Document
 
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, 2018
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)
Registrant’s telephone number, including area code:
(847) 315-2500
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 every Interactive Data File required to be submitted 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 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 ☐ 
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 November 30, 2018 was 943,444,736.
 


Table of Contents

WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE THREE MONTHS ENDED NOVEMBER 30, 2018

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)
 
November 30, 2018
 
August 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
980

 
$
785

Accounts receivable, net
7,144

 
6,573

Inventories
10,976

 
9,565

Other current assets
983

 
923

Total current assets
20,083

 
17,846

Non-current assets:


 
 

Property, plant and equipment, net
13,821

 
13,911

Goodwill
16,809

 
16,914

Intangible assets, net
11,584

 
11,783

Equity method investments (see note 5)
6,570

 
6,610

Other non-current assets
1,074

 
1,060

Total non-current assets
49,858

 
50,278

Total assets
$
69,941

 
$
68,124

 
 
 
 
Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Short-term debt
$
4,344

 
$
1,966

Trade accounts payable (see note 16)
14,660

 
13,566

Accrued expenses and other liabilities
5,484

 
5,862

Income taxes
611

 
273

Total current liabilities
25,099

 
21,667

Non-current liabilities:
 

 
 

Long-term debt
11,646

 
12,431

Deferred income taxes
1,793

 
1,815

Other non-current liabilities
5,140

 
5,522

Total non-current liabilities
18,579

 
19,768

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, 2018 and August 31, 2018
12

 
12

Paid-in capital
10,522

 
10,493

Retained earnings
34,168

 
33,551

Accumulated other comprehensive loss
(3,231
)
 
(3,002
)
Treasury stock, at cost; 229,068,882 shares at November 30, 2018 and 220,380,200 at August 31, 2018
(15,862
)
 
(15,047
)
Total Walgreens Boots Alliance, Inc. shareholders’ equity
25,609

 
26,007

Noncontrolling interests
654

 
682

Total equity
26,263

 
26,689

Total liabilities and equity
$
69,941

 
$
68,124


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, 2018 and 2017
(in millions, except shares)
 
Equity attributable to Walgreens Boots Alliance, Inc.
 
 
 
Common stock shares
Common stock amount
Treasury stock amount
Paid-in capital
Accumulated other comprehensive income (loss)
Retained earnings
Noncontrolling interests
Total equity
August 31, 2018
952,133,418

$
12

$
(15,047
)
$
10,493

$
(3,002
)
$
33,551

$
682

$
26,689

Net earnings





1,123

(23
)
1,100

Other comprehensive income (loss), net of tax




(229
)

(3
)
(232
)
Dividends declared ($0.440 per share)





(418
)
(2
)
(420
)
Treasury stock purchases
(11,994,557
)

(912
)




(912
)
Employee stock purchase and option plans
3,305,875


99

2




101

Stock-based compensation



27




27

Adoption of new accounting standards





(88
)

(88
)
November 30, 2018
943,444,736

$
12

$
(15,862
)
$
10,522

$
(3,231
)
$
34,168

$
654

$
26,263

 
Equity attributable to Walgreens Boots Alliance, Inc.
 
 
 
Common stock shares
Common stock amount
Treasury stock amount
Paid-in capital
Accumulated other comprehensive income (loss)
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 ($0.400 per share)





(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


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,
 
2018
 
2017
Sales
$
33,793

 
$
30,740

Cost of sales
26,152

 
23,399

Gross profit
7,641

 
7,341

 
 
 
 
Selling, general and administrative expenses
6,280

 
5,910

Equity earnings (loss) in AmerisourceBergen
39

 
(112
)
Operating income
1,400

 
1,319

 
 
 
 
Other income (expense)
26

 
(134
)
Earnings before interest and income tax provision
1,427

 
1,185

 
 
 
 
Interest expense, net
161

 
149

Earnings before income tax provision
1,265

 
1,036

Income tax provision
180

 
227

Post tax earnings from other equity method investments
15

 
13

Net earnings
1,100

 
822

Net earnings (loss) attributable to noncontrolling interests
(23
)
 
1

Net earnings attributable to Walgreens Boots Alliance, Inc.
$
1,123

 
$
821

 
 
 
 
Net earnings per common share:
 

 
 

Basic
$
1.18

 
$
0.82

Diluted
$
1.18

 
$
0.81

 
 
 
 
Weighted average common shares outstanding:
 

 
 

Basic
948.2

 
1,006.1

Diluted
951.4

 
1,011.1


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,
 
2018
 
2017
Comprehensive income:
 
 
 
Net earnings
$
1,100

 
$
822

 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

Pension/postretirement obligations
(4
)
 

Unrealized gain on hedges
3

 

Share of other comprehensive income of equity method investments
1

 
2

Currency translation adjustments
(232
)
 
520

Total other comprehensive income (loss)
(232
)
 
522

Total comprehensive income
868

 
1,344

 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interests
(26
)
 
15

Comprehensive income attributable to Walgreens Boots Alliance, Inc.
$
894

 
$
1,329


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,
 
2018
 
2017
Cash flows from operating activities:
 
 
 
Net earnings
$
1,100

 
$
822

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

 
 

Depreciation and amortization
490

 
416

Deferred income taxes
24

 
(63
)
Stock compensation expense
27

 
25

Equity (earnings) loss from equity method investments
(54
)
 
99

Other
97

 
152

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(515
)
 
(362
)
Inventories
(1,424
)
 
(1,018
)
Other current assets
(83
)
 
(154
)
Trade accounts payable
1,097

 
1,043

Accrued expenses and other liabilities
(341
)
 
(216
)
Income taxes
94

 
246

Other non-current assets and liabilities
(54
)
 
13

Net cash provided by operating activities
460

 
1,003

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property, plant and equipment
(470
)
 
(378
)
Proceeds from sale of other assets
30

 
13

Business, investment and asset acquisitions, net of cash acquired
(200
)
 
(265
)
Other
5

 
31

Net cash used for investing activities
(635
)
 
(599
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in short-term debt with maturities of 3 months or less
1,067

 
1,026

Proceeds from debt
1,085

 
110

Payments of debt
(545
)
 
(92
)
Stock purchases
(912
)
 
(2,525
)
Proceeds related to employee stock plans
101

 
32

Cash dividends paid
(422
)
 
(413
)
Other
16

 
5

Net cash provided by (used for) financing activities
390

 
(1,857
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
(6
)
 
29

Changes in cash, cash equivalents and restricted cash:
 

 
 

Net increase (decrease) in cash, cash equivalents and restricted cash
208

 
(1,424
)
Cash, cash equivalents and restricted cash at beginning of period
975

 
3,496

Cash, cash equivalents and restricted cash at end of period
$
1,183

 
$
2,072


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

- 7 -

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. The Company uses the equity-method of accounting for equity investments in less than majority-owned companies if the investment provides the ability to exercise significant influence. All intercompany transactions have been eliminated.

The Consolidated Condensed Financial Statements included herein are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States (“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, 2018.

In the opinion of management, 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, strategic transactions including acquisitions, changes in laws and general economic conditions in the markets in which the Company operates and other factors on the Company’s operations and net earnings for any period may not be comparable to the same period in previous years.

Certain amounts in the Consolidated Condensed Financial Statements and associated notes may not add due to rounding.

