ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
June 1, 2013
|
|
March 2, 2013
|
|
ASSETS
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
108,902
|
|
$
|
129,452
|
|
Accounts receivable, net
|
|
|
881,447
|
|
|
929,476
|
|
Inventories, net of LIFO reserve of $927,241 and $915,241
|
|
|
3,135,759
|
|
|
3,154,742
|
|
Prepaid expenses and other current assets
|
|
|
174,776
|
|
|
195,377
|
|
|
|
|
|
|
|
Total current assets
|
|
|
4,300,884
|
|
|
4,409,047
|
|
Property, plant and equipment, net
|
|
|
1,899,831
|
|
|
1,895,650
|
|
Other intangibles, net
|
|
|
444,234
|
|
|
464,404
|
|
Other assets
|
|
|
300,489
|
|
|
309,618
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
6,945,438
|
|
$
|
7,078,719
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations
|
|
$
|
43,401
|
|
$
|
37,311
|
|
Accounts payable
|
|
|
1,366,036
|
|
|
1,384,644
|
|
Accrued salaries, wages and other current liabilities
|
|
|
1,068,974
|
|
|
1,156,315
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
2,478,411
|
|
|
2,578,270
|
|
Long-term debt, less current maturities
|
|
|
5,778,652
|
|
|
5,904,370
|
|
Lease financing obligations, less current maturities
|
|
|
89,612
|
|
|
91,850
|
|
Other noncurrent liabilities
|
|
|
956,287
|
|
|
963,663
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
9,302,962
|
|
|
9,538,153
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
Stockholders' deficit:
|
|
|
|
|
|
|
|
Preferred stockseries G, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued .008 and
.007
|
|
|
1
|
|
|
1
|
|
Preferred stockseries H, par value $1 per share; liquidation value $100 per share; 2,000 shares authorized; shares issued 1,848 and
1,821
|
|
|
184,829
|
|
|
182,097
|
|
Common stock, par value $1 per share; 1,500,000 authorized; shares issued and outstanding 909,385 and 904,268
|
|
|
909,385
|
|
|
904,268
|
|
Additional paid-in capital
|
|
|
4,283,967
|
|
|
4,280,831
|
|
Accumulated deficit
|
|
|
(7,675,600
|
)
|
|
(7,765,262
|
)
|
Accumulated other comprehensive loss
|
|
|
(60,106
|
)
|
|
(61,369
|
)
|
|
|
|
|
|
|
Total stockholders' deficit
|
|
|
(2,357,524
|
)
|
|
(2,459,434
|
)
|
|
|
|
|
|
|
Total liabilities and stockholders' deficit
|
|
$
|
6,945,438
|
|
$
|
7,078,719
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
3
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
June 1, 2013
|
|
June 2, 2012
|
|
Revenues
|
|
$
|
6,293,057
|
|
$
|
6,468,287
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
Cost of goods sold
|
|
|
4,472,066
|
|
|
4,719,516
|
|
Selling, general and administrative expenses
|
|
|
1,609,261
|
|
|
1,688,066
|
|
Lease termination and impairment charges
|
|
|
10,972
|
|
|
12,143
|
|
Interest expense
|
|
|
113,064
|
|
|
130,588
|
|
Loss on debt retirements, net
|
|
|
|
|
|
17,842
|
|
Gain on sale of assets, net
|
|
|
(5,180
|
)
|
|
(10,051
|
)
|
|
|
|
|
|
|
|
|
|
6,200,183
|
|
|
6,558,104
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
92,874
|
|
|
(89,817
|
)
|
Income tax expense (benefit)
|
|
|
3,212
|
|
|
(61,729
|
)
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
|
|
|
|
|
|
Computation of income (loss) attributable to common stockholders:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
Accretion of redeemable preferred stock
|
|
|
(25
|
)
|
|
(25
|
)
|
Cumulative preferred stock dividends
|
|
|
(2,732
|
)
|
|
(2,574
|
)
|
|
|
|
|
|
|
Income (loss) attributable to common stockholdersbasic
|
|
$
|
86,905
|
|
$
|
(30,687
|
)
|
|
|
|
|
|
|
Add backinterest on convertible notes
|
|
|
1,364
|
|
|
|
|
Add backcumulative preferred stock dividends
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stockholdersdiluted
|
|
$
|
91,001
|
|
$
|
(30,687
|
)
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.10
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.09
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
4
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1, 2013
|
|
June 2, 2012
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
Other comprehensive income:
|
|
|
|
|
|
|
|
Defined benefit pension plans:
|
|
|
|
|
|
|
|
Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost
|
|
|
1,263
|
|
|
1,020
|
|
|
|
|
|
|
|
Total other comprehensive income
|
|
$
|
1,263
|
|
$
|
1,020
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
90,925
|
|
$
|
(27,068
|
)
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
5
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(unaudited)
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Operating activities:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
101,246
|
|
|
106,371
|
|
Lease termination and impairment charges
|
|
|
10,972
|
|
|
12,143
|
|
LIFO charges
|
|
|
12,000
|
|
|
18,750
|
|
Gain on sale of assets, net
|
|
|
(5,180
|
)
|
|
(10,051
|
)
|
Stock-based compensation expense
|
|
|
4,240
|
|
|
3,958
|
|
Loss on debt retirements, net
|
|
|
|
|
|
17,842
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
47,797
|
|
|
96,385
|
|
Inventories
|
|
|
6,935
|
|
|
97,993
|
|
Accounts payable
|
|
|
(15,547
|
)
|
|
(38,703
|
)
|
Other assets and liabilities, net
|
|
|
(67,678
|
)
|
|
87,003
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
184,447
|
|
|
363,603
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
(80,906
|
)
|
|
(78,000
|
)
|
Intangible assets acquired
|
|
|
(11,786
|
)
|
|
(8,958
|
)
|
Proceeds from sale-leaseback transactions
|
|
|
3,989
|
|
|
|
|
Proceeds from dispositions of assets and investments
|
|
|
6,610
|
|
|
11,283
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(82,093
|
)
|
|
(75,675
|
)
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
426,263
|
|
Net repayments to revolver
|
|
|
(123,000
|
)
|
|
(136,000
|
)
|
Principal payments on long-term debt
|
|
|
