10-Q 1 wba-2019228x10q.htm 10-Q 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 February 28, 2019
 
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, $0.01 par value, as of March 31, 2019 was 914,298,978.
 



WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE THREE AND SIX MONTHS ENDED FEBRUARY 28, 2019

TABLE OF CONTENTS

PART I.  FINANCIAL INFORMATION

PART II. OTHER INFORMATION

- 2 -


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)
 
February 28, 2019
 
August 31, 2018
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
818

 
$
785

Accounts receivable, net
7,828

 
6,573

Inventories
10,188

 
9,565

Other current assets
1,016

 
923

Total current assets
19,851

 
17,846

Non-current assets:


 
 

Property, plant and equipment, net
13,828

 
13,911

Goodwill
17,027

 
16,914

Intangible assets, net
11,932

 
11,783

Equity method investments (see note 5)
6,683

 
6,610

Other non-current assets
1,114

 
1,060

Total non-current assets
50,584

 
50,278

Total assets
$
70,434

 
$
68,124

 
 
 
 
Liabilities and equity
 

 
 

Current liabilities:
 

 
 

Short-term debt
$
5,356

 
$
1,966

Trade accounts payable (see note 16)
14,348

 
13,566

Accrued expenses and other liabilities
5,436

 
5,862

Income taxes
163

 
273

Total current liabilities
25,303

 
21,667

Non-current liabilities:
 

 
 

Long-term debt
12,685

 
12,431

Deferred income taxes
1,982

 
1,815

Other non-current liabilities
5,053

 
5,522

Total non-current liabilities
19,719

 
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 February 28, 2019 and August 31, 2018
12

 
12

Paid-in capital
10,571

 
10,493

Retained earnings
34,928

 
33,551

Accumulated other comprehensive loss
(2,705
)
 
(3,002
)
Treasury stock, at cost; 258,337,176 shares at February 28, 2019 and 220,380,200 at August 31, 2018
(18,036
)
 
(15,047
)
Total Walgreens Boots Alliance, Inc. shareholders’ equity
24,770

 
26,007

Noncontrolling interests
643

 
682

Total equity
25,413

 
26,689

Total liabilities and equity
$
70,434

 
$
68,124


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

- 3 -


WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EQUITY
(UNAUDITED)
For the three and six months ended February 28, 2019 and February 28, 2018
(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
November 30, 2018
943,444,736

 
$
12

 
$
(15,862
)
 
$
10,522

 
$
(3,231
)
 
$
34,168

 
$
654

 
$
26,263

Net earnings (loss)

 

 

 

 

 
1,156

 
(18
)
 
1,138

Other comprehensive income, net of tax

 

 

 

 
519

 

 
10

 
529

Dividends declared

 

 

 

 

 
(402
)
 
(1
)
 
(403
)
Treasury stock purchases
(30,103,362
)
 

 
(2,201
)
 

 

 

 

 
(2,201
)
Employee stock purchase and option plans
835,068

 

 
25

 
12

 

 

 

 
37

Stock-based compensation

 

 

 
37

 

 

 

 
37

Other

 

 

 

 
7

 
6

 
(2
)
 
11

February 28, 2019
914,176,442

 
$
12

 
$
(18,036
)
 
$
10,571

 
$
(2,705
)
 
$
34,928

 
$
643

 
$
25,413


 
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 (loss)

 

 

 

 

 
2,279

 
(41
)
 
2,238

Other comprehensive income, net of tax

 

 

 

 
290

 

 
7

 
297

Dividends declared

 

 

 

 

 
(820
)
 
(3
)
 
(823
)
Treasury stock purchases
(42,097,919
)
 

 
(3,113
)
 

 

 

 

 
(3,113
)
Employee stock purchase and option plans
4,140,943

 

 
124

 
14

 

 

 

 
138

Stock-based compensation

 

 

 
63

 

 

 

 
63

Adoption of new accounting standards

 

 

 

 

 
(88
)
 

 
(88
)
Other

 

 

 

 
7

 
6

 
(2
)
 
11

February 28, 2019
914,176,442

 
$
12

 
$
(18,036
)
 
$
10,571

 
$
(2,705
)
 
$
34,928

 
$
643

 
$
25,413



- 4 -


 
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
November 30, 2017
990,446,414

 
$
12

 
$
(12,459
)
 
