Answered Essay: Case 2.3 Walgreens Co. and Subsidiaries

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.

Expert Answer

 

CONSOLIDATED BALANCE SHEETS
Walgreens Co. and Subsidiaries at August 31,2013 and 2012
(in millions, except shares and per share amounts) ANSWER to a.
2012 % to Total 2013 % to Total
Assets
Current Assests 2106 5.94% 1297 3.88%
Cash and cash equivalents 2632 7.42% 2167 6.48%
Accounts Rec, net 6852 19.31% 7036 21.03%
Inventories 284 0.80% 260 0.78%
Other current assets
Total Current Assets 11874 33.47% 10760 32.16%
Noncurrent Assets
Property & equipment, at cost,less accumulated deprec & amortn. 12138 34.21% 12038 35.98%
Equity investment in Alliance Boots 2410 6.79% 2161 6.46%
Alliance Boots call option 6261 17.65% 6140 18.35%
Goodwill 839 2.36% 866 2.59%
Other noncurrent assets 1959 5.52% 1497 4.47%
Total Assets 23607 66.53% 22702 67.84%
35481 100.00% 33462 100.00%
Liabilities and Shareholders’ Equity
Current Liabilities
Short-term borrowings 570 1.61% 1319 3.94%
Trade accounts payable 4635 13.06% 4384 13.10%
Accrued expenses and other liabilities 3577 10.08% 3019 9.02%
Income Taxes 101 0.28% 0.00%
Total Current Liabilites 8883 25.04% 8722 26.07%
Noncurrent liabilites
Long-term debt 4477 12.62% 4073 12.17%
Deferred income taxes 600 1.69% 545 1.63%
Other noncurrent liabilities 2067 5.83% 1866 5.58%
Total noncurrent liabilites 7144 20.13% 6504 19.44%
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 0.23% 80 0.24%
Paid-in capital 1074 3.03% 936 2.80%
Employee stock loan recievable -11 -0.03% -19 -0.06%
Retained Earnings 21523 60.66% 20156 60.24%
Accumulated other comprehensive (loss) income -98 -0.28% 68 0.20%
Treasury Stock at cost, 81,584,572 shares in 2013 and
84,124,816 shares in 2012 -3114 -8.78% -2985 -8.92%
Total Shareholders’ Equity 19454 54.83% 18236 54.50%
Total Liabilites and Shareholder’s Equity 35481 100.00% 33462 100.00%
b.
Most significant
Current asset —- Accounts Receivables
Non-current asset—- Property & equipment, at cost,less accumulated deprec & amortn.
Ratio of Current to Non-Current assets —– 2012 =11874/23607=50.30% & 2013—-10760/22702=47.40%
Proportion of Non-current asset is too large for a retail drug store,which need no large investments in fixed assets (which can be the case for a manufacturing company)
e. On an average 12% outside long-term debt in both years ,compared to 54% of equity participation —- augurs well –with a debt/equity ratio of 12/54= 22% (approx.)
f.
Retained Earnings Ledger account
Fiscal 2013 Debit Credit
Opening Balance 21523
2013 Net Income 2450
Dividends paid(Plug-in Fig.) 3817
Closing Balance 20156
23973 23973
So, dollar amount of dividends Walgreens paid in 2013 3817
d. Inventories are valued on a lower of last-in, first-out (LIFO) cost or market basis.
The statement in the Notes ,
“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” implies that older (FIFO) prices are greater than the Current LIFO prices.
So, Walgreen experienced deflation or decrease in inventory price levels.
LIFO liquidation is said to occur when a company, using LIFO inventory valuation method, sells its old stock of inventory–ie. When using LIFO method ,it sells or issues,for more than it purchases.
This gives a highly distorted or inflated net operating income resulting in higher tax bill in the current period. When LIFO inventory is liquidated, the older costs are matched with the current revenues and thus the financial statements show a higher margin/income,thereby causing a higher tax liability,especially in inflationary periods.
g.
Off-balance sheet financing means that a company incurs but does not include the same as a liability on its balance sheet
It influences the company’s level of debt and liability.
The existence of operating & capital leases as seen in the Notes to the statements ,are off-balance sheet items
The company is recording only the lease rentals, which is significantly lower than any on account purchase , resulting in a balance sheet without any liability
h. Evaluating the creidtworthiness of Walgreen based on the Balance sheet
1. Current Ratio= Current Assets/Current Liabilities 2012 2013
Current assets 11874 10760
Current Liabilities 8883 8722
Current Ratio= Current Assets/Current Liabilities 1.34 1.23
By comparing the ratio of current assets to current liabilities,the potential lender can assess the liquidity of the company as well as its ability to meet the short-term obligations.As current assets ,normally can be converted to cash within one year so as to the current liabilities or obligations that become payable within one year.
Normally a ratio of 2:1 is acceptable .
Walgreens current ratio is well below the norm in both the years & has also decreased in 2013
2. Quick Ratio=( Current Assets-Inventory)/Current Liabilities 2012 2013
Quick assets 11590 10500
Current Liabilities 8883 8722
Quick Ratio=( Current Assets-Inventory)/Current Liabilities 1.30 1.20
Another measure of ready & immediate liquidity, without having to wait to sell inventory.
Normally a ratio of 1:1 is acceptable .
Walgreens Quick ratio is well above the norm in both the years, thanks to its receivables position.
Read along with receivables turn-over(as done below) , shows a strong short-term liquidity.
3. Debt-to-Equity Ratio
The debt-to-equity ratio compares non-trade liabilities with the owner’s total equity. This shows how much of the company is financed by debt when compared to that by equity. Increasing ratios over time ,indicates increasing risk, as with taking on too much debt. This ratio is a very good indicator of the solvency of a company and its ability to continue operations in the long run.
2012 2013
Long-term debt 4477 4073
Total Shareholders’ Equity 19454 18236
Debt/Equity 23% 22%
Less than 25% participation of debt in both the years indicate low level of interest expenses and reasonable long-term commitments
4. Receivables turnover
365/(Credit Sales/Accounts Receivables)
2012 2013
Sales 71633 72217
Accounts Rec, net 6852 7036
Receivables turnover in days. 35 36
Walgreens is very regular in collecting trade-receivables.
5. Total Assets to Total Outside Liabilities 2012 2013
Total assets 35481 33462
Total Outside Liabilities(Total of liabilities side-Total Equity) 16027 15226
Total Assets to Total Outside Liabilities 2.21 2.20
A ratio over 2 indicates that the company is meeting all its liabilities/outside obligations very well and has enough assets as cushion that can produce adequate income to cover debts and earn profits
But for current ratio, all other ratios point to a credit-worthy Walgreens.
c.
Allowance for doubtful account
Debit    2012    Credit Debit    2013    Credit
Op.bal. 101 Op.bal. 99
New provn 107 New provn 124
Write-offs 109 Write-offs 69
Cl.bal 99 Cl.bal 154
Accounts Rec, Gross (Net+Cl. Bal.)6852+99 6951 Accounts Rec, Gross (Net+Cl.bal.)7036+154 7190
New prov. % 107/6951= 1.54% New prov. % 124/7190= 1.72%
Write-off % 109/6951= 1.57% Write-off % 69/7190= 0.96%
Sales 71633 Sales 72217
Gross A/cs/Rec./ Sales 9.70% Gross A/cs/Rec./ Sales 9.96%
6951/71633= 7190/72217=
Buy Essay
Calculate your paper price
Pages (550 words)
Approximate price: -

