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, 2021 , as amended by Form 10-K/A for the fiscal year endedAugust 31, 2021 filed onNovember 24, 2021 (the "2021 10-K"). 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 2021 10-K. References herein to the "Company", "we", "us", or "our" refer toWalgreens Boots Alliance, Inc. and its subsidiaries, and in each case do not include unconsolidated partially-owned entities, except as otherwise indicated or the context otherwise requires.
Certain amounts in the 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 each of the periods presented.
INTRODUCTION AND SEGMENTS
Walgreens Boots Alliance, Inc. and its subsidiaries ("Walgreens Boots Alliance " or the "Company") is a global leader in retail pharmacy and is positioning to become a leading provider of healthcare services. Its operations are conducted through three reportable segments: •United States, •International, and •Walgreens Health
See Note 15 Segment reporting and Note 16 Sales, to the Consolidated Condensed Financial Statements for further information.
FACTORS, TRENDS AND UNCERTAINTIES AFFECTING OUR RESULTS AND COMPARABILITYThe Company has been, and we expect it to continue to be, affected by a number of factors that may cause actual results to differ from our historical results or current expectations. These factors include: the impact of the COVID-19 pandemic ("COVID-19") on our operations and financial results; the financial performance of our equity method investees, including AmerisourceBergen Corporation ("AmerisourceBergen"); the influence of certain holidays; seasonality; foreign currency rates; changes in vendor, payer and customer relationships and terms and associated reimbursement pressure; strategic transactions and acquisitions, dispositions, joint ventures and other strategic collaborations; changes in laws, includingU.S. tax law changes; changes in trade, tariffs, including trade relations between theU.S. andChina , and international relations, including theUK's withdrawal from theEuropean Union and its impact on our operations and prospects and those of our customers and counterparties; the timing and magnitude of cost reduction initiatives, including under our Transformational Cost Management Program (as defined below); the timing and severity of the cough, cold and flu season; fluctuations in variable costs; the impacts of looting, natural disasters, war, terrorism and other catastrophic events; and changes in general economic conditions in the markets in which the Company operates. Specialty pharmacy represents a significant and growing proportion of prescription drug spending in theU.S. , a significant portion of which is dispensed outside of traditional retail pharmacies. To better serve the evolving specialty pharmacy market, inMarch 2017 , we andPrime Therapeutics LLC , a pharmacy benefit management ("PBM") company, closed a transaction to form a combined central specialty pharmacy and mail services company, AllianceRxWalgreens Prime, using an innovative model that seeks to align pharmacy, PBM, and health plans to coordinate patient care, improve health outcomes and deliver cost of care opportunities. Certain clients of our joint venture are not obligated to contract through our joint venture, and have in the past, and may in the future, enter into specialty pharmacy and other agreements without involving our joint venture. During fiscal 2021, and the first three months of fiscal 2022, certain clients chose not to renew their contracts through our joint venture which impacts gross sales. However, considering the relatively low margin nature of this business, the Company does not anticipate this will have a material impact on operating income. 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.
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
COVID-19
COVID-19 has severely impacted, and may continue to impact, the economies of theU.S. , theUK and other countries around the world. COVID-19 has created significant public health concerns as well as significant volatility, uncertainty and economic disruption in every region in which we operate, which has adversely affected, and may again adversely affect, our industries and our business operations. Further, financial and credit markets experienced, and may again experience, volatility. Policies and initiatives designed to reduce the transmission of COVID-19 have resulted in, among other things, temporary closure or reduced hours of operation of certain store locations in theU.S. , theUK and other countries, reduced customer traffic and sales in our retail pharmacies and the adoption and continuation of work-from-home policies. In response to COVID-19 and emerging variants, various domestic and foreign, federal, state and local governmental legislation, regulations, orders, policies and initiatives have been implemented that are designed to reduce the transmission of COVID-19, as well as to help address economic and market volatility and instability resulting from COVID-19. The Company has assessed and will continue to assess the impact of these governmental actions on the Company. The Company has participated in certain of these programs, including for example availing itself to certain tax deferrals which were introduced by the CARES Act in theU.S. , and certain tax deferral and benefit and employee wage support in theUK , and if available, may continue to do so in the future. The Company continues to play a critical role in fighting the COVID-19 pandemic. The Company has worked with theCenters for Disease Control and Prevention ("CDC"),U.S. Department of Health and Human Services ("HHS") and theU.S. government to help administer COVID-19 vaccinations to the general public, high priority groups, including long-term care facility residents and staff.The United States segment also expanded vaccination models to ensure convenient access, including same-day and walk-in appointments, mobile clinics, employer partnerships and extended hours. As ofNovember 30, 2021 , the Company has administered more than 50 million COVID-19 vaccinations, including 8 million boosters, and more than 20 million COVID-19 tests in theU.S. During the three months endedNovember 30, 2021 , the Company has administered more than 15.6 million COVID-19 vaccinations, including 8 million boosters, and more than 6.5 million COVID-19 tests in theU.S. During the three months endedNovember 30, 2021 , performance was driven by execution in COVID-19 vaccine and testing delivery, US retail sales growth, and continued recovery in International. In the US segment, comparable prescriptions filled increased in the quarter primarily driven by COVID-19 vaccinations. Comparable retail sales increased in the quarter, reflecting broad based growth across all categories including health and wellness, which was aided by at-home COVID-19 tests. Gross profit increased compared with the year-ago quarter driven by improved pharmacy margin, aided by COVID-19 vaccinations. The International segment experienced an increase in retail sales in theUK market following the lifting of COVID-19 restrictions, however footfall on the high street remained below pre-COVID-19 levels. The Company also incurred an increase in selling, general and administrative expenses ("SG&A") when compared to prior year from investments to support COVID-19 vaccinations and testing in the US and COVID-19 related government support in theUK which occurred in the prior year-ago quarter. The situation surrounding COVID-19 remains fluid, and could result in additional mandates and directives, including revisions thereto, from foreign, federal, state, county and city authorities throughout the continuation of the COVID-19 pandemic and for sometime thereafter. The impact on theU.S. and global economies, including supply chains and the labor force, and consumer, customer and health care utilization pattern depends upon the evolving factors and future developments related to COVID-19. As a result, the financial and/or operational impact on the Company, operating results, cash flows and/or financial condition is uncertain, but the impact, singularly or collectively, could be material and adverse.
