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Annual Report 2015

Table of contents

  • Page 1
    Annual Report 2015

  • Page 2
    Board of Directors As at 14 October 2015 FROM LEFT TO RIGHT Janice M. Babiak Former Managing Partner, Ernst & Young LLP James A. Skinner Executive Chairman, Walgreens Boots Alliance, Inc. Dominic Murphy Partner, Kohlberg Kravis Roberts & Co. LLP John A. Lederer Former President and Chief Executive ...

  • Page 3
    ... by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ' No È As of February 28, 2015, the aggregate market value of Walgreens Boots Alliance, Inc. common stock held by non-affiliates (based upon the closing transaction price on such date) was...

  • Page 4
    ...about Market Risk Item 8. Financial Statements and Supplementary Data Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure Item 9A. Controls and Procedures Item 9B. Other Information Part III Item 10. Directors, Executive Officers and Corporate Governance Item...

  • Page 5
    ... executive offices are located at 108 Wilmot Road, Deerfield, Illinois 60015. Our common stock trades on the NASDAQ Stock Market under the symbol "WBA". Recent Transactions On August 2, 2012, Walgreens acquired a 45% equity interest in Alliance Boots GmbH ("Alliance Boots") along with a call option...

  • Page 6
    ...branded and generic pharmaceutical products are sourced from AmerisourceBergen in the U.S.; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through Walgreens Boots Alliance Development GmbH ("WBAD"), a global sourcing enterprise formed...

  • Page 7
    ...In any given year, the number of major brand name drugs that undergo a conversion from branded to generic status can vary and the timing of generic conversions can be difficult to predict, which can have a significant impact on retail pharmacy sales, gross profit margins and gross profit dollars. We...

  • Page 8
    ...'s fiscal 2015 total sales. Our U.S. loyalty program, Balance® Rewards, is designed to reward our most valuable customers and encourage shopping in stores and online. Balance Rewards members receive special pricing on select products and earn everyday rewards points for purchasing most merchandise...

  • Page 9
    ...Our sales, gross profit margin and gross profit dollars are impacted by, among other things, both the percentage of prescriptions that we fill that are generic and the rate at which new generic drugs are introduced to the market. Because any number of factors outside of our control can affect timing...

  • Page 10
    ... method investments), which mainly operates under the Alliance Healthcare brand, supplies medicines, other healthcare products and related services to more than 140,000 pharmacies, doctors, health centers and hospitals each year from 302 distribution centers in 12 countries, primarily in Europe...

  • Page 11
    ...or better gross margins on generic drugs than on branded drugs, although there are exceptions. Changes in manufacturers' product distribution business models also can impact the division's sales and gross margin. For example, when pharmaceutical drug manufacturers introduce fee-for-service contracts...

  • Page 12
    ...wholesale pharmacy operations, including regulations relating to our participation in Medicare, Medicaid and other publicly financed health benefit plans; regulations prohibiting kickbacks, beneficiary inducement and the submission of false claims; the Health Insurance Portability and Accountability...

  • Page 13
    ... amount we spend on research and development activities is not material. Financial Information about Foreign and Domestic Operations and Export Sales Prior to completion of the Second Step Transaction, we accounted for our 45% investment in Alliance Boots using the equity method of accounting and as...

  • Page 14
    ... prescription drugs. New brand name drugs can result in increased drug utilization and associated sales revenues, while the introduction of lower priced generic alternatives typically results in relatively lower sales revenues, but higher gross profit margins. Accordingly, a decrease in the number...

  • Page 15
    ... also impact our businesses and competitive positioning. For example, following the announcement of our agreement with AmerisourceBergen providing for, among other things, generic drug purchasing by Walgreens, Alliance Boots and AmerisourceBergen through WBAD, our global sourcing enterprise, some of...

  • Page 16
    ... these risks are realized, it could have a material adverse impact on our operating results. The anticipated strategic and financial benefits of our acquisition of Alliance Boots may not be realized. Walgreens and Alliance Boots entered into the Purchase and Option Agreement dated June 18, 2012, as...

  • Page 17
    ...and competitive factors in the marketplace. Prior to the Alliance Boots acquisition on December 31, 2014, Alliance Boots was a privately-held company and was not subject to the information and reporting requirements of the Securities Exchange Act of 1934, as amended and other federal securities laws...

  • Page 18
    ... affect our consolidated financial results. Our business results depend on our ability to successfully manage ongoing organizational change and achieve cost savings initiatives. In April 2015, our Board of Directors approved a plan to implement the Cost Transformation Program described in MD...

  • Page 19
    ... of branded and generic pharmaceutical drugs as our primary source of such products for our Retail Pharmacy USA division. On March 19, 2013, Walgreens, Alliance Boots and AmerisourceBergen announced various agreements and arrangements, including a ten-year pharmaceutical distribution agreement...