Note 2. 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. The purchases of these stores have been accounted for as business combinations and occurred in waves during fiscal 2018. The Company purchased 1,932 stores for total cash consideration of $4.2 billion for the fiscal year ended August 31, 2018.

As of November 30, 2018, the Company had not completed the analysis to assign fair values for certain intangible assets acquired and liabilities assumed for the acquired stores, and therefore the purchase price allocation has not been finalized as the Company is awaiting additional information to complete its assessment. During the three months ended November 30, 2018, the Company recorded certain measurement period adjustments based on additional information primarily to other non-current liabilities, intangible assets and deferred income taxes, which did not have a material impact on goodwill. The following table summarizes the consideration for the preliminary amounts of identified assets acquired and liabilities assumed for purchase of 1,932 stores as of November 30, 2018.
Consideration
$
4,330

 
 
Identifiable assets acquired and liabilities assumed
 
Inventories
$
1,171

Property, plant and equipment
490

Intangible assets
2,039

Accrued expenses and other liabilities
(55
)
Deferred income taxes
293

Other non-current liabilities
(937
)
Total identifiable net assets
3,001

Goodwill
$
1,329


- 8 -

Table of Contents


The preliminary identified definite-lived intangible assets were as follows:
Definite-lived intangible assets
Weighted-average useful life (in years)
 
Amount (in millions)
Customer relationships
12
 
$
1,800

Favorable lease interests
10
 
219

Trade names
2
 
20

Total
 
 
$
2,039


Consideration includes cash of $4,157 million and the fair value of the option granted to Rite Aid to become a member of the Company’s group purchasing organization, Walgreens Boots Alliance Development GmbH. The fair value for this option was determined using the income approach methodology. The fair value estimates are based on the market compensation for such services and appropriate discount rate, as relevant, that market participants would consider when estimating fair values.

The goodwill of $1,329 million arising from the business combinations primarily reflects the expected operational synergies and cost savings generated from the Store Optimization Program as well as the expected growth from new customers. See note 3, exit and disposal activities, for additional information. The goodwill was allocated to the Retail Pharmacy USA segment. Substantially all of the goodwill recognized is expected to be deductible for income tax purposes.

The fair value for customer relationships was determined using the multi-period excess earnings method, a form of the income approach. Real property fair values were determined using primarily the income approach and sales comparison approach. The fair value measurements of the intangible assets are based on significant inputs not observable in the market and thus represent Level 3 measurements. The fair value estimates for the intangible assets are based on projected discounted cash flows, historical and projected financial information and attrition rates, as relevant, that market participants would consider when estimating fair values.

Assuming stores acquired during the three months ended November 30, 2017 were purchased at the beginning of the comparable period presented, pro forma net earnings and sales of the Company would not be materially different from the comparable period 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.

The Company acquired the first distribution center and related inventory for cash consideration of $61 million during the three months ended November 30, 2018. The transition of the remaining two distribution centers and related inventory remains subject to closing conditions set forth in the amended and restated asset purchase agreement.

Note 3. 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 through the planned closure of approximately 600 stores and related assets within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The actions under the Store Optimization Program commenced in March 2018 and are expected to take place over an 18 month period.

The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $350 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs, compared to the Company's previously stated expectation of $450 million. The Company expects to incur pre-tax charges of approximately $160 million for lease obligations and other real estate costs and approximately $190 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.

Since approval of the Store Optimization Program, the Company has recognized cumulative pre-tax charges to its financial results in accordance with generally accepted accounting principles in the United States of America ("GAAP") totaling $120 million, which were recorded within selling, general and administrative expenses. These charges included $12 million related to lease obligations and other real estate costs and $108 million in employee severance and other exit costs.

Costs related to the Store Optimization Program for the three months ended November 30, 2018 were as follows:

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Table of Contents

Three months ended November 30, 2018
 
Lease obligations and other real estate costs
$
(7
)
Employee severance and other exit costs
27

Total costs
$
20


The changes in liabilities related to the Store Optimization Program for the three months ended November 30, 2018 include the following (in millions):
 
Lease obligations and other real estate costs
 
Employee severance and other exit costs
 
Total
Balance at August 31, 2018
$
308

 
$
21

 
$
329

Costs
(7
)
 
27

 
20

Payments
(47
)
 
(34
)
 
(81
)
Other - non cash1
86

 
1

 
87

Balance at November 30, 2018
$
340

 
$
15

 
$
355


1 
Primarily represents unfavorable lease liabilities from acquired Rite Aid stores.

Cost Transformation Program
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.

The changes in liabilities related to the Cost Transformation Program include the following (in millions):
 
Real estate costs
 
Severance and other business transition and exit costs
 
Total
Balance at August 31, 2018
$
414

 
$
7

 
$
421

Payments
(21
)
 
(1
)
 
(22
)
Other - non cash
5

 

 
5

Currency translation adjustments

 
1

 
1

Balance at November 30, 2018
$
398

 
$
7

 
$
405


Note 4. Operating leases
During the three months ended November 30, 2018, the Company recorded charges of $13 million for facilities that were closed or relocated. This compares to $39 million for the three months ended November 30, 2017. These charges are reported in selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.


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Table of Contents

The changes in reserve for facility closings and related lease termination charges include the following (in millions):
 
For the three months ended November 30, 2018
 
For the twelve months ended August 31, 2018
Balance at beginning of period
$
964

 
$
718

Provision for present value of non-cancellable lease payments on closed facilities
(3
)
 
52

Changes in assumptions
(2
)
 
19

Accretion expense
18

 
58

Other - non cash1
77

 
338

Cash payments, net of sublease income
(84
)
 
(221
)
Balance at end of period
$
970

 
$
964


1 
Represents unfavorable lease liabilities from acquired Rite Aid stores.

Note 5. Equity method investments
Equity method investments as of November 30, 2018 and August 31, 2018, were as follows (in millions, except percentages):
 
November 30, 2018
 
August 31, 2018
 
Carrying value
 
Ownership percentage
 
Carrying value
 
Ownership percentage
AmerisourceBergen
$
5,156

 
27%
 
$
5,138

 
26%
Others
1,414

 
8% - 50%
 
1,472

 
8% - 50%
Total
$
6,570

 
 
 
$
6,610

 
 

AmerisourceBergen Corporation (“AmerisourceBergen”) investment
As of November 30, 2018 and August 31, 2018, the Company owned 56,854,867 AmerisourceBergen common shares, representing approximately 27% and 26% 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 are 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, 2018 was $5.1 billion.

As of November 30, 2018, 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; its investment in Sinopharm Holding Guoda Drugstores Co., Ltd., the Company's retail pharmacy investment in China and the Company's investment in Option Care Inc. in the U.S.

The Company reported $15 million and $13 million of post-tax equity earnings from other equity method investments, including equity method investments classified as operating, for the three months ended November 30, 2018 and 2017, respectively.


