Note 6. Stockholders’ Equity and Earnings per Share

In November 2014, the Company’s board of directors increased the quarterly cash dividend by 23% from $0.235 per share to $0.29 per share.

In August 2013, the Company’s board of directors authorized a program allowing the Company to purchase up to $750 million of its outstanding shares of common stock, subject to market conditions. During the nine months ended June 30, 2015, the Company purchased 2.9 million shares of its common stock for a total of $260.2 million under this program, which included $33.6 million of purchases that cash settled in July 2015 and excluded $18.0 million of fiscal 2014 purchases that cash settled in October 2014. The Company had $315.1 million of availability remaining under this share repurchase program as of June 30, 2015.

In March 2013, the Company and WBA entered into various agreements and arrangements pursuant to which WBA was granted the right to purchase a minority equity position in the Company, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of the Company’s common stock (approximately 7% of the Company’s common stock, on a fully diluted basis as of the date of issuance, assuming the exercise in full of the Warrants, as defined below) in open market transactions. In connection with these arrangements, Walgreens Pharmacy Strategies, LLC, a wholly owned subsidiary of WBA, was issued (a) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $51.50 per share exercisable during a six month period beginning in March 2016, and (b) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017 and Alliance Boots Luxembourg S.à.r.l., also a wholly owned subsidiary of WBA, was issued (a) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $51.50 per share exercisable during a six-month period beginning in March 2016 and (b) a warrant to purchase up to 11,348,456 shares of the Company’s common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017 (collectively, the “Warrants”).

The Company valued these Warrants as of March 18, 2013 (date of issuance) and revised the valuation each subsequent quarter. As of June 30, 2015 the Warrants with an exercise price of $51.50 were valued at $54.14 per share and the Warrants with an exercise price of $52.50 were valued at $52.55 per share. In total, the Warrants were valued at $2,421.5 million as of June 30, 2015. Refer to “Critical Accounting Policies and Estimates — Warrants” in the Company’s Annual Report on Form 10-K for the fiscal year ended September 30, 2014 for a more detailed description of the accounting for the Warrants.

The Company has taken steps to mitigate the potentially dilutive effect that the exercise of the Warrants could have by hedging a portion of its future obligation to deliver common stock with a financial institution and repurchasing additional shares of its common stock for the Company’s own account over time. In June 2013, the Company commenced its hedging strategy by entering into a contract with a financial institution pursuant to which it has executed a series of issuer capped call option transactions (“Capped Calls”). The Capped Calls give the Company the right to buy shares of its common stock subject to the Warrants at specified prices at maturity, should the Warrants be exercised in 2016 and 2017 and were initially intended to cover approximately 60% of the shares subject to the Warrants at the time the Company entered into the transactions. If the Warrants are exercised, the Company will use a majority of the proceeds to repurchase its shares under the Capped Calls. The Capped Calls are subject to a “cap” price. If the Company’s share price exceeds the “cap” price in the Capped Calls at the time the Warrants are exercised, the number of shares that will be delivered to the Company under the Capped Calls will be reduced, and accordingly, will cover less than 60% of the shares of common stock subject to the Warrants. This hedge transaction was completed in January 2014, and included the purchase of Capped Calls on a total of 27.2 million shares of the Company’s common stock for a total premium of $368.7 million.

Based upon the Company’s recent share price, the number of shares of common stock the Company expects to receive under the Capped Calls at maturity has been reduced. Therefore, the Company amended certain of the Capped Calls to increase their “cap” price to continue to address the potentially dilutive effect of the Warrants. The Company paid a premium of $100.0 million in January 2015 to increase the cap price on certain of the Capped Calls subject to the warrants that become exercisable in 2016. The Capped Calls permit the Company to acquire shares of its common stock at strike prices of $51.50 and $52.50 and have expiration dates ranging from February 2016 through October 2017. The Capped Calls permit net share settlement, which is limited by caps on the market price of the Company’s common stock. The Company has accounted for the Capped Calls as equity contracts and therefore, the above premiums were recorded as a reduction to paid-in capital.

In May 2014, the Company’s board of directors authorized a special program allowing the Company to purchase up to $650 million of its outstanding shares of common stock, subject to market conditions, to further mitigate the potentially dilutive effect of the Warrants and supplements the Company’s previously executed warrant hedging strategy. During the nine months ended June 30, 2015, the Company purchased 4.3 million shares (1.6 million shares under the Call Options, as defined below) of its common stock for a total of $398.0 million under this program, which excluded $18.0 million of fiscal 2014 purchases that cash settled in October 2014, to complete its authorization under this program.

In March 2015, the Company supplemented its hedging strategy by entering into a contract with a financial institution pursuant to which it has executed a series of issuer call options (“Call Options”). The Call Options give the Company the right to buy shares of its common stock subject to the Warrants at specified prices between April 2015 and October 2015. In total, the Company purchased Call Options on six million shares of its common stock for a total premium of $80.0 million. The Company has accounted for the Call Options as equity contracts and therefore, the above premiums were recorded as a reduction to paid-in capital.

In April 2015, the Company’s board of directors authorized a new special share repurchase program allowing it to repurchase up to $1.0 billion in shares of its common stock, subject to market conditions, to further mitigate the potentially dilutive effect of the Warrants as part of its warrant hedging strategy. During the nine months ended June 30, 2015, the Company purchased 1.6 million shares (1.4 million under the Call Options) of its common stock for a total of $153.9 million under this program, which included $14.3 million of purchases that cash settled in July 2015. The Company has $846.1 million of availability remaining under this special share repurchase program as of June 30, 2015. Availability under the new special share repurchase program is reduced by share repurchases, if any, of its common stock on the open market under the special program, as well as share repurchases due to the Company’s exercise of Call Options and/or Capped Calls.

Based on the closing stock price of the Company’s common stock on June 30, 2015, the Capped Calls associated with the warrants exercisable in 2016 would have covered approximately 49% of the shares subject to the warrants and the Capped Calls associated with the warrants exercisable in 2017 would have covered approximately 45% of the shares subject to the warrants. Adding the shares repurchased through June 30, 2015 under the special share repurchase programs, the Company would have covered approximately 90% of the warrants exercisable in 2016.

Basic earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented. Diluted earnings per share is computed on the basis of the weighted average number of shares of common stock outstanding during the periods presented plus the dilutive effect of stock options, restricted stock, restricted stock units, and the Warrants.

	Three months ended		Nine months ended
	June 30,		June 30,
(in thousands)	2015	2014	2015	2014
Weighted average common shares outstanding - basic	219,359	225,727	219,689	228,477
Dilutive effect of stock options, restricted stock, and restricted stock units	4,878	—	—	4,834
Dilutive effect of Warrants	15,999	—	—	2,221

Weighted average common shares outstanding - diluted	240,236	225,727	219,689	235,532

There were no potentially dilutive stock options, restricted stock, restricted stock units, or Warrants that were anti-dilutive for the three months ended June 30, 2015. The potentially dilutive stock options, restricted stock, restricted stock units, and Warrants that were antidilutive for the nine months ended June 30, 2015 were 17.6 million. The potentially dilutive stock options, restricted stock, restricted stock units, and Warrants that were antidilutive were 9.9 million and 2.0 million for the three and nine months ended June 30, 2014, respectively.