The Company's current expectations described above are forward-looking statements and our actual results may differ. Factors that might cause a difference include, but are not limited to, those discussed below under "Cautionary note regarding forward-looking statements" and in Item 1A, Risk factors, in our 2021 10-K.
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS STRATEGIC UPDATE InOctober 2021 , the Company announced the launch of its new healthcare strategy. The Company plans to become a leading provider of local clinical care services by leveraging its consumer-centric technology and pharmacy network to deliver value-based care. The Company also plans to continue to transform its core pharmacy and retail business. The Company's goal is to provide better consumer experiences, improve health outcomes and lower costs.WALGREENS HEALTH At the center of the Company's healthcare strategy isWalgreens Health , a consumer-centric, technology-enabled healthcare business that engages consumers through a personalized, omni-channel experience across the care journey.Walgreens Health delivers improved health outcomes and lower costs for payors and providers by delivering care through owned and partnered assets. To advance its strategy, the Company completed majority equity investments inVillage Practice Management Company, LLC ("VillageMD") andShields Health Solutions Parent, LLC ("Shields") and announced investment inCareCentrix, Inc. ("CareCentrix"). The Company has created a new operating segment,Walgreens Health , and is now aligned into three reportable segments:United States , International andWalgreens Health . Fiscal 2021 data related to theWalgreens Health segment, has been reclassified in the Consolidated Condensed Financial Statements and accompanying notes to conform to the current period presentation.
See Note 15 Segment reporting to the Consolidated Condensed Financial Statements for further information.
RECENT TRANSACTIONSVillageMD acquisition OnNovember 24, 2021 , the Company completed the acquisition ofVillageMD . Pursuant to the terms and subject to the conditions set forth in the Unit Purchase Agreement, the Company purchased additional outstanding equity interests ofVillageMD , increasing the Company's total beneficial ownership inVillageMD's outstanding equity interests from approximately 30% to approximately 63%, on a fully diluted basis, for a purchase price of$5.2 billion . The total purchase price comprises cash consideration of$4.0 billion and a promissory note of$1.2 billion . The cash consideration consisted of$2.9 billion to be paid to existing shareholders, after giving affect to the$1.9 billion tender offer described below, as well as$1.1 billion paid in exchange for new preferred units issued byVillageMD . Subject to notice being served, the Company has an option to prepay the promissory note at any time andVillageMD may require the Company to redeem the promissory note afterFebruary 1, 2022 . The promissory note is eliminated in consolidation within the Consolidated Condensed Balance Sheets. OnNovember 24, 2021 ,VillageMD commenced a tender offer to purchase up to$1.9 billion of units inVillageMD for cash. As ofNovember 30, 2021 , the Company recorded the$1.9 billion as redeemable non-controlling interest. The tender offer was fully subscribed and settled onDecember 28, 2021 . The tender offer was funded by cash proceeds provided toVillageMD pursuant to the Unit Purchase Agreement. The Company accounted for this acquisition as a business combination resulting in consolidation ofVillageMD within theWalgreens Health segment in its financial statements. A noncontrolling interest was recognized at fair value. As ofNovember 30, 2021 , the Company had not completed the analysis to assign fair values to all tangible and intangible assets acquired. As such, the preliminary purchase price allocation will be subject to further refinement and may change. These changes may relate to finalization of the fair value of the purchase consideration and the allocation of purchase consideration to all tangible and intangible assets acquired and identified.
See Note 3 Acquisitions, and Note 6 Equity method investments to the Consolidated Condensed Financial Statements for further information.
Shields acquisition OnOctober 29, 2021 , the Company completed the acquisition of Shields. Pursuant to the terms and subject to the conditions set forth in the Securities Purchase Agreement, the Company purchased additional outstanding equity interests of Shields, increasing the Company's total beneficial ownership in Shields' outstanding equity interests from 25% to approximately 70%, on a fully diluted basis, for cash consideration of$969 million , subject to certain purchase price adjustments. WBA Q1 2022 Form 10-Q 35
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS The Company accounted for this acquisition as a business combination resulting in consolidation of Shields within theWalgreens Health segment in its financial statements. A noncontrolling interest was recognized at fair value. Under the terms of the transaction agreements, the Company has an option to acquire the remaining equity interests of Shields in the future. Shields' other equity holders will also have an option to require the Company to purchase the remaining equity interests. Considering the contractual terms related to the noncontrolling interest, it is classified as redeemable noncontrolling interest in the Consolidated Condensed Balance Sheets.
See Note 3 Acquisitions, and Note 6 Equity method investments to the Consolidated Condensed Financial Statements for further information.