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Table of Contents

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, 2018
$
10,483

 
$
3,370

 
$
3,061

 
$
16,914

Acquisitions
6

 

 

 
6

Currency translation adjustments

 
(64
)
 
(47
)
 
(111
)
November 30, 2018
$
10,489

 
$
3,306

 
$
3,014

 
$
16,809


The carrying amount and accumulated amortization of intangible assets consist of the following (in millions):
 
November 30, 2018
 
August 31, 2018
Gross amortizable intangible assets
 
 
 
Customer relationships and loyalty card holders
$
4,291

 
$
4,235

Favorable lease interests and non-compete agreements
668

 
680

Trade names and trademarks
478

 
489

Purchasing and payer contracts
390

 
390

Total gross amortizable intangible assets
5,827

 
5,794

 
 
 
 
Accumulated amortization
 

 
 

Customer relationships and loyalty card holders
$
1,067

 
$
997

Favorable lease interests and non-compete agreements
370

 
359

Trade names and trademarks
217

 
206

Purchasing and payer contracts
85

 
78

Total accumulated amortization
1,739

 
1,640

Total amortizable intangible assets, net
$
4,088

 
$
4,154

 
 
 
 
Indefinite-lived intangible assets
 

 
 

Trade names and trademarks
$
5,460

 
$
5,557

Pharmacy licenses
2,036

 
2,072

Total indefinite-lived intangible assets
$
7,496

 
$
7,629

 
 
 
 
Total intangible assets, net
$
11,584

 
$
11,783


Amortization expense for intangible assets was $134 million and $96 million for the three months ended November 30, 2018
and 2017, respectively.

Estimated future annual amortization expense for the next five fiscal years for intangible assets recorded at November 30, 2018 is as follows (in millions):
 
2020
 
2021
 
2022
 
2023
 
2024
Estimated annual amortization expense
$
460

 
$
410

 
$
390

 
$
357

 
$
339



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Note 7. Debt
Debt consists 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, 2018
 
August 31, 2018
Short-term debt 1
 
 
 
Commercial paper
$
1,855

 
$
430

Credit facilities 2
500

 
999

$8 billion note issuance 3,4
 
 
 
2.700% unsecured notes due 2019
1,248

 

$1 billion note issuance 3,5
 
 
 
5.250% unsecured notes due 2019 6
249

 
249

Other 7
492

 
288

Total short-term debt
$
4,344

 
$
1,966

 
 
 
 
Long-term debt 1
 

 
 

$6 billion note issuance 3,4
 

 
 

3.450% unsecured notes due 2026
$
1,889

 
$
1,888

4.650% unsecured notes due 2046
590

 
590

$8 billion note issuance 3,4
 

 
 

2.700% unsecured notes due 2019

 
1,248

3.300% unsecured notes due 2021
1,245

 
1,245

3.800% unsecured notes due 2024
1,990

 
1,990

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
508

 
517

3.600% unsecured Pound sterling notes due 2025
381

 
387

€750 million note issuance 3,4
 

 
 

2.125% unsecured Euro notes due 2026
846

 
868

$4 billion note issuance 3,5
 

 
 

3.100% unsecured notes due 2022
1,196

 
1,196

4.400% unsecured notes due 2042
492

 
492

Credit facilities 2
500

 

Other 8
22

 
23

Total long-term debt, less current portion
$
11,646

 
$
12,431


1 
Carrying values are presented net of unamortized discount and debt issuance costs, where applicable, and foreign currency denominated debt has been translated using the spot rates at November 30, 2018 and August 31, 2018 respectively.
2 
Credit facilities include debt outstanding under the February 2017 Revolving Credit Agreement, the August 2017 Revolving Credit Agreement and the November 2018 Credit Agreement, which are described in more detail below.
3 
The $6 billion, $8 billion, £0.7 billion, €0.75 billion, $4 billion and $1 billion note issuances as of November 30, 2018 had fair values and carrying values of $2.3 billion and $2.5 billion$6.3 billion and $6.5 billion, $0.9 billion and $0.9 billion, $0.9 billion and $0.8 billion, $1.6 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, 2018 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, 2018.
4 
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.

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5 
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, 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.
6 
Includes interest rate swap fair market value adjustments. See note 9, fair value measurements, for additional fair value disclosures.
7 
Other short-term debt represents a mix of fixed and variable rate debt with various maturities and working capital facilities denominated in various currencies.
8 
Other long-term debt represents a mix of fixed and variable rate debt in various currencies with various maturities.

November 2018 Revolving and Term Loan Credit Agreement
On November 30, 2018, the Company entered into a credit agreement (the “November 2018 Credit Agreement”) with the lenders from time to time party thereto. The November 2018 Credit Agreement includes a $500 million senior unsecured revolving credit facility and a $500 million senior unsecured term loan facility. The facility termination date is, with respect to the revolving credit facility, the earlier of (a) May 30, 2020 and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the November 2018 Credit Agreement and, with respect to the term loan facility, the earlier of (a) May 30, 2020 and (b) the date of acceleration of all term loans pursuant to the November 2018 Credit Agreement. As of November 30, 2018, there were $1.0 billion borrowings outstanding under the November 2018 Credit Agreement.

August 2018 Revolving Credit Agreement
On August 29, 2018, the Company entered into a revolving credit agreement (the “August 2018 Revolving Credit Agreement”) with the lenders and letter of credit issuers from time to time party thereto. The August 2018 Revolving Credit Agreement is an unsecured revolving credit facility with an aggregate commitment in the amount of $3.5 billion, with a letter of credit subfacility commitment amount of $500 million. The facility termination date is the earlier of (a) August 29, 2023, subject to the extension thereof pursuant to the August 2018 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the revolving commitments pursuant to the August 2018 Revolving Credit Agreement. As of November 30, 2018, there were no borrowings outstanding under the August 2018 Revolving Credit Agreement.

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”). On November 30, 2018, in connection with the entrance into the November 2018 Credit Agreement, the Company terminated the 2017 Term Loan Credit Agreement in accordance with its terms and as of such date paid all amounts due in connection therewith.

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. As of November 30, 2018, there were no borrowings outstanding under the August 2017 Revolving Credit Agreement. The 2017 Term Loan Credit Agreement is an unsecured “multi-draw” term loan facility which would have matured on March 30, 2019. As of November 30, 2018, the Company had no borrowings outstanding under the 2017 Term Loan 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, 2018, there were no borrowings outstanding under the February 2017 Revolving Credit Agreement.

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. Certain of the credit facilities provide for an increase in such ratio in certain conditions set forth in the applicable credit agreement. The credit facilities contain various other customary covenants.


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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 debt of $1.8 billion and $0.6 billion of commercial paper outstanding at a weighted average interest rate of 2.61% and 1.46% for the three months ended November 30, 2018 and 2017, respectively.

Interest
Interest paid was $237 million and $217 million for the three months ended November 30, 2018 and 2017, respectively.

Note 8. Financial instruments
The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.

The notional amounts and fair value of derivative instruments outstanding were as follows (in millions):
November 30, 2018
 
Notional
 
Fair value
 
Location in Consolidated Condensed Balance Sheets
Derivatives designated as hedges:
 
 
 
 
 
 
Interest rate swaps
 
$
250

 
$
2

 
Other current liabilities
Cross currency interest rate swaps
 
400


3

 
Other non-current assets
Cross currency interest rate swaps
 
100

 

 
Other non-current liabilities
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency forwards
 
2,476

 
65

 
Other current assets
Foreign currency forwards
 
816

 
5

 
Other current liabilities
August 31, 2018
 
Notional
 
Fair value
 
Location in Consolidated Condensed Balance Sheets
Derivatives designated as hedges:
 
 
 
 
 
 
Interest rate swaps
 
$
250

 
$
1

 
Other current liabilities
Foreign currency forwards
 
15

 

 
Other current assets
Derivatives not designated as hedges:
 
 

 
 

 
 
Foreign currency forwards
 
3,273

 
52

 
Other current assets
Foreign currency forwards
 
825

 
4

 
Other current liabilities

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

The Company has 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.

