UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)



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

For the Quarterly Period Ended May 31, ~~2017~~2018



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

For the transition period from _______to _______

Commission File Number

001-36759

WALGREENS BOOTS ALLIANCE, INC.

(Exact name of registrant as specified in its charter)



Delaware	47-1758322
(State of Incorporation)	(I.R.S. Employer Identification No.)



108 Wilmot Road, Deerfield, Illinois	60015
(Address of principal executive offices)	(Zip Code)

(847) 315-2500

(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 þ 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 þ No ☐

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



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

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to the Section 13(a) of the Exchange Act. ☐

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

Yes ☐ No þ

The number of shares outstanding of the registrant’s Common Stock, $.01 par value, as of May 31, ~~2017~~2018 was ~~1,070,096,486.~~992,411,822.

WALGREENS BOOTS ALLIANCE, INC.

FORM 10-Q FOR THE THREE AND NINE MONTHS ENDED MAY 31, ~~2017~~2018

TABLE OF CONTENTS

PART I. FINANCIAL INFORMATION



Item 1.	Consolidated Condensed Financial Statements (Unaudited)
	a)	Balance Sheets	3
	b)	Statement of Equity	4
	c)	Statements of Earnings	56
	d)	Statements of Comprehensive Income	67
	e)	Statements of Cash Flows	78
	f)	Notes to Financial Statements	9
Item 2.	Management’s discussion and analysis of financial condition and results of operations		2831
Item 3.	Quantitative and qualitative disclosure about market risk		4851
Item 4.	Controls and procedures		4851

PART II. OTHER INFORMATION



Item 1.	Legal proceedings	4952
Item 1A.	Risk factors	4952
Item 2.	Unregistered sales of equity securities and use of proceeds	5052
Item 6.	Exhibits	5152

Part I. Financial Information


~~Item 1.~~	~~Consolidated Condensed Financial Statements (Unaudited)~~

Item 1. Consolidated Condensed Financial Statements (Unaudited)

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED BALANCE SHEETS

(UNAUDITED)

(in millions, except shares and per share amounts)


	May 31, 2017			August 31, 2016			May 31, 2018			August 31, 2017
Assets
Current assets:
Cash and cash equivalents	$	12,253		$	9,807		$	1,818		$	3,301
Accounts receivable, net	6,339			6,260
Accounts receivable, net (see note 18)							7,159			6,528
Inventories	8,681			8,956			9,889			8,899
Other current assets	879			860			1,122			1,025
Total current assets	28,152			25,883			19,988			19,753
Non-current assets:
Property, plant and equipment, net	13,535			14,335			13,938			13,642
Goodwill	15,516			15,527			17,089			15,632
Intangible assets, net	10,208			10,302			12,111			10,156
Equity method investments (see note 4)	6,323			6,174
Equity method investments (see note 5)							6,272			6,320
Other non-current assets	439			467			754			506
Total non-current assets	46,021			46,805			50,164			46,256
Total assets	$	74,173		$	72,688		$	70,152		$	66,009

Liabilities and equity
Current liabilities:
Short-term borrowings	$	4,838		$	323
Trade accounts payable (see note 18)	11,528			11,000
Short-term debt							$	2,587		$	251
Trade accounts payable (see note 16)							13,089			12,494
Accrued expenses and other liabilities	5,065			5,484			5,435			5,473
Income taxes	282			206			371			329
Total current liabilities	21,713			17,013			21,482			18,547
Non-current liabilities:
Long-term debt	14,372			18,705			12,456			12,684
Deferred income taxes	2,403			2,644			1,973			2,281
Other non-current liabilities	4,201			4,045			5,771			4,223
Total non-current liabilities	20,976			25,394			20,200			19,188
Commitments and contingencies
Commitments and contingencies (see note 10)
Equity:
Preferred stock $.01 par value; authorized 32 million shares, none issued	—			—			—			—
Common stock $.01 par value; authorized 3.2 billion shares; issued 1,172,513,618 at May 31, 2017 and August 31, 2016	12			12
Common stock $.01 par value; authorized 3.2 billion shares; issued 1,172,513,618 at May 31, 2018 and August 31, 2017							12			12
Paid-in capital	10,389			10,111			10,444			10,339
Employee stock loan receivable	—			(1		)
Retained earnings	29,744			27,684			32,460			30,137
Accumulated other comprehensive loss	(3,303		)	(2,992		)	(2,792		)	(3,051		)
Treasury stock, at cost; 102,417,132 shares at May 31, 2017 and 89,527,027 at August 31, 2016	(6,242		)	(4,934		)
Treasury stock, at cost; 180,101,796 shares at May 31, 2018 and 148,664,548 at August 31, 2017							(12,388		)	(9,971		)
Total Walgreens Boots Alliance, Inc. shareholders’ equity	30,600			29,880			27,736			27,466
Noncontrolling interests	884			401			734			808
Total equity	31,484			30,281			28,470			28,274
Total liabilities and equity	$	74,173		$	72,688		$	70,152		$	66,009

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

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED ~~STATEMENT~~STATEMENTS OF EQUITY

(UNAUDITED)

For the nine months ended May 31, 2018 and 2017

(in millions, except shares)


	Equity attributable to Walgreens Boots Alliance, Inc.																								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 (loss) income			Retained earnings			Noncontrolling interests			Total equity			Common stock shares		Common stock amount		Treasury stock amount			Paid-in capital		Employee stock loan receivable		Accumulated other comprehensive (loss) income			Retained earnings			Noncontrolling interests			Total equity
August 31, 2016	1,082,986,591		$	12	$	(4,934	)	$	10,111	$	(1	)	$	(2,992	)	$	27,684		$	401		$	30,281
August 31, 2017																									1,023,849,070		$	12	$	(9,971	)	$	10,339	$	—	$	(3,051	)	$	30,137		$	808		$	28,274
Net earnings	—		—		—			—		—			—			3,276			18			3,294			—		—		—			—		—		—			3,512			5			3,517
Other comprehensive income (loss), net of tax	—		—		—			—		—			(311		)	—			(38		)	(349		)
Other comprehensive income, net of tax																									—		—		—			—		—		259			—			7			266
Dividends declared	—		—		—			—		—			—			(1,216		)	(12		)	(1,228		)	—		—		—			—		—		—			(1,189		)	(86		)	(1,275		)
Treasury stock purchases	(17,419,955	)	—		(1,457		)	—		—			—			—			—			(1,457		)	(34,499,913	)	—		(2,525		)	—		—		—			—			—			(2,525		)
Employee stock purchase and option plans	4,529,850		—		149			26		1			—			—			—			176			3,062,665		—		108			10		—		—			—			—			118
Stock-based compensation	—		—		—			71		—			—			—			—			71			—		—		—			91		—		—			—			—			91
Noncontrolling interests acquired and arising on business combinations	—		—		—			181		—			—			—			515			696
May 31, 2017	1,070,096,486		$	12	$	(6,242	)	$	10,389	$	—		$	(3,303	)	$	29,744		$	884		$	31,484
Noncontrolling interests contribution																									—		—		—			4		—		—			—			—			4
May 31, 2018																									992,411,822		$	12	$	(12,388	)	$	10,444	$	—	$	(2,792	)	$	32,460		$	734		$	28,470



	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 (loss) income			Retained earnings			Noncontrolling interests			Total equity
August 31, 2016	1,082,986,591		$	12	$	(4,934	)	$	10,111	$	(1	)	$	(2,992	)	$	27,684		$	401		$	30,281
Net earnings	—		—		—			—		—			—			3,276			18			3,294
Other comprehensive (loss), net of tax	—		—		—			—		—			(311		)	—			(38		)	(349		)
Dividends declared	—		—		—			—		—			—			(1,216		)	(12		)	(1,228		)
Treasury stock purchases	(17,419,955	)	—		(1,457		)	—		—			—			—			—			(1,457		)
Employee stock purchase and option plans	4,529,850		—		149			26		1			—			—			—			176
Stock-based compensation	—		—		—			71		—			—			—			—			71
Noncontrolling interests acquired and arising on business combinations	—		—		—			181		—			—			—			515			696
May 31, 2017	1,070,096,486		$	12	$	(6,242	)	$	10,389	$	—		$	(3,303	)	$	29,744		$	884		$	31,484

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

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF EARNINGS

(UNAUDITED)

(in millions, except per share amounts)


	Three months ended					Nine months ended						Three months ended May 31,						Nine months ended May 31,
	May 31, 2017			May 31, 2016		May 31, 2017			May 31, 2016			2018			2017			2018			2017
Sales	$	30,118		$	29,498	$	88,065		$	88,715		$	34,334		$	30,118		$	98,095		$	88,065
Cost of sales	22,973			22,065		66,243			65,996			26,554			22,973			74,878			66,243
Gross profit	7,145			7,433		21,822			22,719			7,780			7,145			23,217			21,822

Selling, general and administrative expenses	5,712			5,903		17,522			17,861			6,231			5,712			18,456			17,522
Equity earnings in AmerisourceBergen	84			3		143			3			52			84			142			143
Operating income	1,517			1,533		4,443			4,861			1,601			1,517			4,903			4,443

Other income (expense)	(8		)	28		(22		)	(525		)	(4		)	(8		)	(132		)	(22		)
Earnings before interest and income tax provision	1,509			1,561		4,421			4,336			1,597			1,509			4,771			4,421

Interest expense, net	155			147		500			425			157			155			457			500
Earnings before income tax provision	1,354			1,414		3,921			3,911			1,440			1,354			4,314			3,921
Income tax provision	168			322		634			790			109			168			839			634
Post tax earnings from other equity method investments	(21		)	15		7			35
Post tax earnings (loss) from other equity method investments												15			(21		)	42			7
Net earnings	1,165			1,107		3,294			3,156			1,346			1,165			3,517			3,294
Net earnings attributable to noncontrolling interests	3			4		18			13			4			3			5			18
Net earnings attributable to Walgreens Boots Alliance, Inc.	$	1,162		$	1,103	$	3,276		$	3,143		$	1,342		$	1,162		$	3,512		$	3,276

Net earnings per common share:
Basic	$	1.08		$	1.02	$	3.03		$	2.90		$	1.35		$	1.08		$	3.52		$	3.03
Diluted	$	1.07		$	1.01	$	3.02		$	2.88		$	1.35		$	1.07		$	3.51		$	3.02

Dividends declared per share	$	0.375		$	0.360	$	1.125		$	1.080		$	0.400		$	0.375		$	1.200		$	1.125

Weighted average common shares outstanding:
Basic	1,077.1			1,080.8		1,079.6			1,083.3			992.1			1,077.1			996.4			1,079.6
Diluted	1,082.6			1,088.2		1,085.5			1,091.7			995.3			1,082.6			1,000.6			1,085.5

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

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF COMPREHENSIVE INCOME

(UNAUDITED)

(in millions)


	Three months ended						Nine months ended						Three months ended May 31,						Nine months ended May 31,
	May 31, 2017			May 31, 2016			May 31, 2017			May 31, 2016			2018			2017			2018			2017
Comprehensive income:
Net earnings	$	1,165		$	1,107		$	3,294		$	3,156		$	1,346		$	1,165		$	3,517		$	3,294

Other comprehensive income (loss), net of tax:
Pension/postretirement obligations	5			3			1			4			(2		)	5			(4		)	1
Unrealized gain on cash flow hedges	1			—			3			2			1			1			2			3
Unrecognized loss on available-for-sale investments	(1		)	(172		)	(2		)	(259		)	—			(1		)	—			(2		)
Share of other comprehensive loss of equity method investments	2			—			(3		)	—
Share of other comprehensive income (loss) of equity method investments													11			2			13			(3		)
Currency translation adjustments	504			769			(348		)	(837		)	(652		)	504			255			(348		)
Total other comprehensive income (loss)	511			600			(349		)	(1,090		)	(642		)	511			266			(349		)
Total comprehensive income (loss)	1,676			1,707			2,945			2,066
Total comprehensive income													704			1,676			3,783			2,945

Comprehensive income (loss) attributable to noncontrolling interests	8			12			(20		)	(15		)	(9		)	8			12			(20		)
Comprehensive income (loss) attributable to Walgreens Boots Alliance, Inc.	$	1,668		$	1,695		$	2,965		$	2,081
Comprehensive income attributable to Walgreens Boots Alliance, Inc.													$	713		$	1,668		$	3,771		$	2,965

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

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS

(UNAUDITED)

(in millions)

Nine months ended
May 31, 2017 May 31, 2016
Cash flows from operating activities:

Net earnings $ 3,294
$ 3,156
Adjustments to reconcile net earnings to net cash provided by operating activities:

Depreciation and amortization 1,244
1,271
Change in fair value of warrants and related amortization —
845
Deferred income taxes (211 ) (250 )
Stock compensation expense 71
87
Equity earnings from equity method investments (150 ) (38 )
Other 289
(14 )
Changes in operating assets and liabilities:

Accounts receivable, net (153 ) 8
Inventories 259
(481 )
Other current assets 22
21
Trade accounts payable 821
686
Accrued expenses and other liabilities (268 ) (247 )
Income taxes 6
135
Other non-current assets and liabilities 13
10
Net cash provided by operating activities 5,237
5,189

Cash flows from investing activities:

Additions to property, plant and equipment (912 ) (904 )
Proceeds from sale leaseback transactions 436
60
Proceeds from sale of businesses —
68
Proceeds from sale of other assets 39
116
Business and intangible asset acquisitions, net of cash acquired (63 ) (115 )
Investment in AmerisourceBergen —
(1,169 )
Other 48
(17 )
Net cash used for investing activities (452 ) (1,961 )

Cash flows from financing activities:

Proceeds and payments from short-term borrowings, net 277
(658 )
Payments of long-term debt (40 ) (31 )
Stock purchases (1,457 ) (1,152 )
Proceeds related to employee stock plans 174
175
Cash dividends paid (1,228 ) (1,174 )
Other (59 ) (54 )
Net cash used for financing activities (2,333 ) (2,894 )

Effect of exchange rate changes on cash and cash equivalents (6 ) (43 )

Changes in cash and cash equivalents:


Net increase in cash and cash equivalents	2,446		291
					Nine months ended May 31,
					2018			2017
Cash flows from operating activities:
Net earnings					$	3,517		$	3,294
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization					1,300			1,244
Deferred income taxes					(382		)	(211		)
Stock compensation expense					91			71
Equity earnings from equity method investments					(184		)	(150		)
Other					266			289
Changes in operating assets and liabilities:
Accounts receivable, net					(762		)	(153		)
Inventories					230			259
Other current assets					(4		)	22
Trade accounts payable					627			821
Accrued expenses and other liabilities					10			(268		)
Income taxes					793			6
Other non-current assets and liabilities					(117		)	13
Net cash provided by operating activities					5,385			5,237

Cash flows from investing activities:
Additions to property, plant and equipment					(983		)	(912		)
Proceeds from sale-leaseback transactions					—			436
Proceeds from sale of other assets					221			39
Business and intangible asset acquisitions, net of cash acquired					(4,220		)	(63		)
Other					(129		)	48
Net cash used for investing activities					(5,111		)	(452		)

Cash flows from financing activities:
Net change in short-term debt with maturities of 3 months or less					596			277
Proceeds from debt					5,043			—
Payments of debt					(3,507		)	(40		)
Stock purchases					(2,525		)	(1,457		)
Proceeds related to employee stock plans					118			174
Cash dividends paid					(1,291		)	(1,228		)
Other					(217		)	(59		)
Net cash used for financing activities					(1,783		)	(2,333		)

Effect of exchange rate changes on cash and cash equivalents					26			(6		)
Changes in cash and cash equivalents:
Net (decrease) increase in cash and cash equivalents					(1,483		)	2,446
Cash and cash equivalents at beginning of period	9,807		3,000		3,301			9,807
Cash and cash equivalents at end of period	$	12,253	$	3,291	$	1,818		$	12,253

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

WALGREENS BOOTS ALLIANCE, INC. AND SUBSIDIARIES

NOTES TO FINANCIAL STATEMENTS

(UNAUDITED)

Note 1. Accounting policies

Basis of presentation

The Consolidated Condensed Financial Statements of Walgreens Boots Alliance, Inc. (“Walgreens Boots Alliance” or the “Company”) included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission regarding interim financial reporting. The Consolidated Condensed Financial Statements include all subsidiaries in which the Company holds a controlling interest. Investments in less than majority-owned subsidiaries 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.

The Consolidated Condensed ~~Balance Sheets as of May 31, 2017 and August 31, 2016, the Consolidated Condensed~~Financial Statements of Equity for the nine months ended May 31, 2017, the Consolidated Condensed Statements of Cash Flows for the nine months ended May 31, 2017 and May 31, 2016, the Consolidated Condensed Statements of Earnings and the Consolidated Condensed Statements of Comprehensive Income for the three and nine months ended May 31, 2017 and May 31, 2016included herein are unaudited. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States ~~of America~~ (“GAAP”) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited Consolidated Condensed Financial Statements should be read in conjunction with the audited financial statements and the notes thereto included in the Walgreens Boots Alliance Annual Report on Form 10-K for the fiscal year ended August 31, 2016. The Company has evaluated subsequent events from the balance sheet date through the date the financial statements were issued and determined there were no subsequent events to disclose other than as disclosed in notes 1, 7 and 10.2017.

In the opinion of ~~the Company,~~management, the unaudited Consolidated Condensed Financial Statements for the interim periods presented include all adjustments (consisting only of normal recurring adjustments) necessary to present a fair statement of the results for such interim periods. The influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms, strategic transactions including acquisitions, changes in laws, and general economic conditions in the markets in which the Company operates, and other factors on the Company’s operations and net earnings for any period may not be comparable to the same period in previous years. With respect to the Company’s Retail Pharmacy USA segment, 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.”~~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 ~~margin~~profit margins and gross profit dollars making the Company’s operations or net earnings for any period incomparable.

~~To improve comparability, certain classification changes were made to prior periods to conform to current year classifications. These reclassifications were made in the fourth quarter of fiscal 2016.~~

Note 2. Acquisitions

~~Terminated acquisition of Rite Aid Corporation (“Rite Aid”) and related matters~~

On October 27, 2015, Walgreens Boots Alliance entered into an Agreement and Plan of Merger with Rite Aid and Victoria Merger Sub, Inc., a wholly-owned subsidiary of Walgreens Boots Alliance (as amended as described below, the “Merger Agreement”), pursuant to which the Company agreed, subject to the terms and conditions thereof, to acquire Rite Aid, a drugstore chain in the United States. The Merger Agreement was amended by Amendment No. 1 thereto on January 29, 2017.

In connection with regulatory review of the merger contemplated by the Merger Agreement, on December 20, 2016, Walgreens Boots Alliance and Rite Aid announced that they had entered into an agreement (the “Fred’s Asset Purchase Agreement”), subject to the terms and conditions thereof, to sell certain Rite Aid stores and certain assets related to store operations to Fred’s, Inc. (“Fred’s”) for $950 million in an all-cash transaction. The transaction was subject to the approval and completion of the acquisition of Rite Aid by Walgreens Boots Alliance pursuant to the Merger Agreement.

On June 28, 2017, Walgreens Boots Alliance and Rite Aid entered into a mutual termination agreement (the “Termination Agreement”) pursuant to which the parties agreed to terminate the Merger Agreement, including all schedules and exhibits thereto, and all ancillary agreements contemplated thereby, or entered pursuant thereto (other than as expressly specified) (collectively with the Merger Agreement, the “Transaction Documents”), effective as of June 28, 2017. Pursuant to the Termination Agreement, the Company agreed to pay Rite Aid the termination fee of $325 million, which amount the Company plans to pay on or before June 30, 2017 in full satisfaction of any amounts required to be paid by the Company under the Merger Agreement and other Transaction Documents. The parties also agreed to release each other from, among other things,

any and all liability, claims, rights, actions, causes of action, damages, expenses and fees, however arising, in connection with, arising out of or related to the Transaction Documents, the transactions contemplated therein or thereby or certain related matters.

On June 28, 2017, following the termination of the Merger Agreement, the Fred’s Asset Purchase Agreement was terminated. In connection with the termination of the Fred’s Asset Purchase Agreement, the Company agreed to reimburse certain of Fred’s transaction costs in an amount not to exceed $25 million in full satisfaction of any amounts required to be paid by the Company under the Fred’s Asset Purchase Agreement. The Company expects to pay the applicable amount during the fourth quarter of fiscal 2017.

~~See note 7, Borrowings and note 10, Commitments and contingencies for additional information relating to the termination of the Merger Agreement and related matters.~~

~~Pending acquisition~~Acquisition of certain Rite Aid Corporation (“Rite Aid”) assets

On ~~June 28,~~September 19, 2017, the Company ~~entered into~~announced that it had secured regulatory clearance for an ~~Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rite Aid, pursuant~~amended and restated asset purchase agreement to ~~which the Company agreed, subject to the terms and conditions thereof, to acquire 2,186~~purchase 1,932 stores, three distribution centers and related inventory from Rite ~~Aid.~~Aid for $4.375 billion in cash and other consideration. The purchases of these stores have been accounted for as business combinations and occurred in waves during fiscal 2018. The Company purchased 390 stores for total cash consideration of $820 million for the three months ended May 31, 2018 and 1,932 stores for total cash consideration of $4.2 billion for the nine months ended May 31, 2018. The transition of the three distribution centers and related inventory is expected to begin during fiscal 2019 and remains subject to closing conditions set forth in the amended and restated asset purchase agreement.

As of May 31, 2018, the Company had not completed the analysis to assign fair values to all tangible and intangible assets acquired and therefore the purchase price allocation has not been finalized. 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. During the three months ended May 31, 2018, the Company recorded certain measurement period adjustments to identified assets acquired and liabilities assumed based on additional information regarding such assets and liabilities, which did not have a material impact on the purchase price allocation. The following table summarizes the consideration for the ~~transaction will be $5.175 billion in cash,~~purchases and the ~~assumption by the Company~~preliminary amounts of identified assets acquired and liabilities assumed as of the ~~related real estate leases~~nine months ended May 31, 2018.



Consideration	$	4,330

Identifiable assets acquired and liabilities assumed
Inventories	$	1,291
Property, plant and equipment	494
Intangible assets	2,028
Accrued expenses and other liabilities	(54		)
Deferred income taxes	5
Other non-current liabilities	(795		)
Total identifiable net assets	2,969
Goodwill	$	1,361

The preliminary identified definite-lived intangible assets were as follows:



Definite-lived intangible assets	Weighted-average useful life (in years)	Amount (in millions)
Customer relationships	12	$	1,850
Favorable lease interests	6	158
Trade names and trademarks	2	20
Total		$	2,028

Consideration includes cash of $4,157 million and the ~~grant~~fair value of anthe option granted to Rite Aid ~~exercisable through May 2019 and subject to certain conditions,~~ to become a member of the Company’s group purchasing organization, Walgreens Boots Alliance Development GmbH. The fair value for this option was determined using the income approach methodology. The fair value estimates are based on the market compensation for such services and appropriate discount rate, as relevant, that market participants would consider when estimating fair values.

The goodwill of $1,361 million arising from the business combinations primarily reflects the expected operational synergies and cost savings generated from the Store Optimization Program as well as the expected growth from new customers. See note 3, exit and disposal activities, for additional information. The goodwill was allocated to the Retail Pharmacy USA segment. Substantially all of the goodwill recognized is expected to be deductible for income tax purposes.

The fair value for customer relationships was determined using the multi-period excess earnings method, a form of the income approach. Real property fair values were determined using primarily the income approach and sales comparison approach. The fair value measurements of the intangible assets are based on significant inputs not observable in the market, and thus represent Level 3 measurements. The fair value estimates for the intangible assets are based on projected discounted cash flows, historical and projected financial information, and attrition rates, as relevant, that market participants would consider when estimating fair values.

The following table presents supplemental unaudited condensed pro forma consolidated sales for the three and nine months ended May 31, 2018 and 2017 as if all 1,932 stores acquired under the amended and restated asset purchase agreement had occurred on September 1, 2016. Pro forma net earnings of the Company, ~~will also assume certain limited store-related liabilities~~assuming these purchases had occurred at the beginning of each period presented, would not be materially different from the results reported. See note 3, exit and disposal activities, for additional information. The unaudited condensed pro forma information has been prepared for comparative purposes only and is not intended to be indicative of what the Company’s results would have been had the purchases occurred at the beginning of the periods presented or results which may occur in the future.



	Three months ended May 31,				Nine months ended May 31,
(in millions)	2018		2017		2018		2017
Sales	$	34,366	$	32,496	$	102,059	$	95,378

Actual sales from acquired Rite Aid stores for the three and nine months ended May 31, 2018 included in the Consolidated Statement of Earnings are as follows:



(in millions)	Three months ended May 31, 2018		Nine months ended May 31, 2018
Sales	$	2,223	$	3,038

The 1,932 Rite Aid stores acquired did not have a material impact on net earnings of the Company for the three and nine months ended May 31, 2018.

AllianceRx Walgreens Prime

On March 31, 2017, Walgreens Boots Alliance and pharmacy benefit manager Prime Therapeutics LLC (“Prime”) closed a transaction to form a combined central specialty pharmacy and mail services company AllianceRx Walgreens Prime, as part of a strategic alliance. AllianceRx Walgreens Prime is consolidated by Walgreens Boots Alliance and reported within the ~~transaction.~~Retail Pharmacy USA division in its financial statements. The Company accounted for this acquisition of Prime’s specialty pharmacy and mail services business as a business combination involving noncash purchase consideration of $720 million consisting of the issuance of an equity interest in AllianceRx Walgreens Prime.

The ~~transaction is subject to~~Company has completed the ~~expiration or termination~~purchase accounting for the AllianceRx Walgreens Prime transaction. The following table summarizes the consideration for the acquisition and the amounts of ~~applicable waiting periods under~~identified assets acquired and liabilities assumed at the ~~Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary closing conditions. The initial closing is expected to occur within the next six months. Upon the initial closing~~date of the transaction (in millions).



Consideration	$	720

Identifiable assets acquired and liabilities assumed
Accounts receivable	$	217
Inventories	149
Property, plant and equipment	11
Intangible assets	331
Trade accounts payable	(90		)
Accrued expenses and other liabilities	(1		)
Total identifiable net assets	617
Goodwill	$	103

The identified intangible assets primarily include purchasing and payer contracts. These contracts are estimated to have a weighted average useful life of 15 years. The goodwill of $103 million arising from the ~~Company will begin acquiring~~transaction consists of expected purchasing synergies, operating efficiencies by benchmarking performance and applying best practices across the ~~stores~~combined company, consolidation of operations, reductions in selling, general and ~~related~~administrative expenses and combining workforces. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes.

In accordance with ASC Topic 810, Consolidation, the noncontrolling interest was recognized based on its proportionate interest in the identifiable net assets ~~on a phased basis.~~of AllianceRx Walgreens Prime. The difference between the carrying amount of the noncontrolling interest and the fair value recognized as consideration in the business combination is recognized as additional paid in capital.

Note ~~2. Restructuring~~3. Exit and disposal activities

On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) as part of an initiative to optimize store locations within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Store Optimization Program includes plans to close approximately 600 stores and related assets across the U.S. The actions under the Store Optimization Program commenced in March 2018 and are expected to take place over an 18 month period.

and other exit costs. The Company expects to incur pre-tax charges of approximately $270 million for lease obligations and other real estate costs and approximately $180 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.