(4,378
|
)
|
|
(463,637
|
)
|
Change in zero balance cash accounts
|
|
|
(867
|
)
|
|
(41,901
|
)
|
Net proceeds from issuance of common stock
|
|
|
6,744
|
|
|
534
|
|
Financing fees paid for early debt redemption
|
|
|
|
|
|
(11,069
|
)
|
Deferred financing costs paid
|
|
|
(1,403
|
)
|
|
(9,629
|
)
|
|
|
|
|
|
|
Net cash used in financing activities
|
|
|
(122,904
|
)
|
|
(235,439
|
)
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
(20,550
|
)
|
|
52,489
|
|
Cash and cash equivalents, beginning of period
|
|
|
129,452
|
|
|
162,285
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
108,902
|
|
$
|
214,774
|
|
|
|
|
|
|
|
Supplementary cash flow data:
|
|
|
|
|
|
|
|
Cash paid for interest (net of capitalized amounts of $58 and $137, respectively)
|
|
$
|
88,908
|
|
$
|
64,195
|
|
|
|
|
|
|
|
Cash payments of income taxes, net of refunds
|
|
$
|
(1,173
|
)
|
$
|
710
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
5,373
|
|
$
|
3,865
|
|
|
|
|
|
|
|
Preferred stock dividends paid in additional shares
|
|
$
|
2,732
|
|
$
|
2,574
|
|
|
|
|
|
|
|
Gross borrowings from revolver
|
|
$
|
755,000
|
|
$
|
287,000
|
|
|
|
|
|
|
|
Gross repayments to revolver
|
|
$
|
878,000
|
|
$
|
423,000
|
|
|
|
|
|
|
|
See accompanying notes to condensed consolidated financial statements.
6
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended June 1, 2013 and
June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for
interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information
and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all
adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen
week period ended June 1, 2013 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation and Subsidiaries (the "Company") Fiscal 2013 10-K.
New Accounting Pronouncements
In February 2013, the FASB issued ASU No. 2013-02,
Comprehensive Income (Topic 220),
Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income
. The guidance was issued in response to ASU No. 2011-05 and required
disclosure of the effect of significant reclassifications out of accumulated other comprehensive income on the respective line items of net income, if the amounts reclassified are required under
U.S. GAAP to be reclassified in their entirety to net income in the same reporting period. For other amounts not required to be reclassified to net income in their entirety in the same
reporting period, or when a portion of the amount is reclassified to a balance sheet account instead of directly to income or expense, a cross reference to the related footnote disclosures for
additional information should be provided. The new requirements were effective prospectively for fiscal years beginning on or after
December 15, 2012, and for interim periods within those fiscal years. The adoption did not have a material effect on the Company's financial statements.
2. Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income (loss) available to common stockholders by the weighted average number of shares of common stock outstanding for the period.
Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the
7
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
2. Income (Loss) Per Share (Continued)
issuance
of common stock that then shared in the income of the Company subject to anti-dilution limitations.
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Numerator for income (loss) per share:
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
Accretion of redeemable preferred stock
|
|
|
(25
|
)
|
|
(25
|
)
|
Cumulative preferred stock dividends
|
|
|
(2,732
|
)
|
|
(2,574
|
)
|
|
|
|
|
|
|
Income (loss) attributable to common stockholdersbasic
|
|
$
|
86,905
|
|
$
|
(30,687
|
)
|
|
|
|
|
|
|
Add backinterest on convertible notes
|
|
|
1,364
|
|
|
|
|
Add backcumulative preferred stock dividends
|
|
|
2,732
|
|
|
|
|
|
|
|
|
|
|
Income (loss) attributable to common stockholdersdiluted
|
|
$
|
91,001
|
|
$
|
(30,687
|
)
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
893,871
|
|
|
887,516
|
|
Outstanding options and restricted shares, net
|
|
|
38,812
|
|
|
|
|
Convertible notes
|
|
|
24,800
|
|
|
|
|
Convertible preferred stock
|
|
|
33,605
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
991,088
|
|
|
887,516
|
|
|
|
|
|
|
|
Basic income (loss) per share
|
|
$
|
0.10
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
Diluted income (loss) per share
|
|
$
|
0.09
|
|
$
|
(0.03
|
)
|
|
|
|
|
|
|
Due
to their antidilutive effect, the following potential common shares have been excluded from the computation of diluted income (loss) per share as of June 1, 2013 and
June 2, 2012:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Stock options
|
|
|
49,324
|
|
|
72,907
|
|
Convertible preferred stock
|
|
|
|
|
|
31,662
|
|
Convertible notes
|
|
|
|
|
|
24,800
|
|
|
|
|
|
|
|
|
|
|
49,324
|
|
|
129,369
|
|
|
|
|
|
|
|
Also
excluded from the computation of diluted income (loss) per share as of June 1, 2013 and June 2, 2012 are restricted shares and restricted stock units of 0 and 11,366,
respectively, which are included in shares outstanding.
8
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
3. Lease Termination and Impairment Charges
Lease termination and impairment charges consist of amounts as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Impairment charges
|
|
$
|
4,601
|
|
$
|
495
|
|
Lease termination charges
|
|
|
6,371
|
|
|
11,648
|
|
|
|
|
|
|
|
|
|
$
|
10,972
|
|
$
|
12,143
|
|
|
|
|
|
|
|
Impairment Charges
These amounts include the write-down of long-lived assets at locations that were assessed for impairment
because of management's intention to relocate or close the location or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.
