Walgreens Boots Alliance, Inc.
Walgreens Boots Alliance, Inc. (Form: 10-Q, Received: 01/04/2018 16:17:50)
 
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 November 30, 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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth 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 ☐
 
Emerging growth company ☐
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to the Section 13(a) of the Exchange Act. ☐
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 December 31, 2017 was 990,668,837 .
 


Table of Contents

WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE THREE MONTHS ENDED NOVEMBER 30, 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 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)
 
November 30, 2017
 
August 31, 2017
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,830

 
$
3,301

Accounts receivable, net
6,858

 
6,528

Inventories
10,010

 
8,899

Other current assets
983

 
1,025

Total current assets
19,681

 
19,753

Non-current assets:


 
 

Property, plant and equipment, net
13,693

 
13,642

Goodwill
15,931

 
15,632

Intangible assets, net
10,588

 
10,156

Equity method investments (see note 4)
6,028

 
6,320

Other non-current assets
697

 
506

Total non-current assets
46,937

 
46,256

Total assets
$
66,618

 
$
66,009

 
 
 
 
Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Short-term borrowings
$
1,268

 
$
251

Trade accounts payable (see note 17)
13,570

 
12,494

Accrued expenses and other liabilities
5,183

 
5,473

Income taxes
496

 
329

Total current liabilities
20,517

 
18,547

Non-current liabilities:
 

 
 

Long-term debt
12,737

 
12,684

Deferred income taxes
2,319

 
2,281

Other non-current liabilities
4,289

 
4,223

Total non-current liabilities
19,345

 
19,188

Commitments and contingencies (see note 10)


 


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 November 30, 2017 and August 31, 2017
12

 
12

Paid-in capital
10,359

 
10,339

Retained earnings
30,560

 
30,137

Accumulated other comprehensive loss
(2,543
)
 
(3,051
)
Treasury stock, at cost; 182,067,204 shares at November 30, 2017 and 148,664,548 at August 31, 2017
(12,459
)
 
(9,971
)
Total Walgreens Boots Alliance, Inc. shareholders’ equity
25,929

 
27,466

Noncontrolling interests
827

 
808

Total equity
26,756

 
28,274

Total liabilities and equity
$
66,618

 
$
66,009


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

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Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(UNAUDITED)
For the three months ended November 30, 2017 and 2016
(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, 2017
1,023,849,070

 
$
12

 
$
(9,971
)
 
$
10,339

 
$

 
$
(3,051
)
 
$
30,137

 
$
808

 
$
28,274

Net earnings

 

 

 

 

 

 
821

 
1

 
822

Other comprehensive income, net of tax

 

 

 

 

 
508

 

 
14

 
522

Dividends declared

 

 

 

 

 

 
(398
)
 

 
(398
)
Treasury stock purchases
(34,499,913
)
 

 
(2,525
)
 

 

 

 

 

 
(2,525
)
Employee stock purchase and option plans
1,097,257

 

 
37

 
(5
)
 

 

 

 

 
32

Stock-based compensation

 

 

 
25

 

 

 

 

 
25

Noncontrolling interests contribution

 

 

 

 

 

 

 
4

 
4

November 30, 2017
990,446,414

 
$
12

 
$
(12,459
)
 
$
10,359

 
$

 
$
(2,543
)
 
$
30,560

 
$
827

 
$
26,756

 
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

 

 

 

 

 

 
1,054

 
13

 
1,067

Other comprehensive (loss), net of tax

 

 

 

 

 
(818
)
 

 
(47
)
 
(865
)
Dividends declared

 

 

 

 

 

 
(406
)
 

 
(406
)
Treasury stock purchases
(5,600,000
)
 

 
(457
)
 

 

 

 

 

 
(457
)
Employee stock purchase and option plans
1,713,545

 

 
50

 
(5
)
 
1

 

 

 

 
46

Stock-based compensation

 

 

 
26

 

 

 

 

 
26

November 30, 2016
1,079,100,136

 
$
12

 
$
(5,341
)
 
$
10,132

 
$

 
$
(3,810
)
 
$
28,332

 
$
367

 
$
29,692

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

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Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(in millions, except per share amounts)
 
Three months ended November 30,
 
2017
 
2016
Sales
$
30,740

 
$
28,501

Cost of sales
23,399

 
21,385

Gross profit
7,341

 
7,116

 
 
 
 
Selling, general and administrative expenses
5,907

 
5,686

Equity earnings (loss) in AmerisourceBergen
(112
)
 
17

Operating income
1,322

 
1,447

 
 
 
 
Other income (expense)
(137
)
 
1

Earnings before interest and income tax provision
1,185

 
1,448

 
 
 
 
Interest expense, net
149

 
173

Earnings before income tax provision
1,036

 
1,275

Income tax provision
227

 
220

Post tax earnings from other equity method investments
13

 
12

Net earnings
822

 
1,067

Net earnings attributable to noncontrolling interests
1

 
13

Net earnings attributable to Walgreens Boots Alliance, Inc.
$
821

 
$
1,054

 
 
 
 
Net earnings per common share:
 

 
 

Basic
$
0.82

 
$
0.97

Diluted
$
0.81

 
$
0.97

 
 
 
 
Dividends declared per share
$
0.400

 
$
0.375

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
1,006.1

 
1,082.1

Diluted
1,011.1

 
1,088.3


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

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Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions)
 
Three months ended November 30,
 
2017
 
2016
Comprehensive income:
 
 
 
Net earnings
$
822

 
$
1,067

 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

Pension/postretirement obligations

 
(9
)
Unrealized gain on cash flow hedges

 
1

Unrecognized loss on available-for-sale investments

 
(1
)
Share of other comprehensive loss of equity method investments
2

 
(1
)
Currency translation adjustments
520

 
(855
)
Total other comprehensive income (loss)
522

 
(865
)
Total comprehensive income
1,344

 
202

 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interests
15

 
(34
)
Comprehensive income attributable to Walgreens Boots Alliance, Inc.
$
1,329

 
$
236


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


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Table of Contents

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
 
Three months ended November 30,
 
2017
 
2016
Cash flows from operating activities :
 
 
 
Net earnings
$
822

 
$
1,067

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

 
 

Depreciation and amortization
416

 
419

Deferred income taxes
(63
)
 
