18. Segment Reporting

Prior to December 31, 2014, the Company’s operations were within one reportable segment. As a result of the closing of the Second Step Transaction on December 31, 2014, the Company has realigned 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.

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

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

The 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.

The Company’s Retail Pharmacy International and Pharmaceutical Wholesale segments were acquired as part of the Second Step Transaction in which the Company acquired the 55% of Alliance Boots that it 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 eight months of results (January to August 2015) have been reported for these segments for fiscal 2015. To improve comparability, certain classification changes have been made to prior period results, this change has no impact on operating income.

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

	Retail Pharmacy
	USA		International⁽¹⁾		Pharmaceutical Wholesale		Eliminations⁽¹⁾			Walgreens Boots Alliance, Inc.
For the Year Ended August 31, 2016
Sales to external customers	$	83,802	$	13,256	$	20,293	$	-		$	117,351
Intersegment sales		-		-		2,278		(2,278	)		-
Sales	$	83,802	$	13,256	$	22,571	$	(2,278	)	$	117,351

Adjusted Operating Income	$	5,357	$	1,155	$	708	$	(12	)	$	7,208

Depreciation and amortization	$	1,134	$	401	$	166	$	17		$	1,718
Additions to property, plant and equipment		777		444		104		-			1,325

For the Year Ended August 31, 2015
Sales to external customers	$	80,974	$	8,657	$	13,813	$	-		$	103,444
Intersegment sales		-		-		1,514		(1,514	)		-
Sales	$	80,974	$	8,657	$	15,327	$	(1,514	)	$	103,444

Adjusted Operating Income	$	5,098	$	616	$	450	$	(7	)	$	6,157

Depreciation and amortization	$	1,217	$	393	$	120	$	12		$	1,742
Additions to property, plant and equipment		951		249		51		-			1,251

For the Year Ended August 31, 2014
Sales to external customers	$	76,392	$	-	$	-	$	-		$	76,392
Intersegment sales		-		-		-		-			-
Sales	$	76,392	$	-	$	-	$	-		$	76,392


Adjusted Operating Income	$	4,866	$	-	$	-	$	-		$	4,866

Depreciation and amortization	$	1,316	$	-	$	-	$	-		$	1,316
Additions to property, plant and equipment		1,106		-		-		-			1,106

⁽¹⁾	To improve comparability, certain classification changes have been made to fiscal 2015 Sales, Cost of sales and Selling, general and administrative expenses. This change has no impact on Operating Income.

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

	Retail Pharmacy
	USA		International		Pharmaceutical Wholesale		Eliminations			Walgreens Boots Alliance, Inc.
For the Year Ended August 31, 2016
Adjusted Operating Income	$	5,357	$	1,155	$	708	$	(12	)	$	7,208
Cost transformation											(424	)
Acquisition-related amortization											(369	)
LIFO provision											(214	)
Acquisition-related costs											(102	)
Legal settlement											(47	)
Asset impairment											(30	)
Adjustments to equity earnings in AmerisourceBergen											(21	)
Operating Income										$	6,001

For the Year Ended August 31, 2015
Adjusted Operating Income	$	5,098	$	616	$	450	$	(7	)	$	6,157
Cost transformation											(542	)
Acquisition-related amortization											(485	)
LIFO provision											(285	)
Acquisition-related costs											(87	)
Asset impairment											(110	)
Store closures and other optimization costs											(56	)
(Loss) on sale of business											(17	)
Adjustments to equity earnings in Alliance Boots											93
Operating Income										$	4,668

For the Year Ended August 31, 2014
Adjusted Operating Income	$	4,866	$	-	$	-	$	-		$	4,866
Acquisition-related amortization											(282	)
Acquisition-related costs											(82	)
LIFO provision											(132	)
Store closures and other optimization costs											(271	)
Gain on sale of business											9
Adjustments to equity earnings in Alliance Boots											86
Operating Income										$	4,194

No single customer accounted for more than 10% of the Company’s consolidated sales for any of the periods presented. Two payers accounted for approximately 22% of the Retail Pharmacy USA division’s sales in fiscal 2016 and one payer accounted for approximately 12% of the Retail Pharmacy USA division’s sales in fiscal 2015. One customer in the Retail Pharmacy International division accounted for approximately 18% of the division’s sales in fiscal 2016 and approximately 20% in fiscal 2015.

Geographic data for sales is as follows (in millions):

	2016		2015		2014
United States	$	83,802	$	80,974	$	76,392
United Kingdom		14,081		9,235		-
Europe (excluding the United Kingdom)		16,793		11,402		-
Other		2,675		1,833		-
Sales	$	117,351	$	103,444	$	76,392

Geographic data for long-lived assets, defined as property, plant and equipment is as follows (in millions):

	2016		2015
United States	$	10,924	$	11,327
United Kingdom		2,611		2,835
Europe (excluding the United Kingdom)		625		725
Other		175		181
Total long-lived assets	$	14,335	$	15,068