CareCentrix acquisition OnSeptember 4, 2021 , the Company executed a Membership Interest Purchase Agreement to acquire a majority equity interest inCareCentrix , a leading player in the post-acute and home care management sectors, which after the application of a net debt adjustment, is expected to be approximately$330 million . The investment will result in the Company owning approximately 55% controlling equity interest inCareCentrix . Under the terms of the Agreement, the Company has an option to acquire the remaining equity interests ofCareCentrix in the future.CareCentrix ' other equity holders will also have an option to require the Company to purchase the remaining equity interests. The transaction is subject to the receipt of required regulatory clearances and approvals and other customary closing conditions. Upon closing, the Company will account for this acquisition as a business combination and consolidateCareCentrix in its financial statements. Pharmaceutical Wholesale business inGermany OnNovember 30, 2021 , the Company signed an agreement with McKesson Corporation to acquire the remaining 30% equity interest in the pharmaceutical wholesale business inGermany not currently owned by the Company. The transaction is subject to standard regulatory clearance by the relevant local authorities. AllianceRxWalgreens Prime OnDecember 31, 2021 , the Company completed a transaction withPrime Therapeutics LLC to acquire the remaining 45% minority equity interest in AllianceRxWalgreens Prime. AllianceRxWalgreens Prime is a specialty and home delivery pharmacy business inthe United States . TRANSFORMATIONAL COST MANAGEMENT PROGRAM OnDecember 20, 2018 , the Company announced a transformational cost management program that was expected to deliver in excess of$2 billion of annual cost savings by fiscal 2022 (the "Transformational Cost Management Program"). The Company achieved this goal at the end of fiscal 2021. OnOctober 12, 2021 , the Company's Board of Directors approved an expansion and extension of the Transformational Cost Management Program through the end of fiscal 2024. As a result, the Company increased its annual cost savings target to$3.3 billion by the end of fiscal 2024. The Transformational Cost Management Program, which is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and the transformation of the Company's information technology (IT) capabilities, is designed to help the Company achieve increased cost efficiencies. To date, the Company has taken actions across all aspects of the Transformational Cost Management Program which focus onthe United States and International reportable segments along with the Company's global functions. Divisional optimization within the Company's segments includes activities such as optimization of stores. As a result of the expanded program, the Company plans to reduce its presence by up to 150 Boots stores in theUK and up to 150 stores inthe United States over the next three years which are incremental to the previously planned reductions of approximately 200 Boots stores in theUK and approximately 250 stores inthe United States . The Company currently estimates that the Transformational Cost Management Program will result in cumulative pre-tax charges to its GAAP financial results of approximately$3.6 billion to$3.9 billion , of which$3.3 billion to$3.6 billion are expected to be recorded as exit and disposal activities. The Company estimates that approximately 85% of the cumulative pre-
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS tax charges relating to the Transformational Cost Management Program represent current or future cash expenditures, primarily related to employee severance and business transition costs, IT transformation and lease and other real estate payments. The Company currently estimates that it will recognize aggregate pre-tax charges to its GAAP financial results related to the Transformational Cost Management Program as follows: Transformational Cost Management Program Activities Range of Charges Lease obligations and other real estate costs 1$1,250 to 1,350 million Asset impairments 2$525 to 575 million Employee severance and business transition costs$1,150 to 1,200 million Information technology transformation and other exit costs$400 to 450 million Total cumulative pre-tax exit and disposal costs$3.3 to 3.6 billion Other IT transformation costs$275 to 325 million Total estimated pre-tax costs$3.6 to 3.9 billion
1 Includes impairments relating to operating lease right-of-use and finance lease assets. 2 Primarily related to store closures and other asset impairments.
Since the inception of the Transformational Cost Management Program toNovember 30, 2021 , the Company has recognized aggregate cumulative pre-tax charges to its financial results in accordance with GAAP of$1.7 billion , of which$1.5 billion are recorded as exit and disposal activities. See Note 4 Exit and disposal activities, to the Consolidated Condensed Financial Statements for additional information. These charges included$442 million related to lease obligations and other real estate costs,$292 million in asset impairments,$550 million in employee severance and business transition costs,$172 million of information technology transformation and other exit costs and$227 million other IT costs. 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 . Costs from continuing operations under the Transformational Cost Management Program, which were primarily recorded in selling, general and administrative expenses for the three months endedNovember 30, 2021 and 2020, were as follows (in millions): Walgreens Boots Three months ended November 30, 2021 United States International Corporate and Other Alliance, Inc. Lease obligations and other real estate costs $ 87 $ 2 $ - $ 89 Asset impairments 15 25 - 40 Employee severance and business transition costs 20 10 7 37 Information technology transformation and other exit costs 1 7 1 9
Total pre-tax exit and disposal costs $ 123 $
44 $ 9 $ 175
Other IT transformation costs 18 10 - 27
Total pre-tax costs $ 141 $ 53 $ 9 $ 203
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Corporate and Walgreens Boots Three months ended November 30, 2020 United States International Other Alliance, Inc. Lease obligations and other real estate costs $ 22 $ - $ - $ 22 Asset impairments 4 (2) - 1 Employee severance and business transition costs 12 28 12 52 Information technology transformation and other exit costs 10 (5) - 5 Total pre-tax exit and disposal costs $ 48 $ 21 $ 12 $ 81 Other IT transformation costs 13 6 - 19 Total pre-tax costs $ 61 $ 27 $ 12 $ 100 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 ofNovember 30, 2021 andAugust 31, 2021 , the Company owned 58,854,867 of AmerisourceBergen common shares, representing approximately 28.3% of its outstanding common stock based on the share count publicly reported by AmerisourceBergen in its most recent Annual Report on Form 10-K. The Company has a shareholders agreement with AmerisourceBergen, which was most recently amended and restated in connection with the Alliance Healthcare Sale (the "A&R Shareholders Agreement"). Pursuant to the A&R Shareholders Agreement, the Company has designated one member of AmerisourceBergen's board of directors. The Company is also permitted to acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market, and thereafter to designate another member of AmerisourceBergen's board of directors. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances. The Company accounts for its equity 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 (loss) of the Company'sUnited States segment. During the three months endedNovember 30, 2021 and 2020, the Company recognized equity income of$100 million and equity losses of$1.4 billion , in AmerisourceBergen, respectively. The equity losses for the period endedNovember 30, 2020 were primarily due to AmerisourceBergen's recognition of loss of$5.6 billion , net of tax, related to its ongoing opioid litigation in its financial statements for the three months endedSeptember 30, 2020 . The 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 2 Discontinued operations and Note 6 Equity method investments, to the Consolidated Condensed Financial Statements.
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS EXECUTIVE SUMMARY The following table presents certain key financial statistics.
(in millions, except per share
amounts)
Three months ended
2021 2020
Sales $ 33,901 $ 31,438
Gross profit 7,574 6,630
Selling, general and administrative expenses 6,391 5,792
Equity earnings (loss) in AmerisourceBergen 100 (1,373)
Operating income (loss) 1,283 (535)
Adjusted operating income (Non-GAAP measure)1 1,777 1,196
Earnings (loss) before interest and income tax provision 3,900 (472)
Net earnings (loss) attributable to
3,580 (391)
Adjusted net earnings attributable to
1,455 947
Diluted net earnings (loss) per common share - continuing operations (GAAP)
4.13 (0.45)
Adjusted diluted net earnings per common share - continuing operations
(Non-GAAP measure)1 1.68 1.09
Percentage increases (decreases)
Three months ended November 30,
2021 2020
Sales 7.8 5.1
Gross profit 14.2 (2.2)
Selling, general and administrative expenses 10.4 (1.3)
Operating income (loss) NM (158.1)
Adjusted operating income (Non-GAAP measure) 1 48.5 (11.0)
Earnings (loss) before interest and income tax provision NM (149.3)
Net earnings (loss) attributable to
NM (150.8)
Adjusted net earnings attributable to
53.5 (15.4)
Diluted net earnings (loss) per common share - continuing operations (GAAP)
NM (152.3)
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)1
53.2 (12.8)
Percent to sales
Three months ended November 30,
2021 2020
Gross margin 22.3 21.1
Selling, general and administrative expenses 18.9 18.4
1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
NM - Not meaningful. Percentage increases above 200% or when one period includes income and other period includes loss are considered not meaningful.
