Walgreens Boots Alliance, Inc. - Quarter Report: 2015 May (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☑

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended May 31, 2015

or

☐

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

(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)

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 ☑       No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☑            No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ☑	Accelerated filer ☐
Non-accelerated filer ☐  (Do not check if a smaller reporting company)	Smaller reporting company ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐        No ☑

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of June 30, 2015 was 1,092,282,712.

 

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WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE QUARTER ENDED MAY 31, 2015

Item 1.	Consolidated Condensed Financial Statements (Unaudited)		3
	a)	Balance Sheets	3
	b)	Statement of Equity	4
	c)	Statements of Earnings	5
	d)	Statements of Comprehensive Income	6
	e)	Statements of Cash Flows	7
	f)	Notes to Financial Statements	8
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		52
Item 3.	Quantitative and Qualitative Disclosure about Market Risk		71
Item 4.	Controls and Procedures		72

PART II.  OTHER INFORMATION

Item 1.	Legal Proceedings	73
Item 1A.	Risk Factors	73
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	73
Item 5.	Other Information	73
Item 6.	Exhibits	74

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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 per share amounts)

		May 31, 2015				August 31, 2014
Assets
Current Assets:
Cash and cash equivalents		$	4,449			$	2,646
Accounts receivable, net			6,899				3,218
Inventories			8,764				6,076
Other current assets			917				302
Total Current Assets			21,029				12,242
Non-Current Assets:
Property, plant and equipment, at cost, less accumulated depreciation and amortization			15,241				12,257
Equity investment in Alliance Boots			-				7,336
Goodwill			17,361				2,359
Intangible assets			11,229				1,180
Other non-current assets			5,784				1,876
Total Non-Current Assets			49,615				25,008
Total Assets		$	70,644			$	37,250
Liabilities and Equity
Current Liabilities:
Short-term borrowings		$	1,192			$	774
Trade accounts payable			9,932				4,315
Accrued expenses and other liabilities			4,849				3,701
Income taxes			184				105
Total Current Liabilities			16,157				8,895
Non-Current Liabilities:
Long-term debt			15,055				3,716
Deferred income taxes			3,532				1,080
Other non-current liabilities			3,971				2,942
Total Non-Current Liabilities			22,558				7,738
Commitments and Contingencies (see Note 12)
Equity:
Preferred stock $.01 par value ($.0625 at August 31, 2014); authorized 32 million shares, none issued			-				-
Common stock $.01 par value ($.078125 at August 31, 2014); authorized 3.2 billion shares; issued 1,172,513,618 at May 31, 2015 and 1,028,180,150 at August 31, 2014			12				80
Paid-in capital			9,889				1,172
Employee stock loan receivable			(3	)			(5	)
Retained earnings			25,460				22,327
Accumulated other comprehensive (loss) income			(141	)			136
Treasury stock, at cost; 80,545,443 shares at May 31, 2015 and 77,793,261 at August 31, 2014			(3,654	)			(3,197	)
Total Walgreens Boots Alliance, Inc. Shareholders’ Equity			31,563				20,513
Noncontrolling interests			366				104
Total Equity			31,929				20,617
Total Liabilities and Equity		$	70,644			$	37,250

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

 

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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENT OF EQUITY

(UNAUDITED)

For the nine month period ended May 31, 2015

(In millions, except per share amounts)

		Equity attributable to Walgreens Boots Alliance, Inc.
		Common Stock Shares				Common Stock Amount				Treasury Stock Amount				Paid-In Capital				Employee Stock Loan Receivable				Accumulated Other Comprehensive Income				Retained Earnings				Noncontrolling Interests				Total Equity
August 31, 2014			950,386,889			$	80			$	(3,197	)		$	1,172			$	(5	)		$	136			$	22,327			$	104			$	20,617
Net earnings			-				-				-				-				-				-				4,194				53				4,247
Other comprehensive income, net of tax			-				-				-				-				-				(277	)			-				(9	)			(286	)
Dividends declared ($1.0125 per share)			-				-				-				-				-				-				(1,061	)			-				(1,061	)
Exchange of Walgreen Co. shares for Walgreens Boots Alliance, Inc. shares			-				(69	)			-				69				-				-				-				-				-
Issuance of shares for Alliance Boots acquisition			144,333,468				1				-				10,976				-				-				-				-				10,977
Treasury stock purchases			(12,094,030	)			-				(831	)			-				-				-				-				-				(831	)
Employee stock purchase and option plans			9,341,848				-				374				25				-				-				-				-				399
Stock-based compensation			-				-				-				86				-				-				-				-				86
Acquisition of noncontrolling interest			-				-				-				(2,439	)			-				-				-				(130	)			(2,569	)
Employee stock loan receivable			-				-				-				-				2				-				-				-				2
Noncontrolling interests in businesses acquired			-				-				-				-				-				-				-				348				348
May 31, 2015			1,091,968,175			$	12			$	(3,654	)		$	9,889			$	(3	)		$	(141	)		$	25,460			$	366			$	31,929

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

 

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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(UNAUDITED)

(In millions, except per share amounts)

		Three Months Ended May 31,								Nine Months Ended May 31,
		2015				2014				2015				2014
Net sales		$	28,795			$	19,401			$	74,922			$	57,335
Cost of sales			21,314				13,961				55,263				41,093
Gross Profit			7,481				5,440				19,659				16,242
Selling, general and administrative expenses			6,080				4,551				16,142				13,499
Equity earnings in Alliance Boots			-				135				315				465
Operating Income			1,401				1,024				3,832				3,208
Gain on previously held equity interest			-				-				706				-
Other income			461				124				1,164				290
Earnings Before Interest and Income Tax Provision			1,862				1,148				5,702				3,498
Interest expense, net			151				35				350				113
Earnings Before Income Tax Provision			1,711				1,113				5,352				3,385
Income tax provision			408				357				1,120				1,167
Post tax earnings from equity method investments			7				-				15				-
Net Earnings			1,310				756				4,247				2,218
Net earnings attributable to noncontrolling interests			8				42				53				65
Net Earnings Attributable to Walgreens Boots Alliance, Inc.		$	1,302			$	714			$	4,194			$	2,153
Net earnings per common share attributable to Walgreens Boots Alliance, Inc. – basic		$	1.19			$	0.75			$	4.08			$	2.26
Net earnings per common share attributable to Walgreens Boots Alliance, Inc. – diluted		$	1.18			$	0.74			$	4.04			$	2.23
Dividends declared per share		$	0.3375			$	0.3150			$	1.0125			$	0.9450
Average shares outstanding			1,091.4				955.3				1,026.9				952.2
Dilutive effect of stock options			11.0				12.3				10.8				12.1
Average diluted shares			1,102.4				967.6				1,037.7				964.3

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

 

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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(In millions)

		Three Months Ended May 31,								Nine Months Ended May 31,
		2015				2014				2015				2014
Comprehensive Income
Net Earnings		$	1,310			$	756			$	4,247			$	2,218
Other comprehensive income (loss), net of tax:
Postretirement liability			(2	)			(2	)			(11	)			4
Unrealized (loss) on cash flow hedges			-				(13	)			(12	)			(13	)
Unrecognized gain on available-for-sale investments			74				40				263				75
Share of other comprehensive income (loss) of Alliance Boots			-				49				113				(7	)
Currency translation adjustments			(149	)			24				(639	)			305
Total Other Comprehensive Income (Loss)			(77	)			98				(286	)			364
Total Comprehensive Income			1,233				854				3,961				2,582
Comprehensive income attributable to noncontrolling interests			4				42				44				65
Comprehensive Income Attributable to Walgreens Boots Alliance, Inc.		$	1,229			$	812			$	3,917			$	2,517

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

 

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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(In millions)

		Nine Months Ended May 31,
		2015				2014
Cash Flows from Operating Activities:
Net earnings		$	4,247			$	2,218
Adjustments to reconcile net earnings to net cash provided by operating activities -
Depreciation and amortization			1,264				1,001
Change in fair value of warrants and related amortization			(1,313	)			(290	)
Gain on previously held equity interest			(706	)			-
Deferred income taxes			240				219
Stock compensation expense			86				85
Unrealized gain from fair value adjustments			(114	)			-
Equity earnings in Alliance Boots			(315	)			(465	)
Other			738				129
Changes in operating assets and liabilities -
Accounts receivable, net			(273	)			(411	)
Inventories			679				493
Other current assets			54				12
Trade accounts payable			19				(425	)
Accrued expenses and other liabilities			(152	)			(46	)
Income taxes			(179	)			(103	)
Other non-current assets and liabilities			(116	)			92
Net cash provided by operating activities			4,159				2,509
Cash Flows from Investing Activities:
Additions to property, plant and equipment			(890	)			(821	)
Proceeds from sale leaseback transactions			867				144
Proceeds related to the sale of business			814				-
Proceeds from sale of other assets			71				29
Alliance Boots acquisition, net of cash received			(4,461	)			-
Other business and intangible asset acquisitions, net of cash received			(112	)			(323	)
Purchases of short-term investments held to maturity			(41	)			(41	)
Proceeds from short-term investments held to maturity			42				42
Investment in AmerisourceBergen			-				(493	)
Other			(174	)			(82	)
Net cash used for investing activities			(3,884	)			(1,545	)
Cash Flows from Financing Activities:
Payments of short-term borrowings, net			(251	)			-
Proceeds from issuance of long-term debt			12,279				-
Payments of long-term debt			(8,582	)			(550	)
Proceeds from financing leases			-				225
Stock purchases			(831	)			(205	)
Proceeds related to employee stock plans			400				518
Cash dividends paid			(1,013	)			(898	)
Other			(380	)			(34	)
Net cash provided by (used for) financing activities			1,622				(944	)
Effect of exchange rate changes on cash and cash equivalents			(94	)			-
Changes in Cash and Cash Equivalents:
Net increase in cash and cash equivalents			1,803				20
Cash and cash equivalents at beginning of period			2,646				2,106
Cash and cash equivalents at end of period		$	4,449			$	2,126

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

 

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WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Walgreens Boots Alliance, Inc. (“WBA” or “Walgreens Boots Alliance”) and subsidiaries is a global pharmacy-led wellbeing enterprise. Its operations are conducted through three reportable segments (Retail Pharmacy USA, Retail Pharmacy International and Pharmaceutical Wholesale). See Note 19, Segment Reporting for additional discussion.

