Walgreens 2012 Annual Report Download - page 26

The obligations and commitments included in the table above do not include
unconsolidated partially owned entities, such as Alliance Boots GmbH, of which
we own 45% of the outstanding share capital. The expected timing of payments of
the obligations above is estimated based on current information. Timing of payments
and actual amounts paid may be different, depending on the time of receipt of
goods or services, or changes to agreed-upon amounts for some obligations.
In connection with the Alliance Boots Purchase and Option Agreement dated
June 18, 2012, we have the right, but not the obligation, to purchase the remaining
55% interest in Alliance Boots GmbH at any time during the period beginning
February 2, 2015, and ending August 2, 2015. If we exercise this call option,
we would, subject to the terms and conditions of such agreement, be obligated to
make a cash payment of £3.133 billion (equivalent to approximately $5.0 billion
based on exchange rates as of August 31, 2012) and issue approximately
144.3 million shares of our common stock, with the amount and form of such
consideration being subject to adjustment in certain circumstances including if the
volume weighted average price of our common stock is below $31.18 per share
during a period shortly before the closing of the second step transaction. We also
would assume the then-outstanding debt of Alliance Boots GmbH upon the closing
of the second step transaction. In the event that we do not exercise the option,
under certain circumstances, our ownership of Alliance Boots GmbH will reduce
from 45% to 42% in exchange for nominal consideration to Walgreens.
Off–Balance Sheet Arrangements
We do not have any unconsolidated special purpose entities and, except as described
herein, we do not have significant exposure to any off–balance sheet arrangements.
The term “off–balance sheet arrangement” generally means any transaction,
agreement or other contractual arrangement to which an entity unconsolidated
with us is a party, under which we have: (i) any obligation arising under a guarantee
contract, derivative instrument or variable interest; or (ii) a retained or contingent
interest in assets transferred to such entity or similar arrangement that serves
as credit, liquidity or market risk support for such assets.
Letters of credit are issued to support purchase obligations and commitments
(as reflected on the Contractual Obligations and Commitments table)
as follows (In millions):
August 31, 2012
Inventory purchase commitments $ 157
Insurance 38
Real estate development 229
Total $ 424
We have no off–balance sheet arrangements other than those disclosed on the
Contractual Obligations and Commitments table. Both on–balance sheet and
off–balance sheet financing alternatives are considered when pursuing our capital
structure and capital allocation objectives.
Recent Accounting Pronouncements
In August 2010, the Financial Accounting Standards Board (FASB) issued an exposure
draft on lease accounting that would require entities to recognize assets and liabilities
arising from lease contracts on the balance sheet. The proposed exposure draft states
that lessees and lessors should apply a “right-of-use model” in accounting for all
leases. Under the proposed model, lessees would recognize an asset for the right to
use the leased asset, and a liability for the obligation to make rental payments over the
lease term. The lease term is defined as the longest possible term that is “more likely
than not” to occur. The accounting by a lessor would reflect its retained exposure to
the risks or benefits of the underlying leased asset. A lessor would recognize an asset
representing its right to receive lease payments based on the expected term of the
lease. On the basis of feedback received from comment letters, roundtables, and
outreach sessions, the FASB has made significant changes to the proposals in the
exposure draft and therefore has decided to re-expose the revised exposure draft in the
first quarter of calendar 2013. The proposed standard, as currently drafted, will have a
material impact on the Company’s reported results of operations and financial position.
The impact of this exposure draft is non-cash in nature and will not affect the
Company’s cash position.
In July 2012, FASB issued Accounting Standards Update (ASU) 2012-02, which
permits an entity to make a qualitative assessment to determine whether it is more
likely than not that an indefinite-lived intangible asset, other than goodwill, is impaired.
If an entity concludes, based on an evaluation of all relevant qualitative factors,
that it is not more likely than not that the fair value of an indefinite-lived intangible
asset is less than its carrying amount, it will not be required to perform the quantitative
impairment for that asset. The ASU is effective for impairment tests performed for
fiscal years beginning after September 15, 2012 (fiscal 2014), with early adoption
permitted. The ASU will not have a material impact on the Company’s reported results
of operations and financial position. The impact is non-cash in nature and will not
affect the Company’s cash position.
Financing and Market Risk
We are exposed to interest rate volatility with regard to future issuances of
fixed-rate debt, and existing and future issuances of floating-rate debt. Primary
exposures include U.S. Treasury rates, LIBOR, and commercial paper rates.
From time to time, we use interest rate swaps and forward-starting interest rate
swaps to hedge our exposure to interest rate changes, to reduce the volatility of
our financing costs, and to achieve a desired proportion of fixed versus floating-
rate debt, based on current and projected market conditions. Generally under
these swaps, we agree with a counterparty to exchange the difference between
fixed-rate and floating-rate interest amounts based on an agreed upon notional
principal amount.
Information regarding our interest rate swap transactions is set forth in Note 9 to
the Consolidated Financial Statements. These financial instruments are sensitive
to changes in interest rates. On August 31, 2012, we had $4.8 billion in long-term
debt obligations that had floating interest rates. A one percentage point increase
or decrease in interest rates would increase or decrease the annual interest
expense we recognize and the cash we pay for interest expense by approximately
$48 million. In conjunction with the September 2012 notes issuance we refinanced
$3.0 billion of the $4.8 billion outstanding floating rate long-term debt at August 31,
2012. This refinancing included $550 million of floating rate notes which accrue
interest at the rate equal to the three-month U.S. dollar LIBOR as determined at
the beginning of each quarterly period, plus 0.500%. The remaining notes that
were part of the refinancing were at fixed rates. A one percentage point increase
or decrease in the three-month U.S. dollar LIBOR would increase or decrease the
annual interest expense we recognize and the cash we pay for interest expense
on these floating rate notes by approximately $6 million.
In connection with our Purchase and Option Agreement with Alliance Boots and
the transactions contemplated thereby, our exposure to foreign currency risks,
primarily with respect to the British pound sterling, and to a lesser extent the
Euro and certain other foreign currencies, is expected to increase. We are
exposed to the translation of foreign currency earnings to the U.S. dollar as a
result of our 45% interest in Alliance Boots GmbH, which we account for using
the equity method of accounting on a one month lag. Foreign currency forward
contracts and other derivative instruments may be used from time to time in
some instances to hedge in full or in part certain risks relating to foreign currency
denominated assets and liabilities, intercompany transactions, and in connection
with acquisitions, joint ventures or investments outside the United States. As of
August 31, 2012 and August 31, 2011, we did not have any outstanding foreign
exchange derivative instruments.
Management’s Discussion and Analysis of Results of Operations
and Financial Condition (continued)
24 2012 Walgreens Annual Report