Alliance Boots GmbH

Interim condensed consolidated financial statements

 

for the nine month period ended 31 December 2014

 

Alliance Boots GmbH

Group interim condensed consolidated income statement (unaudited)

for the nine month period ended 31 December

 

Group interim condensed consolidated statement of comprehensive income (unaudited)

for the nine month period ended 31 December

 

 

Alliance Boots GmbH

Group interim condensed consolidated statement of financial position

 

 

Alliance Boots GmbH

 

Group interim condensed consolidated statement of changes in equity (unaudited)

for the nine month period ended 31 December

 

 

 

 

Alliance Boots GmbH

 

Group interim condensed consolidated statement of cash flows (unaudited)

for the nine month period ended 31 December

 

 

Alliance Boots GmbH

 

Notes to the interim condensed consolidated financial statements

for the nine month period ended 31 December 2014

 

1.	General information

 

The interim condensed consolidated financial statements for the nine month period ended 31 December 2014 were approved by the Board and authorised for issue on 27 October 2015.

 

2.	Basis of accounting

 

The interim condensed consolidated financial statements have been prepared in Sterling reflecting the denomination of the currency of the most significant proportion of the trade and cash flows of the Company and its subsidiaries and their interests in associates and joint ventures and have been rounded to the nearest £1 million.  The interim condensed consolidated financial statements have been prepared up to the point of acquisition of the Group by Superior on 31 December 2014, in accordance with IAS 34 ‘Interim Financial Reporting'.  Selected explanatory notes are included to explain events and transactions that are significant to an understanding of the changes in financial position and performance of the Group since the last annual consolidated financial statements as at, and for the year ended, 31 March 2014.  This interim condensed consolidated financial report does not include all of the information required for full annual financial statements, and should be read in conjunction with the Group’s annual financial statements for the year ended 31 March 2014, which were prepared in accordance with International Financial Reporting Standards (IFRSs).

Preparing the interim financial report requires management to make judgements, estimates and assumptions that affect the application of accounting policies and reported amounts of assets and liabilities, income and expense.  Actual results may differ from these estimates.

In preparing this interim condensed consolidated financial report, significant judgements made by management in applying the Group’s accounting policies and the key sources of estimation uncertainty were the same as those that applied to the consolidated financial statements as at, and for the year ended, 31 March 2014.

 

3.	Significant accounting policies

 

The accounting policies applied by the Group in this interim condensed consolidated financial report are the same as those applied by the Group in its consolidated financial statements as at, and for the year ended, 31 March 2014.

 

4.	Profit from operations before share of post-tax earnings of associates and joint ventures

 

 

 

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

5.	Exceptional items

 

 

1

During a prior period, the Company together with Walgreen Co. signed agreements with AmerisourceBergen Corporation (‘AmerisourceBergen’) which included the Group receiving warrants to purchase up to 8% of the equity of AmerisourceBergen at future dates.  Simultaneously, the Group issued a call option to Walgreen Co. for Walgreen Co. to purchase these warrants from the Group, only exercisable if Walgreen Co. exercises its option to acquire the remaining 55% equity stake of the Group that they did not own at that time.

 

2

During the period, the Group recorded impairments of goodwill and other intangible assets resulting from the valuation carried out when Superior acquired the Group on 31 December 2014.  The impairments were calculated using a net present value of future cash flows methodology and a relief from royalty method.

 

3

During the period, the Group acquired the 50% of UniDrug Distribution Group Limited (‘UDG’) and 70% of Soap & Glory Limited (‘Soap & Glory’), respectively, that it did not already own.  The fair value of the respective pre-existing interests were remeasured to fair value giving rise to respective gains.