(61
)
Stock compensation expense
25

 
26

Equity (earnings) loss from equity method investments
99

 
(29
)
Other
152

 
81

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(362
)
 
(259
)
Inventories
(1,018
)
 
(1,330
)
Other current assets
(154
)
 
(109
)
Trade accounts payable
1,011

 
884

Accrued expenses and other liabilities
(222
)
 
(378
)
Income taxes
246

 
217

Other non-current assets and liabilities
9

 
(3
)
Net cash provided by operating activities
961

 
525

 
 
 
 
Cash flows from investing activities :
 

 
 

Additions to property, plant and equipment
(378
)
 
(378
)
Proceeds from sale leaseback transactions

 
436

Proceeds from sale of other assets
13

 
26

Business and intangible asset acquisitions, net of cash acquired
(265
)
 
(15
)
Other
31

 
20

Net cash (used for) provided by investing activities
(599
)
 
89

 
 
 
 
Cash flows from financing activities :
 

 
 

Proceeds and payments from short-term borrowings, net
1,026

 
49

Proceeds from issuance of debt
110

 

Payments of debt
(92
)
 
(4
)
Stock purchases
(2,525
)
 
(457
)
Proceeds related to employee stock plans
32

 
41

Cash dividends paid
(413
)
 
(406
)
Other
5

 
(1
)
Net cash used for financing activities
(1,857
)
 
(778
)
 
 
 
 
Effect of exchange rate changes on cash and cash equivalents
24

 
(45
)
Changes in cash and cash equivalents :
 

 
 

Net decrease in cash and cash equivalents
(1,471
)
 
(209
)
Cash and cash equivalents at beginning of period
3,301

 
9,807

Cash and cash equivalents at end of period
$
1,830

 
$
9,598


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Table of Contents


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

- 8 -

Table of Contents

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 Sheets as of November 30, 2017 and August 31, 2017 , the Consolidated Condensed Statements of Equity, the Consolidated Condensed Statements of Earnings, the Consolidated Condensed Statements of Comprehensive Income, and the Consolidated Condensed Statements of Cash Flows for the three months ended November 30, 2017 and 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, 2017 . The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in notes 5 and 19.

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 profit 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 profit margins and gross profit dollars making the Company’s operations or net earnings for any period incomparable.

Note 2. Exit and disposal activities
On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) as part of an initiative to optimize store locations within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Store Optimization Program includes plans to close approximately 600 stores and related assets across the U.S. The actions under the Store Optimization Program are expected to take place over an 18 month period beginning in spring 2018.

The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $450 million , including costs associated with lease obligations and other real estate costs, employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately $270 million for lease obligations and other real estate costs and approximately $180 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in future cash expenditures.

The Company did not incur any charges related to the Store Optimization Program for the three months ended November 30, 2017 .

On April 8, 2015, the Walgreens Boots Alliance Board of Directors approved a plan to implement a 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 focused primarily on the Retail Pharmacy USA segment, but included activities from all segments. The Company completed the Cost Transformation Program in the fourth quarter of fiscal 2017.

- 9 -



The changes in accrued expenses and other liabilities related to the Cost Transformation Program for the three months ended November 30, 2017 include the following (in millions):
 
 
Real estate
costs
 
Severance and
other business
transition and
exit costs
 
Total
Balance at August 31, 2017
 
$
521

 
$
79

 
$
600

Payments
 
(42
)
 
(39
)
 
(81
)
Balance at November 30, 2017
 
$
479

 
$
40

 
$
519


Note 3. Operating leases
Initial terms for leased premises in the U.S. are 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. Historically, the Company has entered into several sale-leaseback transactions. For the three months ended November 30, 2017 , the Company did not record any proceeds from sale-leaseback transactions. For the three months ended November 30, 2016 , the Company recorded proceeds from sale-leaseback transactions of $436 million .

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 months ended November 30, 2017 , the Company recorded charges of $39 million for facilities that were closed or relocated under long-term leases. This compares to $17 million for the three months ended November 30, 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 primarily in other non-current liabilities, include the following (in millions):
 
For the three months ended November 30, 2017
 
For the twelve months ended August 31, 2017
Balance at beginning of period
$
718

 
$
466

Provision for present value of non-cancellable lease payments on closed facilities
29

 
344

Assumptions about future sublease income, terminations and changes in interest rates
1

 
13

Interest accretion
9

 
37

Cash payments, net of sublease income
(61
)
 
(142
)
Balance at end of period
$
696

 
$
718


As of November 30, 2017 , the Company remains secondarily liable on 71 leases. The maximum potential undiscounted future payments are $318 million as of November 30, 2017 .

Note 4. Equity method investments
Equity method investments as of November 30, 2017 and August 31, 2017 , were as follows (in millions, except percentages):
 
November 30, 2017
 
August 31, 2017
 
Carrying
value
 
Ownership
percentage
 
Carrying
value
 
Ownership
percentage
AmerisourceBergen
$
4,895

 
26%
 
$
5,024

 
26%
Others
1,133

 
8% - 50%
 
1,296

 
8% - 50%
Total
$
6,028

 
 
 
$
6,320

 
 

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AmerisourceBergen investment
As of November 30, 2017 and August 31, 2017 , the Company owned 56,854,867 AmerisourceBergen Corporation (“AmerisourceBergen”) common shares, representing approximately 26% of the outstanding AmerisourceBergen common stock. 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 November 30, 2017 is $4.8 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 (“Guangzhou Pharmaceuticals”) 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 $13 million and $12 million of post-tax equity earnings from equity method investments other than AmerisourceBergen for the three months ended November 30, 2017 and 2016 , respectively. During the three months period ended November 30, 2017 , the Company recorded an impairment of $170 million in its equity interest in Guangzhou Pharmaceuticals, which was included in other income (expense) in the Consolidated Condensed Statements of Earnings. The fair value of the Company's equity interest in Guangzhou Pharmaceuticals was determined using the proposed sale price and thus represents Level 3 measurement.

Note 5. Acquisitions
Acquisition of certain Rite Aid Corporation ( Rite Aid ) assets
On September 19, 2017, the Company announced that it had secured regulatory clearance for an amended and restated asset purchase agreement to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion in cash and other consideration. During the quarter, the Company purchased 97 stores for total cash consideration of $241 million . Ownership of the remaining stores is expected to be transferred in phases in fiscal 2018. These transfers remain subject to closing conditions set forth in the amended and restated asset purchase agreement and will be accounted for as business combinations.