On December 31, 2014, Walgreens Boots Alliance became the successor of Walgreen Co. (“Walgreens”) pursuant to a merger designed to effect a reorganization of Walgreens into a holding company structure (the “Reorganization”). Pursuant to the Reorganization, Walgreens became a wholly owned subsidiary of Walgreens Boots Alliance, a newly-formed Delaware corporation, and each issued and outstanding share of Walgreens common stock, par value $0.078125, converted on a one-to-one basis into Walgreens Boots Alliance common stock, par value $0.01.

On December 31, 2014, following the completion of the Reorganization, Walgreens Boots Alliance completed the acquisition of the remaining 55% of Alliance Boots GmbH (“Alliance Boots”) that Walgreens did not previously own (the “Second Step Transaction”) in exchange for £3.133 billion in cash and 144,333,468 shares of WBA common stock pursuant to the Purchase and Option Agreement dated June 18, 2012, as amended (the “Purchase and Option Agreement”). Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method immediately upon completion of the Second Step Transaction. For financial reporting and accounting purposes, Walgreens Boots Alliance was the acquirer of Alliance Boots. The consolidated financial statements (and other data) reflect the results of operations and financial position of Walgreens and its subsidiaries for periods prior to December 31, 2014 and of Walgreens Boots Alliance and its subsidiaries for periods after the closing of the Reorganization and the Second Step Transaction on December 31, 2014.

References to the “Company” refer to Walgreens Boots Alliance and its subsidiaries from and after the effective time of the Reorganization on December 31, 2014 and, prior to that time, to the predecessor registrant Walgreens and its subsidiaries, except as otherwise indicated or the context otherwise requires.

The consolidated condensed financial statements of 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 Balance Sheets as of May 31, 2015 and August 31, 2014, the Consolidated Condensed Statement of Equity for the nine month period ended May 31, 2015, the Consolidated Condensed Statements of Earnings and the Consolidated Condensed Statements of Comprehensive Income for the three and nine month periods ended May 31, 2015 and 2014, and the Consolidated Condensed Statements of Cash Flows for the nine months ended May 31, 2015 and 2014, have been prepared without audit. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America 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 Annual Report on Form 10-K, as amended, for the fiscal year ended August 31, 2014.

In the opinion of the Company, the consolidated condensed financial statements for the unaudited 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. Because of the acquisition of Alliance Boots, influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms and other factors on the Company’s operations, net earnings for any interim period may not be comparable to the same interim period in previous years or indicative of net earnings for the full fiscal year. In addition, the positive impact on gross profit margins and gross profit dollars typically has been significant in the first several months after a generic version of a drug is first allowed to compete with the branded version, which is generally referred to as a “generic conversion”. In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can increase or decrease, which can have a significant impact on the Company’s Retail Pharmacy USA segment’s sales, gross profit margins and gross profit dollars.

As part of the Second Step Transaction, the Company acquired the remaining 27.5% noncontrolling interest in Walgreens Boots Alliance Development GmbH (“WBAD”), a 50/50 joint venture between the Company and Alliance Boots. The Company already owned a 50% direct ownership in WBAD and indirectly owned an additional ownership interest through its previous 45% investment in Alliance Boots, representing a direct and indirect economic interest of 72.5%. The Company’s acquisition of the remaining 27.5% effective ownership in WBAD as part of the Second Step Transaction was accounted for as an equity transaction as it has historically been consolidated by the Company. On January 1, 2015, WBAD Holdings Limited sold 320 common shares of WBAD, representing approximately 5% of the equity interests in WBAD, to Alliance Healthcare Italia Distribuzione S.p.A. (“AHID”), which is not a member of the Company’s consolidated group. Under certain circumstances, AHID has the right to put, and WBAD Holdings Limited has the right to call, the 320 common shares of WBAD currently owned by AHID for a purchase price of $100,000.

 

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Immediately prior to the completion of the Second Step Transaction, the Company held a 45% equity interest in Alliance Boots and recorded its proportionate share of equity income in Alliance Boots in the Company’s consolidated financial statements on a three-month reporting lag. Following the Second Step Transaction, the Company eliminated the three-month reporting lag and applied this change retrospectively as a change in accounting principle in accordance with Accounting Standards Codification (“ASC”) Topic 250, Accounting Changes and Error Corrections. See Note 3, Change in Accounting Policy for further information.

The preparation of financial statements in accordance with accounting principles generally accepted in the United States of America requires management to use judgment in the application of accounting policies, including making estimates and assumptions. The Company bases its estimates on the information available at the time, its experience and on various other assumptions believed to be reasonable under the circumstances. Adjustments may be made in subsequent periods to reflect more current estimates and assumptions about matters that are inherently uncertain. Actual results may differ. For a discussion of the Company’s significant accounting policies, please see the Walgreens Annual Report on Form 10-K, as amended, for the fiscal year ended August 31, 2014. The additional accounting policies outlined below are incremental and incorporate the inclusion of the Alliance Boots operations.

Consolidation

The consolidated condensed financial statements include all majority-owned subsidiaries. Investments in less than majority-owned companies in which the Company does not have a controlling interest, but does have significant influence are accounted for as equity method investments. All intercompany transactions have been eliminated.

Restricted Cash

The Company is required to maintain cash deposits with certain banks which consist of deposits restricted under contractual agency agreements and cash restricted by law and other obligations. As of May 31, 2015, the amount of such restricted cash was $187 million. There was no restricted cash as of August 31, 2014.

Accounts Receivable

Accounts receivable are stated net of allowances for doubtful accounts. Accounts receivable balances primarily include amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), clients and members, as well as vendors and manufacturers. Charges to bad debt are based on both historical write-offs and specifically identified receivables.

Inventory

The Company values inventories on a lower of cost or market basis. Inventory includes product costs, inbound freight, direct labor, warehousing costs, overhead costs relating to the manufacture and distribution of products and vendor allowances not classified as a reduction of advertising expense.

The Company’s Retail Pharmacy USA segment inventory is accounted for using the last-in-first-out (“LIFO”) method. At May 31, 2015 and August 31, 2014, Retail Pharmacy USA segment inventories would have been greater by $2.4 billion and $2.3 billion, respectively, if they had been valued on a lower of first-in-first-out (“FIFO”) cost or market basis. LIFO inventory costs can only be determined annually when inflation rates and inventory levels are finalized; therefore, LIFO inventory costs for interim financial statements are estimated.

The Company’s Retail Pharmacy International and Pharmaceutical Wholesale segments’ inventory is accounted for using the FIFO method, except for retail inventory in the Retail Pharmacy International segment, which is primarily determined using the retail inventory method. Under the retail inventory method, cost is determined by applying a calculated cost-to-retail ratio across groupings of similar items. The cost-to-retail ratio is applied to ending inventory at its current owned retail valuation to determine the cost of ending inventory across groupings of similar items. Current owned retail valuation represents the retail price for which merchandise is offered for sale on a regular basis reduced for any permanent or clearance markdowns. Inherent in the retail method calculation are certain management judgments and estimates including initial mark-up, markdowns and shrinkage, which can impact the owned retail valuation and, therefore, the ending inventory valuation at cost.

Vendor Allowances and Supplier Rebates

Vendor allowances are principally received as a result of purchases, sales or promotion of vendors’ products. Allowances are generally recorded as a reduction of inventory and are recognized as a reduction of cost of sales when the related merchandise is sold. Those allowances received for promoting vendors’ products are offset against advertising expense and result in a reduction of selling, general and administrative expenses to the extent of advertising costs incurred, with the excess treated as a reduction of inventory costs.

 

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Rebates or refunds received by the Company from its suppliers, mostly in cash, are considered as an adjustment of the prices of the supplier’s products purchased by the Company.

Revenue Recognition

Revenue is recognized when: (a) persuasive evidence of an arrangement exists, (b) delivery has occurred or services have been rendered, (c) the seller’s price to the buyer is fixed or determinable, and (d) collectability is reasonably assured. The following revenue recognition policies have been established for the Company’s reportable segments.

Retail Pharmacy USA and Retail Pharmacy International

The Company recognizes revenue at the time the customer takes possession of the merchandise, after making appropriate adjustments for estimated returns, which are immaterial. Revenue does not include sales related taxes. In certain international locations, the Company initially estimates revenue based on expected reimbursements from governmental agencies for dispensing prescription drugs and providing optical services. The estimates are based on historical experience and updated to actual reimbursement amounts.