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
Net earnings from continuing operations Net earnings attributable to the Company for the three months endedNovember 30, 2021 was$3.6 billion compared to a net loss of$391 million for the prior year period. Diluted net earnings per share was$4.13 compared to diluted net loss per share of$0.45 for the prior year period. The increases in net earnings and diluted net earnings per share reflect a$2.5 billion after-tax gain due to the remeasurement of the Company's previously held minority equity and debt investments inVillageMD and Shields to fair value during the three months endedNovember 30, 2021 , and a$1.2 billion charge, net of tax, from the company's equity earnings in AmerisourceBergen in the year-ago quarter. Other income for the three months endedNovember 30, 2021 was$2.6 billion compared to$63 million for the prior year quarter. The increase in other income is mainly due to the remeasurement of the Company's previously held equity and debt investments inVillageMD and Shields to fair value during the three months endedNovember 30, 2021 . Net interest expense was$86 million and$136 million for the three months endedNovember 30, 2021 and 2020, respectively. The decrease in interest expense was primarily the result of debt extinguishments completed during fiscal 2021 and lower interest rates on remaining debt. The Company's effective tax rate for the three months endedNovember 30, 2021 was an expense of 7.2 percent, primarily due to lower tax expense on gains from consolidation of the Company's investment inVillageMD and Shields, as a portion of these gains is not subject to tax. See Note 3 Acquisitions, to the Consolidated Condensed Financial Statements for further information. The effective tax rate for the three months endedNovember 30, 2020 was a benefit of 34.0 percent, on a pretax loss for the three months endedNovember 30, 2020 , primarily due to the discrete tax effect of equity losses in AmerisourceBergen. See Note 6 Equity method investments, to the Consolidated Condensed Financial Statements for further information. Adjusted net earnings from continuing operations (Non-GAAP measure) Adjusted net earnings attributable to the Company for the three months endedNovember 30, 2021 increased 53.5 percent to$1.5 billion compared with the prior year quarter. Adjusted diluted net earnings per share for the three months endedNovember 30, 2021 increased 53.2 percent to$1.68 compared with the year-ago quarter. Adjusted diluted net earnings and adjusted diluted net earnings per share were not significantly impacted by currency translation. Excluding the impact of currency translation, the increases in adjusted net earnings for the three months endedNovember 30, 2021 primarily reflect strong adjusted gross profit growth across both pharmacy and retail inthe United States and a continued rebound in International segment sales and profitability. 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 Q1 2022 Form 10-Q 40
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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 November 30,
2021 2020
Sales $ 28,032 $ 27,163
Gross profit 6,347 5,639
Selling, general and administrative expenses 5,091 4,770
Equity earnings (loss) in AmerisourceBergen 100 (1,373)
Operating income (loss) 1,356 (504)
Adjusted operating income (Non-GAAP measure)1 1,690 1,155
Number of prescriptions 2 218.0 204.6
30-day equivalent prescriptions 2,3 313.8 297.3
Number of locations at period end 8,942 9,001
Percentage increases (decreases)
Three months ended November 30,
2021 2020
Sales 3.2 3.9
Gross profit 12.6 (1.3)
Selling, general and administrative expenses 6.7 (0.8)
Operating income (loss) NM (154.9)
Adjusted operating income (Non-GAAP measure) 1 46.3 (11.4)
Comparable sales 4 7.9 3.7
Pharmacy sales 1.1 5.9
Comparable pharmacy sales 4 6.8 5.0
Retail sales 10.1 (2.2)
Comparable retail sales 4 10.6 0.4
Comparable number of prescription 2,4 7.1 (2.5)
Comparable 30-day equivalent prescriptions 2,3,4 6.2 2.7
Percent to sales
Three months ended November 30,
2021 2020
Gross margin 22.6 20.8
Selling, general and administrative expenses 18.2 17.6
1See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures. 2Includes vaccinations, including COVID-19. 3Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription. 4Comparable sales are defined as sales from stores that have been open for at least twelve consecutive months without closure for seven or more consecutive days, including due to looting or store damage, and without a major remodel or being subject to a natural disaster, in the past twelve months as well as e-commerce sales. E-commerce sales include
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS digitally initiated sales online or through mobile applications. Relocated stores are not included as comparable sales for the first twelve months after the relocation. Acquired stores are not included as comparable sales for the first twelve months after acquisition or conversion, when applicable, whichever is later. Comparable sales, comparable pharmacy sales, comparable retail sales, comparable number of prescriptions and comparable number of 30-day equivalent prescriptions refer to total sales, pharmacy sales, retail sales, number of prescriptions and number of 30-day equivalent prescriptions, respectively. Comparable retail sales for previous periods have been restated to include e-commerce sales. The method of calculating comparable sales varies across the retail industry and our method of calculating comparable sales may not be the same as other retailers' methods.
NM - Not meaningful. Percentage increases above 200% or when one period includes income and other period includes loss are considered not meaningful.