Lease Termination Charges
As part of the Company's ongoing business activities, the Company assesses stores and distribution centers for potential closure or
relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as
impairment of assets at these locations. The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Balancebeginning of period
|
|
$
|
323,758
|
|
$
|
367,864
|
|
Provision for present value of noncancellable lease payments of closed stores
|
|
|
393
|
|
|
3,574
|
|
Changes in assumptions about future sublease income, terminations and changes in interest rates
|
|
|
520
|
|
|
2,057
|
|
Interest accretion
|
|
|
5,458
|
|
|
6,056
|
|
Cash payments, net of sublease income
|
|
|
(18,118
|
)
|
|
(20,968
|
)
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
312,011
|
|
$
|
358,583
|
|
|
|
|
|
|
|
4. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy
is based upon the
9
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
4. Fair Value Measurements (Continued)
lowest
level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:
-
-
Level 1Inputs to the valuation methodology are unadjusted quoted prices in active markets for
identical assets or liabilities that the Company has the ability to access at the measurement date.
-
-
Level 2Inputs to the valuation methodology are quoted prices for similar assets and liabilities in
active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
-
-
Level 3Inputs to the valuation methodology are unobservable inputs based upon management's best
estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.
Non-Financial Assets Measured on a Non-Recurring Basis
Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating
impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by
evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the
amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates
future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the
first quarter of fiscal 2014, long-lived assets from continuing operations with a carrying value of $17,508, primarily store assets, were written down to their fair value of $12,907,
resulting in an impairment charge of $4,601. During the first quarter of fiscal 2013, long-lived assets with a carrying value of $1,096, primarily store assets, were written down to their
fair value of $601, resulting in an impairment charge of $495. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired
in the current period may be further impaired in future periods.
10
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
4. Fair Value Measurements (Continued)
The
following table presents fair values for those assets measured at fair value on a non-recurring basis at June 1, 2013 and June 2, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurement Using
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total as of
June 1,
2013
|
|
Long-lived assets held for use
|
|
$
|
|
|
$
|
|
|
$
|
592
|
|
$
|
592
|
|
Long-lived assets held for sale
|
|
$
|
|
|
$
|
12,315
|
|
$
|
|
|
$
|
12,315
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
12,315
|
|
$
|
592
|
|
$
|
12,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total as of
June 2,
2012
|
|
Long-lived assets held for use
|
|
$
|
|
|
$
|
|
|
$
|
601
|
|
$
|
601
|
|
Long-lived assets held for sale
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
601
|
|
$
|
601
|
|
|
|
|
|
|
|
|
|
|
|
As
of June 1, 2013 and June 2, 2012, the Company did not have any financial assets measured on a recurring basis.
Other Financial Instruments
Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts
payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature.
The
fair value for LIBOR-based borrowings under the Company's senior secured credit facility and first and second lien term loans are estimated based on the quoted market price of the
financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company's other long-term indebtedness are estimated based
on quoted market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company's total
long-term indebtedness was $5,795,530 and $6,117,849, respectively, as of June 1, 2013. There were no outstanding derivative financial instruments as of June 1, 2013 and
March 2, 2013.
5. Income Taxes
The Company recorded an income tax expense of $3,212 and an income tax benefit of $61,729 for the thirteen week periods ended June 1, 2013 and June 2, 2012, respectively.
The income tax expense or benefit is recorded net of adjustments to maintain a full valuation allowance against the Company's net deferred tax assets.
11
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
5. Income Taxes (Continued)
The income tax expense for the thirteen week period ended June 1, 2013 is primarily attributable to the accrual of federal, state and local taxes and adjustments to unrecognized
tax benefits offset by adjustments to the valuation allowance of $36,889.
The
income tax benefit for the thirteen week period ended June 2, 2012 is primarily attributable to the recognition of previously unrecognized tax benefits resulting from the
appellate settlement of the Brooks Eckerd Internal Revenue Service (IRS) Audit for the periods leading up to the acquisition which include fiscal years 2004 - 2007. This
amount was offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses as this audit was related to pre-acquisition
periods. The accrual of federal, state and local taxes for the thirteen week period ended June 2, 2012 included adjustments to the valuation allowance of $27,787.
The
Company is indemnified by Jean Coutu Group for certain tax liabilities incurred for all years ended up to and including June 4, 2007, related to the June 2007 Brooks Eckerd
acquisition. Although the Company is indemnified by Jean Coutu Group, the Company remains the primary obligor to the tax authorities with respect to any tax liability arising for the years prior to
the acquisition. Accordingly, as of June 1, 2013 and March 2, 2013 the Company had corresponding recoverable indemnification assets of $31,323 and $30,710 from Jean Coutu Group,
respectively, included in the 'Other Assets' line of the Consolidated Balance Sheets, to reflect the indemnification for such liabilities.
The
Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the
evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate
resolution may result in a payment that is materially different from the current estimate of the tax liabilities.
Over
the next 12 months, the Company believes that it is reasonably possible that the amount of unrecognized tax positions including interest and penalties could decrease tax
liabilities by approximately $31,414, which would impact the effective tax rate if the company's tax positions are sustained upon audit or the controlling statute of limitations expires. The primary
driver of the decrease is contingent upon the statute of limitations expiring. The corresponding indemnification asset will reverse concurrently in selling, general and administrative expenses.
The
valuation allowances as of June 1, 2013 and March 2, 2013 apply to the net deferred tax assets of the Company. The Company continues to maintain a full valuation
allowance of $2,186,785 and $2,223,675 against net deferred tax assets at June 1, 2013 and March 2, 2013, respectively.
12
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
6. Intangible Assets
The Company's intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company's amortizable intangible assets as of June 1, 2013
and March 2, 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 1, 2013
|
|
March 2, 2013
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Remaining
Weighted
Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Remaining
Weighted
Average
Amortization
Period
|
Favorable leases and other
|
|
$
|
626,019
|
|
$
|
(423,564
|
)
|
9 years
|
|
$
|
623,541
|
|
$
|
(413,556
|
)
|
10 years
|
Prescription files
|
|
|
1,294,145
|
|
|
(1,052,366
|
)
|
4 years
|
|
|
1,286,087
|
|
|
(1,031,668
|
)
|
4 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
1,920,164
|
|
$
|
(1,475,930
|
)
|
|
|
$
|
1,909,628
|
|
$
|
(1,445,224
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Also
included in other non-current liabilities, as of June 1, 2013 and March 2, 2013, are unfavorable lease intangibles with a net carrying amount of $67,935
and $70,195 respectively. These intangible liabilities are amortized over their remaining lease terms.