Costs related to the Store Optimization Program, which were primarily recorded in selling, general and administrative expenses for the Company's Retail Pharmacy USA segment included in the three and nine months ended May 31, 2018, are as follows (in millions):



Three months ended May 31, 2018
Lease obligations and other real estate costs	2
Employee severance and other exit costs	22
Total costs	$	24



Nine months ended May 31, 2018
Lease obligations and other real estate costs	2
Employee severance and other exit costs	22
Total costs	$	24

The changes in liabilities related to the Store Optimization Program for the nine months ended May 31, 2018 include the following (in millions):



	Lease obligations and other real estate costs		Employee severance and other exit costs			Total
Balance at August 31, 2017	$	—	$	—		$	—
Costs	2		22			24
Payments	—		(8		)	(8		)
Other - non cash¹	30		—			30
Balance at May 31, 2018	$	32	$	14		$	46


¹	Represents unfavorable lease liabilities from acquired Rite Aid stores.

On April 8, 2015, the Walgreens Boots Alliance 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 implemented and built on the cost-reduction initiative previously announced by the Company on August 6, 2014 and included plans to close stores across the U.S.; reorganize corporate and field operations; drive operating efficiencies; and streamline information technology and other functions. The actions under the Cost Transformation Program ~~focus~~focused primarily on the Retail Pharmacy USA ~~segment. From inception through May 31, 2017,~~segment, but included activities from all segments. The Company completed the ~~Company incurred pre-tax charges~~Cost Transformation Program in the fourth quarter of ~~$1.6 billion ($677 million related to asset impairment charges, $557 million~~fiscal 2017.

The changes in ~~real estate costs and $324 million in severance and other business transition and exit costs)~~liabilities related to the Cost Transformation Program for the nine months ended May 31, 2018 include the following (in millions):



	Real estate costs			Severance and other business transition and exit costs			Total
Balance at August 31, 2017	$	521		$	79		$	600
Payments	(112		)	(68		)	(180		)
Other - non cash	20			(1		)	19
Currency translation adjustments	—			(1		)	(1		)
Balance at May 31, 2018	$	429		$	9		$	438

Total costs by segment, which ~~are~~were primarily recorded ~~within~~in selling, general and administrative ~~expenses. Restructuring charges are recognized as~~expenses included in the ~~costs are incurred in accordance with GAAP.~~

~~Restructuring costs by segment~~three and nine months ended May 31, 2017, are as follows (in millions):


Three months ended May 31, 2017	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.		Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
Asset impairments	$	96	$	18	$	—	$	114	$	96	$	18	$	—	$	114
Real estate costs	15		—		—		15		15		—		—		15
Severance and other business transition and exit costs	18		8		16		42		18		8		16		42
Total restructuring costs	$	129	$	26	$	16	$	171

Three months ended May 31, 2016
Asset impairments	$	48	$	—	$	—	$	48
Real estate costs	—		—		—		—
Severance and other business transition and exit costs	12		6		7		25
Total restructuring costs	$	60	$	6	$	7	$	73
Total costs									$	129	$	26	$	16	$	171

Nine months ended May 31, 2017 Retail Pharmacy USA Retail Pharmacy International Pharmaceutical Wholesale Walgreens Boots Alliance, Inc.
Asset impairments $ 207
$ 21
$ 1
$ 229
Real estate costs 264
—
—
264
Severance and other business transition and exit costs 46
30
23
99
Total restructuring costs $ 517
$ 51
$ 24
$ 592

Nine months ended May 31, 2016

Asset impairments $ 73
$ —
$ —
$ 73
Real estate costs 52
—
—
52
Severance and other business transition and exit costs 45
14
7
66
Total restructuring costs $ 170
$ 14
$ 7
$ 191

~~The changes in accrued expenses and other liabilities related to the Cost Transformation Program include the following (in millions):~~

Asset
impairments

Real estate
costs

Severance and
other business
transition and
exit costs
Total
Balance at August 31, 2016 $ —
$ 248
$ 27
$ 275
Restructuring costs 229
264
99
592
Payments —
(51 ) (80 ) (131 )
Other - non cash (229 ) —
—
(229 )
Currency translation adjustments —
—
—
—
Balance at May 31, 2017 $ —
$ 461
$ 46
$ 507



Nine months ended May 31, 2017	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
Asset impairments	$	207	$	21	$	1	$	229
Real estate costs	264		—		—		264
Severance and other business transition and exit costs	46		30		23		99
Total costs	$	517	$	51	$	24	$	592

Note 3.4. Operating leases

Initial ~~lease term~~terms for leased premises in the U.S. isare 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 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~~Historically, the Company has entered into several sale-leaseback transactions. For the nine months ended May 31, ~~2017 and~~2018, the Company did not record any proceeds from sale-leaseback transactions. For the nine months ended May 31, ~~2016,~~2017, the Company recorded proceeds from sale-leaseback transactions of $436 million and $60 million, respectively. The Company has determined it no longer has continuing involvement related to these transactions and in accordance with the accounting standards related to sale-leaseback transactions has recognized any loss on sale immediately, any gain on sale was deferred and amortized over the life of the lease. Gains and losses are recorded within selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.million.

The Company provides for future costs related to closed locations. The liability is based on the present value of future rent obligations and other related costs (net of estimated sublease rent) to the first lease option date. During the three and nine months ended May 31, ~~2017,~~2018, the Company recorded charges of ~~$25~~$21 million and ~~$289~~$88 million for facilities that were ~~closed or relocated under long-term leases, including stores closed through the Company’s restructuring activities.~~closed. This compares to ~~$16~~$25 million and ~~$91~~$289 million for the three and nine months ended May 31, ~~2016.~~2017. These charges are reported in selling, general and administrative expenses in the Consolidated Condensed Statements of Earnings.

The changes in reserve for facility closings and related lease termination charges primarily in other non-current liabilities, include the following (in millions):


	For the nine months ended May 31, 2017			For the twelve months ended August 31, 2016			For the nine months ended May 31, 2018			For the twelve months ended August 31, 2017
Balance at beginning of period	$	466		$	446		$	718		$	466
Provision for present value of non-cancellable lease payments on closed facilities	271			134			34			344
Assumptions about future sublease income, terminations and changes in interest rates	(7		)	(34		)
Interest accretion	25			27
Changes in assumptions							7			13
Accretion expense							47			37
Other - non cash¹							30			—
Cash payments, net of sublease income	(100		)	(107		)	(159		)	(142		)
Balance at end of period	$	655		$	466		$	677		$	718


¹	Represents unfavorable lease liabilities from acquired Rite Aid stores.

As of May 31, ~~2017,~~2018, the Company remains secondarily liable on 7071 leases. The maximum potential undiscounted future payments are ~~$330~~$311 million as of May 31, ~~2017.~~2018.

Note 4.5. Equity method investments

Equity method investments as of May 31, ~~2017~~2018 and August 31, ~~2016,~~2017, are as follows (in millions, except percentages):


	May 31, 2017			August 31, 2016			May 31, 2018			August 31, 2017
	Carrying value		Ownership percentage	Carrying value		Ownership percentage	Carrying value		Ownership percentage	Carrying value		Ownership percentage
AmerisourceBergen	$	5,051	26%	$	4,964	24%	$	5,120	26%	$	5,024	26%
Others	1,272		8% - 50%	1,210		12% - 50%	1,152		8% - 50%	1,296		8% - 50%
Total	$	6,323		$	6,174		$	6,272		$	6,320

AmerisourceBergen investment

As of May 31, ~~2017~~2018 and August 31, ~~2016,~~2017, the Company owned 56,854,867 AmerisourceBergen Corporation (“AmerisourceBergen”) common shares, representing approximately 26% ~~and 24%~~ of the outstanding AmerisourceBergen common ~~stock, respectively.~~stock. The Company accounts for its equity investment in AmerisourceBergen using the equity method of accounting, with the net earnings attributable to the Company’s investment being classified within the operating income of its Pharmaceutical Wholesale segment. Due to the timing and availability of financial information of AmerisourceBergen, the Company accounts for this equity method investment on a financial reporting lag of two months. Equity earnings from AmerisourceBergen isare reported as a separate line in the Consolidated Condensed Statements of Earnings. The level 1 fair market value of the Company’s equity investment in AmerisourceBergen common stock at May 31, ~~2017~~2018 is ~~$5.2~~$4.7 billion.

~~The~~As of May 31, 2018, the Company’s investment in AmerisourceBergen carrying value exceeded its proportionate share of the net assets of AmerisourceBergen by ~~$4.4~~$4.2 billion. This premium of ~~$4.4~~$4.2 billion was recognized as part of the carrying value in the Company’s equity investment in AmerisourceBergen. The difference was primarily related to goodwill and the fair value of AmerisourceBergen intangible assets.

Other investments

The Company’s other equity method investments include its investments in Guangzhou Pharmaceuticals Corporation (“Guangzhou Pharmaceuticals”) and Nanjing Pharmaceutical Corporation Limited, the Company’s pharmaceutical wholesale investments in China; and the equity method investment retained through the sale of a majority interest in Option Care Inc. in fiscal 2015.

The Company reported $15 million of post-tax equity earnings and $21 million of post-tax equity losses ~~and $15 million of post-tax equity earnings~~ from other equity method investments ~~other than AmerisourceBergen~~ for the three months ended May 31, ~~2017~~2018 and May 31, ~~2016,~~2017, respectively. The Company reported $42 million and $7 million of post-tax equity earnings ~~and $35 million of post-tax equity earnings~~ from other equity method investments ~~other than AmerisourceBergen~~ for the nine months ended May 31, ~~2017~~2018 and May 31, ~~2016,~~2017, respectively. During the nine month period ended May 31, 2018, the Company recorded an impairment of $170 million in its equity interest in Guangzhou Pharmaceuticals, which was included in other income (expense) in the Consolidated Condensed Statements of Earnings. The fair value of the Company’s equity interest in Guangzhou Pharmaceuticals was determined using the proposed sale price and thus represents Level 3 measurement. During the three months ended May 31, 2018, the Company completed the sale of a 30 percent interest in Guangzhou Pharmaceuticals to its joint venture partner Guangzhou Baiyunshan Pharmaceutical Holdings resulting in a $172 million reduction in carrying value and a $8 million cumulative translation adjustment loss.

~~Note 5. Acquisitions~~

~~AllianceRx Walgreens Prime~~

On March 31, 2017, Walgreens Boots Alliance and pharmacy benefit manager Prime Therapeutics LLC ("Prime") closed a transaction to form a combined central specialty pharmacy and mail services company AllianceRx Walgreens Prime, as part of a strategic alliance. AllianceRx Walgreens Prime is consolidated by Walgreens Boots Alliance and reported within the Retail

Pharmacy USA division in its financial statements. The Company accounted for this acquisition of Prime’s specialty pharmacy and mail services business as a business combination involving noncash purchase consideration of $720 million consisting of the issuance of an equity interest in AllianceRx Walgreens Prime.

As of May 31, 2017, the Company had not completed the analysis to assign fair values to all tangible and intangible assets acquired and therefore the purchase price allocation 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 for the acquisition and the preliminary amounts of identified assets acquired and liabilities assumed at the date of the transaction (in millions).

May 31, 2017
Total consideration $ 720

Identifiable assets acquired and liabilities assumed
Accounts receivable, net $ 233
Inventories 149
Property, plant and equipment, net 11
Intangible assets, net 331
Trade accounts payable (89 )
Accrued expenses and other liabilities (2 )
Total identifiable net assets 633
Goodwill $ 87

The preliminary identified intangible assets primarily include payer contracts. These contracts are estimated to have a weighted average useful life of 15 years. The preliminary goodwill of $87 million arising from the 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. Substantially all of the goodwill recognized is not expected to be deductible for income tax purposes.

In accordance with ASC Topic 810, Consolidation, the noncontrolling interest was recognized based on its proportionate interest in the identifiable net assets of AllianceRx Walgreens Prime. The difference between the carrying amount of the noncontrolling interest and the fair value recognized as consideration in the business combination is recognized as additional paid in capital.

The Company incurred legal and other professional services costs related to the transaction, which were included in selling, general and administrative expenses, of $4 million and $8 million, respectively, for the three and nine month periods ended May 31, 2017.

Pro forma net earnings and sales of the Company, assuming the acquisition had occurred at the beginning of each period presented, would not be materially different from the results reported. The acquisition did not have a material impact on net earnings or sales of the Company for the three and nine month periods ended May 31, 2017.

Note 6. Goodwill and other intangible assets

Changes in the carrying amount of goodwill by reportable segment consist of the following (in millions):


	Retail Pharmacy USA		Retail Pharmacy International			Pharmaceutical Wholesale			Walgreens Boots Alliance, Inc.			Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Walgreens Boots Alliance, Inc.
August 31, 2016	$	9,036	$	3,369		$	3,122		$	15,527
Balance at August 31, 2017												$	9,139	$	3,392	$	3,101	$	15,632
Acquisitions	87		—			—			87			1,361		—		4		1,365
Currency translation adjustments	—		(36		)	(62		)	(98		)	—		54		38		92
May 31, 2017	$	9,123	$	3,333		$	3,060		$	15,516
Balance at May 31, 2018												$	10,500	$	3,446	$	3,143	$	17,089

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


	May 31, 2017		August 31, 2016		May 31, 2018		August 31, 2017
Gross amortizable intangible assets
Customer relationships and loyalty card holders	$	1,830	$	1,867
Purchased prescription files	669		932
Customer relationships and loyalty card holders ¹					$	4,331	$	2,510
Favorable lease interests and non-compete agreements	536		619		621		523
Trade names and trademarks	502		532		495		504
Purchasing and payer contracts	390		94		389		391
Total gross amortizable intangible assets	3,927		4,044		5,836		3,928

Accumulated amortization
Customer relationships and loyalty card holders	$	371	$	275
Purchased prescription files	376		600
Customer relationships and loyalty card holders ¹					$	930	$	780
Favorable lease interests and non-compete agreements	355		388		353		355
Trade names and trademarks	135		105		190		155
Purchasing and payer contracts	44		71		71		51
Total accumulated amortization	1,281		1,439		1,544		1,341
Total amortizable intangible assets, net	$	2,646	$	2,605	$	4,292	$	2,587

Indefinite lived intangible assets
Trade names and trademarks	$	5,507	$	5,604	$	5,696	$	5,514
Pharmacy licenses	2,055		2,093		2,123		2,055
Total indefinite lived intangible assets	$	7,562	$	7,697	$	7,819	$	7,569

Total intangible assets, net	$	10,208	$	10,302	$	12,111	$	10,156


¹	Includes purchased prescription files.

Amortization expense for intangible assets was $146 million and $363 million for the three and nine months ended May 31, 2018, respectively, and $98 million and $287 million for the three and nine months ended May 31, 2017, ~~and $104 million and $320 million for the three and nine months ended May 31, 2016,~~ respectively.

Estimated future annual amortization expense for the next five fiscal years for intangible assets recorded at May 31, ~~2017~~2018 is as follows (in millions):

2018 2019 2020 2021 2022
Estimated annual amortization expense $ 361
$ 333
$ 273
$ 205
$ 185



	2019		2020		2021		2022		2023
Estimated annual amortization expense	$	545	$	470	$	413	$	388	$	348

Note 7. ~~Borrowings~~Debt

~~Borrowings~~Debt consist of the following (all amounts are presented in millions of U.S. dollars and debt issuances are denominated in U.S. dollars, unless otherwise noted)

May 31, 2017 August 31, 2016
Short-term borrowings ¹

$6 Billion note issuance ^2,3

1.750% unsecured notes due 2018 $ 1,248
$ —
2.600% unsecured notes due 2021 1,494
—
3.100% unsecured notes due 2023 745
—
$8 Billion note issuance ^2,3

1.750% unsecured notes due November 2017 749
—
Unsecured Pound Sterling variable rate term loan due 2019 105
63
Other ⁴
497
260
Total short-term borrowings $ 4,838
$ 323

Long-term debt ¹

Unsecured Pound Sterling variable rate term loan due 2019 $ 1,736
$ 1,833
$6 Billion note issuance ^2,3

1.750% unsecured notes due 2018 —
1,246
2.600% unsecured notes due 2021 —
1,493
3.100% unsecured notes due 2023 —
744
3.450% unsecured notes due 2026 1,886
1,885
4.650% unsecured notes due 2046 590
590
$8 Billion note issuance ^2,3

1.750% unsecured notes due 2017 —
746
2.700% unsecured notes due 2019 1,246
1,244
3.300% unsecured notes due 2021 1,243
1,242
3.800% unsecured notes due 2024 1,988
1,987
4.500% unsecured notes due 2034 495
494
4.800% unsecured notes due 2044 1,492
1,492
£700 Million note issuance ^2,3

2.875% unsecured Pound Sterling notes due 2020 513
521
3.600% unsecured Pound Sterling notes due 2025 384
391
€750 Million note issuance ^2,3

2.125% unsecured Euro notes due 2026 838
830
$4 Billion note issuance ^3,7

3.100% unsecured notes due 2022 1,194
1,194
4.400% unsecured notes due 2042 492
492
$1 Billion note issuance ^3,7

5.250% unsecured notes due 2019 ⁵
250
249
Other ⁶
25
32
Total long-term debt, less current portion $ 14,372
$ 18,705



	May 31, 2018		August 31, 2017
Short-term debt ¹
Commercial paper	1,039		—
Credit facilities ²	999		—
$1 billion note issuance ^3,4
5.250% unsecured notes due 2019 ⁵	248		—
Other ⁶	301		251
Total short-term debt	2,587		251

Long-term debt ¹
$6 billion note issuance ^3,7
3.450% unsecured notes due 2026	1,888		1,887
4.650% unsecured notes due 2046	590		590
$8 billion note issuance ^3,7
2.700% unsecured notes due 2019	1,247		1,246
3.300% unsecured notes due 2021	1,245		1,244
3.800% unsecured notes due 2024	1,989		1,988
4.500% unsecured notes due 2034	495		495
4.800% unsecured notes due 2044	1,492		1,492
£700 million note issuance ^3,7
2.875% unsecured Pound sterling notes due 2020	530		513
3.600% unsecured Pound sterling notes due 2025	397		384
€750 million note issuance ^3,7
2.125% unsecured Euro notes due 2026	869		884
$4 billion note issuance ^3,4
3.100% unsecured notes due 2022	1,195		1,195
4.400% unsecured notes due 2042	492		492
$1 billion note issuance ^3,4
5.250% unsecured notes due 2019 ⁵	—		250
Other ⁸	27		24
Total long-term debt, less current portion	$	12,456	$	12,684


¹	Carry values are presented net of unamortized discount and debt issuance costs, where applicable, and foreign currency denominated borrowings have been translated using ~~the~~ spot rates at May 31, ~~2017~~2018 and August 31, ~~2016,~~2017, respectively.

Credit facilities includes borrowings outstanding under the February 2017 Revolving Credit Agreement, the August 2017 Revolving Credit Agreement and the 2017 Term Loan Credit Agreement, which are described in more detail below. From time to time, the Company may also enter into other credit facilities, including in March 2018, a $350 million short-term unsecured revolving credit facility which was undrawn as of May 31, 2018.

The $6 billion, $8 billion, £0.7 billion, €0.75 billion, $4 billion and $1 billion note issuances as of May 31, 2018 had fair values and carrying values of $2.4 billion and $2.5 billion, $6.4 billion and $6.5 billion, $1.0 billion and $0.9 billion, $0.9 billion and $0.9 billion, $1.7 billion and $1.7 billion, and $0.3 billion and $0.2 billion, respectively. The fair values of the notes outstanding are level 1 fair value measures and determined based on quoted market price and translated at the May 31, 2018 spot rate, as applicable. The fair values and carrying values of these issuances do not include notes that have been redeemed or repaid as of May 31, 2018.


⁴	Notes are senior debt obligations of Walgreen Co. and rank equally with all other unsecured and unsubordinated indebtedness of Walgreen Co. On December 31, 2014, Walgreens Boots Alliance fully and unconditionally guaranteed the

outstanding notes on an unsecured and unsubordinated basis. The guarantee, for so long as it is in place, is an unsecured, unsubordinated debt obligation of Walgreens Boots Alliance and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance.


⁵	Includes interest rate swap fair market value adjustments. See note 9, fair value measurements for additional fair value disclosures.


⁶	Other short-term debt represents a mix of fixed and variable rate borrowings with various maturities and working capital facilities denominated in various currencies.


⁷	Notes are unsubordinated debt obligations of Walgreens Boots Alliance and rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance from time to time outstanding.

The fair value and carrying value of the $6 billion, $8 billion, £0.7 billion, €0.75 billion, $4 billion and $1 billion note issuances as of May 31, 2017 was $6.1 billion and $6.0 billion, $7.5 billion and $7.2 billion, $1.0 billion and $0.9 billion, $0.9 billion and $0.8 billion, $1.7 billion and $1.7 billion, and $0.3 billion and $0.3 billion, respectively. The fair values of the notes outstanding are level 1 fair value measures and determined based on quoted market price and translated at the May 31, 2017 spot rate, as applicable.


⁴	~~Other short-term borrowings represent a mix of fixed and variable rate borrowings with various maturities and working capital facilities denominated in various currencies.~~


⁵	~~Includes interest rate swap fair market value adjustments. See note 9, Fair value measurements for additional fair value disclosures.~~


⁶⁸	Other long-term debt represents a mix of fixed and variable rate borrowings in various currencies with various maturities.

⁷

Notes are senior debt obligations of Walgreens 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 Walgreens Boots Alliance and will rank equally in right of payment with all other unsecured and unsubordinated indebtedness of Walgreens Boots Alliance.

August 2017 ~~Term Loan~~ Credit Agreements

On ~~February 22,~~August 24, 2017, the Company entered into ~~(a)~~ a ~~$4.8~~$1.0 billion ~~unsecured term loan facility~~revolving credit agreement with the lenders from time to time party thereto (the ~~“Syndicated~~“August 2017 Revolving Credit Agreement”) and ~~(b)~~ a $1.0 billion ~~unsecured~~ term loan ~~facility~~credit agreement with Sumitomo Mitsui Banking Corporation ~~as lender and administrative agent~~ (the ~~“Sumitomo Credit Agreement” and, together with the Syndicated Credit Agreement, the~~ “2017 Term Loan Credit ~~Agreements”~~Agreement”).

The ~~obligations~~August 2017 Revolving Credit Agreement is an unsecured revolving credit facility with a facility termination date of the earlier of (a) January 31, 2019, subject to any extension thereof pursuant to the terms of the August 2017 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate commitments provided by the lenders ~~party to each~~thereunder. As of May 31, 2018, there were no borrowings outstanding under the August 2017 Revolving Credit Agreement. The 2017 Term Loan Credit Agreement is an unsecured “multi-draw” term loan facility which matures on March 30, 2019. As of May 31, 2018, Walgreens Boots Alliance had $1.0 billion of borrowings outstanding under the 2017 Term Loan Credit ~~Agreements to fund the loans thereunder~~Agreement, and no additional commitments were to become effective upon the date of closing of the transactions contemplated by the Merger Agreement. Each of the 2017 Term Loan Credit Agreements and the commitments contemplated thereby terminated on June 28, 2017 upon the termination of the Merger Agreement. See note 1, Basis of presentation. As of May 31, 2017, there were no borrowings under either of the 2017 Term Loan Credit Agreements.available.

February 2017 Revolving Credit Agreement

On February 1, 2017, the Company entered into a $1.0 billion revolving credit facility ~~(the “2017~~(as amended, the “February 2017 Revolving Credit Agreement”) with the lenders from time to time party thereto and, on August 1, 2017, the Company entered into an amendment agreement thereto. The ~~Company will be~~terms and conditions of the ~~borrower under the~~February 2017 Revolving Credit Agreement ~~which terminates on~~were unchanged by the amendment other than the extension of the facility termination date to the earlier of (a) ~~364 days following the effective date thereof, subject to the extension thereof pursuant to provisions specified in the Revolving Credit Agreement,~~January 31, 2019 and (b) the date of termination in whole of the aggregate ~~commitment pursuant to~~commitments provided by the Revolving Credit Agreement. The ability of the Company to request the making of loans under the 2017 Revolving Credit Agreement is subject to the satisfaction (or waiver) of certain customary conditions set forth therein.lenders thereunder. As of May 31, ~~2017,~~2018, there were no borrowings outstanding under the February 2017 Revolving Credit Agreement.

$6.0 billion note issuance

On June 1, 2016, Walgreens Boots Alliance received net proceeds ~~(after deducting underwriting discounts and offering expenses)~~ of $6.0 billion from a public offering of five series of U.S. dollar ~~notes: $1.2 billion of 1.750%~~ notes due 2018 (the “2018 notes”), $1.5 billion of 2.600% notes due 2021 (the “2021 notes”), $0.8 billion of 3.100% notes due 2023 (the “2023 notes”), $1.9 billion of 3.450% notes due 2026 (the “2026 notes”)with varying maturities and $0.6 billion of 4.650% notes due 2046 (the “2046 notes”). Total issuance costs relating to the notes, including underwriting discounts and offering expenses, were $30 million. The notes contain redemption terms which allow or require the Company to redeem the notes at defined redemption prices plus accrued and unpaid interest ~~at redemption dates set forth in the applicable series of notes. Interest on the notes issued on June 1, 2016 is payable semi-annually.~~rates. Because the merger with Rite Aid was not consummated on or prior to June 1, 2017, the 2018 notes, the 2021 notes and the 2023 notes ~~(but not the 2026 notes or 2046 notes, which remain outstanding in accordance with their respective terms)~~ were redeemed on June 5, 2017 under the special mandatory redemption terms of the indenture governing such notes. Walgreens Boots Alliance was required to redeem all of the 2018 notes, the 2021 notes and the 2023 notes then outstanding, at a special mandatory redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest of approximately $1 million to, but excluding, the date of redemption. ~~Accordingly, the 2018 notes, the 2021~~The 2026 notes and ~~the 2023~~2046 notes ~~were classified as Short-term borrowings on the Consolidated Condensed Balance Sheet as of May 31, 2017.~~remain outstanding in accordance with their respective terms.

Debt covenants

~~The~~Each of the Company’s credit facilities contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60:1.00. The credit facilities contain various other customary covenants.

~~Other borrowings~~Commercial paper

The Company periodically borrows under its commercial paper ~~program. There were no commercial paper borrowings outstanding as of May 31, 2017 or August 31, 2016, respectively. The Company had no activity~~program and may borrow under ~~its commercial paper~~

~~program for the nine months ended May 31, 2017.~~it in future periods. The Company had average daily short-term borrowings of ~~$18 million~~$1.4 billion of commercial paper outstanding at a weighted average interest rate of ~~0.66%~~2.00% for the nine ~~month period~~months ended May 31, ~~2016.~~2018. The Company had no activity under its commercial paper program for the nine months ended May 31, 2017.

Interest

Interest paid was $450 million and $573 million for the nine months ended May 31, 2018 and May 31, 2017, respectively.

Note 8. Financial instruments

The Company uses derivative instruments to manage its exposure to interest rate and foreign currency exchange risks.

The notional amounts, fair value and balance sheet presentation of derivative instruments outstanding as of May 31, ~~2017~~2018 and August 31, ~~2016~~2017 are as follows (in millions):


	May 31, 2017				August 31, 2016					May 31, 2018				August 31, 2017
	Notional ¹		Fair value		Notional ¹		Fair value		Location in Consolidated Condensed Balance Sheets	Notional ¹		Fair value		Notional ¹		Fair value		Location in Consolidated Condensed Balance Sheets
Derivatives designated as fair value hedges:
Derivatives designated as hedges:
Interest rate swaps	$	250	$	—	$	—	$	—	Other non-current liabilities	$	—	$	—	$	250	$	—	Other non-current assets
Interest rate swaps	—		—		250		3		Other non-current assets	250		2		—		—		Other current liabilities
Foreign currency forwards										28		—		24		—		Other current assets
Derivatives not designated as hedges:
Foreign currency forwards	133		—		1,177		16		Other current assets	$	3,762	$	147	$	221	$	—	Other current assets
Foreign currency forwards	976		5		41		—		Accrued expenses and other liabilities	—		—		2,816		19		Other current liabilities
Basis swaps	2		—		—		—		Accrued expenses and other liabilities
Basis swaps	—		—		2		1		Other current assets


¹	Amounts are presented in U.S. dollar equivalents, as applicable.