Sales for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Sales for the three months endedNovember 30, 2021 increased by 3.2 percent to$28.0 billion . Comparable sales increased by 7.9 percent for the three months endedNovember 30, 2021 . Pharmacy sales increased by 1.1 percent for the three months endedNovember 30, 2021 and represented 75.3 percent of the segment's sales. Excluding AllianceRxWalgreens Prime, pharmacy sales increased by 5.8 percent. The increase is due to higher brand inflation and favorable COVID-19 vaccinations and testing, partially offset by reimbursement pressure. For the three months endedNovember 30, 2020 , pharmacy sales increased 5.9 percent and represented 76.8 percent of the segment's sales. Comparable pharmacy sales increased 6.8 percent for the three months endedNovember 30, 2021 compared to an increase of 5.0 percent in the year-ago quarter. Within comparable sales, prescriptions filled during the three months endedNovember 30, 2021 increased by 6.2 percent from a year earlier, including a positive impact of approximately 5.3 percent from COVID-19 vaccinations. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by 0.3 percent for the three months endedNovember 30, 2021 compared to a reduction of 0.4 percent for the year-ago quarter. The effect of generics on segment sales was a reduction of 0.2 percent for the three months endedNovember 30, 2021 compared to a reduction of 0.3 percent for the year-ago quarter. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were 97.2 percent of prescription sales for the three months endedNovember 30, 2021 compared to 97.5 percent in the year-ago quarter. The total number of prescriptions (including vaccinations) filled for the three months endedNovember 30, 2021 was 218.0 million compared to 204.6 million in the year-ago quarter. Prescriptions (including vaccinations) adjusted to 30-day equivalents were 313.8 million in the three months endedNovember 30, 2021 compared to 297.3 million in the year-ago quarter. Retail sales increased by 10.1 percent for the three months endedNovember 30, 2021 and were 24.7 percent of the segment's sales. In comparison, in the year-ago quarter, retail sales decreased by 2.2 percent and comprised 23.1 percent of the segment's sales. Comparable retail sales increased 10.6 percent in the three months endedNovember 30, 2021 and 0.4 percent in the year-ago quarter. The increase in comparable retail sales in the current quarter was primarily driven by health & wellness, including favorable impact of at-home COVID-19 tests and cough cold flu, as well as beauty and personal care categories, partially offset by the continued de-emphasis of tobacco. Operating income for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Operating income for the three months endedNovember 30, 2021 was$1.4 billion , including$100 million from the Company's share of equity earnings in AmerisourceBergen. This compared with a loss of$504 million in the prior year quarter, including$1.4 billion from Company's equity loss in AmerisourceBergen. Excluding the impact of AmerisourceBergen, the increase was due to gross profit growth across both pharmacy and retail. Gross margin was 22.6 percent for the three months endedNovember 30, 2021 compared to 20.8 percent in the year-ago quarter. Gross margin was positively impacted in the current quarter by pharmacy margins, primarily due to COVID-19 vaccinations and testing. The increase in pharmacy margins was partially offset by reimbursement pressure. Retail margin was negatively impacted by shrink and increased import freight costs for the three months endedNovember 30, 2021 . Selling, general and administrative expenses as a percentage of sales were 18.2 percent for the three months endedNovember 30, 2021 and 17.6 percent for the three months endedNovember 30, 2020 . Costs related to COVID-19 vaccinations and testing were partially offset by savings related to the Company's Transformational Cost Management Program.
WBA Q1 2022 Form 10-Q 42
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Adjusted operating income (Non-GAAP measure) for the three months endedNovember 30, 2021 and 2020 Adjusted operating income for the three months endedNovember 30, 2021 increased by 46.3 percent to$1.7 billion . The increase was primarily due to adjusted gross profit growth across both pharmacy and retail.
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
International
The Company's International segment consists of pharmacy-led health and beauty retail businesses outside theU.S. and pharmaceutical wholesaling and distribution business inGermany . Pharmacy-led health and beauty retail businesses include Boots branded stores in theUK , theRepublic of Ireland andThailand , the Benavides brand inMexico and the Ahumada brand inChile . Sales for these businesses are principally derived from the sale of prescription drugs and health and wellness, beauty, personal care and other consumer products. The International segment operates in currencies other than theU.S. dollar, including the British pound sterling, Euro, Chilean peso and Mexican peso and therefore the segment's results are impacted by movements in foreign currency exchange rates. See Item 3, "Quantitative and qualitative disclosure about market risk, foreign currency exchange rate risk", for further information on currency risk. The Company presents certain information related to operating results in "constant currency," which is a non-GAAP financial measure. Comparable sales in constant currency, comparable pharmacy sales in constant currency and comparable retail sales in constant currency exclude the effects of fluctuations in foreign currency exchange rates. See "--Non-GAAP Measures." FINANCIAL PERFORMANCE (in millions, except location amounts) Three months ended November 30, 2021 2020 Sales$ 5,818 $ 4,285 Gross profit 1,207 990 Selling, general and administrative expenses 1,153 952 Operating income 54 39 Adjusted operating income (Non-GAAP measure)1 164 87 Number of locations at period end 4,020 4,116 Percentage increases (decreases) Three months ended November 30, 2021 2020 Sales 35.8 13.4 Gross profit 21.9 (6.9) Selling, general and administrative expenses 21.1 (6.0) Operating income 39.8 (25.1) Adjusted operating income (Non-GAAP measure) 1 89.0 (1.0) Comparable sales in constant currency 2 12.0 (3.1) Pharmacy sales 13.6 (0.3) Comparable pharmacy sales in constant currency 2 9.2 3.7 Retail sales 18.0 (10.3) Comparable retail sales in constant currency 2 13.7 3.8 WBA Q1 2022 Form 10-Q 43
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Percent to sales Three months ended November 30, 2021 2020 Gross margin 20.7 23.1 Selling, general and administrative expenses 19.8
22.2
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 inGermany . 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 and our method of calculating comparable sales in constant currency may not be the same as other retailers' methods.
NM - Not meaningful. Percentage increases above 200% or when one period includes income and other period includes loss are considered not meaningful.
Sales for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Sales for the three months endedNovember 30, 2021 increased 35.8 percent to$5.8 billion , which includes incremental sales associated with the Company's pharmaceutical wholesale combined business inGermany . The favorable impact of currency translation on sales was 1.6 percentage points. Comparable sales in constant currency increased 12.0 percent, mainly due to higher sales in BootsUK . Sales in the comparable year ago-quarter include the adverse impact of strict COVID-19 restrictions on store footfall, as theUK entered a second national lockdown inNovember 2020 . Pharmacy sales increase 13.6 percent in the three months endedNovember 30, 2021 and represented 17.5 percent of the segment's sales. The favorable impact of currency translation on pharmacy sales was 4.6 percentage points. Comparable pharmacy sales in constant currency increased 9.2 percent, primarily in theUK , reflecting stronger demand for pharmacy services. Retail sales increased 18.0 percent for the three months endedNovember 30, 2021 and represented 30.9 percent of the segment's sales. The favorable impact of currency translation on retail sales was 4.4 percentage points. Comparable retail sales in constant currency increased 13.7 percent reflecting higher retail sales in theUK , including a recovery in store footfall compared to a year ago-quarter, as COVID-19 restrictions were lifted. Footfall on theUK high street remains below pre-COVID-19 levels. Operating income for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Operating income for the three months endedNovember 30, 2021 increased 39.8 percent to$54 million . Operating income was negatively impacted by 3.8 percentage points ($1 million ) as a result of currency translation. Excluding the impact of currency translation, the increase in operating income was primarily in theUK , reflecting recovery inUK footfall, following the lifting of COVID-19 restrictions. This was partially offset by higher costs associated with the Company's wholesale business inGermany . Gross profit increased 21.9 percent for the three months endedNovember 30, 2021 . Gross profit was favorably impacted by 3.7 percentage points ($37 million ) as a result of currency translation. The remaining increase was primarily due to higher retail sales and stronger demand for pharmacy services in theUK , together with the incremental gross profit associated with the Company's pharmaceutical wholesale business inGermany . This was partially offset by higherNHS reimbursement levels in the year ago quarter.