  • Page 20
    ... in certain equity method investments and other investments of Alliance Boots over which Alliance Boots does not exercise control. We rely on the internal controls and financial reporting controls of these entities and their failure to maintain effectiveness or comply with applicable standards may...

  • Page 21
    ...is high. Changes in market dynamics or actions of competitors or manufacturers, including industry consolidation and the emergence of new competitors, could materially and adversely impact us. Our retail pharmacy businesses face intense competition from local, regional, national and global companies...

  • Page 22
    ...be constrained if suitable new store locations cannot be identified with lease terms or purchase prices that are acceptable to us. We compete with other retailers and businesses for suitable locations for our stores. Local land use and other regulations applicable to the types of stores we desire to...

  • Page 23
    .... Throughout our operations, we receive, retain and transmit certain personal information that our customers and others provide to purchase products or services, fill prescriptions, enroll in promotional programs, participate in our customer loyalty programs, register on our websites, or otherwise...

  • Page 24
    ... disrupt our business operations. We accept payments using a variety of methods, including cash, checks, credit and debit cards, Apple Payâ„¢ and gift cards, and we may offer new payment options over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations...

  • Page 25
    ... or adverse changes in legislation or regulations governing prescription drug pricing, healthcare services or mandated benefits, may cause customers to reduce the amount of our products and services they purchase or the price they are willing to pay for our products and services. We expect continued...

  • Page 26
    ... service requirements, debt refinancing, acquisitions or other purposes; reducing our flexibility in planning for or reacting to changes in our industry and market conditions; making us more vulnerable in the event of a downturn in our business operations; and exposing us to interest rate risk given...

  • Page 27
    ... markets, our operating performance, and our credit ratings. The major credit rating agencies have assigned us and our corporate debt investment grade credit ratings. These ratings are based on a number of factors, which include their assessment of our financial strength and financial policies...

  • Page 28
    ...; the timing of the introduction of new generic and brand name prescription drugs; inflation, including with respect to generic drug procurement costs; the timing and severity of the cough, cold and flu season; changes in payer reimbursement rates and terms; fluctuations in inventory, energy...

  • Page 29
    Standards Board and the International Accounting Standards Board could require us to make significant changes to our lease management system or other accounting systems, and could result in adverse changes to our financial statements. We have a substantial amount of goodwill and other intangible ...

  • Page 30
    ..., which are primarily based on the financial markets as well as longevity and employee retention rates. This valuation is particularly sensitive to material changes in the value of equity, bond and other investments held by the pension plans, changes in the corporate bond yields which are used in...

  • Page 31
    ... stock to former Alliance Boots shareholders. These shares represented approximately 20.9% of our outstanding shares as of August 31, 2015. We also entered into, on August 2, 2012, a shareholders agreement (the "Company Shareholders Agreement") with certain of the SP Investors and the KKR Investors...

  • Page 32
    ... sales of stock or assets, or business combinations with any stockholder or group of stockholders who own 15% or more of our common stock. Under the Company Shareholders Agreement, each of the SP Investors and the KKR Investors, respectively, is entitled to designate one nominee to the Board...

  • Page 33
    ... or sales of Walgreens Boots Alliance common stock, including sales of shares by its directors and officers or its key investors, including the SP Investors and the KKR Investors. There are a number of additional business risks that could adversely affect our businesses and financial results...

  • Page 34
    ...Our Retail Pharmacy USA division also operated two prescription mail service facilities containing a total of approximately 237 thousand square feet, one of which was leased. We operated 302 pharmaceutical distribution centers located outside of the United States, primarily in Europe, and containing...

  • Page 35
    ... and business experience over the past five years for each executive officer. Executive officers are elected by, and serve at the discretion of, the Board of Directors. Unless otherwise stated, employment is by Walgreens Boots Alliance. Mr. Skinner has served as Executive Chairman since January 2015...

  • Page 36
    ... Murphy has served as Executive Vice President, President of Global Brands since December 2014. Previously, he served as Managing Director, Health & Beauty, International and Brands at Alliance Boots from August 2013 to December 2014 and joint Chief Operating Officer for Boots in the UK and Republic...

  • Page 37
    ... as Executive Vice President and Global Chief Human Resources Officer since December 2014. Previously, she served as Senior Vice President and Chief Human Resources Officer of Walgreens from January 2010 to December 2014. Prior to that, she served in a variety of legal and operational positions...

  • Page 38
    ...the quarter ended August 31, 2015 of equity securities that are registered by us pursuant to Section 12 of the Exchange Act. Subject to applicable law, share purchases may be made in open market transactions, privately negotiated transactions, or pursuant to instruments and plans complying with Rule...