The Company uses interest rate swaps to manage the interest rate exposure associated with some of its fixed-rate borrowings and designates them as fair value hedges. ~~The~~From time to time, the Company ~~uses~~may use forward starting interest rate swaps to hedge ~~its~~ interest rate exposure of some or all of its anticipated debt issuances.

The Company utilizes foreign currency forward contracts and other foreign currency derivatives to hedge significant committed and highly probable future transactions and cash flows denominated in currencies other than the functional currency of the Company or its subsidiaries. The Company has significant ~~non-U.S~~non-U.S. dollar denominated net investments and uses foreign currency denominated financial instruments, specifically foreign currency derivatives and foreign currency denominated debt, to hedge its foreign currency risk.

Fair value hedges

The Company holds an interest rate ~~swaps~~swap converting $250 million of its 5.250% fixed rate notes to a floating interest rate based on the six-month LIBOR in arrears plus a constant spread. ~~All~~The swap termination ~~dates coincide~~date coincides with the ~~notes~~January 15, 2019 maturity date ~~January 15, 2019. These swaps were~~of the notes. This swap was designated as a fair value ~~hedges.~~hedge.

The gains and losses due to changes in fair value on the swaps and on the hedged notes attributable to interest rate risk ~~were~~did not ~~material.~~have a material impact on the Company’s Financial Statements. The changes in fair value of the Company’s debt that was swapped from fixed to variable rate and designated as fair value hedges are included in long-term debt on the Consolidated Condensed Balance Sheets (see note 7, ~~Borrowings)~~debt).

Derivatives not designated as hedges

The Company enters into derivative transactions that are not designated as accounting hedges. These derivative instruments are economic hedges of foreign currency risks. The ~~gains~~income and ~~(losses)~~(expense) due to changes in fair value of these derivative instruments were recognized in earnings as follows (in millions):


		Three months ended					Nine months ended							Three months ended May 31,					Nine months ended May 31,
	Location in Consolidated Condensed Statements of Earnings	May 31, 2017			May 31, 2016		May 31, 2017			May 31, 2016			Location in Consolidated Condensed Statements of Earnings	2018		2017			2018			2017
Foreign currency forwards	Selling, general and administrative expenses	$	(19	)	$	24	$	28		$	(1	)	Selling, general and administrative expenses	$	108	$	(19	)	$	(75	)	$	28
Foreign currency forwards	Other income (expense)	(1		)	4		(15		)	37			Other income (expense)	3		(1		)	36			(15		)

Derivatives credit risk

Counterparties to derivative financial instruments expose the Company to credit-related losses in the event of counterparty nonperformance, and the Company regularly monitors the credit worthiness of each counterparty.

Derivatives offsetting

The Company does not offset the fair value amounts of derivative instruments subject to master netting agreements in the Consolidated Condensed Balance Sheets.

Note 9. Fair value measurements

The Company measures certain assets and liabilities in accordance with ASC Topic 820, Fair Value Measurements and Disclosures, which defines fair value as the price that would be received for an asset or paid to transfer a liability in an orderly

transaction between market participants on the measurement date. In addition, it establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels:

Level 1 - Quoted prices in active markets that are accessible at the measurement date for identical assets and liabilities. The fair value hierarchy gives the highest priority to level 1 inputs.

Level 2 - Observable inputs other than quoted prices in active markets.

Level 3 - Unobservable inputs for which there is little or no market data available. The fair value hierarchy gives the lowest priority to level 3 inputs.

Assets and liabilities measured at fair value on a recurring basis are as follows (in millions):


	May 31, 2017		Level 1		Level 2		Level 3		May 31, 2018		Level 1		Level 2		Level 3
Assets:
Money market funds¹	$	10,491	$	10,491	$	—	$	—	$	1,104	$	1,104	$	—	$	—
Available-for-sale investments²	1		1		—		—		1		1		—		—
Foreign currency forwards³	—		—		—		—		147		—		147		—
Liabilities:
Foreign currency forwards³	5		—		5		—
Basis swaps³	—		—		—		—
Interest rate swaps⁴	—		—		—		—		2		—		2		—


	August 31, 2016		Level 1		Level 2		Level 3		August 31, 2017		Level 1		Level 2		Level 3
Assets:
Money market funds¹	$	9,133	$	9,133	$	—	$	—	$	2,096	$	2,096	$	—	$	—
Available-for-sale investments²	32		32		—		—		1		1		—		—
Liabilities:
Foreign currency forwards³	16		—		16		—		19		—		19		—
Interest rate swaps⁴	3		—		3		—
Liabilities:
Basis swaps³	1		—		1		—


¹	Money market funds are valued at the closing price reported by the fund sponsor.


²	~~Fair values~~The fair value of quoted investments are based on current bid prices as of the balance sheet dates.


³	The fair value of ~~basis swaps and~~ forward currency contracts isare estimated by discounting the difference between the contractual forward price and the current available forward price for the residual maturity of the contract using observable market rates.


⁴	The fair value of interest rate swaps is calculated by discounting the estimated future cash flows based on the applicable observable yield curves. See note 8, ~~Financial~~financial instruments for additional information.

There were no transfers between levels for the three and nine months ended May 31, ~~2017.~~2018.

The Company reports its debt instruments under the guidance of ASC Topic 825, Financial Instruments, which requires disclosure of the fair value of the Company’s debt in the footnotes to the ~~consolidated financial statements.~~Consolidated Financial Statements. Unless otherwise noted, the fair value for all notes was determined based upon quoted market prices and therefore categorized as level 1. See note 7, ~~Borrowings~~debt for further information. The carrying values of accounts receivable, net and trade accounts payable approximated their respective fair values due to their short-term nature.

Note 10. Commitments and contingencies

~~Litigation and regulatory proceedings~~

The Company is involved in legal proceedings and is subject to investigations, inspections, audits, inquiries and similar actions by governmental authorities, arising in the normal course of the Company’s business, including the matters described below. Legal proceedings, in general, and securities and class action litigation, in particular, can be expensive and disruptive. Some of these suits may purport or may be determined to be class actions and/or involve parties seeking large and/or indeterminate amounts, including punitive or exemplary damages, and may remain unresolved for several years. From time to time, the Company is also involved in legal proceedings as a plaintiff involving antitrust, tax, contract, intellectual property and other matters. Gain contingencies, if any, are recognized when they are realized. The results of legal proceedings are often uncertain and difficult to predict, and the costs incurred in litigation can be substantial, regardless of the outcome. The Company believes that its defenses and assertions in pending legal proceedings have merit, and does not believe that any of these pending matters, after consideration of applicable reserves and rights to indemnification, will have a material adverse effect on the Company’s consolidated financial position. However, substantial unanticipated verdicts, fines and rulings do sometimes occur. As a result, the Company could from time to time incur judgments, enter into settlements or revise its expectations regarding the outcome

of certain matters, and such developments could have a material adverse effect on its results of operations in the period in which the amounts are accrued and/or its cash flows in the period in which the amounts are paid.

On a quarterly basis, the Company assesses its liabilities and contingencies for outstanding legal proceedings and reserves are established on a case-by-case basis for those legal claims for which management concludes that it is probable that a loss will be incurred and that the amount of such loss can be reasonably estimated. Substantially all of these contingencies are subject to significant uncertainties and, therefore, determining the likelihood of a loss and/or the measurement of any loss can be complex. With respect to litigation and other legal proceedings where the Company has determined that a loss is reasonably possible, the Company is unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings. The Company’s assessments are based on estimates and assumptions that have been deemed reasonable by management, but that may prove to be incomplete or inaccurate, and unanticipated events and circumstances may occur that might cause the Company to change those estimates and assumptions. Therefore, it is possible that an unfavorable resolution of one or more pending litigation or other contingencies could have a material adverse effect on the Company’s ~~consolidated financial statements~~Consolidated Financial Statements in a future fiscal period. Management’s assessment of current litigation and other legal proceedings, including the corresponding accruals, could change because of the discovery of facts with respect to legal actions or other proceedings pending against the Company which are not presently known. Adverse rulings or determinations by judges, juries, governmental authorities or other parties could also result in changes to management’s assessment of current liabilities and contingencies. Accordingly, the ultimate costs of resolving these claims may be substantially higher or lower than the amounts reserved.

On December 29, 2014, a putative shareholder filed a derivative action in federal court in the Northern District of Illinois against certain current and former directors and officers of Walgreen Co., and Walgreen Co. as a nominal defendant, arising out of certain public statements the Company made regarding its former fiscal 2016 goals. The action asserts claims for breach of fiduciary duty, waste and unjust enrichment. On April 10, 2015, the defendants filed a motion to dismiss. On May 18, 2015, the case was stayed in light of a securities class action that was filed on April 10, 2015. After a ruling issued on September 30, 2016 in the securities class action, which is described below, on November 3, 2016, the Court entered a stipulation and order extending the stay until the securities case is fully resolved.

On April 10, 2015, a putative shareholder filed a securities class action in federal court in the Northern District of Illinois against Walgreen Co. and certain former officers of Walgreen Co. The action asserts claims for violation of the federal securities laws arising out of certain public statements the Company made regarding its former fiscal 2016 goals. On June 16, 2015, the Court entered an order appointing a lead plaintiff. Pursuant to the Court’s order, lead plaintiff filed an amended complaint on August 17, 2015, and defendants moved to dismiss the amended complaint on October 16, 2015. Lead plaintiff filed a response to the motion to dismiss on December 22, 2015, and defendants filed a reply in support of the motion on February 5, 2016. On September 30, 2016, the Court issued an order granting in part and denying in part defendants’ motion to dismiss. Defendants filed their answer to the amended complaint on November 4, 2016 and filed an amended answer on January 16, 2017. Plaintiffs filed their motion for class certification on April 21, 2017. ~~Briefing~~Plaintiffs’ motion was granted on ~~the motion~~March 29, 2018 and merits discovery is ~~scheduled to be completed by August 25, 2017.~~proceeding.

As of ~~May~~August 31, 2017, the Company was aware of two putative class action lawsuits filed by purported Rite Aid stockholders against Rite Aid and its board of directors, Walgreens Boots Alliance and Victoria Merger Sub, Inc. for claims arising out of the transactions contemplated by the original Merger Agreement (prior to its amendment on January 29, 2017) (such transactions, the “Rite Aid Transactions”). One Rite Aid action was filed in the State of Pennsylvania in the Court of Common Pleas of Cumberland County (the “Pennsylvania action”), and one action was filed in the United States District Court for the Middle District of Pennsylvania (the “federal action”). The Pennsylvania action primarily alleged that the Rite Aid board of directors breached its fiduciary duties in connection with the Rite Aid Transactions by, among other things, agreeing to an unfair and inadequate price, agreeing to deal protection devices that preclude other bidders from making successful competing offers for Rite Aid, and failing to disclose all allegedly material information concerning the proposed merger, and also alleged that Walgreens Boots Alliance and Victoria Merger Sub, Inc. aided and abetted these alleged breaches of fiduciary duty. The federal action alleged, among other things, that Rite Aid and its board of directors disseminated an allegedly false and misleading proxy statement in connection with the Rite Aid Transactions. The plaintiffs in the federal action also filed a motion for preliminary injunction seeking to enjoin the Rite Aid shareholder vote relating to the Rite Aid Transactions. That motion was denied and ~~the Rite Aid shareholders approved the Rite Aid Transactions at a special meeting on February 4, 2016. In the federal action,~~ plaintiffs agreed to stay the litigation until after the Rite Aid Transactions ~~have closed, but on~~closed. On March 17, 2017, plaintiffs moved to lift the stay to allow plaintiffs to file an amended complaint. On August 4, 2017, that motion was granted for the limited purpose of allowing plaintiffs to file a motion seeking leave to amend their complaint in light of the termination of the Merger Agreement. Plaintiffs filed such a motion on September 22, 2017. The Company filed aits response ~~opposing this~~on October 6, 2017. The Court granted the motion ~~and~~on November 27, 2017, ordering the plaintiffs to file their amended complaint within 10 business days. Plaintiffs filed their amended complaint on December 11, 2017. Pursuant to a briefing schedule set by the Court, the

Company filed a motion to dismiss on February 16, 2018. Plaintiffs filed their response brief on May 1, 2018 and reply ~~in support of this motion~~briefs were filed on ~~April 14, 2017.~~ June 7, 2018.

The Company was also named as a defendant in eight putative class action lawsuits filed in the Court of Chancery of the State of Delaware (the “Delaware actions”). Those actions were consolidated, and plaintiffs filed a motion for preliminary injunction seeking to enjoin the Rite Aid shareholder vote relating to the Rite Aid Transactions. That motion was denied and the plaintiffs in the Delaware actions agreed to settle this matter for an immaterial amount. The Delaware actions all have been dismissed.

~~Terminated acquisition of Rite Aid and related matters~~

~~On June 28,~~In December 2017, the United States Judicial Panel on Multidistrict Litigation consolidated numerous cases filed against an array of defendants by various plaintiffs such as counties, cities, hospitals, Indian tribes and others, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation, captioned In re National Prescription Opiate Litigation (MDL No. 2804), is pending in the U.S. District Court for the Northern District of Ohio. The Company is named as a defendant in a subset of the cases included in this multidistrict litigation. The Company also has been named as a defendant in several lawsuits brought in state courts relating to opioid matters. The relief sought by various plaintiffs is compensatory and ~~Rite Aid entered into~~punitive damages, as well as injunctive relief. Additionally, the ~~Termination Agreement pursuant~~Company has received from the Attorney Generals of several states subpoenas, civil investigative demands, and/or other requests concerning opioid matters.

Note 11. Income taxes

The effective tax rate for the three and nine months ended May 31, 2018 was 7.6% and 19.4% respectively, compared to 12.4% and 16.2% for the three and nine months ended May 31, 2017. As further described below, the decrease in the effective tax rate for the three months ended and the increase in the effective tax rate for the nine months ended May 31, 2018 were significantly impacted by an additional provisional net tax benefit of $140 million and a provisional net tax expense of $44 million respectively, as a result of the U.S. tax law changes, which were enacted on December 22, 2017. The decrease in the prior year comparable periods are due to higher net discrete tax benefits. In addition, the Company's results for the three and nine months ended May 31, 2018 also include a net reduction to the Company’s estimated annual tax rate for the current year as a result of the U.S. tax law changes.

Income taxes paid for the nine months ended May 31, 2018 were $428 million, compared to $839 million for the nine months ended May 31, 2017.

U.S. tax law changes

The United States government enacted comprehensive tax legislation in December 2017. The accounting guidance on income taxes generally requires the effects of new tax legislation to be recognized in the period of enactment. The SEC issued Staff Accounting Bulletin 118 (“SAB 118”), which provides for a measurement period of up to one year from the enactment date for companies to complete their accounting for the U.S. tax law changes. In accordance with the SEC staff guidance, companies must reflect the income tax effects of those aspects of the U.S. tax law changes for which the ~~parties agreed to terminate~~accounting is complete. To the ~~Merger Agreement and other Transaction Documents. Pursuant to~~extent a company’s accounting for the ~~Termination Agreement,~~income tax effect of certain provisions of the U.S. tax law changes is incomplete but the Company ~~agreed~~is able to ~~pay Rite Aid~~determine a reasonable estimate, a provisional estimate must be recorded in the ~~termination fee~~Company’s financial statements. If companies cannot determine a provisional estimate for the effects of ~~$325 million~~an aspect of the U.S. tax law changes, they should continue applying the accounting guidance on income taxes on the basis of the provisions of the tax laws in ~~full satisfaction of any amounts required to be paid by~~effect immediately before the ~~Company under the Merger Agreement and other Transaction Documents. The Company plans to pay Rite Aid such fee on or before June 30, 2017. See note 1, Basis of presentation.~~U.S. tax law changes were enacted.

~~On June 28, 2017, following~~The U.S. tax law changes include broad and complex changes affecting the ~~termination~~Company’s fiscal 2018 results. Among other things, the U.S. tax law changes reduce the federal corporate tax rate from 35% to 21% effective January 1, 2018 and require companies to immediately accrue for and pay over an eight year period a one-time transition tax on certain un-repatriated earnings of foreign subsidiaries. The U.S. tax law changes also alter the taxation of foreign earnings, repeal of the ~~Merger Agreement, the Fred’s Asset Purchase Agreement was terminated.~~ deduction for domestic production activities and establish a global intangible low tax income (GILTI) regime, as well as base erosion anti-avoidance tax (BEAT).

In connection with the ~~termination~~Company’s ongoing analysis of the ~~Fred’s Asset Purchase Agreement,~~impact of the U.S. tax law changes, which is provisional and subject to change, the Company ~~agreed to reimburse~~recorded a net tax expense of $44 million during the nine months ended May 31, 2018. This provisional net tax expense arises from the Company’s accrual for the transition tax and other U.S. tax law changes of $679 million, partly offset by a benefit of $635 million from re-measuring the Company’s net U.S. deferred tax liabilities.

Based on the effective dates of certain aspects of ~~Fred’s transaction costs in an amount not to exceed $25 million in full satisfaction of any amounts~~the U.S. tax law changes as well as estimated data required to be ~~paid by~~used in the corresponding measurement calculations, the Company’s analysis of the income tax effects of the U.S. tax law changes could not be finalized as of May 31, 2018. While the Company ~~under~~made reasonable estimates of the ~~Fred’s Asset Purchase Agreement.~~impact of the transition tax and the remeasurement of its deferred tax assets and liabilities, the final impact of the U.S. tax law changes may differ from these estimates, due to, among other things, changes in its interpretations and assumptions, additional guidance and actions the

Company may take. The Company expects to ~~pay~~finalize such provisional amounts within the ~~applicable amount during~~time period prescribed by SAB 118. The U.S. tax law changes created new rules that allow the ~~fourth quarter~~Company to make an accounting policy election to either treat taxes due on future GILTI inclusions in taxable income as either a current period expense or reflect such inclusions related to temporary basis differences in the Company’s measurement of ~~fiscal 2017. See note 1, Basis~~deferred taxes. The Company’s analysis of ~~presentation.~~the new GILTI rules is not complete; therefore, the Company has not made a policy election regarding the tax accounting treatment of the GILTI tax.

The U.S. tax law changes have the potential to change the Company’s assertions with respect to whether earnings of the Company’s foreign subsidiaries should remain indefinitely reinvested. The Company continues to evaluate these changes, therefore, the Company has not made any changes to its indefinite reinvestment assertions.

Note ~~11.~~12. Retirement benefits

The Company sponsors several retirement plans, including defined benefit plans, defined contribution plans and a postretirement health plan.

Effective September 1, 2016, for UK and U.S. benefit plans previously using the yield curve approach to establish discount rates, the Company changed the method used to calculate the service cost and interest cost components of net periodic benefit costs for pension and postretirement benefit plans and will measure these costs by applying the specific spot rates along the yield curve to the plans’ projected cash flows. The Company believes the new approach provides a more precise measurement of service and interest costs by improving the correlation between projected cash flows and the corresponding spot yield curve rates. The change does not affect the measurement of the Company’s pension and other postretirement benefit obligations for those plans and is accounted for as a change in accounting estimate, which is applied prospectively.

Defined benefit pension plans (non-U.S. plans)

The Company has various defined benefit pension plans outside the United States. The principal defined benefit pension plan is the Boots Pension Plan, which covers certain employees in the United Kingdom (the “Boots Plan”). The Boots Plan is a funded final salary defined benefit plan providing pensions and death benefits to members. The Boots Plan was closed to future accrual effective July 1, 2010, with pensions calculated based on salaries up until that date. The Boots Plan is governed by a trustee board, which is independent of the Company. The plan is subject to a full funding actuarial valuation on a triennial basis.

Components of net periodic pension costs for the defined benefit pension plans (in millions):


	Three months ended						Nine months ended						Three months ended May 31,						Nine months ended May 31,
	May 31, 2017			May 31, 2016			May 31, 2017			May 31, 2016			2018			2017			2018			2017
Service costs	$	1		$	1		$	3		$	3		$	2		$	1		$	5		$	3
Interest costs	43			77			129			236			50			43			146			129
Expected returns on plan assets/other	(41		)	(62		)	(112		)	(189		)	(54		)	(41		)	(158		)	(112		)
Total net periodic pension costs	$	3		$	16		$	20		$	50		$	(2	)	$	3		$	(7	)	$	20

The Company made cash contributions to its defined benefit pension plans of ~~$48~~$57 million for the nine months ended May 31, ~~2017,~~2018, which primarily related to committed funded payments. The Company plans to contribute an additional ~~$18~~$7 million to its defined benefit pension plans in fiscal ~~2017.~~2018.

Defined contribution plans

The principal retirement plan for U.S. employees is the Walgreen Profit-Sharing Retirement ~~Plan,~~Trust, to which both the Company and participating employees contribute. The Company’s contribution is in the form of a guaranteed match which is approved annually by the Walgreen Co. Board of Directors and reviewed by the Compensation Committee and Finance Committee of the Walgreens Boots Alliance Board of Directors. The profit-sharing provision was an expense of ~~$58~~$53 million and $164 million for the three and nine months ended May 31, ~~2017~~2018 compared to an expense of $58 million and ~~$169~~$164 million in the three and nine months ended May 31, ~~2016.~~2017.

The Company also has ~~other~~certain contract based ~~as well as statutory~~ defined contribution ~~schemes, including~~arrangements. The principal one is the Alliance Healthcare & Boots Retirement Savings Plan, which is United Kingdom based and to which both the Company and participating employees contribute. The cost recognized in the Consolidated Condensed Statements of Earnings for the three and nine months ended May 31, ~~2017~~2018 was ~~$26~~$33 million and ~~$82~~$94 million compared to a cost of ~~$33~~$26 million and ~~$102~~$82 million in the three and nine months ended May 31, ~~2016.~~2017.

Postretirement ~~Healthcare Plan~~healthcare plan

The Company provides certain health insurance benefits to retired U.S. employees who meet eligibility requirements, including age, years of service and date of hire. The costs of these benefits are accrued over the service life of the employee. An amendment to this plan in the third quarter of fiscal 2017 resulted in a $109 million curtailment gain.

Note ~~12.~~13. Earnings per share

The dilutive effect of outstanding stock options on earnings per share is calculated using the treasury stock method. Stock options are anti-dilutive and excluded from the earnings per share calculation if the exercise price exceeds the average market

price of the common shares. There were ~~6.4~~12.1 million outstanding options to purchase common shares that were anti-dilutive and excluded from the third quarter earnings per share calculation as of May 31, ~~2017~~2018 compared to ~~2.8~~6.4 million as of May 31, ~~2016.~~2017. Anti-dilutive shares excluded from the year to date earnings per share calculation were ~~5.7 million compared to 2.4~~10.1 million for the ~~periods~~period ended May 31, ~~2017 and~~2018 compared to 5.7 million for the period ended May 31, ~~2016, respectively.~~

~~Note 13. Depreciation and amortization~~

~~The Company has recorded the following depreciation and amortization expense in the Consolidated Condensed Statements of Earnings (in millions):~~

Three months ended
Nine months ended
May 31, 2017
May 31, 2016
May 31, 2017
May 31, 2016
Depreciation expense $ 334
$ 353
$ 1,000
$ 997
Intangible asset and other amortization 79
94
244
274
Total depreciation and amortization expense $ 413
$ 447
$ 1,244
$ 1,271
2017.

Note 14. ~~Supplemental information~~

The effective tax rate for the three months ended May 31, 2017 was 12.4% compared to 22.8% for the prior year period. The effective tax rate for the nine months ended May 31, 2017 was 16.2% compared to 20.2% for the prior year period. The decrease in the effective tax rate for the three months and nine months ended May 31, 2017 was primarily attributable to net incremental discrete tax benefits and a lower estimated annual tax rate. Cash paid for income taxes was $839 million and $812 million in the nine months ended May 31, 2017 and May 31, 2016, respectively.

~~Interest paid was $573 million and $512 million for the nine months ended May 31, 2017 and May 31, 2016, respectively.~~

~~Note 15.~~ Accumulated other comprehensive income (loss)

The following is a summary of net changes in accumulated other comprehensive income by component and net of tax for the three and nine months ended May 31, ~~2017~~2018 and May 31, ~~2016~~2017 (in millions):


	Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments			Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total			Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments		Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total
Balance at February 28, 2017	$	(216	)	$	1		$	(35	)	$	(6	)	$	(3,553	)	$	(3,809	)
Balance at February 28, 2018																			$	(141	)	$	—	$	(32	)	$	—		$	(1,990	)	$	(2,163	)
Other comprehensive income (loss) before reclassification adjustments	(102		)	(1		)	—			4			499			400			—			—		—			3			(647		)	(644		)
Amounts reclassified from accumulated OCI ¹	109			—			1			—			—			110
Amounts reclassified from accumulated OCI																			(2		)	—		1			11			8			18
Tax benefit (provision)	(2		)	—			—			(2		)	—			(4		)	—			—		—			(3		)	—			(3		)
Net other comprehensive income (loss)	5			(1		)	1			2			499			506			(2		)	—		1			11			(639		)	(629		)
Balance at May 31, 2017	$	(211	)	$	—		$	(34	)	$	(4	)	$	(3,054	)	$	(3,303	)
Balance at May 31, 2018																			$	(143	)	$	—	$	(31	)	$	11		$	(2,629	)	$	(2,792	)


	Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments			Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total			Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments		Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total
Balance at August 31, 2016	$	(212	)	$	2		$	(37	)	$	(1	)	$	(2,744	)	$	(2,992	)
Balance at August 31, 2017																			$	(139	)	$	—	$	(33	)	$	(2	)	$	(2,877	)	$	(3,051	)
Other comprehensive income (loss) before reclassification adjustments	(107		)	(2		)	—			(4		)	(310		)	(423		)	(1		)	—		—			7			240			246
Amounts reclassified from accumulated OCI ¹	109			—			4			—			—			113
Amounts reclassified from accumulated OCI																			(5		)	—		3			11			8			17
Tax benefit (provision)	(1		)	—			(1		)	1			—			(1		)	2			—		(1		)	(5		)	—			(4		)
Net other comprehensive income (loss)	1			(2		)	3			(3		)	(310		)	(311		)	(4		)	—		2			13			248			259
Balance at May 31, 2017	$	(211	)	$	—		$	(34	)	$	(4	)	$	(3,054	)	$	(3,303	)
Balance at May 31, 2018																			$	(143	)	$	—	$	(31	)	$	11		$	(2,629	)	$	(2,792	)



	Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments			Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total
Balance at February 28, 2017	$	(216	)	$	1		$	(35	)	$	(6	)	$	(3,553	)	$	(3,809	)
Other comprehensive income (loss) before reclassification adjustments	(102		)	(1		)	—			4			499			400
Amounts reclassified from accumulated OCI¹	109			—			1			—			—			110
Tax benefit (provision)	(2		)	—			—			(2		)	—			(4		)
Net other comprehensive income (loss)	5			(1		)	1			2			499			506
Balance at May 31, 2017	$	(211	)	$	—		$	(34	)	$	(4	)	$	(3,054	)	$	(3,303	)


	Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments			Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments		Currency translation adjustment			Total			Pension/ post- retirement obligations			Unrecognized gain (loss) on available-for- sale investments			Unrealized gain (loss) on cash flow hedges			Share of OCI of equity method investments			Currency translation adjustment			Total
Balance at February 29, 2016	$	30		$	172		$	(38	)	$	—	$	(2,032	)	$	(1,868	)
Balance at August 31, 2016																		$	(212	)	$	2		$	(37	)	$	(1	)	$	(2,744	)	$	(2,992	)
Other comprehensive income (loss) before reclassification adjustments	5			(6		)	—			—		762			761			(107		)	(2		)	—			(4		)	(310		)	(423		)
Amounts reclassified from accumulated OCI	—			(268		)	1			—		(2		)	(269		)
Amounts reclassified from accumulated OCI¹																		109			—			4			—			—			113
Tax benefit (provision)	(2		)	102			(1		)	—		—			99			(1		)	—			(1		)	1			—			(1		)
Net other comprehensive income (loss)	3			(172		)	—			—		760			591			1			(2		)	3			(3		)	(310		)	(311		)
Balance at May 31, 2016	$	33		$	—		$	(38	)	$	—	$	(1,272	)	$	(1,277	)
Balance at May 31, 2017																		$	(211	)	$	—		$	(34	)	$	(4	)	$	(3,054	)	$	(3,303	)


¹	Includes amendment to U.S. postretirement healthcare plan resulting in a curtailment gain. See note 12, retirement benefits.