As of November 30, 2017, the Company had not completed the analysis to assign fair values to all tangible and intangible assets acquired and therefore the purchase price allocation has not been completed.

Pro forma net earnings and sales of the Company, assuming the acquired stores had occurred at the beginning of each period presented, would not be materially different from the results reported. The acquired stores did not have a material impact on net earnings or sales of the Company for the three months ended November 30, 2017 .

From December 1, 2017 through the date of this report, the Company purchased 260 additional stores for total cash consideration of $474 million .

AllianceRx Walgreens Prime
On March 31, 2017, Walgreens Boots Alliance and pharmacy benefit manager Prime Therapeutics LLC (“Prime”) closed a transaction to form a combined central specialty pharmacy and mail services company AllianceRx Walgreens Prime, as part of a strategic alliance. AllianceRx Walgreens Prime is consolidated by Walgreens Boots Alliance and reported within the Retail Pharmacy USA segment in its financial statements. The Company accounted for this acquisition of Prime’s specialty pharmacy and mail services business as a business combination involving non-cash purchase consideration of $720 million consisting of the issuance of an equity interest in AllianceRx Walgreens Prime.

As of November 30, 2017 , the Company had not completed the analysis to determine the fair value of the consideration acquired or to assign fair values to all tangible and intangible assets acquired, and therefore the purchase price allocation has not been completed. The preliminary purchase price allocation will be subject to further refinement and may result in material

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changes. These changes will primarily relate to the allocation of consideration and the fair value assigned to all tangible and intangible assets acquired and identified. The following table summarizes the consideration for the acquisition and the preliminary amounts of identified assets acquired and liabilities assumed at the date of the transaction (in millions).
Total consideration
$
720

 
 
Identifiable assets acquired and liabilities assumed
 
Accounts receivable
$
217

Inventories
149

Property, plant and equipment
11

Intangible assets
331

Trade accounts payable
(90
)
Accrued expenses and other liabilities
(1
)
Total identifiable net assets
617

Goodwill
$
103


The preliminary identified intangible assets primarily include payer contracts. These contracts are estimated to have a weighted average useful life of 15 years. The preliminary goodwill of $103 million arising from the transaction consists of expected purchasing synergies, operating efficiencies by benchmarking performance and applying best practices across the combined company, consolidation of operations, reductions in selling, general and administrative expenses and combining workforces. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes.

In accordance with ASC Topic 810, Consolidation, the noncontrolling interest was recognized based on its proportionate interest in the identifiable net assets of AllianceRx Walgreens Prime. The difference between the carrying amount of the noncontrolling interest and the fair value recognized as consideration in the business combination is recognized as additional paid in capital.

Note 6. 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, 2017
$
9,139

 
$
3,392

 
$
3,101

 
$
15,632

Acquisitions
101

 

 

 
101

Currency translation adjustments

 
103

 
95

 
198

November 30, 2017
$
9,240

 
$
3,495

 
$
3,196

 
$
15,931


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

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November 30, 2017
 
August 31, 2017
Gross amortizable intangible assets
 
 
 
Customer relationships and loyalty card holders
$
1,910

 
$
1,851

Purchased prescription files
716

 
659

Favorable lease interests and non-compete agreements
499

 
523

Trade names and trademarks
513

 
504

Purchasing and payer contracts
390

 
391

Total gross amortizable intangible assets
4,028

 
3,928

 
 
 
 
Accumulated amortization
 

 
 

Customer relationships and loyalty card holders
$
397

 
$
409

Purchased prescription files
420

 
371

Favorable lease interests and non-compete agreements
335

 
355

Trade names and trademarks
169

 
155

Purchasing and payer contracts
57

 
51

Total accumulated amortization
1,378

 
1,341

Total amortizable intangible assets, net
$
2,650

 
$
2,587

 
 
 
 
Indefinite lived intangible assets
 

 
 

Trade names and trademarks
$
5,783

 
$
5,514

Pharmacy licenses
2,155

 
2,055

Total indefinite lived intangible assets
$
7,938

 
$
7,569

 
 
 
 
Total intangible assets, net
$
10,588

 
$
10,156


Amortization expense for intangible assets was $96 million and $95 million for the three months ended November 30, 2017
and 2016 , respectively.

Estimated future annual amortization expense for the next five fiscal years for intangible assets recorded at November 30, 2017 is as follows (in millions):
 
2019
 
2020
 
2021
 
2022
 
2023
Estimated annual amortization expense
$
350

 
$
295

 
$
244

 
$
218

 
$
197



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Note 7. 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)
 
November 30, 2017
 
August 31, 2017
Short-term borrowings 1
 
 
 
Commercial paper
$
990

 
$

Other 2
278

 
251

Total short-term borrowings
$
1,268

 
$
251

 
 
 
 
Long-term debt 1
 

 
 

$6 billion note issuance   3,4
 

 
 

3.450% unsecured notes due 2026
$
1,887

 
$
1,887

4.650% unsecured notes due 2046
590

 
590

$8 billion note issuance   3,4
 

 
 

2.700% unsecured notes due 2019
1,247

 
1,246

3.300% unsecured notes due 2021
1,244

 
1,244

3.800% unsecured notes due 2024
1,989

 
1,988

4.500% unsecured notes due 2034
495

 
495

4.800% unsecured notes due 2044
1,492

 
1,492

£700 million note issuance   3,4
 

 
 

2.875% unsecured pound sterling notes due 2020
538

 
513

3.600% unsecured pound sterling notes due 2025
403

 
384

€750 million note issuance   3,4
 

 
 

2.125% unsecured euro notes due 2026
888

 
884

$4 billion note issuance   4,7
 

 
 

3.100% unsecured notes due 2022
1,195

 
1,195

4.400% unsecured notes due 2042
492

 
492

$1 billion note issuance   4,7
 

 
 

5.250% unsecured notes due 2019 5
249

 
250

Other 6
28

 
24

Total long-term debt, less current portion
$
12,737

 
$
12,684


1  
Carry values 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 November 30, 2017 and August 31, 2017 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 currencies.
3  
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.
4  
The issuances of the $6 billion , $8 billion , £0.7 billion , €0.75 billion , $4 billion and $1 billion notes as of November 30, 2017 had fair values and carrying values of $2.5 billion  and $2.5 billion $6.7 billion  and $6.5 billion , $1.0 billion  and $0.9 billion , $0.9 billion  and $0.9 billion , $1.7 billion  and $1.7 billion , and $0.3 billion  and $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 November 30, 2017 spot rate, as applicable. The fair values and carrying values of these issuances do not include notes that have been redeemed or repaid as of November 30, 2017 .
5  
Includes interest rate swap fair market value adjustments. See note 9, fair value measurements for additional fair value disclosures.
6  
Other long-term debt represents a mix of fixed and variable rate borrowings in various currencies with various maturities.
7  
Notes are senior debt obligations of Walgreen Co. and rank equally with all other unsecured and unsubordinated indebtedness of Walgreen Co. 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,

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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.

