Walgreens Boots Alliance, Inc.
Walgreens Boots Alliance, Inc. (Form: 10-Q, Received: 04/05/2017 16:38:40)

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q
(Mark One)
 
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended February 28, 2017
or
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______to _______
Commission File Number
001-36759
WALGREENS BOOTS ALLIANCE, INC.
(Exact name of registrant as specified in its charter)

Delaware
47-1758322
(State of Incorporation)
(I.R.S. Employer Identification No.)
108 Wilmot Road, Deerfield, Illinois
60015
(Address of principal executive offices)
(Zip Code)

(847) 315-2500
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes  þ        No ☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes   þ      No ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer þ
Accelerated filer ☐
Non-accelerated filer ☐  (Do not check if a smaller reporting company)
Smaller reporting company ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yes ☐        No þ
The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of March 31, 2017 was 1,080,950,894.
 


Table of Contents

WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2017

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION
 
Item 1.
Consolidated Condensed Financial Statements (Unaudited)
 
 
a)
 
 
b)
 
 
c)
 
 
d)
 
 
e)
 
 
f)
 
Item 2.
 
Item 3.
 
Item 4.

PART II. OTHER INFORMATION
 
Item 1.
 
Item 1A.
 
Item 2.
 
Item 5.
 
Item 6.

- 2 -

Table of Contents

PART I. FINANCIAL INFORMATION

Item 1.
Consolidated Condensed Financial Statements (Unaudited)

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED BALANCE SHEETS
(UNAUDITED)
(In millions, except shares and per share amounts)
 
February 28, 2017
 
August 31, 2016
Assets
 
 
 
Current Assets:
 
 
 
Cash and cash equivalents
$
11,822

 
$
9,807

Accounts receivable, net
5,674

 
6,260

Inventories
9,230

 
8,956

Other current assets
783

 
860

Total Current Assets
27,509

 
25,883

Non-Current Assets:


 
 

Property, plant and equipment, net
13,528

 
14,335

Goodwill
15,214

 
15,527

Intangible assets, net
9,650

 
10,302

Equity method investments (see Note 4)
6,164

 
6,174

Other non-current assets
440

 
467

Total Non-Current Assets
44,996

 
46,805

Total Assets
$
72,505

 
$
72,688

 
 
 
 
Liabilities and Equity
 

 
 

Current Liabilities:
 

 
 

Short-term borrowings
$
1,153

 
$
323

Trade accounts payable (see Note 17)
11,264

 
11,000

Accrued expenses and other liabilities
4,935

 
5,484

Income taxes
326

 
206

Total Current Liabilities
17,678

 
17,013

Non-Current Liabilities:
 

 
 

Long-term debt
17,758

 
18,705

Deferred income taxes
2,339

 
2,644

Other non-current liabilities
4,309

 
4,045

Total Non-Current Liabilities
24,406

 
25,394

Commitments and Contingencies (see Note 9)


 


Equity:
 

 
 

Preferred stock $.01 par value; authorized 32 million shares, none issued

 

Common stock $.01 par value; authorized 3.2 billion shares; issued 1,172,513,618 at February 28, 2017 and August 31, 2016
12

 
12

Paid-in capital
10,162

 
10,111

Employee stock loan receivable

 
(1
)
Retained earnings
28,987

 
27,684

Accumulated other comprehensive (loss) income
(3,809
)
 
(2,992
)
Treasury stock, at cost; 91,818,244 shares at February 28, 2017 and 89,527,027 at August 31, 2016
(5,285
)
 
(4,934
)
Total Walgreens Boots Alliance, Inc. Shareholders’ Equity
30,067

 
29,880

Noncontrolling interests
354

 
401

Total Equity
30,421

 
30,281

Total Liabilities and Equity
$
72,505

 
$
72,688


The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 3 -

Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENT OF EQUITY
(UNAUDITED)
For the six months ended February 28, 2017
(In millions, except shares)
 
Equity attributable to Walgreens Boots Alliance, Inc.
 
 
 
 
 
Common Stock
Shares
 
Common
Stock
Amount
 
Treasury
Stock
Amount
 
Paid-In
Capital
 
Employee
Stock
Loan
Receivable
 
Accumulated
Other
Comprehensive
(Loss) Income
 
Retained
Earnings
 
Noncontrolling
Interests
 
Total
Equity
August 31, 2016
1,082,986,591

 
$
12

 
$
(4,934
)
 
$
10,111

 
$
(1
)
 
$
(2,992
)
 
$
27,684

 
$
401

 
$
30,281

Net earnings

 

 

 

 

 

 
2,114

 
15

 
2,129

Other comprehensive income (loss), net of tax

 

 

 

 

 
(817
)
 

 
(43
)
 
(860
)
Dividends declared ($0.750 per share)

 

 

 

 

 

 
(811
)
 
(6
)
 
(817
)
Treasury stock purchases
(5,600,000
)
 

 
(457
)
 

 

 

 

 

 
(457
)
Employee stock purchase and option plans
3,308,783

 

 
106

 
10

 
1

 

 

 

 
117

Stock-based compensation

 

 

 
52

 

 

 

 

 
52

Noncontrolling interests in businesses acquired

 

 

 
(11
)
 

 

 

 
(13
)
 
(24
)
February 28, 2017
1,080,695,374

 
$
12

 
$
(5,285
)
 
$
10,162

 
$

 
$
(3,809
)
 
$
28,987

 
$
354

 
$
30,421


The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 4 -

Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(In millions, except per share amounts)
 
Three Months Ended

Six Months Ended
 
February 28, 2017

February 29, 2016

February 28, 2017

February 29, 2016
Sales
$
29,446

 
$
30,184

 
$
57,947

 
$
59,217

Cost of sales
21,885

 
22,317

 
43,270

 
43,931

Gross Profit
7,561

 
7,867

 
14,677

 
15,286

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
6,124

 
6,007

 
11,810

 
11,958

Equity earnings in AmerisourceBergen
42

 

 
59

 

Operating Income
1,479

 
1,860

 
2,926

 
3,328

 
 
 
 
 
 
 
 
Other expense
(15
)
 
(496
)
 
(14
)
 
(553
)
Earnings Before Interest and Income Tax Provision
1,464

 
1,364

 
2,912

 
2,775

 
 
 
 
 
 
 
 
Interest expense, net
172

 
140

 
345

 
278

Earnings Before Income Tax Provision
1,292

 
1,224

 
2,567

 
2,497

Income tax provision
246

 
301

 
466

 
468

Post tax earnings from other equity method investments
16

 
9

 
28

 
20

Net Earnings
1,062

 
932

 
2,129

 
2,049

Net earnings attributable to noncontrolling interests
2

 
2

 
15

 
9

Net Earnings Attributable to Walgreens Boots Alliance, Inc.
$
1,060

 
$
930

 
$
2,114

 
$
2,040

 
 
 
 
 
 
 
 
Net earnings per common share:
 

 
 

 
 

 
 

Basic
$
0.98

 
$
0.86

 
$
1.96

 
$
1.88

Diluted
$
0.98

 
$
0.85

 
$
1.94

 
$
1.87

 
 
 
 
 
 
 
 
Dividends declared per share
$
0.375

 
$
0.360

 
$
0.750

 
$
0.720

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
1,079.7

 
1,080.2

 
1,080.9

 
1,084.6

Diluted
1,085.5

 
1,088.4

 
1,086.9

 
1,093.5


The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.