$
10,359

 
$
(2,543
)
 
$
30,560

 
$
827

 
$
26,756

Net earnings

 

 

 

 

 
1,349

 

 
1,349

Other comprehensive income, net of tax

 

 

 

 
380

 

 
6

 
386

Dividends declared

 

 

 

 

 
(396
)
 
(6
)
 
(402
)
Employee stock purchase and option plans
1,219,163

 

 
44

 
7

 

 

 

 
51

Stock-based compensation

 

 

 
38

 

 

 

 
38

Noncontrolling interests contribution

 

 

 
4

 

 

 
(4
)
 

February 28, 2018
991,665,577

 
$
12

 
$
(12,415
)
 
$
10,408

 
$
(2,163
)
 
$
31,513

 
$
823

 
$
28,178



 
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

 

 

 

 

 
2,170

 
1

 
2,171

Other comprehensive income, net of tax

 

 

 

 
888

 

 
20

 
908

Dividends declared

 

 

 

 

 
(794
)
 
(6
)
 
(800
)
Treasury stock purchases
(34,499,913
)
 

 
(2,525
)
 

 

 

 

 
(2,525
)
Employee stock purchase and option plans
2,316,420

 

 
81

 
2

 

 

 

 
83

Stock-based compensation

 

 

 
63

 

 

 

 
63

Noncontrolling interests contribution

 

 

 
4

 

 

 

 
4

February 28, 2018
991,665,577

 
$
12

 
$
(12,415
)
 
$
10,408

 
$
(2,163
)
 
$
31,513

 
$
823

 
$
28,178



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

- 5 -


WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS
(UNAUDITED)
(in millions, except per share amounts)
 
Three months ended
February 28,

Six months ended
February 28,
 
2019

2018

2019
 
2018
Sales
$
34,528

 
$
33,021

 
$
68,321

 
$
63,761

Cost of sales
26,773

 
24,925

 
52,925

 
48,324

Gross profit
7,754

 
8,096

 
15,395

 
15,437

 
 
 
 
 
 
 
 
Selling, general and administrative expenses
6,320

 
6,321

 
12,599

 
12,231

Equity earnings in AmerisourceBergen
83

 
202

 
121

 
90

Operating income
1,517

 
1,977

 
2,918

 
3,296


 
 
 
 
 
 
 
Other income (expense)
19

 
12

 
45

 
(122
)
Earnings before interest and income tax provision
1,536

 
1,989

 
2,963

 
3,174


 
 
 
 
 
 
 
Interest expense, net
181

 
151

 
342

 
300

Earnings before income tax provision
1,356

 
1,838

 
2,621

 
2,874

Income tax provision
226

 
503

 
406

 
730

Post tax earnings from other equity method investments
9

 
14

 
24

 
27

Net earnings
1,138

 
1,349

 
2,238

 
2,171

Net earnings (loss) attributable to noncontrolling interests
(18
)
 

 
(41
)
 
1

Net earnings attributable to Walgreens Boots Alliance, Inc.
$
1,156

 
$
1,349

 
$
2,279

 
$
2,170

 
 
 
 
 
 
 
 
Net earnings per common share:
 

 
 

 
 

 
 

Basic
$
1.25

 
$
1.36

 
$
2.43

 
$
2.17

Diluted
$
1.24

 
$
1.36

 
$
2.42

 
$
2.16

 
 
 
 
 
 
 
 
Weighted average common shares outstanding:
 

 
 

 
 

 
 

Basic
928.4

 
991.0

 
938.3

 
998.6

Diluted
930.7

 
995.5

 
941.1

 
1,003.3


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

- 6 -


WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
(UNAUDITED)
(in millions)
 
Three months ended
February 28,
 
Six months ended
February 28,
 
2019
 
2018
 
2019
 
2018
Comprehensive Income:
 

 
 

 
 

 
 

Net earnings
$
1,138

 
$
1,349

 
$
2,238

 
$
2,171


 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax:
 

 
 

 
 
 
 

Pension/postretirement obligations
(2
)
 
(2
)
 
(6
)
 
(2
)
Unrealized gain (loss) on hedges
(13
)
 
1

 
(10
)
 
1

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

 
(1
)
 
2

Currency translation adjustments
553

 
387

 
321

 
907

Total other comprehensive income (loss)
536

 
386

 
304

 
908

Total comprehensive income
1,674

 
1,735

 
2,542

 
3,079

 
 