Amortization
expense for these intangible assets and liabilities was $31,685 and $34,076 for the thirteen week periods ended June 1, 2013 and June 2, 2012, respectively.
The anticipated annual amortization expense for these intangible assets and liabilities is 2014$106,305; 2015$89,363; 2016$78,178; 2017$65,147 and
2018$27,348.
13
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at June 1, 2013 and March 2, 2013:
|
|
|
|
|
|
|
|
|
|
June 1, 2013
|
|
March 2, 2013
|
|
Secured Debt:
|
|
|
|
|
|
|
|
Senior secured revolving credit facility due February 2018
|
|
|
542,000
|
|
|
665,000
|
|
Tranche 6 Term Loan due February 2020
|
|
|
1,161,000
|
|
|
1,161,000
|
|
8.00% senior secured notes (senior lien) due August 2020
|
|
|
650,000
|
|
|
650,000
|
|
7.5% senior secured notes (second lien) due March 2017
|
|
|
500,000
|
|
|
500,000
|
|
Tranche 1 Term Loan (second lien) due August 2020
|
|
|
470,000
|
|
|
470,000
|
|
10.25% senior secured notes (second lien) due October 2019 ($270,000 face value less unamortized discount of $1,313 and $1,364)
|
|
|
268,687
|
|
|
268,636
|
|
Other secured
|
|
|
5,267
|
|
|
5,298
|
|
|
|
|
|
|
|
|
|
|
3,596,954
|
|
|
3,719,934
|
|
Guaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
9.5% senior notes due June 2017 ($810,000 face value less unamortized discount of $5,203 and $5,529)
|
|
|
804,797
|
|
|
804,471
|
|
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $4,591 and $4,759)
|
|
|
906,591
|
|
|
906,759
|
|
|
|
|
|
|
|
|
|
|
1,711,388
|
|
|
1,711,230
|
|
Unguaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
8.5% convertible notes due May 2015
|
|
|
64,188
|
|
|
64,188
|
|
7.7% notes due February 2027
|
|
|
295,000
|
|
|
295,000
|
|
6.875% fixed-rate senior notes due December 2028
|
|
|
128,000
|
|
|
128,000
|
|
|
|
|
|
|
|
|
|
|
487,188
|
|
|
487,188
|
|
Lease financing obligations
|
|
|
116,135
|
|
|
115,179
|
|
|
|
|
|
|
|
Total debt
|
|
|
5,911,665
|
|
|
6,033,531
|
|
Current maturities of long-term debt and lease financing obligations
|
|
|
(43,401
|
)
|
|
(37,311
|
)
|
|
|
|
|
|
|
Long-term debt and lease financing obligations, less current maturities
|
|
$
|
5,868,264
|
|
$
|
5,996,220
|
|
|
|
|
|
|
|
Credit Facility
The Company has a senior secured credit facility that consists of a $1,795,000 revolving credit facility and a $1,161,000 senior
secured term loan (the "Tranche 6 Term Loan"). Borrowings under the revolving credit facility bear interest at a rate per annum between LIBOR plus 2.25% and LIBOR plus 2.75%, if the Company
chooses to make LIBOR borrowings, or between Citibank's base rate plus 1.25% and Citibank's base rate plus 1.75% in each case based upon the amount of revolver availability as defined in the senior
secured credit facility. The Company is required to pay fees between 0.375%
14
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Indebtedness and Credit Agreements (Continued)
and
0.50% per annum on the daily unused amount of the revolver, depending on the amount of revolver availability. Amounts drawn under the revolver become due and payable on February 21, 2018.
The Tranche 6 Term Loan matures on February 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 3.00%, if the Company chooses to make LIBOR borrowings, or at
Citibank's base rate plus 2.00%. The Tranche 6 Term Loan is subject to a 1.00% LIBOR floor per annum.
The
Company's ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At June 1, 2013,
the Company had $542,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $112,523, which resulted in additional borrowing capacity of
$1,140,477.
The
senior secured credit facility contains certain restrictions on the ability of the Company and the subsidiary guarantors to accumulate cash on hand, and under certain circumstances,
requires the funds in the Company's deposit accounts to be applied first to the repayment of outstanding revolving loans under the senior secured credit facility and then to be held as Collateral for
the senior obligations.
The
senior credit facility restricts the amount of secured and unsecured debt the Company may have outstanding in addition to borrowings under the senior secured credit facility and
existing indebtedness, subject to limitations on the amount of such debt that shall mature or require scheduled payments of principal prior to May 21, 2020. The senior secured credit facility
allows the Company to incur an unlimited amount of unsecured debt with a maturity beyond May 21, 2020. However, the Company's second priority secured term loan facilities and the indentures
that govern the Company's secured and guaranteed unsecured notes contain restrictions on the amount of additional secured and unsecured debt that can be incurred by the Company. The Company could not
incur any additional secured debt assuming a fully drawn revolver and the outstanding letters of credit. The ability to issue additional unsecured debt under the second priority secured term loan
facilities and the indentures is generally governed by an interest coverage ratio test. As of June 1, 2013, we had the ability to issue additional unsecured debt under the second lien credit
facility and other indentures.
The
senior secured credit facility contains additional covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions
and the granting of liens. The credit facility has a financial covenant, which is the maintenance of a fixed charge coverage ratio. The covenant requires that, if availability on the revolving credit
facility is less than $150,000, the Company must maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. As of June 1, 2013, the Company was in compliance with this financial covenant.
The senior secured credit facility also provides for customary events of default.
The
Company also has a second priority secured term loan facility, which includes a $470,000 second priority secured term loan (the "Tranche 1 Term Loan"). The Tranche 1
Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75%, if the Company chooses to make LIBOR borrowings, or at Citibank's base rate plus
3.75%. The Tranche 1 Term Loan is subject to a 1.00% LIBOR floor per annum.