  • Page 39
    ... relating to a client retention escrow. On August 2, 2012, the Company completed the acquisition of 45% of the issued and outstanding share capital of Alliance Boots GmbH (Alliance Boots) in exchange for cash and Company shares. The Company accounted for this investment under the equity method...

  • Page 40
    ... Boots GmbH that Walgreens did not previously own in exchange for £3.133 billion ($4.874 billion) in cash and approximately 144.3 million shares of Walgreens Boots Alliance common stock pursuant to the Purchase and Option Agreement. Walgreens previously had acquired, on August 2, 2012, a 45% equity...

  • Page 41
    ...to which branded and generic pharmaceutical products are sourced from AmerisourceBergen in the U.S.; an agreement which provides AmerisourceBergen the ability to access generics and related pharmaceutical products through WBAD, a global sourcing enterprise formed by Walgreens and Alliance Boots; and...

  • Page 42
    ... States related to the Cost Transformation Program in fiscal 2015. On March 24, 2014, the Board of Directors approved a plan to close underperforming stores in efforts to optimize and focus resources within our Retail Pharmacy USA operations in a manner intended to increase shareholder value. As...

  • Page 43
    ...Looking Statements" below. EXECUTIVE SUMMARY The following table presents certain key financial statistics for the Company for fiscal 2015, 2014 and 2013. All periods have been recast to reflect the removal of the three-month reporting lag applied to reporting equity earnings in Alliance Boots prior...

  • Page 44
    ... previously held equity interest in Alliance Boots. See Note 8, Acquisitions, to the Consolidated Financial Statements for additional information. Other income (expense) for fiscal 2015 was income of $685 million as compared to expense of $481 million in fiscal 2014. The change in fair value of our...

  • Page 45
    ... attributed to the change in the price of AmerisourceBergen's common stock. In addition, we recorded $19 million and $9 million in fiscal 2014 and 2013, respectively, of other income relating to the amortization of the deferred credit associated with the initial value of the Walgreens warrants. - 41...

  • Page 46
    ... equity earnings in Alliance Boots from September 1, 2014 through December 31, 2014. (in millions, except location amounts) 2015 2014 2013 Total Sales Gross Profit Selling, general and administrative expenses Operating Income Adjusted Operating Income (Non-GAAP measure)(1) Number of Prescriptions...

  • Page 47
    ... equity earnings in Alliance Boots for four months in the current year versus twelve months in the comparable period and current year costs related to the Cost Transformation Program. Gross margin as a percent of total sales was 26.9% in fiscal 2015 compared to 28.2% in fiscal 2014. Pharmacy margins...

  • Page 48
    ... fiscal 2014. As a percentage of total sales, expenses in fiscal 2015 were lower primarily due to store labor efficiencies partially offset by higher costs related to the Cost Transformation Program. Adjusted Operating Income (Non-GAAP measure) fiscal 2015 compared to fiscal 2014 Retail Pharmacy USA...

  • Page 49
    ... of total sales, expenses were lower primarily due to lower store compensation costs, store occupancy costs and headquarters costs, partially offset by costs related to our store optimization plan. Adjusted Operating Income (Non-GAAP measure) fiscal 2014 compared to fiscal 2013 Retail Pharmacy USA...

  • Page 50
    ... presented. (in millions) 2015 Retail Pharmacy USA Retail Pharmacy International Pharmaceutical Wholesale Eliminations and Other Walgreens Boots Alliance, Inc. Operating Income (GAAP) Cost transformation Acquisition-related amortization(1) LIFO provision Asset impairment Acquisition-related costs...

  • Page 51
    ... Pharmacy USA Retail Pharmacy International Pharmaceutical Wholesale Eliminations and Other Walgreens Boots Alliance, Inc. Operating Income (GAAP) Acquisition-related amortization Store closures and other optimization costs LIFO provision Acquisition-related costs Increase in fair market value...

  • Page 52
    2015 2014 2013 Net earnings attributable to Walgreens Boots Alliance, Inc. (GAAP) Alliance Boots call option loss Acquisition-related amortization Cost transformation LIFO provision Transaction foreign currency hedging loss Asset impairment Alliance Boots equity method non-cash tax Early debt ...

  • Page 53
    ... locations as well as a specialty pharmacy and a distribution center. Fiscal 2013 acquisitions included the acquisition of 141 USA Drug locations. Significant Retail Pharmacy International capital expenditures in fiscal 2015 primarily relate to investments in our stores and information technology...

  • Page 54
    ... to Walgreens Boots Alliance, Inc. In August 2014, our Board of Directors authorized the 2014 stock repurchase program, which authorizes the repurchase of up to $3.0 billion of the Company's common stock prior to its expiration on August 31, 2016. We purchased 8.2 million shares under the 2014 stock...