- 5 -

Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(In millions)
 
Three Months Ended
 
Six Months Ended
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Comprehensive Income
 
 
 
 
 
 
 
Net Earnings
$
1,062

 
$
932

 
$
2,129

 
$
2,049

 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 
 
 

Pension/postretirement obligations
5

 
(2
)
 
(4
)
 
1

Unrealized gain on cash flow hedges
1

 
1

 
2

 
2

Unrecognized loss on available-for-sale investments

 
(88
)
 
(1
)
 
(87
)
Share of other comprehensive loss of equity method investments
(4
)
 

 
(5
)
 

Currency translation adjustments
3

 
(1,156
)
 
(852
)
 
(1,606
)
Total Other Comprehensive Income (Loss)
5

 
(1,245
)
 
(860
)
 
(1,690
)
Total Comprehensive Income (Loss)
1,067

 
(313
)
 
1,269

 
359

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interests
5

 
(33
)
 
(28
)
 
(27
)
Comprehensive Income (Loss) Attributable to Walgreens Boots Alliance, Inc.
$
1,062

 
$
(280
)
 
$
1,297

 
$
386


The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 6 -

Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(In millions)
 
Six Months Ended
 
February 28, 2017
 
February 29, 2016
Cash Flows from Operating Activities :
 
 
 
Net earnings
$
2,129

 
$
2,049

Adjustments to reconcile net earnings to net cash provided by operating activities:
 

 
 

Depreciation and amortization
831

 
824

Change in fair value of warrants and related amortization

 
586

Deferred income taxes
(226
)
 
(171
)
Stock compensation expense
52

 
60

Equity earnings from equity method investments
(87
)
 
(20
)
Other
184

 
196

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
189

 
(152
)
Inventories
(507
)
 
(553
)
Other current assets
17

 
33

Trade accounts payable
789

 
160

Accrued expenses and other liabilities
(309
)
 
(79
)
Income taxes
154

 
92

Other non-current assets and liabilities
166

 
60

Net cash provided by operating activities
3,382

 
3,085

 
 
 
 
Cash Flows from Investing Activities :
 

 
 

Additions to property, plant and equipment
(639
)
 
(657
)
Proceeds from sale leaseback transactions
436

 
60

Proceeds from sale of businesses

 
43

Proceeds from sale of other assets
22

 
85

Business and intangible asset acquisitions, net of cash received
(52
)
 
(86
)
Other
36

 
3

Net cash used for investing activities
(197
)
 
(552
)
 
 
 
 
Cash Flows from Financing Activities :
 

 
 

Proceeds and payments from short-term borrowings, net
76

 
61

Payments of long-term debt
(9
)
 
(81
)
Stock purchases
(457
)
 
(1,152
)
Proceeds related to employee stock plans
116

 
129

Cash dividends paid
(817
)
 
(787
)
Other
(31
)
 
(29
)
Net cash used for financing activities
(1,122
)
 
(1,859
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
(48
)
 
(88
)
 
 
 
 
Changes in Cash and Cash Equivalents :
 

 
 


- 7 -


Net increase in cash and cash equivalents
2,015

 
586

Cash and cash equivalents at beginning of period
9,807

 
3,000

Cash and cash equivalents at end of period
$
11,822

 
$
3,586


The accompanying Notes to Consolidated Condensed Financial Statements are an integral part of these Statements.

- 8 -


WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)

Note 1. Accounting Policies
Basis of Presentation
The Consolidated Condensed Financial Statements of Walgreens Boots Alliance, Inc. (“Walgreens Boots Alliance” or the "Company") included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The Consolidated Condensed Financial Statements include all subsidiaries in which the Company holds a controlling interest. Investments in less than majority-owned subsidiaries in which the Company does not have a controlling interest, but does have significant influence, are accounted for as equity method investments. All intercompany transactions have been eliminated.

The Consolidated Condensed Balance Sheet as of February 28, 2017 , the Consolidated Condensed Statement of Equity for the six months ended February 28, 2017 , and the Consolidated Condensed Statements of Earnings, the Consolidated Condensed Statements of Comprehensive Income and the Consolidated Condensed Statements of Cash Flows for the three and six months ended February 28, 2017 and February 29, 2016 are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited Consolidated Condensed Financial Statements should be read in conjunction with the audited financial statements and the notes thereto included in the Walgreens Boots Alliance Annual Report on Form 10-K for the fiscal year ended August 31, 2016 .

In the opinion of the Company, the unaudited Consolidated Condensed Financial Statements for the interim periods presented include all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of the results for such interim periods. The influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms and other factors on the Company’s operations, net earnings for any period may not be comparable to the same period in previous years. With respect to the Company’s Retail Pharmacy USA segment, the positive impact on gross margins and gross profit dollars typically has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a “generic conversion.” In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on the Company’s Retail Pharmacy USA segment’s sales, gross margin and gross profit dollars making the Company’s operations or net earnings for any period incomparable.

To improve comparability, certain classification changes were made to prior periods to conform to current year classifications. These reclassifications were made in the fourth quarter of fiscal 2016.

On October 27, 2015, Walgreens Boots Alliance entered into an Agreement and Plan of Merger with Rite Aid Corporation (“Rite Aid”) and Victoria Merger Sub, Inc., a wholly-owned subsidiary of Walgreens Boots Alliance (as amended as described below, the “Merger Agreement”), pursuant to which the Company agreed, subject to the terms and conditions thereof, to acquire Rite Aid, a drugstore chain in the United States with 4,547 stores in 31 states and the District of Columbia as of November 26, 2016. The Merger Agreement was amended by Amendment No. 1 (the “Amendment”) on January 29, 2017. Under the terms of the Amendment, the parties agreed to reduce the price for each share of Rite Aid common stock to be paid by Walgreens Boots Alliance upon closing to a maximum of $7.00 per share and a minimum of $6.50 per share. In addition, Walgreens Boots Alliance will be required to divest up to 1,200 Rite Aid stores and certain additional related assets if required to obtain regulatory approval. The exact price per share will be determined based on the number of required store divestitures, with the price set at $7.00 per share if 1,000 stores or fewer are required for divestiture and at $6.50 per share if 1,200 stores are required for divestiture. If the required divestitures fall between 1,000 and 1,200 stores, then there will be a pro-rata adjustment of the price per share. Additionally, Walgreens Boots Alliance and Rite Aid agreed to extend the end date under the Merger Agreement to July 31, 2017 in order to allow the parties additional time to obtain regulatory approval. The transaction is subject to approval by the holders of Rite Aid’s common stock, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions.