15
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
7. Indebtedness and Credit Agreements (Continued)
On
June 21, 2013, the Company entered into a new second priority secured term loan facility, which includes a $500,000 second priority secured term loan (the "Tranche 2
Term Loan"). The Company used net proceeds from the Tranche 2 Term Loan, borrowings under its revolving credit facility and available cash to repurchase and repay all of the Company's
outstanding $500,000 aggregate principal of 7.5% senior secured notes due 2017. See Note 12.
Substantially
all of Rite Aid Corporation's 100 percent owned subsidiaries guarantee the obligations under the senior secured credit facility, second priority secured term loan
facilities, secured guaranteed notes and unsecured guaranteed notes. The senior secured credit facility, second priority secured term loan facilities and secured guaranteed notes are secured, on a
senior or second priority basis, as applicable, by a lien on, among other things, accounts receivable, inventory and prescription files of the subsidiary guarantors. The subsidiary guarantees related
to the Company's senior secured credit facility,
second priority secured term loan facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes are full and unconditional and joint and several, and there are no
restrictions on the ability of the Company to obtain funds from its subsidiaries. Also, the Company has no independent assets or operations, and subsidiaries not guaranteeing the credit facility,
second priority secured term loan facilities and applicable notes are minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented.
Other Transactions
On July 2, 2013, the Company issued $810,000 of its 6.75% senior notes due 2021. The Company intends to use the net proceeds
from the 6.75% notes, borrowings under its revolving credit facility and available cash to repurchase and repay all of the Company's outstanding $810,000 aggregate principal of 9.5% senior notes due
2017. See Note 12.
Maturities
The aggregate annual principal payments of long-term debt for the remainder of fiscal 2014 and thereafter are as follows:
2014$13,975; 2015$11,610; 2016$75,798; 2017$511,610; 2018$1,363,610 and $3,820,852 thereafter.
16
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Reclassifications from Accumulated Other Comprehensive Income
The following table summarizes the components of accumulated other comprehensive loss and the changes in balances of each component of accumulated other comprehensive loss, net of tax as
applicable, for the thirteen weeks ended June 1, 2013 and June 2, 2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen week period ended
June 1, 2013
|
|
Thirteen week period ended
June 2, 2012
|
|
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
(61,369
|
)
|
$
|
(61,369
|
)
|
$
|
(52,634
|
)
|
$
|
(52,634
|
)
|
Amounts reclassified from accumulated other comprehensive loss to net income (loss)
|
|
|
1,263
|
|
|
1,263
|
|
|
1,020
|
|
|
1,020
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
(60,106
|
)
|
$
|
(60,106
|
)
|
$
|
(51,614
|
)
|
$
|
(51,614
|
)
|
|
|
|
|
|
|
|
|
|
|
The
following table summarizes the effects on net income (loss) of significant amounts classified out of each component of accumulated other comprehensive loss for the thirteen week
periods ended June 1, 2013 and June 2, 2012:
|
|
|
|
|
|
Thirteen week period ended June 1, 2013
|
Details about accumulated other comprehensive
loss components
|
|
Amount
reclassified from
accumulated other
comprehensive loss
|
|
Affected line item in the condensed consolidated
statements of operations
|
Defined benefit pension plans
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a)
|
|
$
|
(60
|
)
|
Selling, general and administrative expenses
|
Amortization of unrecognized net loss(a)
|
|
|
(1,203
|
)
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
(1,263
|
)
|
Total before income tax expense
|
|
|
|
|
|
Income tax expense(b)
|
|
|
|
|
|
|
|
$
|
(1,263
|
)
|
Net of income tax expense
|
|
|
|
|
|
17
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
8. Reclassifications from Accumulated Other Comprehensive Income (Continued)
|
|
|
|
|
|
Thirteen week period ended June 2, 2012
|
Details about accumulated other comprehensive
loss components
|
|
Amount
reclassified from
accumulated other
comprehensive loss
|
|
Affected line item in the condensed consolidated
statements of operations
|
Defined benefit pension plans
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a)
|
|
$
|
(60
|
)
|
Selling, general and administrative expenses
|
Amortization of unrecognized net loss(a)
|
|
|
(960
|
)
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
(1,020
|
)
|
Total before income tax expense
|
|
|
|
|
|
Income tax expense(b)
|
|
|
|
|
|
|
|
$
|
(1,020
|
)
|
Net of income tax expense
|
|
|
|
|
|
-
(a)
-
See
Note 9, Retirement Plans for additional details.
-
(b)
-
Income
tax expense is $0 due to the valuation allowance. See Note 5, Income Taxes for additional details.
9. Retirement Plans
Net periodic pension expense recorded in the thirteen week periods ended June 1, 2013 and June 2, 2012, for the Company's defined benefit plans includes the following
components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified Executive
Retirement Plans
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
June 1, 2013
|
|
June 2, 2012
|
|
June 1, 2013
|
|
June 2, 2012
|
|
Service cost
|
|
$
|
829
|
|
$
|
868
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
|
1,551
|
|
|
1,566
|
|
|
136
|
|
|
154
|
|
Expected return on plan assets
|
|
|
(1,779
|
)
|
|
(1,749
|
)
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
60
|
|
|
60
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss
|
|
|
1,203
|
|
|
960
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
1,864
|
|
$
|
1,705
|
|
$
|
136
|
|
$
|
154
|
|
|
|
|
|
|
|
|
|
|
|
During
the thirteen week period ended June 1, 2013 the Company contributed $404 to the Nonqualified Executive Retirement Plans. During the remainder of fiscal 2014, the Company
expects to contribute $1,258 to the Nonqualified Executive Retirement Plans and $0 to the Defined Benefit Pension Plan.
18
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. Commitments and Contingencies
The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the matters
described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the
amount can be reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss
contingency both probable and reasonably estimable. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
The
Company's contingencies are subject to significant uncertainties, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective
action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which
are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual
issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a sealed qui tam lawsuit ("whistleblower" action) has been filed and whether the government
agency makes a decision to intervene in the lawsuit following investigation.