Pharmaceutical Wholesale

Wholesale revenue is recognized upon shipment of goods, which is generally also the day of delivery. When the Company acts in the capacity of an agent or a logistics service provider, revenue is the fee received for the service and is recognized when the services have been performed. The Company has determined it is the agent when providing logistics services, which is based on its assessment of the following criteria: (a) whether it is the primary obligor in the arrangement, (b) whether it has latitude in establishing the price, changing the product or performing part of the service, (c) whether it has discretion in supplier selection, (d) whether it is involved in the determination of service specifications, and (e) whether it is exposed to credit risk.

Financial Instruments

The Company uses derivative instruments to hedge its exposure to interest rate and currency risks arising from operating and financing activities. In accordance with its risk management policies, the Company does not hold or issue derivative instruments for trading or speculative purposes.

Derivatives are recognized on the Consolidated Condensed Balance Sheets at their fair values. When the Company becomes a party to a derivative instrument and intends to apply hedge accounting, it formally documents the hedge relationship and the risk management objective for undertaking the hedge which includes designating the instrument for financial reporting purposes as a fair value hedge, a cash flow hedge, or a net investment hedge. The accounting for changes in fair value of a derivative instrument depends on whether the Company had designated it in a qualifying hedging relationship and further, on the type of hedging relationship. The Company applies the following accounting policies:

·

Changes in the fair value of a derivative designated as a fair value hedge, along with the gain or loss on the hedged asset or liability attributable to the hedged risk, are recorded in the Consolidated Condensed Statements of Earnings.

·

The effective portion of changes in the fair value of a derivative designated as a cash flow hedge is recorded in accumulated other comprehensive income (loss) in the Consolidated Condensed Statements of Comprehensive Income and reclassified into earnings in the period or periods during which the hedged item affects earnings.

·

The effective portion of changes in the fair value of a derivative designated as a hedge of a net investment in a foreign operation is recorded in cumulative translation adjustments within accumulated other comprehensive income (loss) in the Consolidated Condensed Statements of Comprehensive Income. Recognition in earnings of amounts previously recorded in cumulative translation adjustments is limited to circumstances such as complete or substantially complete liquidation of the net investment in the hedged investments in foreign operations.

·

Changes in the fair value of a derivative not designated in a hedging relationship are recognized in the Consolidated Condensed Statements of Earnings along with the ineffective portions of changes in the fair value of derivatives designated in hedging relationships.

Cash receipts or payments on a settlement of a derivative contract are reported in the Consolidated Condensed Statements of Cash Flows consistent with the nature of the underlying hedged item.

 

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For derivative instruments designated as hedges, the Company assesses, both at the hedge’s inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. Highly effective means that cumulative changes in the fair value of the derivative are between 80% and 125% of the cumulative changes in the fair value of the hedged item. In addition, when the Company determines that a derivative is not highly effective as a hedge, hedge accounting is discontinued. When it is probable that a hedged forecasted transaction will not occur, the Company discontinues hedge accounting for the affected portion of the forecasted transaction, and reclassifies any gains or losses in accumulated other comprehensive income (loss) to earnings in the Consolidated Condensed Statements of Earnings. When a derivative in a hedge relationship is terminated or the hedged item is sold, extinguished or terminated, hedge accounting is discontinued prospectively.

Pension and Postretirement Benefits

The Company has various defined benefit pension plans that cover some of its foreign employees. The Company also has postretirement healthcare plans that cover qualifying domestic employees. Eligibility and the level of benefits for these plans vary depending participants’ status, date of hire and or length of service. Pension and postretirement expenses and valuations are dependent on assumptions used by third party actuaries in calculating those amounts. These assumptions include discount rates, healthcare cost trends, long-term return on plan assets, retirement rates, mortality rates and other factors.

The Company funds its pension plans in accordance with applicable regulations. Postretirement plans are not funded.

Income Taxes

In determining the provision for income taxes, the Company uses an annual effective income tax rate based on full-year forecast income, permanent differences between book and tax income, the relative proportion of foreign and domestic income, statutory income tax rates, projections of income subject to Subpart F rules and unrecognized tax benefits related to current year results. Discrete events such as the assessment of the ultimate outcome of tax audits, audit settlements, recognizing previously unrecognized tax benefits due to lapsing of the applicable statute of limitations, recognizing or de-recognizing benefits of deferred tax assets due to future year financial statement projections and changes in tax laws are recognized in the period in which they occur.

The Company is subject to routine income tax audits that occur periodically in the normal course of business. U.S. federal, state, local and foreign tax authorities raise questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income among various tax jurisdictions. In evaluating the tax benefits associated with the various tax filing positions, the Company records a tax benefit for uncertain tax positions using the highest cumulative tax benefit that is more likely than not to be realized. Adjustments are made to the liability for unrecognized tax benefits in the period in which the Company determines the issue is effectively settled with the tax authorities, the statute of limitations expires for the return containing the tax position or when more information becomes available. As of May 31, 2015, approximately $119 million of unrecognized tax benefits were reported as current liabilities, with the balance being classified as long-term liabilities on the Consolidated Condensed Balance Sheets. Based on current knowledge, it is reasonably possible the amount of unrecognized tax benefits will decrease in the next 12 months by up to $119 million, primarily due to expected tax audit settlements in multiple tax jurisdictions. The Company does not expect the settlements to materially impact the Consolidated Condensed Statements of Earnings, the Consolidated Condensed Balance Sheets or the Company’s liquidity.

Business Combinations

Business combinations are accounted for under ASC Topic 805, Business Combinations, using the acquisition method of accounting. The cost of an acquired company is assigned to the tangible and intangible assets purchased and the liabilities assumed on the basis of their fair values at the date of acquisition. The determination of fair values of assets and liabilities acquired requires estimates and the use of valuation techniques when a market value is not readily available. Any excess of purchase price over the fair value of net tangible and intangible assets acquired is allocated to goodwill. The final determination of the fair value of certain assets and liabilities is completed within the one year measurement period as allowed under ASC Topic 805, Business Combinations. Transaction costs associated with business combinations are expensed as they are incurred.

Noncontrolling Interests

The Company accounts for its less than 100% interest in consolidated subsidiaries in accordance with ASC Topic 810, Consolidation, and accordingly, the Company presents noncontrolling interests as a component of equity on its Consolidated Condensed Balance Sheets and reports the noncontrolling interest net earnings or loss as Net earnings attributable to noncontrolling interests in the Consolidated Condensed Statements of Earnings.

Currency

Assets and liabilities of non-U.S. dollar functional currency operations are translated into U.S. dollars at end-of-period exchange rates while revenues, expenses and cash flows are translated at average monthly exchange rates over the period. Equity is translated at historical exchange rates and the resulting cumulative translation adjustments are included as a component of accumulated other comprehensive income (loss) in the Consolidated Condensed Balance Sheets.

 

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For U.S. dollar functional currency operations, foreign currency assets and liabilities are remeasured into U.S. dollars at end-of-period exchange rates, except for nonmonetary balance sheet amounts, which are remeasured from historical exchange rates. Revenues and expenses are recorded at average monthly exchange rates over the period, except for those expenses related to nonmonetary balance sheet amounts, which are remeasured from historical exchange rates. Gains or losses from foreign currency remeasurement and transactions are included in selling, general and administrative expenses within the Consolidated Condensed Statements of Earnings. For all periods presented, there were no material operational gains or losses from foreign currency transactions.

Warrants

Walgreens, Alliance Boots and AmerisourceBergen Corporation (“AmerisourceBergen”) entered into a Framework Agreement dated as of March 18, 2013, pursuant to which (1) Walgreens and Alliance Boots together were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen common stock (approximately 7 percent of the then fully diluted equity of AmerisourceBergen, assuming the exercise in full of the warrants described below) in open market transactions; (2) Walgreens and Alliance Boots collectively were issued (a) warrants to purchase up to 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $51.50 per share exercisable during a six-month period beginning in March 2016, and (b) warrants to purchase up to 22,696,912 shares of AmerisourceBergen common stock at an exercise price of $52.50 per share exercisable during a six-month period beginning in March 2017. The parties and affiliated entities also entered into certain related agreements governing relations between and among the parties thereto, including the Shareholders Agreement and the Transaction Rights Agreement.

Pursuant to the Reorganization and Second Step Transaction discussed in Note 1, Organization, and Note 2, Basis of Presentation, Walgreens and Alliance Boots became wholly owned subsidiaries of WBA effective December 31, 2014. The Company holds all AmerisourceBergen warrants issued to Walgreens and Alliance Boots in its consolidated subsidiaries.

The warrants are valued at the date of issuance and the end of the period using a Monte Carlo simulation. Key assumptions used in the valuation include risk-free interest rates using constant maturity treasury rates; the dividend yield for AmerisourceBergen’s common stock; AmerisourceBergen’s common stock price; AmerisourceBergen’s equity volatility; the number of shares of AmerisourceBergen’s common stock outstanding; the number of AmerisourceBergen’s employee stock options and the exercise price; and the details specific to the warrants. The Company reports its warrants at fair value within other non-current assets in the Consolidated Condensed Balance Sheets. A deferred credit from the day-one valuation attributable to the warrants granted to Walgreens is being amortized over the life of the warrants. Gains and losses due to changes in the fair value on warrants are recognized in other income in the Consolidated Condensed Statements of Earnings. See Note 10, Financial Instruments, for additional disclosure regarding the Company’s warrants.

