Walgreens Boots Alliance Exceeds Expectations for Fiscal 2022 First Quarter Earnings and Raises Guidance for Fiscal Year

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(UNAUDITED)

(in millions, except per share amounts)

Three months ended November 30,

2021

2020

Sales

$

33,901

$

31,438

Cost of sales

26,326

24,808

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

)

Other income

2,617

63

Earnings (loss) before interest and tax

3,900

(472

)

Interest expense, net

86

136

Earnings (loss) before tax

3,814

(607

)

Income tax provision (benefit)

275

(207

)

Post tax (loss) earnings from other equity method investments

(7

)

15

Net earnings (loss) from continuing operations

3,531

(385

)

Net earnings from discontinued operations

—

87

Net earnings (loss)

3,531

(299

)

Net (loss) earnings attributable to noncontrolling interests - continuing operations

(48

)

5

Net earnings attributable to noncontrolling interests - discontinued operations

—

4

Net earnings (loss) attributable to Walgreens Boots Alliance, Inc.

3,580

(308

)

Net earnings (loss) attributable to Walgreens Boots Alliance, Inc.:

Continuing operations

$

3,580

$

(391

)

Discontinued operations

—

83

Total

$

3,580

$

(308

)

Basic net earnings (loss) per common share:

Continuing operations

$

4.13

$

(0.45

)

Discontinued operations

—

0.10

Total

$

4.13

$

(0.36

)

Diluted net earnings (loss) per common share:

Continuing operations

$

4.13

$

(0.45

)

Discontinued operations

—

0.10

Total

$

4.13

$

(0.36

)

Weighted average common shares outstanding:

Basic

865.8

865.3

Diluted

867.6

865.3

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(in millions)

November 30,
2021

August 31,
2021

Assets

Current assets:

Cash and cash equivalents

$

4,135

$

1,193

Accounts receivable, net

5,960

5,663

Inventories

9,475

8,159

Other current assets

745

800

Total current assets

20,314

15,814

Non-current assets:

Property, plant and equipment, net

12,295

12,247

Operating lease right-of-use assets

21,826

21,893

Goodwill

21,520

12,421

Intangible assets, net

12,770

9,936

Equity method investments

6,367

6,987

Other non-current assets

1,413

1,987

Total non-current assets

76,192

65,471

Total assets

$

96,507

$

81,285

Liabilities, redeemable noncontrolling interest and equity

Current liabilities:

Short-term debt

$

2,647

$

1,305

Trade accounts payable

12,452

11,136

Operating lease obligations

2,266

2,259

Accrued expenses and other liabilities

6,973

7,260

Income taxes

110

94

Total current liabilities

24,447

22,054

Non-current liabilities:

Long-term debt

11,199

7,675

Operating lease obligations

22,103

22,153

Deferred income taxes

1,970

1,850

Other non-current liabilities

3,422

3,413

Total non-current liabilities

38,694

35,091

Redeemable noncontrolling interest

2,787

319

Total equity

30,579

23,822

Total liabilities, redeemable noncontrolling interest and equity

$

96,507

$

81,285

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)

Three months ended November 30,

2021

2020

Cash flows from operating activities:

Net earnings

$

3,531

$

(299

)

Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization

500

475

Deferred income taxes

164

(348

)

Stock compensation expense

35

36

Equity (earnings) loss from equity method investments

(93

)

1,350

Gain on previously held investment interests

(2,576

)

—

Other

95

(71

)

Changes in operating assets and liabilities:

Accounts receivable, net

(127

)

(259

)

Inventories

(1,352

)

(1,225

)

Other current assets

(58

)

36

Trade accounts payable

1,335

1,398

Accrued expenses and other liabilities

(399

)

(105

)

Income taxes

79

132

Other non-current assets and liabilities

(36

)

74

Net cash provided by operating activities

1,099

1,195

Cash flows from investing activities:

Additions to property, plant and equipment

(454

)

(431

)

Proceeds from sale-leaseback transactions

202

231

Business, investment and asset acquisitions, net of cash acquired

(1,800

)

(77

)

Other

95

19

Net cash (used for) investing activities

(1,958

)

(259

)

Cash flows from financing activities:

Net change in short-term debt with maturities of 3 months or less

937

(347

)

Proceeds from debt

7,940

3,310

Payments of debt

(4,444

)

(2,807

)

Stock purchases

(154

)

(110

)

Proceeds related to employee stock plans

19

4

Cash dividends paid

(413

)

(405

)

Other

(7

)

4

Net cash provided by (used for) financing activities

3,877

(352

)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(20

)

10

Changes in cash, cash equivalents and restricted cash:

Net increase in cash, cash equivalents and restricted cash

2,998

594

Cash, cash equivalents and restricted cash at beginning of period

1,270

746

Cash, cash equivalents and restricted cash at end of period

$

4,268

$

1,339

NET EARNINGS (LOSS) AND DILUTED NET EARNINGS (LOSS) PER SHARE

Three months ended November 30,

2021

2020

Net earnings (loss) from continuing operations (GAAP)