Note 15. Segment reporting

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

The Retail Pharmacy USA segment consists of the Walgreens business, which includes the operation of retail drugstores and convenient care clinics; and operation of mail and central specialty pharmacy services. Sales for the segment are principally derived from the sale of prescription drugs and a wide assortment of retail products, including health and wellness, beauty, personal care and consumables and general merchandise.

The Retail Pharmacy International segment consists of pharmacy-led health and beauty retail businesses and optical practices. These businesses include Boots branded stores in the United Kingdom, Thailand, Norway, the Republic of Ireland and the Netherlands; Benavides in Mexico and Ahumada in Chile. Sales for the segment are principally derived from the sale of prescription drugs and health and wellness, beauty, personal care and other consumer products.

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

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

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



	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations			Walgreens Boots Alliance, Inc.
Three months ended May 31, 2018
Sales to external customers	$	25,917	$	2,995	$	5,422	$	—		$	34,334
Intersegment sales	—		—		543		(543		)	—
Sales	$	25,917	$	2,995	$	5,965	$	(543	)	$	34,334

Adjusted operating income	$	1,492	$	198	$	257	$	—		$	1,947

Three months ended May 31, 2017
Sales to external customers	$	22,528	$	2,809	$	4,781	$	—		$	30,118
Intersegment sales	—		—		515		(515		)	—
Sales	$	22,528	$	2,809	$	5,296	$	(515	)	$	30,118

Adjusted operating income	$	1,463	$	193	$	253	$	5		$	1,914



	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations			Walgreens Boots Alliance, Inc.
Nine months ended May 31, 2018
Sales to external customers	$	72,884	$	9,395	$	15,816	$	—		$	98,095
Intersegment sales	—		—		1,622		(1,622		)	—
Sales	$	72,884	$	9,395	$	17,438	$	(1,622	)	$	98,095

Adjusted operating income	$	4,518	$	688	$	712	$	1		$	5,919

Nine months ended May 31, 2017
Sales to external customers	$	65,001	$	8,872	$	14,192	$	—		$	88,065
Intersegment sales	—		—		1,551		(1,551		)	—
Sales	$	65,001	$	8,872	$	15,743	$	(1,551	)	$	88,065

Adjusted operating income	$	4,304	$	648	$	703	$	1		$	5,656

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

Pension/ post-
retirement
obligations

Unrecognized
gain (loss) on
available-for-
sale
investments

Unrealized
gain (loss) on
cash flow
hedges

Share of
OCI of
equity
method
investments

Currency
translation
adjustment
Total
Balance at August 31, 2015 $ 29
$ 259
$ (40 ) $ —
$ (462 ) $ (214 )
Other comprehensive income (loss) before reclassification adjustments 4
(150 ) —
—
(808 ) (954 )
Amounts reclassified from accumulated OCI —
(268 ) 4
—
(2 ) (266 )
Tax benefit (provision) —
159
(2 ) —
—
157
Net other comprehensive income (loss) 4
(259 ) 2
—
(810 ) (1,063 )
Balance at May 31, 2016 $ 33
$ —
$ (38 ) $ —
$ (1,272 ) $ (1,277 )



	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Three months ended May 31, 2018
Adjusted operating income	$	1,492	$	198	$	257	$	—	$	1,947
Acquisition-related amortization									(131		)
Acquisition-related costs									(57		)
LIFO provision									(69		)
Adjustments to equity earnings in AmerisourceBergen									(60		)
Certain legal and regulatory accruals and settlements									(5		)
Store optimization									(24		)
Operating income									$	1,601

Three months ended May 31, 2017
Adjusted operating income	$	1,463	$	193	$	253	$	5	$	1,914
Acquisition-related amortization									(83		)
Acquisition-related costs									(29		)
LIFO provision									(97		)
Adjustments to equity earnings in AmerisourceBergen									(17		)
Cost transformation									(171		)
Operating income									$	1,517

¹~~Includes amendment to U.S. postretirement healthcare plan resulting in a curtailment gain. See note 11, Retirement benefits.~~



	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Nine months ended May 31, 2018
Adjusted operating income	$	4,518	$	688	$	712	$	1	$	5,919
Acquisition-related amortization									(329		)
Acquisition-related costs									(173		)
LIFO provision									(166		)
Adjustments to equity earnings in AmerisourceBergen									(136		)
Certain legal and regulatory accruals and settlements									(120		)
Hurricane-related costs									(83		)
Store optimization									(24		)
Asset recovery									15
Operating income									$	4,903

Nine months ended May 31, 2017
Adjusted operating income	$	4,304	$	648	$	703	$	1	$	5,656
Acquisition-related amortization									(247		)
Acquisition-related costs									(75		)
LIFO provision									(204		)
Adjustments to equity earnings in AmerisourceBergen									(95		)
Cost transformation									(592		)
Operating income									$	4,443

Note 16. Related parties

The Company has a long-term pharmaceutical distribution agreement with AmerisourceBergen pursuant to which the Company sources branded and generic pharmaceutical products from AmerisourceBergen principally for its U.S. operations.

Related party transactions (in millions):



	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
Purchases, net	$	15,830	$	10,703	$	39,566	$	31,941



	May 31, 2018		August 31, 2017
Trade accounts payable, net	$	5,802	$	4,384

Additionally, AmerisourceBergen receives sourcing services for generic pharmaceutical products.

~~Note 16. Segment reporting~~

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

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

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

The Pharmaceutical Wholesale segment consists of pharmaceutical wholesaling and distribution businesses and an equity method investment in AmerisourceBergen reported on a two-month lag. Wholesale operations are located in France, the United Kingdom, Germany, Turkey, Spain, the Netherlands, Egypt, Norway, Romania, Czech Republic and Lithuania. Sales for the segment are principally derived from wholesaling and distribution of a comprehensive offering of brand-name pharmaceuticals (including specialty pharmaceutical products) and generic pharmaceuticals,

~~health and beauty products, home healthcare supplies and equipment, and related services to pharmacies and other healthcare providers.~~

Results for each reportable segment include the allocation of procurement rebates and corporate-related overhead costs. The “Eliminations” column includes intersegment sales and the profit on these intersegment sales to the extent the inventory has not been subsequently sold externally.

To improve comparability, certain classification changes were made to prior period sales, cost of sales and selling, general and administrative expenses. These changes had no impact on operating income or adjusted operating income. The reclassifications were made in the fourth quarter of fiscal 2016.

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

Retail
Pharmacy
USA

Retail
Pharmacy
International

Pharmaceutical
Wholesale
Eliminations
Walgreens
Boots
Alliance, Inc.
Three months ended May 31, 2017
Sales to external customers $ 22,528
$ 2,809
$ 4,781
$ —
$ 30,118
Intersegment sales —
—
515
(515 ) —
Sales $ 22,528
$ 2,809
$ 5,296
$ (515 ) $ 30,118

Adjusted operating income $ 1,463
$ 193
$ 253
$ 5
$ 1,914
Three months ended May 31, 2016

Sales to external customers $ 21,185
$ 3,132
$ 5,181
$ —
$ 29,498
Intersegment sales —
—
567
(567 ) —
Sales $ 21,185
$ 3,132
$ 5,748
$ (567 ) $ 29,498

Adjusted operating income $ 1,382
$ 258
$ 179
$ (5 ) $ 1,814

Retail
Pharmacy
USA

Retail
Pharmacy
International

Pharmaceutical
Wholesale
Eliminations
Walgreens
Boots
Alliance, Inc.
Nine months ended May 31, 2017
Sales to external customers $ 65,001
$ 8,872
$ 14,192
$ —
$ 88,065
Intersegment sales —
—
1,551
(1,551 ) —
Sales $ 65,001
$ 8,872
$ 15,743
$ (1,551 ) $ 88,065

Adjusted operating income $ 4,304
$ 648
$ 703
$ 1
$ 5,656
Nine months ended May 31, 2016

Sales to external customers $ 63,055
$ 10,219
$ 15,441
$ —
$ 88,715
Intersegment sales —
—
1,730
(1,730 ) —
Sales $ 63,055
$ 10,219
$ 17,171
$ (1,730 ) $ 88,715

Adjusted operating income $ 4,257
$ 908
$ 500
$ (12 ) $ 5,653

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

Retail
Pharmacy
USA

Retail
Pharmacy
International

Pharmaceutical
Wholesale
Eliminations
Walgreens
Boots
Alliance, Inc.
Three months ended May 31, 2017
Adjusted operating income $ 1,463
$ 193
$ 253
$ 5
$ 1,914
Cost transformation

(171 )
Acquisition-related amortization

(83 )
LIFO provision

(97 )
Adjustments to equity earnings in AmerisourceBergen

(17 )
Acquisition-related costs

(29 )
Operating income

$ 1,517
Three months ended May 31, 2016

Adjusted operating income $ 1,382
$ 258
$ 179
$ (5 ) $ 1,814
Cost transformation

(73 )
Acquisition-related amortization

(96 )
LIFO provision

(92 )
Adjustments to equity earnings in AmerisourceBergen (5 )
Acquisition-related costs (15 )
Operating income

$ 1,533

Retail
Pharmacy
USA

Retail
Pharmacy
International

Pharmaceutical
Wholesale
Eliminations
Walgreens
Boots
Alliance, Inc.
Nine months ended May 31, 2017
Adjusted operating income $ 4,304
$ 648
$ 703
$ 1
$ 5,656
Cost transformation

(592 )
Acquisition-related amortization

(247 )
LIFO provision

(204 )
Adjustments to equity earnings in AmerisourceBergen

(95 )
Acquisition-related costs

(75 )
Operating income

$ 4,443
Nine months ended May 31, 2016

Adjusted operating income $ 4,257
$ 908
$ 500
$ (12 ) $ 5,653
Cost transformation

(191 )
Acquisition-related amortization

(278 )
LIFO provision

(206 )
Adjustments to equity earnings in AmerisourceBergen (5 )
Acquisition-related costs

(82 )
Asset impairment (30 )
Operating income

$ 4,861

Note 17. New accounting pronouncements

Adoption of new accounting pronouncements

~~Modifications of share-based payments~~

Accounting for hedging activities

In ~~May~~August 2017, the ~~Financial~~FASB issued ASU 2017-12, Derivative and Hedging (Topic 815): Targeted Improvements to Accounting ~~Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2017-09, Compensation - Stock Compensation (Topic 718): Scope of Modification Accounting.~~for Hedging Activities. This ASU ~~clarifies which changes~~expands an entity’s ability to hedge nonfinancial and financial risk components and reduces complexity in fair value hedges of interest rate risk. It eliminates the ~~terms or conditions of a share-based payment award require an entity~~requirement to ~~apply modification accounting~~separately measure and report hedge ineffectiveness and generally requires the entire change in ~~Topic 718. Specifically, an entity would not apply modification accounting if~~ the fair value ~~vesting conditions, and classification~~ of ~~the awards are~~a hedging instrument to be presented in the same ~~immediately before~~income statement line as the hedged item. It also eases certain documentation and ~~after~~assessment requirements and modifies the ~~modification.~~accounting for components excluded from the assessment of hedge effectiveness. This ASU is effective for fiscal years

beginning after December 15, ~~2017~~2018 (fiscal ~~2019)~~2020), and ~~interims~~interim periods within those fiscal ~~years.~~years, with early adoption permitted. The Company early adopted this guidance ~~on a prospective basis~~ during the third fiscal quarter ~~ended May 31, 2017.~~of 2018. The adoption did not have any impact on the Company’s results of operations, cash flows or financial position. The updated accounting policy for financial instruments is as follows:

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 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 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 Statements of Earnings in the same line item - interest expense, net.

Changes in the fair value of a derivative designated as a cash flow hedge are recorded in accumulated other comprehensive income (loss) in the Consolidated Statements of Comprehensive Income and reclassified into earnings in the period or periods during which the hedged item affects earnings and is presented in the same line item as the earnings effect of the hedged item.

Changes in the fair value of a derivative designated as a hedge of a net investment in a foreign operation are recorded in cumulative translation adjustments within accumulated other comprehensive income (loss) in the Consolidated 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 Statements of Earnings.

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

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 Statements of Earnings when the hedged item affects earnings. When a derivative in a hedge relationship is terminated or the hedged item is sold, extinguished or terminated, hedge accounting is discontinued prospectively.

New accounting pronouncements not yet adopted

Accounting for reclassification of certain tax effects from accumulated other comprehensive income

In February 2018, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2018-02, Income Statement-Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income. This ASU addresses the income tax effects of items in accumulated other comprehensive income (“AOCI”) which were originally recognized in other comprehensive income, rather than in income from continuing operations. Specifically, it permits a reclassification from AOCI to retained earnings for the adjustment of deferred taxes due to the reduction of the historical corporate income tax rate to the newly enacted corporate income tax rate resulting from the U.S. tax law changes enacted in December 2017. It also requires certain disclosures about these reclassifications. This ASU is effective for fiscal years beginning after December 15, 2018 (fiscal 2020), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied either on a prospective basis in the period of adoption or

retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income tax rate in the U.S. tax law changes are recognized. The Company is evaluating the effect of adopting this new accounting guidance, but does not expect adoption will have a material impact on the Company’s financial position.

Presentation of net periodic pension cost and net ~~period~~periodic postretirement benefit cost

In March 2017, the FASB issued ASU 2017-07, Compensation - Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost. This ASU requires an employer to report the service cost component of net periodic pension cost and net periodic postretirement cost in the same line item in the statement of earnings as other compensation costs arising from services rendered by the related employees during the period. The other net cost components are required to be presented in the statement of earnings separately from the service cost component and outside a subtotal of income from operations. Additionally, the line item used in the statement of earnings to present the other net cost components must be disclosed in the notes to the financial statements. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and ~~interims~~interim periods within those fiscal years, ~~with early adoption permitted. The new guidance~~and must be applied on a retrospective basis. The Company has evaluated the effect of adopting this new accounting guidance and determined that adoption ~~of this ASU is~~will not ~~expected to~~ have a ~~significant~~material impact on the Company’s ~~consolidated financial statements.~~results of operations. The Company will adopt this new accounting guidance as of September 1, 2018 (fiscal 2019).

Restricted cash

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash. This ASU requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. Therefore, amounts generally described as restricted cash and restricted cash equivalents should be included with cash and cash equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the ~~statement~~Statement of ~~cash flows.~~Cash Flows. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a retrospective basis. The Company has evaluated the effect of adopting this new accounting guidance and determined that adoption ~~of this ASU is~~will not ~~expected to~~ have a ~~significant~~material impact on the Company’s ~~consolidated financial statements.~~Statement of Cash Flows. The Company will adopt this new accounting guidance as of September 1, 2018 (fiscal 2019).

Tax accounting for intra-entity asset transfers

In October 2016, the FASB issued ASU 2016-16, Income Taxes (Topic 740): Intra-Entity Transfers of Assets Other Than Inventory. Topic 740, Income Taxes, prohibits the recognition of current and deferred income taxes for an intra-entity asset transfer until the asset has been sold to an outside party. In addition, interpretations of this guidance have developed in practice for transfers of certain intangible and tangible assets. This prohibition on recognition is an exception to the principle of comprehensive recognition of current and deferred income taxes in GAAP. To more faithfully represent the economics of intra-entity asset transfers, the amendments in this ASU require that entities recognize the income tax consequences of an intra-entity transfer of an asset other than inventory when the transfer occurs. The amendments in this ASU do not change GAAP for the pre-tax effects of an intra-entity asset transfer under Topic 810, Consolidation, or for an intra-entity transfer of inventory. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), including interim periods within those fiscal years, with early adoption permitted. The new guidance must be applied on a modified retrospective basis through a cumulative effect adjustment recognized directly to retained earnings as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance. The Company will adopt this new accounting guidance as of September 1, 2018 (fiscal 2019).

Classification of certain cash receipts and cash payments

In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU addresses the classification of certain specific cash flow issues including debt prepayment or extinguishment costs, settlement of certain debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of certain insurance claims and distributions received from equity method investees. This ASU is effective for fiscal years beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years, with early adoption permitted. An entity that elects early adoption must adopt all of the amendments in the same period and the new guidance must be applied on a retrospective basis. The Company ~~is evaluating~~has evaluated the effect of adopting this ~~ASU will have on its consolidated statement of cash flows.~~

~~Recognition of breakage for prepaid stored-value products~~

In March 2016, the FASB issued ASU 2016-04, Liabilities-Extinguishments of Liabilities (Subtopic 405-20): Recognition of Breakage for Certain Prepaid Stored-Value Products. This ASU addresses diversity in practice related to the derecognition of a prepaid store-value product liability. The ASU amends thenew accounting guidance ~~on extinguishing financial liabilities for certain prepaid store-value products. If an entity selling prepaid store-value products expects to be entitled to an amount~~and determined that adoption will not ~~be redeemed,~~have a material impact on the ~~entity~~Company’s Statement of Cash Flows. The Company will recognize the expected breakage in proportion to the pattern of rights expected to be exercised by the product holder to the extent that it is probable that a significant reversal of the breakage amount will not subsequently occur. The ASU is effective for annual periods beginning after December 15, 2017 (fiscal 2019), and interim periods within those fiscal years, with early adoption permitted, including adoption before the effective date of ASU 2015-14, Revenue from Contracts with Customers (described below). The amendments inadopt this ~~ASU should be applied either on a modified retrospective basis through a cumulative effect adjustment recognized directly to retained earnings~~new accounting guidance as of ~~the date of adoption or retrospectively to each period presented. The Company is evaluating the effect the ASU will have on its consolidated financial statements.~~September 1, 2018 (fiscal 2019).

Leases

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes Topic 840, Leases. Subsequently, the FASB has issued additional ASUs which further clarify this guidance. This ASU increases the transparency and comparability of organizations by ~~recognizing lease assets and lease liabilities~~requiring the capitalization of substantially all leases on the balance sheet and ~~disclosing~~disclosures of key information about leasing arrangements. AtUnder this new guidance, at the lease commencement date, a lessee recognizes a right-

of-use asset and lease liability, ~~and right-of-use asset,~~ which is initially measured at the present value of the future lease payments. For income statement purposes, a dual model was retained for lessees, requiring leases to be classified as either operating or finance leases. Under the operating lease model, lease expense is recognized on a straight-line basis over the lease term. Under the finance lease ~~approach,~~model, interest on the lease liability is recognized separately from amortization of the right-of-use asset. Repayments of the principal portion of the lease liability will be classified as financing activities and payments of interest on the lease liability and variable lease payments will be classified as operating activities in the statement of cash flows. Under the operating lease approach, the cost of the lease is calculated on a straight-line basis over the life of the lease term. All cash payments are classified as operating activities in the statement of cash flows. For sale and leaseback transactions, in order for a sale to occur, the transfer of the asset must meet all criteria in Topic 606. Any consideration paid for the asset is accounted for as a financing transaction. For transactions previously accounted for as a sale and leaseback, the transitionThe new guidance in Topic 842 does not require an entity to assess whether the transaction would have qualified as a sale and a leaseback in accordance with Topic 842. Additionally, gains recorded under sale and leaseback transactions are recognized at the transaction date and no longer deferred over the lease term. This ASU is effective for ~~annual periods~~fiscal years beginning after December 15, 2018 (fiscal 2020)., and interim periods within those fiscal years. In transition, lessees ~~and lessors~~ are required to recognize and measure leases at the beginning of the earliest period presented (fiscal 2018) using a modified retrospective approach which includes a number of optional practical expedients that entities may elect to apply.

The Company will adopt this ASU on September 1, 2019 (fiscal 2020). The Company has begun evaluating and planning for ~~the~~ adoption and implementation of this ASU, including implementing a new global lease accounting system, evaluating practical expedient and accounting policy elections, and assessing the overall financial statement impact. This ASU will have a material impact on the Company’s financial position. The impact on the Company’s results of operations is being evaluated. The impact of this ASU is non-cash in nature and will not affect the Company’s cash ~~position.~~flows.

Classification and measurement of financial instruments

In January 2016, the FASB issued ASU 2016-01, Financial Instruments –- Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. Subsequently, the FASB has issued additional ASUs which further clarify this guidance. This ASU requires equity investments (except those under the equity method of accounting or those that result in the consolidation of an investee) to be measured at fair value with changes in fair value recognized in net income. However, an entity may choose to measure equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. This simplifies the impairment assessment of equity investments previous held at cost. Separate presentation of financial assets and liabilities by measurement category is required. This ASU is effective prospectively for ~~annual periods~~fiscal years beginning after December 15, 2017 (fiscal 2019)., and interim periods within those fiscal years. Early application is permitted, for fiscal years or interim periods that have not yet been issued as of the beginning of the fiscal year of adoption. The new guidance must be applied on a modified retrospective basis, with the exception of the amendments related to the measurement alternative for equity investments without readily determinable fair values, which must be applied on a prospective basis. The Company ~~is evaluating~~has evaluated the effect of adopting this new accounting ~~guidance.~~guidance and determined that adoption will not have a material impact on the Company’s results of operations. The Company will adopt this new accounting guidance as of September 1, 2018 (fiscal 2019).

Revenue recognition on contracts with customers

In May ~~2015,~~2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU ~~removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and capital markets by providing~~provides a single ~~comprehensive principles-based model with additional disclosures regarding uncertainties. The~~ principles-based revenue recognition model ~~has~~with a five-step analysis of transactions to determine when and how revenue is recognized. The core principle is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. ~~In August 2015,~~Subsequently, the FASB has issued ~~ASU 2015-14, Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date,~~additional ASUs which ~~defers~~further clarify this guidance and also defer the effective date ~~of ASU 2014-09~~ by one year to ~~annual reporting periods~~fiscal years beginning after December 15, 2017 (fiscal 2019) and is the date on which the Company expects to adopt the new guidance. Subsequently, the FASB has also issued additional accounting standards updates to clarify the guidance in ASU 2014-09, all of which must be adopted concurrently. In transition, the ASU may be applied retrospectively to each prior period

~~presented or retrospectively with the cumulative effect recognized as of the date of adoption. The Company is evaluating the effect of adopting this new accounting guidance.~~

~~Measurement of inventory~~

In July 2015, the FASB issued ASU 2015-11, Inventory (Topic 330): Simplifying the Measurement of Inventory. This ASU simplifies current accounting treatments by requiring entities to measure most inventories at “the lower of cost and net realizable value” rather than using lower of cost or market. This guidance does not apply to inventories measured using last-in, first-out method or the retail inventory method. This ASU is effective prospectively for annual periods beginning after December 15, 2016, and interim periods ~~thereafter (fiscal 2018) with early adoption permitted. Upon transition, entities must disclose the accounting change.~~within those fiscal years. The Company ~~is evaluating~~continues to evaluate the ~~effect~~impact of this ASU, the related amendments and the interpretive guidance on the Company's consolidated financial statements, and will use the modified retrospective method as the transition approach when adopting this new accounting guidance ~~but does not expect adoption will have a material impact~~on September 1, 2018 (fiscal 2019). Based on the ~~Company’s results~~preliminary assessment, the impact of ~~operations, cash flows or~~adopting the new guidance will not be material to the consolidated financial ~~position.~~statements and will be limited to immaterial changes to the timing of recognition of revenues related to loyalty programs and gift cards, in addition to disaggregated revenue disclosures. Specifically, the Company currently uses the cost approach to account for loyalty programs. Upon adoption, the Company will use the deferred revenue approach. Additionally, gift card breakage currently is recognized at point of sale by the Retail Pharmacy USA segment and upon expiration primarily within the Retail Pharmacy International segment. Upon adoption of the new revenue recognition guidance, all breakage will be recognized based on the pattern in which the customer redeems the gift cards.

Note 18. ~~Related parties~~Supplemental information

Accounts receivable

Accounts receivable are stated net of allowances for doubtful accounts. Accounts receivable balances primarily consist of trade receivables due from customers, including amounts due from third party providers (e.g., pharmacy benefit managers, insurance companies and governmental agencies), clients and members. Trade receivables were $5,893 million and $5,458 million at May 31, 2018 and August 31, 2017, respectively. Other accounts receivable balances, which consist primarily of receivables from vendors and manufacturers, including receivables from AmerisourceBergen (see note 16, related parties), were $1,266 million and $1,070 million at May 31, 2018 and August 31, 2017, respectively.

Depreciation and amortization

The Company has ~~a long-term pharmaceutical distribution agreement with AmerisourceBergen pursuant to which~~recorded the ~~Company sources branded~~following depreciation and ~~generic pharmaceutical products from AmerisourceBergen principally for its U.S. operations.~~

~~Related party transactions~~amortization expense in the Consolidated Condensed Statements of Earnings (in millions):

Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Purchases, net $ 10,703
$ 10,632
$ 31,941
$ 31,436

May 31, 2017 August 31, 2016
Trade accounts payable, net $ 4,148
$ 3,456



	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
Depreciation expense	$	358	$	334	$	1,040	$	1,000
Intangible asset and other amortization	84		79		260		244
Total depreciation and amortization expense	$	442	$	413	$	1,300	$	1,244

~~Additionally, AmerisourceBergen receives sourcing services for generic pharmaceutical products.~~Accumulated depreciation and amortization on property, plant and equipment was $10.2 billion at May 31, 2018 and $9.3 billion at August 31, 2017.

Note 19. Subsequent event

On June 28, 2018, Premise Health Holding Corp. and OMERS, a Canadian pension fund, announced that an affiliate of OMERS will acquire control of Premise Health, which is currently owned by an entity in which the Company indirectly holds a minority equity interest. The transaction, which is subject to customary closing conditions, is expected to be completed in July 2018. Upon closing, the Company estimates that it would recognize an after-tax gain on disposition of approximately $272 million, which the Company intends to treat as a special item impacting the comparability of results.


~~Item 2.~~	~~Management’s discussion and analysis of financial condition and results of operations~~

Item 2. Management’s discussion and analysis of financial condition and results of operations

The following discussion and analysis of our financial condition and results of operations should be read together with the financial statements and the related notes included elsewhere herein and the ~~consolidated financial statements,~~Consolidated Financial Statements, accompanying notes and Management’s discussion and analysis of financial condition and results of operations and other disclosures contained in the Walgreens Boots Alliance, Inc. Annual Report on Form 10-K for the fiscal year ended August 31, ~~2016.~~2017. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results may differ materially from those discussed in forward-looking statements. Factors that might cause a difference include, but are not limited to, those discussed under “Cautionary note regarding forward-looking statements” below and in Item 1A “Risk factors” in our Form 10-K for the fiscal year ended August 31, ~~2016~~2017 and in ~~Item 1A “Risk factors” in this report.~~our Form 10-Q for the fiscal quarter ended November 30, 2017. References herein to the “Company”, “we”, “us”, or “our” refer to Walgreens Boots Alliance, Inc. and its subsidiaries, except as otherwise indicated or the context otherwise requires.