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.

Fair value hedges
The Company holds an interest rate swap 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. The swap termination date coincide with the notes' maturity date, January 15, 2019. This swap was designated as a fair value hedge.

The gains and losses due to changes in fair value on the swap 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, debt).

Net investment hedges
The Company uses cross currency interest rate swaps as hedges of net investments in subsidiaries with non-U.S. dollar functional currencies. For qualifying net investment hedges, changes in the fair value of the derivatives are recorded in the currency translation adjustment within accumulated other comprehensive income (loss).

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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 income and (expense) 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
 
2018
 
2017
Foreign currency forwards
Selling, general and administrative expenses
 
$
45

 
$
(19
)
Foreign currency forwards
Other income (expense)
 
3

 
34


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 Accounting Standards Codification ("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 were as follows (in millions):
 
November 30, 2018
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market funds1
$
398

 
$
398

 
$

 
$

Available-for-sale investments2

 

 

 

Foreign currency forwards3
65

 

 
65

 

Cross currency interest rate swaps4
3

 

 
3

 

Liabilities:
 

 
 

 
 

 
 

Interest rate swaps4
2

 

 
2

 

Foreign currency forwards3
5

 

 
5

 

 
August 31, 2018
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market funds1
$
227

 
$
227

 
$

 
$

Available-for-sale investments2
1

 
1

 

 

Foreign currency forwards3
52

 

 
52

 

Liabilities:
 

 
 

 
 

 
 

Interest rate swaps4
1

 

 
1

 

Foreign currency forwards3
4

 

 
4

 


1 
Money market funds are valued at the closing price reported by the fund sponsor.

- 16 -

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2 
Fair values of quoted investments are based on current bid prices as of November 30, 2018 and August 31, 2018.
3 
The fair value of 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.
4 
The fair value of interest rate swaps and cross currency 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, 2018.

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, debt, 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, including litigation, arbitration and other claims, and investigations, inspections, audits, claims, inquiries and similar actions by pharmacy, healthcare, tax and other governmental authorities, arising in the normal course of the Company’s business, including the matters described below. Legal proceedings, in general, and securities, class action and multi-district 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. The Company also may be named from time to time in qui tam actions initiated by private third parties. In such actions, the private parties purport to act on behalf of federal or state governments, allege that false claims have been submitted for payment by the government and may receive an award if their claims are successful. After a private party has filed a qui tam action, the government must investigate the private party's claim and determine whether to intervene in and take control over the litigation. These actions may remain under seal while the government makes this determination. If the government declines to intervene, the private party may nonetheless continue to pursue the litigation on his or her own purporting to act on behalf of the government. 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. 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 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 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. 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. Plaintiff filed its motion for class certification on April 21, 2017. The Court granted plaintiff’s motion on March 29, 2018 and merits discovery is proceeding.

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As of the date of this report, 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. There has been no activity in this lawsuit since the complaint was filed. 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 matter was stayed. On March 17, 2017, plaintiffs moved to lift the stay to allow plaintiffs to file an amended complaint. That motion was granted, and plaintiffs filed their amended complaint on December 11, 2017, alleging that the Company and certain of its officers (the “Walgreens Boots Alliance Defendants”) made false or misleading statements regarding the Rite Aid Transactions. On July 11, 2018, the Court denied the Company’s motion to dismiss, but narrowed the time scope of the subject statements. The Company filed an answer and affirmative defenses on August 8, 2018, and on August 24, 2018 filed a new motion to dismiss based on the named plaintiff’s lack of standing. The Court granted that motion on October 24, 2018. On November 2, 2018, plaintiff’s counsel filed a new lawsuit making identical claims on behalf of a new set of plaintiffs against only the Walgreens Boots Alliance Defendants. The Court named the new group of plaintiffs as lead plaintiffs and named plaintiffs’ counsel as lead plaintiffs’ counsel in the case going forward.

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.

In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against an array of defendants by various plaintiffs such as counties, cities, hospitals, Indian tribes and others, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation, captioned In re National Prescription Opiate Litigation (MDL No. 2804), is pending in the U.S. District Court for the Northern District of Ohio. The Company is named as a defendant in a subset of the cases included in this multidistrict litigation. The Company also has been named as a defendant in several lawsuits brought in state courts relating to opioid matters. The relief sought by various plaintiffs is compensatory and punitive damages, as well as injunctive relief. Additionally, the Company has received from the Attorney Generals of several states subpoenas, civil investigative demands and/or other requests concerning opioid matters.

On September 28, 2018, the Company announced that it had reached an agreement with the SEC to fully resolve an investigation into certain forward-looking financial goals and related disclosures by Walgreens. The disclosures at issue were made prior to the strategic combination with Alliance Boots and the merger pursuant to which Walgreens Boots Alliance became the parent holding company on December 31, 2014. The settlement does not involve any of the Company’s current officers or executives, nor does it allege intentional or reckless conduct by the Company. In agreeing to the settlement, the Company neither admitted nor denied the SEC’s allegations. Pursuant to the agreement with the SEC, the Company consented to the SEC’s issuance of an administrative order, and the Company paid a $34.5 million penalty, which was fully reserved for in the Company’s Consolidated Financial Statements as of August 31, 2018.

The Company has been responding to a civil investigation involving allegations under the False Claims Act by a United States Attorney’s Office, working in conjunction with several states, regarding certain dispensing practices. The Company is cooperating with this investigation and has entered into an agreement in principle with the United States Attorney’s Office and the participating state attorneys general to resolve the matter. The Company has established reserves in relation to such a potential resolution. The agreement in principle remains subject to final documentation and approval by a U.S. District Court judge.


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Note 11. Income taxes
The effective tax rate for the three months ended November 30, 2018 was 14.2% compared to 21.9% for the three months ended November 30, 2017. The decrease in the effective tax rate for the three months ended November 30, 2018 was significantly impacted by a net reduction to the Company’s estimated annual tax rate for the current year as a result of the U.S. tax law changes, which were enacted on December 22, 2017.

Income taxes paid for the three months ended November 30, 2018 were $61 million, compared to $45 million for the three months ended November 30, 2017.

U.S. tax law changes
In connection with the Company’s ongoing analysis of the impact of the U.S. tax law changes enacted in December 2017 and in accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), the Company recorded a tax benefit of $12 million during the three months ended November 30, 2018, which is provisional and subject to change. This provisional tax benefit is related to the Company's accrual for the transition tax and other U.S. tax law changes. The Company has not recorded any adjustments to the provisional amounts related to the remeasurement of its net U.S. deferred tax liabilities for the three months ended November 30, 2018.

The Company’s analysis of the income tax effects of the U.S. tax law changes could not be finalized as of November 30, 2018. While the Company made reasonable estimates of the impact of the transition tax and the remeasurement of its deferred tax assets and liabilities, the final impact of the U.S. tax law changes may differ from these estimates, due to, among other things, changes in its interpretations and assumptions, technical clarifications from the U.S. Department of the Treasury and IRS and actions the Company may take. The U.S. Department of the Treasury recently issued multiple proposed regulations related to the U.S. tax law changes. The Company is in the process of analyzing any impact on its current current estimates if these proposed regulations are finalized in their current form. The Company expects to finalize such provisional amounts within the time period prescribed by SAB 118.