Walgreens historically accounted for its investment and proportionate share of earnings in Alliance Boots utilizing a three-month reporting lag. Concurrent with the completion of the Second Step Transaction, the Company eliminated the three-month reporting lag. The Company determined that the elimination of the three-month reporting lag was preferable because having Alliance Boots and its subsidiaries have the same period-end reporting date improves overall financial reporting as business performance is reflected in the Company’s consolidated financial statements on a more timely basis.

In accordance with ASC Topic 810, Consolidation, a change to eliminate a previously existing reporting lag is considered a change in accounting principle in accordance with ASC Topic 250, Accounting Changes and Error Corrections. Changes in accounting principles are to be reported through retrospective application of the new principle to all prior financial statement periods presented. Accordingly, the consolidated condensed financial statements have been recast to reflect the period specific effects of eliminating the three-month reporting lag. The acquisition of the initial 45% interest was reflected in the Company’s August 31, 2012 balance sheet. The Company’s equity earnings and income statement for the year ended August 31, 2012, were not recasted as the impact was not material.

The elimination of the three-month reporting lag for the equity investment in Alliance Boots resulted in the adjustments as of and for the periods indicated below (in millions, except per share amounts). The impact of the change in accounting policy on the current period financial statements is not material.

 

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		Three Months Ended May 31, 2014												Nine Months Ended May 31, 2014
		As Reported				Adjustments				After Change in Accounting Principle				As Reported				Adjustments				After Change in Accounting Principle
Consolidated Condensed Statements of Earnings
Equity earnings in Alliance Boots		$	137			$	(2	)		$	135			$	482			$	(17	)		$	465
Operating Income			1,026				(2	)			1,024				3,225				(17	)			3,208
Earnings Before Income Tax Provision			1,115				(2	)			1,113				3,402				(17	)			3,385
Income tax provision			351				6				357				1,166				1				1,167
Net Earnings			764				(8	)			756				2,236				(18	)			2,218
Net Earnings Attributable to Walgreens Boots Alliance, Inc.			722				(8	)			714				2,171				(18	)			2,153
Net earnings per common share attributable to Walgreens Boots Alliance, Inc. – basic			0.76				(0.01	)			0.75				2.28				(0.02	)			2.26
Net earnings per common share attributable to Walgreens Boots Alliance, Inc. – diluted			0.75				(0.01	)			0.74				2.25				(0.02	)			2.23
Consolidated Condensed Statements of Comprehensive Income
Net Earnings			764				(8	)			756				2,236				(18	)			2,218
Share of other comprehensive income (loss) of Alliance Boots			(19	)			68				49				(89	)			82				(7	)
Cumulative translation adjustments			69				(45	)			24				323				(18	)			305
Total Other Comprehensive Income			75				23				98				300				64				364
Total Comprehensive Income			839				15				854				2,536				46				2,582
Comprehensive Income Attributable to Walgreens Boots Alliance, Inc.		$	797			$	15			$	812			$	2,471			$	46			$	2,517

		As of August 31, 2014
		As Reported(1)				Adjustments				After Change in Accounting Principle
Consolidated Condensed Balance Sheet
Non-Current Assets:
Equity investment in Alliance Boots		$	7,248			$	88			$	7,336
Total Non-Current Assets			24,920				88				25,008
Total Assets			37,162				88				37,250
Non-Current Liabilities:
Deferred income taxes			1,048				32				1,080
Total Non-Current Liabilities			7,706				32				7,738
Equity:
Retained earnings			22,229				98				22,327
Accumulated other comprehensive income			178				(42	)			136
Total Walgreens Boots Alliance, Inc. Shareholders’ Equity			20,457				56				20,513
Total Equity			20,561				56				20,617
Total Liabilities and Equity		$	37,162			$	88			$	37,250

 

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		Nine Months Ended May 31, 2014
		As Reported				Adjustments				After Change in Accounting Principle
Consolidated Condensed Statement of Cash Flows
Cash Flows from Operating Activities:
Net earnings		$	2,236			$	(18	)		$	2,218
Deferred income taxes			218				1				219
Equity earnings in Alliance Boots			(482	)			17				(465	)

(1)

Due to the adoption of Accounting Standards Update 2015-03, Interest – Imputation of Interest, all reported periods include debt issuance costs as a contra-liability. This impacts the August 31, 2014 Consolidated Condensed Balance Sheet by reducing non-current assets and non-current liabilities by $20 million.

The cumulative effect of eliminating the three-month reporting lag was recorded as an after-tax increase to retained earnings of $98 million as of September 1, 2013, the first day of the Company’s 2014 fiscal year.

Initial terms for leased premises in the U.S. are typically 15 to 25 years, followed by additional terms containing renewal options at five-year intervals, and may include rent escalation clauses. Non-U.S. leases are typically for shorter terms and may or may not include cancellation clauses or renewal options. The commencement date of all lease terms is the earlier of the date the Company becomes legally obligated to make rent payments or the date the Company has the right to control the property. The Company recognizes rent expense on a straight-line basis over the term of the lease. In addition to minimum fixed rentals, some leases provide for contingent rentals based upon a portion of sales.

The Company continuously evaluates its real estate portfolio in conjunction with its capital needs. The Company has entered into several sale-leaseback transactions. For the nine month periods ended May 31, 2015 and 2014, the Company recorded proceeds from sale-leaseback transactions of $867 million and $144 million, respectively. In some of these transactions, the Company negotiated fixed rate renewal options which constitute a form of continuing involvement, resulting in the assets remaining on the balance sheet and a corresponding finance lease obligation.

Annual minimum rental commitments under all leases having an initial or remaining non-cancelable term of more than one year are shown below (in millions):

		Financing Obligation				Capital Lease				Operating Lease
2015		$	19			$	68			$	3,110
2016			18				65				3,028
2017			18				62				2,988
2018			18				59				2,755
2019			18				59				2,572
Later			1,130				880				24,020
Total Minimum Lease Payments		$	1,221			$	1,193			$	38,473

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The capital and finance lease amounts include $1.5 billion of imputed interest and executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $218 million on leases due in the future under non-cancelable subleases.

In March 2014, the Company’s Board of Directors approved a plan to close underperforming stores in efforts to optimize and focus resources in a manner intended to increase shareholder value. The Company incurred no pre-tax charges related to this plan in the three month period ended May 31, 2015. For the nine month period ended May 31, 2015, the Company incurred total pre-tax charges of $17 million primarily related to lease termination costs. The Company incurred pre-tax charges of $95 million ($47 million related to lease termination costs and $48 million in asset impairments) for the three and nine month periods ended May 31, 2014. The Company expects to incur no additional costs related to this plan.

On April 8, 2015, the Company’s Board of Directors approved a plan to implement a new restructuring program (the “Cost Transformation Program”) as part of an initiative to reduce costs and increase operating efficiencies. The Cost Transformation Program included plans to close approximately 200 stores across the U.S.; reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions. The Company incurred pre-tax charges of $160 million ($102 million related to asset impairment charges, $34 million in severance and other business transition and exit costs and $24 million in real estate costs) related to the Cost Transformation Program in the three and nine month periods ended May 31, 2015.

		May 31, 2015				August 31, 2014
Balance – beginning of period		$	257			$	123
Provision for present value of non-cancellable lease payments on closed facilities			44				171
Assumptions about future sublease income, terminations and changes in interest rates			(2	)			(8	)
Interest accretion			18				14
Liability assumed through acquisition of Alliance Boots			13				-
Cash payments, net of sublease income			(52	)			(43	)
Balance – end of period		$	278			$	257

		Three Months Ended May 31,								Nine Months Ended May 31,
		2015				2014				2015				2014
Minimum rentals		$	852			$	686			$	2,339			$	2,020
Contingent rentals			1				1				3				4
Less: Sublease rental income			(15	)			(4	)			(32	)			(16	)
		$	838			$	683			$	2,310			$	2,008

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Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method upon completion of the Second Step Transaction on December 31, 2014.  Equity method investments as of May 31, 2015 and August 31, 2014 were as follows (in millions, except percentages):

		May 31, 2015								August 31, 2014
		Carrying Value				Ownership Percentage				Carrying Value				Ownership Percentage
Alliance Boots		$	N/A				100	%		$	7,336				45	%
Other			1,244				12% - 50	%			74				30% - 50	%
Total		$	1,244							$	7,410

N/A	Not applicable

Alliance Boots

On August 2, 2012, pursuant to the Purchase and Option Agreement the Company acquired 45% of the issued and outstanding share capital of Alliance Boots in exchange for $4.025 billion in cash and approximately 83.4 million shares of Walgreens common stock.  The Purchase and Option Agreement provided, subject to the satisfaction or waiver of specified conditions, a call option that gave the Company the right, but not the obligation, to acquire the remaining 55% of Alliance Boots in exchange for an additional £3.1 billion in cash as well as an additional 144.3 million Company shares, subject to certain adjustments (the “call option”).  On August 5, 2014, the Purchase and Option Agreement was amended to permit the exercise of the call option beginning on that date, and the Company, through an indirectly wholly-owned subsidiary to which the Company previously assigned its right to the call option, exercised the call option on August 5, 2014. The Company’s equity earnings, initial investment and the call option excluded the Alliance Boots minority interest in Galenica Ltd. (“Galenica”). The Alliance Boots investment in Galenica was distributed to the Alliance Boots shareholders other than Walgreens in May 2013, which had no impact on the Company’s financial results.