  • Page 55
    ... in each case, plus an applicable margin calculated based on our credit ratings. Total upfront fees related to the Term Loan Agreement and Revolving Credit Agreement were $14 million. We pay a facility fee to the financing banks to keep these lines of credit active. At August 31, 2015, there were no...

  • Page 56
    ... our business model, capital structure, financial policies and financial performance. Our credit ratings impact our borrowing costs, access to capital markets and operating lease costs. The rating agency ratings are not recommendations to buy, sell or hold our debt securities or commercial paper...

  • Page 57
    ... for closed locations, cost of sales and inventory, equity method investments, pension and postretirement benefits and income taxes. We use the following methods to determine our estimates: Business Combinations - We account for business combinations using the acquisition method of accounting, which...

  • Page 58
    ... of revenue, operating income, depreciation and amortization and capital expenditures. The allocation requires several analyses to determine the fair value of assets and liabilities including, among other things, purchased prescription files, customer relationships, pharmacy licenses and trade names...

  • Page 59
    ... change in the estimates or assumptions used to determine cost of sales or inventory. Equity method investments - We use the equity method to account for investments in companies if the investment provides the ability to exercise significant influence, but not control, over operating and financial...

  • Page 60
    ... 5 Years Operating leases(1) Purchase obligations(2): Open inventory purchase orders Real estate development Other corporate obligations Short-term borrowings and long-term debt* Interest payment on short term borrowings and long-term debt Insurance* Retirement benefit obligations Closed location...

  • Page 61
    ... ASU 201515 had no material financial statement impact. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December...

  • Page 62
    ...volume, pharmacy sales trends, prescription margins, generic prescription drug inflation, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, competition, economic and business conditions...

  • Page 63
    ... in the cost of goods, risks associated with the operation and growth of our customer loyalty programs, competition, risks associated with new business areas and activities, risks associated with acquisitions, divestitures, joint ventures and strategic investments, including those relating to our...

  • Page 64
    ...stock price and equity volatility may have a significant impact on the value of the warrants to acquire AmerisourceBergen common stock described in Note 11, Financial Instruments to our Consolidated Financial Statements in Part II, Item 8 of this Form 10-K. As of August 31, 2015, a one dollar change...

  • Page 65
    ...capital Employee stock loan receivable Retained earnings Accumulated other comprehensive (loss) income Treasury stock, at cost; 82,603,274 shares at August 31, 2015 and 77,793,261 at August 31, 2014 Total Walgreens Boots Alliance, Inc. Shareholders' Equity Noncontrolling interests Total Equity Total...

  • Page 66
    ... years ended August 31, 2015, 2014 and 2013 (In millions, except shares and per share amounts) Equity attributable to Walgreens Boots Alliance, Inc. Employee Accumulated Common Treasury Stock Other Stock Stock Paid-In Loan Comprehensive Retained Noncontrolling Total Amount Amount Capital Receivable...

  • Page 67
    ... STATEMENTS OF EARNINGS For the years ended August 31, 2015, 2014 and 2013 (In millions, except share and per share amounts) 2015 2014 2013 Net sales Cost of sales Gross Profit Selling, general and administrative expenses Gain on sale of business Equity earnings in Alliance Boots Operating Income...

  • Page 68
    ... INCOME For the years ended August 31, 2015, 2014 and 2013 (In millions) 2015 2014 2013 Comprehensive Income Net Earnings Other comprehensive income (loss), net of tax: Pension/postretirement obligations Unrealized (loss) on cash flow hedges Unrecognized gain on available-for-sale investments Share...

  • Page 69
    ... Change in fair value of warrants and related amortization Loss on exercise of call option Gain on previously held equity interest Deferred income taxes Stock compensation expense Equity earnings in Alliance Boots Other Changes in operating assets and liabilities Accounts receivable, net Inventories...

  • Page 70
    ... 144.3 million shares of Walgreens Boots Alliance 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...

  • Page 71
    ... 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 global sourcing enterprise established by the Company and Alliance Boots. The Company already owned a 50% direct...

  • Page 72
    ...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 August 31, 2015 and August 31, 2014...

  • Page 73
    ... information relating to the Company's equity method investments. Investments The Company's investments consist principally of corporate debt, other debt securities, and equity securities of publicly-traded companies. The Company classifies its investments in securities at the time of purchase...

  • Page 74
    ... to the store point-of-sale system. These costs are amortized over a three to eight year period. Amortization expense for capitalized system development costs and software was $178 million in fiscal 2015, $127 million in fiscal 2014 and $105 million in fiscal 2013. Unamortized costs at August...

  • Page 75
    ... 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...