On December 20, 2016, Walgreens Boots Alliance and Rite Aid announced that they have entered into an agreement to sell 865 Rite Aid stores and certain assets related to store operations to Fred’s, Inc. (“Fred’s”) for $950 million in an all-cash transaction. The transaction is subject to Federal Trade Commission (“FTC”) approval, the approval and completion of the pending acquisition of Rite Aid by Walgreens Boots Alliance pursuant to the Merger Agreement, and other customary closing conditions. If the FTC requires divestiture of more than the 865 Rite Aid stores currently contemplated by the purchase

- 9 -


agreement and Walgreens Boots Alliance agrees to sell such stores, the purchase agreement requires Fred’s to purchase such additional stores.

Note 2. Restructuring
On April 8, 2015, the Walgreens Boots Alliance Board of Directors approved a plan to implement a new restructuring program (the “Cost Transformation Program”) as part of an initiative to reduce costs and increase operating efficiencies. The Cost Transformation Program implemented and built on the cost-reduction initiative previously announced by the Company on August 6, 2014 and included plans to close stores across the U.S.; reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions. The actions under the Cost Transformation Program focus primarily on the Retail Pharmacy USA segment. From inception through February 28, 2017 , the Company incurred pre-tax charges of $1.4 billion ( $563 million related to asset impairment charges, $542 million in real estate costs and $282 million in severance and other business transition and exit costs) related to the Cost Transformation Program. All charges related to the Cost Transformation Program have been recorded within selling, general and administrative expenses. Restructuring charges are recognized as the costs are incurred in accordance with GAAP.

Restructuring costs by segment are as follows (in millions):
Three Months Ended February 28, 2017
Retail Pharmacy USA
 
Retail Pharmacy International
 
Pharmaceutical Wholesale
 
Walgreens Boots Alliance, Inc.
Asset impairments
$
65

 
$
1

 
$
1

 
$
67

Real estate costs
240

 

 

 
240

Severance and other business transition and exit costs
11

 
18

 
4

 
33

Total restructuring costs
$
316

 
$
19

 
$
5

 
$
340

 
 
 
 
 
 
 
 
Three Months Ended February 29, 2016
 

 
 

 
 

 
 

Asset impairments
$

 
$

 
$

 
$

Real estate costs

 

 

 

Severance and other business transition and exit costs
25

 
3

 

 
28

Total restructuring costs
$
25

 
$
3

 
$

 
$
28

Six Months Ended February 28, 2017
Retail Pharmacy USA
 
Retail Pharmacy International
 
Pharmaceutical Wholesale
 
Walgreens Boots Alliance, Inc.
Asset impairments
$
111

 
$
3

 
$
1

 
$
115

Real estate costs
249

 

 

 
249

Severance and other business transition and exit costs
28

 
22

 
7

 
57

Total restructuring costs
$
388

 
$
25

 
$
8

 
$
421

 
 
 
 
 
 
 
 
Six Months Ended February 29, 2016
 

 
 

 
 

 
 

Asset impairments
$
25

 
$

 
$

 
$
25

Real estate costs
52

 

 

 
52

Severance and other business transition and exit costs
33

 
8

 

 
41

Total restructuring costs
$
110

 
$
8

 
$

 
$
118


The changes in Accrued expenses related to the Cost Transformation Program include the following (in millions):

- 10 -


 
Asset
Impairments
 
Real estate
costs
 
Severance and
other business
transition and
exit costs
 
Total
Balance at August 31, 2016
$

 
$
248

 
$
27

 
$
275

Restructuring Costs
115

 
249

 
57

 
421

Payments

 
(28
)
 
(29
)
 
(57
)
Other - non cash
(115
)
 

 
(13
)
 
(128
)
Currency translation adjustments

 

 
(1
)
 
(1
)
Balance at February 28, 2017
$

 
$
469

 
$
41

 
$
510


Note 3. Operating Leases
Initial lease term for premises in the U.S. is typically 15 to 25 years, followed by additional terms containing renewal options at five -year intervals, and may include rent escalation clauses. Non-U.S. leases are typically for shorter terms and may include cancellation clauses or renewal options. 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.

The Company continuously evaluates its real estate portfolio in conjunction with its capital needs. The Company has entered into several sale-leaseback transactions. For the six months ended February 28, 2017 and February 29, 2016 , the Company recorded proceeds from sale-leaseback transactions of $436 million and $60 million , respectively. The Company has determined it no longer has continuing involvement related to these transactions and in accordance with the accounting standards related to sale-leaseback transactions has recognized any loss on sale immediately, any gain on sale was deferred and amortized over the life of the lease. Gains and losses are recorded within selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.

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. During the three and six months ended February 28, 2017 , the Company recorded charges of $247 million and $264 million for facilities that were closed or relocated under long-term leases, including stores closed through the Company’s restructuring activities. This compares to $9 million and $75 million for the three and six months ended February 29, 2016 . These charges are reported in selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.

The changes in reserve for facility closings and related lease termination charges include the following (in millions):
 
For the six months ended February 28, 2017
 
For the twelve months ended August 31, 2016
Balance at beginning of period
$
466

 
$
446

Provision for present value of non-cancellable lease payments on closed facilities
258

 
134

Assumptions about future sublease income, terminations and changes in interest rates
(10
)
 
(34
)
Interest accretion
16

 
27

Cash payments, net of sublease income
(59
)
 
(107
)
Balance at end of period
$
671

 
$
466


As of February 28, 2017 , the Company remains secondarily liable on 71 leases. The maximum potential undiscounted future payments are $335 million as of February 28, 2017 .

Note 4. Equity Method Investments
Equity method investments as of February 28, 2017 and August 31, 2016 , are as follows (in millions, except percentages):

- 11 -


 
February 28, 2017
 
August 31, 2016
 
Carrying
Value
 
Ownership
Percentage
 
Carrying
Value
 
Ownership
Percentage
AmerisourceBergen
$
4,982

 
26%
 
$
4,964

 
24%
Others
1,182

 
12% - 50%
 
1,210

 
12% - 50%
Total
$
6,164

 
 
 
$
6,174

 
 

AmerisourceBergen Investment
As of February 28, 2017 and August 31, 2016 , the Company owned 56,854,867 AmerisourceBergen Corporation (“AmerisourceBergen”) common shares, representing approximately 26% and 24% of the outstanding AmerisourceBergen common stock, respectively. The Company accounts for its equity investment in AmerisourceBergen using the equity method of accounting, with the net earnings attributable to the Company’s investment being classified within the operating income of its Pharmaceutical Wholesale segment. Due to the timing and availability of financial information of AmerisourceBergen, the Company accounts for this equity method investment on a financial reporting lag of two months . Equity earnings from AmerisourceBergen is reported as a separate line in the Consolidated Condensed Statements of Earnings. The level 1 fair market value of the Company’s equity investment in AmerisourceBergen common stock at February 28, 2017 is $5.2 billion .