INTRODUCTION AND SEGMENTS

Walgreens Boots Alliance, Inc. (“Walgreens Boots Alliance”) and its subsidiaries are a global pharmacy-led health and wellbeing enterprise. Its operations are conducted through three reportable segments:

Retail Pharmacy USA;

Retail Pharmacy International; and

Pharmaceutical Wholesale

See note ~~16, Segment~~15, segment reporting for further information.

On March 31, 2017, Walgreens Boots Alliance and pharmacy benefit manager Prime Therapeutics LLC closed a transaction to form a combined central specialty pharmacy and mail services company AllianceRx Walgreens Prime, as part of a strategic alliance. AllianceRx Walgreens Prime is consolidated by Walgreens Boots Alliance and reported within the Retail Pharmacy USA division in its financial statements. See note 5, Acquisitions for further information.

~~Terminated acquisition of Rite Aid Corporation (“Rite Aid”) and related matters~~

Agreement”), pursuant to which the Company agreed, subject to the terms and conditions thereof, to acquire Rite Aid, a drugstore chain in the United States. The Merger Agreement was amended by Amendment No. 1 thereto on January 29, 2017.

See note 7, Borrowings and note 10, Commitments and contingencies to the consolidated condensed financial statements for additional information relating to the termination of the Merger Agreement and related matters.

~~Pending acquisition~~Acquisition of certain Rite Aid Corporation (“Rite Aid”) assets

On ~~June 28,~~September 19, 2017, the Company ~~entered into~~announced it had secured regulatory clearance for an ~~Asset Purchase Agreement (the “Asset Purchase Agreement”) with Rite Aid, pursuant~~amended and restated asset purchase agreement to ~~which the Company agreed, subject to the terms and conditions thereof, to acquire 2,186~~purchase 1,932 stores, three distribution centers and related inventory from Rite ~~Aid. The consideration~~Aid for ~~the transaction will be $5.175~~$4.375 billion in cash and other consideration. The Company has completed the ~~assumption by the Company~~acquisition of all 1,932 Rite Aid stores. The transition of the three distribution centers and related ~~real estate leases and the grant of an option~~inventory is expected to ~~Rite Aid, exercisable through May~~begin during fiscal 2019 and remains subject to ~~certain~~closing conditions ~~to become a member of~~set forth in the ~~Company’s group purchasing organization, Walgreens Boots Alliance Development GmbH. The Company will also assume certain limited store-related liabilities as part of the transaction.~~amended and restated asset purchase agreement.

The Company continues to expect to complete integration of the acquired stores and related assets by the end of fiscal 2020, at an estimated total cost of approximately $750 million, which is reported as acquisition-related costs. In addition, the Company continues to expect to spend approximately $500 million of capital on store conversions and related activities. The Company continues to expect annual synergies from the transaction of more than $300 million, which are expected to be fully realized within four years of the initial closing of this transaction and derived primarily from procurement, cost savings and other operational matters.

The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “cautionary note regarding forward-looking statements” below.

Comparability

The influence of certain holidays, seasonality, foreign currency rates, changes in vendor, payer and customer relationships and terms, strategic transactions including acquisitions, for example the acquisition of stores and other assets from Rite Aid, joint ventures and other strategic collaborations, changes in laws, for example the U.S. tax law changes, and general economic conditions in the markets in which the Company operates and other factors on the Company’s operations and net earnings for any period may not be comparable to the same period in previous years and are not necessarily indicative of future operating results.

RECENT DEVELOPMENTS

Premise Health

On June 28, 2018, Premise Health Holding Corp. and OMERS, a Canadian pension fund, announced that an affiliate of OMERS will acquire control of Premise Health, which is currently owned by an entity in which the Company indirectly holds a minority equity interest. The transaction, which is subject to customary closing conditions, is expected to be completed in July 2018. Upon closing, the Company estimates that it would recognize an after-tax gain on disposition of approximately $272 million, which the Company intends to ~~finance~~treat as a special item impacting the ~~acquisition through~~comparability of results. See “cautionary note regarding forward-looking statements” below.

U.S. tax law changes

The United States government enacted comprehensive tax legislation in December 2017. The U.S. tax law changes include broad and complex changes affecting the Company's fiscal 2018 results. Among other things, the U.S. tax law changes reduce the federal corporate tax rate from 35% to 21% effective January 1, 2018 and require companies to immediately accrue for and pay over an eight year period a ~~combination~~one-time transition tax on certain un-repatriated earnings of ~~cash on hand~~foreign subsidiaries. The U.S. tax law changes also alter the taxation of foreign earnings, repeal the deduction for domestic production activities and ~~funds available under existing credit facilities~~establish a global intangible low tax income (GILTI) regime as well as a base erosion anti-avoidance tax (BEAT).

In connection with the Company’s ongoing analysis of the impact of the U.S. tax law changes, which is provisional and ~~arrangements.~~subject to change, the Company recorded a net tax expense of $44 million during the nine months ended May 31, 2018. This provisional net tax expense arises from the Company’s accrual for the transition tax and other U.S. tax law changes of $679 million, partly offset by a benefit of $635 million from re-measuring the Company’s net U.S. deferred tax liabilities. As of May 31, 2018, while the Company made reasonable estimates of the impact of the U.S. tax law changes, the final impact may differ from these estimates, due to, among other things, changes in its interpretations and assumptions, additional guidance and actions the Company may take.

In addition, the Company’s results for the three and nine months ended May 31, 2018 also include a net reduction to the estimated annual tax rate for the current year as a result of the U.S. tax law changes.

Investment in Chinese Pharmacy Chain GuoDa

On December 6, 2017 the Company announced that it had reached an agreement with China National Accord Medicines Corporation Ltd. to become an investor in its subsidiary Sinopharm Holding Guoda Drugstores Co., Ltd. (“GuoDa”), a leading retail pharmacy chain in China.

Following a public tender process, the Company’s bid met all the requirements set by the seller to acquire a 40 percent equity interest in GuoDa worth approximately $432 million translated using spot rate at May 31, 2018. The transaction is subject to ~~the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended,~~regulatory review and approval, and other customary closing conditions. ~~The initial closing is expected to occur within the next six months.~~ Upon ~~the initial closing of the transaction,~~completion, the Company will ~~begin acquiring~~account for this equity investment using the equity method of accounting.

EXIT AND DISPOSAL ACTIVITIES

Store Optimization Program

On October 24, 2017, the Company’s Board of Directors approved a plan to implement a program (the “Store Optimization Program”) to optimize store locations within the Company’s Retail Pharmacy USA segment upon completion of the acquisition of certain stores and related assets from Rite Aid. The Store Optimization Program includes plans to close approximately 600 stores and related assets across the U.S. and is expected to result in cost savings of approximately $300 million per year to be fully delivered by the end of fiscal 2020. The actions under the Store Optimization Program commenced in March 2018 and are expected to take place over an 18 month period.

The Company currently estimates that it will recognize cumulative pre-tax charges to its GAAP financial results of approximately $450 million, including costs associated with lease obligations and other real estate costs, employee severance and other exit costs. The Company expects to incur pre-tax charges of approximately $270 million for lease obligations and other real estate costs and approximately $180 million for employee severance and other exit costs. The Company estimates that substantially all of these cumulative pre-tax charges will result in cash expenditures.

The Company has recognized cumulative pre-tax charges to its financial results in accordance with generally accepted accounting principles in the United States of America ("GAAP") of $24 million, which were recorded within selling, general, and administrative expenses. These charges included $2 million related to lease obligations and other real estate costs and $22 million in employee severance and other exit costs.

Store Optimization Program charges are recognized as the costs are incurred over time in accordance with GAAP. The Company treats charges related to the Store Optimization Program as special items impacting comparability of results in its quarterly earnings disclosures.

The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on ~~a phased basis.~~various factors. See “cautionary note regarding forward-looking statements” below.

AMERISOURCEBERGEN CORPORATION RELATIONSHIP

As of May 31, ~~2017,~~2018, the Company owned 56,854,867 AmerisourceBergen common shares representing approximately 26% of the outstanding AmerisourceBergen common stock, and had designated one member of AmerisourceBergen’s board of directors. As of May 31, ~~2017,~~2018, the Company can acquire up to an additional 8,398,752 AmerisourceBergen shares in the open market and thereafter designate another member of AmerisourceBergen’s board of directors, subject in each case to applicable legal and contractual requirements. The amount of permitted open market purchases is subject to increase or decrease in certain circumstances.

Effective March 18, 2016, the Company ~~accounted~~began accounting for the investment in AmerisourceBergen using the equity method of accounting, subject to a two-month reporting lag, with the net earnings attributable to the investment being classified within the operating income of the Pharmaceutical Wholesale segment. See note ~~4, Equity~~5, equity method investments, to the Consolidated Condensed Financial Statements for further information.

~~RESTRUCTURING PROGRAMS~~

On April 8, 2015, the Walgreens Boots Alliance 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 implements and builds on the planned three-year, $1.0 billion cost-reduction initiative previously announced by Walgreens on August 6, 2014 and includes a number of elements designed to help achieve profitable growth through increased cost efficiencies. In April 2015, the Company announced that it had identified additional opportunities for cost savings that increased the total expected cost savings of the Cost Transformation Program by $500 million to a targeted $1.5 billion by the end of fiscal 2017, with significant areas of focus including plans to close approximately 200 stores across the U.S.; reorganize divisional and field operations; drive operating efficiencies; and streamline information technology and other functions. The actions under the Cost Transformation Program focus primarily on the Company’s Retail Pharmacy USA segment. The Company achieved $1.5 billion in savings from its previously announced Cost Transformation Program ahead of schedule. As previously reported, the Company expects to close a total of approximately 260 stores and the program is on track to be completed by the end of fiscal 2017. Accordingly, full program benefits will be recognized in subsequent periods.

As of the date of this report, the Company estimates that the Cost Transformation Program will recognize cumulative pre-tax charges to its financial results in accordance with generally accepted accounting principles in the United States of America (“GAAP”) of approximately $1.8 billion (which is consistent with the upper end of the expected range of pre-tax charges at the time the Cost Transformation Program was launched in April 2015). These charges include costs associated with lease obligations and other real estate payments, asset impairments and employee termination and other business transition and exit costs. As of the date of this report, the Company expects to incur pre-tax charges of approximately $675 million for real estate costs, including lease obligations (net of estimated sublease income); $725 million for asset impairment charges relating primarily to asset write-offs from store closures, information technology, inventory and other non-operational real estate asset write-offs; and $400 million for employee severance and other business transition and exit costs. The Company estimates that approximately 60% of the cumulative pre-tax charges will result in cash expenditures over time, primarily related to historical and future lease and other real estate payments and employee separation costs. See note 2. Restructuring, to the Consolidated Financial Statements for additional information.

The amounts and timing of all estimates are subject to change until finalized. The actual amounts and timing may vary materially based on various factors. See “Cautionary Note Regarding Forward-Looking Statements” below.

EXECUTIVE SUMMARY

The following table presents certain key financial statistics for the three and nine months ended May 31, ~~2017~~2018 and May 31, ~~2016,~~2017, respectively.


	(in millions, except per share amounts)								(in millions, except per share amounts)
	Three months ended				Nine months ended				Three months ended May 31,				Nine months ended May 31,
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016		2018		2017		2018		2017
Sales	$	30,118	$	29,498	$	88,065	$	88,715	$	34,334	$	30,118	$	98,095	$	88,065
Gross profit²	7,145		7,433		21,822		22,719
Selling, general and administrative expenses²	5,712		5,903		17,522		17,861
Gross profit									7,780		7,145		23,217		21,822
Selling, general and administrative expenses									6,231		5,712		18,456		17,522
Equity earnings in AmerisourceBergen	84		3		143		3		52		84		142		143
Operating income	1,517		1,533		4,443		4,861		1,601		1,517		4,903		4,443
Adjusted operating income (Non-GAAP measure)¹	1,914		1,814		5,656		5,653		1,947		1,914		5,919		5,656
Earnings before interest and income tax provision	1,509		1,561		4,421		4,336		1,597		1,509		4,771		4,421
Net earnings attributable to Walgreens Boots Alliance, Inc.	1,162		1,103		3,276		3,143		1,342		1,162		3,512		3,276
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)¹	1,441		1,288		4,118		3,843		1,522		1,441		4,538		4,118
Net earnings per common share – diluted	1.07		1.01		3.02		2.88		1.35		1.07		3.51		3.02
Adjusted net earnings per common share – diluted (Non-GAAP measure)¹	1.33		1.18		3.79		3.52		1.53		1.33		4.54		3.79


	Percentage increases (decreases) from prior year								Percentage increases (decreases)
	Three months ended				Nine months ended				Three months ended May 31,			Nine months ended May 31,
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016 ³		2018	2017		2018	2017
Sales	2.1		2.4		(0.7	)	18.4		14.0	2.1		11.4	(0.7	)
Gross profit²	(3.9	)	0.2		(3.9	)	16.2
Selling, general and administrative expenses²	(3.2	)	(1.9	)	(1.9	)	11.3
Gross profit									8.9	(3.9	)	6.4	(3.9	)
Selling, general and administrative expenses									9.1	(3.2	)	5.3	(1.9	)
Operating income	(1.0	)	9.4		(8.6	)	26.9		5.5	(1.0	)	10.4	(8.6	)
Adjusted operating income (Non-GAAP measure)¹	5.5		3.7		0.1		20.1		1.7	5.5		4.6	0.1
Earnings before interest and income tax provision	(3.3	)	(16.2	)	2.0		(24.0	)	5.8	(3.3	)	7.9	2.0
Net earnings attributable to Walgreens Boots Alliance, Inc.	5.3		(15.3	)	4.2		(25.1	)	15.5	5.3		7.2	4.2
Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)¹	11.9		14.7		7.2		23.3		5.6	11.9		10.2	7.2
Net earnings per common share – diluted	5.9		(14.4	)	4.9		(28.7	)	26.2	5.9		16.2	4.9
Adjusted net earnings per common share – diluted (Non-GAAP measure)¹	12.7		15.7		7.7		17.3		15.0	12.7		19.8	7.7

Percent to sales
Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Gross margin²
23.7 25.2 24.8 25.6
Selling, general and administrative expenses²
19.0 20.0 19.9 20.1



	Percent to sales
	Three months ended May 31,		Nine months ended May 31,
	2018	2017	2018	2017
Gross margin	22.7	23.7	23.7	24.8
Selling, general and administrative expenses	18.1	19.0	18.8	19.9


¹	See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable financial measure calculated in accordance with generally accepted accounting principles in the United States (“GAAP”).


²	To improve comparability, certain classification changes were made to prior period sales, cost of sales and selling, general and administrative expenses. These changes had no impact on operating income or adjusted operating income. The reclassifications were made in the fourth quarter of fiscal 2016.


³	The nine months ended May 31, 2016 include the results of Alliance Boots GmbH on a fully consolidated basis, while the nine months ended May 31, 2015 include the results of Alliance Boots GmbH for five months on a fully consolidated basis and for four months as equity earnings in Alliance Boots GmbH reflecting Walgreen Co.'s pre-merger 45% interest.

WALGREENS BOOTS ALLIANCE RESULTS OF OPERATIONS

Net earnings attributable to Walgreens Boots Alliance for the three months ended May 31, ~~2017~~2018 increased ~~5.3%~~15.5% to ~~$1,162 million~~$1.3 billion compared with the prior year period, while diluted net earnings per share increased ~~5.9%~~26.2% to ~~$1.07~~$1.35 compared with the prior year period. The increases in net earnings and diluted net earnings per share for the three month period ended May 31, ~~2017~~2018 primarily ~~reflects~~reflect costs related to the Company's Cost Transformation Program in the prior year period and a lower effective tax ~~rate.~~rate in the current period. Diluted net earnings per share was also positively affected by a lower number of shares outstanding compared to the prior year period. Net earnings and diluted net earnings per share were ~~negatively~~each positively impacted by ~~1.5~~1.0 percentage points ~~and 2.0 percentage points, respectively,~~ as a result of currency translation.

Net earnings attributable to Walgreens Boots Alliance for the nine months ended May 31, ~~2017~~2018 increased ~~4.2%~~7.2% to ~~$3.3~~$3.5 billion compared with the prior year period, while diluted net earnings per share increased ~~4.9%~~16.2% to ~~$3.02~~$3.51 compared with the prior year period. The increases in net earnings and diluted net earnings per share for the nine month period ended May 31, ~~2017~~2018 primarily reflect the ~~reduction in the fair value~~effects of ~~the Company’s AmerisourceBergen warrants in the year-ago period partially offset by higher costs related to~~ the Cost Transformation Program in the ~~current~~prior year period, partially offset by impairment of the Company's equity method investment in Guangzhou Pharmaceuticals Corporation in the nine months ended May 31, 2018. Diluted net earnings per share was also positively affected by a lower number of shares outstanding compared to the prior year period. Net earnings and diluted net earnings per share were ~~each negatively~~positively impacted by ~~2.4~~0.9 percentage points and 1.0 percentage points respectively, as a result of currency translation.

Other income (expense) for the three ~~and~~months ended May 31, 2018 was an expense of $4 million as compared to an expense of $8 million for the three months ended May 31, 2017. Other income (expense) for the nine months ended May 31, ~~2017~~2018 was an expense of $8$132 million, ~~and $22 million, respectively,~~which primarily reflects the impairment of the Company’s equity method investment in Guangzhou Pharmaceuticals, as compared to an ~~income of $28 million and an~~ expense of ~~$525~~$22 million, ~~respectively, in~~for the ~~three and~~ nine months ended May 31, 2016. The comparable periods included expenses of $259 million and $845 million for the reduction in the fair value of the AmerisourceBergen warrants for the three and nine months ended May 31, 2016, respectively, and $268 million income in both periods for the change in accounting method for the Company's investment in AmerisourceBergen.

2017.

Interest was a net expense of ~~$155~~$157 million and ~~$500~~$457 million for the three and nine months ended May 31, ~~2017,~~2018, respectively, compared to ~~$147~~$155 million and ~~$425~~$500 million in the three and nine months ended May 31, ~~2016,~~2017, respectively. ~~The increases mainly reflect~~For the ~~interest expense associated with~~nine months ended May 31, 2018 the ~~debt financing for~~decrease is primarily as a result of the ~~then-pending acquisition~~redemption of ~~Rite Aid.~~certain notes in June 2017 pursuant to the special mandatory redemption terms of the indenture governing such notes.

The effective tax rate for the three and nine months ended May 31, ~~2017~~2018 was ~~12.4%~~7.6% and 19.4% respectively, compared to ~~22.8%~~12.4% and 16.2% for the ~~prior year period. The~~three and nine months ended May 31, 2017. For the three months ended May 31, 2018, the decrease in the effective tax rate was due to the impact of the U.S. tax law changes enacted in December 2017, including the company’s estimated accrual for transition tax, which was updated in the quarter. For the nine months ended May 31, 2018, the increase in the effective tax rate reflects the Company’s estimated accrual for transition tax. A provisional net tax benefit of $140 million and net expense of $44 million was recorded during the three and nine months ended May 31, 2018, respectively, as a result of U.S. tax law changes enacted in December 2017. In addition, the Company’s results for the nine months ended May 31, ~~2017 was 16.2% compared~~2018 also include a net reduction to ~~20.2% for~~ the ~~prior year period. The decrease in the effective~~Company’s estimated annual tax rate for the three months and nine months ended May 31, 2017 was primarily attributable to net incremental discrete tax benefits and a lower estimated annual tax rate. The lower estimated annual tax rate was mostlycurrent year as a result of ~~forecast changes in the geographic mix of our pre-tax earnings, increased benefits associated with~~ the U.S. ~~taxation of our non-U.S. operations and additional favorable permanent book-tax differences, including~~ tax credits. For the three months ended May 31, 2017 discrete tax benefits resulted primarily from net tax benefits associated with prior tax years. For the nine months ended May 31, 2017 discrete tax benefits resulted primarily from adopting ASU 2016-09 and net tax benefits associated with prior tax years.law changes.

~~Walgreens Boots Alliance adjusted~~Adjusted diluted net earnings per share (Non-GAAP measure)

Adjusted net earnings attributable to Walgreens Boots Alliance for the three months ended May 31, ~~2017~~2018 increased ~~11.9%~~5.6% to ~~$1.4~~$1.5 billion, compared with the year-ago quarter. Adjusted diluted net earnings per share increased ~~12.7%~~15.0% to ~~$1.33,~~$1.53, compared with the year-ago quarter. Adjusted net earnings and adjusted diluted net earnings per share were each ~~negatively~~positively impacted by ~~1.7~~1.0 percentage points and 1.5 percentage points respectively, as a result of currency translation.

Excluding the impact of currency translation, the increase in adjusted net earnings and adjusted diluted net earnings per share for the three months ended May 31, ~~2017~~2018 reflects the impact of the U.S. tax law changes. Adjusted diluted net earnings per share was ~~primarily due to an increase in equity earnings from AmerisourceBergen and~~also positively affected by a lower ~~effective tax rate.~~number of shares outstanding compared to the prior year period.

Adjusted net earnings attributable to Walgreens Boots Alliance for the nine months ended May 31, ~~2017,~~2018 increased ~~7.2%~~10.2% to ~~$4.1~~$4.5 billion, compared with the year-ago period. Adjusted diluted net earnings per share increased ~~7.7%~~19.8% to ~~$3.79,~~$4.54, compared with the year-ago period. Adjusted net earnings and adjusted diluted net earnings per share were ~~negatively~~positively impacted by ~~2.1~~1.1 percentage points and ~~2.2~~1.3 percentage points, respectively, as a result of currency translation.

Excluding the impact of currency translation, the increase in adjusted net earnings and adjusted diluted net earnings per share for the nine months ended May 31, ~~2017~~2018 primarily reflects the impact of the U.S. tax law changes and increased adjusted operating income. Adjusted diluted net earnings per share was ~~primarily due to an increase in equity earnings from AmerisourceBergen and~~also positively affected by a lower ~~effective tax rate.~~number of shares outstanding compared to the prior year period. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

RESULTS OF OPERATIONS BY SEGMENT

Retail Pharmacy USA


	(in millions, except location amounts)								(in millions, except location amounts)
	Three months ended				Nine months ended				Three months ended May 31,				Nine months ended May 31,
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016		2018		2017		2018		2017
Sales	$	22,528	$	21,185	$	65,001	$	63,055	$	25,917	$	22,528	$	72,884	$	65,001
Gross profit	5,507		5,603		16,822		16,943		6,029		5,507		17,898		16,822
Selling, general and administrative expenses	4,337		4,434		13,427		13,317		4,776		4,337		14,117		13,427
Operating income	1,170		1,169		3,395		3,626		1,253		1,170		3,781		3,395
Adjusted operating income (Non-GAAP measure)¹	1,463		1,382		4,304		4,257		1,492		1,463		4,518		4,304

Number of prescriptions²	196.0		187.4		575.8		560.0		215.2		196.0		615.8		575.8
30-day equivalent prescriptions^2,3	255.2		235.3		739.5		699.0		285.2		255.2		814.6		739.5
Number of locations at period end	8,138		8,208		8,138		8,208		9,964		8,138		9,964		8,138


	Percentage increases (decreases) from prior year								Percentage increases (decreases)
	Three months ended				Nine months ended				Three months ended May 31,				Nine months ended May 31,
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016		2018		2017		2018		2017
Sales	6.3		3.7		3.1		3.3		15.0		6.3		12.1		3.1
Gross profit	(1.7	)	1.4		(0.7	)	2.3		9.5		(1.7	)	6.4		(0.7	)
Selling, general and administrative expenses	(2.2	)	(1.3	)	0.8		(1.4	)	10.1		(2.2	)	5.1		0.8
Operating income	0.1		13.2		(6.4	)	7.3		7.1		0.1		11.4		(6.4	)
Adjusted operating income (Non-GAAP measure)¹	5.9		4.1		1.1		5.3		2.0		5.9		5.0		1.1
Comparable store sales^4,5	3.7		3.9		2.6		3.9
Comparable store sales⁴									(1.2	)	3.7		1.9		2.6
Pharmacy sales	10.3		5.8		5.5		5.2		19.3		10.3		17.4		5.5
Comparable pharmacy sales^4,5	5.8		6.0		4.4		6.3
Comparable pharmacy sales⁴									—		5.8		4.1		4.4
Retail sales	(1.8	)	(0.4	)	(1.9	)	(0.3	)	5.2		(1.8	)	0.6		(1.9	)
Comparable retail sales⁴	(0.4	)	0.1		(0.6	)	(0.2	)	(3.8	)	(0.4	)	(2.5	)	(0.6	)
Comparable number of prescriptions^2,4	4.8		2.8		3.6		2.5		(2.4	)	4.8		1.5		3.6
Comparable 30-day equivalent prescriptions^2,3,4	8.3		4.5		6.5		4.0		—		8.3		4.2		6.5


	Percent to sales				Percent to sales
	Three months ended		Nine months ended		Three months ended May 31,		Nine months ended May 31,
	May 31, 2017	May 31, 2016	May 31, 2017	May 31, 2016	2018	2017	2018	2017
Gross margin	24.4	26.4	25.9	26.9	23.3	24.4	24.6	25.9
Selling, general and administrative expenses	19.3	20.9	20.7	21.1	18.4	19.3	19.4	20.7


¹	See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure and related disclosures.


²	Includes immunizations.


³	Includes the adjustment to convert prescriptions greater than 84 days to the equivalent of three 30-day prescriptions. This adjustment reflects the fact that these prescriptions include approximately three times the amount of product days supplied compared to a normal prescription.

⁴

Comparable stores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or subject to a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. The method of calculating comparable sales varies across the industries in which ~~we operate.~~the Company operates. As a result, our method of calculating comparable sales may not be the same as other companies’ methods. ~~The nine month period ended May 31, 2016 comparable sales and comparable prescription figures include an adjustment to remove February 29, 2016 results due to the leap year.~~

⁵

Comparable store sales and comparable pharmacy sales for the three and six months ended February 28, 2017 reflect certain revisions. These revisions did not impact the Company's financial statements and resulted in increases to previously reported comparable store sales and comparable pharmacy sales from 2.4% and 4.2%, respectively, to 3.1% and 5.3%, respectively, for the three months ended February 28, 2017 and from 1.8% and 3.0%, respectively, to 2.1% and 3.6%, respectively, for the six months ended February 28, 2017.

Sales for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy USA division’s sales for the three months ended May 31, ~~2017~~2018 increased by ~~6.3%~~15.0% to ~~$22.5 billion, which includes two months of results for AllianceRx Walgreens Prime, our recently formed central specialty and mail services business.~~$25.9 billion. Sales in comparable stores ~~increased 3.7%~~decreased 1.2% compared with the year-ago quarter.