 
 
 
 
 
 
Comprehensive income (loss) attributable to noncontrolling interests
(8
)
 
6

 
(34
)
 
21

Comprehensive income attributable to Walgreens Boots Alliance, Inc.
$
1,682

 
$
1,729

 
$
2,576

 
$
3,058


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


- 7 -


WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in millions)
 
Six months ended February 28,
 
2019
 
2018
Cash flows from operating activities:
 
 
 
Net earnings
$
2,238

 
$
2,171

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

 
 

Depreciation and amortization
990

 
858

Deferred income taxes
161

 
(474
)
Stock compensation expense
63

 
63

Equity (earnings) from equity method investments
(145
)
 
(117
)
Other
155

 
87

Changes in operating assets and liabilities:
 

 
 

Accounts receivable, net
(1,164
)
 
(637
)
Inventories
(557
)
 
(314
)
Other current assets
(61
)
 
(66
)
Trade accounts payable
682

 
599

Accrued expenses and other liabilities
(542
)
 
188

Income taxes
(522
)
 
903

Other non-current assets and liabilities
(104
)
 
(52
)
Net cash provided by operating activities
1,195

 
3,208

 
 
 
 
Cash flows from investing activities:
 

 
 

Additions to property, plant and equipment
(793
)
 
(666
)
Proceeds from sale of other assets
54

 
18

Business, investment and asset acquisitions, net of cash acquired
(347
)
 
(3,375
)
Other
41

 
(133
)
Net cash used for investing activities
(1,046
)
 
(4,156
)
 
 
 
 
Cash flows from financing activities:
 

 
 

Net change in short-term debt with maturities of 3 months or less
336

 
836

Proceeds from debt
6,414


3,089

Payments of debt
(3,117
)
 
(1,279
)
Stock purchases
(3,113
)
 
(2,525
)
Proceeds related to employee stock plans
138

 
83

Cash dividends paid
(841
)
 
(815
)
Other
67

 
(5
)
Net cash used for financing activities
(115
)
 
(616
)
 
 
 
 
Effect of exchange rate changes on cash, cash equivalents and restricted cash

 
56

Changes in cash, cash equivalents and restricted cash:
 

 
 

Net increase (decrease) in cash, cash equivalents and restricted cash
34

 
(1,508
)
Cash, cash equivalents and restricted cash at beginning of period
975

 
3,496

Cash, cash equivalents and restricted cash at end of period
$
1,009

 
$
1,988


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

- 8 -


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. All percentages have been calculated using unrounded amounts for the three and six months ended February 28, 2019.

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 February 28, 2019, the Company had not completed the analysis to assign fair values for certain 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 February 28, 2019, the Company recorded certain measurement period adjustments based on additional information, which did not have a material impact on goodwill. The following table summarizes the consideration paid and the preliminary amounts of identified assets acquired and liabilities assumed for purchase of 1,932 stores as of February 28, 2019 (in millions):
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
291

Other non-current liabilities
(937
)
Total identifiable net assets
2,999

Goodwill
$
1,331


- 9 -


The 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 $1,331 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.

The following table presents supplemental unaudited condensed pro forma consolidated sales for the three and six months ended February 28, 2018 and gives effect to the acquisition of all 1,932 stores acquired under the amended and restated asset purchase agreement as if such had been acquired on September 1, 2017. Pro forma net earnings of the Company for the three and six months ended February 28, 2018, assuming these purchases had occurred at the beginning of each period presented, would not be materially different from the results reported. See note 3, exit and disposal activities, for additional disclosures. The unaudited condensed pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the purchases occurred at the beginning of the periods presented or results which may occur in the future.

 
Three months ended February 28,
 
Six months ended February 28,
(in millions)
2018
 
2018
Sales
$
34,567

 
$
67,693


The Company acquired the first distribution center and related inventory for cash consideration of $61 million during the six months ended February 28, 2019. 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.

Other acquisitions
The Company acquired certain prescription files and related pharmacy inventory from Fred’s Inc. for the aggregate purchase price of $77 million for the three months ended February 28, 2019 and $177 million for the six months ended February 28, 2019.