The Company’s investment in AmerisourceBergen carrying value exceeded its proportionate share of the net assets of AmerisourceBergen by $4.4 billion . This premium of $4.4 billion was recognized as part of the carrying value in the Company’s equity investment in AmerisourceBergen. The difference was primarily related to goodwill and the fair value of AmerisourceBergen intangible assets.

Other Investments
The Company’s other equity method investments include its investments in Guangzhou Pharmaceuticals Corporation and Nanjing Pharmaceutical Corporation Limited, the Company’s pharmaceutical wholesale investments in China; and the equity method investment retained through the sale of a majority interest in Option Care Inc. in fiscal 2015. The Company reported $16 million and $9 million of post-tax equity earnings from equity method investments other than AmerisourceBergen for the three months ended February 28, 2017 and February 29, 2016 , respectively. The Company reported $ 28 million and $20 million of post-tax equity earnings from equity method investments other than AmerisourceBergen for the six months ended February 28, 2017 and February 29, 2016 , respectively.

Note 5. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill by reportable segment consist of the following (in millions):
 
Retail
Pharmacy USA
 
Retail
Pharmacy
International
 
Pharmaceutical
Wholesale
 
Walgreens
Boots
Alliance, Inc.
August 31, 2016
$
9,036

 
$
3,369

 
$
3,122

 
$
15,527

Currency translation adjustments

 
(146
)
 
(167
)
 
(313
)
February 28, 2017
$
9,036

 
$
3,223

 
$
2,955

 
$
15,214


The carrying amount and accumulated amortization of intangible assets consist of the following (in millions):

- 12 -


 
February 28, 2017
 
August 31, 2016
Gross Amortizable Intangible Assets
 
 
 
Customer relationships and loyalty card holders
$
1,764

 
$
1,867

Purchased prescription files
718

 
932

Favorable lease interests and non-compete agreements
542

 
619

Trade names and trademarks
509

 
532

Purchasing and payer contracts
61

 
94

Total gross amortizable intangible assets
3,594

 
4,044

 
 
 
 
Accumulated amortization
 

 
 

Customer relationships and loyalty card holders
$
328

 
$
275

Purchased prescription files
415

 
600

Favorable lease interests and non-compete agreements
344

 
388

Trade names and trademarks
129

 
105

Purchasing and payer contracts
39

 
71

Total accumulated amortization
1,255

 
1,439

Total amortizable intangible assets, net
$
2,339

 
$
2,605

 
 
 
 
Indefinite lived Intangible Assets
 

 
 

Trade names and trademarks
$
5,323

 
$
5,604

Pharmacy licenses
1,988

 
2,093

Total indefinite lived intangible assets
$
7,311

 
$
7,697

 
 
 
 
Total intangible assets, net
$
9,650

 
$
10,302


Amortization expense for intangible assets was $94 million and $189 million for the three and six months ended February 28, 2017 , and $124 million and $216 million for the three and six months ended February 29, 2016 , respectively.

Estimated annual amortization expense for intangible assets recorded at February 28, 2017 is as follows (in millions):
 
2017
 
2018
 
2019
 
2020
 
2021
Estimated annual amortization expense
$
357

 
$
326

 
$
295

 
$
236

 
$
194



- 13 -


Note 6. Borrowings
Borrowings consist of the following (all amounts are presented in millions of U.S. dollars and debt issuances are denominated in U.S. dollars, unless otherwise noted)
 
February 28, 2017
 
August 31, 2016
Short-Term Borrowings   ( 1 )
 
 
 
1.750% unsecured notes due November 2017 ( 5 )(7)
$
748

 
$

Unsecured Pound Sterling variable rate term loan due 2019
90

 
63

Other (2)
315

 
260

Total short-term borrowings
$
1,153

 
$
323

 
 
 
 
Long-Term Debt (1)
 

 
 

Unsecured Pound Sterling variable rate term loan due 2019
$
1,711

 
$
1,833

$6 Billion Note Issuance   (5)(7)
 

 
 

1.750% unsecured notes due 2018
1,247

 
1,246

2.600% unsecured notes due 2021
1,494

 
1,493

3.100% unsecured notes due 2023
745

 
744

3.450% unsecured notes due 2026
1,886

 
1,885

4.650% unsecured notes due 2046
590

 
590

$8 Billion Note Issuance   (5)(7)
 

 
 

1.750% unsecured notes due 2017

 
746

2.700% unsecured notes due 2019
1,245

 
1,244

3.300% unsecured notes due 2021
1,243

 
1,242

3.800% unsecured notes due 2024
1,987

 
1,987

4.500% unsecured notes due 2034
494

 
494

4.800% unsecured notes due 2044
1,492

 
1,492

£700 Million Note Issuance   (1)(5)(7)
 

 
 

2.875% unsecured Pound Sterling notes due 2020
495

 
521

3.600% unsecured Pound Sterling notes due 2025
371

 
391

€750 Million Note Issuance   (1)(5)(7)
 

 
 

2.125% unsecured Euro notes due 2026
790

 
830

$4 Billion Note Issuance   (6)(7)
 

 
 

3.100% unsecured notes due 2022
1,194

 
1,194

4.400% unsecured notes due 2042
492

 
492

$1 Billion Note Issuance   (6)(7)
 

 
 

5.250% unsecured notes due 2019 (3)
249

 
249

Other (4)
33

 
32

Total long-term debt, less current portion
$
17,758

 
$
18,705


(1)  
All notes are presented net of unamortized discount and debt issuance costs, where applicable, and foreign currency denominated borrowings have been translated using the spot rates at February 28, 2017 and August 31, 2016 , respectively.
(2)  
Other short-term borrowings represent a mix of fixed and variable rate borrowings with various maturities and working capital facilities denominated in various foreign currencies.
(3)  
Includes interest rate swap fair market value adjustments. See Note 8, Fair Value Measurements for additional fair value disclosures.
(4)  
Other long-term debt represents a mix of fixed and variable rate borrowings in various foreign currencies with various maturities.
(5)  
Notes are unsubordinated debt obligations of Walgreens Boots Alliance and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance from time to time outstanding.

- 14 -


(6)  
Notes are senior debt obligations of Walgreens and rank equally with all other unsecured and unsubordinated indebtedness of Walgreens. On December 31, 2014, Walgreens Boots Alliance fully and unconditionally guaranteed the outstanding notes on an unsecured and unsubordinated basis. The guarantee, for so long as it is in place, is an unsecured, unsubordinated debt obligation of Walgreens Boots Alliance and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance.
(7)  
The fair value & carrying value of the $6 billion , $8 billion , £0.7 billion , €0.75 billion , $4 billion and $1 billion note issuances as of February 28, 2017 was $6.0 billion  & $6.0 billion $7.4 billion  & $7.2 billion , $0.9 billion  & $0.9 billion , $0.8 billion  & $0.8 billion , $1.7 billion  & $1.7 billion and $0.3 billion  & $0.2 billion , respectively. The fair values of the notes outstanding are Level 1 fair value measures and determined based on quoted market price and translated at the February 28, 2017 spot rate, as applicable.