  • Page 76
    ... on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date. The reserve for store closings, including $219 million from locations closed under the Company's restructuring actions, was $446 million as of August 31, 2015 and...

  • Page 77
    ... to credit risk. Cost of Sales Retail Pharmacy USA cost of sales is derived based upon point-of-sale scanning information with an estimate for shrinkage and is adjusted based on periodic inventories. All other segment cost of sales includes the purchase price of goods and services sold, store and...

  • Page 78
    ... result of a member's inactivity or if the points remain unredeemed after three years. Breakage income, which is reported in cost of sales, was not significant in fiscal 2015, 2014 or 2013. Insurance The Company obtains insurance coverage for catastrophic exposures as well as those risks required by...

  • Page 79
    ... guidance provided in ASU 201515 had no material financial statement impact. In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606), an update to ASU 2014-09. This ASU amends ASU 2014-09 to defer the effective date by one year for annual reporting - 75 -

  • Page 80
    ... 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...

  • Page 81
    ... 2015 financial statements is not material. Year Ended August 31, 2014 Year Ended August 31, 2013 After After Change in Change in As Accounting As Accounting Reported Adjustments Principle Reported Adjustments Principle Consolidated Statements of Earnings Equity earnings in Alliance Boots Operating...

  • Page 82
    ...stores in efforts to optimize and focus resources within the Retail Pharmacy USA operations in a manner intended to increase shareholder value. In fiscal 2015, the Company incurred total pre-tax charges related to this plan of $17 million, primarily related to lease termination costs. In fiscal 2014...

  • Page 83
    ... executory costs. Total minimum lease payments have not been reduced by minimum sublease rentals of approximately $214 million on leases due in the future under non-cancelable subleases. The Company provides for future costs related to closed locations. The liability is based on the present value of...

  • Page 84
    ... Year Ended August 31, 2015 2014 Balance - beginning of period Provision for present value of non-cancellable lease payments on closed facilities Assumptions about future sublease income, terminations and changes in interest rates Interest accretion Liability assumed through acquisition of Alliance...

  • Page 85
    ... 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...

  • Page 86
    ... Non-current liabilities Shareholders' equity(2) Statements of Earnings (in millions) $5,015 1,548 3,936 837 1,790 $ 9,074 22,363 9,372 10,608 11,457 Year Ended August 31, 2015(3) 2014(3) 2013(3) Net sales Gross Profit Net Earnings Share of earnings from equity method investments(3) (1) $20,905...

  • Page 87
    ...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 global sourcing enterprise between Walgreens and Alliance...

  • Page 88
    ... the date of the Second Step Transaction (in millions). Consideration paid Cash Common stock Total consideration transferred Less: consideration attributed to WBAD Fair value of the investment in Alliance Boots held before the Second Step Transaction Total consideration Identifiable assets acquired...

  • Page 89
    ... 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 $8.1 billion in Alliance Boots was determined using the income approach methodology. The fair value for trade names...

  • Page 90
    ... 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 information reflect certain adjustments related to past operating performance and acquisition accounting...

  • Page 91
    ... locations as well as a specialty pharmacy business and a distribution center. The Kerr Drug acquisition added $42 million to goodwill and $54 million to intangible assets, primarily prescription files and payer contracts, with $74 million allocated to net tangible assets. Additionally, the Company...

  • Page 92
    ... with Walgreens Take Care Employer business which was sold in June 2014. Represents goodwill associated with Walgreens Infusion Services business which was sold in April 2015. Other primarily represents immaterial purchase accounting adjustments for prior year Company acquisitions. In fiscal 2015...

  • Page 93
    ... weighted-average amortization period by intangible asset category is as follows (in years): Intangible asset class 2015 2014 Purchased prescription files Favorable lease interests Purchasing and payer contracts Non-compete agreements Trade names and trademarks Customer relationships Loyalty card...

  • Page 94
    ...491 - 32 - $3,716 (3) (4) (5) (6) All notes are presented net of unamortized discount and debt issuance costs, where applicable. Other short-term borrowings represent a mix of fixed and variable rate borrowings with various maturities and working capital facilities denominated in various foreign...

  • Page 95
    ... Boots Alliance from time to time outstanding. The notes were fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Walgreens until August 10, 2015, when such guarantees were unconditionally released and discharged (as described below). Total issuance costs relating...

  • Page 96
    ... Boots Alliance from time to time outstanding. The notes were fully and unconditionally guaranteed on an unsecured and unsubordinated basis by Walgreens until August 10, 2015, when such guarantees were unconditionally released and discharged (as described below). Total issuance costs relating...

  • Page 97
    ... Change in Control If Walgreens Boots Alliance experiences a change of control triggering event, unless Walgreens Boots Alliance has exercised its option to redeem the fixed rate notes or has defeased the notes as described in the indenture, Walgreens Boots Alliance will be required to offer payment...