Note 3. Exit and disposal activities
Transformational Cost Management Program
On December 20, 2018, the Company announced a multi-faceted program (the “Transformational Cost Management Program”), which includes divisional optimization initiatives, global smart spending, global smart organization and digitalization of the enterprise to transform long-term capabilities. Divisional optimization includes cost reduction activities across all segments of the Company. Additionally, the Company has initiated global smart spending and smart organization

- 10 -


programs, initially focused on the Company’s Retail Pharmacy USA division, its retail business in the UK and its global functions. Actions under the Transformational Cost Management Program announced on December 20, 2018 are expected to be complete by fiscal 2022.

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, it may incur.
Costs related to the Transformational Cost Management Program, which were primarily recorded within selling, general and administrative expenses were as follows (in millions):
Three months ended February 28, 2019
Retail Pharmacy USA
 
Retail Pharmacy International
 
Pharmaceutical Wholesale
 
Walgreens Boots Alliance, Inc.
Employee severance and other exit costs
$
14

 
$
14

 
$
11

 
$
39

Asset impairments1

 
26

 
85

 
111

Total costs
$
14

 
$
40

 
$
96

 
$
150


Six months ended February 28, 2019
Retail Pharmacy USA
 
Retail Pharmacy International
 
Pharmaceutical Wholesale
 
Walgreens Boots Alliance, Inc.
Employee severance and other exit costs
$
16

 
$
35

 
$
11

 
$
62

Asset impairments1

 
32

 
85

 
117

Total costs
$
16

 
$
67

 
$
96

 
$
179


1 
Primarily includes write down of certain software and inventory.

The changes in liabilities related to the Transformational Cost Management Program include the following (in millions):
 
 
Employee severance and other exit costs
 
Asset impairments
 
Total
Balance at August 31, 2018
 
$

 
$

 
$

Costs
 
62

 
117

 
179

Payments
 
(33
)
 

 
(33
)
Other - non cash
 

 
(117
)
 
(117
)
Balance at February 28, 2019
 
$
30

 
$

 
$
30


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. As of the date of this report, the Company expects to close approximately 750 stores. The actions under the Store Optimization Program commenced in March 2018 and are now expected to be complete by the end of fiscal 2020.

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 and employee severance and other exit costs. 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 GAAP totaling $150 million, which were primarily recorded within selling, general and administrative expenses. These charges included $21 million related to lease obligations and other real estate costs and $130 million in employee severance and other exit costs.

- 11 -



Costs related to the Store Optimization Program were as follows (in millions):
 
Three months ended February 28, 2019
 
Six months ended February 28, 2019
Lease obligations and other real estate costs
$
9

 
$
2

Employee severance and other exit costs
22

 
49

Total costs
$
31

 
$
51


The changes in liabilities related to the Store Optimization Program 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
2

 
49

 
51

Payments
(91
)
 
(56
)
 
(147
)
Other - non cash1
103

 

 
103

Balance at February 28, 2019
$
321

 
$
14

 
$
336


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 United States; 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
 
(44
)
 
(2
)
 
(46
)
Other - non cash
 
19

 

 
19

Balance at February 28, 2019
 
$
390

 
$
5

 
$
395


Note 4. Operating leases
During the three and six months ended February 28, 2019, the Company recorded charges of $29 million and $42 million for facilities that were closed or relocated. This compares to $28 million and $67 million for the three and six months ended February 28, 2018. These charges are reported in selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.


- 12 -


The changes in reserve for facility closings and related lease termination charges include the following (in millions):
 
For the six months ended February 28, 2019
 
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
1

 
52

Changes in assumptions
21

 
19

Accretion expense
20

 
58

Other - non cash1
86

 
338

Cash payments, net of sublease income
(164
)
 
(221
)
Balance at end of period
$
928

 
$
964


1 
Represents unfavorable lease liabilities from acquired Rite Aid stores.

Note 5. Equity method investments
Equity method investments as of February 28, 2019 and August 31, 2018, were as follows (in millions, except percentages):
 
February 28, 2019
 
August 31, 2018
 
Carrying
value
 
Ownership
percentage
 
Carrying
value
 
Ownership
percentage
AmerisourceBergen
$
5,212

 
27%
 
$
5,138

 
26%
Others
1,471

 
8% - 50%
 
1,472

 
8% - 50%
Total
$
6,683

 
 
 
$
6,610

 
 

AmerisourceBergen Corporation (“AmerisourceBergen”) investment
As of February 28, 2019 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 February 28, 2019 was $4.7 billion.