Backstop Commitment Letter, Backstop Credit Agreement and 2017 Term Loan Credit Agreements
In connection with Amendment No. 1 to the Merger Agreement, on January 31, 2017, the Company entered into (i) a $5.0 billion backstop facility commitment letter (the “Backstop Commitment Letter”) and (ii) a $5.0 billion unsecured bridge term loan facility (the “Backstop Credit Agreement”). Upon entry into the Backstop Credit Agreement, the Backstop Commitment Letter and the commitments contemplated thereby terminated.

On February 22, 2017, the Company entered into (a) a $4.8 billion unsecured term loan facility with the lenders party thereto (the “Syndicated Credit Agreement”) and (b) a $1.0 billion unsecured term loan facility with Sumitomo Mitsui Banking Corporation, as lender and administrative agent (the “Sumitomo Credit Agreement” and, together with the Syndicated Credit Agreement, the “2017 Term Loan Credit Agreements”). In connection therewith, as of such date the commitments available under the Backstop Credit Agreement were reduced to zero and such agreement terminated in accordance with its terms.
The Syndicated Credit Agreement is a two -tranche unsecured term loan facility (each tranche in an amount of $2.4 billion ), with the first tranche maturing October 27, 2019 and the second tranche maturing October 27, 2021, provided that the Company may increase the commitments available under either of the tranches of the Syndicated Credit Agreement at any time prior to the funding date thereunder by up to $450 million , subject to obtaining commitments from existing lenders and/or new lenders selected by the Company and reasonably acceptable to Bank of America, N.A., as administrative agent.
The Sumitomo Credit Agreement is a two -tranche unsecured term loan facility (each tranche in an amount of $500 million ), with the first tranche maturing on the first anniversary of the funding date thereunder and the second tranche maturing on the earlier of the first anniversary of the funding date thereunder and March 30, 2018.

Walgreens Boots Alliance will be the borrower under each of the 2017 Term Loan Credit Agreements. The obligations of the lenders party to each of the 2017 Term Loan Credit Agreements to fund the loans thereunder become effective upon the date of closing of the transactions contemplated by the Merger Agreement. The ability of the Company to request the funding of loans under each of the 2017 Term Loan Credit Agreements is subject to the satisfaction (or waiver) of certain customary "limited conditions" set forth therein and will terminate upon the occurrence of certain events set forth therein. Commitments to provide loans under each of the 2017 Term Loan Credit Agreements will expire on the earliest of (a) the date of consummation of the acquisition by Walgreens Boots Alliance (the “Acquisition”) of all the issued and outstanding equity interests of Rite Aid (provided that loans may be funded on such date), (b) prior to the consummation of the Acquisition, the termination of the Merger Agreement by Walgreens Boots Alliance or with the written consent of Walgreens Boots Alliance in accordance with its terms (other than with respect to provisions therein that expressly survive termination), (c) 11:59 p.m., New York time, on July 31, 2017; provided that Walgreens Boots Alliance may extend such date to October 31, 2017 on prior written notice to the respective Administrative Agent and lenders thereunder, and (d) the date of termination in whole of the lender’s commitments under each applicable 2017 Term Loan Credit Agreement in accordance with the terms thereof.

As of February 28, 2017, there were no borrowings under either of the 2017 Term Loan Credit Agreements.

2017 Revolving Credit Agreement
On February 1, 2017, the Company entered into a $1.0 billion revolving credit facility (the “2017 Revolving Credit Agreement”) with the lenders from time to time party thereto. The Company will be the borrower under the 2017 Revolving Credit Agreement, which terminates on the earlier of (a)  364 days following the effective date thereof, subject to the extension thereof pursuant to provisions specified in the Revolving Credit Agreement, and (b) the date of termination in whole of the aggregate commitment pursuant to the Revolving Credit Agreement. The ability of the Company to request the making of loans under the 2017 Revolving Credit Agreement is subject to the satisfaction (or waiver) of certain customary conditions set forth therein (including a separate set of customary “limited conditions” applicable to any loans made for the sole purpose of financing the Acquisition). As of February 28, 2017, there were no borrowings under the 2017 Revolving Credit Agreement.


- 15 -


$6.0 billion Note Issuance
On June 1, 2016, Walgreens Boots Alliance received net proceeds (after deducting underwriting discounts and offering expenses) of $6.0 billion from a public offering of five series of U.S. dollar notes with varying maturities and interest rates. Total issuance costs relating to the notes, including underwriting discounts and offering expenses, were $30 million . In the event that the merger contemplated by the Agreement and Plan of Merger dated as of October 27, 2015 among the Company, Rite Aid Corporation (“Rite Aid”) and Victoria Merger Sub, Inc., a wholly-owned subsidiary of the Company (as amended pursuant to Amendment No. 1 thereto, dated as of January 29, 2017, the “Merger Agreement”) is not consummated on or prior to June 1, 2017 (the first anniversary of the issuance date of the notes) or if the Merger Agreement is terminated at any time on or prior to June 1, 2017, then Walgreens Boots Alliance will be required to redeem the notes due 2018, the notes due 2021 and the notes due 2023 (but not the notes due 2026 or notes due 2046) on the date described in the applicable note at a redemption price equal to 101% of the aggregate principal amount of the notes to be redeemed, plus accrued and unpaid interest from and including the date of initial issuance, or the most recent date to which interest has been paid, whichever is later, to, but excluding, the date of redemption.

The notes issued on June 1, 2016 contain redemption terms which allow or require the Company to redeem the notes at defined redemption prices plus accrued and unpaid interest at redemption dates set forth in the applicable series of notes. Interest on the notes issued on June 1, 2016 is payable semi-annually.

Bridge Credit Agreement, 2015 Term Loan Credit Agreement and 2016 Term Loan Credit Agreement
In connection with the pending acquisition of Rite Aid, on December 18, 2015, the Company entered into a 364 -day unsecured bridge term loan facility with initial aggregate commitments of $7.8 billion (as amended, the “Bridge Credit Agreement”) and a $5.0 billion unsecured term loan facility (as amended, the “2015 Term Loan Credit Agreement”) and on August 30, 2016, the Company entered into a $1.0 billion senior unsecured term loan facility (the “2016 Term Loan Credit Agreement”). On January 27, 2017, each of the Bridge Credit Agreement, the 2015 Term Loan Credit Agreement, and the 2016 Term Loan Credit Agreement terminated in accordance with its terms.

Debt covenants
The Company’s credit facilities contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60 :1.00. The credit facilities contain various other customary covenants. In the case of the 2017 Term Loan Credit Agreements, such covenants are not in effect until the loans under each such credit facility are funded.

Other Borrowings
The Company periodically borrows under its commercial paper program. There were no commercial paper borrowings outstanding as of February 28, 2017 or August 31, 2016 , respectively. The Company had no activity under its commercial paper program for the six months ended February 28, 2017 . The Company had average daily short-term borrowings of $20 million of commercial paper outstanding at a weighted average interest rate of 0.62% for the six month period ended February 29, 2016 .