Prior to the closing of the Second Step Transaction on December 31, 2014, the Company accounted for its 45% investment in Alliance Boots using the equity method of accounting. Because the underlying net assets in Alliance Boots were denominated in a foreign currency, translation gains or losses had an impact on the recorded value of the Company’s investment. The Company utilized a three-month reporting lag in recording equity income in Alliance Boots, which was eliminated on December 31, 2014 (See Note 3, Change in Accounting Policy). The Company’s share of Alliance Boots earnings was recorded as Equity earnings in Alliance Boots in the Consolidated Condensed Statements of Earnings. The Company’s investment was recorded as Equity investment in Alliance Boots in the Consolidated Condensed Balance Sheets.

The Company’s initial investment in Alliance Boots exceeded its proportionate share of the net assets of Alliance Boots by $2.4 billion. This premium of $2.4 billion was recognized as part of the carrying value in the Company’s equity investment in Alliance Boots. The difference was primarily related to the fair value of Alliance Boots indefinite-lived intangible assets and goodwill. The Company’s equity method income from the investment in Alliance Boots was adjusted to reflect the amortization of fair value adjustments in certain definite lived assets of Alliance Boots. The Company’s incremental amortization expense associated with the Alliance Boots investment was zero and $14 million for the three and nine month periods ended May 31, 2015, respectively, and $11 million and $31 million for the three and nine month periods ended May 31, 2014, respectively. The incremental amortization expense was recorded as a reduction in equity earnings from Alliance Boots for all periods prior to closing of the Second Step Transaction on December 31, 2014.

The Second Step Transaction closed on December 31, 2014. (See Note 1, Organization, and Note 2, Basis of Presentation.) In connection with this transaction as required by ASC Topic 805, Business Combinations, the Company recorded a non-cash gain of $706 million resulting from the remeasurement of the previously held equity interest in Alliance Boots at its acquisition date fair value. The non-cash gain includes $80 million of foreign currency translation gains and losses reclassified from accumulated other comprehensive income. This gain is preliminary and may be subject to change as the Company finalizes purchase accounting.

Other Equity Method Investments

Other equity method investments primarily relate to equity method investments in Guangzhou Pharmaceuticals Corporation and Nanjing Pharmaceutical Corporation Limited, the Company’s pharmaceutical wholesale investments in China and the equity method investment retained through the sale of Walgreens Infusion Services in April 2015. Also included are additional investments in pharmaceutical wholesaling and distribution, retail pharmacy and our hearing care operator and the equity method investment retained through the sale of Take Care Employer in fiscal 2014. Equity investments of the Company are recorded within other noncurrent assets on the Consolidated Condensed Balance Sheets. The Company reported $7 million and $15 million of equity earnings in equity method investments for the three and nine month periods ended May 31, 2015, respectively. Equity earnings from the historical Walgreens equity method investments for the three and nine month periods ended May 31, 2014, respectively were immaterial. The Company’s share of equity income is reported as post tax earnings from equity method investments, in the Consolidated Condensed Statements of Earnings.

 

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Summarized Financial Information

Summarized financial information for the Company’s equity method investees is as follows:

Balance Sheet (in millions)

		May 31, 2015(1)				August 31, 2014(1)
Current assets		$	4,985			$	9,074
Noncurrent assets			1,564				22,363
Current liabilities			3,944				9,372
Noncurrent liabilities			819				10,608
Shareholders’ equity (2)			1,786				11,457

Income Statement (in millions)

		Three Months Ended May 31,								Nine Months Ended May 31,
		2015(3)				2014(3)				2015(3)				2014(3)
Net sales		$	2,884			$	9,385			$	17,862			$	28,485
Gross Profit			181				2,029				3,349				6,084
Net Income			28				320				771				1,091
Share of income from equity method investments(3)			7				137				330				467

⁽¹⁾  Net assets in foreign equity method investments are translated at their respective May 31, 2015 and August 31, 2014 spot rates.

⁽²⁾  Shareholders’ equity at May 31, 2015 and August 31, 2014 includes $163 million and $283 million respectively, related to noncontrolling interests.

⁽³⁾  Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method upon completion of the Second Step Transaction on December 31, 2014. Earnings for the three and nine month periods ended May 31, 2015 reflect incremental acquisition-related amortization expense of zero and $14 million ($11 million net of tax), respectively. Incremental acquisition-related amortization expense for the three and nine month periods ended May 31, 2014 were $11 million ($9 million net of tax) and $31 million ($25 million net of tax), respectively. Earnings in foreign equity method investments are translated at their respective average exchange rates.

Walgreens, Alliance Boots and AmerisourceBergen entered into a Framework Agreement dated as of March 18, 2013, pursuant to which Walgreens and Alliance Boots together were granted the right to purchase a minority equity position in AmerisourceBergen, beginning with the right, but not the obligation, to purchase up to 19,859,795 shares of AmerisourceBergen common stock (approximately 7 percent of the then fully diluted equity of AmerisourceBergen, assuming the exercise in full of the warrants described within Note 10, Financial Instruments) in open market transactions.

In conjunction with its long-term relationship with AmerisourceBergen, Walgreens acquired shares of AmerisourceBergen through open market transactions totaling $63 million and $493 million, respectively, during the three and nine months ended May 31, 2014. As of May 31, 2015, the Company held 11.5 million shares, approximately 5.2% of AmerisourceBergen’s outstanding common stock at a total fair value of $1.3 billion. The Company’s cumulative cost basis of common shares acquired was $717 million at May 31, 2015.

Pursuant to ASC Topic 320, Investments – Debt and Equity Securities, the Company accounts for the investment in AmerisourceBergen shares as an available-for-sale investment reported at fair value within other non-current assets in the Consolidated Condensed Balance Sheets. As an available-for-sale investment, changes in the fair value are recorded through other comprehensive income. The value of the investment is recorded at the closing price of AmerisourceBergen common stock as of the balance sheet date.

 

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A summary of the cost and fair value of available-for-sale securities, with gross unrealized gains and losses, is as follows (in millions):

		May 31, 2015
		Cost				Unrealized gains				Currency Translation Adjustments				Unrealized losses				Fair value
AmerisourceBergen common stock		$	717			$	573			$	-			$	-			$	1,290
Other investments			82				4				(2	)			-				84
Total available-for-sale investments		$	799			$	577			$	(2	)		$	-			$	1,374
		August 31, 2014
		Cost				Unrealized gains				Currency Translation Adjustments				Unrealized losses				Fair value
AmerisourceBergen common stock		$	717			$	170			$	-			$	-			$	887
Total available-for-sale investments		$	717			$	170			$	-			$	-			$	887

For the three and nine month periods ended May 31, 2015 and 2014, there were no sales of available-for-sale investments.

The Company has $84 million of other available-for-sale investments classified within other current assets in the Consolidated Condensed Balance Sheets at May 31, 2015.

Alliance Boots

The Second Step Transaction closed on December 31, 2014, resulting in the acquisition by the Company of 55% of the issued and outstanding share capital of Alliance Boots, increasing its interest to 100%. (See Note 1, Organization, and Note 2, Basis of Presentation.) The Company previously accounted for its 45% interest in Alliance Boots as an equity method investment. As a result of the Second Step Transaction, the Company significantly expanded its operations to include pharmacy-led health and beauty retailing and pharmaceutical wholesaling and distribution businesses in major international markets.

As a result of the closing of the Second Step Transaction, the Company increased its interest in WBAD, a 50/50 joint venture between Walgreens and Alliance Boots, to 100%. Because Walgreens held, prior to the Second Step Transaction, a 50% direct interest and an additional indirect interest in WBAD through its 45% ownership of Alliance Boots, the financial results of WBAD were fully consolidated into the Walgreens financial statements with the remaining 27.5% effective interest being recorded as a noncontrolling interest. The acquisition of the 27.5% noncontrolling interest was accounted for as an equity transaction with no gain or loss recorded in the statement of earnings under ASC Topic 805, Business Combinations. On January 1, 2015, WBAD Holdings Limited sold 320 common shares of WBAD, representing approximately 5% of the equity interests in WBAD, to Alliance Healthcare Italia Distribuzione S.p.A. (“AHID”), which is not a member of the Company’s consolidated group. Under certain circumstances, AHID has the right to put, and WBAD Holdings Limited has the right to call, the 320 common shares of WBAD currently owned by AHID for a purchase price of $100,000.

The total purchase price of the Second Step Transaction of $15.9 billion included £3.133 billion in cash (approximately $4.9 billion at the December 31, 2014 spot rate of $1.56 to £1.00) and 144.3 million of the Company’s common shares at a fair value of $11.0 billion (based on the December 30, 2014 closing market price of $76.05). Of the total purchase price, $13.3 billion was preliminarily allocated to acquire the 55% ownership interest in Alliance Boots and $2.6 billion was preliminarily allocated to acquire the noncontrolling interest in WBAD. The purchase price attributed to the acquisition of the noncontrolling interest in WBAD was determined based on the relative fair value of Alliance Boots and WBAD, respectively.