 

4

In August 2012, the Company entered a Purchase and Option Agreement with its parent company, AB Acquisitions Holdings Limited, and Walgreen Co. for Walgreen Co. to acquire a 45% equity stake in the Group.  As part of this agreement, the Company made a commitment to distribute or otherwise transfer its subsidiary’s investment in Galenica Ltd. and any related dividend distributions or proceeds to the selling shareholders at a future date without any payment.  The Group recognised this commitment as a liability measured at fair value.  On 10 May 2013, the Group distributed its investment in Galenica Ltd. recognising a gain on distribution of £115 million.  The increase in the fair value of the liability for this commitment since the beginning of the period to the date of distribution was £43 million.

 

5	Other related to net gains/(losses) on disposal of non-current assets, acquisition related costs, legal and other advisory costs for the Walgreen Co. and AmerisourceBergen transactions and residual costs in relation to other previously announced exceptional projects.

 

6	During a prior period, the Group entered into a contract to acquire a 12% interest in Nanjing Pharmaceutical Company Limited.  The investment was completed in the period, and the fair value gain in the period on this derivative financial instrument was £17 million.

 

7	During the prior period, the Group repurchased and repaid acquisition borrowings with a net value of £858 million.  Pre-paid financing fees expensed on these repurchases and repayments were £13 million.

 

8

The exceptional credit in the prior period mainly relates to the net reduction in deferred tax assets and liabilities resulting from the three percentage point reduction in the rate of future UK corporation tax enacted during the period.  This comprised a two percentage point reduction applicable from April 2014 and the further one percentage point reduction applicable from April 2015.

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

6.

Tax

 

Income tax expense is recognised based on management’s best estimate of the weighted average annual income tax rate expected for the full financial year applied to the pre-tax income of the interim period.  The effective tax rate, which is defined as the tax charge/(credit) expressed as a percentage of profit from operations excluding share of post-tax earnings of associates and joint ventures, net of finance income and finance costs for the nine month period ended 31 December 2014 was 16.9% (2013: (5.6)%).  The 22.5% increase in the effective tax rate arises mainly as a result of an exceptional tax credit in the prior period which related to the net reduction in deferred tax assets and liabilities resulting from the three percentage point reduction in the rate of future UK corporation tax enacted in that period.

 

7.	Capital expenditure

 

During the nine month period ended 31 December 2014, the Group purchased intangible assets with a cost of £63 million (2013: £72 million) and property, plant and equipment assets with a cost of £192 million (2013: £132 million).  Property, plant and equipment with a carrying amount of £5 million (2013: £5 million) were disposed in the period.

 

8.	Cash and cash equivalents

 

Bank overdrafts included as a component of cash and cash equivalents as shown in the condensed consolidated statements of cash flows were £28 million (31 December 2013: £36 million).

 

9.	Analysis of movement in net borrowings

 

Set out below is a reconciliation of the net decrease in cash and cash equivalents to the (increase)/decrease in net borrowings:

 

Cash and cash equivalents outflow from decrease in debt and debt financing comprised repayment and repurchase of borrowings and settlement of derivative financial instruments of £1,352 million (2013: £1,052 million) and repayment of capital element of finance lease obligations of £4 million (2013: £4 million) less proceeds from borrowings of £1,215 million (2013: £638 million).  Proceeds from borrowings include funding provided by the committed revolving credit facility.

Set out below is an analysis of net borrowings at 31 December:

 

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

10.	Financial assets and liabilities

 

The carrying amounts of financial assets and liabilities were:

 

The Group’s principal borrowings at the period end were:

 

·	Committed facilities – £5,562 million (31 March 2014: £5,697 million) in total:

-

Loans – senior facilities current borrowings: in December 2014, the Group issued a voluntary repayment notice to lenders on its variable rate loans and revolving credit facility to repay all principal outstanding amounts in January 2015.  By doing so the Group relinquished its right to repay the facilities at the original maturity dates of July 2017 and July 2018, and became contractually obliged to repay the facilities within 12 months of the reporting date.  The variable rate loans and revolving credit facility were therefore presented in current liabilities.  The variable rate loans, which were denominated in Sterling and Euros, were fully drawn and their aggregate carrying value at 31 December 2014 was £4,267 million (31 March 2014: £5,049 million) including the impact of currency revaluation, and were reported net of unamortised fees incurred in respect of the loans.  The revolving credit facility of £1,092 million (31 March 2014: £677 million) provided access to funding in a range of currencies. £511 million (31 March 2014: £100 million) of this facility was drawn as at 31 December 2014 and classified as current borrowings.