The
Company has been named in a collective and class action lawsuit,
Indergit v. Rite Aid Corporation et al
pending in the United States
District Court for the Southern District of New York, filed purportedly on behalf of current and former store managers working in the Company's stores at various locations around the country. The
lawsuit alleges that the Company failed to pay overtime to store managers as required under the FLSA and under certain New York state statutes. The lawsuit also seeks other relief, including
liquidated damages, punitive damages, attorneys' fees, costs and injunctive relief arising out of state and federal claims for overtime pay. On April 2, 2010, the Court conditionally certified
a nationwide collective group of individuals who worked for the Company as store managers since March 31, 2007. The Court ordered that Notice of the
Indergit
action be sent to the purported members
of the collective group (approximately 7,000 current and former store managers) and approximately 1,550
joined the
Indergit
action. Discovery as to certification issues has been completed. The parties have fully briefed the issues of Rule 23 class
certification of the New York store manager claims and decertification of the nationwide collective action claims and are awaiting a ruling from the Court. At this time, the Company is not able to
either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit. The Company's management believes, however, that this lawsuit is without merit and not
appropriate for collective or class action treatment and is vigorously defending this lawsuit.
The
Company is currently a defendant in several putative class action lawsuits filed in state courts in California alleging violations of California wage and hour laws, rules and
regulations pertaining primarily to failure to pay overtime, pay for missed meals and rest periods and failure to provide employee seating. These suits purport to be class actions and seek substantial
damages. At this time, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuits. The Company's management believes,
however, that the plaintiffs'
19
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. Commitments and Contingencies (Continued)
allegations
are without merit and that their claims are not appropriate for class action treatment. The Company is vigorously defending all of these claims.
The
Company was served with a United States Department of Health and Human Services Office of the Inspector General ("OIG") subpoena dated March 5, 2010 in connection with an
investigation being conducted by the OIG and the United States Attorney's Office for the Central District of California. The subpoena requests records related to any gift card inducement programs for
customers who transferred prescriptions for drugs or medicines to the Company's pharmacies, and whether any customers who receive federally funded prescription benefits (e.g. Medicare and
Medicaid) may have benefited from those programs. The Company has substantially completed its production of records in response to the subpoena. In June 2013, the government contacted the Company, and
the Company is involved in ongoing discussions with the government regarding the matter.
The
Company received a subpoena dated May 9, 2011 from certain California counties seeking information regarding compliance with environmental regulations governing the management
of hazardous waste. The Company has responded to the subpoena, is cooperating with California regulators, and continues to review its operations pertaining to the management of hazardous materials.
The Company is in discussions with the California regulators and has recorded an estimated amount to settle these matters.
The
Company was served with a Civil Investigative Demand Subpoena Duces Tecum dated August 26, 2011 by the United States Attorney's Office for the Eastern District of Michigan.
The subpoena requests records regarding Rite Aid's Rx Savings Program and the reporting of usual and customary charges to publicly funded health programs. In connection with the same investigation,
the Company was served with a Civil Subpoena Duces Tecum dated February 22, 2013 by the State of Indiana Office of the Attorney General. The Company is completing its response to both of the
subpoenas and is unable to predict the timing or outcome of any review by the government of such information.
In
April 2012, the Company received an administrative subpoena from the Drug Enforcement Administration ("DEA"), Albany, New York District Office, requesting information regarding the
Company's sale of products containing pseudoephedrine ("PSE"). In April 2012, it also received a communication from the United States Attorneys Office for the Northern District of New York ("USAO")
concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 ("CMEA"). In April 2013, the Company received additional administrative subpoenas from DEA
concerning certain retail PSE transactions at New York stores and the USAO commenced discussions with the Company regarding whether, from 2009 (upon implementation of an electronic PSE transaction
logbook system) through the present, the Company sold products containing PSE in violation of the CMEA. Violations of the CMEA could result in the imposition of administrative, civil and/or criminal
penalties against the Company. The Company is cooperating with the government and has provided information responsive to the subpoenas. The Company cannot predict the timing or outcome of any review
by the DEA or USAO of such information.
20
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
10. Commitments and Contingencies (Continued)
In
addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of our
business. While the Company's management cannot predict the outcome of any of the claims, the Company's management does not believe that the outcome of any of these legal matters will be material to
the Company's consolidated financial position. It is possible, however, that the Company's results of operations or cash flows in a particular fiscal period could be materially affected by an
unfavorable resolution of pending litigation or contingencies.
The California Department of Health Care Services ("DHCS"), the agency responsible for administering the State of California Medicaid
program, implemented retroactive reimbursement rate reductions effective June 1, 2011, impacting the medical provider community in California, including pharmacies. Numerous medical providers,
including representatives of both chain and independent pharmacies, filed suits against DHCS in federal district court in California and obtained preliminary injunctions against the rate cuts, subject
to a trial on the merits. DHCS appealed the preliminary injunctions to the Ninth Circuit Court of Appeals, which Court vacated the injunctions. The numerous medical providers are considering their
options. Based upon the actions of DHCS and the decision of the appeals court, the Company has recorded an appropriate accrual. As pertinent facts and circumstances develop, this accrual may be
adjusted.
11. Related Party Transactions
As of June 1, 2013, the Jean Coutu Group owned 105,901,162 shares (11.3% of the voting power of the Company) of common stock. On June 26, 2013, the Jean Coutu Group
announced that it had sold 40,500,000 of its 105,901,162 shares of Rite Aid's common stock and now owns approximately 6.9% of the voting power of the Company. At this level of ownership, the Jean
Coutu Group (and, subject to certain conditions, certain members of the Coutu family) has the right to designate one of the eight members of the Company's board of directors, subject to adjustment for
future reductions in its ownership position in the Company.
12. Subsequent Events
On June 21, 2013, the Company entered into a new second priority secured term loan facility, which includes the Tranche 2 Term Loan. The Tranche 2 Term Loan matures
on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if the Company chooses to make LIBOR borrowings, or at Citibank's base
rate plus 2.875%. The Company used the net proceeds from the Tranche 2 Term Loan, borrowings under its revolving credit facility and
available cash to repurchase and repay all of the Company's outstanding $500,000 aggregate principal of 7.5% senior secured notes due 2017.
