Case 2.3 Walgreens Co. and Subsidiaries
The following excerpts are from the 2013 Walgreen Co. Form 10-K:
CONSOLIDATED BALANCE SHEETS Walgreens Co. and Subsidiaries at August 31,2013 and 2012 (in millions, except shares and per share amounts) 2012 2013 Assets Current Assests $2,106 $1,297 Cash and cash equivalents $2,632 $2,167 Accounts Rec, net $6,852 $7,036 Inventories $284 $260 Other current assets $11,874 $10,760 Total Current Assets Noncurrent Assets Property & equipment, at cost,less accumulated deprec & amortization $12,138 $12,038 Equity investment in Alliance Boots $2,410 $2,161 Alliance Boots call option $6,261 $6,140 Goodwill $839 $866 Other noncurrent assets $1,959 $1,497 Total Assets $23,607 $22,702 $35,481 $33,462 Liabilities and Shareholders' Equity Current Liabilities Short-term borrowings $570 $1,319 Trade accounts payable $4,635 $4,384 Accrued expenses and other liabilities $3,577 $3,019 Income Taxes $101 Total Current Liabilites $8,883 $8,722 Noncurrent liabilites Long-term debt $4,477 $4,073 Deferred income taxes $600 $545 Other noncurrent liabilities $2,067 $1,866 Total noncurrent liabilites $7,144 $6,504 Commitments and contingencies(see note) Shareholders' Equity Preferred stock, $.0625 per value; authorized 32 million shares; issued 1,028,180,150 shares in 2013 and 2012 $80 $80 Paid-in capital $1,074 $936 Employee stock loan recievable ($11) ($19) Retained Earnings $21,523 $20,156 Accumulated other comprehensive (loss) income ($98) $68 Treasury Stock at cost, 81,584,572 shares in 2013 and 84,124,816 shares in 2012 ($3,114) ($2,985) Total Shareholders' Equity $19,454 $18,236 Total Liabilites and Shareholder's Equity $35,481 $33,462 The accompanying Notes to Consolidated Financial Statements are integral parts of these statments.
Notes to Consolidated financial Statements
1.Summary of Major Accounting Policies
Description of Business
The company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31,2013 there was 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011.
Allowance for Doubtful Accounts
The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (In millions):
2013
2012
2011
Balance at beginning of year
$99
$101
$104
Bad debt provision
$124
$107
$88
Write-offs
($69)
($109)
($91)
Balance at end of year
$154
$99
$101
Inventories
Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively. Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense.
3.Leases
The company owns 20.2% 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 to 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
Operatin 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 amoutn 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 remains secondarily liable on 26 assigned leases. The maiximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041.
WALGREEN CO. INFORMATION FROM CONSOLIDATED
STATEMENTS OF COMPREHENSIVE INCOME
For the Years Ended August 31,2013 and 2012 (in millions)
2013
2012
Sales
$72,217
$71,633
Net Income
$2,450
$2,127
Required:
a. Using the consolidated balance sheets for Walgreen Co. for August 31,2013 and 2012, prepare a common-size balance sheet.
b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store?
c. Analyze accounts recievable and allowance for doubtful accounts.
d. What inventory is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported.
e. Assess the level of debt and risk that Walgreen has by looking only at the balnce sheet.
f. Estimate the dollar amount of dividends Walgreens paid in 2013.
g. Does Walgreen use off-balance sheet fiancing? Explain your answer.
h. Evaluate the creidtworthiness of Walgreen based on the Balance sheet and the excerpts from the notes.