  • Page 98
    ...was $3.5 billion of issued notes outstanding), 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...

  • Page 99
    ... Walgreens Boots Alliance'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. Total upfront fees related to the Term Loan Agreement and Revolving Credit Agreement were $14 million. The Company pays...

  • Page 100
    ... exchange risks. As a result of the Second Step Transaction, the Company acquired all the derivative instruments held by Alliance Boots at their acquisition date fair values. The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of August 31, 2015...

  • Page 101
    ... attributable to interest rate risk were recognized as follows (in millions): Location in Consolidated Statements of Earnings 2015 2014 2013 Interest rate swaps Notes Interest expense, net Interest expense, net $(4) 6 $(15) 15 $ 63 (43) The changes in fair value of the Company's debt that was...

  • Page 102
    ... income (expense) $ 1 78 (166) 72 $- - - - $- - - - As discussed in Note 2, Summary of Major Accounting Policies, the Company holds (a) a warrant 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...

  • Page 103
    ... were as follows (in millions): Location in Consolidated Statements of Earnings 2015 2014 2013 Warrants Derivatives Credit Risk Other income (expense) $759 $366 $111 Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of counterparty...

  • Page 104
    ... date; AmerisourceBergen's equity volatility; the number of shares of AmerisourceBergen's common stock outstanding; the number of AmerisourceBergen employee stock options and the exercise price; and the details specific to the warrants. Forward interest rate swaps were valued using three-month...

  • Page 105
    ...and 12, 2014, putative shareholders filed class actions in federal court in the Northern District of Illinois against the Walgreens Board of Directors, Walgreen Co., and Walgreens Boots Alliance, Inc. arising out of the Company's definitive proxy statement/prospectus filed with the SEC in connection...

  • Page 106
    ... the statutory federal income tax rate and the effective tax rate is as follows: 2015 2014 2013 Federal statutory rate State income taxes, net of federal benefit Loss on Alliance Boots call option(1) Deferred tax asset recognition(1) Gain on previously held equity interest Foreign income taxed at...

  • Page 107
    ... Compensation and benefits Insurance Accrued rent Outside basis difference Bad debts Tax attributes Stock compensation Other Less: Valuation allowance Total deferred tax assets Deferred tax liabilities Accelerated depreciation Inventory Intangible assets Equity method investment Deferred income...

  • Page 108
    ... equity compensation plans. A total of 60.4 million shares became available for delivery under the Omnibus Plan. In connection with the Reorganization, the Omnibus Plan was assumed by the Company and each Walgreens stock option, restricted stock unit award, performance share award, deferred stock...

  • Page 109
    ... tax benefit realized was $159 million in fiscal 2015 compared to $130 million in the prior year. The Walgreens Boots Alliance, Inc. Employees Stock Purchase Plan permits eligible employees to purchase common stock at 90% of the fair market value at the date of purchase. Employees may make purchases...

  • Page 110
    ... on performance criteria. The Company also issues shares to nonemployee directors. Each director receives an equity grant of shares every year on November 1. In fiscal 2013, the number of shares granted to each director was determined by dividing $170,000 by the price of a share of common stock on...

  • Page 111
    ..., 2014 and fiscal 2015 prior to the date of the Second Step Transaction within Equity earnings in Alliance Boots. Defined benefit pension plan assets were invested in the following classes of securities as of August 31, 2015: Percentage of Fair Market Value Equity securities Debt securities Real...

  • Page 112
    ...interest rates and are categorized as Level 2 investments. Derivatives which are exchange-traded and for which market quotations are readily available are valued at the last reported sale price or official closing price as reported by an independent pricing service on the primary market, or exchange...

  • Page 113
    ...(in millions): Boots and Other Pension Plans 2015 Service costs Interest costs Expected returns on plan assets Settlements Total net periodic pension costs $ 3 214 (173) (2) $ 42 Change in benefit obligations for the defined benefit pension plans from the date of the Second Step Transaction (in...

  • Page 114
    ... benefit pension plans in fiscal 2016 and expects to make contributions beyond 2016, which will vary based upon many factors, including the performance of the Company's pension investments. Defined Contribution Plans The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing...

  • Page 115
    ... age, years of service and date of hire. The costs of these benefits are accrued over the service life of the employee. The Company's postretirement health benefit plan is not funded. Components of net periodic benefit costs (in millions): 2015 2014 2013 Service cost Interest cost Amortization...

  • Page 116
    ... benefit to be paid net of the estimated federal subsidy during fiscal year 2016 is $10 million. 17. Capital Stock In connection with the Company's capital policy, the Board of Directors has authorized share repurchase programs. In August 2014, the Company's Board of Directors authorized the 2014...