On
July 2, 2013, the Company issued $810,000 of its 6.75% senior notes due 2021. The Company's obligations under the notes are fully and unconditionally guaranteed, jointly and
severally, on an
21
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Thirteen Week Periods Ended June 1, 2013 and June 2, 2012
(Dollars and share information in thousands, except per share amounts)
(unaudited)
12. Subsequent Events (Continued)
unsubordinated
basis, by all of its subsidiaries that guarantee the Company's obligations under the senior secured credit facility, the second priority secured term loan facilities and the outstanding
8.00% senior secured notes due 2020, 10.25% senior secured notes due 2019, 9.5% senior notes due 2017 and 9.25% senior notes due 2020. The Company intends to use the net proceeds of the 6.75% notes,
borrowings under its revolving credit facility and/or available cash to repurchase and repay all of the Company's outstanding $810,000 aggregate principal of 9.5% senior notes due 2017.
In
connection with these refinancing transactions, the Company will record a loss on debt retirement, including tender and call premium and interest, unamortized debt issue costs and
unamortized discount of approximately $63,000 during the second quarter of fiscal 2014.
22
Table of Contents
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Overview
Net income for the thirteen week period ended June 1, 2013 was $89.7 million compared to the net loss of
$28.1 million for the thirteen week period ended June 2, 2012. The improvement in our operating results is driven primarily by higher gross profit from generic drug introductions, lower
selling, general and administrative expenses ("SG&A"), as well as lower interest expense and loss on debt retirements, partially offset by higher income tax expense.
Results of Operations
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
June 1, 2013
|
|
June 2, 2012
|
|
|
|
(dollars in thousands)
|
|
Revenues
|
|
$
|
6,293,057
|
|
$
|
6,468,287
|
|
Revenue (decline) growth
|
|
|
(2.7
|
)%
|
|
1.2
|
%
|
Same store sales (decline) growth
|
|
|
(2.5
|
)%
|
|
2.5
|
%
|
Pharmacy sales (decline) growth
|
|
|
(4.1
|
)%
|
|
1.7
|
%
|
Same store prescription count (decrease) increase
|
|
|
(0.1
|
)%
|
|
3.0
|
%
|
Same store pharmacy sales (decline) growth
|
|
|
(3.8
|
)%
|
|
2.4
|
%
|
Pharmacy sales as a % of total sales
|
|
|
67.5
|
%
|
|
68.4
|
%
|
Third party sales as a % of total pharmacy sales
|
|
|
97.0
|
%
|
|
96.6
|
%
|
Front-end sales growth
|
|
|
0.3
|
%
|
|
2.0
|
%
|
Same store front-end sales growth
|
|
|
0.4
|
%
|
|
2.7
|
%
|
Front-end sales as a % of total sales
|
|
|
32.5
|
%
|
|
31.6
|
%
|
Store data:
|
|
|
|
|
|
|
|
Total stores (beginning of period)
|
|
|
4,623
|
|
|
4,667
|
|
Closed stores
|
|
|
(8
|
)
|
|
(15
|
)
|
Total stores (end of period)
|
|
|
4,615
|
|
|
4,652
|
|
Relocated stores
|
|
|
|
|
|
2
|
|
Remodeled stores
|
|
|
108
|
|
|
143
|
|
Revenue decreased 2.7% for the thirteen week period ended June 1, 2013 compared to the thirteen week period ended June 2,
2012, primarily driven by a decrease in same store
sales and by operating 37 fewer stores than in the same period last year. The decrease in same store sales was driven by a decrease in pharmacy sales, which was primarily driven by generic drug
introductions, which have a substantially lower selling price than their brand counterparts, and continued reimbursement rate pressures.
Pharmacy
same store sales decreased by 3.8% in the thirteen week period ended June 1, 2013 compared to the thirteen week period ended June 2, 2012. The decrease was
primarily driven by an approximate 4.6% negative impact from generic drug introductions and continued lower reimbursement rates from pharmacy benefit managers and government payors. Same store
prescription count for the thirteen week period ended June 1, 2013 was flat compared to the thirteen week period ended June 2, 2012. We expect recent and future generic drug
introductions and lower reimbursement rates to continue to have additional negative impact on our revenues.
Front-end
same store sales increased by 0.4% in the thirteen week period ended June 1, 2013 compared to the thirteen week period ended June 2, 2012 reflecting
the continued positive impact from
23
Table of Contents
our
wellness+ loyalty program, incremental sales from our Wellness format stores and other initiatives to increase sales in the front end. We have completed 905 Wellness store remodels as of
June 1, 2013.
We
include in same store sales all stores that have been open at least one year. Stores in liquidation are considered closed. Relocation stores are not included in the same store sales
until one year has lapsed.
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended
|
|
|
|
June 1, 2013
|
|
June 2, 2012
|
|
|
|
(dollars in thousands)
|
|
Cost of goods sold
|
|
$
|
4,472,066
|
|
$
|
4,719,516
|
|
Gross profit
|
|
|
1,820,991
|
|
|
1,748,771
|
|
Gross margin
|
|
|
28.9
|
%
|
|
27.0
|
%
|
Selling, general and administrative expenses
|
|
|
1,609,261
|
|
|
1,688,066
|
|
Selling, general and administrative expenses as a percentage of revenues
|
|
|
25.6
|
%
|
|
26.1
|
%
|
Lease termination and impairment charges
|
|
|
10,972
|
|
|
12,143
|
|
Interest expense
|
|
|
113,064
|
|
|
130,588
|
|
Gross profit increased $72.2 million due to increases in both pharmacy and front-end gross profit. Pharmacy gross
profit was higher due to the continued benefit of generic drug introductions and increases in generic penetration, partially offset by continued pressure on pharmacy benefit manager and governmental
reimbursement rates. Front-end gross profit was higher due to higher same store sales reflecting the continued positive impact of our wellness+ loyalty program and Wellness Store remodels.
Front-end gross profit was also positively impacted by higher vendor promotional funding and a lower LIFO estimate.