$

3,580

$

(391

)

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 (gain) loss6

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 equity earnings from 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

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)

$

1,455

$

948

Net earnings attributable to Walgreens Boots Alliance, Inc. – discontinued operations (GAAP)

—

83

Acquisition-related amortization 2

—

21

Acquisition-related costs 3

—

2

Transformational cost management 1

—

4

Tax impact of adjustments 8

—

(5

)

Total adjustments to net earnings attributable to Walgreens Boots Alliance, Inc. – discontinued operations

$

—

$

22

Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. - discontinued operations (Non-GAAP measure)

$

—

$

105

Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)

$

1,455

$

1,052

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)

$

1.68

$

1.09

Diluted net earnings per common share - discontinued operations (GAAP)

$

—

$

0.10

Total adjustments to net earnings (loss) attributable to Walgreens Boots Alliance, Inc. – discontinued operations

—

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

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 $1,373 million during the three months ended November 30, 2020. These equity losses are primarily due to AmerisourceBergen's 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.

5

The Company’s United States segment inventory is accounted for using the last-in-first-out (“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 November 30, 2021, the Company recorded such pretax gains of $2,174 million and $402 million for VillageMD and Shields respectively.

8

Adjustments to income tax provision (benefit) include adjustments to the GAAP basis tax provision (benefit) commensurate with non-GAAP adjustments and certain discrete tax items including U.S. tax law changes and equity method non-cash tax. These charges are recorded 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 November 30, 2020.

11

Includes impact of potentially dilutive securities in the quarterly calculation of weighted-average common shares, diluted for adjusted diluted net earnings per common share calculation purposes for the three months ended November 30, 2020.

(in millions)

Three months ended November 30, 2021

United States1

International

Walgreens
Health

Corporate and
Other

Walgreens Boots
Alliance, Inc.

Sales

$

28,032

$

5,818

$

51

$

—

$

33,901

Gross profit (GAAP)

$

6,347

$

1,207

$

20

$

—

$

7,574

LIFO provision

14

—

—

—

14

Acquisition-related amortization

7

—

—

—

7

Adjusted gross profit (Non-GAAP measure)

$

6,368

$

1,207

$

20

$

—

$

7,595

Selling, general and administrative expenses (GAAP)

$

5,091

$

1,153

$

65

$

82

$

6,391

Acquisition-related costs

3

(39

(24

(11

(71

Transformational cost management

(141

(54

—

(9

(203

Acquisition-related amortization

(133

(17

(8

—

(158

Adjusted selling, general and administrative expenses (Non-GAAP measure)

$

4,821

$

1,043

$

33

$

64

$

5,961

Operating income (loss) (GAAP)

$

1,356

$

54

$

(45

$

(82

$

1,283

Adjustments to equity earnings in AmerisourceBergen

43

—

—

—

43

Acquisition-related amortization

140

17

8

—

165

Transformational cost management

141

54

—

9

203

LIFO provision

14

—

—

—

14

Acquisition-related costs

(3

39

24

11

71

Adjusted operating income (loss) (Non-GAAP measure)

$

1,690

$

164

$

(13

$

(63

$

1,777

Gross margin (GAAP)

22.6

%

20.7

%

40.3

%

22.3

%

Adjusted gross margin (Non-GAAP measure)

22.7

%

20.7

%

40.3

%

22.4

%

Selling, general and administrative expenses percent to sales (GAAP)

18.2

%

19.8

%

128.9

%

18.9

%

Adjusted selling, general and administrative expenses percent to sales (Non-GAAP measure)

17.2

%

17.9

%

65.5

%

17.6

%

Operating margin2

4.5

%

0.9

%

(88.6)

%

3.5

%

Adjusted operating margin (Non-GAAP measure)2

5.5

%

2.8

%

(25.2)

%

4.8

%

1

Operating income (loss) for United States includes equity earnings (loss) in AmerisourceBergen. As a result of the two-month reporting lag, operating income (loss) for the three month period ended November 30, 2021 includes AmerisourceBergen equity earnings (loss) for the period of July 1, 2021 through September 30, 2021. Operating income (loss) for the three month period ended November 30, 2020 includes AmerisourceBergen equity earnings (loss) for the period of July 1, 2020 through September 31, 2020.

2

Operating margins and adjusted operating margins have been calculated excluding equity earnings (loss) in AmerisourceBergen and adjusted equity earnings (loss) in AmerisourceBergen, respectively.

(in millions)

Three months ended November 30, 2020

United States1

International

Walgreens
Health3

Corporate and
Other

Walgreens Boots
Alliance, Inc.