Pharmacy sales increased by ~~10.3%~~19.3% for the three months ended May 31, ~~2017~~2018 and ~~represented 69.9%~~accounted for 72.5% of the division’s sales. ~~Sales include two months of AllianceRx Walgreens Prime.~~ The increase in the current quarter is mainly due to higher prescription volumes ~~including~~from the acquisition of Rite Aid stores and from central specialty and mail following the formation of AllianceRx Walgreens Prime. In the year-ago quarter, pharmacy sales increased ~~5.8%~~10.3% and ~~represented 67.4%~~accounted for 69.9% of the division’s sales. Comparable pharmacy sales ~~increased 5.8%~~were unchanged for the three months ended May 31, ~~2017,~~2018, compared to an increase of ~~6.0%~~5.8% in the year-ago ~~quarter, primarily due to strong volume growth from Medicare Part D~~quarter. Brand inflation was offset by reimbursement pressure and ~~volume growth from previously announced strategic~~generics which had a negative impact on comparable pharmacy ~~partnerships.~~sales growth. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription

sales by ~~2.6%~~1.1% in the three months ended May 31, ~~2017~~2018 compared to a reduction of ~~1.8%~~2.6% in the year-ago quarter. On division sales, this effect was a reduction of ~~1.6%~~0.7% for the three months ended May 31, ~~2017~~2018 compared to a reduction of ~~1.1%~~1.6% for the year-ago quarter. The total number of prescriptions (including immunizations) filled for the three months ended May 31, ~~2017~~2018 was ~~196.0~~215.2 million compared to ~~187.4~~196.0 million in the year-ago quarter. Prescriptions (including immunizations) filled adjusted to 30-day equivalents were ~~255.2~~285.2 million in the three months ended May 31, ~~2017~~2018 compared to ~~235.3~~255.2 million in the year-ago quarter.

Retail sales ~~decreased 1.8%~~increased 5.2% for the three months ended May 31, ~~2017~~2018 and were ~~30.1%~~27.5% of the division’s sales. In the year-ago quarter, retail sales decreased ~~0.4%~~1.8% and represented ~~32.6%~~30.1% of the division’s sales. The ~~decrease~~increase in the current quarter ~~reflects~~is mainly due to sales from the ~~impact of the previously announced closure of certain e-commerce operations.~~acquired Rite Aid stores. Comparable retail sales decreased ~~0.4%~~3.8% in the three months ended May 31, ~~2017~~2018 compared to ~~an increase~~a decrease of ~~0.1%~~0.4% in the year-ago quarter. The decrease in comparable retail sales growth in the current period was due to declines in the consumables and general merchandise category, the health and inwellness category and the personal care category, partially offset by growth in the ~~health and wellness category and in the~~ beauty category.

Operating income for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy USA division’s operating income for the three months ended May 31, ~~2017~~2018 increased ~~0.1%~~7.1% to ~~$1.2~~$1.3 billion. The increase was primarily due to ~~lower~~higher sales and a reduction in selling, general and administrative expenses as a percentage of sales, partially offset by lower gross ~~profit.~~margin.

Gross ~~profit decreased 1.7% from~~margin was 23.3% for the three months ended May 31, 2018 compared to 24.4% in the year-ago ~~quarter, reflecting~~quarter. Pharmacy margins in the current period were negatively impacted by a higher mix of specialty sales and by lower third-party reimbursements. The decrease in ~~both~~ pharmacy ~~and retail gross profit,~~margins were partially offset by the ~~latter partially related~~favorable impact of procurement efficiencies. Retail margins were positively impacted in the current period primarily due to ~~one-time expenses associated with the Cost Transformation Program.~~underlying margin improvement from changes to promotions.

Selling, general and administrative expenses as a percentage of sales were ~~19.3%~~18.4% in the three months ended May 31, ~~2017~~2018 compared to ~~20.9%~~19.3% in the year-ago quarter. Expenses as a percentage of sales were lower in the current period primarily due to sales mix and cost savings partially offset by higher ~~sales. The Company also benefited from a reduction in expenses due to an amendment to certain employee post-retirement benefits and from the Cost Transformation Program.~~cost mix of acquired Rite Aid stores.

Adjusted operating income (Non-GAAP measure) for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy USA division’s adjusted operating income for the three months ended May 31, ~~2017~~2018 increased ~~5.9%~~2.0% to $1.5 billion. The increase was primarily due to ~~lower~~higher sales and a reduction in selling, general and administrative expenses as a percentage of sales, partially offset by ~~a decline in~~lower gross ~~profit.~~margin. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

Sales for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy USA division’s total sales for the nine months ended May 31, ~~2017~~2018 increased ~~3.1%~~12.1% to ~~$65.0~~$72.9 billion. Sales in comparable stores increased ~~2.6%~~1.9% compared with the year-ago period.

Pharmacy sales increased by ~~5.5%~~17.4% for the nine months ended May 31, ~~2017~~2018 and represented ~~68.5%~~71.7% of the division’s sales. In the nine months ended May 31, ~~2016,~~2017, pharmacy sales were up ~~5.2%~~5.5% and represented ~~66.9%~~68.5% of the division’s sales. Comparable pharmacy sales were up 4.1% in the nine months ended May 31, 2018 compared to an increase of 4.4% in the nine months ended May 31, ~~2017 compared to an increase of 6.3% in the nine months ended May 31, 2016.~~2017. The effect of generic drugs, which have a lower retail price, replacing brand name drugs reduced prescription sales by ~~2.6%~~1.5% in the ~~current~~ nine month period ended May 31, ~~2017~~2018 compared to a reduction of ~~2.1%~~2.6% in the year-ago period. The effect of generics on division sales was a reduction of ~~1.6%~~0.9% in the current nine month period compared to a reduction of ~~1.2%~~1.6% in the year-ago period. Third party sales, where reimbursement is received from managed care organizations, governmental agencies, employers or private insurers, were ~~97.7%~~98.0% of prescription sales for the nine month period ended May 31, ~~2017~~2018 compared to ~~97.3%~~97.7% for the nine months ended May 31, ~~2016.~~2017. The total number of prescriptions (including

immunizations) filled for the nine months ended May 31, ~~2017~~2018 was ~~575.8~~615.8 million compared to ~~560.0~~575.8 million for the year-ago period. Prescriptions (including immunizations) filled adjusted to 30-day equivalents were ~~739.5~~814.6 million in the nine months ended May 31, ~~2017~~2018 compared to ~~699.0~~739.5 million in the year-ago period.

Retail sales ~~decreased 1.9%~~increased 0.6% for the nine months ended May 31, ~~2017~~2018 and were ~~31.5%~~28.3% of the division’s sales. In comparison, for the nine months ended May 31, ~~2016~~2017 retail sales decreased ~~0.3%~~1.9% and represented ~~33.1%~~31.5% of the division’s sales. The ~~decrease~~increase in the current period ~~reflects~~is mainly due to sales from the acquired Rite Aid stores. The impact from changes to our promotional plans and the impact of the previously announced closure of certain e-commerce ~~operations.~~operations negatively impacted retail sales in the period. Comparable retail sales decreased ~~0.6%~~2.5% for the current nine month period compared to a decrease of ~~0.2%~~0.6% in the year-ago period. The decrease in comparable retail sales in the nine months ended May 31, ~~2017~~2018 was primarily due to declines in the consumables and general merchandise category and in the personal care category, partially offset by growth in the health and wellness category and in the beauty category.

Operating income for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~

2017

Retail Pharmacy USA division’s operating income for the nine months ended May 31, ~~2017 decreased 6.4%~~2018 increased 11.4% to ~~$3.4~~$3.8 billion. The ~~decrease~~increase was primarily due to higher ~~costs associated with the Cost Transformation Program,~~sales and a reduction in selling, general and administrative expenses as a percentage of sales, partially offset by ~~other cost benefits.~~lower gross margin.

Gross ~~profit decreased 0.7% from~~margin was 24.6% for the nine months ended May 31, 2018 compared to 25.9% in the year-ago period. Pharmacy margins in the current period were negatively impacted by a higher mix of specialty sales and by lower third-party reimbursements. The decrease in pharmacy margins were partially offset by the favorable impact of procurement efficiencies. Retail margins were positively impacted in the current period primarily due to ~~a decrease in both pharmacy and retail gross profit, the latter partially related~~underlying margin improvement from changes to ~~one-time expenses associated with the Cost Transformation Program.~~promotions.

Selling, general and administrative expenses as a percentage of sales were ~~20.7%~~19.4% for the nine month period ended May 31, ~~2017~~2018 compared to ~~21.1%~~20.7% in the year-ago period. Expenses as a percentage of sales were lower in the current period primarily due to sales mix, the Cost Transformation Program in the year-ago period and higher ~~sales and sales mix.~~prescription volume partially offset by higher cost mix of acquired Rite Aid stores in the current period.

Adjusted operating income (Non-GAAP measure) for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy USA division’s adjusted operating income for the nine months ended May 31, ~~2017~~2018 increased ~~1.1%~~5.0% to ~~$4.3~~$4.5 billion. The increase was primarily due to ~~lower~~higher sales and a reduction in selling, general and administrative expenses as a percentage of sales, partially offset by lower gross ~~profit.~~margin. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

Retail Pharmacy International

This division comprises retail pharmacy businesses operating in countries outside of the U.S. and in currencies other than the U.S. dollar, including the British ~~Pound,~~pound sterling, Euro, Chilean ~~Peso~~peso and Mexican ~~Peso,~~peso and therefore the division’s results are impacted by movements in foreign currency exchange rates. See Item 3. Quantitative and qualitative disclosure about market risk, ~~Foreign~~foreign currency exchange rate risk for further information on currency risk.

(in millions, except location amounts)
Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Sales⁴
$ 2,809
$ 3,132
$ 8,872
$ 10,219
Gross profit⁴
1,148
1,298
3,527
4,159
Selling, general and administrative expenses⁴
1,006
1,075
3,005
3,335
Operating income 142
223
522
824
Adjusted operating income (Non-GAAP measure)¹
193
258
648
908
Number of locations at period end 4,710
4,628
4,710
4,628

Percentage increases (decreases) from prior year
Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Sales⁴
(10.3 ) (3.1 ) (13.2 ) NA
Gross profit⁴
(11.6 ) (2.6 ) (15.2 ) NA
Selling, general and administrative expenses⁴
(6.4 ) (4.6 ) (9.9 ) NA
Operating income (36.3 ) 8.8
(36.7 ) NA
Adjusted operating income (Non-GAAP measure)¹
(25.2 ) 3.6
(28.6 ) NA
Comparable store sales²
(9.9 ) (5.4 ) (12.9 ) NA
Comparable store sales in constant currency^2,3
0.2
0.2
(0.3 ) NA
Pharmacy sales⁴
(9.7 ) (3.6 ) (13.2 ) NA
Comparable pharmacy sales²
(9.9 ) (6.6 ) (13.3 ) NA
Comparable pharmacy sales in constant currency^2,3
(0.1 ) (0.7 ) (1.4 ) NA
Retail sales⁴
(10.7 ) (2.0 ) (13.2 ) NA
Comparable retail sales²
(10.0 ) (4.6 ) (12.7 ) NA
Comparable retail sales in constant currency^2,3
0.4
0.7
0.4
NA



	(in millions, except location amounts)
	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
Sales	$	2,995	$	2,809	$	9,395	$	8,872
Gross profit	1,215		1,148		3,733		3,527
Selling, general and administrative expenses	1,043		1,006		3,125		3,005
Operating income	172		142		608		522
Adjusted operating income (Non-GAAP measure)¹	198		193		688		648
Number of locations at period end	4,734		4,710		4,734		4,710

Percent to sales
Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Gross margin⁴
40.9 41.4 39.8 40.7
Selling, general and administrative expenses⁴
35.8 34.3 33.9 32.6



	Percentage increases (decreases)
	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
Sales	6.6		(10.3	)	5.9		(13.2	)
Gross profit	5.8		(11.6	)	5.8		(15.2	)
Selling, general and administrative expenses	3.7		(6.4	)	4.0		(9.9	)
Operating income	21.1		(36.3	)	16.5		(36.7	)
Adjusted operating income (Non-GAAP measure)¹	2.6		(25.2	)	6.2		(28.6	)
Comparable store sales²	7.4		(9.9	)	6.5		(12.9	)
Comparable store sales in constant currency^2,3	(1.4	)	0.2		(1.3	)	(0.3	)
Pharmacy sales	6.7		(9.7	)	7.0		(13.2	)
Comparable pharmacy sales²	6.8		(9.9	)	7.3		(13.3	)
Comparable pharmacy sales in constant currency^2,3	(1.7	)	(0.1	)	(0.4	)	(1.4	)
Retail sales	6.6		(10.7	)	5.3		(13.2	)
Comparable retail sales²	7.7		(10.0	)	6.1		(12.7	)
Comparable retail sales in constant currency^2,3	(1.3	)	0.4		(1.7	)	0.4



	Percent to sales
	Three months ended May 31,		Nine months ended May 31,
	2018	2017	2018	2017
Gross margin	40.6	40.9	39.7	39.8
Selling, general and administrative expenses	34.8	35.8	33.3	33.9


NA	~~Not applicable~~


¹	See “--Non-GAAP Measures” below for reconciliations to the most directly comparable GAAP measure and related disclosures.

Comparable stores are defined as those that have been open for at least twelve consecutive months without closure for seven or more consecutive days and without a major remodel or a natural disaster in the past twelve months. Relocated and acquired stores are not included as comparable stores for the first twelve months after the relocation or acquisition. The method of calculating comparable sales varies across the industries in which ~~we operate.~~the Company operates. As a result, our method of calculating comparable sales may not be the same as other companies’ methods. ~~The nine month period ended May 31, 2016 comparable sales figures include an adjustment to remove February 29, 2016 results due to the leap year.~~

The Company presents certain information related to current period operating results in “constant currency,” which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of the United States reporting in currencies other than the U.S. dollar and this presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations. See “--Non-GAAP Measures” below.


⁴	To improve comparability, certain classification changes were made to prior period sales, cost of sales and selling, general and administrative expenses. These changes had no impact on operating income or adjusted operating income. The reclassifications were made in the fourth quarter of fiscal 2016.

Sales for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy International division’s sales for the three months ended May 31, ~~2017 decreased 10.3%~~2018 increased 6.6% to ~~$2.8~~$3.0 billion. Sales in comparable stores ~~decreased 9.9%~~increased 7.4% from the year-ago quarter. The ~~negative~~positive impact of currency translation on ~~both~~ sales and comparable sales was ~~10.1~~8.7 percentage points and ~~10.1~~8.8 percentage points, respectively. Comparable store sales in constant currency ~~increased 0.2%~~decreased 1.4% from the year-ago quarter.

Pharmacy sales ~~decreased 9.7%~~increased 6.7% in the three months ended May 31, ~~2017~~2018 and represented 37.1% of the division’s sales. Comparable pharmacy sales ~~decreased 9.9%~~increased 6.8% from the year-ago quarter. The ~~negative~~positive impact of currency translation on pharmacy sales and comparable pharmacy sales was ~~9.9~~8.4 percentage points and ~~9.8~~8.5 percentage points, respectively. Comparable pharmacy sales in constant currency decreased ~~0.1%~~1.7% from the year-ago ~~quarter. The decrease was~~quarter mainly due to ~~the negative impact of a reduction in pharmacy~~lower prescription volume and government funding in the United Kingdom.

Retail sales ~~decreased 10.7%~~increased 6.6% for the three months ended May 31, ~~2017~~2018 and were 62.9% of the division’s sales. Comparable retail sales ~~decreased 10.0%~~increased 7.7% from the year-ago quarter. The ~~negative~~positive impact of currency translation on retail sales and comparable retail

sales was ~~10.3~~8.9 percentage points and ~~10.4~~9.0 percentage points, respectively. Comparable retail sales in constant currency ~~increased 0.4%~~decreased 1.3% from the year-ago quarter reflecting ~~growth~~lower Boots UK retail sales in ~~the United Kingdom.~~a challenging market place.

Operating income for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy International division’s operating income for the three months ended May 31, ~~2017 decreased 36.3%~~2018 increased 21.1% to ~~$142~~$172 million of which ~~10.7~~14.8 percentage points ($2421 million) was as a result of the ~~negative~~positive impact of currency translation. The remaining ~~decrease~~increase was due to ~~higher~~lower selling, general and administrative ~~expenses as a percentage of sales and lower gross profit.~~expenses.

Gross profit ~~decreased 11.6%~~increased 5.8% from the year-ago quarter of which ~~10.4~~8.8 percentage points ($~~135~~101 million) was as a result of the ~~negative~~positive impact of currency translation. Excluding the impact of currency translation, the decrease was due to lower retail gross margin.

Selling, general and administrative expenses ~~decreased 6.4%~~increased 3.7% from the year-ago quarter. Expenses were ~~positively~~negatively impacted by ~~10.3~~8.0 percentage points ($~~111~~80 million) as a result of currency translation. As a percentage of sales, selling, general and administrative expenses were ~~35.8%~~34.8% in the current quarter, compared to ~~34.3%~~35.8% in the year-ago quarter.

Adjusted operating income (Non-GAAP measure) for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~

2017

Retail Pharmacy International division’s adjusted operating income for the three months ended May 31, ~~2017 decreased 25.2%~~2018 increased 2.6% to ~~$193~~$198 million, of which ~~11.2~~11.9 percentage points ($2923 million) was as a result of the ~~negative~~positive impact of currency translation. ~~The remaining~~Excluding the impact of currency translation the decrease was ~~primarily~~ due to ~~higher~~lower gross profit and the phasing of certain selling, general and administrative expenses, ~~as a percentage of sales and lower gross profit.~~partially offset by cost containment measures. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

Sales for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy International division’s sales for the nine months ended May 31, ~~2017 decreased 13.2%~~2018 increased 5.9% to ~~$8.9~~$9.4 billion. Sales in comparable stores ~~decreased 12.9%~~increased 6.5% from the year-ago period. Of the ~~decreases~~increases in sales and comparable store sales, ~~12.6~~7.7 percentage points and ~~12.6~~7.8 percentage points, respectively, were as a result of the ~~negative~~positive impact of currency translation. Comparable store sales in constant currency decreased ~~0.3%~~1.3% from the year-ago period.

Pharmacy sales ~~decreased~~increased by ~~13.2%~~7.0% in the nine months ended May 31, ~~2017~~2018 and represented ~~34.9%~~35.3% of the division’s sales. Comparable pharmacy sales ~~decreased 13.3%~~increased 7.3% from the year-ago period. Of the ~~decreases~~increases in pharmacy sales and comparable pharmacy sales, ~~12.0~~7.6 percentage points and ~~11.9~~7.7 percentage points, respectively, were as a result of the ~~negative~~positive impact of currency translation. Comparable pharmacy sales in constant currency decreased ~~1.4% from the year-ago period. The decrease was mainly due to the negative impact of a reduction in pharmacy funding in the United Kingdom.~~

~~Retail sales decreased 13.2% for the nine months ended May 31, 2017 and were 65.1% of the division’s sales. Comparable retail sales decreased 12.7%~~0.4% from the year-ago period.

Retail sales increased 5.3% for the nine months ended May 31, 2018 and were 64.7% of the division’s sales. Comparable retail sales increased 6.1% from the year-ago period. Retail sales and comparable retail sales were ~~negatively~~positively impacted by ~~13.0~~7.8 percentage points and ~~13.1~~7.8 percentage points, respectively, as a result of currency translation. Comparable retail sales in constant currency ~~increased 0.4%~~decreased 1.7% from the year-ago period reflecting ~~growth in the United Kingdom.~~lower Boots UK retail sales.

Operating income for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy International division’s operating income for the nine months ended May 31, ~~2017 decreased 36.7%~~2018 increased 16.5% to ~~$522~~$608 million, of which ~~10.0~~9.2 percentage points ($8248 million) was as a result of the ~~negative~~positive impact of currency translation. The remaining ~~decrease~~increase was due to ~~higher~~lower selling, general and administrative ~~expenses as a percentage of sales and lower gross profit.~~expenses.

Gross profit ~~decreased 15.2%~~increased 5.8% from the year-ago period, of which ~~12.5~~7.8 percentage points ($~~521~~277 million) was as a result of the ~~negative~~positive impact of currency translation. ~~The remaining~~Excluding the impact of currency translation the decrease was primarily due to lower ~~gross profit in the United Kingdom which was impacted by reduced pharmacy funding compared to the year-ago period.~~Boots UK retail sales.

Selling, general and administrative expenses ~~decreased 9.9%~~increased 4.0% from the year-ago period. Expenses were ~~positively~~negatively impacted by ~~13.2~~7.6 percentage points ($~~439~~229 million) as a result of currency translation. ~~This was offset in part by higher depreciation over the year-ago period.~~ As a percentage of sales, selling, general and administrative expenses were ~~33.9%~~33.3% in the current period, compared to ~~32.6%~~33.9% in the year-ago period.

Adjusted operating income (Non-GAAP measure) for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Retail Pharmacy International division’s adjusted operating income for the nine months ended May 31, ~~2017 decreased 28.6%~~2018 increased 6.2% to ~~$648~~$688 million, of which ~~11.0~~8.4 percentage points ($~~100~~54 million) was as a result of the ~~negative~~positive impact of currency translation. ~~The remaining~~Excluding the impact of currency translation the decrease was due to lower ~~gross profit and higher~~sales partially offset by lower selling, general and administrative ~~expenses as a percentage of sales.~~expenses. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

Pharmaceutical Wholesale

This division ~~comprises~~includes pharmaceutical wholesale businesses operating in currencies other than the U.S. dollar including the British ~~Pound,~~pound sterling, Euro, and Turkish ~~Lira,~~lira, and thus the division’s results are impacted by movements in foreign currency exchange rates. See Item 3. Quantitative and qualitative disclosure about market risk, ~~Foreign~~foreign currency exchange rate risk for further information on currency risk.



	(in millions, except location amounts)
	Three months ended May 31,				Nine months ended May 31,
	2018		2017		2018		2017
Sales	$	5,965	$	5,296	$	17,438	$	15,743
Gross profit	536		491		1,590		1,478
Selling, general and administrative expenses	412		375		1,219		1,096
Equity earnings in AmerisourceBergen	52		84		142		143
Operating income	176		200		513		525
Adjusted operating income (Non-GAAP measure)¹	257		253		712		703


	(in millions, except location amounts)								Percentage increases (decreases)
	Three months ended				Nine months ended				Three months ended May 31,				Nine months ended May 31,
	May 31, 2017		May 31, 2016		May 31, 2017		May 31, 2016		2018		2017		2018		2017
Sales	$	5,296	$	5,748	$	15,743	$	17,171	12.6		(7.9	)	10.8		(8.3	)
Gross profit	491		537		1,478		1,629		9.2		(8.6	)	7.6		(9.3	)
Selling, general and administrative expenses	375		394		1,096		1,209		9.9		(4.8	)	11.2		(9.3	)
Equity earnings in AmerisourceBergen	84		3		143		3
Operating income	200		146		525		423		(12.0	)	37.0		(2.3	)	24.1
Adjusted operating income (Non-GAAP measure)¹	253		179		703		500		1.6		41.3		1.3		40.6
Comparable sales²									12.6		(7.0	)	10.8		(5.4	)
Comparable sales in constant currency^2,3									4.0		3.7		4.0		4.5

Percentage increases (decreases) from prior year
Three months ended Nine months ended
May 31, 2017 May 31, 2016 May 31, 2017 May 31, 2016
Sales (7.9 ) 0.7
(8.3 ) NA
Gross profit (8.6 ) (4.1 ) (9.3 ) NA
Selling, general and administrative expenses (4.8 ) (1.0 ) (9.3 ) NA
Operating income 37.0
(9.9 ) 24.1
NA
Adjusted operating income (Non-GAAP measure)¹
41.3
4.7
40.6
NA
Comparable sales²
(7.0 ) 4.6
(5.4 ) NA
Comparable sales in constant currency^2,3
3.7
6.3
4.5
NA


	Percent to sales				Percent to sales
	Three months ended		Nine months ended		Three months ended May 31,		Nine months ended May 31,
	May 31, 2017	May 31, 2016	May 31, 2017	May 31, 2016	2018	2017	2018	2017
Gross margin	9.3	9.3	9.4	9.5	9.0	9.3	9.1	9.4
Selling, general and administrative expenses	7.1	6.9	7.0	7.0	6.9	7.1	7.0	7.0


NA	~~Not applicable~~


¹	See “--Non-GAAP Measures” below for reconciliations to the most directly comparable GAAP measure and related disclosures.


²	Comparable sales are defined as sales excluding acquisitions and dispositions. ~~The nine month period ended May 31, 2016 comparable sales figures include an adjustment to remove February 29, 2016 results due to the leap year.~~

Sales for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s sales for the three months ended May 31, ~~2017 decreased 7.9%~~2018 increased 12.6% to ~~$5.3~~$6.0 billion. Comparable sales ~~which exclude acquisitions and dispositions, decreased 7.0%~~increased 12.6%.

Sales ~~and comparable sales~~ were ~~negatively~~positively impacted by ~~10.6~~8.6 percentage points ~~and 10.7 percentage points, respectively,~~ as a result of currency translation. Comparable sales in constant currency increased ~~3.7%~~4.0%, reflecting growth in emerging markets ~~and the United Kingdom~~ partially offset by challenging market conditions in certain continental ~~Europe.~~European countries.

Operating income for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s operating income for the three months ended May 31, ~~2017,~~2018, which included ~~$84~~$52 million from the Company’s share of equity earnings in AmerisourceBergen, ~~increased 37.0%~~decreased 12.0% to ~~$200 million.~~$176 million as a result of the reduction in equity earnings in AmerisourceBergen, compared to the year-ago quarter. Operating income was ~~negatively~~positively impacted by ~~11.6~~1.0 percentage points ($172 million) as a result of currency translation.

Gross profit ~~decreased 8.6%~~increased 9.2% from the year-ago quarter. Gross profit was ~~negatively~~positively impacted by ~~10.5~~7.4 percentage points ($5636 million) as a result of currency translation. The remaining movement was primarily due to higher sales, partly offset by lower gross margin, including some generic procurement pressure.

Selling, general and administrative expenses ~~decreased 4.8%~~increased 9.9% from the year-ago quarter. Expenses were ~~positively~~negatively impacted by ~~9.9~~9.1 percentage points ($3934 million) as a result of currency translation. As a percentage of sales, selling, general and administrative expenses were ~~7.1%~~6.9% in the current quarter, compared to ~~6.9%~~7.1% in the year-ago quarter.

Adjusted operating income (Non-GAAP measure) for the three months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s adjusted operating income for the three months ended May 31, ~~2017,~~2018, which included ~~$101~~$112 million from the Company’s share of adjusted equity earnings in AmerisourceBergen, increased ~~41.3%~~1.6% to ~~$253~~$257 million. Adjusted operating income was ~~negatively~~positively impacted by ~~11.8~~1.2 percentage points ($213 million) as a result of currency translation.

Excluding the contribution from the Company’s share of adjusted equity earnings in AmerisourceBergen and the ~~negative~~positive impact of currency translation, adjusted operating income ~~increased 0.6%~~decreased 6.6% over the year-ago ~~quarter.~~quarter, primarily due to lower gross margin. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

Sales for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s sales for the nine months ended May 31, ~~2017 decreased 8.3%~~2018 increased 10.8% to ~~$15.7~~$17.4 billion. Comparable sales ~~decreased 5.4%~~increased 10.8%.

Sales and comparable sales were ~~negatively~~each positively impacted by ~~9.6~~6.8 percentage points and ~~9.9~~6.8 percentage points respectively, as a result of currency translation. Comparable sales in constant currency increased ~~4.5%~~4.0%, reflecting growth in emerging markets ~~and the United Kingdom~~ partially offset by challenging market conditions in certain continental ~~Europe.~~European countries.

Operating income for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s operating income for the nine months ended May 31, ~~2017,~~2018, which included ~~$143~~$142 million from the Company’s share of equity earnings in AmerisourceBergen, ~~increased 24.1%~~decreased 2.3% to ~~$525~~$513 million. Operating income was ~~negatively~~positively impacted by ~~11.6~~1.1 percentage points ($496 million) as a result of currency translation.

