Segment Reporting

6 Months Ended

Feb. 29, 2016

Segment Reporting [Abstract]

Segment Reporting

Note 18. Segment Reporting

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

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

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

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

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

The segment information reflects the operating results of the Company’s business segments. The Company began recording revenue and expense transactions using the new segments effective January 1, 2015. Beginning January 1, 2015, synergy benefits including WBAD operations have been allocated to the Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale segments on a source of procurement benefit basis. Under this method, the synergy benefits are allocated to the segment whose purchase gave rise to the benefit. A synergy arising on the purchase of an item for use in an entity in the Retail Pharmacy USA segment is recognized in the Retail Pharmacy USA segment and similarly for the Retail Pharmacy International and Pharmaceutical Wholesale segments. Procurement service income related to third parties is recognized in the Pharmaceutical Wholesale segment. Corporate costs have been allocated to segments based on their respective gross profit.

Our Retail Pharmacy International and Pharmaceutical Wholesale segments were acquired as part of the Second Step Transaction in which we acquired the 55% of Alliance Boots that we did not already own on December 31, 2014. The Company has determined that it is impracticable to restate segment information for periods prior the completion of the Second Step Transaction, as well as to provide disclosures for such periods under both the old basis and new basis of reporting for certain items. Specifically, WBAD operations prior to December 31, 2014 were recorded in the Retail Pharmacy USA segment and have not been restated, as the Company believes it is impracticable to separate the information to the individual reportable segments. Equity earnings from Alliance Boots prior to the completion of the Second Step Transaction has been recorded within the Retail Pharmacy USA segment. The equity earnings of the 45% interest in Alliance Boots have not been separated into the Retail Pharmacy International and Pharmaceutical Wholesale segments for the prior period, as the Company believes it is impracticable. Accordingly, only two months of results (January and February 2015) have been reported for these segments for the three and six months ended February 28, 2015.

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

	Retail Pharmacy
	USA		International		Pharmaceutical Wholesale		Eliminations and Unallocated  Items			Consolidated
Three Months Ended February 29, 2016
Sales to external customers	$	21,500	$	3,627	$	5,057	$	-		$	30,184
Intersegment sales		-		62		570		(632	)		-
Total Sales		21,500		3,689		5,627		(632	)		30,184
Adjusted Operating Income	$	1,632	$	335	$	155	$	(2	)	$	2,120
Three Months Ended February 28, 2015
Sales to external customers	$	21,048	$	2,017	$	3,508	$	-		$	26,573
Intersegment sales		-		30		357		(387	)		-
Total Sales		21,048		2,047		3,865		(387	)		26,573
Adjusted Operating Income	$	1,598	$	125	$	121	$	(4	)	$	1,840

	Retail Pharmacy
	USA		International		Pharmaceutical Wholesale		Eliminations and Unallocated  Items			Consolidated
Six Months Ended February 29, 2016
Sales to external customers	$	41,870	$	7,086	$	10,261	$	-		$	59,217
Intersegment sales		-		134		1,162		(1,296	)		-
Total Sales		41,870		7,220		11,423		(1,296	)		59,217
Adjusted Operating Income	$	2,875	$	650	$	321	$	(7	)	$	3,839
Six Months Ended February 28, 2015
Sales to external customers	$	40,602	$	2,017	$	3,508	$	-		$	46,127
Intersegment sales		-		30		357		(387	)		-
Total Sales		40,602		2,047		3,865		(387	)		46,127
Adjusted Operating Income	$	2,716	$	125	$	121	$	(4	)	$	2,958

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

	Retail Pharmacy
	USA		International		Pharmaceutical Wholesale		Eliminations and Unallocated Items			Consolidated
Three Months Ended February 29, 2016
Adjusted Operating Income	$	1, 632	$	335	$	155	$	(2	)	$	2,120
Acquisition-related amortization											(101	)
Cost transformation											(28	)
LIFO provision											(68	)
Acquisition-related costs											(33	)
Asset impairment											(30	)
Operating Income										$	1,860
Three Months Ended February  28, 2015
Adjusted Operating Income	$	1,598	$	125	$	121	$	(4	)	$	1,840
(Decrease) increase in fair market value of warrants											(6	)
Acquisition-related amortization											(217	)
LIFO provision											(55	)
Acquisition-related costs											(59	)
Asset impairment											(110	)
Store closures and other optimization costs											(16	)
Operating Income										$	1,377

	Retail Pharmacy
	USA		International		Pharmaceutical Wholesale		Eliminations and Unallocated Items			Consolidated
Six Months Ended February 29, 2016
Adjusted Operating Income	$	2,875	$	650	$	321	$	(7	)	$	3,839
Acquisition-related amortization											(182	)
Cost transformation											(118	)
LIFO provision											(114	)
Acquisition-related costs											(67	)
Asset impairment											(30	)
Operating Income										$	3,328
Six Months Ended February 28, 2015
Adjusted Operating Income	$	2,716	$	125	$	121	$	(4	)	$	2,958
(Decrease) increase in fair market value of warrants											123
Acquisition-related amortization											(306	)
LIFO provision											(107	)
Acquisition-related costs											(83	)
Asset impairment											(110	)
Store closures and other optimization costs											(44	)
Operating Income										$	2,431