The U.S. tax law changes created new rules that allow the Company to make an accounting policy election to either treat taxes due on future GILTI inclusions in taxable income as either a current period expense or reflect such inclusions related to temporary basis differences in the Company’s measurement of deferred taxes. The Company’s analysis of the new GILTI rules is not complete; therefore, the Company has not made a policy election regarding the tax accounting treatment of the GILTI tax. The Company also continues to evaluate the impact of the GILTI provisions under the U.S. tax law changes which are complex and subject to continuing regulatory interpretation by the IRS. The Company has, however, included an estimate of the current GILTI impact in its effective tax rate for fiscal 2019.

The U.S. tax law changes have the potential to change the Company’s assertions with respect to whether earnings of the Company’s foreign subsidiaries should remain indefinitely reinvested. The Company continues to evaluate these changes, therefore, the Company has not made any changes to its indefinite reinvestment assertions.

Note 12. 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 (the “Boots Plan”), which covers certain employees in the United Kingdom. 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.


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Components of net periodic pension costs for the defined benefit pension plans (in millions):
 
 
Three months ended November 30,
 
Location in Consolidated Condensed Statements of Earnings
2018
 
2017
Service costs
Selling, general and administrative expenses
$
1

 
$
2

Interest costs
Other expense1
49

 
47

Expected returns on plan assets/other
Other income1
(60
)
 
(51
)
Total net periodic pension costs (income)
 
$
(10
)
 
$
(2
)

1 
Shown as other income (expense) on Consolidated Condensed Statements of Earnings.

The Company made cash contributions to its defined benefit pension plans of $9 million for the three months ended November 30, 2018, which primarily related to committed funded payments. The Company plans to contribute an additional $22 million to its defined benefit pension plans in fiscal 2019.

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 $61 million for the three months ended November 30, 2018 compared to an expense of $57 million for the three months ended November 30, 2017.

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 for the three months ended November 30, 2018 was $31 million compared to a cost of $30 million in the three months ended November 30, 2017.

Note 13. Accumulated other comprehensive income (loss)
The following is a summary of net changes in accumulated other comprehensive income ("AOCI") by component and net of tax for the three months ended November 30, 2018 and 2017 (in millions):
 
Pension/ post-retirement obligations
 
Unrecognized gain (loss) on available-for-sale investments
 
Unrealized gain (loss) on hedges
 
Share of AOCI of equity method investments
 
Cumulative translation adjustments
 
Total
Balance at August 31, 2018
$
101

 
$

 
$
(30
)
 
$
3

 
$
(3,076
)
 
$
(3,002
)
Other comprehensive income (loss) before reclassification adjustments

 

 
3

 
1

 
(228
)
 
(224
)
Amounts reclassified from AOCI
(4
)
 

 
1

 

 

 
(3
)
Tax benefit (provision)

 

 
(1
)
 

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

 
3

 
1

 
(229
)
 
(229
)
Balance at November 30, 2018
$
97

 
$

 
$
(27
)
 
$
4

 
$
(3,305
)
 
$
(3,231
)

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Pension/ post-retirement obligations
 
Unrecognized gain (loss) on available-for-sale investments
 
Unrealized gain (loss) on hedges
 
Share of AOCI of equity method investments
 
Cumulative translation adjustments
 
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 AOCI

 

 
1

 

 

 
1

Tax benefit (provision)
1

 

 
(1
)
 
(1
)
 

 
(1
)
Net change in other comprehensive income (loss)

 

 

 
2

 
506

 
508

Balance at November 30, 2017
$
(139
)
 
$

 
$
(33
)
 
$

 
$
(2,371
)
 
$
(2,543
)

Note 14. 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.

Retail Pharmacy USA
The Retail Pharmacy USA segment consists of the Walgreens business, which includes the operation of retail drugstores, convenient care clinics and 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 and personal care and consumables and general merchandise.

Retail Pharmacy International
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 and personal care and other consumer products.

Pharmaceutical Wholesale
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.


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The following table reflects results of operations and reconciles adjusted operating income to operating income for the Company's reportable segments (in millions):
 
Retail Pharmacy USA
 
Retail Pharmacy International
 
Pharmaceutical Wholesale
 
Eliminations1
 
Walgreens Boots Alliance, Inc.
Three months ended November 30, 2018
 
 
 
 
 
 
 
 
 
Sales
$
25,721

 
$
2,901

 
$
5,708

 
$
(537
)
 
$
33,793

 
 
 
 
 
 
 
 
 
 
Adjusted operating income
$
1,379

 
$
132

 
$
220

 
$
1

 
$
1,732

Acquisition-related amortization
 
 
 
 
 
 
 
 
(123
)
Acquisition-related costs
 

 
 

 
 

 
 

 
(66
)
Adjustments to equity earnings in AmerisourceBergen
 

 
 

 
 

 
 

 
(44
)
LIFO provision
 

 
 

 
 

 
 

 
(39
)
Transformational cost management
 

 
 

 
 

 
 

 
(30
)
Store optimization
 
 
 
 
 
 
 
 
(20
)
Certain legal and regulatory accruals and settlements
 
 
 
 
 
 
 
 
(10
)
Operating income
 

 
 

 
 

 
 

 
$
1,400

 
 
 
 
 
 
 
 
 
 
Three months ended November 30, 2017
 

 
 

 
 

 
 

 
 

Sales
$
22,489

 
$
3,083

 
$
5,718

 
$
(550
)
 
$
30,740

 
 
 
 
 
 
 
 
 
 
Adjusted operating income3
$
1,378

 
$
205

 
$
225

 
$
(2
)
 
$
1,806

Acquisition-related amortization
 

 
 

 
 

 
 

 
(85
)
Acquisition-related costs
 

 
 

 
 

 
 

 
(51
)
Adjustments to equity earnings in AmerisourceBergen
 

 
 

 
 

 
 

 
(189
)
LIFO provision
 
 
 
 
 
 
 
 
(54
)
Certain legal and regulatory accruals and settlements2
 
 
 
 
 
 
 
 
(25
)
Hurricane-related costs
 
 
 
 
 
 
 
 
(83
)
Operating income3
 

 
 

 
 

 
 

 
$
1,319


1 
Eliminations relate to intersegment sales between the Pharmaceutical Wholesale and the Retail Pharmacy International segments.
2 
As previously disclosed, beginning in the quarter ended August 31, 2018, management reviewed and refined its practice to include all charges related to the matters included in certain legal and regulatory accruals and settlements. In order to present non-GAAP measures on a consistent basis for fiscal year 2018, the Company included adjustments in the quarter ended August 31, 2018 of $14 million, $50 million and $5 million which were previously accrued in the Company’s financial statements for the quarters ended November 30, 2017, February 28, 2018 and May 31, 2018, respectively. These additional adjustments impact the comparability of such results to the results reported in prior and future quarters.
3 
The Company adopted new accounting guidance in Accounting Standards Update 2017-07 as of September 1, 2018 (fiscal 2019) on a retrospective basis for the Consolidated Condensed Statements of Earnings presentation. See note 17, new accounting pronouncements, for further information.