Note 7. Financial Instruments
The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.

The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of February 28, 2017 and August 31, 2016 are as follows (in millions):

- 16 -


 
February 28, 2017
 
August 31, 2016
 
 
 
Notional (1)
 
Fair
Value
 
Notional (1)
 
Fair
Value
 
Location in Consolidated
Condensed Balance Sheets
Derivatives designated as fair value hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
250

 
1

 

 

 
Other non-current liabilities
Interest rate swaps

 

 
250

 
3

 
Other non-current assets
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign currency forwards
253

 
2

 
1,177

 
16

 
Other current assets
Foreign currency forwards
1,052

 
11

 
41

 

 
Other current liabilities
Basis swaps
2

 
1

 

 

 
Other current liabilities
Basis swaps

 

 
2

 
1

 
Other current assets

(1)  
Amounts are presented in U.S. dollar equivalents, as applicable.

The Company uses interest rate swaps to manage the interest rate exposure associated with some of its fixed-rate borrowings and designates them as fair value hedges. The Company uses forward starting interest rate swaps to hedge its interest rate exposure of some of its anticipated debt issuances.

The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge significant committed and highly probable future transactions and cash flows denominated in currencies other than the functional currency of the Company or its subsidiaries. The Company has significant non-U.S. dollar denominated net investments and uses foreign currency denominated financial instruments, specifically foreign currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.

Fair Value Hedges
The Company holds interest rate swaps converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread. All swap termination dates coincide with the notes maturity date, January 15, 2019. These swaps were designated as fair value hedges.

The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest rate risk were not material.

The changes in fair value of the Company’s debt that was swapped from fixed to variable rate and designated as fair value hedges are included in long-term debt on the Consolidated Condensed Balance Sheets (see Note 6, Borrowings). At February 28, 2017 and August 31, 2016 , the cumulative fair value adjustments resulted in a decrease in long-term debt of $1 million and an increase of $3 million , respectively. No material gains or losses were recorded from ineffectiveness during the three and six months ended February 28, 2017 .

Derivatives not Designated as Hedges
The Company enters into derivative transactions that are not designated as accounting hedges. These derivative instruments are economic hedges of foreign currency risks. The gains and (losses) due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):
 
 
 
Three Months Ended

Six Months Ended
 
Location in Consolidated Condensed
Statements of Earnings
 
February 28, 2017

February 29, 2016

February 28, 2017

February 29, 2016
Foreign currency forwards
Selling, general and administrative expense
 
$
(2
)
 
$
(23
)
 
$
47

 
$
(25
)
Foreign currency forwards
Other income (expense)
 
$
(15
)
 
$
33

 
$
(14
)
 
$
33


Derivatives Credit Risk

- 17 -


Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of counterparty nonperformance, and the Company regularly monitors the credit worthiness of each counterparty.

Derivatives Offsetting
The Company does not offset the fair value amounts of derivative instruments subject to master netting agreements in the Consolidated Condensed Balance Sheets.

Note 8. Fair Value Measurements
The Company measures certain assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to Level 1 inputs.
Level 2 - Observable inputs other than quoted prices in active markets.
Level 3 - Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to Level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis are as follows (in millions):
 
February 28, 2017
 
Level 1
 
Level 2
 
Level 3
Assets :
 
 
 
 
 
 
 
Restricted cash (1)
$
170

 
$
170

 
$

 
$

Money market funds (2)
10,106

 
10,106

 

 

Available-for-sale investments (3)
28

 
28

 

 

Foreign currency forwards (4)
2

 

 
2

 


Liabilities :
 

 
 

 
 

 
 

Foreign currency forwards (4)
11

 

 
11

 

Basis swaps (4)
1

 

 
1

 

Interest rate swaps (5)
1

 

 
1

 

 
August 31, 2016
 
Level 1
 
Level 2
 
Level 3
Assets :
 
 
 
 
 
 
 
Restricted cash (1)
$
185

 
$
185

 
$

 
$

Money market funds (2)
9,133

 
9,133

 

 

Available-for-sale investments (3)
32

 
32

 

 

Interest rate swaps (5)
3

 

 
3

 

Foreign currency forwards (4)
16

 

 
16

 

Liabilities :
 

 
 

 
 

 
 

Basis swaps (4)
1

 

 
1

 


(1)  
Restricted cash consists of deposits restricted under agency agreements and cash restricted by law and other obligations.
(2)  
Money market funds are valued at the closing price reported by the fund sponsor.
(3)  
Fair values of quoted investments are based on current bid prices as of the balance sheet dates.
(4)  
The fair value of basis swaps and forward currency contracts is 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.
(5)  
The fair value of interest rate swaps is calculated by discounting the estimated future cash flows based on the applicable observable yield curves. See Note 7, Financial Instruments for additional information.


There were no transfers between levels for the three and six months ended February 28, 2017 .

- 18 -



The Company reports its debt instruments under the guidance of ASC Topic 825, Financial Instruments, which requires disclosure of the fair value of the Company’s debt in the footnotes to the consolidated financial statements. Unless otherwise noted, the fair value for all notes was determined based upon quoted market prices and therefore categorized as Level 1. See Note 6, Borrowings for further information. The carrying values of accounts receivable and trade accounts payable approximated their respective fair values due to their short-term nature.

Note 9. Commitments and Contingencies
The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the normal course of the Company’s business, including the matters described below. Legal proceedings, in general, and securities and class action litigation, in particular, can be expensive and disruptive. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company is also involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit, and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s consolidated financial position. However, substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, the Company could from time to time incur judgments, enter into settlements or revise its expectations regarding the outcome of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.

On a quarterly basis, the Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case-by-case basis for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company is unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company’s consolidated financial statements in a future fiscal period. Management’s assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management’s assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved.

On December 29, 2014, a putative shareholder filed a derivative action in federal court in the Northern District of Illinois against certain current and former directors and officers of Walgreen Co., and Walgreen Co. as a nominal defendant, arising out of certain public statements the Company made regarding its former fiscal 2016 goals. The action asserts claims for breach of fiduciary duty, waste and unjust enrichment. On April 10, 2015, the defendants filed a motion to dismiss. On May 18, 2015, the case was stayed in light of a securities class action that was filed on April 10, 2015. After a ruling issued on September 30, 2016 in the securities class action, which is described below, on November 3, 2016, the Court entered a stipulation and order extending the stay until the securities case is fully resolved.

On April 10, 2015, a putative shareholder filed a securities class action in federal court in the Northern District of Illinois against Walgreen Co. and certain former officers of Walgreen Co. The action asserts claims for violation of the federal securities laws arising out of certain public statements the Company made regarding its former fiscal 2016 goals. On June 16, 2015, the Court entered an order appointing a lead plaintiff. Pursuant to the Court’s order, lead plaintiff filed an amended complaint on August 17, 2015, and defendants moved to dismiss the amended complaint on October 16, 2015. Lead plaintiff filed a response to the motion to dismiss on December 22, 2015, and defendants filed a reply in support of the motion on February 5, 2016. On September 30, 2016, the Court issued an order granting in part and denying in part defendants’ motion to dismiss. Defendants filed their answer to the amended complaint on November 4, 2016 and filed an amended answer on January 16, 2017. The Court has granted defendants’ request to bifurcate class certification and merits discovery.