As of February 28, 2019, 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; Sinopharm Holding GuoDa Drugstores Co., Ltd., the Company's retail pharmacy investment in China and Option Care Inc., the Company's investment in the United States.

The Company reported $9 million and $14 million of post-tax equity earnings from other equity method investments, including equity method investments classified as operating, for the three months ended February 28, 2019 and 2018, respectively. The Company reported $24 million and $27 million of post-tax equity earnings from other equity method investments for the six months ended February 28, 2019 and 2018, respectively.

Note 6. Goodwill and other intangible assets
Goodwill and indefinite-lived intangible assets are evaluated for impairment annually during the fourth quarter, or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit or intangible asset below its carrying value. Based on the fiscal 2018 annual impairment analysis, the fair values of the Company’s reporting units exceeded their carrying amounts ranging from approximately 11% to approximately 312%. The fair

- 13 -


value of the Boots reporting unit, within the Retail Pharmacy International division, is in excess of its carrying value by approximately 11%. The Company continues to monitor weakness in the U.K. retail market, uncertainty surrounding future NHS funding and the U.K.’s potential exit from the European Union (commonly referred to as “Brexit”), and the potential impact these and other factors may have on the fair value of the Boots reporting units in future periods. The determination of the fair value of the reporting units requires us to make significant estimates and assumptions. Although we believe our estimates of fair value are reasonable, actual financial results could differ from those estimates due to the inherent uncertainty involved in making such estimates.

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.
Balance at August 31, 2018
$
10,483

 
$
3,370

 
$
3,061

 
$
16,914

Acquisitions
8

 

 

 
8

Disposals

 
(8
)
 

 
(8
)
Currency translation adjustments

 
59

 
54

 
113

Balance at February 28, 2019
$
10,491

 
$
3,421

 
$
3,115

 
$
17,027


The carrying amount and accumulated amortization of intangible assets consist of the following (in millions):
 
February 28, 2019
 
August 31, 2018
Gross amortizable intangible assets
 
 
 
Customer relationships and loyalty card holders
$
4,421

 
$
4,235

Favorable lease interests and non-compete agreements
669

 
680

Trade names and trademarks
507

 
489

Purchasing and payer contracts
382

 
390

Total gross amortizable intangible assets
5,979

 
5,794

 
 
 
 
Accumulated amortization
 

 
 

Customer relationships and loyalty card holders
$
1,147

 
$
997

Favorable lease interests and non-compete agreements
386

 
359

Trade names and trademarks
242

 
206

Purchasing and payer contracts
86

 
78

Total accumulated amortization
1,861

 
1,640

Total amortizable intangible assets, net
$
4,118

 
$
4,154

 
 
 
 
Indefinite-lived intangible assets
 

 
 

Trade names and trademarks
$
5,688

 
$
5,557

Pharmacy licenses
2,126

 
2,072

Total indefinite-lived intangible assets
$
7,814

 
$
7,629

 
 
 
 
Total intangible assets, net
$
11,932

 
$
11,783


Amortization expense for intangible assets was $139 million and $273 million for the three and six months ended February 28, 2019, respectively, and $121 million and $217 million for the three and six months ended February 28, 2018, respectively.

Estimated future annual amortization expense for the next five fiscal years for intangible assets recorded at February 28, 2019 is as follows (in millions):
 
2020
 
2021
 
2022
 
2023
 
2024
Estimated annual amortization expense
$
483

 
$
432

 
$
412

 
$
378

 
$
361



- 14 -


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):
 
February 28, 2019
 
August 31, 2018
Short-term debt 1
 
 
 
Commercial paper
$
3,027

 
$
430

Credit facilities 2
644

 
999

$8 billion note issuance 3,4
 
 
 
2.700% unsecured notes due 2019
1,249

 

$1 billion note issuance 5
 

 
 

5.250% unsecured notes due 2019 6

 
249

Other 7
436

 
288

Total short-term debt
$
5,356

 
$
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
1,246

 
1,245

3.800% unsecured notes due 2024
1,991

 
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
531

 
517

3.600% unsecured Pound sterling notes due 2025
397

 
387

€750 million note issuance 3,4
 

 
 

2.125% unsecured Euro notes due 2026
849

 
868

$4 billion note issuance 3,5
 

 
 