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Note 15. Sales
The following table summarizes the Company’s sales by segment and by major source (in millions):
 
 
Three months ended November 30,
 
 
2018
 
2017
Retail Pharmacy USA
 
 
 
 
Pharmacy
 
$
19,147

 
$
16,282

Retail
 
6,574

 
6,207

Total
 
25,721

 
22,489

 
 
 
 
 
Retail Pharmacy International
 
 
 
 
Pharmacy
 
1,039

 
1,104

Retail
 
1,862

 
1,979

Total
 
2,901

 
3,083

 
 
 
 
 
Pharmaceutical Wholesale
 
5,708

 
5,718

 
 
 
 
 
Eliminations1
 
(537
)
 
(550
)
 
 
 
 
 
Walgreens Boots Alliance, Inc.
 
$
33,793

 
$
30,740


1 
Eliminations relate to intersegment sales between the Pharmaceutical Wholesale and the Retail Pharmacy International segments.

Contract balances with customers
Contract liabilities primarily represent the Company’s obligation to transfer additional goods or services to a customer for which the Company has received consideration, for example the Company’s Balance Rewards® and Boots Advantage Card loyalty programs. Under such programs, customers earn reward points on purchases for redemption at a later date. See note 18, supplemental information, for further information on receivables from contracts with customers.

Note 16. 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. Additionally, AmerisourceBergen receives sourcing services for generic pharmaceutical products.

Related party transactions with AmerisourceBergen (in millions):
 
Three months ended November 30,
 
2018
 
2017
Purchases, net
$
14,322

 
$
11,604

 
November 30, 2018
 
August 31, 2018
Trade accounts payable, net
$
6,246

 
$
6,274


Note 17. New accounting pronouncements
Adoption of new accounting pronouncements
Presentation of net periodic pension cost and net periodic postretirement benefit cost
In March 2017, the FASB issued Accounting Standards Update ("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 benefit 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. All 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

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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 interim periods within those fiscal years, and must be applied on a retrospective basis. The impact on our previously reported net periodic costs as a result of the retrospective adoption of this standard results in a reclassification from selling, general and administrative expenses to other income (expense) of $125 million, $73 million and $(69) million for periods ended August 31, 2018, 2017 and 2016, respectively. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) on a retrospective basis and the adoption did not have a material impact on the Company's results of operations, cash flows or financial position. The updated accounting policy for pension and postretirement benefits is as follows:

Pension and postretirement benefits
The Company has various defined benefit pension plans that cover some of its non-U.S. employees. The Company also has a postretirement healthcare plan that covers qualifying U.S. employees. Eligibility and the level of benefits for these plans vary depending on participants’ status, date of hire and or length of service. Pension and postretirement plan expenses and valuations are dependent on assumptions used by third-party actuaries in calculating those amounts. These assumptions include discount rates, healthcare cost trends, long-term return on plan assets, retirement rates, mortality rates and other factors. The Company funds its pension plans in accordance with applicable regulations. The Company records the service cost component of net pension cost and net postretirement benefit cost in selling, general and administrative expenses. The Company records all other net cost components of net pension cost and net postretirement benefit cost in other income (expense). See note 12, retirement benefits, for further information.

The following is a reconciliation of the effect of the reclassification of all other net cost components (excluding service cost component) of net pension cost and net postretirement benefit cost from selling, general and administrative expenses to other income (expense) in the Company’s Consolidated Condensed Statements of Earnings, in millions:
 
As reported
 
Adjustments
 
As revised
Three months ended November 30, 2017
 

 
 

 
 

Selling, general and administrative expenses
$
5,907

 
$
3

 
$
5,910

Operating income
1,322

 
(3
)
 
1,319

Other income (expense)
(137
)
 
3

 
(134
)

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 Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and the adoption did not have a material impact on the Company’s Statement of Cash Flows.


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The following is a reconciliation of the effect on the relevant line items on the Consolidated Condensed Statements of Cash Flows for the three months ended November 30, 2017 as a result of adopting this new accounting guidance:
 
As reported
 
Adjustments
 
As revised
Three months ended November 30, 2017
 

 
 

 
 

Trade accounts payable
$
1,011

 
$
32

 
$
1,043

Accrued expenses and other liabilities
(222
)
 
6

 
(216
)
Other non-current assets and liabilities
9

 
4

 
13

Net cash provided by operating activities
961

 
42

 
1,003

 
 
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash
24

 
5

 
29

Net increase (decrease) in cash, cash equivalents and restricted cash
(1,471
)
 
47

 
(1,424
)
Cash, cash equivalents and restricted cash at beginning of period
3,301

 
195

 
3,496

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

 
$
242

 
$
2,072


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. 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. This ASU does not change 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 adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and the adoption did not have a material impact on the Company's results of operations.

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 adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and adoption did not have a material impact on the Company’s Statement of Cash Flows.

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. The Company adopted this new accounting guidance on September 1, 2018 (fiscal 2019) using the modified retrospective transition approach for all contracts and the adoption did not have a material impact on the Company’s results of operations. The adoption mainly resulted in changes to recognition of revenues related to loyalty programs and gift card breakage. Prior to adoption, the Company used the cost approach to account for loyalty programs. Upon adoption, the Company uses the deferred revenue approach. Prior to adoption, gift card breakage was primarily recognized at point of sale. Upon adoption, all gift card breakage is recognized based on the redemption pattern. The changes in accounting for loyalty programs and gift card breakage resulted in a cumulative transition adjustment of $98 million in retained earnings. See note 15, sales, for additional disclosures. The updated accounting policy for revenue recognition and loyalty programs are as follows:


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Revenue recognition
Retail Pharmacy USA and Retail Pharmacy International
The Company recognizes revenue, net of taxes and expected returns, at the time it sells merchandise or dispenses prescription drugs to the customer. The Company estimates revenue based on expected reimbursements from third-party payers (e.g., pharmacy benefit managers, insurance companies and governmental agencies) for dispensing prescription drugs. The estimates are based on all available information including historical experience and are updated to actual reimbursement amounts.

Pharmaceutical Wholesale
Wholesale revenue is recognized, net of taxes and expected returns, upon shipment of goods, which is generally also the day of delivery. Returns are estimated using expected returns.

Loyalty programs and gift card
The Company’s loyalty rewards programs represent a separate performance obligation and are accounted for using the deferred revenue approach. When goods are sold, the transaction price is allocated between goods sold and loyalty points awarded based upon the relative standalone selling price. The revenue allocated to the loyalty points is recognized upon redemption. Loyalty program breakage is recognized as revenue based on the redemption pattern.

Customer purchases of gift cards are not recognized as revenue until the card is redeemed. Gift card breakage (i.e., unused gift card) is recognized as revenue based on the redemption pattern.

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. Subsequently, the FASB has issued additional ASUs which further clarify this guidance. 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 less impairment, if any, and 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 the measurement alternative for equity investments without readily determinable fair values, which must be applied on a prospective basis. The Company adopted this new accounting guidance as of September 1, 2018 (fiscal 2019) and 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
Collaborative arrangements
In November 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-18, Collaborative Arrangements (Topic 808). This ASU clarifies the interaction between Topic 808, Collaborative Arrangements, and Topic 606, Revenue from Contracts with Customers. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021). The adoption of this ASU is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.