  • Page 117
    ...• The Retail Pharmacy USA segment consists of the legacy Walgreens business, which includes the operation of retail drugstores and convenient care clinics, in addition to providing specialty pharmacy services. Revenues for the segment are principally derived from the sale of prescription drugs and...

  • Page 118
    ... practices, and related contract manufacturing operations. Stores are located in the United Kingdom, Mexico, Chile, Thailand, Norway, the Republic of Ireland, The Netherlands and Lithuania. Revenues for the segment are principally derived from the sale of prescription drugs and retail health, beauty...

  • Page 119
    ... of the Company's reportable segments (in millions): Eliminations and Unallocated Items Retail Pharmacy USA International Pharmaceutical Wholesale Consolidated For the Year Ended August 31, 2015 Sales to external customers Intersegment sales Total Sales Adjusted Operating Income Depreciation and...

  • Page 120
    ... Year Ended August 31, 2014 Adjusted Operating Income Acquisition-related amortization LIFO provision Store closure and other optimization costs Acquisition-related costs Increase in fair market value of warrants Gain on sale of business Operating Income For the Year Ended August 31, 2013 Adjusted...

  • Page 121
    ... in fiscal 2015: $9.0 billion for debt assumed; $11.0 billion for the Company's common stock issued; $2.6 billion of consideration attributable to WBAD; $8.1 billion related to the fair value of the Company's 45% investment in Alliance Boots; $26.6 billion in fair value of assets acquired; and $20...

  • Page 122
    ...sets forth the sales price ranges of the Company's common stock by quarter during the fiscal years ended August 31, 2015 and August 31, 2014 as reported by the Consolidated Transaction Reporting System. Quarter Ended February May November August Fiscal Year Fiscal 2015 Fiscal 2014 High Low High...

  • Page 123
    ... a combination of cash on hand and debt financing. Concurrently with the signing of the Merger Agreement, the Company entered into a bridge facility commitment letter (the "Commitment Letter"), dated October 27, 2015, with UBS Securities LLC and UBS AG, Stamford Branch for a $12.8 billion senior...

  • Page 124
    ... report on internal control over financial reporting in the year of consolidation. Alliance Boots represented approximately 49.2% of the Company's total assets as of August 31, 2015 and 21.7% of the Company's net sales for the year ended August 31, 2015. /s/ Stefano Pessina Stefano Pessina Executive...

  • Page 125
    ... Note 3 to the consolidated financial statements, the Company has elected to change its method of accounting for its equity investment and equity earnings in Alliance Boots to eliminate the three month reporting lag as of August 31, 2014 and for the years ended August 31, 2014 and 2013. We have also...

  • Page 126
    ... for the year ended August 31, 2015 of the Company and our report dated October 28, 2015 expressed an unqualified opinion on those financial statements and includes an explanatory paragraph on a change in accounting method for equity investment and equity earnings in Alliance Boots GmbH to eliminate...

  • Page 127
    ... management, including its Chief Executive Officer (CEO) and Chief Financial Officer (CFO). Upon completion of the Second Step Transaction on December 31, 2014, Alliance Boots became a consolidated subsidiary and ceased being accounted for under the equity method. As this occurred during fiscal 2015...

  • Page 128
    ...evaluation pursuant to Exchange Act Rule 13a-15(d) of the Company's internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) by the Company's management, including its CEO and CFO, except as noted below, no changes during the quarter ended August 31, 2015 were identified...

  • Page 129
    ... Code of Ethics for CEO and Financial Executives and Code of Conduct and Business Ethics, are available on the Company's website at investor.walgreensbootsalliance.com or, upon written request and free of charge, in printed hardcopy form. Written requests should be sent to Walgreens Boots Alliance...

  • Page 130
    ...2015 and 2014 Consolidated Statements of Equity, Earnings, Comprehensive Income and Cash Flows for the years ended August 31, 2015, 2014 and 2013 Notes to Consolidated Financial Statements Management's Report on Internal Control Reports of Independent Registered Public Accounting Firms (2) Financial...

  • Page 131
    ... SEC Document Reference 2.1* Purchase and Option Agreement by and among Walgreen Co., Alliance Boots GmbH and AB Acquisitions Holdings Limited dated June 18, 2012 and related annexes. Amendment No. 1, dated August 5, 2014, to the Purchase and Option Agreement and Walgreen Co. Shareholders...

  • Page 132
    ... 3.1 to Walgreens Boots Alliance, Inc.'s Current Report on Form 8-K (File No. 1-36759) filed with the SEC on October 16, 2015. Incorporated by reference to Exhibit 4.1 to Walgreen Co.'s registration statement on Form S-3ASR (File No. 333-198443) filed with the SEC on September 16, 2014. Incorporated...