The preliminary impact of the equity transaction is as follows (in millions):

		Amount
Consideration attributable to WBAD		$	2,569
Less:  Carrying value of the Company’s pre-existing noncontrolling interest			130
Impact to additional paid in capital		$	2,439

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As of May 31, 2015, the Company had not completed the analysis to assign fair values to all tangible and intangible assets acquired and therefore the purchase price allocation for Alliance Boots and WBAD has not been completed. The preliminary purchase price allocation will be subject to further refinement and may result in material changes. These changes will primarily relate to the allocation of consideration and the fair value assigned to all tangible and intangible assets acquired and identified. The following table summarizes the consideration paid to acquire the remaining 55% interest in Alliance Boots and the preliminary amounts of identified assets acquired and liabilities assumed at the date of the Second Step Transaction (in millions).

Consideration paid
Cash		$	4,874
Common stock			10,977
Total consideration transferred			15,851
Less: consideration attributed to WBAD			(2,569	)
			13,282
Fair value of the investment in Alliance Boots held before the Second Step Transaction			8,293
Total consideration		$	21,575
Identifiable assets acquired and liabilities assumed including noncontrolling interests
Cash and cash equivalents		$	413
Accounts receivable			3,803
Inventories			3,713
Other current assets			894
Property, plant and equipment			3,834
Intangible assets			10,658
Other non-current assets			1,960
Trade accounts payable, accrued expenses and other liabilities			(7,708	)
Borrowings			(9,010	)
Deferred income taxes			(2,182	)
Other non-current liabilities			(396	)
Noncontrolling interests			(348	)
Total identifiable net assets and noncontrolling interests			5,631
Goodwill		$	15,944

Significant changes from the preliminary purchase price valuation at February 28, 2015 include a reduction in identified intangible assets based on updated financial information, lower deferred income taxes as a result of the decrease in identified intangible assets and increases in equity investments and noncontrolling interests based on updated financial information. The preliminary purchase price allocation will be subject to further refinement and may result in material changes.

As a result of the Company acquiring the remaining 55% interest in Alliance Boots, the Company’s previously held 45% interest was remeasured to fair value, resulting in a gain of $706 million. This gain has been recognized as Gain on previously held equity interest in the Consolidated Condensed Statements of Earnings. This gain is preliminary and may be subject to change as the Company finalizes purchase accounting.

The fair value of the previously held equity interest of $8.3 billion in Alliance Boots was determined using the Income Approach methodology.  The fair value measurement of the previously held equity interest is based on significant inputs not observable in the market, and thus represents a Level 3 measurement. The fair value estimates for the previously held equity interest are based on (a) projected discounted cash flows, (b) historical and projected financial information, and (c) synergies including cost savings, as relevant, that market participants would consider when estimating the fair value of the previously held equity interest in Alliance Boots. The fair value for trade names and trademarks was determined using the relief from royalty method of the income approach; pharmacy licenses and customer relationships used the excess earnings method of the income approach; and loyalty card holders used the incremental cash flow method which is a form of the income approach. Personal property fair values were determined primarily using the indirect cost approach, while real property fair values were determined using the income, market and/or cost approach.

 

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The preliminary identified definite and indefinite lived intangible assets were as follows:

Definite-Lived Intangible Assets		Weighted-Average Useful Life (in years)				Amount (in millions)
Customer relationships			12			$	1,329
Loyalty card holders			12				756
Trade names and trademarks			10				303
Favorable lease interests			3				92
Total						$	2,480

Indefinite-Lived Intangible Assets		Amount (in millions)
Trade names and trademarks		$	5,608
Pharmacy licenses			2,570
Total		$	8,178

The preliminary goodwill of $15.9 billion arising from the Second Step Transaction consists of expected purchasing synergies, operating efficiencies by benchmarking performance and applying best practices across the combined company, consolidation of operations, reductions in selling, general and administrative expenses and combining workforces. The Company determined that the preliminary goodwill should be allocated across all segments because each segment will benefit from synergies related to the acquisition that will increase each segment’s overall profitability. The Company determined that $4.9 billion of preliminary goodwill arising from synergies was directly attributable to the Retail Pharmacy USA segment. The Company also allocated $3.7 billion of preliminary goodwill from the acquisition to the Retail Pharmacy USA segment based on a with and without analysis whereby the difference between the fair value of a segment before the acquisition and its fair value after the acquisition represents the amount of goodwill assigned to that segment. Of the remaining preliminary goodwill, $3.9 billion was allocated to the Retail Pharmacy International segment and $3.5 billion was allocated to the Pharmaceutical Wholesale segment. The allocation of the goodwill to the individual reporting units within the respective segments has not been completed. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes.

The Company incurred legal and other professional services costs related to the Second Step Transaction, which were included in selling, general and administrative expenses, of $4 million and $87 million for the three and nine month periods ended May 31, 2015.

The preliminary fair value of the assets acquired includes inventory having an estimated fair value of $3.7 billion. This fair value includes a $106 million fair value adjustment to capitalize the estimated profit in acquired finished goods inventory as of the date of the Second Step Transaction, which was expensed to cost of sales over the first inventory turn. The Company recorded zero and $106 million of expense related to the fair value adjustment for the three and nine month periods ended May 31, 2015, respectively.

The following table presents supplemental unaudited condensed pro forma consolidated statements of earnings for 2015 and 2014 as if the Second Step Transaction had occurred on September 1, 2013, the first day of the Company’s fiscal 2014. As described in Note 3, Change in Accounting Policy, the information has been presented without a lag. The unaudited condensed pro forma statements reflect certain adjustments related to past operating performance and acquisition accounting adjustments, such as increased amortization expense based on the fair valuation of assets acquired, the impact of acquisition financing, transaction costs and the related income tax effects. The unaudited condensed pro forma statements do not include any anticipated synergies which may be achievable subsequent to the date of the Second Step Transaction. The unaudited condensed pro forma statements also exclude certain non-recurring items such as the gain on Walgreens previously held 45% investment in Alliance Boots and other transaction related costs. Accordingly, the unaudited condensed pro forma results have been prepared for comparative purposes only and are not intended to be indicative of what the Company’s results would have been had the Second Step Transaction occurred at the beginning of the periods presented or the results which may occur in the future.

 

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		Pro forma Three months ended May 31,								Pro forma Nine months ended May 31,
		2015				2014				2015				2014
(in millions, except per share amounts)
Net sales		$	28,795			$	28,740			$	87,969			$	85,739
Net earnings			1,302				952				3,955				2,940
Net earnings per common share:
Basic		$	1.19			$	0.87			$	3.85			$	2.68
Diluted			1.18				0.86				3.81				2.65

Actual results from Alliance Boots operations included in the Consolidated Condensed Statements of Earnings since December 31, 2014, the date of the Second Step Transaction, are as follows (in millions, except per share amounts):

		Three months ended May 31, 2015				Nine months ended May 31, 2015
(in millions, except per share amounts)
Net sales		$	8,370			$	13,895
Net earnings			487				817
Net earnings per common share:
Basic		$	0.45			$	0.80
Diluted			0.44				0.79

Other Acquisitions

The aggregate purchase price of all businesses, excluding Alliance Boots, net of cash received was $112 million for the nine month period ended May 31, 2015. These acquisitions added $22 million to goodwill and $78 million to intangible assets, primarily pharmacy files. The remaining fair value relates to immaterial amounts of tangible assets, less liabilities assumed. Operating results of the businesses acquired have been included in the Consolidated Condensed Statements of Earnings from their respective acquisition dates forward. Pro forma results of the Company, assuming all of the other acquisitions had occurred at the beginning of each period presented, would not be materially different from the results reported.

		Retail Pharmacy USA				Retail Pharmacy International				Pharmaceutical Wholesale				Total
August 31, 2014		$	2,359			$	-			$	-			$	2,359
Acquisitions			8,588				3,918				3,460				15,966
Sale of business(1)			(706	)			-				-				(706	)
Other(2)			(3	)			-				-				(3	)
Currency translation adjustments			-				(116	)			(139	)			(255	)
May 31, 2015		$	10,238			$	3,802			$	3,321			$	17,361

(1)	Represents goodwill associated with Walgreens Infusion Services business which was sold on April 7, 2015.

(2)	Other primarily represents immaterial purchase accounting adjustments for prior year Company acquisitions.

 

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As a result of the Second Step Transaction, the Company recorded $15.9 billion of goodwill and $10.7 billion of intangible assets in conjunction with the preliminary purchase accounting. See Note 7, Acquisitions for additional information regarding the transaction.

The carrying amount and accumulated amortization of intangible assets consist of the following (in millions):

		May 31, 2015				August 31, 2014
Gross Amortizable Intangible Assets
Purchased prescription files		$	866			$	1,079
Favorable lease interests			378				382
Purchasing and payer contracts			94				301
Non-compete agreements			151				151
Trade names and trademarks			453				191
Customer relationships			1,435				-
Loyalty card holders			735				-
Other amortizable intangible assets			55				4
Total gross amortizable intangible assets			4,167				2,108
Accumulated amortization
Purchased prescription files			436				474
Favorable lease interests			198				174
Purchasing and payer contracts			63				145
Non-compete agreements			83				70
Trade names and trademarks			63				69
Customer relationships			100				-
Loyalty card holders			26				-
Other amortizable intangible assets			2				4
Total accumulated amortization			971				936
Total amortizable intangible assets, net		$	3,196			$	1,172
Indefinite Lived Intangible Assets
Trade names and trademarks		$	5,509			$	8
Pharmacy licenses			2,524				-
Total indefinite lived intangible assets		$	8,033			$	8
Total intangible assets, net		$	11,229			$	1,180

The carrying amount of amortizable intangible assets and accumulated amortization includes negative currency translation adjustments of $84 million and $3 million, respectively, as of May 31, 2015.