Financial instruments - hedging and derivatives
In October 2018, the FASB issued ASU 2018-16, Derivatives and Hedging (Topic 815): Inclusion of the Secured Overnight Financing Rate (SOFR) Overnight Index Swap (OIS) Rate as Benchmark Interest Rate for Hedge Accounting Purposes. This ASU permits use of the OIS rate based on the SOFR as a U.S. benchmark interest rate for hedge accounting purposes. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a prospective basis. The adoption of this ASU is not expected to have a significant impact on the Company’s results of operations, cash flows or financial position.

Intangibles – goodwill and other – internal-use software
In August 2018, the FASB issued ASU 2018-15, Intangibles-Goodwill and Other- Internal-Use Software (Subtopic 350-40). This ASU addresses customer’s accounting for implementation costs incurred in a cloud computing arrangement that is a service contract and also adds certain disclosure requirements related to implementation costs incurred for internal-use software and cloud computing arrangements. The amendment aligns the requirements for capitalizing implementation costs incurred in a hosting arrangement that is a service contract with the requirements for capitalizing implementation costs incurred to develop or obtain internal-use software (and hosting arrangements that include an internal-use software license). This ASU is effective

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for fiscal years beginning after December 15, 2019 (fiscal 2021), and interim periods within those fiscal years, with early adoption permitted. The amendments in this ASU can be applied either retrospectively or prospectively to all implementation costs incurred after the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position or results of operations.

Compensation – retirement benefits – defined benefit plans
In August 2018, the FASB issued ASU 2018-14, Compensation - Retirement benefits (Topic 715-20). This ASU amends ASC 715 to add, remove and clarify disclosure requirements related to defined benefit pension and other postretirement plans. The ASU eliminates the requirement to disclose the amounts in accumulated other comprehensive income expected to be recognized as part of net periodic benefit cost over the next year. The ASU also removes the disclosure requirements for the effects of a one-percentage-point change on the assumed health care costs and the effect of this change in rates on service cost, interest cost and the benefit obligation for postretirement health care benefits. This ASU is effective for fiscal years ending after December 15, 2020 (fiscal 2022) and must be applied on a retrospective basis. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's financial position.

Fair value measurement
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820). The ASU eliminates such disclosures as the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy. The ASU adds new disclosure requirements for Level 3 measurements. This ASU is effective for fiscal years beginning after December 15, 2019 (fiscal 2021), and interim periods within those fiscal years, with early adoption permitted for any eliminated or modified disclosures. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's disclosures.

Compensation – stock compensation
In June 2018, the FASB issued ASU 2018-07, Compensation-Stock Compensation (Topic 718). This ASU eliminated most of the differences between accounting guidance for share-based compensation granted to nonemployees and the guidance for share-based compensation granted to employees. The ASU supersedes the guidance for nonemployees and expands the scope of the guidance for employees to include both. This ASU is effective for annual periods beginning after December 15, 2018 (fiscal 2020), and interim periods within those years. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company's financial position.

Accounting for reclassification of certain tax effects from accumulated other comprehensive income
In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the income tax effects of items in accumulated other comprehensive income (“AOCI”) which were originally recognized in other comprehensive income, rather than in income from continuing operations. Specifically, it permits a reclassification from AOCI to retained earnings for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the U.S. tax law changes enacted in December 2017. It also requires certain disclosures about these reclassifications. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. tax law changes are recognized. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position.

Leases
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. Subsequently, the FASB has issued additional ASUs which further clarify this guidance. 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. In July 2018, a new ASU was issued to provide relief to the companies from restating the comparative period.

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Pursuant to this ASU, WBA will not restate comparative periods presented in the Company’s financial statements in the period of adoption.

The Company will adopt this ASU on September 1, 2019 (fiscal 2020). The Company continues to plan for adoption and implementation of this ASU, including implementing a new global 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.

Note 18. Supplemental information
Accounts receivable
Accounts receivable are stated net of allowances for doubtful accounts. Accounts receivable balances primarily consist of trade receivables due from customers, including amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), clients and members. Trade receivables were $5.9 billion and $5.4 billion at November 30, 2018 and August 31, 2018, respectively. Other accounts receivable balances, which consist primarily of receivables from vendors and manufacturers, including receivables from AmerisourceBergen (see note 16, related parties), were $1.3 billion and $1.2 billion at November 30, 2018 and August 31, 2018, respectively.

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 November 30,
 
2018
 
2017
Depreciation expense
$
356

 
$
335

Intangible asset and other amortization
134

 
81

Total depreciation and amortization expense
$
490

 
$
416


Accumulated depreciation and amortization on property, plant and equipment was $10.6 billion at November 30, 2018 and $10.5 billion at August 31, 2018.

Restricted cash
The Company is required to maintain cash deposits with certain banks which consist of deposits restricted under contractual agency agreements and cash restricted by law and other obligations. As of November 30, 2018 and August 31, 2018, the amount of such restricted cash was $203 million and $190 million, respectively, and is reported in other current assets on the Consolidated Condensed Balance Sheets.

The following represents a reconciliation of cash and cash equivalents in the Consolidated Condensed Balance Sheets to total cash, cash equivalents and restricted cash in the Consolidated Condensed Statements of Cash Flows as of November 30, 2018 and August 31, 2018:
 
November 30, 2018
 
August 31, 2018
Cash and cash equivalents
$
980

 
$
785

Restricted cash (included in other current assets)
203

 
190

Cash, cash equivalents and restricted cash
$
1,183

 
$
975


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 11.3 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, 2018 compared to 7.6 million as of November 30, 2017.

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 con

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tained in the Walgreens Boots Alliance, Inc. Annual Report on Form 10-K for the fiscal year ended August 31, 2018. 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 below 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, 2018. 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.

Certain amounts in the management's discussion and analysis of financial condition and results of operations may not add due to rounding.

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 14, 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. The Company has completed the acquisition of all 1,932 Rite Aid stores. The transition of the first distribution center and related inventory occurred in September 2018 and the transition of the remaining two distribution centers and related inventory remains subject to closing conditions set forth in the amended and restated asset purchase agreement.

The Company continues to expect to complete integration of the acquired stores and related assets by the end of fiscal 2020, at an estimated total cost of approximately $850 million, which is reported as acquisition-related costs, compared to the Company's previously stated expectation of $750 million. The Company has recognized cumulative pre-tax charges to its fiscal 2018 and 2019 financial results of $221 million and $64 million, respectively, related to integration of the acquired stores and related assets. In addition, the Company continues to expect to spend approximately $500 million of capital on store conversions and related activities. The Company expects annual synergies from the transaction of more than $325 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.

See exit and disposal activities in item 2, management's discussion and analysis of financial condition and results of operations, for information on the Store Optimization Program.

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.

Comparability
The influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms, strategic transactions including acquisitions, for example the acquisition of stores and other assets from Rite Aid, joint ventures and other strategic collaborations, changes in laws, for example the U.S. tax law changes, the timing and magnitude of cost reduction initiatives and general economic conditions in the markets in which the Company operates and other factors on the Company’s operations and net earnings for any period may not be comparable to the same period in previous years and are not necessarily indicative of future operating results.

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”) to optimize store locations through the planned closure of approximately 600 stores and related assets within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The actions under the Store Optimization Program commenced in March 2018 and are expected to take place over an 18 month period. The Store Optimization Program is expected to result in cost savings of approximately $325 million per year, to be fully delivered by the end of fiscal 2020.