- 19 -


As of February 28, 2017 , the Company was aware of two putative class action lawsuits filed by purported Rite Aid stockholders against Rite Aid and its board of directors, Walgreens Boots Alliance and Victoria Merger Sub, Inc. for claims arising out of the transactions contemplated by the original Merger Agreement (prior to its amendment on January 29, 2017) (such transactions, the “Rite Aid Transactions”). One action was filed in the State of Pennsylvania in the Court of Common Pleas of Cumberland County (the “Pennsylvania action”), and one action was filed in the United States District Court for the Middle District of Pennsylvania (the “federal action”). The Pennsylvania action primarily alleged that the Rite Aid board of directors breached its fiduciary duties in connection with the Rite Aid Transactions by, among other things, agreeing to an unfair and inadequate price, agreeing to deal protection devices that preclude other bidders from making successful competing offers for Rite Aid, and failing to disclose all allegedly material information concerning the proposed merger, and also alleged that Walgreens Boots Alliance and Victoria Merger Sub, Inc. aided and abetted these alleged breaches of fiduciary duty. The federal action alleged, among other things, that Rite Aid and its board of directors disseminated an allegedly false and misleading proxy statement in connection with the Rite Aid Transactions. The plaintiffs in the federal action also filed a motion for preliminary injunction seeking to enjoin the Rite Aid shareholder vote relating to the Rite Aid Transactions. That motion was denied, and the Rite Aid shareholders approved the Rite Aid Transactions at a special meeting on February 4, 2016. In the federal action, plaintiffs agreed to stay the litigation until after the Rite Aid Transactions have closed, but on March 17, 2017, moved to lift the stay to allow plaintiffs to file an amended complaint. The Company has filed a response opposing this motion. The Company was also named as a defendant in eight putative class action lawsuits filed in the Court of Chancery of the State of Delaware (the “Delaware actions”). Those actions were consolidated, and plaintiffs filed a motion for preliminary injunction seeking to enjoin the Rite Aid shareholder vote relating to the Rite Aid Transactions. That motion was denied, and on April 15, 2016, the plaintiffs in the Delaware actions agreed to a settlement in principle related to this matter for an immaterial amount. The Delaware actions all have been dismissed.

Note 10. Retirement Benefits
The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.

Effective September 1, 2016, for UK and U.S. benefit plans previously using the yield curve approach to establish discount rates, the Company changed the method used to calculate the service cost and interest cost components of net periodic benefit costs for pension and postretirement benefit plans and will measure these costs by applying the specific spot rates along the yield curve to the plans’ projected cash flows. The Company believes the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of the Company’s pension and other postretirement benefit obligations for those plans and is accounted for as a change in accounting estimate, which is applied prospectively.

Defined Benefit Pension Plans (non-U.S. plans)
The Company has various defined benefit pension plans outside the United States. The principal defined benefit pension plan is the Boots Pension Plan, which covers certain employees in the United Kingdom (the “Boots Plan”). The Boots Plan is a funded final salary defined benefit plan providing pensions and death benefits to members. The Boots Plan was closed to future accrual effective July 1, 2010, with pensions calculated based on salaries up until that date. The Boots Plan is governed by a trustee board, which is independent of the Company. The plan is subject to a full funding actuarial valuation on a triennial basis.

Components of net periodic pension costs for the defined benefit pension plans (in millions):
 
Three Months Ended
 
Six Months Ended
 
February 28, 2017
 
February 29, 2016
 
February 28, 2017
 
February 29, 2016
Service costs
$

 
$

 
$
2

 
$
2

Interest costs
43

 
77

 
86

 
159

Expected returns on plan assets
(36
)
 
(62
)
 
(73
)
 
(127
)
Curtailments
2

 

 
2

 

Total net periodic pension costs
$
9

 
$
15

 
$
17

 
$
34


The Company made cash contributions to its defined benefit pension plans of $9 million for the six months ended February 28, 2017 , which primarily related to committed funded payments. The Company plans to contribute an additional $54 million to its defined benefit pension plans in fiscal 2017 .

Defined Contribution Plans

- 20 -


The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing Retirement Trust, to which both the Company and participating employees contribute. The Company’s contribution, which has historically related to adjusted FIFO earnings before interest and taxes and a portion of which is in the form of a guaranteed match, is determined annually at the discretion of the Walgreens Boots Alliance Board of Directors (or Compensation Committee thereof). The profit-sharing provision was an expense of $49 million and $106 million for the three and six months ended February 28, 2017 compared to an expense of  $53 million and $111 million in the three and six months ended February 29, 2016 .

The Company also has other contract based as well as statutory defined contribution schemes, including the Alliance Healthcare & Boots Retirement Savings Plan, to which both the Company and participating employees contribute. The cost recognized in the Consolidated Condensed Statements of Earnings for the three and six months ended February 28, 2017 was $28 million and $56 million compared to a cost of $34 million and $69 million in the three and six months ended February 29, 2016 .

Postretirement Healthcare Plan
The Company provides certain health insurance benefits to retired U.S. employees who meet eligibility requirements, including age, years of service and date of hire. The costs of these benefits are accrued over the service life of the employee.

Note 11. Earnings Per Share
The dilutive effect of outstanding stock options on earnings per share is calculated using the treasury stock method. Stock options are anti-dilutive and excluded from the earnings per share calculation if the exercise price exceeds the average market price of the common shares. There were 6.7 million outstanding options to purchase common shares that were anti-dilutive and excluded from the second quarter earnings per share calculation as of February 28, 2017 compared to 3.2 million as of February 29, 2016 . Anti-dilutive shares excluded from the year to date earnings per share calculation were 5.4 million compared to 2.2 million for the periods ended February 28, 2017 and February 29, 2016 , respectively.

Note 12. Depreciation and Amortization
The Company has recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (in millions):
 
Three Months Ended

Six Months Ended
 
February 28, 2017

February 29, 2016

February 28, 2017

February 29, 2016
Depreciation expense
$
332

 
$
346

 
$
666

 
$
644

Intangible asset and other amortization
81

 
96

 
165

 
180

Total depreciation and amortization expense
$
413

 
$
442

 
$
831

 
$
824


Note 13. Supplemental Cash Flow Disclosures
Interest paid was $375 million and $302 million for the six months ended February 28, 2017 and February 29, 2016 , respectively. Cash paid for income taxes was $537 million and $481 million in the six months ended February 28, 2017 and February 29, 2016 , respectively.