The carrying amount of indefinite lived intangible assets includes negative currency translation adjustments of $145 million as of May 31, 2015.

Amortization expense for intangible assets was $104 million and $368 million for the three and nine months ended May 31, 2015, respectively and $71 million and $214 million for the three and nine months ended May 31, 2014, respectively.

Estimated annual amortization expense for intangible assets recorded at May 31, 2015 is as follows (in millions):

		2015				2016				2017				2018				2019
Estimated annual amortization expense:		$	482			$	425			$	380			$	342			$	318

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Short-term borrowings and long-term debt consist of the following (all amounts are presented in millions of U.S. dollars. Debt issuances are denominated in U.S. dollars, unless otherwise noted):

		May 31, 2015				August 31, 2014
Short-Term Borrowings(1)
Current portion of loans assumed through the purchase of land and buildings; various interest rates from 5.000% to 8.750%; various maturities from 2015 to 2035		$	2			$	8
Unsecured variable rate notes due 2016			747				-
1.000% unsecured notes due 2015			-				750
Other(2)			443				16
Total short-term borrowings		$	1,192			$	774
Long-Term Debt(1)
Unsecured Pound Sterling variable rate term loan due 2019		$	2,212			$	-
1.800% unsecured notes due 2017			996				994
1.750% unsecured notes due 2017			746				-
5.250% unsecured notes due 2019(3)			1,020				1,007
2.700% unsecured notes due 2019			1,242				-
2.875% unsecured Pound Sterling notes due 2020(4)			607				-
3.300% unsecured notes due 2021			1,240				-
3.100% unsecured notes due 2022			1,192				1,192
3.800% unsecured notes due 2024			1,985				-
3.600% unsecured Pound Sterling notes due 2025(4)			455				-
2.125% unsecured Euro notes due 2026(5)			817				-
4.500% unsecured notes due 2034			494				-
4.400% unsecured notes due 2042			492				491
4.800% unsecured notes due 2044			1,491				-
Loans assumed through the purchase of land and buildings; various interest rates from 5.000% to 8.750%; various maturities from 2015 to 2035			33				40
Other(6)			35				-
			15,057				3,724
Less: current maturities			2				8
Total long-term debt		$	15,055			$	3,716

(1)	All notes are presented net of unamortized discount and debt issuance costs, where applicable.

(2)	Other short-term borrowings represent a mix of fixed and variable rate borrowings with various maturities and working capital facilities denominated in various foreign currencies including $46 million of U.S. dollar equivalent bank overdrafts.

(3)	Also includes interest rate swap fair market value adjustments, see Note 11, Fair Value Measurements for additional fair value disclosures.

(4)	Pound Sterling denominated notes are translated at the May 31, 2015 spot rate of $1.53 to one British Pound Sterling.

(5)	Euro denominated notes are translated at the May 31, 2015 spot rate of $1.10 to one Euro.

(6)	Other long-term debt represents a mix of fixed and variable rate borrowings in various foreign currencies with various maturities.

Extinguishment of Debt Assumed in Second Step Transaction

As a result of the Second Step Transaction (see Note 7, Acquisitions), the Company assumed $9.0 billion of Alliance Boots existing debt. In January 2015, the Company repaid substantially all of the assumed debt with proceeds from the November 2014 debt issuances described below.

$8.0 Billion Note Issuance

On November 18, 2014, WBA received net proceeds (after deducting underwriting discounts and estimated offering expenses) of $7.9 billion from a public offering of notes with varying maturities and interest rates, the majority of which are fixed rate. The notes are unsecured, unsubordinated debt obligations of WBA and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of WBA from time to time outstanding. The notes are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Walgreens as described below. See Note 22, Subsequent Events. Total issuance costs relating to the notes, including underwriting discounts and estimated offering expenses, were $44 million. The fair value of the notes as of May 31, 2015 was $8.0 billion. Fair value for these notes was determined based upon quoted market prices.

 

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The following table summarizes each tranche of notes issued:

Notes Issued (in millions)			Maturity Date	Interest Rate	Interest Payment Dates
$	750		May 18, 2016	Variable; three-month U.S. dollar LIBOR, reset quarterly, plus 45 basis points	February 18, May 18, August 18, and November 18; commencing on February 18, 2015
	750		November 17, 2017	Fixed 1.750%	May 17 and November 17; commencing on May 17, 2015
	1,250		November 18, 2019	Fixed 2.700%	May 18 and November 18; commencing on May 18, 2015
	1,250		November 18, 2021	Fixed 3.300%	May 18 and November 18; commencing on May 18, 2015
	2,000		November 18, 2024	Fixed 3.800%	May 18 and November 18; commencing on May 18, 2015
	500		November 18, 2034	Fixed 4.500%	May 18 and November 18; commencing on May 18, 2015
	1,500		November 18, 2044	Fixed 4.800%	May 18 and November 18; commencing on May 18, 2015
$	8,000

Walgreens Guarantee

The Walgreens guarantee, for so long as it is in place, is an unsecured, unsubordinated debt obligation of Walgreens and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens from time to time outstanding. See Note 22, Subsequent Events. The purpose of the guarantee is to protect the WBA notes against structural subordination to certain indebtedness of Walgreens. The Walgreens guarantee will automatically terminate, and the obligations of Walgreens under the Walgreens guarantee will be unconditionally released and discharged, if and when (i) the aggregate outstanding principal amount of Capital Markets Indebtedness (as defined), including the Existing Notes (as defined), and Commercial Bank Indebtedness (as defined), in each case, of Walgreens is less than $2.0 billion and (ii) Walgreens does not guarantee any Capital Markets Indebtedness (other than the notes or the Euro/Sterling Notes (as defined)) or Commercial Bank Indebtedness, in each case, of WBA. In addition, the Walgreens guarantee will automatically terminate, and the obligations of Walgreens under the Walgreens guarantee will be unconditionally released and discharged, with respect to any series of outstanding notes, upon (i) repayment of such series of outstanding notes in full, (ii) the satisfaction and discharge of the indenture with respect to such series of outstanding notes or (iii) the defeasance or covenant defeasance of such series of outstanding notes in accordance with the terms of the indenture. Once released in accordance with its terms, the Walgreens guarantee will not subsequently be required to be reinstated.

Redemption Option

WBA may redeem (a) the notes due 2017, at any time in whole or from time to time in part, (b) the notes due 2019, at any time prior to October 18, 2019 in whole or from time to time prior to October 18, 2019 in part, (c) the notes due 2021, at any time prior to September 18, 2021 in whole or from time to time prior to September 18, 2021 in part, (d) the notes due 2024, at any time prior to August 18, 2024 in whole or from time to time prior to August 18, 2024 in part, (e) the notes due 2034, at any time prior to May 18, 2034 in whole or from time to time prior to May 18, 2034 in part, and (f) the notes due 2044, at any time prior to May 18, 2044 in whole or from time to time prior to May 18, 2044 in part, in each case, at WBA’s option for the sum of accrued and unpaid interest plus a redemption price equal to the greater of:

(1) 100% of the principal amount of the fixed rate notes being redeemed; and

 

(2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the redemption date), discounted to the redemption date on a semi-annual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the applicable series of notes), plus 15 basis points for the notes due 2017, 15 basis points for the notes due 2019, 20 basis points for the notes due 2021, 20 basis points for the notes due 2024, 20 basis points for the notes due 2034 and 25 basis points for the notes due 2044.

 

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In addition, at any time on or after October 18, 2019 with respect to the notes due 2019, September 18, 2021 with respect to the notes due 2021, August 18, 2024 with respect to the notes due 2024, May 18, 2034 with respect to the notes due 2034, or May 18, 2044 with respect to the notes due 2044, WBA may redeem some or all of the applicable series of fixed rate notes at its option, at a redemption price equal to 100% of the principal amount of the applicable fixed rate notes being redeemed, plus accrued and unpaid interest on the fixed rate notes being redeemed to, but excluding, the redemption date.

Change in Control

If WBA experiences a change of control triggering event, unless WBA has exercised its option to redeem the fixed rate notes or has defeased the notes as described in the indenture, WBA will be required to offer payment of cash equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest.

£700 Million and €750 Million Notes Issuance

On November 20, 2014, WBA issued three series of debt securities denominated in Euros and Pound Sterling in a public offering, each with varying maturities and interest rates. Interest on all notes is payable annually on November 20, commencing on November 20, 2015. The notes are unsecured, unsubordinated debt obligations of WBA and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of WBA from time to time outstanding. The notes are fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Walgreens as described below. See Note 22, Subsequent Events. Total issuance costs relating to the notes, including underwriting discounts and estimated offering expenses, were $11 million. The fair value of the notes as of May 31, 2015 was $1.9 billion. Fair value for these notes was determined based upon quoted market prices.