-

Other loans: these loans totalling £784 million (31 March 2014: £548 million) represented a mix of fixed and variable rate borrowings denominated in Sterling, Euros, Czech Koruna, Chilean Peso and Turkish Lira with principal maturities concentrated between 2015 and 2029.

 

·	Uncommitted facilities – £157 million (31 March 2014: £35 million) in total:

-

Bank overdrafts and local bank loans repayable on demand.  These facilities were denominated in Turkish Lira, Russian Rouble, Mexican Peso and Czech Koruna.

 

·	Finance leases – £11 million (31 March 2014: £13 million) in total.

Cash and cash equivalents included gross bank overdrafts of £40 million (31 March 2014: £80 million) which were offset under cash pooling arrangements.

 

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

10.	Financial assets and liabilities (continued)

 

Carrying value and fair value

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

At 31 December 2014, carrying values and fair values of the Group’s financial assets and liabilities held to finance the Group’s operations were:

 

The fair values of bank overdrafts, other loans and trade receivables approximate to their carrying values due to either their short term nature or being re-priced at variable interest rates.  The carrying value of the variable rate senior facility loans approximated fair values of the instruments due to their maturity dates being in January 2015.  The fair value of these loans has been estimated as level 2 in the fair value hierarchy.

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

10.	Financial assets and liabilities (continued)

 

The carrying values of financial assets and liabilities held at fair value, as analysed by the levels of the fair value hierarchy, were:

 

The levels of the fair value hierarchy reflect the significance of the valuation inputs used in making fair value measurements and are defined as follows:

Level 1:

quoted prices in active markets for the same instrument.

Level 2:

quoted prices in active markets for similar assets or liabilities or other valuation techniques for which all significant inputs are based either directly or indirectly on observable market data.

Level 3:

determined on inputs that are not based on observable market data.

Derivative financial instruments

The derivative financial instruments that the Group holds were not traded in an active market.  Accordingly, their fair values were determined by using suitable valuation techniques that do not make use of entity-specific estimates or by using movements in observable prices for underlying financial instruments attributable to the hedged risks.  The fair value of interest rate swaps was calculated by discounting the estimated cash flows received and paid based on the applicable observable yield curves.  The fair value of interest rate caps was calculated using an option pricing methodology.  The fair value of forward currency contracts was estimated by discounting the difference between the contractual forward price and the current available forward price for the residual maturity of the contract using observable market rates.  The fair value of credit derivatives was calculated by discounting anticipated cash flows using the applicable observable yield curve plus a margin derived from the current trading value of the underlying security.  The fair value of the equity purchase commitment is calculated based on quoted market prices for equity instruments adjusted for the probability of the acquisition occurring.  All computed fair values for derivative financial instruments include an appropriate adjustment for own and counterparty credit risk as appropriate.

Available-for-sale investments

The fair values of quoted investments were based on current bid prices.

There were no transfers between Level 1 and Level 2 fair value measurements during the period.  Movements in the period for financial instruments measured using Level 3 valuation methods are presented below:

 

On 4 December 2014, the Group completed the acquisition of a 12% stake in Nanjing Pharmaceutical Company Limited, which has been accounted for as an associate to the Group using the equity method.  This resulted in the transfer of £29 million from the Level 3 category.

The fair value increase on financial instruments categorised within Level 3 in the nine month period ended 31 December 2014 of £17 million (year ended 31 March 2014: £7 million), is included within finance income in the income statement.