August 2017 Credit Agreements
On August 24, 2017, the Company entered into a $1.0 billion revolving credit agreement with the lenders from time to time party thereto (the “August 2017 Revolving Credit Agreement”) and a $1.0 billion term loan credit agreement with Sumitomo Mitsui Banking Corporation (the “2017 Term Loan Credit Agreement” and together with the August 2017 Revolving Credit Agreement, the “August 2017 Credit Agreements”).

The August 2017 Revolving Credit Agreement is an unsecured revolving credit facility with a facility termination date of the earlier of (a) January 31, 2019, subject to any extension thereof pursuant to the terms of the August 2017 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate commitments provided by the lenders thereunder. The 2017 Term Loan Credit Agreement is an unsecured “multi-draw” term loan facility maturing on March 30, 2019. The aggregate commitments of Sumitomo Mitsui Banking Corporation under the 2017 Term Loan Credit Agreement are initially equal to $1.0 billion , which shall be reduced on June 1, 2018 to the lesser of $500 million and the aggregate remaining undrawn commitments thereunder. Any remaining undrawn commitments thereunder and the ability of the Company to request loans under such commitments shall terminate on September 1, 2018. As of November 30, 2017 , Walgreens Boots Alliance had $30 million of borrowings outstanding under the 2017 Term Loan Credit Agreement and there were no borrowings outstanding under the August 2017 Revolving Credit Agreement.

February 2017 Revolving Credit Agreement
On February 1, 2017, the Company entered into a $1.0 billion revolving credit facility (as amended, the “February 2017 Revolving Credit Agreement”) with the lenders from time to time party thereto and, on August 1, 2017, the Company entered into an amendment agreement thereto. The terms and conditions of the February 2017 Revolving Credit Agreement were unchanged by the amendment other than the extension of the facility termination date to the earlier of (a) January 31, 2019 and (b) the date of termination in whole of the aggregate commitments provided by the lenders thereunder. As of November 30, 2017 , there were no borrowings outstanding under the February 2017 Revolving Credit Agreement.

$6.0 billion note issuance
On June 1, 2016, Walgreens Boots Alliance received net proceeds of $6.0 billion from a public offering of five series of U.S. dollar notes with varying maturities and interest rates. Because the merger with Rite Aid was not consummated on or prior to June 1, 2017, the 2018 notes, the 2021 notes and the 2023 notes were redeemed on June 5, 2017 under the special mandatory redemption terms of the indenture governing such notes. Walgreens Boots Alliance was required to redeem all of the 2018 notes, the 2021 notes and the 2023 notes then outstanding, at a special mandatory redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest of approximately $1 million to, but excluding, the date of redemption. The 2026 notes and 2046 notes remain outstanding in accordance with their respective terms and are subject to redemption in certain circumstances.

Debt covenants
Each of 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.

Commercial paper
The Company periodically borrows under its commercial paper program and may borrow under it in future periods. The Company had average daily short-term borrowings of $ 620 million of commercial paper outstanding at a weighted average interest rate of 1.46 % for the three months ended November 30, 2017 . The Company had no activity under its commercial paper program for the twelve months ended August 31, 2017 .

Note 8. 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 November 30, 2017 and August 31, 2017 are as follows (in millions):

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November 30, 2017
 
August 31, 2017
 
 
 
Notional 1
 
Fair value
 
Notional 1
 
Fair value
 
Location in Consolidated
Condensed Balance Sheets
Derivatives designated as hedges:
 
 
 
 
 
 
 
 
 
Interest rate swaps
$

 
$

 
$
250

 
$

 
Other non-current assets
Interest rate swaps
250

 
1

 

 

 
Other non-current liabilities
Foreign currency forwards

 

 
24

 

 
Other current assets
Derivatives not designated as hedges:
 
 
 
 
 
 
 
 
 
Foreign currency forwards
139

 
3

 
221

 

 
Other current assets
Foreign currency forwards
3,064

 
15

 
2,816

 
19

 
Other current liabilities

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 did not have a material impact on the Company’s Financial Statements. 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 7, borrowings).

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 November 30,
 
Location in Consolidated Condensed
Statements of Earnings
 
2017
 
2016
Foreign currency forwards
Selling, general and administrative expenses
 
$
(19
)
 
$
50

Foreign currency forwards
Other income
 
34

 
1


Derivatives credit risk
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 9. 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

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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):
 
November 30, 2017
 
Level 1
 
Level 2
 
Level 3
Assets :
 
 
 
 
 
 
 
Money market funds 1
$
940

 
$
940

 
$

 
$

Available-for-sale investments 2
1

 
1

 

 

Foreign currency forwards 3
3

 

 
3

 

Liabilities :
 

 
 

 
 

 
 

Foreign currency forwards 3
15

 

 
15

 

Interest rate swaps 4
1

 

 
1

 

 
August 31, 2017
 
Level 1
 
Level 2
 
Level 3
Assets :
 
 
 
 
 
 
 
Money market funds 1
$
2,096

 
$
2,096

 
$

 
$

Available-for-sale investments 2
1

 
1

 

 

Liabilities :
 

 
 

 
 

 
 

Foreign currency forwards 3
19

 

 
19

 


1  
Money market funds are valued at the closing price reported by the fund sponsor.
2  
Fair values of quoted investments are based on current bid prices as of the balance sheet dates.
3  
The fair value of forward currency contracts are 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.
4  
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 8, financial instruments for additional information.