Sales

$

27,163

$

4,285

$

—

$

(10

)

$

31,438

Gross profit (GAAP)

$

5,639

$

990

$

—

$

1

$

6,630

Transformational cost management

(1

)

—

—

—

(1

)

LIFO provision

33

—

—

—

33

Adjusted gross profit (Non-GAAP measure)

$

5,671

$

990

$

—

$

1

$

6,663

Selling, general and administrative expenses (GAAP)

$

4,770

$

952

$

3

$

67

$

5,792

Acquisition-related amortization

(76

)

(19

)

—

—

(95

)

Transformational cost management

(61

)

(27

)

—

(12

)

(100

)

Acquisition-related costs

(8

)

(2

)

—

(12

)

(21

)

Adjusted selling, general and administrative expenses (Non-GAAP measure)

$

4,625

$

904

$

3

$

43

$

5,574

Operating income (loss) (GAAP)

$

(504

)

$

39

$

(3

)

$

(66

)

$

(535

)

Adjustments to equity earnings (loss) in AmerisourceBergen

1,481

—

—

—

1,481

Acquisition-related amortization

76

19

—

—

95

Transformational cost management

60

27

—

12

100

LIFO provision

33

—

—

—

33

Acquisition-related costs

8

2

—

12

21

Adjusted operating income (loss) (Non-GAAP measure)

$

1,155

$

87

$

(3

)

$

(42

)

$

1,196

Gross margin (GAAP)

20.8

%

23.1

%

—

%

21.1

%

Adjusted gross margin (Non-GAAP measure)

20.9

%

23.1

%

—

%

21.2

%

Selling, general and administrative expenses percent to sales (GAAP)

17.6

%

22.2

%

—

%

18.4

%

Adjusted selling, general and administrative expenses percent to sales (Non-GAAP measure)

17.0

%

21.1

%

—

%

17.7

%

Operating margin2

3.2

%

0.9

%

—

%

2.7

%

Adjusted operating margin (Non-GAAP measure)2

3.9

%

2.0

%

—

%

3.5

%

1

Operating income (loss) for United States includes equity earnings (loss) in AmerisourceBergen. As a result of the two-month reporting lag, operating income (loss) for the three month period ended November 30, 2021 includes AmerisourceBergen equity earnings (loss) for the period of July 1, 2021 through September 30, 2021. Operating income (loss) for the three month period ended November 30, 2020 includes AmerisourceBergen equity earnings (loss) for the period of July 1, 2020 through September 31, 2020.

2

Operating margins and adjusted operating margins have been calculated excluding equity earnings (loss) in AmerisourceBergen and adjusted equity earnings (loss) in AmerisourceBergen, respectively.

3

Fiscal 2021 data related to Walgreens Health operating segment has been reclassified to conform to the current period presentation.

Three months ended November 30,

2021

2020

Equity earnings in AmerisourceBergen (GAAP)

$

100

$

(1,373

)

Acquisition-related intangibles amortization

35

30

Employee severance, litigation, and other

13

1,548

Impairment of non-customer note receivable

4

—

Gains from antitrust litigation settlements

3

—

Impairment of assets

3

3

Tax reform

3

(100

)

Goodwill impairment

2

—

Certain discrete tax benefits

—

6

New York State Opioid Stewardship Act

—

3

LIFO credit

(1

)

(7

)

Non-controlling interest

(2

)

—

Gain on remeasurement of equity investment

(18

)

—

Adjusted equity earnings in AmerisourceBergen (Non-GAAP measure)

$

143

$

108

Three months ended November 30, 2021

Three months ended November 30, 2020

Earnings
before
income tax
provision

Income tax
provision

Effective
tax rate

Earnings
before
income tax
provision

Income tax
provision

Effective
tax rate

Effective tax rate (GAAP)

$

3,814

$

275

7.2

%

$

(607

)

$

(207

)

.

(34.0

)%

Impact of non-GAAP adjustments

(2,080

)

4

1,740

55

Equity method non-cash tax

—

(18

)

—

346

Adjusted tax rate true-up

—

22

—

6

Subtotal

$

1,733

$

284

$

1,132

$

200

Exclude adjusted equity earnings in AmerisourceBergen

(143

)

—

(108

)

—

Adjusted effective tax rate excluding adjusted equity earnings in AmerisourceBergen (Non-GAAP measure)

$

1,591

$

284

17.8

%

$

1,024

$

200

19.5

%

FREE CASH FLOW

Three months ended November 30,

2021

2020

Net cash provided by operating activities (GAAP)

$

1,099

$

1,195

Less: Additions to property, plant and equipment - as reported

(454

(431

Free cash flow - (Non-GAAP measure)1

$

645

$

763

1

Free cash flow is defined as net cash provided by operating activities in a period less additions to property, plant and equipment (capital expenditures) made in that period. This measure does not represent residual cash flows available for discretionary expenditures as the measure does not deduct the payments required for debt service and other contractual obligations or payments for future business acquisitions. Therefore, we believe it is important to view free cash flow as a measure that provides supplemental information to our entire statements of cash flows.