3.100% unsecured notes due 2022
1,196

 
1,196

4.400% unsecured notes due 2042
493

 
492

Credit facilities 2
1,500

 

Other 8
15

 
23

Total long-term debt, less current portion
$
12,685

 
$
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 February 28, 2019 and August 31, 2018, respectively.
2 
Credit facilities include debt outstanding under the January 2019 364-Day Revolving Credit Agreement, the December 2018 Revolving Credit Agreement, the December 2018 Term Loan Credit Agreement, the November 2018 Credit Agreement and the August 2018 Revolving Credit Agreement, which are described in more detail below.
3 
The $6 billion, $8 billion, £0.7 billion, €0.75 billion and $4 billion note issuances as of February 28, 2019 had fair values and carrying values of $2.4 billion and $2.5 billion$6.4 billion and $6.5 billion, $0.9 billion and $0.9 billion, $0.9 billion and $0.8 billion and $1.6 billion and $1.7 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 February 28, 2019 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 February 28, 2019.
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.

- 15 -


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.

January 2019 364-Day Revolving Credit Agreement
On January 18, 2019, the Company entered into a $2.0 billion 364-day revolving credit agreement (the “January 2019 364-Day Revolving Credit Agreement”) with the lenders from time to time party thereto. The January 2019 364-Day Revolving Credit Agreement is a senior unsecured 364-day revolving credit facility, with a facility termination date of the earlier of (a) 364 days following January 31, 2019, the date of the effectiveness of the commitments pursuant to the January 364-Day Revolving Credit Agreement, subject to extension thereof pursuant to the January 2019 364-Day Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the January 2019 364-Day Revolving Credit Agreement. As of February 28, 2019, there were no borrowings outstanding under the January 364-Day Revolving Credit Agreement.

December 2018 Revolving Credit Agreement
On December 21, 2018, the Company entered into a $1.0 billion revolving credit agreement (the “December 2018 Revolving Credit Agreement”) with the lenders from time to time party thereto. The December 2018 Revolving Credit Agreement is a senior unsecured revolving credit facility with a facility termination date of the earlier of (a) 18 months following January 28, 2019, the date of the effectiveness of the commitments pursuant to the December 2018 Revolving Credit Agreement, subject to extension thereof pursuant to the December 2018 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate amount of the commitments pursuant to the December 2018 Revolving Credit Agreement. As of February 28, 2019, there were $0.5 billion borrowings outstanding under the December 2018 Revolving Credit Agreement.

December 2018 Term Loan Credit Agreement
On December 5, 2018, Walgreens Boots Alliance entered into a $1.0 billion term loan credit agreement (the “December 2018 Term Loan Credit Agreement”) with the lenders from time to time party thereto. The December 2018 Term Loan Credit Agreement is a senior unsecured term loan facility with a facility termination date of the earlier of (a) January 29, 2021 and (b) the date of acceleration of all term loans pursuant to the December 2018 Term Loan Credit Agreement. As of February 28, 2019, there were $1.0 billion borrowings outstanding under the December 2018 Term Loan Credit Agreement.

November 2018 Credit Agreement
On November 30, 2018, the Company entered into a credit agreement (as amended, the “November 2018 Credit Agreement”) with the lenders from time to time party thereto and, on March 25, 2019, the Company entered into an amendment to such credit agreement reflecting certain changes to the borrowing notice provisions 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 February 28, 2019, there were $0.7 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 February 28, 2019, there were no borrowings outstanding under the August 2018 Revolving Credit Agreement.

August 2017 Credit Agreements

- 16 -


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. On January 31, 2019, the August 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.

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. On January 31, 2019, the February 2017 Revolving Credit Agreement matured and the Company paid all amounts due in connection therewith.

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, subject to increase in certain circumstances set forth in the applicable credit agreement. The credit facilities contain various other customary covenants.

Commercial paper
The Company periodically borrows under its commercial paper program and may borrow under it in future periods. The Company had average daily commercial paper outstanding of $2.4 billion and $1.2 billion at a weighted average interest rate of 2.96% and 1.81% for the six months ended February 28, 2019 and 2018, respectively.