There were no transfers between levels for the three months ended November 30, 2017 .

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 7, 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 10. 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

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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. Plaintiffs filed their motion for class certification on April 21, 2017.

As of August 31, 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 Rite Aid 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 plaintiffs agreed to stay the litigation until after the Rite Aid Transactions closed. On March 17, 2017, plaintiffs moved to lift the stay to allow plaintiffs to file an amended complaint. On August 4, 2017, that motion was granted for the limited purpose of allowing plaintiffs to file a motion seeking leave to amend their complaint in light of the termination of the Merger Agreement. Plaintiffs filed such a motion on September 22, 2017. The Company filed its response on October 6, 2017. The Court granted the motion on November 27, 2017, ordering the plaintiffs to file their amended complaint within 10 business days. Plaintiffs filed their amended complaint on December 11, 2017. The Court set a briefing schedule pursuant to which motions to dismiss will be filed by February 16, 2018, response briefs by April 17, 2018 and reply briefs by May 17, 2018.

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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 the plaintiffs in the Delaware actions agreed to settle this matter for an immaterial amount. The Delaware actions all have been dismissed.

Note 11. Retirement benefits
The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.

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 November 30,
 
2017
 
2016
Service costs
$
2

 
$
2

Interest costs
47

 
43

Expected returns on plan assets
(51
)
 
(37
)
Total net periodic pension costs
$
(2
)
 
$
8


The Company made cash contributions to its defined benefit pension plans of $9 million for the three months ended November 30, 2017 , which primarily related to committed funded payments. The Company plans to contribute an additional $50 million to its defined benefit pension plans in fiscal 2018 .

Defined contribution plans
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 is in the form of a guaranteed match which is approved annually by the Walgreen Co. Board of Directors and reviewed by the Compensation Committee and Finance Committee of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of $57 million for the three months ended November 30, 2017 and November 30, 2016 .

The Company also has certain contract based defined contribution arrangements. The principal one is the Alliance Healthcare & Boots Retirement Savings Plan, which is United Kingdom based and to which both the Company and participating employees contribute. The cost recognized in the Consolidated Condensed Statements of Earnings for the three months ended November 30, 2017 was $30 million compared to a cost of $28 million in the three months ended November 30, 2016 .

Note 12. 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 7.6 million outstanding options to purchase common shares that were anti-dilutive and excluded from the first quarter earnings per share calculation as of November 30, 2017 compared to 4.0 million as of November 30, 2016 .

Note 13. Depreciation and amortization
The Company has recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (in millions):

- 19 -


 
Three months ended November 30,
 
2017
 
2016
Depreciation expense
$
335

 
$
335

Intangible asset and other amortization
81

 
84

Total depreciation and amortization expense
$
416

 
$
419


Note 14. Supplemental financial information
The effective tax rate for the three months ended November 30, 2017 was 21.9% compared to 17.3% for the prior year period. The increase in effective tax rate was primarily attributable to reduced discrete tax benefits in the current period. During the three months ended November 30, 2016 , we recognized a discrete tax benefit of $77 million related to reducing our deferred tax liabilities, following enactment of a U.K. tax rate reduction. This benefit did no t recur during the three months ended November 30, 2017 . The impact of this non-recurrence was partly offset by additional net discrete tax benefits for the three months ended November 30, 2017 , primarily related to our equity method investment in AmerisourceBergen. Cash paid for income taxes was $45 million and $63 million in the three months ended November 30, 2017 and 2016 , respectively.

Interest paid was $217 million and $246 million for the three months ended November 30, 2017 and 2016 , respectively.

Note 15. 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 months ended November 30, 2017 and 2016 (in millions):
 
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, 2017
$
(139
)
 
$

 
$
(33
)
 
$
(2
)
 
$
(2,877
)
 
$
(3,051
)
Other comprehensive income (loss) before reclassification adjustments
(1
)
 

 

 
3

 
506

 
508

Amounts reclassified from accumulated OCI

 

 
1

 

 

 
1

Tax benefit (provision)
1

 

 
(1
)
 
(1
)
 

 
(1
)
Net other comprehensive income

 

 

 
2

 
506

 
508

Balance at November 30, 2017
$
(139
)
 
$

 
$
(33
)
 
$

 
$
(2,371
)
 
$
(2,543
)
 
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
(11
)
 
(1
)
 
1

 
(1
)
 
(808
)
 
(820
)
Tax benefit
2

 

 

 

 

 
2

Net other comprehensive income (loss)
(9
)
 
(1
)
 
1

 
(1
)
 
(808
)
 
(818
)
Balance at November 30, 2016
$
(221
)
 
$
1

 
$
(36
)
 
$
(2
)
 
$
(3,552
)
 
$
(3,810
)

Note 16. Segment reporting
The Company has aligned its operations into 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.

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The Retail Pharmacy USA segment consists of the Walgreens business, which includes the operation of retail drugstores and convenient care clinics; and operation of mail and central specialty pharmacy services. Sales for the segment are principally derived from the sale of prescription drugs and a wide assortment of retail products, including health and wellness, beauty, personal care and consumables and general merchandise.

The Retail Pharmacy International segment consists of pharmacy-led health and beauty retail businesses and optical practices. These businesses include Boots branded stores in the United Kingdom, Thailand, Norway, the Republic of Ireland and the Netherlands; Benavides in Mexico and Ahumada in Chile. Sales for the segment are principally derived from the sale of prescription drugs and health and wellness, beauty, personal care and other consumer products.

The Pharmaceutical Wholesale segment consists of the Alliance Healthcare pharmaceutical wholesaling and distribution businesses and an equity method investment in AmerisourceBergen. Wholesale operations are located in the United Kingdom, Germany, France, Turkey, Spain, the Netherlands, Egypt, Norway, Romania, Czech Republic and Lithuania. Sales 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.

The results of operations for each reportable segment include procurement benefits and an allocation of corporate-related overhead costs. The “Eliminations” column contains items not allocable to the reportable segments, as the information is not utilized by the chief operating decision maker to assess segment performance and allocate resources.