Gross profit ~~decreased 9.3%~~increased 7.6% from the year-ago period. The ~~negative~~positive impact of currency translation was ~~9.7~~6.2 percentage points ($~~157~~91 million). The remaining movement was primarily due to higher sales, partly offset by lower gross margin, including some generic procurement pressure.

Selling, general and administrative expenses ~~decreased 9.3%~~increased 11.2% from the year-ago period, of which ~~8.9~~7.7 percentage points ($~~108~~85 million) was as a result of the ~~positive~~negative impact of currency translation. The remaining ~~decrease~~increase was primarily related to ~~cost benefits and dispositions.~~sales activity. As a percentage of sales, selling, general and administrative expenses were 7.0% in the current period, compared to 7.0% in the year-ago period.

Adjusted operating income (Non-GAAP measure) for the nine months ended May 31, ~~2017~~2018 and ~~May 31, 2016~~2017

Pharmaceutical Wholesale division’s adjusted operating income for the nine months ended May 31, ~~2017,~~2018, which included ~~$238~~$278 million from the Company’s share of adjusted equity earnings in AmerisourceBergen, increased ~~40.6%~~1.3% to ~~$703~~$712 million. Adjusted operating income was ~~negatively~~positively impacted by ~~11.8~~1.4 percentage points ($5910 million) as a result of currency translation.

Excluding the contribution from the Company’s share of adjusted equity earnings in AmerisourceBergen and the ~~negative~~positive impact of currency translation, adjusted operating income ~~increased 6.3%~~decreased 8.8% over the year-ago ~~period.~~period, primarily due to lower gross margin and higher selling, general and administrative expenses as a percentage of sales, partially offset by sales growth. See “--Non-GAAP Measures” below for a reconciliation to the most directly comparable GAAP measure.

NON-GAAP MEASURES

The following information provides reconciliations of the supplemental non-GAAP financial measures, as defined under the rules of the Securities and Exchange Commission, presented herein to the most directly comparable financial measures calculated and presented in accordance with GAAP. The Company has provided the non-GAAP financial measures, which are

not calculated or presented in accordance with GAAP, as supplemental information and in addition to the financial measures that are calculated and presented in accordance with GAAP.

These supplemental non-GAAP financial measures are presented because our management has evaluated our financial results both including and excluding the adjusted items or the effects of foreign currency translation, as applicable, and believe that the supplemental non-GAAP financial measures presented provide additional perspective and insights when analyzing the core operating performance of our business from period to period and trends in our historical operating results. These supplemental non-GAAP financial measures should not be considered superior to, as a substitute for or as an alternative to, and should be considered in conjunction with, the GAAP financial measures presented.

The Company also presents certain information related to current period operating results in “constant currency,” which is a non-GAAP financial measure. These amounts are calculated by translating current period results at the foreign currency exchange rates used in the comparable period in the prior year. The Company presents such constant currency financial information because it has significant operations outside of the United States reporting in currencies other than the U.S. dollar and such presentation provides a framework to assess how its business performed excluding the impact of foreign currency exchange rate fluctuations.


	(in millions)										(in millions)
	Three months ended May 31, 2017										Three months ended May 31, 2018
	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.		Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Operating income (GAAP)	$	1,170	$	142	$	200	$	5	$	1,517	$	1,253	$	172	$	176	$	—	$	1,601
Cost transformation	129		26		16		—		171
Acquisition-related amortization	38		25		20		—		83		84		26		21		—		131
Acquisition-related costs											57		—		—		—		57
LIFO provision	97		—		—		—		97		69		—		—		—		69
Adjustments to equity earnings in AmerisourceBergen	—		—		17		—		17		—		—		60		—		60
Acquisition-related costs	29		—		—		—		29
Certain legal and regulatory accruals and settlements											5		—		—		—		5
Store optimization											24		—		—		—		24
Adjusted operating income (Non-GAAP measure)	$	1,463	$	193	$	253	$	5	$	1,914	$	1,492	$	198	$	257	$	—	$	1,947

(in millions)
Three months ended May 31, 2016
Retail
Pharmacy
USA Retail
Pharmacy
International Pharmaceutical
Wholesale Eliminations Walgreens
Boots
Alliance, Inc.
Operating income (GAAP) $ 1,169
$ 223
$ 146
$ (5 ) $ 1,533
Cost transformation 60
6
7
—
73
Acquisition-related amortization 46
29
21
—
96
LIFO provision 92
—
—
—
92
Adjustments to equity earnings in AmerisourceBergen —
—
5
—
5
Acquisition-related costs 15
—
—
—
15
Adjusted operating income (Non-GAAP measure) $ 1,382
$ 258
$ 179
$ (5 ) $ 1,814


	(in millions)										(in millions)
	Nine months ended May 31, 2017										Three months ended May 31, 2017
	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.		Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Operating income (GAAP)	$	3,395	$	522	$	525	$	1	$	4,443	$	1,170	$	142	$	200	$	5	$	1,517
Cost transformation	517		51		24		—		592
Acquisition-related amortization	113		75		59		—		247		38		25		20		—		83
Acquisition-related costs											29		—		—		—		29
LIFO provision	204		—		—		—		204		97		—		—		—		97
Adjustments to equity earnings in AmerisourceBergen	—		—		95		—		95		—		—		17		—		17
Acquisition-related costs	75		—		—		—		75
Cost transformation											129		26		16		—		171
Adjusted operating income (Non-GAAP measure)	$	4,304	$	648	$	703	$	1	$	5,656	$	1,463	$	193	$	253	$	5	$	1,914


	(in millions)											(in millions)
	Nine months ended May 31, 2016											Nine months ended May 31, 2018
	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations			Walgreens Boots Alliance, Inc.		Retail Pharmacy USA			Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Operating income (GAAP)	$	3,626	$	824	$	423	$	(12	)	$	4,861	$	3,781		$	608	$	513	$	1	$	4,903
Cost transformation	170		14		7		—			191
Acquisition-related amortization	143		70		65		—			278		186			80		63		—		329
Acquisition-related costs												173			—		—		—		173
LIFO provision	206		—		—		—			206		166			—		—		—		166
Adjustments to equity earnings in AmerisourceBergen	—		—		5		—			5		—			—		136		—		136
Acquisition-related costs	82		—		—		—			82
Asset impairment	$	30	$	—	$	—	$	—		$	30
Certain legal and regulatory accruals and settlements												120			—		—		—		120
Hurricane-related costs												83			—		—		—		83
Store optimization												24			—		—		—		24
Asset recovery												(15		)	—		—		—		(15		)
Adjusted operating income (Non-GAAP measure)	$	4,257	$	908	$	500	$	(12	)	$	5,653	$	4,518		$	688	$	712	$	1	$	5,919



	(in millions)
	Nine months ended May 31, 2017
	Retail Pharmacy USA		Retail Pharmacy International		Pharmaceutical Wholesale		Eliminations		Walgreens Boots Alliance, Inc.
Operating income (GAAP)	$	3,395	$	522	$	525	$	1	$	4,443
Acquisition-related amortization	113		75		59		—		247
Acquisition-related costs	75		—		—		—		75
LIFO provision	204		—		—		—		204
Adjustments to equity earnings in AmerisourceBergen	—		—		95		—		95
Cost transformation	517		51		24		—		592
Adjusted operating income (Non-GAAP measure)	$	4,304	$	648	$	703	$	1	$	5,656


	(in millions, except per share amounts)												(in millions, except per share amounts)
	Three months ended						Nine months ended						Three months ended May 31,						Nine months ended May 31,
	May 31, 2017			May 31, 2016			May 31, 2017			May 31, 2016			2018			2017			2018			2017
Net earnings attributable to Walgreens Boots Alliance, Inc. (GAAP)	$	1,162		$	1,103		$	3,276		$	3,143		$	1,342		$	1,162		$	3,512		$	3,276

Adjustments to operating income:
Cost transformation¹	171			73			592			191
Acquisition-related amortization¹	83			96			247			278
LIFO provision¹	97			92			204			206
Adjustments to equity earnings in AmerisourceBergen¹	17			5			95			5
Acquisition-related costs¹	29			15			75			82
Asset impairment¹	—			—			—			30
Acquisition-related amortization													131			83			329			247
Acquisition-related costs													57			29			173			75
LIFO provision													69			97			166			204
Adjustments to equity earnings in AmerisourceBergen													60			17			136			95
Certain legal and regulatory accruals and settlements													5			—			120			—
Hurricane-related costs													—			—			83			—
Store optimization													24			—			24			—
Cost transformation													—			171			—			592
Asset recovery													—			—			(15		)	—
Total adjustments to operating income	397			281			1,213			792			346			397			1,016			1,213

Adjustments to other income (expense):
Net investment hedging (gain) loss¹	1			(4		)	15			(37		)
Decrease in fair market value of AmerisourceBergen warrants¹	—			259			—			845
Impact of change in accounting method for AmerisourceBergen equity investment¹	—			(268		)	—			(268		)
Impairment of equity method investment													8			—			178			—
Net investment hedging (gain) loss													(3		)	1			(36		)	15
Total adjustments to other income (expense)	1			(13		)	15			540			5			1			142			15

Adjustments to interest expense, net:
Prefunded interest expenses¹	34			4			123			4
Prefunded acquisition financing costs													—			34			29			123
Total adjustments to interest expense, net	34			4			123			4			—			34			29			123

Adjustments to income tax provision:
United Kingdom tax rate change²	—			—			(77		)	(178		)
Tax impact of adjustments³	(153		)	(87		)	(432		)	(458		)
U.S. tax law changes¹													(140		)	—			44			—
Equity method non-cash tax													8			24			19			34
UK tax rate change¹													—			—			—			(77		)
Tax impact of adjustments²													(39		)	(177		)	(224		)	(466		)
Total adjustments to income tax provision	(153		)	(87		)	(509		)	(636		)	(171		)	(153		)	(161		)	(509		)

Adjusted net earnings attributable to Walgreens Boots Alliance, Inc. (Non-GAAP measure)	$	1,441		$	1,288		$	4,118		$	3,843		$	1,522		$	1,441		$	4,538		$	4,118

Diluted net earnings per common share (GAAP)	$	1.07		$	1.01		$	3.02		$	2.88		$	1.35		$	1.07		$	3.51		$	3.02
Adjustments to operating income	0.37			0.26			1.12			0.73			0.35			0.37			1.02			1.12
Adjustments to other income (expense)	—			(0.01		)	0.01			0.49			0.01			—			0.14			0.01
Adjustments to interest expense, net	0.03			—			0.11			—			—			0.03			0.03			0.11
Adjustments to income tax provision	(0.14		)	(0.08		)	(0.47		)	(0.58		)	(0.18		)	(0.14		)	(0.16		)	(0.47		)
Adjusted diluted net earnings per common share (Non-GAAP measure)	$	1.33		$	1.18		$	3.79		$	3.52		$	1.53		$	1.33		$	4.54		$	3.79

Weighted average common shares outstanding, diluted	1,082.6			1,088.2			1,085.5			1,091.7			995.3			1,082.6			1,000.6			1,085.5

Presented on a pre-tax basis. The comparable prior period has been recast accordingly to reflect the tax impact of adjustments as a single adjustment. There has been no change in net earnings attributable to Walgreens Boots Alliance, Inc., diluted net earnings per share, adjusted net earnings attributable to Walgreens Boots Alliance, Inc. or adjusted net earnings per share from those previously reported.Discrete tax-only items.


²	~~Discrete tax-only items.~~


³	Represents the adjustment to the GAAP basis tax provision commensurate with non-GAAP adjustments.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents were $1.8 billion (including $730 million in non-U.S. jurisdictions) as of May 31, 2018, compared to $12.3 billion (including $2.2 billion in non-U.S. jurisdictions) ~~as of May 31, 2017, compared to $3.3 billion (including $1.5 billion in non-U.S. jurisdictions)~~ at May 31, ~~2016.~~2017. Short-term investment objectives are primarily to minimize risk and maintain liquidity. To attain these objectives, investment limits are placed on the amount, type and issuer of securities. Investments are principally in U.S. Treasury money market funds and AAA-rated money market funds.

Our long-term capital policy is to maintain a strong balance sheet and financial flexibility; reinvest in our core strategies; invest in strategic opportunities that reinforce our core strategies and meet return requirements; and return surplus cash flow to ~~shareholders~~stockholders in the form of dividends and share repurchases over the long term. In June 2018, the Company’s Board of Directors reviewed and refined the Company’s dividend policy to set forth the Company’s current intention to increase its dividend each year.

Cash provided by operations and the issuance of debt are the principal sources of funds for expansion, investments, acquisitions, remodeling programs, dividends to shareholders and stock repurchases. Net cash provided by operating activities for the nine months ended May 31, ~~2017~~2018 was ~~$5,237 million,~~$5.4 billion, compared to ~~$5,189 million~~$5.2 billion for the year-ago period. The $148 million increase in cash provided by operating activities was primarily due to ~~improved working capital management, with~~lower cash outflows from income taxes paid and accrued expenses and other liabilities partially offset by higher cash ~~inflows~~outflows from ~~changes~~accounts receivable, net and trade accounts payable. Changes in ~~inventories. Increases~~income taxes paid are mainly due to the impact of U.S. tax law changes. Changes in ~~cash inflows on inventories resulted primarily from~~accrued expenses and other liabilities are mainly driven by the timing of payments. Changes in accounts receivable, net are mainly driven by increased sales in Retail Pharmacy USA ~~inventory management initiatives~~and timing. Changes in trade accounts payable are mainly driven by the timing of payments resulting from term changes on pharmaceutical related ~~to simplified retail product offering, promotional efficiencies and lower brand name drug inflation.~~purchases in the year ago period partially offset by increased purchases in Retail Pharmacy USA.

Net cash used for investing activities was ~~$452 million~~$5.1 billion for the nine months ended May 31, ~~2017,~~2018, compared to ~~$1,961~~$452 million used in the year-ago period. Business acquisitions in the nine months ended May 31, ~~2017~~2018 were ~~$63 million~~$4.2 billion compared to ~~$115~~$63 million for the year-ago period. Business acquisitions in the year-ago period were primarily the acquisition of an international beauty brand and the purchase of prescription files. The year-ago period included an investment in AmerisourceBergen of $1,169 million following the exercise of warrants.

For the nine months ended May 31, ~~2017,~~2018, additions to property, plant and equipment were ~~$912~~$983 million compared to ~~$904~~$912 million in the year-ago period. Capital expenditures by reporting segment were as follows:


	Nine months ended				Nine months ended May 31,
	May 31, 2017		May 31, 2016		2018		2017
Retail Pharmacy USA	$	556	$	523	$	726	$	556
Retail Pharmacy International	279		315		182		279
Pharmaceutical Wholesale	77		66		75		77
Total	$	912	$	904	$	983	$	912

Significant capital expenditures primarily relate to investments in our stores and information technology projects.

Additionally, investing activities for the nine months ended May 31, ~~2017 included~~2018 did not include any proceeds related to sale-leaseback transactions, ~~of $436 million,~~ compared to ~~$60~~$436 million in the year-ago period.

Net cash used for financing activities for the nine months ended May 31, ~~2017~~2018 was ~~$2,333 million,~~$1.8 billion, compared to net cash used of ~~$2,894 million~~$2.3 billion in the year-ago period. WeThe Company repurchased shares as part of the ~~$1 billion~~June 2017 stock repurchase program described below and to support the needs of the employee stock plans totaling ~~$1,457 million~~$2.5 billion in the nine months ended May 31, ~~2017,~~2018, compared to ~~$1,152 million~~$1.5 billion in shares repurchased in the nine months ended May 31, ~~2016.~~2017. Proceeds related to employee stock plans were ~~$174~~$118 million during the nine months ended May 31, ~~2017,~~2018, compared to ~~$175~~$174 million for the nine months ended May 31, ~~2016.~~2017. Cash dividends paid were ~~$1,228 million~~$1.3 billion during the nine months ended May 31, ~~2017,~~2018, compared to ~~$1,174 million~~$1.2 billion for the same period a year ago. ~~We currently intend~~

The Company believes that cash flow from operations, availability under our existing credit facilities and arrangements, current cash and investment balances and our ability to ~~continue~~obtain other financing, if necessary, will provide adequate cash funds for our foreseeable working capital needs, capital expenditures at existing facilities, pending acquisitions (including the acquisition of Rite Aid assets), dividend payments and debt service obligations for at least the next 12 months. Our cash requirements are subject to ~~maintain a long-term dividend payout ratio target~~change as business conditions warrant and opportunities arise. The timing and size of ~~approximately 30 to 35 percent of adjusted net earnings attributable to Walgreens Boots Alliance.~~any new business ventures or acquisitions that the Company may complete may also impact our cash requirements.

Stock repurchase programs

In April 2017, Walgreens Boots Alliance authorized a stock repurchase program (the ~~“$1 billion~~“April 2017 stock repurchase program”), which authorized the repurchase of up to $1.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on December 31, 2017. In May 2017, the Company completed the ~~$1 billion~~April 2017 stock repurchase ~~program. See Part II, Item 2 below for additional information.~~program, purchasing 11.8 million shares. In June 2017, Walgreens Boots Alliance authorized a new stock repurchase program, ~~(the “$5 billion stock repurchase program”),~~ which ~~authorizes~~authorized the repurchase of up to $5.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on August 31, ~~2018.We determine~~2018, which authorization was increased by an additional $1.0 billion in October 2017 (as expanded, the “June 2017 stock repurchase program”). During fiscal 2017, the Company purchased 47.2 million shares at a total cost of $3.8 billion under the June 2017 stock repurchase program. During the nine months ended May 31, 2018, the Company purchased 30.3 million shares at a total cost of $2.2 billion. The June 2017 stock repurchase program was completed in October 2017. In June 2018, Walgreens Boots Alliance authorized a new stock repurchase program, which authorized the repurchase of up to $10.0 billion of Walgreens Boots Alliance common stock, which program has no specified expiration date. The Company determines the timing and amount of repurchases, including repurchases to offset anticipated dilution from equity incentive plans, based on our assessment of various factors, including prevailing market conditions, alternate uses of capital, liquidity and the

economic environment. ~~We have~~The Company has repurchased, and may from time to time in the future repurchase, shares on the open market through Rule 10b5-1 plans, which enable us to repurchase shares at times when wethe Company otherwise might be precluded from doing so under insider trading laws.

WeCommercial paper

The Company periodically ~~borrow~~borrows under ~~our~~its commercial paper program and may continue to borrow under it in future periods. ~~There~~The Company had $1.0 billion commercial paper borrowings outstanding as of May 31, 2018 and there were no commercial paper borrowings outstanding as of ~~May 31, 2017 or~~ August 31, ~~2016, respectively.~~2017. The Company had average daily short-term borrowings of $1.4 billion of commercial paper outstanding at a weighted average interest rate of 2.00% for the nine months ended May 31, 2018 and no activity under its commercial paper program for the nine months ended May 31, 2017. ~~The Company had average daily short-term borrowings~~

Financing actions

On November 10, 2014, Walgreens Boots Alliance and Walgreens entered into a term loan credit agreement with the lenders party thereto (the “2014 Term Loan Agreement”), which provided Walgreens Boots Alliance and Walgreens with the ability to borrow up to £1.45 billion on an unsecured basis. On August 30, 2017, Walgreens Boots Alliance used available cash to repay in full all outstanding loans and obligations under the 2014 Term Loan Agreement, which, as of ~~$18~~such date, consisted of the remaining unamortized amount of £1.41 billion ($1.83 billion at the August 31, 2017 spot rate of $1.295 to £1) aggregate principal amount of outstanding loans together with accrued interest thereon through, but excluding, the payment date, and the 2014 Term Loan Agreement terminated in accordance with its terms.

On November 10, 2014, Walgreens Boots Alliance and Walgreens entered into a five-year unsecured, multicurrency revolving credit agreement with the lenders party thereto (the “2014 Revolving Credit Agreement”), which has available credit of $3.0 billion, of which $500 million is available for the issuance of ~~commercial paper outstanding~~letters of credit. Borrowings under the 2014 Revolving Credit Agreement bear interest at a ~~weighted average interest~~fluctuating rate ~~of 0.66% for~~per annum equal to, at Walgreens Boots Alliance’s option, the ~~nine month period ended~~alternate base rate or the reserve adjusted LIBOR, in each case, plus an applicable margin calculated based on Walgreens Boots Alliance’s credit ratings. As of May 31, ~~2016.~~2018 and 2017, there were no borrowings or letters of credit issued pursuant to the 2014 Revolving Credit Agreement.

~~Terminated acquisition~~On November 18, 2014, Walgreens Boots Alliance issued several series of ~~Rite Aid and related matters~~

~~Pursuant~~unsecured, unsubordinated notes totaling $8.0 billion, with maturities ranging from 2016 to 2044. All such notes have fixed interest rates, with the ~~Termination Agreement,~~exception of the ~~Company agreed to pay Rite Aid the termination fee of $325~~$750 million floating rate notes due 2016, which ~~amount the Company plans to pay on or before June 30, 2017,~~were repaid in full ~~satisfaction~~in May 2016 and which had a floating rate based on the three month LIBOR plus a fixed spread of any amounts required to be paid by the Company under the Merger Agreement and other Transaction Documents. In connection with the termination of the Fred’s Asset Purchase Agreement, the Company agreed to reimburse certain of Fred’s transaction costs in an amount not to exceed $25 million45 basis points. On August 28, 2017, Walgreens Boots Alliance redeemed in full ~~satisfaction of any amounts required to be paid by the Company under the Fred’s Asset Purchase Agreement. The Company expects to pay the applicable amount during the fourth quarter of fiscal 2017.~~its $750 million 1.750% notes due 2017 at a make-whole redemption price.

On June 1, 2016, Walgreens Boots Alliance issued in an underwritten public offering $1.2 billion of 1.750% notes due 2018 (the “2018 notes”), $1.5 billion of 2.600% notes due 2021 (the “2021 notes”), $0.8 billion of 3.100% notes due 2023 (the “2023 notes”), $1.9 billion of 3.450% notes due 2026 (the “2026 notes”) and $0.6 billion of 4.650% notes due 2046 (the “2046 notes”). Because the merger with Rite Aid was not consummated on or prior to June 1, 2017, the 2018 notes, the 2021 notes and the 2023 notes ~~(but not the 2026 notes or 2046 notes, which remain outstanding in accordance with their respective terms)~~ were redeemed on June 5, 2017 under the special mandatory redemption terms of the indenture governing such notes. Walgreens Boots Alliance was required to redeem all of the 2018 notes, the 2021 notes and the 2023 notes then outstanding, at a special mandatory redemption price equal to 101% of the aggregate principal amount of such notes, plus accrued and unpaid interest of approximately $1 million to, but excluding, the date of redemption. Walgreens Boots Alliance used cash on hand to fund the special mandatory redemption. As a result of the special mandatory redemption of the 2018 notes, the 2021 notes and the 2023 notes, in the fourth quarter of fiscal 2017, the Company will recognize as interest expense on a pretax basis the entire $13 million unamortized portion of the related debt issuance costs and debt issuance discounts and the entire $35 million redemption premium paid on such notes upon such redemption. The 2026 notes and 2046 notes ~~(which are not subject to special mandatory redemption) are subject to redemption~~remain outstanding in ~~certain circumstances.~~accordance with their respective terms.

On February 22, 2017, Walgreens Boots Alliance entered into (a) a $4.8 billion unsecured term loan facility with the lenders party thereto (the “Syndicated Credit Agreement”) and (b) a $1.0 billion unsecured term loan facility with Sumitomo Mitsui Banking Corporation, as lender and administrative agent (the “Sumitomo Credit Agreement” and, together with the Syndicated Credit Agreement, the “2017 Term Loan Credit Agreements”). The obligations of the lenders party to each of the 2017 Term Loan Credit Agreements to fund the loans thereunder were to become effective upon the date of closing of the transactions contemplated by the Merger Agreement. Each of the 2017 Term Loan Credit Agreements and the commitments contemplated thereby terminated on June 28, 2017 upon the termination of the Merger Agreement. See "-Introduction and segments - terminated acquisition of Rite Aid and related matters" above. Upfront fees paid to date in connection with the 2017 Term Loan Credit Agreements totaled $4.6 million. As of May 31, 2017, there were no borrowings under either of the 2017 Term Loan Credit Agreements.

~~2017 Revolving Credit Agreement~~

On February 1, 2017, Walgreens Boots Alliance entered into a $1.0 billion revolving credit facility ~~(the “2017~~(as amended, the “February 2017 Revolving Credit Agreement”) with the lenders from time to time party ~~thereto.~~thereto and, on August 1, 2017, Walgreens Boots

Alliance ~~will be~~entered into an amendment agreement thereto. The terms and conditions of the ~~borrower under the~~February 2017 Revolving Credit Agreement ~~which terminates on~~were unchanged by the amendment other than the extension of the facility termination date to the earlier of (a) ~~364 days following the effective date thereof, subject to the extension thereof pursuant to provisions specified in the Revolving Credit Agreement,~~January 31, 2019 and (b) the date of termination in whole of the aggregate ~~commitment pursuant to~~commitments provided by the ~~Revolving Credit Agreement. The ability of Walgreens Boots Alliance to request the making of loans~~lenders thereunder. Borrowings under the ~~2017 Revolving Credit Agreement is subject to the satisfaction (or waiver) of certain customary conditions set forth therein. Borrowings under the~~February 2017 Revolving Credit Agreement will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the reserve adjusted Eurocurrency rate, in each case, plus an applicable margin calculated based on Walgreens Boots Alliance’s credit ratings. Upfront fees paid to date in connection with the 2017 Revolving Credit Agreement totaled $0.5 million. In addition, Walgreens Boots Alliance will also pay to the lenders under the 2017 Revolving Credit Agreement certain customary fees, including a commitment fee on the daily actual excess of each such lender’s commitment over such lender’s outstanding credit exposure under the 2017 Revolving Credit Agreement, which commitment fee is earned and payable quarterly. As of May 31, ~~2017,~~2018, there were no borrowings under the February 2017 Revolving Credit Agreement.

On August 24, 2017, Walgreens Boots Alliance entered into a $1.0 billion revolving credit agreement with the lenders from time to time party thereto (the “August 2017 Revolving Credit Agreement”) and a $1.0 billion term loan credit agreement with Sumitomo Mitsui Banking Corporation (the “2017 Term Loan Credit Agreement” and together with the August 2017 Revolving Credit Agreement, the “August 2017 Credit Agreements”). The August 2017 Revolving Credit Agreement is an unsecured revolving credit facility with a facility termination date of the earlier of (a) January 31, 2019, subject to any extension thereof pursuant to the terms of the August 2017 Revolving Credit Agreement and (b) the date of termination in whole of the aggregate commitments provided by the lenders thereunder. As of May 31, 2018, there were no borrowings outstanding under the August 2017 Revolving Credit Agreement. The 2017 Term Loan Credit Agreement is an unsecured “multi-draw” term loan facility maturing on March 30, 2019. As of May 31, 2018, Walgreens Boots Alliance had $1.0 billion of borrowings outstanding under the 2017 Term Loan Credit Agreement, and no additional commitments were available. Borrowings under the August 2017 Credit Agreements will bear interest at a fluctuating rate per annum equal to, at Walgreens Boots Alliance’s option, the alternate base rate or the Eurocurrency rate, in each case, plus an applicable margin calculated based on Walgreens Boots Alliance’s credit ratings.

From time to time, the Company may also enter into other credit facilities, including in March 2018, a $350 million short-term unsecured revolving credit facility which was undrawn as of May 31, 2018.