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

11.	Acquisitions of businesses

 

During the period, the Group acquired controlling equity stakes in a number of businesses.  The most significant were a 99.4% interest in Farmacias Ahumada S.A. (“FASA”) for consideration of £365 million and a further 50% stake in UDG, previously a joint venture of the Group, for consideration of £66 million.  These acquisitions have been accounted for using the acquisition method and the interim condensed consolidated financial statements include the results of these businesses for the period from the respective acquisition dates.

FASA

On 11 August 2014, the Group acquired 99.4% of the equity of FASA, a listed company based in Latin America.  This acquisition provided the Group with a major presence in the Latin America market and a further step towards reaching a global footprint.

The preliminary fair values of the identifiable assets and liabilities of FASA as at the date of acquisition were:

 

The consolidated income statement for the period includes revenue of £221 million and profit before tax for the period of £nil in respect of the FASA business since the acquisition date.  If the FASA business had been a subsidiary of the Group from the beginning of the period, taking into account their results prior to acquisition, revenue and profit before tax for the combined Group on a pro forma basis would have been £18,165 million and £701 million respectively.

The fair value of the non-controlling interests were determined with reference to the closing share price of FASA and Farmacias Benavides S.A.B de C.V., a subsidiary of FASA, respectively at the date of acquisition.

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

11.	Acquisitions of businesses (continued)

 

UDG

On 15 August 2014, the Group acquired the remaining 50% of the equity of UDG it did not own for £66 million.  This acquisition provided our UK pharmaceutical customers with a broader and more integrated range of flexible pre-wholesaling and contract logistics solutions.

The preliminary fair values of the identifiable assets and liabilities of UDG as at the date of acquisition were:

 

The re-measurement to fair value of the Group’s existing 50% joint venture interest in UDG resulted in a gain of £32 million (fair value of £66 million less £34 million carrying value of equity accounted associate at the acquisition date), which was recognised in the income statement within profit from operations.

Other acquisitions

The Group acquired other businesses during the period for a total cash consideration of £77 million and non-cash consideration of £5 million.  The fair value of net assets acquired was £48 million, which included cash and cash equivalents of £7 million, with goodwill recognised of £46 million. One of these other acquisitions was in relation to an existing associate and the re-measurement to fair value of the Group’s existing share of the associate resulted in a gain of £6 million (fair value of £12 million less £6 million carrying value of equity accounted associate at the acquisition date), which was recognised in the income statement within profit from operations.

Acquisition related costs

The Group incurred acquisition related costs of £4 million in respect of the acquisitions described above and other acquisition related projects.  These costs have been included within administrative costs in the Group’s income statement and are part of the operating cash flows in the statement of cash flows.

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

12.	Commitments

 

Capital expenditure contracted for at the period end and not yet incurred was £109 million (31 March 2014: £39 million) in respect of property, plant and equipment and software.

 

13.	Retirement benefit assets and obligations

 

As at 31 December 2014, the net retirement benefit obligation in respect of defined benefit pension schemes was £45 million (31 March 2014: £174 million), comprising schemes with retirement benefit net assets of £70 million (31 March 2014: £nil) and schemes with retirement benefit net obligations of £115 million (31 March 2014: £174 million).  Net actuarial gains in the period were £81 million (2013: £235 million net actuarial losses) with tax charge attributable of £16 million (2013: £42 million credit) and these are recorded in the Group’s interim condensed statement of other comprehensive income.

 

14.	Related parties

 

The Group’s related party relationships and transactions for the year ended 31 March 2014 were disclosed in the Annual Report for the year ended 31 March 2014.  In the nine month period ended 31 December 2014, the significant related party relationships and transactions for the Group were as follows:

Parent and ultimate controlling party

Throughout the period and as at 31 December 2014, AB Acquisitions Holdings Limited was the ultimate parent company of Alliance Boots GmbH.  Subsequent to 31 December 2014, AB Acquisitions Holdings Limited was renamed Sprint Acquisitions Holdings Limited.