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The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $350 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs, compared to the Company's previously stated expectation of $450 million. The Company expects to incur pre-tax charges of approximately $160 million for lease obligations and other real estate costs and approximately $190 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.

The Company has recognized cumulative pre-tax charges to its fiscal 2018 and 2019 financial results in accordance with generally accepted accounting principles in the United States of America ("GAAP") totaling $120 million, which were recorded within selling, general and administrative expenses. These charges included $12 million related to lease obligations and other real estate costs and $108 million in employee severance and other exit costs.

Store Optimization Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Store Optimization Program as special items impacting comparability of results in its 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.

TRANSFORMATIONAL COST MANAGEMENT PROGRAM
On December 20, 2018, the Company announced a transformational cost management program that is targeting to deliver in excess of $1 billion of annual cost savings by the end of the third year. The transformational cost management program is multi-faceted and includes divisional optimization initiatives, global smart spending, global smart organization and digitization of the enterprise to transform long-term capabilities. Divisional optimization includes cost reduction activities in the Pharmaceutical Wholesale division and in the Company’s retail businesses in Chile and Mexico. Additionally, the Company has initiated global smart spending and smart organization programs, initially focused on the Company’s Retail Pharmacy USA division, its retail business in the UK and its global functions. The Company anticipates that aspects of such initiatives would result in significant restructuring and other special charges as it is implemented.

As of the date of this report, the Company is not able to make a determination of the total estimated amount or range of amounts that may be incurred for each major type of cost nor the future cash expenditures or charges, including non-cash impairment charges (if any), it may incur. The Company will update this disclosure upon the determination of such amounts. The Company has recognized cumulative pre-tax charges for the three months ended November 30, 2018 in accordance with generally accepted accounting principles in the United States of America ("GAAP") of $30 million, which were primarily recorded within selling, general and administrative expenses. These charges primarily relate to the retail businesses in Chile and Mexico in the Retail Pharmacy International division.

The Company’s analysis is preliminary and therefore is subject to change. Actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.

U.S. TAX LAW CHANGES
In connection with the Company’s ongoing analysis of the impact of the U.S. tax law changes enacted in December 2017 and in accordance with SEC Staff Bulletin 118 (“SAB 118”), the Company recorded a tax benefit of $12 million during the three months ended November 30, 2018, which is provisional and subject to change. This provisional tax benefit is related to the Company’s accrual for the transition tax and other U.S. tax law changes. The Company has not recorded any adjustments to the provisional amounts related to the remeasurement of its net U.S. deferred tax liabilities for the three months ended November 30, 2018.

As of November 30, 2018, while the Company made reasonable estimates of the impact of the U.S. tax law changes, the final impact may differ from these estimates, due to, among other things, changes in its interpretations and assumptions, technical clarifications from the U.S. Department of the Treasury and the Internal Revenue Service and actions the Company may take. The U.S. Department of the Treasury recently issued multiple proposed regulations related to the U.S. tax law changes. The Company is in the process of analyzing any impact on its current estimates if these proposed regulations are finalized in their current form.


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EXECUTIVE SUMMARY
The following table presents certain key financial statistics for the Company for the three months ended November 30, 2018 and 2017, respectively.
 
(in millions, except per share amounts)
 
Three months ended November 30,
 
2018
 
2017
Sales
$
33,793

 
$
30,740

Gross profit
7,641

 
7,341

Selling, general and administrative expenses
6,280

 
5,910

Equity earnings (loss) in AmerisourceBergen
39

 
(112
)
Operating income
1,400

 
1,319

Adjusted operating income (Non-GAAP measure)1
1,732

 
1,806

Earnings before interest and income tax provision
1,427

 
1,185

Net earnings attributable to Walgreens Boots Alliance, Inc.
1,123

 
821

Adjusted net earnings attributable to Walgreens Boots Alliance, Inc.
(Non-GAAP measure)1
1,386

 
1,295

Net earnings per common share – diluted
1.18

 
0.81

Adjusted net earnings per common share – diluted (Non-GAAP measure)1
1.46

 
1.28

 
Percentage increases (decreases)
 
Three months ended November 30,
 
2018
 
2017
Sales
9.9
 
7.9
Gross profit
4.1
 
3.2
Selling, general and administrative expenses
6.3
 
4.1
Operating income
6.1
 
(9.3)
Adjusted operating income (Non-GAAP measure)1
(4.1)
 
4.2
Earnings before interest and income tax provision
20.4
 
(18.2)
Net earnings attributable to Walgreens Boots Alliance, Inc.
36.8
 
(22.1)
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc.
(Non-GAAP measure)1
7.0
 
7.8
Net earnings per common share – diluted
45.7
 
(16.5)
Adjusted net earnings per common share – diluted (Non-GAAP measure)1
14.1
 
16.4
 
Percent to sales
 
Three months ended November 30,
 
2018
 
2017
Gross margin
22.6
 
23.9
Selling, general and administrative expenses
18.6
 
19.2

1 
See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with GAAP.

WALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS
Net earnings attributable to Walgreens Boots Alliance for the three months ended November 30, 2018 increased 36.8% to $1.1 billion, while diluted net earnings per share increased 45.7% to $1.18 compared with the prior year period. The increases in net earnings and diluted earnings per share primarily reflect the impairment of the Company's equity method investment in Guangzhou Pharmaceuticals Corporation (“Guangzhou Pharmaceuticals”) in the comparable prior year period and an increase in the Company's equity earnings in AmerisourceBergen Corporation ("AmerisourceBergen"). Diluted net earnings per share was also positively affected by a lower number of shares outstanding compared to the prior year period.

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Other income for the three months ended November 30, 2018 was $26 million compared to an expense of $134 million in the comparable prior year period. Other income for the three months ended November 30, 2017 primarily reflects impairment of the Company's equity method investment in Guangzhou Pharmaceuticals.

Interest was a net expense of $161 million and $149 million for the three months ended November 30, 2018 and 2017, respectively.

The effective tax rate for the three months ended November 30, 2018 was 14.2% compared to 21.9% for the prior year period.
The effective tax rate was significantly impacted by a net reduction to the Company's estimated annual tax rate for the current year as a result of the U.S. tax law changes, which were enacted on December 22, 2017.

Adjusted diluted net earnings per share (Non-GAAP measure)
Adjusted net earnings attributable to Walgreens Boots Alliance for the three months ended November 30, 2018 increased 7.0% to $1.4 billion compared with the year-ago quarter. Adjusted diluted net earnings per share increased 14.1% to $1.46 compared with the year-ago quarter. Adjusted net earnings for the three months ended November 30, 2018 and 2017 were negatively impacted by 0.6 percentage points 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, 2018 was primarily due to a decrease in the adjusted effective tax rate partially offset by lower adjusted operating income. Adjusted diluted net earnings per share for the three months ended November 30, 2018 also benefited from a lower number of shares outstanding 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
This division comprises the retail pharmacy business operating in the U.S.
 
(in millions, except location amounts)
 
Three months ended November 30,
 
2018
 
2017
Sales
$
25,721

 
$
22,489

Gross profit
6,000

 
5,602

Selling, general and administrative expenses
4,834

 
4,475

Operating income
1,166

 
1,127

Adjusted operating income (Non-GAAP measure)1