The following table details each tranche of Euro and Pound Sterling notes issued:

Notes Issued (in millions)			Maturity Date	Interest Rate
Euro Notes:
€	750		November 20, 2026	Fixed 2.125%
Pound Sterling Notes:
£	400		November 20, 2020	Fixed 2.875%
	300		November 20, 2025	Fixed 3.600%
£	700

Walgreens Guarantee

The Walgreens guarantee, for so long as it is in place, is an unsecured, unsubordinated debt obligation of Walgreens and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens from time to time outstanding. See Note 22, Subsequent Events. The purpose of the guarantee is to protect the WBA notes against structural subordination to certain indebtedness of Walgreens. The Walgreens guarantee will automatically terminate, and the obligations of Walgreens under the Walgreens guarantee will be unconditionally released and discharged, if and when (i) the aggregate outstanding principal amount of Capital Markets Indebtedness (as defined), including the Existing Notes (as defined), and Commercial Bank Indebtedness (as defined), in each case, of Walgreens is less than $2.0 billion and (ii) Walgreens does not guarantee any Capital Markets Indebtedness (other than the notes or the U.S. Dollar Notes (as defined)) or Commercial Bank Indebtedness, in each case, of WBA. In addition, the Walgreens guarantee will automatically terminate, and the obligations of Walgreens under the Walgreens guarantee will be unconditionally released and discharged, with respect to any series of outstanding notes, upon (i) repayment of such series of outstanding notes in full, (ii) the satisfaction and discharge of the indenture with respect to such series of outstanding notes or (iii) the defeasance or covenant defeasance of such series of outstanding notes in accordance with the terms of the indenture. Once released in accordance with its terms, the Walgreens guarantee will not subsequently be required to be reinstated.

 

Redemption Option

WBA may redeem (a) the Euro notes, at any time prior to August 20, 2026 in whole or from time to time prior to August 20, 2026 in part, (b) the Pound Sterling notes due 2020, at any time prior to October 20, 2020 in whole or from time to time prior to October 20, 2020 in part, and (c) the Pound Sterling notes due 2025, at any time prior to August 20, 2025 in whole or from time to time prior to August 20, 2025 in part, in each case, at WBA’s option for the sum of accrued and unpaid interest plus at a redemption price equal to the greater of:

(1) 100% of the principal amount of the notes to be redeemed; and

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(2) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the redemption date), discounted to the redemption date on an annual basis at the applicable Comparable Government Bond Rate, (as defined in the applicable series of notes), plus 20 basis points for the Euro notes, 20 basis points for the Pound Sterling notes due 2020 and 20 basis points for Pound Sterling the notes due 2025.

In addition, at any time on or after August 20, 2026 with respect to the Euro notes, October 20, 2020 with respect to the Pound Sterling notes due 2020, or August 20, 2025 with respect to the Pound Sterling notes due 2025, WBA may redeem some or all of the applicable series of notes at its option, at a redemption price equal to 100% of the principal amount of the applicable notes to be redeemed, plus, in every case, accrued and unpaid interest on the notes to be redeemed to, but excluding, the redemption date.

Change in Control

If WBA experiences a change of control triggering event, unless WBA has exercised its option to redeem the fixed rate notes or has defeased the notes as described in the indenture, WBA will be required to offer payment of cash equal to 101% of the aggregate principal amount of the notes plus accrued and unpaid interest.

$4.0 Billion Note Issuance

On September 13, 2012, Walgreens obtained net proceeds from a public offering of $4.0 billion of notes with varying maturities and interest rates, the majority of which, at issuance, were fixed rate. The notes are unsecured senior debt obligations and rank equally with all other unsecured and unsubordinated indebtedness of Walgreens. 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 WBA and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of WBA. Total issuance costs relating to the notes, including underwriting discounts and fees, were $26 million.

The Company repaid the $550 million variable rate notes on their March 13, 2014 maturity date. Additionally, the Company repaid the $750 million 1.000% fixed rate notes on their March 13, 2015 maturity date.

The following table details each tranche of outstanding notes as of May 31, 2015:

 

Notes Issued (in millions)			Maturity Date	Interest Rate	Interest Payment Dates
$	1,000		September 15, 2017	Fixed 1.800%	March 15 and September 15; commencing on March 15, 2013
	1,200		September 15, 2022	Fixed 3.100%	March 15 and September 15; commencing on March 15, 2013
	500		September 15, 2042	Fixed 4.400%	March 15 and September 15; commencing on March 15, 2013
$	2,700

The fair value of the notes as of May 31, 2015 and August 31, 2014 was $2.7 billion and $3.4 billion, respectively. Fair value for these notes was determined based upon quoted market prices.

Redemption Option and Change in Control

Walgreens may redeem the fixed rate notes at its option, at any time in whole, or from time to time in part, at a redemption price equal to the greater of: (a) 100% of the principal amount of the notes being redeemed; and (b) the sum of the present values of the remaining scheduled payments of principal and interest thereon (not including any portion of such payments of interest accrued as of the date of redemption), discounted to the date of redemption on a semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at the Treasury Rate (as defined in the applicable series of notes), plus 12 basis points for the notes due 2015, 20 basis points for the notes due 2017, 22 basis points for the notes due 2022 and 25 basis points for the notes due 2042. See Note 22, Subsequent Events. If a change of control triggering event occurs, Walgreens will be required, unless it has exercised its right to redeem the notes, to offer to purchase the notes at a purchase price equal to 101% of their principal amount, plus accrued and unpaid interest, if any, on the notes repurchased to the date of repurchase.

$1.0 Billion Note Issuance

On January 13, 2009, Walgreens issued notes totaling $1.0 billion bearing an interest rate of 5.250% paid semiannually in arrears on January 15 and July 15 of each year, beginning on July 15, 2009. The notes will mature on January 15, 2019. The notes are unsecured senior debt obligations and rank equally with all other unsecured senior indebtedness of Walgreens. On December 31, 2014, WBA 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 WBA and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of WBA. The notes are not convertible or exchangeable. Total issuance costs relating to this offering including underwriting discounts and fees, were $8 million. The fair value of the notes as of May 31, 2015 and August 31, 2014 was $1.1 billion and $1.1 billion, respectively. Fair value for these notes was determined based upon quoted market prices.

 

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Redemption Option and Change in Control

Other Borrowings

The Company periodically borrows under its commercial paper program and may continue to borrow under it in future periods. There were no commercial paper borrowings outstanding at May 31, 2015 or May 31, 2014. The Company had average daily short-term borrowings of $110 million of commercial paper outstanding at a weighted average interest rate of 0.52% for the nine month period ended May 31, 2015. For the nine month period ended May 31, 2014, the Company had average daily short-term borrowings of $5 million of commercial paper outstanding at a weighted average interest rate of 0.23%.

On November 10, 2014, WBA and Walgreens entered into a term loan credit agreement (the “Term Loan Agreement”) which provides the ability to borrow up to £1.45 billion on an unsecured basis. As of May 31, 2015, the Company has borrowed £1.45 billion ($2.2 billion at the May 31, 2015 spot rate of $1.53 to £1) under the Term Loan Agreement. Borrowings under the Term Loan Agreement bear interest at a fluctuating rate per annum equal to the reserve adjusted LIBOR plus an applicable margin based on the Company’s credit ratings.

On November 10, 2014, WBA and Walgreens entered into a five-year unsecured, multicurrency revolving credit agreement (the “Revolving Credit Agreement”), replacing prior Walgreens agreements dated July 20, 2011 and July 23, 2012. The new unsecured revolving credit agreement initially totaled $2.25 billion, of which $375 million was available for the issuance of letters of credit.  On December 29, 2014, upon the affirmative vote of the majority of common shares of Walgreens represented and entitled to vote at the Walgreens special meeting of shareholders to approve the issuance of the shares necessary to complete the Second Step Transaction, the available credit increased to $3.0 billion, of which $500 million is available for the issuance of letters of credit. The issuance of letters of credit reduces the aggregate amount otherwise available under the Revolving Credit Agreement for the making of revolving loans. Borrowings under the Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at WBA’s option, the alternate base rate or the reserve adjusted LIBOR, in each case, plus an applicable margin calculated based on the Company’s credit ratings. The Company’s ability to access these facilities is subject to compliance with the terms and conditions of the credit facilities, including financial covenants. The covenants require the Company to maintain certain financial ratios related to the proportion of consolidated debt to total capitalization and priority debt, along with limitations on the sale of assets and purchases of investments. Total upfront fees related to the Term Loan Agreement and Revolving Credit Agreement were $14 million. The Company pays a facility fee to the financing banks to keep these lines of credit active. At May 31, 2015, there were no borrowings or letters of credit issued against the revolving credit facility.

On December 19, 2014, WBA and Walgreens entered into a Revolving Credit Agreement (the “364-Day Credit Agreement”) with the lenders party thereto. The 364-Day Credit Agreement is a 364-day unsecured, multicurrency revolving facility. The aggregate commitment of all lenders under the 364-Day Credit Agreement is $750 million. At May 31, 2015, there were no borrowings against the 364-Day Credit Agreement.

Walgreens as co-obligor guarantees the punctual payment when due, whether at stated maturity, by acceleration or otherwise, of all obligations of Walgreens Boots Alliance under the Term Loan Agreement, the Revolving Credit Agreement, and the 364-Day Credit Agreement, which guarantee will remain in full force and effect until certain conditions are met. See Note 22, Subsequent Events.