Help Me Write My Essay - Reasons:

Best Online Essay Writing Service

We strive to give our customers the best online essay writing experience. We Make sure essays are submitted on time and all the instructions are followed.

Our Writers are Experienced and Professional

Our essay writing service is founded on professional writers who are on stand by to help you any time.

Free Revision Fo all Essays

Sometimes you may require our writers to add on a point to make your essay as customised as possible, we will give you unlimited times to do this. And we will do it for free.

Timely Essay(s)

We understand the frustrations that comes with late essays and our writers are extra careful to not violate this term. Our support team is always engauging our writers to help you have your essay ahead of time.

Customised Essays &100% Confidential

Our Online writing Service has zero torelance for plagiarised papers. We have plagiarism checking tool that generate plagiarism reports just to make sure you are satisfied.

24/7 Customer Support

Our agents are ready to help you around the clock. Please feel free to reach out and enquire about anything.

Try it now!

Calculate the price of your order

Total price:
$0.00

How it works?

Follow these simple steps to get your paper done

Place your order

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Receive the final file

Once your paper is ready, we will email it to you.

HOW OUR ONLINE ESSAY WRITING SERVICE WORKS

Let us write that nagging essay.

STEP 1

Submit Your Essay/Homework Instructions

By clicking on the "PLACE ORDER" button, tell us your requires. Be precise for an accurate customised essay. You may also upload any reading materials where applicable.

STEP 2

Pick A & Writer

Our ordering form will provide you with a list of writers and their feedbacks. At step 2, its time select a writer. Our online agents are on stand by to help you just in case.

STEP 3

Editing (OUR PART)

At this stage, our editor will go through your essay and make sure your writer did meet all the instructions.

STEP 4

Receive your Paper

After Editing, your paper will be sent to you via email.