Debt covenants

~~The~~Each of the Company’s credit facilities described above contain a covenant to maintain, as of the last day of each fiscal quarter, a ratio of consolidated debt to total capitalization not to exceed 0.60:1.00. The credit facilities contain various other customary covenants. As of May 31, ~~2017,~~2018, the Company was in compliance with all such applicable covenants.

Credit ratings

As of June ~~28, 2017,~~27, 2018, the credit ratings of Walgreens Boots Alliance were:



Rating agency	Long-term debt rating	Commercial paper rating	Outlook
Fitch	BBB	F2	Stable
Moody’s	Baa2	P-2	~~On review for downgrade~~Stable
Standard & Poor’s	BBB	A-2	~~Negative~~Stable

In assessing our credit strength, each ~~credit~~ rating agency considers various factors including our business model, capital structure, financial policies and financial performance. There can be no assurance that any particular rating will be assigned or maintained. 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. Each rating may be subject to revision or withdrawal at any time by the assigning rating agency and should be evaluated independently of any other rating.

AmerisourceBergen relationship

Pursuant to our arrangements with AmerisourceBergen, ~~we have~~the Company has the right, but not the obligation, to ~~increase our~~purchase a minority equity position in AmerisourceBergen over time as described under “--AmerisourceBergen Corporation ~~Relationship”~~relationship” above. As of May 31, 2017, the Company owned 56,854,867 AmerisourceBergen common shares representing approximately 26% of the outstanding AmerisourceBergen common stock. This includes a total of approximately 11.5 million shares of AmerisourceBergen that we purchased in the open market. ShareSubject to applicable legal and contractual requirements, share purchases may be made from time to time in open market transactions or pursuant to instruments and plans complying with Rule 10b5-1. ~~Our ability to invest in equity in AmerisourceBergen above certain thresholds is subject to the receipt of regulatory approvals.~~

We believe that cash flow from operations, availability under our existing credit facilities and arrangements, current cash and investment balances and our ability to obtain other financing, if necessary, will provide adequate cash funds for foreseeable working capital needs, capital expenditures at existing facilities, acquisitions, dividend payments and debt service obligations for at least the next 12 months. Our cash requirements are subject to change as business conditions warrant and opportunities arise. The timing and size of any new business ventures or acquisitions that we may complete may also impact our cash requirements.

~~See Item 3. Qualitative and quantitative disclosures about market risk below for a discussion of certain financing and market risks.~~

OFF-BALANCE SHEET ARRANGEMENTS

~~We do~~The Company does not have any unconsolidated special purpose entities and, except as described herein, ~~we do~~the Company does not have significant exposure to any off-balance sheet arrangements. The term “off-balance sheet arrangement” generally means any transaction, agreement or other contractual arrangement to which an entity unconsolidated with us is a party, under which ~~we have:~~the Company has: (i) any obligation arising under a guarantee contract, derivative instrument or variable interest; or (ii) a retained or contingent interest in assets transferred to such entity or similar arrangement that serves as credit, liquidity or market risk support for such assets.

As of May 31, ~~2017, we have~~2018, the Company has issued ~~$330~~$200 million in letters of credit, primarily related to insurance obligations. WeThe Company also had $45 million of guarantees to various suppliers outstanding as of May 31, ~~2017. We remain~~2018. The Company remains secondarily liable on 7071 leases. The maximum potential undiscounted future payments related to these leases was ~~$330~~$311 million as of May 31, ~~2017.~~2018.

CONTRACTUAL OBLIGATIONS AND COMMITMENTS

Other than our obligations under the ~~Merger Agreement~~amended and restated asset purchase agreement with Rite Aid and the transactions contemplated thereby, there have been no material changes, outside of the ordinary course of business, in our outstanding contractual obligations disclosed in the Walgreens Boots Alliance Annual Report on Form 10-K for the year ended August 31, ~~2016.~~2017.

CRITICAL ACCOUNTING POLICIES

The ~~consolidated financial statements~~Consolidated Financial Statements are prepared in accordance with GAAP and include amounts based on management’s prudent judgments and estimates. Actual results may differ from these estimates. Management believes that any reasonable deviation from those judgments and estimates would not have a material impact on our consolidated financial position or

results of operations. To the extent that the estimates used differ from actual results, however, adjustments to the statement of earnings and corresponding balance sheet accounts would be necessary. These adjustments would be made in future periods. For a discussion of our significant accounting policies, please see the Walgreens Boots Alliance Annual Report on Form 10-K for the fiscal year ended August 31, ~~2016.~~2017. Some of the more significant estimates include business combinations, goodwill and indefinite-lived intangible asset impairment, vendor allowances, liability for closed locations, cost of sales and inventory, equity method investments, pension and postretirement benefits and income taxes. There have been no significant changes in those accounting policies.

NEW ACCOUNTING PRONOUNCEMENTS

A discussion of new accounting pronouncements is described in note 17, ~~New~~new accounting pronouncements in Item 1. Consolidated Condensed Financial Statements (Unaudited) of this ~~Current~~Quarterly Report on Form 10-Q and is incorporated herein by reference.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report and other documents that we file or furnish with the SEC contain forward-looking statements that are based on current expectations, estimates, forecasts and projections about our future performance, our business, our beliefs and our management’s assumptions. In addition, we, or others on our behalf, may make forward-looking statements in press releases or written statements, on the Company’s website or in our communications and discussions with investors and analysts in the normal course of business through meetings, webcasts, phone calls, conference calls and other communications. Some of such forward-looking statements may be based on certain data and forecasts relating to our business and industry that we have obtained from internal surveys, market research, publicly available information and industry publications. Industry publications, surveys and market research generally state that the information they provide has been obtained from sources believed to be reliable, but that the accuracy and completeness of such information is not guaranteed. Statements that are not historical facts are forward-looking statements, including, without limitation, those regarding estimates of and goals for future financial and operating performance as well as forward-looking statements concerning the expected execution and effect of our business strategies, our cost-savings and growth initiatives, pilot programs and initiatives, and restructuring activities and the amounts and timing of their expected impact, ~~the termination of the Merger Agreement with Rite Aid~~our amended and ~~the transactions contemplated thereby (including the termination of the divestiture~~restated asset purchase agreement ~~to sell certain Rite Aid stores and assets to Fred’s, Inc.) and their possible effects, our pending Asset Purchase Agreement~~ with Rite Aid and the transactions contemplated thereby and their possible timing and effects, our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, estimates of the impact of developments on our earnings, earnings per share and other financial and operating metrics, cough, cold and flu season, prescription volume, pharmacy sales trends, prescription margins, changes in generic prescription drug prices, retail margins, number and location of new store openings, network participation, vendor, payer and customer relationships and terms, possible new contracts or contract extensions, the proposed withdrawal of the United Kingdom from the European Union and its possible effects, competition, economic and business conditions, outcomes of litigation and regulatory matters, the level of capital expenditures, industry trends, demographic trends, growth strategies, financial results, cost reduction initiatives, impairment or other charges, acquisition and joint venture synergies, competitive strengths and changes in legislation or regulations. Words such as “expect,” “likely,” “outlook,” “forecast,” “preliminary,” "pilot," “would,” “could,” “should,” “can,” “will,” “project,” “intend,” “plan,” “goal,” “guidance,” “target,” “aim,” “continue,” “sustain,” “synergy,” “on track,” “on schedule,” “headwind,” “tailwind,” “believe,” “seek,” “estimate,” “anticipate,” “upcoming,” “to come,” “may,” “possible,” “assume,” and variations of such words and similar expressions are intended to identify such forward-looking statements, which are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions, known or unknown, that could cause actual results to vary materially from those indicated or anticipated, including, but not limited to, those relating to the impact of private and public third-party payers’ efforts to reduce prescription drug reimbursements, fluctuations in foreign currency exchange rates, the timing and magnitude of the impact of branded to generic drug conversions and changes in generic drug prices, our ability to realize synergies and achieve financial, tax and operating results in the amounts and at the times anticipated, supply arrangements including our commercial agreement with AmerisourceBergen, the arrangements and transactions contemplated by our framework agreement with AmerisourceBergen and their possible effects, the risks associated with our equity method investment in AmerisourceBergen, the occurrence of any event, change or other circumstance that could give rise to the termination, cross-termination or modification of any of our contractual obligations, the amount of costs, fees, expenses and charges incurred in connection with strategic transactions, whether the costs and charges associated with ~~restructuring activities~~our store optimization program will exceed estimates, our ability to realize expected savings and benefits from cost-savings initiatives, restructuring activities and acquisitions and joint ventures in the amounts and at the times anticipated, the timing and amount of any impairment or other charges, the timing and severity of cough, cold and flu season, risks related to pilot programs and new business initiatives and ventures generally, including the risks that anticipated benefits may not be realized, changes in management’s plans and assumptions, the risks associated with governance and control matters, the ability to retain key personnel, changes in economic and business conditions generally or in particular markets in which we participate, changes in financial markets, credit ratings and interest rates, the risks

associated with international business operations, including the risks associated with the proposed withdrawal of the United Kingdom from the European Union, the risk of unexpected costs, liabilities or delays, changes in vendor, customer and payer relationships and terms, including changes in network participation and reimbursement terms and the associated impacts on volume and operating results, risks of inflation 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 the ability of the parties to satisfy the closing conditions (including, without limitation, the expiration or termination of applicable waiting periods under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended) and consummate the pending acquisition of certain assets pursuant to our amended and restated asset purchase agreement with Rite Aid, ~~assets and related matters on a timely basis or at all,~~ the risks associated with the integration of complex businesses, the risks associated with the termination of our Merger Agreement with Rite Aid and the transactions contemplated thereby (including the divestiture transaction to sell certain Rite Aid stores and assets to Fred’s, Inc.) and the effects thereof, outcomes of legal and regulatory matters, ~~including~~and risks associated with ~~respect to regulatory review and actions in connection with the pending acquisition of certain Rite Aid assets and related matters, and~~ changes in laws, including those relating to the December 2017 U.S. tax legislation, regulations or interpretations thereof. These and other risks, assumptions and uncertainties are described in Item 1A. “Risk ~~Factors”~~factors” in our Annual Report on Form 10-K for the fiscal year ended August 31, ~~2016, in Item 1A. “Risk factors” in this report~~2017 and our Quarterly Report on Form 10-Q for the fiscal quarter ended November 30, 2017 and in other documents that we file or furnish with the SEC. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those indicated or anticipated by such forward-looking statements. Accordingly, you are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date they are made. Except to the extent required by law, we do not undertake, and expressly disclaim, any duty or obligation to update publicly any forward-looking statement after the date ~~the statement is made,~~of this report, whether as a result of new information, future events, changes in assumptions or otherwise.


~~Item 3.~~	~~Quantitative and qualitative disclosure about market risk~~

Item 3. Quantitative and qualitative disclosure about market risk

Interest rate risk

~~We are~~The Company is exposed to interest rate volatility with regard to existing debt issuances. Primary exposures include U.S. Treasury rates, LIBOR and commercial paper rates. From time to time, ~~we use~~the Company uses interest rate swaps and forward-starting interest rate swaps to hedge our exposure to the impact of interest rate changes on existing debt and future debt issuances respectively, to reduce the volatility of our financing costs and, based on current and projected market conditions, achieve a desired proportion of fixed versus floating-rate debt. Generally under these swaps, ~~we agree~~the Company agrees with a counterparty to exchange the difference between fixed-rate and floating-rate interest amounts based on an agreed upon notional principal amount.

~~We also use interest rate caps to protect from rising interest rates on existing floating-rate debt.~~ Information regarding our ~~interest rate swaps, forward starting interest rate swaps, and interest rate caps~~ transactions are set forth in note ~~8. Financial~~8, financial instruments, to ~~our unaudited~~the Consolidated Condensed Financial Statements. These financial instruments are sensitive to changes in interest rates. On May 31, ~~2017, we~~2018, the Company had ~~approximately $1.7 billion in~~no material long-term debt obligations that had floating interest rates. A one percentage point increase or decrease in interest rates for the various debt held by us would increase or decrease the annual interest expense we recognize and the cash we pay for interest expense on long-term debt obligations by approximately $17 million. The amounts exclude the impact of any associated ~~interest rate swaps, forward starting interest rate swaps and interest rate caps.~~derivative contracts.

Foreign currency exchange rate risk

~~We are~~The Company is exposed to fluctuations in foreign currency exchange rates, primarily with respect to the British ~~Pound Sterling~~pound sterling and Euro, and certain other foreign currencies, ~~including the Mexican Peso, Chilean Peso, Norwegian Krone and Turkish Lira~~ which may affect our net investment in foreign subsidiaries and may cause fluctuations in cash flows related to foreign denominated transactions. ~~We are~~The Company is also exposed to the translation of foreign currency earnings to the U.S. dollar. ~~We enter~~The Company enters into foreign currency forward contracts to hedge against the effect of exchange rate fluctuations on non-functional currency cash ~~flows of certain entities denominated in foreign currencies.~~flows. These transactions are almost exclusively less than 12 months in maturity. In addition, ~~we enter~~the Company enters into foreign currency forward contracts that are not designated in hedging relationships to offset, in part, the impacts of certain intercompany activities (primarily associated with intercompany financing transactions). ~~As circumstances warrant, we also use basis swaps as hedging instruments to hedge portions of our net investments in foreign operations. The~~

Our foreign currency derivative instruments are sensitive to changes in exchange rates. A hypothetical 1% ~~increase or decrease~~change in foreign currency exchange rates versus the U.S. dollar would ~~increase or decrease our pre-tax income~~change the fair value of the foreign currency derivatives held as of May 31, 2018 by approximately ~~$10 million due to changes in the value of~~$14 million. The foreign currency ~~derivative instruments. Excluded from the computation were~~derivatives are intended to partially hedge anticipated transactions, foreign currency trade payables and receivables, and net investments in foreign ~~subsidiaries, which the abovementioned instruments are intended to partially hedge.~~subsidiaries.


~~Item 4.~~	~~Controls and procedures~~

Item 4. Controls and procedures

Evaluation of disclosure controls and procedures

Management conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this Form 10-Q. The controls evaluation was conducted under the supervision and with the participation of the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”). As of the end of the period covered by this report, the Company had acquired 1,932 stores from Rite Aid. The scope of management's assessment of the effectiveness of the Company's disclosure controls and procedures did not include the internal controls over financial reporting of the acquired Rite Aid stores. This exclusion is in accordance with the SEC staff's general guidance that an assessment of a recently acquired business may be omitted from the scope of management's assessment for one year following the acquisition. Based upon the controls evaluation, our CEO and CFO have concluded that, as of the end of the period covered by this report, our disclosure controls and procedures were effective to provide reasonable assurance that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified by the SEC, and that such information is accumulated and communicated to management, including the CEO and CFO, as appropriate to allow timely decisions regarding required disclosure.

Changes in internal control over financial reporting

In connection with the 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, no changes during the three months ended May 31, ~~2017~~2018 were identified that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting. As a result of the acquisition of Rite Aid stores, the Company has incorporated internal controls over significant processes specific to the acquisition that it believes to be appropriate and necessary in consideration of the level of related integration. As the post-closing integration continues, the Company will continue to review such internal controls and processes and may take further steps to integrate such controls and processes with those of the Company.

Inherent limitations on effectiveness of controls

Our management, including the CEO and CFO, do not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a

control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be

faulty and that breakdowns can occur because of simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

Part II. Other Information


~~Item 1.~~	~~Legal proceedings~~

Item 1. Legal proceedings

The information in response to this item is incorporated herein by reference to note 10, ~~Commitments~~commitments and contingencies of the Consolidated Condensed Financial Statements of this Quarterly Report.


~~Item 1A.~~	~~Risk factors~~

Item 1A. Risk factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed in Item 1A. “Risk factors” in the Walgreens Boots Alliance Annual Report on Form 10-K for the fiscal year ended August 31, ~~2016 as amended~~2017 and ~~supplemented by~~Quarterly Report on Form 10-Q for the ~~risk factors set forth below,~~fiscal quarter ended November 30, 2017, which could materially affect our business, financial condition or future results. The risk factors in the Form 10-K for the year ended August 31, 2016 captioned “We may not be able to successfully or timely complete the pending acquisition of Rite Aid” and “If we complete our pending acquisition of Rite Aid, we may not realize the anticipated benefits of the transaction, which could adversely impact our results of operations” are hereby deleted. In addition, the second through fifth sentences of the second paragraph of the risk factor captioned “We have significant outstanding debt; our debt and associated payment obligations could significantly increase in the future if we incur additional debt and do not retire existing debt” are hereby deleted.

~~We may not be able to successfully or timely complete the pending acquisition of certain Rite Aid assets.~~

Risks and uncertainties related to our pending acquisition of 2,186 stores and three distribution centers from Rite Aid include, among others: the occurrence of any event, change or other circumstance that could give rise to the termination of the Asset Purchase Agreement including that regulatory or other approvals required for the transaction are not obtained; that litigation may be filed which could prevent or delay the transaction; and that uncertainty regarding the transaction may adversely affect relationships with suppliers, payers, customers and other third parties. Completion of the transaction is subject to the satisfaction of certain conditions set forth in the Asset Purchase Agreement, including the expiration or termination of applicable waiting periods (and any extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and other customary conditions. We will be unable to complete the pending acquisition of these Rite Aid assets until each of the conditions to closing is either satisfied or waived. In deciding whether or not to object to the transaction, regulatory agencies have broad discretion in administering the applicable governing regulations. We can provide no assurance that we will obtain the necessary approvals on any particular timetable or at all, or that any conditions that are imposed in connection with such review would not diminish the anticipated benefits of the transaction or result in the termination of the transaction. We have incurred and will continue to incur significant costs, expenses and fees for professional services and other transaction costs in connection with the pending transaction, as well as the diversion of management resources, for which we will receive little or no benefit if the closing of the transaction does not occur.

If we complete the pending acquisition of certain Rite Aid assets pursuant to the Asset Purchase Agreement, we may not realize the anticipated benefits of the transaction, which could adversely impact our results of operations.

We entered into the Asset Purchase Agreement to acquire certain Rite Aid stores and distribution centers with the expectation that the transaction will result in various benefits, including, among other things, cost savings and operating efficiencies. The achievement of the anticipated benefits of the transaction is subject to a number of uncertainties, including whether the acquired assets can be integrated into our business in an efficient and effective manner, the possibility of faulty assumptions underlying expectations regarding potential synergies and the integration process, unforeseen expenses or delays, and competitive factors in the marketplace. If the acquisition of Rite Aid assets pursuant to the Asset Purchase Agreement is completed, we can provide no assurance that the anticipated benefits of the transaction, including cost savings and synergies, will be fully realized in the time frame anticipated or at all; the costs or difficulties related to the integration of the acquired assets into our business and operations will not be greater than expected; unanticipated costs, charges and expenses will not result from the transaction; litigation relating to the transaction will not be filed; and the transaction will not cause disruption to the parties’ business and operations and relationships with employees and suppliers, payers, customers and other third parties. If one or more of these risks are realized, it could have a material adverse impact on our operating results.

We could also encounter unforeseen transaction and integration-related costs or other circumstances, such as unforeseen liabilities or other issues resulting from the transaction. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention, which could adversely impact our agility to respond to market opportunities and our ability to timely identify and implement other strategic actions. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have a material adverse impact on our business operations, financial condition and results of operations. In addition, we have incurred significant transaction costs related to the pending transaction and, if it is consummated, we will continue to incur significant integration and related costs as we integrate the acquired Rite Aid assets. These integration and acquisition-related costs, including legal, accounting, financial and tax advisory and other fees and costs, may be higher than expected and some of these costs may be material.


~~Item 2.~~	~~Unregistered sales of equity securities and use of proceeds~~

Item 2. Unregistered sales of equity securities and use of proceeds

(c)

~~The following table provides information about~~There were no purchases byof the ~~Company~~Company’s common stock during the quarter ended May 31, ~~2017~~2018 and as of ~~equity securities~~ that ~~are registered by~~date no shares were authorized to be repurchased under a publicly announced plan. In June 2018, Walgreens Boots Alliance authorized a new stock repurchase program, which authorized the ~~Company pursuant~~repurchase of up to ~~Section 12~~$10.0 billion of ~~the Exchange Act.~~Walgreens Boots Alliance common stock, which program has no specified expiration date. Subject to applicable law, share purchases may be made from time to time in open market transactions, privately negotiated transactions including accelerated share repurchase agreements, or pursuant to instruments and plans complying with Rule 10b5-1.

Issuer purchases of equity securities
Period Total number of shares purchased Average price paid per share
Total number of shares purchased as part of publicly announced repurchase programs¹

Approximate dollar value of shares that may yet be purchased under the plans or program¹
03/01/17 – 03/31/17 —
$ —
—
$ —
04/01/17 – 04/30/17 6,329,364
83.50
6,329,364
471,493,961
05/01/17 – 05/31/17 5,490,591
85.87
5,490,591
—
Total 11,819,955
$ 84.60
11,819,955
$ —

In April 2017, Walgreens Boots Alliance authorized a stock repurchase program which authorized the repurchase of up to $1.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on December 31, 2017. In May 2017, the Company completed this $1.0 billion stock repurchase program. In June 2017, Walgreens Boots Alliance authorized a new stock repurchase program, which authorizes the repurchase of up to $5.0 billion of Walgreens Boots Alliance common stock prior to the program’s expiration on August 31, 2018.


~~Item 6.~~	~~Exhibits~~

Item 6. Exhibits

The agreements included as exhibits to this report are included to provide information regarding their terms and not intended to provide any other factual or disclosure information about the Company or the other parties to the agreements. The agreements may contain representations and warranties by each of the parties to the applicable agreement that were made solely for the benefit of the other parties to the applicable agreement, and:

should not in all instances be treated as categorical statements of fact, but rather as a way of allocating the risk to one of the parties if those statements prove to be inaccurate;

may have been qualified by disclosures that were made to the other party in connection with the negotiation of the applicable agreement, which disclosures are not necessarily reflected in the agreement;

may apply standards of materiality in a way that is different from what may be viewed as material to you or other investors; and

were made only as of the date of the applicable agreement or such other date or dates as may be specified in the agreement and are subject to more recent developments.

Accordingly, these representations and warranties may not describe the actual state of affairs as of the date they were made or at any other time.



Exhibit No.	Description	SEC Document Reference

3.1	Amended and Restated Certificate of Incorporation of Walgreens Boots Alliance, Inc.	Incorporated by reference to Exhibit 3.1 to Walgreens Boots Alliance, Inc.’s Current Report on Form 8-K12B (File No. 001-36759) filed with the SEC on December 31, 2014.




3.2	Amended and Restated Bylaws of Walgreens Boots Alliance, Inc.	Incorporated by reference to Exhibit 3.1 to Walgreens Boots Alliance, Inc.’s Current Report on Form 8-K (File No. 001-36759) filed with the SEC on June 10, 2016.

10.1* 10.1*	~~Extension,~~Offer letter agreement dated as of March ~~27, 2017, to Assignment Letter~~6, 2018 between ~~Alexander Gourlay~~James Kehoe and Walgreens Boots Alliance, ~~Services Limited.~~Inc.	Incorporated by reference to Exhibit ~~10.6~~10.1 to Walgreens Boots Alliance, Inc.’s ~~Quarterly~~Current Report on Form ~~10-Q for the quarter ended February 28, 2017~~8-K (File No. 1-36759) filed with the SEC on ~~April 5, 2017.~~March 8, 2018.

10.2*	Contract amendment dated as of March 6, 2018 between George Fairweather and Walgreens Boots Alliance, Inc.	Incorporated by reference to Exhibit 10.2 to Walgreens Boots Alliance, Inc.’s Current Report on Form 8-K (File No. 1-36759) filed with the SEC on March 8, 2018.

12	Computation of Ratio of Earnings to Fixed Charges.	Filed herewith.

31.1	Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

31.2	Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.	Filed herewith.

32.1	Certification of the Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished herewith.

32.2	Certification of the Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350.	Furnished herewith.

101.INS	XBRL Instance Document	Filed herewith.

101.SCH	XBRL Taxonomy Extension Schema Document	Filed herewith.

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document	Filed herewith.

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document	Filed herewith.

101.LAB	XBRL Taxonomy Extension Label Linkbase Document	Filed herewith.

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document	Filed herewith.

___________________________

* Management contract or compensatory plan or arrangement.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



	Walgreens Boots Alliance, Inc.
	(Registrant)

Dated: June ~~29, 2017~~28, 2018	/s/ ~~George R. Fairweather~~James Kehoe
	~~George R. Fairweather~~James Kehoe
	Executive Vice President and Global Chief Financial Officer


Dated: June ~~29, 2017~~28, 2018	/s/ Kimberly R. Scardino
	Kimberly R. Scardino
	Senior Vice President, Global Controller and Chief Accounting Officer
	(Principal Accounting Officer)

- 5354 -



	Asset impairments			Real estate costs			Severance and other business transition and exit costs			Total
Balance at August 31, 2016	$	—		$	248		$	27		$	275
Restructuring costs	229			264			99			592
Payments	—			(51		)	(80		)	(131		)
Other - non cash	(229		)	—			—			(229		)
Currency translation adjustments	—			—			—			—
Balance at May 31, 2017	$	—		$	461		$	46		$	507



	May 31, 2017
Total consideration	$	720

Identifiable assets acquired and liabilities assumed
Accounts receivable, net	$	233
Inventories	149
Property, plant and equipment, net	11
Intangible assets, net	331
Trade accounts payable	(89		)
Accrued expenses and other liabilities	(2		)
Total identifiable net assets	633
Goodwill	$	87



	May 31, 2017		August 31, 2016
Short-term borrowings ¹
$6 Billion note issuance ^2,3
1.750% unsecured notes due 2018	$	1,248	$	—
2.600% unsecured notes due 2021	1,494		—
3.100% unsecured notes due 2023	745		—
$8 Billion note issuance ^2,3
1.750% unsecured notes due November 2017	749		—
Unsecured Pound Sterling variable rate term loan due 2019	105		63
Other ⁴	497		260
Total short-term borrowings	$	4,838	$	323

Long-term debt ¹
Unsecured Pound Sterling variable rate term loan due 2019	$	1,736	$	1,833
$6 Billion note issuance ^2,3
1.750% unsecured notes due 2018	—		1,246
2.600% unsecured notes due 2021	—		1,493
3.100% unsecured notes due 2023	—		744
3.450% unsecured notes due 2026	1,886		1,885
4.650% unsecured notes due 2046	590		590
$8 Billion note issuance ^2,3
1.750% unsecured notes due 2017	—		746
2.700% unsecured notes due 2019	1,246		1,244
3.300% unsecured notes due 2021	1,243		1,242
3.800% unsecured notes due 2024	1,988		1,987
4.500% unsecured notes due 2034	495		494
4.800% unsecured notes due 2044	1,492		1,492
£700 Million note issuance ^2,3
2.875% unsecured Pound Sterling notes due 2020	513		521
3.600% unsecured Pound Sterling notes due 2025	384		391
€750 Million note issuance ^2,3
2.125% unsecured Euro notes due 2026	838		830
$4 Billion note issuance ^3,7
3.100% unsecured notes due 2022	1,194		1,194
4.400% unsecured notes due 2042	492		492
$1 Billion note issuance ^3,7
5.250% unsecured notes due 2019 ⁵	250		249
Other ⁶	25		32
Total long-term debt, less current portion	$	14,372	$	18,705



	Issuer purchases of equity securities
Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced repurchase programs¹	Approximate dollar value of shares that may yet be purchased under the plans or program¹
03/01/17 – 03/31/17	—	$	—	—	$	—
04/01/17 – 04/30/17	6,329,364	83.50		6,329,364	471,493,961
05/01/17 – 05/31/17	5,490,591	85.87		5,490,591	—
Total	11,819,955	$	84.60	11,819,955	$	—