  • Page 133
    ... and certain other investors party thereto. Amendment No. 1, dated August 5, 2014, to the Purchase and Option Agreement and Walgreen Co. Shareholders Agreement, by and among Walgreen Co., Alliance Boots GmbH, AB Acquisitions Holdings Limited, Walgreen Scotland Investments LP, KKR Sprint (European...

  • Page 134
    ... year ended August 31, 2013 (File No. 1-00604). Incorporated by reference to Exhibit 10.3 to Walgreen Co.'s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on January 14, 2013. 10.5 10.6 10.7 Form of Performance Share Award agreement (effective October 2015). Form of Stock Option...

  • Page 135
    ... the SEC on January 20, 2010. Incorporated by reference to Exhibit 10.11 to Walgreen Co.'s Annual Report on Form 10-K for the fiscal year ended August 31, 2011 (File No. 1-00604). 10.15 Form of Amendment to Stock Option Award agreements. 10.16 10.17 10.18 UK Sub-Plan under the Walgreens Boots...

  • Page 136
    ....26 Form of Stock Option Agreement (Benefit Indicator 516 and above) (effective September 1, 2011). Walgreen Co. 1986 Executive Deferred Compensation/Capital Accumulation Plan. Incorporated by reference to Exhibit 10.12 to Walgreen Co.'s Annual Report on Form 10-K for the fiscal year ended August...

  • Page 137
    ....4 to Walgreens Boots Alliance, Inc.'s Current Report on Form 8-K12B (File No. 1-36759) filed with the SEC on December 31, 2014. 10.38 10.39 Amendment No. 1 to the Walgreen Co. 2011 Executive Deferred Compensation Plan. 10.40 Walgreens Boots Alliance, Inc. Executive Deferred Profit-Sharing Plan...

  • Page 138
    ...10.48 Rules of the Alliance Boots 2012 Long Term Incentive Plan, as amended. Incorporated by reference to Exhibit 10.11 to Walgreens Boots Alliance, Inc.'s Quarterly Report on Form 10-Q for the quarter ended February 28, 2015 (File No. 1-36759) filed with the SEC on April 9, 2015. Incorporated by...

  • Page 139
    ...Boots Alliance, Inc.'s Quarterly Report on Form 10-Q for the quarter ended February 28, 2015 (File No. 1-36759) filed with the SEC on April 9, 2015. Incorporated by reference to Exhibit 99.1 to Walgreen Co.'s Registration Statement on Form S-8 (File No. 333-174811) filed with the SEC on June 9, 2011...

  • Page 140
    ... Walgreens Boots Alliance, Inc.'s Current Report on Form 8-K (File No. 1-36759) filed with the SEC on January 30, 2015. 10.68 10.69 Walgreens Boots Alliance, Inc. Long-Term Global Assignment Relocation Policy Secondment Agreement dated September 27, 2013 between Alliance Boots Management Services...

  • Page 141
    ....1 to Walgreen Co.'s Current Report on Form 8-K (File No. 1-00604) filed with the SEC on March 20, 2013. 10.83 Shareholders' Agreement, dated as of August 2, 2012, by and among Alliance Boots GmbH, AB Acquisition Holdings Limited and Walgreen Co. Framework Agreement, dated as of March 18, 2013, by...

  • Page 142
    ... by reference to Exhibit 10.1 to Walgreens Boots Alliance, Inc.'s Quarterly Report on Form 10-Q for the quarter ended May 31, 2015 (File No. 1-36759) filed with the SEC on July 9, 2015. Filed herewith. Filed herewith. Filed herewith. Filed herewith. Filed herewith. Filed herewith. 10.90 10.91 12...

  • Page 143
    ... SEC Document Reference 99.2 Alliance Boots GmbH interim condensed consolidated financial statements comprised of the Group interim consolidated condensed statement of financial position at December 31, 2014 and 2013, and the related Group interim consolidated condensed income statement...

  • Page 144
    .... WALGREENS BOOTS ALLIANCE, INC. October 28, 2015 By: /s/ George R. Fairweather George R. Fairweather Executive Vice President and Global Chief Financial Officer Pursuant to the requirements of the Securities and Exchange Act of 1934 this report has been signed below by the following persons on...

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  • Page 147
    ... 2015, Walgreens Boots Alliance, Inc. had approximately 70,250 stockholders of record. Investor information is available at http:// investor.walgreensbootsalliance.com. This includes charters of all committees of the board of directors, code of conduct and business ethics, code of ethics for CEO...

  • Page 148
    Contact us Walgreens Boots Alliance, Inc. 108 Wilmot Road Deerfield, IL 60015 +1 (847) 315-3700