Walgreens 2012 Annual Report Download - page 23

Liquidity and Capital Resources
Cash and cash equivalents were $1.3 billion at August 31, 2012, compared to
$1.6 billion at August 31, 2011. Short-term investment objectives are to minimize
risk, maintain liquidity and maximize after-tax yields. To attain these objectives,
investment limits are placed on the amount, type and issuer of securities.
Investments are principally in U.S. Treasury market funds.
On October 14, 2009, our Board of Directors approved a long-term capital policy:
to maintain a strong balance sheet and financial flexibility; reinvest in our core
strategies; invest in strategic opportunities that reinforce our core strategies and
meet return requirements; and return surplus cash flow to shareholders in the form
of dividends and share repurchases over the long term.
Net cash provided by operating activities was $4.4 billion at August 31, 2012,
compared to $3.6 billion a year ago. The increase was primarily as a result of changes
in working capital balances including reduced inventory levels. Cash provided by
operations is the principal source of funds for expansion, investments, acquisitions,
remodeling programs, dividends to shareholders and stock repurchases.
Net cash used for investing activities was $5.9 billion versus $1.5 billion last year.
Additions to property and equipment were $1.6 billion compared to $1.2 billion last
year. In fiscal 2012, we added a total of 266 locations (175 net) compared to last
year’s 297 locations (164 net). There were 34 owned locations added during the
year and 41 under construction at August 31, 2012, versus 62 owned locations
added and 44 under construction as of August 31, 2011.
Infusion and
Work- Respiratory Specialty Mail
Drugstores sites Services Pharmacy Service Total
August 31, 2010 7,562 367 101 14 2 8,046
New/Relocated 237 21 1 2 — 261
Acquired 32 — 4 — — 36
Closed/Replaced (70) (33) (23) (7) — (133)
August 31, 2011 7,761 355 83 9 2 8,210
New/Relocated 169 36 5 2 — 212
Acquired 43 — 10 1 — 54
Closed/Replaced (43) (25) (22) (1) — (91)
August 31, 2012 7,930 366 76 11 2 8,385
Investing activities in 2012 include the August 2012 purchase of a 45% equity interest
in Alliance Boots GmbH for $7.0 billion, of which $4.0 billion was cash. This investment
is accounted for as an equity method investment. Business acquisitions this year were
$490 million versus $630 million in fiscal 2011. Business acquisitions in fiscal 2012
included certain assets from BioScrip’s community specialty pharmacies and centralized
specialty and mail services pharmacy businesses for $144 million plus inventory; the
purchase of Crescent Pharmacy Holdings, LLC, an infusion pharmacy business, for
$73 million, net of assumed cash; and selected other assets (primarily prescription
files). Business acquisitions in 2011 included the purchase of drugstore.com, inc., for
$398 million net of assumed cash, $29 million of infusion and respiratory services
assets and selected other assets (primarily prescription files). In fiscal 2011, we sold
our pharmacy benefit management business, Walgreens Health Initiatives, Inc. (WHI),
to Catalyst Health Solutions Inc. (Catalyst) and recorded net cash proceeds of
$442 million. In fiscal 2012, we paid $45 million to Catalyst which was the result of
a working capital adjustment in accordance with the June 2011 sales agreement. On
July 5, 2012, we entered into an agreement to purchase a regional drugstore chain
in the mid-South region of the United States from Stephen L. LaFrance Holdings, Inc.
and members of the LaFrance family for $438 million, subject to adjustment in certain
circumstances (the USA Drug transaction). The transaction included 144 stores operated
under the USA Drug, Super D Drug, May’s, Med-X and Drug Warehouse names.
The transaction closed subsequent to our fiscal year end on September 17, 2012.
Capital expenditures for fiscal 2013 are expected to be between $1.6 billion and
$1.8 billion, excluding business acquisitions, joint ventures and prescription file
purchases, although the actual amount may vary depending upon a variety of factors,
including, among other things, the timing of implementation of certain capital projects.