WBA Q1 2022 Form 10-Q 44
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Selling, general and administrative expenses increased 21.1 percent for the three months endedNovember 30, 2021 . Expenses were adversely impacted by 4.0 percentage points ($38 million ) as a result of currency translation. Excluding the impact of currency translation, the increase reflects increased investments in acquisition related activity compared to the year-ago quarter, incremental expenses associated with the Company's wholesale business inGermany and the non-recurring COVID-19 related government support in the year ago quarter. As a percentage of sales, selling, general and administrative expenses were 19.8 percent in the three months endedNovember 30, 2021 compared to 22.2 percent in the year-ago quarter. Adjusted operating income (Non-GAAP measure) for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Adjusted operating income for the three months endedNovember 30, 2021 increased 89.0 percent to$164 million . Adjusted operating income in the quarter was not significantly impacted by currency translation. Excluding the impact of currency translation, the increase in adjusted operating income was primarily in theUK , reflecting higher retail sales and stronger demand for pharmacy services.
See "--Non-GAAP Measures" below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP and related disclosures.
Walgreens Health The Company'sWalgreens Health segment currently consists ofWalgreens Health , an organically developed consumer-centric omni-channel business that contracts with payors and providers to deliver clinical healthcare services to their members through both digital and physical channels; a majority equity ownership position inVillageMD , a leading, national provider of value-based primary care services; a majority equity ownership position in Shields, a specialty pharmacy integrator and accelerator for hospitals. FINANCIAL PERFORMANCE (in
millions, except location amounts)
Three months ended November 30,
2021 2020
Sales $ 51 $ -
Gross profit 20 -
Selling, general and administrative expenses 65 3
Operating (loss) (45) (3)
Adjusted operating (loss) (Non-GAAP measure)1 (13) (3)
Number of payor/provider partnerships at period end 2 -
Number of locations with
45 -
Number of VillageMD co-located clinics at period end 72 -
WBA Q1 2022 Form 10-Q 45
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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.
Sales for the three months ended
Operating income for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Operating loss for the three months endedNovember 30, 2021 was$45 million , compared to a loss of$3 million in the year-ago quarter. Selling, general and administrative expenses were$65 million for the three months endedNovember 30, 2021 compared to$3 million for the three months endedNovember 30, 2020 . Selling, general and administrative expenses reflect the two acquisitions and accelerating of investments inWalgreens Health for the three months endedNovember 30, 2021 . Adjusted operating income (Non-GAAP measure) for the three months endedNovember 30, 2021 compared to three months endedNovember 30, 2020 Adjusted operating loss was$13 million for the three months endedNovember 30, 2021 , reflecting the two acquisitions and accelerating of investments inWalgreens Health compared to a loss of$3 million in the year-ago quarter. 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 theSEC rules, 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 herein, which are not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP. See notes to the "Net Earnings (loss) From Continuing Operations (GAAP)" to "Adjusted diluted net earnings per common share (Non-GAAP measure)" reconciliation table for definitions of non-GAAP financial measures and related adjustments presented below. These supplemental non-GAAP financial measures are presented because management has evaluated the Company's financial results both including and excluding the adjusted items or the effects of foreign currency translation, as applicable, and believes that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of the Company from period to period and trends in the Company's historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented herein. The Company does not provide a reconciliation for non-GAAP estimates on a forward-looking basis where it is unable to provide a meaningful or accurate calculation or estimation of reconciling items and the information is not available without unreasonable effort. This is due to the inherent difficulty of forecasting the timing or amount of various items that have not yet occurred, are out of the Company's control or cannot be reasonably predicted, and that would impact the most directly comparable forward-looking GAAP financial measure. These items may include but are not limited to merger integration expenses, restructuring charges, acquisition-related costs, asset impairments and other significant items that currently cannot be predicted without unreasonable efforts. For the same reasons, the Company is unable to address the probable significance of the unavailable information. Forward-looking non-GAAP financial measures may vary materially from the corresponding GAAP financial measures. 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. WBA Q1 2022 Form 10-Q 46
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
Operating income to Adjusted operating income by segments
(in millions)
Three months ended November 30, 2021
United States International Walgreens Health Corporate and Walgreens Boots
Other Alliance, Inc.