Interest
Interest paid was $349 million and $281 million for the six months ended February 28, 2019 and 2018, 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):
February 28, 2019
 
Notional
 
Fair value
 
Location in Consolidated Condensed Balance Sheets
Derivatives designated as hedges:
 
 
 
 
 
 
Cross currency interest rate swaps
 
$
623

 
$
16

 
Other non-current liabilities
Derivatives not designated as hedges:
 
 
 
 
 
 
Foreign currency forwards
 
748

 
3

 
Other current assets
Foreign currency forwards
 
2,807

 
92

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

 
$
1

 
Accrued expenses and other 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

 
Accrued expenses and other liabilities

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.


- 17 -


The Company uses interest rate swaps from time to time 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.

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).
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 as follows (in millions):
 
 
 
Three months ended
February 28,
 
Six months ended
February 28,
 
Location in Consolidated
Condensed Statements of Earnings
 
2019
 
2018
 
2019
 
2018
Foreign currency forwards
Selling, general and administrative expenses
 
$
(106
)
 
$
(164
)
 
$
(60
)
 
$
(183
)
Foreign currency forwards
Other income (expense)
 
(6
)
 
(1
)
 
(2
)
 
33


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):
 
February 28, 2019
 
Level 1
 
Level 2
 
Level 3
Assets:
 
 
 
 
 
 
 
Money market funds1
$
142

 
$
142

 
$

 
$

Available-for-sale investments2
5

 
5

 

 

Foreign currency forwards3
3

 

 
3

 

Liabilities:
 

 
 

 
 

 
 

Foreign currency forwards3
92

 

 
92

 

Cross currency interest rate swaps4
16

 

 
16

 


- 18 -


 
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.
2 
Fair value of quoted investments are based on current bid prices as of February 28, 2019 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 and six months ended February 28, 2019.

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

- 19 -


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 a consolidated class action complaint on August 17, 2015, and defendants moved to dismiss the 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 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 plaintiffs’ motion on March 29, 2018 and merits discovery is proceeding. On December 19, 2018, plaintiffs filed a first amended complaint and defendants moved to dismiss the new complaint on February 19, 2019.

As of the date of this report, the Company was aware of two previously disclosed putative class action lawsuits filed by purported Rite Aid stockholders against Walgreens Boots Alliance and certain of its officers regarding the transactions contemplated by the original merger agreement between the Company and Rite Aid (prior to its amendment on January 29, 2017) (such transactions, the “Rite Aid Transactions”). One of the Rite Aid actions was filed in the State of Pennsylvania in the Court of Common Pleas of Cumberland County (the “Pennsylvania action”) and primarily alleged that Walgreens Boots Alliance and one of its subsidiaries aided and abetted certain alleged breaches of fiduciary duty by the board of directors of Rite Aid in connection with the Rite Aid Transactions. This action was terminated by the court for lack of prosecution in December 2018. The other action was filed in the United States District Court for the Middle District of Pennsylvania (the “federal action”) and alleges, among other things, that the Company and certain of its officers made false or misleading statements regarding the Rite Aid Transactions. The Company has filed a motion to dismiss the federal action, which motion is fully briefed and awaits ruling.

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.

On January 22, 2019, the Company announced that it had reached an agreement to resolve 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. Pursuant to the agreement, the Company paid $209.2 million to the United States and the various states involved in the matter, substantially all of which was reserved for in the Company’s Consolidated Financial Statements as of November 30, 2018.

Note 11. Income taxes
The effective tax rate for the three and six months ended February 28, 2019 was 16.7% and 15.5%, respectively, compared to 27.4% and 25.4% for the three and six months ended February 28, 2018, respectively. The decrease in the effective tax rates for the three and six months ended February 28, 2019 was primarily due to the provisional net discrete tax expense that was recorded during the three months ended February 28, 2018 as a result of the U.S. tax law changes, which were enacted on December 22, 2017.


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Income taxes paid for the six months ended February 28, 2019 were $766 million, compared to $301 million for the six months ended February 28, 2018.

U.S. tax law changes
In connection with the U.S. tax law changes enacted in December 2017 and in accordance with SEC Staff Accounting Bulletin 118 (“SAB 118”), the Company completed its analysis of the income tax effects of the U.S. tax law changes during the three months ended February 28, 2019. The incremental net tax benefit for the six months ended recorded upon completion of the analysis of the income tax effects of the U.S. tax law changes was not material to our Consolidated Condensed Financial Statements.