Case 2.3 Walgreens Co. and Subsidiaries
The following excerpts are from the 2013 Walgreen Co. Form 10-K:
CONSOLIDATED BALANCE SHEETS | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Walgreens Co. and Subsidiaries at August 31,2013 and 2012 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
(in millions, except shares and per share amounts) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
2012 | 2013 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current Assests | $2,106 | $1,297 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Cash and cash equivalents | $2,632 | $2,167 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accounts Rec, net | $6,852 | $7,036 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Inventories | $284 | $260 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other current assets | $11,874 | $10,760 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Current Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncurrent Assets | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Property & equipment, at cost,less accumulated deprec & amortization | $12,138 | $12,038 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Equity investment in Alliance Boots | $2,410 | $2,161 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Alliance Boots call option | $6,261 | $6,140 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Goodwill | $839 | $866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other noncurrent assets | $1,959 | $1,497 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Assets | $23,607 | $22,702 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
$35,481 | $33,462 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Liabilities and Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Current Liabilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Short-term borrowings | $570 | $1,319 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Trade accounts payable | $4,635 | $4,384 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accrued expenses and other liabilities | $3,577 | $3,019 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Income Taxes | $101 | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Current Liabilites | $8,883 | $8,722 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Noncurrent liabilites | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Long-term debt | $4,477 | $4,073 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Deferred income taxes | $600 | $545 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Other noncurrent liabilities | $2,067 | $1,866 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total noncurrent liabilites | $7,144 | $6,504 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Commitments and contingencies(see note) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Shareholders' Equity | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Preferred stock, $.0625 per value; authorized 32 million shares; | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
issued 1,028,180,150 shares in 2013 and 2012 | $80 | $80 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Paid-in capital | $1,074 | $936 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Employee stock loan recievable | ($11) | ($19) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Retained Earnings | $21,523 | $20,156 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Accumulated other comprehensive (loss) income | ($98) | $68 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Treasury Stock at cost, 81,584,572 shares in 2013 and | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
84,124,816 shares in 2012 | ($3,114) | ($2,985) | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Shareholders' Equity | $19,454 | $18,236 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Total Liabilites and Shareholder's Equity | $35,481 | $33,462 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The accompanying Notes to Consolidated Financial Statements are integral parts of these statments. Notes to Consolidated financial Statements 1.Summary of Major Accounting Policies Description of Business The company is principally in the retail drugstore business and its operations are within one reportable segment. At August 31,2013 there was 8,582 drugstore and other locations in 50 states, the District of Columbia, Guam, and Puerto Rico. Prescription sales were 62.9% of total sales for fiscal 2013 compared to 63.2% in 2012 and 64.7% in 2011. Allowance for Doubtful Accounts The provision for bad debt is based on both historical write-off percentages and specifically identified receivables. Activity in the allowance for doubtful accounts was as follows (In millions):
Inventories Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis. At August 31, 2013 and 2012, inventories would have been greater by $2.1 billion and $1.9 billion, respectively, if they had been valued on a lower of first-in, first-out (FIFO) cost or market basis. As a result of declining inventory levels, the fiscal 2013 and 2012 LIFO provisions were reduced by $194 million and $268 million of LIFO liquidation, respectively. Inventory includes product costs, inbound freight, warehousing costs, and vendor allowances not classified as a reduction of advertising expense. 3.Leases The company owns 20.2% 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 to 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):
|
The capital lease amoutn 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 remains secondarily liable on 26 assigned leases. The maiximum potential undiscounted future payments are $18 million at August 31, 2013. Lease option dates vary, with some extending to 2041.
WALGREEN CO. INFORMATION FROM CONSOLIDATED | ||||||||
STATEMENTS OF COMPREHENSIVE INCOME | ||||||||
For the Years Ended August 31,2013 and 2012 (in millions) | ||||||||
2013 | 2012 | |||||||
Sales | $72,217 | $71,633 | ||||||
Net Income | $2,450 | $2,127 |
Required:
a. Using the consolidated balance sheets for Walgreen Co. for August 31,2013 and 2012, prepare a common-size balance sheet.
b. Which current asset is the most significant? Which noncurrent asset is the most significant? Are the relative proportions of current and noncurrent assets what you would expect for a drug store?
c. Analyze accounts recievable and allowance for doubtful accounts.
d. What inventory is used to value inventories? Has Walgreen experienced inflation or deflation? Explain your answer. Explain the reference in the inventory note to the LIFO liquidation and what this means with regard to net income reported.
e. Assess the level of debt and risk that Walgreen has by looking only at the balnce sheet.
f. Estimate the dollar amount of dividends Walgreens paid in 2013.
g. Does Walgreen use off-balance sheet fiancing? Explain your answer.
h. Evaluate the creidtworthiness of Walgreen based on the Balance sheet and the excerpts from the notes.