Operating income (loss) (GAAP) 1,356 54 (45) (82) 1,283
Transformational cost management 141 54 - 9
203
Acquisition-related amortization 140 17 8 - 165 Acquisition-related costs (3) 39 24 11 71 Adjustments to equity earnings in AmerisourceBergen 43 - - - 43 LIFO provision 14 - - - 14 Adjusted operating income (loss) (Non-GAAP measure)$ 1,690 $ 164 (13)$ (63) $ 1,777 (in millions) Three months ended November 30, 2020 United States InternationalWalgreens Health Corporate and Walgreens Boots Other Alliance, Inc. Operating income (loss) (GAAP)$ (504) $ 39 $ (3)$ (66) $
(535)
Transformational cost management 60 27 - 12 100 Acquisition-related amortization 76 19 - - 95 Acquisition-related costs 8 2 - 12 21 Adjustments to equity earnings (loss) in AmerisourceBergen 1,481 - - - 1,481 LIFO provision 33 - - - 33 Adjusted operating income (loss) (Non-GAAP measure)$ 1,155 $ 87 $ (3)$ (42) $ 1,196 WBA Q1 2022 Form 10-Q 47
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Net Earnings to Adjusted net earnings & Earnings per share to Adjusted Earnings per share (in millions) Three months endedNovember 30, 2021 2020 Net earnings (loss) from continuing operations (GAAP)
Adjustments to operating income (loss): Transformational cost management 1 203 100 Acquisition-related amortization 2 165 95 Acquisition-related costs 3 71 21 Adjustments to equity earnings (loss) in AmerisourceBergen 4 43 1,481 LIFO provision 5 14 33 Total adjustments to operating income (loss) 495 1,731 Adjustments to other income: Net investment hedging loss 6 1 9 Gain on previously held investments 7 (2,576) - Total adjustments to other income (2,574) 9
Adjustments to income tax provision (benefit):
Equity method non-cash tax 8 18 (346) Tax impact of adjustments 8 (26) (61) Total adjustments to income tax provision (benefit) (8) (407)
Adjustments to post tax (loss) earnings in other equity method investments: Adjustments to equity earnings in other equity method investments 9
15 13
Total adjustments to post tax (loss) earnings from other equity method
investments 15 13
WBA Q1 2022 Form 10-Q 48
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
Adjustments to net (loss) earnings attributable to noncontrolling interests: Transformational cost management 1
(1) -
Acquisition-related amortization 2 (32) (4)
Acquisition-related costs 3 (17) -
LIFO provision 5 - (3)
Total adjustments to net (loss) earnings attributable to noncontrolling interests
(50) (8)
Adjusted net earnings attributable to Continuing Operations (Non-GAAP measure)
- 83
Transformational cost management 1 - 4
Acquisition-related amortization 2 - 21
Acquisition-related costs 3 - 2
Tax impact of adjustments 8 - (5)
Total adjustments to net earnings (loss) attributable to
$ -
Adjusted net earnings attributable to
$ -
Adjusted net earnings attributable to
Diluted net earnings per common share - continuing operations (GAAP) 10
$ 4.13 $ (0.45) Adjustments to operating income 0.57 2.00 Adjustments to other income (2.97) 0.01 Adjustments to income tax provision (benefit) (0.01) (0.47)
Adjustments to post tax (loss) earnings from other equity method investments 9
0.02 0.01
Adjustments to net (loss) earnings attributable to noncontrolling interests
(0.06) (0.01)
Adjusted diluted net earnings per common share - continuing operations (Non-GAAP measure)
Diluted net earnings per common share - discontinued operations (GAAP)
$ -
- 0.03
Adjusted diluted net earnings per common share - discontinued operations (Non-GAAP measure)
$ - $ 0.12
Adjusted diluted net earnings per common share (Non-GAAP measure) $ 1.68 $ 1.22
Weighted average common shares outstanding, diluted (in millions) 11 867.6 865.3
WBA Q1 2022 Form 10-Q 49
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS
1 Transformational Cost Management 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. 2 Acquisition-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 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. 3 Acquisition-related costs are transaction and integration costs associated with certain
merger, acquisition and divestitures related activities. These costs include all charges
incurred on certain mergers, acquisition and divestitures related activities, for example,
including costs related to integration efforts for successful merger, acquisition and
divestitures activities. Examples of such costs include deal costs, severance and stock
compensation. These charges are primarily recorded within selling, general and
administrative expenses. These costs are significantly impacted by the timing and
complexity of the underlying merger, acquisition and divestitures related activities and
do not reflect the Company's current operating performance. 4 Adjustments to equity earnings (loss) in AmerisourceBergen consist of the Company's
proportionate share of non-GAAP adjustments reported by AmerisourceBergen consistent with
the Company's non-GAAP measures. The Company recognized equity losses in AmerisourceBergen
of
primarily due to AmerisourceBergen's recognition of
related to its ongoing opioid litigation in its financial statements for the three months
period ended
("LIFO") method. This adjustment represents the impact on cost of sales as if the United
States segment inventory is accounted for using first-in first-out ("FIFO") method. The
LIFO provision is affected by changes in inventory quantities, product mix, and
manufacturer pricing practices, which may be impacted by market and other external
influences. Therefore, the Company cannot control the amounts recognized or timing of
these items. 6 Gain or loss on certain derivative instruments used as economic hedges of the Company's
net investments in foreign subsidiaries. These charges are recorded within other income
(loss). We do not believe this volatility related to mark-to-market adjustment on the
underlying derivative instruments reflects the Company's operational performance. 7 Includes significant gains on business combinations due to the remeasurement of previously
held minority equity interests and debt securities to fair value. During the three months
ended
million for
provision (benefit) commensurate with non-GAAP adjustments and certain discrete tax items
including
within income tax provision (benefit). 9 Adjustments to post tax (loss) 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 (loss) earnings from other equity method investments. Although
the Company may have shareholder rights and board representation commensurate with its
ownership interests in these equity method investees, adjustments relating to equity
method investments are not intended to imply that the Company has direct control over
their operations and resulting revenue and expenses. Moreover, these non-GAAP financial
measures have limitations in that they do not reflect all revenue and expenses of these
equity method investees. 10 Due to the anti-dilutive effect resulting from the reported net loss, the impact of
potentially dilutive securities on the per share amounts has been omitted from the
quarterly calculation of weighted-average common shares outstanding for diluted EPS for
the three months ended
weighted-average common shares, diluted for adjusted diluted net earnings per common share
calculation purposes for the three months ended
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. WBA Q1 2022 Form 10-Q 50
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS LIQUIDITY AND CAPITAL RESOURCES The Company's long-term capital policy is to: maintain a strong balance sheet and financial flexibility; reinvest in its core strategies; invest in strategic opportunities that reinforce its core strategies and meet return requirements; and return surplus cash flow to stockholders in the form of dividends and share repurchases over the long term. InJune 2018 , the Company's Board of Directors reviewed and refined the Company's dividend policy to set forth the Company's current intention to increase its dividend each year. The Company's cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that the Company may complete may also impact its cash requirements. Additionally, the Company's cash requirements, and its ability to generate cash flow, have been and may continue to be adversely affected by COVID-19 and the resulting market volatility and instability. For further information regarding the impact of COVID-19 on the Company, including on its liquidity and capital resources, please see Item 1A, Risk factors in the 2021 10-K. The Company expects to fund its working capital needs, capital expenditures, pending acquisitions, continuing obligations for recently completed acquisitions, dividend payments and debt service obligations from liquidity sources including cash flow from operations, availability under existing credit facilities, commercial paper programs, working capital financing arrangements and current cash and investment balances. The Company believes that these sources, and the ability to obtain other financing will provide adequate cash funds for the Company's foreseeable working capital needs, capital expenditures, pending acquisitions, dividend payments and debt service obligations for at least the next 12 months. See Part II. Item 3, Qualitative and quantitative disclosures about market risk, below for a discussion of certain financing and market risks. Cash, cash equivalents and restricted cash were$4.3 billion (including$286 million in non-U.S. jurisdictions) as ofNovember 30, 2021 compared to$1.3 billion (including$204 million in non-U.S. jurisdictions) as ofAugust 31, 2021 . 