The following table reflects results of operations of the Company’s reportable segments (in millions):
 
Retail
Pharmacy
USA
 
Retail
Pharmacy
International
 
Pharmaceutical
Wholesale
 
Eliminations
 
Walgreens
Boots
Alliance, Inc.
Three months ended November 30, 2017
 
 
 
 
 
 
 
 
 
Sales to external customers
$
22,489

 
$
3,083

 
$
5,168

 
$

 
$
30,740

Intersegment sales

 

 
550

 
(550
)
 

Sales
$
22,489

 
$
3,083

 
$
5,718

 
$
(550
)
 
$
30,740

 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
1,377

 
$
210

 
$
224

 
$
(2
)
 
$
1,809

 
 
 
 
 
 
 
 
 
 
Three months ended November 30, 2016
 

 
 

 
 

 
 

 
 

Sales to external customers
$
20,659

 
$
2,962

 
$
4,880

 
$

 
$
28,501

Intersegment sales

 

 
537

 
(537
)
 

Sales
$
20,659

 
$
2,962

 
$
5,417

 
$
(537
)
 
$
28,501

 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
1,289

 
$
213

 
$
224

 
$

 
$
1,726

 
 
 
 
 
 
 
 
 
 
The following table reconciles adjusted operating income to operating income (in millions):

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Retail
Pharmacy
USA
 
Retail
Pharmacy
International
 
Pharmaceutical
Wholesale
 
Eliminations
 
Walgreens
Boots
Alliance, Inc.
Three months ended November 30, 2017
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
1,377

 
$
210

 
$
224

 
$
(2
)
 
$
1,809

Adjustments to equity earnings in AmerisourceBergen
 
 
 
 
 
 
 
 
(189
)
Acquisition-related amortization
 

 
 

 
 

 
 

 
(85
)
Hurricane-related costs
 

 
 

 
 

 
 

 
(83
)
LIFO provision
 

 
 

 
 

 
 

 
(54
)
Acquisition-related costs
 

 
 

 
 

 
 

 
(51
)
Legal settlement
 

 
 

 
 

 
 

 
(25
)
Operating income
 

 
 

 
 

 
 

 
$
1,322

 
 
 
 
 
 
 
 
 
 
Three months ended November 30, 2016
 

 
 

 
 

 
 

 
 

Adjusted operating income
$
1,289

 
$
213

 
$
224

 
$

 
$
1,726

Adjustments to equity earnings in AmerisourceBergen
 

 
 

 
 

 
 

 
(41
)
Acquisition-related amortization
 

 
 

 
 

 
 

 
(82
)
LIFO provision
 

 
 

 
 

 
 

 
(58
)
Acquisition-related costs
 
 
 
 
 
 
 
 
(17
)
Cost transformation
 
 
 
 
 
 
 
 
(81
)
Operating income
 

 
 

 
 

 
 

 
1,447

 
 
 
 
 
 
 
 
 
 
Note 17. Related parties
The Company has a long-term pharmaceutical distribution agreement with AmerisourceBergen pursuant to which the Company sources branded and generic pharmaceutical products from AmerisourceBergen principally for its U.S. operations.

Related party transactions (in millions):
 
Three months ended
 
November 30, 2017
 
November 30, 2016
Purchases, net
$
11,604

 
$
10,636

 
November 30, 2017
 
August 31, 2017
Trade accounts payable, net
$
4,818

 
$
4,384


Additionally, AmerisourceBergen receives sourcing services for generic pharmaceutical products.

Note 18. New accounting pronouncements
Adoption of new accounting pronouncements
Measurement of inventory
In July 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU simplifies current accounting treatments by requiring entities to measure most inventories at “the lower of cost and net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using last-in, first-out method or the retail inventory method. This ASU is effective for fiscal years beginning after December 15, 2016 (fiscal 2018), and interim periods within those fiscal years. The Company adopted this guidance on a prospective basis during the quarter ended November 30, 2017. The adoption did not have a material impact on the Company’s results of operations, cash flows or financial position.

New accounting pronouncements not yet adopted
Accounting for hedging activities

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In August 2017, the FASB issued ASU 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities. This ASU expands an entity’s ability to hedge nonfinancial and financial risk components and reduces complexity in fair value hedges of interest rate risk. It eliminates the requirement to separately measure and report hedge ineffectiveness and generally requires the entire change in the fair value of a hedging instrument to be presented in the same income statement line as the hedged item. It also eases certain documentation and assessment requirements and modifies the accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interims periods within those fiscal years, with early adoption permitted. The new guidance with respect to cash flow and net investment hedge relationships existing on the date of adoption must be applied on a modified retrospective basis, and the new presentation and disclosure requirements must be applied on a prospective basis. The adoption of this ASU is not expected to have a significant impact on Company’s results of operations, cash flows or financial position.

Presentation of net periodic pension cost and net periodic postretirement benefit cost
In March 2017, the FASB issued ASU 2017-07, Compensation – Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement cost in the same line item in the statement of earnings as other compensation costs arising from services rendered by the related employees during the period. The other net cost components are required to be presented in the statement of earnings separately from the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the statement of earnings to present the other net cost components must be disclosed in the notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and interims periods within those fiscal years, and must be applied on a retrospective basis. The Company has evaluated the effect of adopting this new accounting guidance and determined that adoption will not have a material impact on the Company’s results of operations. The Company will adopt this new accounting guidance as of September 1, 2018 (fiscal 2019).

Restricted cash
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a retrospective basis. The adoption of this ASU is not expected to have a significant impact on Company’s consolidated statement of cash flows.

Tax accounting for intra-entity asset transfers
In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Topic 740, Income Taxes, prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. To more faithfully represent the economics of intra-entity asset transfers, the amendments in this ASU require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), including interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a modified retrospective basis through a cumulative effect adjustment recognized directly to retained earnings as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance.

Classification of certain cash receipts and cash payments
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period and the new guidance must be applied on a retrospective basis. The Company is evaluating the effect this ASU will have on its consolidated statement of cash flows.