While the Company completed its analysis of the income tax effects of the U.S. tax law changes, the final impact of the U.S. tax law changes may differ from this analysis, due to, among other things, technical clarifications from the U.S. Department of the Treasury and Internal Revenue Service (“IRS”), interpretations of the U.S. tax law changes and actions the Company may take. The Company will continue to evaluate the impact of any future authoritative guidance with respect to the U.S. tax law changes.

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 global intangible low-taxed income (“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 has elected to treat GILTI as a current period expense. The Company 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.

As we repatriate the undistributed earnings of our foreign subsidiaries for use in the United States, the earnings from our foreign subsidiaries will generally not be subject to U.S. federal tax. We continuously evaluate the amount of foreign earnings that are not necessary to be permanently reinvested in our foreign subsidiaries.

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.

Components of net periodic pension costs for the defined benefit pension plans (in millions):
 
 
Three months ended
February 28,
 
Six months ended
February 28,
 
Location in Consolidated Condensed Statements of Earnings
2019
 
2018
 
2019
 
2018
Service costs
Selling, general and administrative expenses
$
1

 
$
1

 
$
2

 
$
3

Interest costs
Other expense1
50

 
49

 
99

 
96

Expected returns on plan assets/other
Other income1
(64
)
 
(53
)
 
(124
)
 
(104
)
Total net periodic pension costs (income)
 
$
(13
)
 
$
(3
)
 
$
(23
)
 
$
(5
)

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

The Company made cash contributions to its defined benefit pension plans of $11 million for the six months ended February 28, 2019, which primarily related to committed funded payments. The Company plans to contribute an additional $23 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

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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 $64 million and $125 million for the three and six months ended February 28, 2019 compared to an expense of $55 million and $111 million in the three and six months ended February 28, 2018.

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 and six months ended February 28, 2019 was $33 million and $64 million compared to a cost of $31 million and $61 million in the three and six months ended February 28, 2018.

Note 13. Accumulated other comprehensive income (loss)
The following is a summary of net changes in accumulated other comprehensive income (loss) ("AOCI") by component and net of tax for the three and six months ended February 28, 2019 and February 28, 2018 (in millions):
 
Pension/ post-
retirement
obligations

Unrealized
gain (loss) on
hedges

Share of AOCI of
equity method
investments

Cumulative
translation
adjustments
 
Total
Balance at November 30, 2018
$
97

 
$
(27
)
 
$
4

 
$
(3,305
)
 
$
(3,231
)
Other comprehensive income (loss) before reclassification adjustments

 
(19
)
 
(2
)
 
537

 
516

Amounts reclassified from AOCI
(4
)
 
2

 

 

 
(2
)
Other

 

 

 
7

 
7

Tax benefit (provision)
2

 
4

 

 
(1
)
 
5

Net change in other comprehensive
income (loss)
(2
)
 
(13
)
 
(2
)
 
543

 
526

Balance at February 28, 2019
$
95

 
$
(40
)
 
$
2

 
$
(2,762
)
 
$
(2,705
)
 
Pension/ post-
retirement
obligations

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

 
(16
)
 
(1
)
 
309

 
292

Amounts reclassified from AOCI
(8
)
 
3

 

 

 
(5
)
Other

 

 

 
7

 
7

Tax benefit (provision)
2

 
3

 

 
(2
)
 
3

Net change in other comprehensive
income (loss)
(6
)
 
(10
)
 
(1
)
 
314

 
297

Balance at February 28, 2019
$
95

 
$
(40
)
 
$
2

 
$
(2,762
)
 
$
(2,705
)


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Pension/ post-
retirement
obligations

Unrealized
gain (loss) on
hedges

Share of AOCI of
equity method
investments

Cumulative
translation
adjustments
 
Total
Balance at November 30, 2017
$
(139
)
 
$
(33
)
 
$

 
$
(2,371
)
 
$
(2,543
)
Other comprehensive income (loss) before reclassification adjustments

 

 
1

 
381

 
382

Amounts reclassified from AOCI
(3
)
 
1

 

 

 
(2
)
Tax benefit (provision)
1

 

 
(1
)
 

 

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

 

 
381

 
380

Balance at February 28, 2018
$
(141
)
 
$
(32
)
 
$

 
$
(1,990
)
 
$
(2,163
)

 
Pension/ post-
retirement
obligations

Unrealized
gain (loss) on
hedges

Share of AOCI of
equity method
investments

Cumulative
translation
adjustments