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. OnNovember 24, 2021 ,VillageMD commenced a tender offer to purchase up to$1.9 billion of units inVillageMD for cash. As ofNovember 30, 2021 , the Company recorded the$1.9 billion as redeemable non-controlling interest. The tender offer was fully subscribed and settled onDecember 28, 2021 . The tender offer was funded by cash proceeds provided toVillageMD pursuant to the Unit Purchase Agreement. The Company has also previously announced its intention to make further cash investments for the acquisition ofCareCentrix . Additionally, certain acquisitions include put options which may be exercised in the future. The Company currently expect that the incremental investment resulting from the exercise of the put options in the future could be between approximately$1.3 billion and$1.6 billion . As ofNovember 30, 2021 , the Company had an aggregate borrowing capacity of$9 billion , including funds already drawn. AtNovember 30, 2021 , the Company had no guarantees outstanding and no amounts issued under letters of credit. See Note 8 Debt, to the Consolidated Condensed Financial Statements for further information on the Company's debt instruments and its recent financing actions. Cash flows from operating activities Cash provided by operations and the incurrence of debt are the principal sources of funds for expansion, investments, acquisitions, remodeling programs, dividends to stockholders and stock repurchases. Net cash provided by operating activities for the three months endedNovember 30, 2021 was$1.1 billion , compared to$1.2 billion for the prior year period. The decrease in cash provided by operating activities reflects higher cash outflows from inventories and lower cash inflows from accrued expenses and other liabilities, partially offset by an increase in operating performance. Changes in inventories and accrued expenses and other liabilities are mainly driven by timing. Cash flows from investing activities Net cash used for investing activities was$2.0 billion for the three months endedNovember 30, 2021 compared to$0.3 billion for the prior-year period. Net cash used for investing activities for the three months endedNovember 30, 2021 includes business acquisitions, net of cash acquired ofVillageMD and Shields for$0.8 billion and$0.9 billion , respectively. Net cash used for the business acquisition ofVillageMD includes net consideration of$2.9 billion of which$1.9 billion was held as cash byVillageMD onNovember 30, 2021 , and subsequently used for the tender offer which completed onDecember 28, 2021 . See Note 3 Acquisitions, to the Consolidated Condensed Financial Statement for further information. WBA Q1 2022 Form 10-Q 51
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WALGREENS BOOTS ALLIANCE , INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS Capital Expenditure Capital expenditure includes information technology projects and other growth initiatives. Additions to property, plant and equipment were as follows (in millions): Three months ended November 30, 2021 2020 United States $ 355$ 343 International 84 59Walgreens Health 15 10 Discontinued operations - 20 Total $ 454$ 431 Cash flows from financing activities Net cash used for financing activities for the three months endedNovember 30, 2021 was$3.9 billion compared to$352 million in the prior-year period. In the three months endedNovember 30, 2021 there were$8.9 billion in proceeds from debt, primarily from revolving credit facilities and the issuance of notes, compared to$3.0 billion in proceeds from debt in three months endedNovember 30, 2020 . In the three months endedNovember 30, 2021 there were$4.4 billion in payments of debt made primarily for revolving credit facilities and commercial paper debt compared to$2.8 billion in three months endedNovember 30, 2020 . See Note 8 Debt, to the Consolidated Condensed Financial Statement for further information. The Company repurchased shares totaling$154 million in the three months endedNovember 30, 2021 to support the needs of its employee stock plans compared to$110 million in the prior year period which also included stock repurchase program described below. Cash dividends paid were$413 million during the three months endedNovember 30, 2021 compared to$405 million for the prior year period.
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 ofNovember 30, 2021 . TheJune 2018 stock repurchase program has no specified expiration date. InJuly 2020 , the Company suspended repurchases under this program. The Company may continue to repurchase stock to offset anticipated dilution from equity incentive plans. The Company determines the timing and amount of repurchases, including repurchases to offset anticipated dilution from equity incentive plans, based on its assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the economic environment. The Company has repurchased, and may from time to time in the future repurchase, shares on the open market through Rule 10b5-1 plans, which enable the Company to repurchase shares at times when we otherwise might be precluded from doing so under federal securities laws. Debt covenants Each of the Company's credit facilities described in Note 8 Debt, to the Consolidated Condensed Financial Statements, 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. The credit facilities also contain various other customary covenants. As ofNovember 30, 2021 , the Company was in compliance with all such applicable covenants. Credit ratings As ofJanuary 5, 2022 , the credit ratings ofWalgreens Boots Alliance were: Rating agency Long-term debt rating Commercial paper rating Outlook Moody's Baa2 P-2 Negative Standard & Poor's BBB A-2 Stable WBA Q1 2022 Form 10-Q 52
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS 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. CRITICAL ACCOUNTING ESTIMATES 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 Consolidated Statements of Earnings and corresponding Consolidated Balance Sheets 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 2021 10-K. 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. 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 made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These include, without limitation, any statements regarding the Company's future operations, financial or operating results, capital allocation, anticipated debt levels and ratios, future earnings, planned activities, anticipated growth, market opportunities, strategies, competition, and other expectations and targets for future periods. Words such as "expect," "likely," "outlook," "forecast," "preliminary," "pilot," "project," "intend," "plan," "goal," "target," "aim," "continue," "believe," "seek," "anticipate," "upcoming," "may," "possible," and variations of such words and similar expressions are intended to identify such forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated. These risks, assumptions and uncertainties include those described in Item 1A, Risk factors, above, which are incorporated herein by reference, and in other documents that we file or furnish with theSEC . If one or more of these risks or uncertainties materializes, or if underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. All forward-looking statements we make or that are made on our behalf are qualified by these cautionary statements. Accordingly, you should not place undue reliance on these forward-looking statements, which speak only as of the date they are made. We do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date of this report, whether as a result of new information, future events, changes in assumptions or otherwise. WBA Q1 2022 Form 10-Q 53
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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
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