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Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. This ASU increases the transparency and comparability of organizations by requiring the capitalization of substantially all leases on the balance sheet and disclosures of key information about leasing arrangements. Under this new guidance, at the lease commencement date, a lessee recognizes a right-of-use asset and lease liability, which is initially measured at the present value of the future lease payments. For income statement purposes, a dual model was retained for lessees, requiring leases to be classified as either operating or finance leases. Under the operating lease model, lease expense is recognized on a straight-line basis over the lease term. Under the finance lease model, interest on the lease liability is recognized separately from amortization of the right-of-use asset. The new guidance is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years. In transition, lessees are required to recognize and measure leases at the beginning of the earliest period presented (fiscal 2018) using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply.
The Company will adopt this ASU on September 1, 2019 (fiscal 2020). The Company has begun evaluating and planning for adoption and implementation of this ASU, including selecting a new lease accounting system, evaluating practical expedient and accounting policy elections, and assessing the overall financial statement impact. This ASU will have a material impact on the Company’s financial position. The impact on the Company’s results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect the Company’s cash flows.
Classification and measurement of financial instruments
In January 2016, the FASB issued ASU 2016-01, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. This ASU requires equity investments (except those under the equity method of accounting or those that result in the consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This simplifies the impairment assessment of equity investments previous held at cost. Separate presentation of financial assets and liabilities by measurement category is required. This ASU is effective prospectively for fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years. Early application is permitted, for fiscal years or interim periods that have not yet been issued as of the beginning of the fiscal year of adoption. The new guidance must be applied on a modified retrospective basis, with the exception of the amendments related to equity investments without readily determinable fair values, which must be applied on a prospective basis. The Company is evaluating the effect of adopting this new accounting guidance but does not expect adoption to have a material impact on the Company’s results of operations.
                              
Revenue recognition on contracts with customers
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU provides a single principles-based revenue recognition model with a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. Subsequently, the FASB has issued additional ASUs which further clarify this guidance and also defer the effective date by one year to fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years. The Company continues to evaluate the impact this ASU, the related amendments and the interpretive guidance will have on the Company’s Consolidated Financial Statements. The Company continues to evaluate the method of adoption. Based on preliminary assessment, the Company believes the impact of adopting the new guidance will not be material to its consolidated financial statements, and that the impact will be limited to immaterial changes to the timing of recognition of revenues related to loyalty programs and gift cards, in addition to disaggregated revenue disclosures. The Company will adopt this ASU on September 1, 2018 (fiscal 2019).

Note 19. Subsequent event
On December 22, 2017, U.S. tax legislation was enacted that made significant changes to many elements of the U.S. federal Internal Revenue Code. Due to the recent enactment of this tax legislation and expected further rulemaking and future regulatory guidance, a comprehensive estimate of the overall tax impact to the Company's financial position, results of operations and cash flows cannot be made at this time. However, at this time, the Company does anticipate this tax legislation will result in a discrete tax impact related to revaluing the Company's U.S. federal deferred tax assets and liabilities, a discrete tax impact associated with including incremental earnings from the Company's non-U.S. entities in its U.S. federal income tax base and a change to the Company’s fiscal 2018 estimated annual tax rate due to the statutory corporate tax rate reduction. These changes will impact Deferred income tax and Other non-current liabilities in the Consolidated Condensed Balance Sheet. 


- 24 -


Item 2. Management’s discussion and analysis of financial condition and results of operations
The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and the consolidated financial statements, accompanying notes and Management’s discussion and analysis of financial condition and results of operations and other disclosures contained in the Walgreens Boots Alliance, Inc. Annual Report on Form 10-K for the fiscal year ended August 31, 2017 . This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Cautionary note regarding forward-looking statements” and in Item 1A “Risk factors” in our Form 10-K for the fiscal year ended August 31, 2017 and in Item 1A“Risk factors” in this report. References herein to the “Company”, “we”, “us”, or “our” refer to Walgreens Boots Alliance, Inc. and its subsidiaries, except as otherwise indicated or the context otherwise requires.

INTRODUCTION AND SEGMENTS
Walgreens Boots Alliance, Inc. (“Walgreens Boots Alliance”) and its subsidiaries are a global pharmacy-led health and wellbeing enterprise. Its operations are conducted through three reportable segments:
Retail Pharmacy USA;
Retail Pharmacy International; and
Pharmaceutical Wholesale

See note 16, segment reporting for further information.

Acquisition of certain Rite Aid Corporation ( Rite Aid ) assets
On September 19, 2017, the Company announced it had secured regulatory clearance for an amended and restated asset purchase agreement to purchase 1,932 stores, three distribution centers and related inventory from Rite Aid for $4.375 billion in cash and other consideration. As of December 31, 2017, the Company had acquired 357 Rite Aid stores. The Company expects ownership of the remaining stores to be transferred in phases, with the goal being to complete the store transfers in spring 2018. These transfers remain subject to closing conditions set forth in the amended and restated asset purchase agreement.

The Company expects to complete integration of the acquired stores and related assets by the end of fiscal 2020, at an estimated total cost of approximately $750 million, which is reported as acquisition-related costs. In addition, the Company plans to spend approximately $500 million of capital on store conversions and related activities.

The Company expects to realize annual synergies from the transaction of more than $300 million, which are expected to be fully realized within four years of the initial closing of this transaction and derived primarily from procurement, cost savings and other operational matters.

The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.

RECENT DEVELOPMENTS
Investment in Chinese Pharmacy Chain GuoDa
On December 6, 2017 the Company announced that it had reached an agreement with China National Accord Medicines Corporation Ltd. to become an investor in its subsidiary Sinopharm Holding Guoda Drugstores Co., Ltd. (“GuoDa”), a leading retail pharmacy chain in China.

Following a public tender process, the Company's bid met all the requirements set by the seller to acquire a 40 percent equity interest in GuoDa through a capital increase worth approximately $416 million. The transaction is subject to regulatory review and approval, and other customary closing conditions. Upon completion, the Company will account for this equity investment using the equity method of accounting.

Recent U.S. tax legislation
On December 22, 2017, U.S. tax legislation was enacted that made significant changes to many elements of the U.S. federal Internal Revenue Code.  Due to the recent enactment of this tax legislation and expected further rulemaking and future regulatory guidance, a comprehensive estimate of the overall tax impact to the Company's financial position, results of operations and cash flows cannot be made at this time. However, at this time, the Company does anticipate this tax legislation will result in a discrete tax impact related to revaluing the Company's U.S. federal deferred tax assets and liabilities, a discrete tax impact associated with including incremental earnings from the Company's non-U.S. entities in its U.S. federal income tax base and a change to the Company’s fiscal 2018 estimated annual tax rate due to the statutory corporate tax rate reduction. These changes will impact Deferred income tax and Other non-current liabilities in the Consolidated Condensed Balance Sheet.

