Walgreens 2013 Annual Report Download - page 38

Notes to Consolidated Financial Statements (continued)
36 2013 Walgreens Annual Report
2. Restructuring
The Company completed one of its strategic initiatives to enhance shareholder value
in fiscal 2011 known as the “Rewiring for Growth” program, which was designed
to, among other things, reduce cost and improve productivity. In fiscal 2011,
the Company recorded $42 million of pre-tax charges in selling, general and
administrative expenses associated with the program.
Additionally, as a part of the Company’s Customer Centric Retailing (CCR) initiative,
it has modified the store format to enhance category layouts and adjacencies,
shelf heights and sight lines, and brand and private brand assortments, all of
which were designed to positively impact the shopper experience. This initiative
was completed in the first quarter of fiscal 2012. In total, the Company converted
5,843 stores and opened 559 new stores with the CCR format. In fiscal 2012, the
Company incurred $33 million in total program costs, of which $15 million was
included in selling, general and administrative expenses and $18 million in capital
costs. In fiscal 2011, the Company incurred $144 million in total program costs,
of which $84 million was included in selling, general and administrative expenses
and $60 million in capital costs.
3. Leases
The Company owns approximately 20% of its operating locations; the remaining
locations are leased premises. Initial terms are typically 20 to 25 years, followed by
additional terms containing renewal options at five-year intervals, and may include rent
escalation clauses. The commencement date of all lease terms is the earlier of the date
the Company becomes legally obligated to make rent payments or the date the
Company has the right to control the property. The Company recognizes rent expense
on a straight-line basis over the term of the lease. In addition to minimum fixed rentals,
some leases provide for contingent rentals based upon a portion of sales.
Minimum rental commitments at August 31, 2013, under all leases having an initial or
remaining non-cancelable term of more than one year are shown below (In millions):
Capital Lease Operating Lease
2014 $ 19 $ 2,536
2015 19 2,514
2016 18 2,464
2017 17 2,389
2018 15 2,292
Later 270 23,507
Total minimum lease payments $ 358 $ 35,702
The capital lease amount includes $155 million of imputed interest and executory
costs. Total minimum lease payments have not been reduced by minimum
sublease rentals of approximately $140 million on leases due in the future
under non-cancelable subleases.
The Company provides for future costs related to closed locations. The liability
is based on the present value of future rent obligations and other related costs
(net of estimated sublease rent) to the first lease option date. In fiscal 2013,
2012 and 2011, the Company recorded charges of $43 million, $20 million
and $54 million, respectively, for facilities that were closed or relocated under
long-term leases. These charges are reported in selling, general and administrative
expenses on the Consolidated Statements of Comprehensive Income.
The changes in reserve for facility closings and related lease termination charges
include the following (In millions):
Twelve Months Ended August 31, 2013 2012
Balance – beginning of period $ 117 $ 145
Provision for present value of non-cancelable
lease payments of closed facilities 34 6
Assumptions about future sublease income,
terminations and changes in interest rates (6) (11)
Interest accretion 15 25
Cash payments, net of sublease income (37) (48)
Balance – end of period $ 123 $ 117
The Company remains secondarily liable on 26 assigned leases. The maximum
potential undiscounted future payments are $18 million at August 31, 2013.
Lease option dates vary, with some extending to 2041.
Rental expense, which includes common area maintenance, insurance and taxes,
was as follows (In millions) :
2013 2012 2011
Minimum rentals $ 2,644 $ 2,585 $ 2,506
Contingent rentals 6 6 9
Less: Sublease rental income (22) (20) (15)
$ 2,628 $ 2,571 $ 2,500
4. Acquisitions and Divestitures
In September 2012, the Company completed its acquisition of Stephen L. LaFrance
Holdings, Inc. (USA Drug) for $436 million net of assumed cash, subject to adjustment
in certain circumstances. This acquisition increased the Company’s presence in the
mid-South region of the country. The purchase price allocation for this acquisition
added $220 million to goodwill and $156 million to intangible assets, primarily
prescription files and non-compete agreements, with $60 million allocated to net
tangible assets, primarily inventory. The purchase price allocation is complete with
the exception of the evaluation of certain deferred tax balances. The USA Drug
acquisition contributed $364 million of revenue and a pre-tax loss of $74 million in
fiscal 2013, including transaction and store closure costs of $57 million.
In December 2012, the Company acquired an 80% interest in Cystic Fibrosis
Foundation Pharmacy LLC for $29 million net of assumed cash, subject to
working capital adjustments, and a call option to acquire the remaining 20% interest.
The investment provides joint ownership in a specialty pharmacy for cystic fibrosis
patients and their families and a provider of new product launch support and call
center services for drug manufacturers. The investment added $16 million to goodwill
and $21 million to intangible assets, primarily payer contracts.
The aggregate purchase price of all business and intangible asset acquisitions, excluding
USA Drug and Cystic Fibrosis, was $165 million in fiscal 2013. These acquisitions
added $135 million to intangible assets, primarily prescription files. The remaining
fair value relates to immaterial amounts of tangible assets, less liabilities assumed.
Operating results of businesses acquired have been included in the Consolidated
Statements of Comprehensive Income from their respective acquisition dates forward
and were not material.
In fiscal 2012, the Company acquired certain assets of BioScrip, Inc.’s (BioScrip)
community specialty pharmacies and centralized specialty and mail services pharmacy
business for $144 million plus inventory. The acquisition added $94 million to goodwill
and $49 million to other intangible assets. The addition of BioScrip’s community specialty
pharmacies and centralized specialty and mail services pharmacy businesses advances
community pharmacy and brings additional specialty pharmacy products and services
closer to patients. The Company also purchased Crescent Pharmacy Holdings, LLC
(Crescent), an infusion pharmacy business, for $73 million, net of assumed cash. The
Crescent acquisition added $40 million to goodwill and $26 million to intangible assets,
primarily payer contracts. The acquisition is a strategic investment to expand the
Company’s infusion services in select California markets.
5. Equity Method Investments
Equity method investments as of August 31, 2013 and 2012, were as follows
(In millions, except percentages):
2013 2012
Carrying Ownership Carrying Ownership
Value Percentage Value Percentage
Alliance Boots $ 6,261 45% $ 6,140 45%
Other equity method
investments 7 30% – 50% 7 30% – 50%
Total equity method
investments $ 6,268 $ 6,147