Note 14. Accumulated Other Comprehensive Income (Loss)
The following is a summary of net changes in accumulated other comprehensive income by component and net of tax for the three and six months ended February 28, 2017 and February 29, 2016 (in millions):

- 21 -


 
Pension/ post-
retirement
obligations
 
Unrecognized
gain (loss) on
available-for-
sale
investments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Share of
OCI of
equity
method
investments
 
Currency
translation
adjustment
 
Total
Balance at November 30, 2016
$
(221
)
 
$
1

 
$
(36
)
 
$
(2
)
 
$
(3,552
)
 
$
(3,810
)
Other comprehensive income (loss) before reclassification adjustments
6

 

 

 
(7
)
 
(1
)
 
(2
)
Amounts reclassified from accumulated OCI

 

 
1

 

 

 
1

Tax benefit (provision)
(1
)
 

 

 
3

 

 
2

Net other comprehensive income (loss)
5

 

 
1

 
(4
)
 
(1
)
 
1

Balance at February 28, 2017
$
(216
)
 
$
1

 
$
(35
)
 
$
(6
)
 
$
(3,553
)
 
$
(3,809
)
 
Pension/ post-
retirement
obligations
 
Unrecognized
gain (loss) on
available-for-
sale
investments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Share of
OCI of
equity
method
investments
 
Currency
translation
adjustment
 
Total
Balance at August 31, 2016
$
(212
)
 
$
2

 
$
(37
)
 
$
(1
)
 
$
(2,744
)
 
$
(2,992
)
Other comprehensive income (loss) before reclassification adjustments
(5
)
 
(1
)
 

 
(8
)
 
(809
)
 
(823
)
Amounts reclassified from accumulated OCI

 

 
3

 

 

 
3

Tax benefit (provision)
1

 

 
(1
)
 
3

 

 
3

Net other comprehensive income (loss)
(4
)
 
(1
)
 
2

 
(5
)
 
(809
)
 
(817
)
Balance at February 28, 2017
$
(216
)
 
$
1

 
$
(35
)
 
$
(6
)
 
$
(3,553
)
 
$
(3,809
)

 
Pension/ post-
retirement
obligations
 
Unrecognized
gain (loss) on
available-for-
sale
investments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Share of
OCI of
equity
method
investments
 
Currency
translation
adjustment
 
Total
Balance at November 30, 2015
$
32

 
$
260

 
$
(39
)
 
$

 
$
(911
)
 
$
(658
)
Other comprehensive income (loss) before reclassification adjustments
(4
)
 
(139
)
 

 

 
(1,121
)
 
(1,264
)
Amounts reclassified from accumulated OCI

 

 
2

 

 

 
2

Tax benefit (provision)
2

 
51

 
(1
)
 

 

 
52

Net other comprehensive income (loss)
(2
)
 
(88
)
 
1

 

 
(1,121
)
 
(1,210
)
Balance at February 29, 2016
$
30

 
$
172

 
$
(38
)
 
$

 
$
(2,032
)
 
$
(1,868
)


- 22 -


 
Pension/ post-
retirement
obligations
 
Unrecognized
gain (loss) on
available-for-
sale
investments
 
Unrealized
gain (loss) on
cash flow
hedges
 
Share of
OCI of
equity
method
investments
 
Currency
translation
adjustment
 
Total
Balance at August 31, 2015
$
29

 
$
259

 
$
(40
)
 
$

 
$
(462
)
 
$
(214
)
Other comprehensive income (loss) before reclassification adjustments
(1
)
 
(144
)
 

 

 
(1,570
)
 
(1,715
)
Amounts reclassified from accumulated OCI

 

 
3

 

 

 
3

Tax benefit (provision)
2

 
57

 
(1
)
 

 

 
58

Net other comprehensive income (loss)
1

 
(87
)
 
2

 

 
(1,570
)
 
(1,654
)
Balance at February 29, 2016
$
30

 
$
172

 
$
(38
)
 
$

 
$
(2,032
)
 
$
(1,868
)

Note 15. Segment Reporting
The Company has three reportable segments: Retail Pharmacy USA, Retail Pharmacy International, and Pharmaceutical Wholesale. The operating segments have been identified based on the financial data utilized by the Company’s Chief Executive Officer (the chief operating decision maker) to assess segment performance and allocate resources among the Company’s operating segments, which have been aggregated as described below. The chief operating decision maker uses adjusted operating income to assess segment profitability. The chief operating decision maker does not use total assets by segment to make decisions regarding resources, therefore the total asset disclosure by segment has not been included.

The Retail Pharmacy USA segment consists of retail drugstores and convenient care clinics and the provision of specialty pharmacy services. Revenues for the segment are principally derived from the sale of prescription drugs and a wide assortment of general merchandise, including non-prescription drugs, beauty products, photo finishing, seasonal merchandise, greeting cards and convenience foods.

The Retail Pharmacy International segment consists primarily of pharmacy-led health and beauty stores and optical practices. Stores are located in the United Kingdom, Mexico, Chile, Thailand, Norway, the Republic of Ireland, the Netherlands and Lithuania. Revenues for the segment are principally derived from the sale of prescription drugs and retail health, beauty, toiletries and other consumer products.

The Pharmaceutical Wholesale segment consists of pharmaceutical wholesaling and distribution businesses and an equity method investment in AmerisourceBergen reported on a two-month lag. Wholesale operations are located in France, the United Kingdom, Germany, Turkey, Spain, the Netherlands, Egypt, Norway, Romania, Czech Republic and Lithuania. Revenues for the segment are principally derived from wholesaling and distribution of a comprehensive offering of brand-name pharmaceuticals (including specialty pharmaceutical products) and generic pharmaceuticals, health and beauty products, home healthcare supplies and equipment, and related services to pharmacies and other healthcare providers.

Results for each reportable segment include the allocation of procurement rebates and corporate-related overhead costs. The “Eliminations” column includes intersegment sales and the profit on these intersegment sales to the extent the inventory has not been subsequently sold externally.

To improve comparability, certain classification changes were made to prior period Sales, Cost of sales and Selling, general and administrative expenses. These changes had no impact on Operating Income or Adjusted Operating Income. The reclassifications were made in the fourth quarter of fiscal 2016.

The following table reflects results of operations of the Company’s reportable segments (in millions):

- 23 -


 
Retail
Pharmacy
USA
 
Retail
Pharmacy
International
 
Pharmaceutical
Wholesale
 
Eliminations
 
Walgreens
Boots
Alliance, Inc.
Three Months Ended February 28, 2017
 
 
 
 
 
 
 
 
 
Sales to external customers
$
21,814

 
$
3,101

 
$
4,531

 
$

 
$
29,446

Intersegment sales

 

 
499

 
(499
)
 

Sales
$
21,814

 
$
3,101

 
$
5,030

 
$
(499
)
 
$
29,446

 
 
 
 
 
 
 
 
 
 
Adjusted Operating Income
$
1,552

 
$
242

 
$
226

 
$
(4
)
 
$
2,016

Three Months Ended February 29, 2016
 

 
 

 
 

 
 

 
 

Sales to external customers
$
21,500

 
$
3,627

 
$
5,057