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Table of Contents

See note 19, “subsequent event” above and “cautionary note regarding forward-looking statements” and Item 1A “Risk factors” below.

EXIT AND DISPOSAL ACTIVITIES
Store Optimization Program
On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) as part of an initiative to optimize store locations within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Store Optimization Program includes plans to close approximately 600 stores and related assets across the U.S. and is expected to result in cost savings of $300 million per year to be delivered by the end of fiscal 2020. The actions under the Store Optimization Program are expected to take place over an 18 month period beginning in spring 2018.

The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $450 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately $270 million for lease obligations and other real estate costs and approximately $180 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in future cash expenditures.

As the Store Optimization Program is implemented, charges will be recognized as the costs are incurred over time in accordance with GAAP. The Company intends to treat charges related to the Store Optimization Program as special items impacting comparability of results in its quarterly earnings disclosures.

The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.

AMERISOURCEBERGEN CORPORATION RELATIONSHIP
As of November 30, 2017 , the Company owned 56,854,867 AmerisourceBergen common shares representing approximately 26% of the outstanding AmerisourceBergen common stock, and had designated one member of AmerisourceBergen’s board of directors. As of November 30, 2017 , the Company can acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market and thereafter designate another member of AmerisourceBergen’s board of directors, subject in each case to applicable legal and contractual requirements. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances.

Effective March 18, 2016, the Company began accounting for the investment in AmerisourceBergen using the equity method of accounting, subject to a two-month reporting lag, with the net earnings attributable to the investment being classified within the operating income of the Pharmaceutical Wholesale segment. See note 4, equity method investments, to the Consolidated Condensed Financial Statements for further information.

EXECUTIVE SUMMARY
The following table presents certain key financial statistics for the Company for the three months ended November 30, 2017 and 2016 , respectively.

- 26 -


 
(in millions, except per share amounts)
 
Three months ended November 30,
 
2017
 
2016
Sales
$
30,740

 
$
28,501

Gross profit
7,341

 
7,116

Selling, general and administrative expenses
5,907

 
5,686

Equity earnings (loss) in AmerisourceBergen
(112
)
 
17

Operating income
1,322

 
1,447

Adjusted operating income (Non-GAAP measure) 1
1,809

 
1,726

Earnings before interest and income tax provision
1,185

 
1,448

Net earnings attributable to Walgreens Boots Alliance, Inc.
821

 
1,054

Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure) 1
1,295

 
1,201

Net earnings per common share – diluted
0.81

 
0.97

Adjusted net earnings per common share – diluted (Non-GAAP measure) 1
1.28

 
1.10

 
Percentage increases (decreases)
 
Three months ended November 30,
 
2017
 
2016
Sales
7.9

 
(1.8
)
Gross profit
3.2

 
(4.1
)
Selling, general and administrative expenses
3.9

 
(4.5
)
Operating income
(8.6
)
 
(1.4
)
Adjusted operating income (Non-GAAP measure) 1
4.8

 
0.4

Earnings before interest and income tax provision
(18.2
)
 
2.6

Net earnings attributable to Walgreens Boots Alliance, Inc.
(22.1
)
 
(5.0
)
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure) 1
7.8

 
6.1

Net earnings per common share – diluted
(16.5
)
 
(4.0
)
Adjusted net earnings per common share – diluted (Non-GAAP measure) 1
16.4

 
6.8

 
Percent to sales
 
Three months ended November 30,
 
2017
 
2016
Gross margin
23.9
 
25.0
Selling, general and administrative expenses
19.2
 
20.0

1  
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States (“GAAP”).

WALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS
Net earnings attributable to Walgreens Boots Alliance for the three months ended November 30, 2017 decrease d 22.1% to $821 million , while diluted net earnings per share decrease d 16.5% to $0.81 compared with the prior year period. The decreases were mainly due to impairment of the Company's equity method investment in Guangzhou Pharmaceuticals Corporation (“Guangzhou Pharmaceuticals”). In addition, the decreases in net earnings reflect a loss from the Company's equity earnings in AmerisourceBergen in the current period and benefits from the U.K. tax rate reduction recorded in the comparable prior year period.

Other income (expense) for the three months ended November 30, 2017 was an expense of $137 million as compared to an income of $1 million in the comparable prior year period, which primarily reflects impairment of the Company's equity method investment in Guangzhou Pharmaceuticals.

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Interest was a net expense of $149 million and $173 million for the three months ended November 30, 2017 and 2016, respectively. The decrease mainly reflects lower borrowings.

The effective tax rate for the three months ended November 30, 2017 was 21.9% compared to 17.3% for the prior year period.
The increase in effective tax rate was primarily attributable to reduced discrete tax benefits in the current period. During the three months ended November 30, 2016 , we recognized a discrete tax benefit of $77 million related to reducing our deferred tax liabilities, following enactment of a U.K. tax rate reduction. This benefit did not recur during the three months ended November 30, 2017 . The impact of this non-recurrence was partly offset by additional net discrete tax benefits for the three months ended November 30, 2017 , primarily related to our equity method investment in AmerisourceBergen.

Adjusted diluted net earnings per share (Non-GAAP measure)
Adjusted net earnings attributable to Walgreens Boots Alliance for the three months ended November 30, 2017 increase d 7.8% to $1.3 billion , compared with the year-ago quarter. Adjusted diluted net earnings per share increase d 16.4% to $1.28 , compared with the year-ago quarter. Adjusted net earnings and adjusted diluted net earnings per share were positively impacted by 0.6 percentage points and 0.9 percentage points, respectively, due to currency translation.

Excluding the impact of currency translation, the increase in adjusted net earnings and adjusted diluted net earnings per share for the three months ended November 30, 2017 was primarily due to an increase in sales and a reduction in selling, general and administrative expenses as a percentage of sales partially offset by lower gross margin.

Adjusted diluted net earnings per share for the three months ended November 30, 2017 also benefited from a lower number of shares in issue as a result of the stock repurchase programs described below. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

RESULTS OF OPERATIONS BY SEGMENT

Retail Pharmacy USA
 
(in millions, except location amounts)