of$350 million , with designated borrowers from time to time party thereto and lenders from time to time party thereto. The 364-Day Facility's termination date is the earlier of (i) 364 days fromDecember 23, 2020 , the effective date (subject to the extension thereof pursuant to the 2020 Revolving Credit Agreement) and (ii) the date of termination in whole of the aggregate amount of the revolving commitments under the 364-Day Facility pursuant to the 2020 Revolving Credit Agreement. The 18-Month Facility's termination date is the earlier of (i) 18 months from the effective date (subject to the extension thereof pursuant to the 2020 Revolving Credit Agreement) and (ii) the date of termination in whole of the aggregate amount of the revolving commitments under the 18-Month Facility pursuant to the 2020 Revolving Credit Agreement. As ofFebruary 28, 2021 , there were$100 million borrowings outstanding under the 2020 Revolving Credit Agreement. After the entry into the 2020 Revolving Credit Agreement and the full or partial termination of the Company's other credit agreements as discussed herein, as ofFebruary 28, 2021 , the Company had an aggregate borrowing capacity of$7.9 billion including funds already drawn. 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 ofFebruary 28, 2021 , the Company was in compliance with all such applicable covenants. Credit ratings As ofMarch 30, 2021 , the credit ratings ofWalgreens Boots Alliance were: Rating agency Long-term debt rating Commercial paper rating Outlook Fitch BBB- F3 Negative Moody's Baa2 P-2 Negative Standard & Poor's BBB A-2 Negative 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 ofFebruary 28, 2021 , the Company owned 56,854,867 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 ofFebruary 28, 2021 , the Company can acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market and thereafter designate another member of WBA Q2 2021 Form 10-Q 60
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS AmerisourceBergen's board of directors, subject in each case to applicable legal and contractual requirements. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances. Subject to applicable legal and contractual requirements, share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1. See Note 6 Equity method investments, to the Consolidated Condensed Financial Statements for further information. OnJanuary 6, 2021 , the Company entered into a Share Purchase Agreement with AmerisourceBergen pursuant to which AmerisourceBergen will purchase the majority of the Company's pharmaceutical wholesale operations, among other assets, for$6.275 billion in cash (subject to customary purchase price adjustments) and 2 million shares of common stock of AmerisourceBergen. See "Recent Developments" above and Note 2 Discontinued operations to the Consolidated Condensed Financial Statements for additional 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 the Company's Annual Report on Form 10-K for the year endedAugust 31, 2020 . 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. For a discussion of our significant accounting policies, please see the Company's Annual Report on Form 10-K for the fiscal year endedAugust 31, 2020 . Some of the more significant estimates include business combinations, leases, goodwill and indefinite-lived intangible asset impairment, cost of sales and inventory, equity method investments, pension and postretirement benefits and income taxes. See Note 18 New accounting pronouncements, to the Consolidated Condensed Financial Statements for additional information. NEW ACCOUNTING PRONOUNCEMENTS A discussion of new accounting pronouncements is described in Note 18 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
WBA Q2 2021 Form 10-Q 61
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS and impact of COVID-19, the expected execution and effect of our business strategies, our cost-savings and growth initiatives, pilot programs, strategic partnerships and initiatives, and restructuring activities and the amounts and timing of their expected impact and delivery of estimated cost savings, the withdrawal of theUK from theEuropean Union and its possible effects 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, the closing of the sale of certain pharmaceutical wholesale operations to AmerisourceBergen pursuant to the Share Purchase Agreement datedJanuary 6, 2021 , 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, 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, the risks associated with the withdrawal of theUK from theEuropean Union , 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 international trade policies, tariffs, including tariff negotiations between theU.S. 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, 2020 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. All forward-looking statements we make or that are made on our behalf are qualified by these cautionary statements. Accordingly, you are cautioned not to place undue reliance on these WBA Q2 2021 Form 10-Q 62
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
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.
WBA Q2 2021 Form 10-Q 63
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
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