Sprint Acquisitions Holdings Limited is incorporated in Gibraltar and is jointly controlled by Alliance Santé Participations S.A., and three private equity investment vehicles advised by Kohlberg Kravis Roberts & Co. L.P..  S. Pessina and O. Barra, who were Directors of Alliance Boots GmbH throughout the period, are directors of Alliance Santé Participations S.A., which is ultimately owned by a family trust.  Sprint Acquisitions Holdings Limited’s registered office is 57/63 Line Wall Road, Gibraltar.

Transactions with fellow subsidiaries of Sprint Acquisitions Holdings Limited

A summary of the significant transactions with fellow subsidiaries of Sprint Acquisitions Holdings Limited in the period is as follows:

On 4 August 2014, the Group sold its 100% equity interest in Alliance Boots Investments 5 Limited, a company that owned 51% of the equity of OOO Alliance Healthcare Rus (“Alliance Healthcare Russia”), a subsidiary of the Group, to a subsidiary of Sprint Acquisitions Holdings Limited for £3 million.  As part of the transaction, a put and call mechanism was put in place over the 51% equity interest owned by Sprint Acquisitions Holdings Limited in Alliance Boots Investments 1 Limited, the parent of Alliance Healthcare Russia, which resulted in the Group continuing to exercise control over the Alliance Healthcare Russia business.  The Group continued to consolidate the results of Alliance Healthcare Russia and its subsidiaries in the Group’s financial statements because it continued to be exposed to variable returns from its involvement in the Russia business and had the ability to affect those returns through its power over the entity.

On 9 December 2014, the Group exchanged its 49% equity interest in Alliance Healthcare Italia S.p.a, an associate of the Group, for a 49% equity interest in AB Acquisitions UK Holdco 3 Limited (subsequently renamed Sprint Acquisitions UK Holdco 3 Limited), a subsidiary of Sprint Acquisitions Holdings Limited.  The share-for-share exchange reflected the fair value of the Group’s equity interest in the respective entities.  Prior to 31 December 2014, Sprint Acquisitions UK Holdco 3 Limited was subsequently capitalised by its majority shareholder, diluting the Group’s equity interest to 9%.

Transactions with Walgreen Co.

Following Walgreen Co. acquisition of a 45% equity stake in Alliance Boots GmbH in August 2012, Walgreen Co. and its subsidiaries (“Walgreens”) were related parties.  A summary of the significant transactions in the period are as follows:

Transactions with Walgreens (excluding those Walgreens subsidiaries which the Group accounts for as joint ventures) were revenue of £113.4 million (2013: £65.0 million), the reimbursement of administrative costs (including secondments) of £3.9 million (2013: £1.7 million) and administrative costs (including secondments) of £3.1 million (2013: £0.8 million).

Transactions with associates and joint ventures

Trading transactions with associates and joint ventures were:

 

 

 

Alliance Boots GmbH

Notes to the interim condensed consolidated financial statements (continued)

for the nine month period ended 31 December 2014

 

15.	Events after the period end

 

On 31 December 2014, Walgreens Boots Alliance, Inc. (‘WBA’), a newly incorporated company registered in the US, became the successor of Walgreen Co. as part of a reorganisation programme at Walgreens which resulted in Walgreens becoming a wholly owned subsidiary of WBA.  Furthermore on 31 December 2014, WBA completed the acquisition of the remaining 55% of Alliance Boots GmbH that it did not previously own and the 2.7% non-controlling interest in AB Acquisitions Luxco 1 S.à r.l. (which is a holding company of the principal subsidiaries, associates and joint ventures), in exchange for £3,133 million in cash and 144,333,468 shares of WBA common stock ($11.0 billion based on the 30 December 2014 closing market price of $76.05) pursuant to the Purchase and Option Agreement dated 18 June 2012 as amended. As a result, WBA became the ultimate parent undertaking of the Group.

In January 2015, the Group repaid all principal outstanding amounts on its senior credit facilities and certain of the Group’s other committed loans to lenders which amounted to £5,254 million.

 

In July 2015, the Group acquired Liz Earle Beauty Co. Limited, owner of the Liz Earle skincare brand for £140 million.

 

 

14

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