We expect new drugstore organic growth of approximately 1.5 to 2.5 percent in fiscal
2013. During fiscal 2012, we added a total of 212 locations, of which 169 were
new or relocated drugstores. We are continuing to relocate stores to more convenient
and profitable freestanding locations.
Net cash provided by financing activities was $1.2 billion compared to the prior year’s
net cash use of $2.4 billion. We borrowed $3.0 billion under a 364-day bridge term
loan facility in connection with the Alliance Boots GmbH investment, which borrowings
were repaid subsequent to year end using net proceeds from the September 2012
public offering of unsecured notes described below. We repurchased shares totaling
$1.2 billion in fiscal 2012, $1.2 billion in conjunction with our share buyback programs
and $40 million to support the needs of the employee stock plans. In the prior year,
we repurchased shares totaling $2.0 billion, $1.8 billion in conjunction with our share
buyback programs and $244 million to support the needs of the employee stock
plans. We had proceeds related to employee stock plans of $165 million compared to
$235 million last year. Cash dividends paid were $787 million versus $647 million a
year ago. On June 19, 2012, we announced an increase in the quarterly dividend
to 27.5 cents per share from the previous rate of 22.5 cents per share. The increase
raises the annual dividend rate from 90 cents per share to $1.10 per share.
In connection with our capital policy, our Board of Directors has authorized several share
repurchase programs and set a long-term dividend payout ratio target between 30 and
35 percent of net earnings. The 2009 and 2011 stock repurchase programs, which
were both completed in fiscal 2011, allowed for the repurchase of up to $2.0 billion
and $1.0 billion of the Company’s common stock, respectively. Additionally, on July 13,
2011, our Board of Directors authorized the 2012 stock repurchase program,
which allows for the repurchase of up to $2.0 billion of the Company’s common
stock prior to its expiration on December 31, 2015. Activity related to these programs
was as follows (In millions):
Fiscal Year Ended 2012 2011 2010
2009 stock repurchase program $ — $ 360 $ 1,640
2011 stock repurchase program — 1,000 —
2012 stock repurchase program 1,151 424 —
$ 1,151 $ 1,784 $ 1,640
We determine the timing and amount of repurchases from time to time based on
our assessment of various factors including prevailing market conditions, alternate
uses of capital, liquidity, the economic environment and other factors. We anticipate
that the pace of any future share repurchase activity may be significantly curtailed
from the levels achieved in the preceding two years due to the debt levels incurred for
the investment in Alliance Boots GmbH. The timing and amount of these purchases
may change at any time and from time to time. 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 a company to repurchase shares at times
when it otherwise might be precluded from doing so under insider trading laws.
We had no commercial paper outstanding at August 31, 2012. In connection with
our commercial paper program, we maintain two unsecured backup syndicated
lines of credit that total $1.35 billion. The first $500 million facility expires on
July 20, 2015, and allows for the issuance of up to $250 million in letters of credit.
The second $850 million facility expires on July 23, 2017, and allows for the issuance
of up to $200 million in letters of credit. The issuance of letters of credit under either
of these facilities reduces available borrowings. Our ability to access these facilities
is subject to our compliance with the terms and conditions of the credit facility,
including financial covenants. The covenants require us to maintain certain financial
ratios related to minimum net worth and priority debt, along with limitations on the
sale of assets and purchases of investments. At August 31, 2012, we were in
compliance with all such covenants. The Company pays a facility fee to the financing
banks to keep these lines of credit active. At August 31, 2012, there were no
letters of credit issued against these facilities and we do not anticipate any future
letters of credit to be issued against these facilities.
As of October 19, 2012, our credit ratings were:
Long-Term Commercial
Rating Agency Debt Rating Paper Rating Outlook
Moody’s Baa1 P-2 Negative
Standard & Poor’s BBB A-2 Stable
2012 Walgreens Annual Report 21