Gross
margin was 28.9% of sales for the thirteen week period ended June 1, 2013 compared to 27.0% of sales for the thirteen week period ended June 2, 2012. The improvement
in gross margin was primarily due to cost reductions on existing generic drugs and generic drug introductions, higher vendor promotional funding and a lower LIFO estimate, partially offset by
increased tier discounts from our wellness+ customer loyalty program and continued pressure on pharmacy benefit manager and governmental reimbursement rates.
We
use the last-in, first-out (LIFO) method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and
inventory levels are final. Therefore, LIFO costs for interim period financial statements are estimated. The LIFO charges were $12.0 million for the thirteen week period ended June 1,
2013 compared to LIFO charges of $18.8 million for the thirteen week period ended June 2, 2012.
Selling, General and Administrative Expenses
SG&A as a percentage of revenues was 25.6% in the thirteen week period ended June 1, 2013 compared to 26.1% in the thirteen week
period ended June 2, 2012. The decrease in SG&A as a percentage of revenues was due primarily to the prior year reversal of $60.2 million of tax indemnification asset resulting from our
settlement with the Internal Revenue Service associated with a pre-acquisition Brooks Eckerd tax audit, which is completely offset by an income tax benefit as noted below, and higher prior
year litigation charges relating to the $20.9 million settlement of certain wage and hour class actions. These favorable variances are partially offset by increased salaries and benefit costs
for wage increases and investments to support our sales initiatives. These amounts are partially
24
Table of Contents
offset
by lower depreciation and amortization. SG&A improved this quarter compared to the prior year due to the tax indemnification asset reversal discussed above, however, we expect to see continued
SG&A increases as a percentage of revenues relative to the prior year due to the continued impact of generic drug introductions and reimbursement rate pressures on our pharmacy sales.
Lease termination and impairment charges consist of amounts as follows:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
Impairment charges
|
|
$
|
4,601
|
|
$
|
495
|
|
Lease termination charges
|
|
|
6,371
|
|
|
11,648
|
|
|
|
|
|
|
|
|
|
$
|
10,972
|
|
$
|
12,143
|
|
|
|
|
|
|
|
Impairment Charges:
These amounts include the write-down of long-lived assets at locations that were assessed for impairment
because of management's intention to relocate or close the location, or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.
Please
refer to "Management's Discussion and Analysis of Financial Condition and Results of OperationsImpairment Charges" included in our fiscal 2013 10-K for a
detailed description of our impairment methodology.
Lease Termination Charges:
Charges to close a store, which principally consist of continuing lease obligations, are recorded at the
time the store is
closed and all inventory is liquidated, pursuant to the guidance set forth in ASC 420, "Exit or Disposal Cost Obligations." We calculate our liability for closed stores on a
store-by-store basis. The calculation includes the discounted effect of future minimum lease payments and related ancillary costs, from the date of closure to the end of the
remaining lease term, net of estimated cost recoveries that may be achieved through subletting properties or through favorable lease terminations. We evaluate these assumptions each quarter and adjust
the liability accordingly. As part of our ongoing business activities, we assess stores and distribution centers for potential closure and relocation. Decisions to close or relocate stores
or distribution centers in future periods would result in charges for lease exit costs and liquidation of inventory, as well as impairment of assets at these locations.
Interest expense was $113.1 million for the thirteen week period ended June 1, 2013, compared to $130.6 million
for the thirteen week period ended June 2, 2012. The weighted average interest rates on our indebtedness for the thirteen week periods ended June 1, 2013 and June 2, 2012 were
7.1% and 7.4% respectively.
We recorded an income tax expense of $3.2 million and an income tax benefit of $61.7 million for the thirteen week
periods ended June 1, 2013 and June 2, 2012, respectively. The income tax expense or benefit is recorded net of adjustments to maintain a full valuation allowance against our net
deferred tax assets.
25
Table of Contents
The
income tax expense for the thirteen week period ended June 1, 2013 is primarily attributable to the accrual of federal, state and local taxes and adjustments to unrecognized
tax benefits offset by adjustments to the valuation allowance of $36.9 million.
The
income tax benefit for the thirteen week period ended June 2, 2012 is primarily attributable to the recognition of previously unrecognized tax benefits resulting from reaching
an agreement with the IRS Appellate Division settling the examination of the Brooks Eckerd fiscal years 2004-2007. The settlement with the IRS did not impact our net financial position,
results of operations or cash flows. Furthermore, the settlement resulted in the resolution of tax contingencies associated with these tax years which had impacted the effective rate by decreasing tax
expense in the first quarter by $61.5 million. This amount is offset by a reversal of the related tax indemnification asset which was recorded in selling, general and administrative expenses.
The accrual of federal, state and local taxes for the thirteen week period ended June 2, 2012 included adjustments to the valuation allowance of $27.8 million.
We
recognize tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation
of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current
estimate of the tax liabilities.
Over
the next 12 months, we believe that it is reasonably possible that the amount of unrecognized tax positions including interest and penalties could decrease tax liabilities by
approximately $31.4 million which would impact the effective tax rate if our tax positions are sustained upon audit or the controlling statute of limitations expires. The primary driver of the
decrease is contingent upon the statute of limitations expiring. The corresponding indemnification asset will reverse concurrently in selling, general and administrative expenses.
We
evaluate our deferred tax assets on a regular basis to determine if a valuation allowance against the net deferred tax assets is required. A cumulative loss in recent years is
significant negative evidence in considering whether deferred tax assets are realizable. Based on the negative evidence, we are precluded from relying on projections of future taxable income to
support the recognition of deferred tax assets. The ultimate realization of deferred tax assets is dependent upon the existence of sufficient taxable income generated in the carryforward periods.
Liquidity and Capital Resources
We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under the
revolving credit facility of our senior secured credit facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on
debt and to fund capital expenditures. Total liquidity as of June 1, 2013 was $1,141.8 million, which consisted of revolver borrowing capacity of $1,140.5 million and invested
cash of $1.3 million.
Our senior secured credit facility consists of a $1.795 billion revolving credit facility and a $1.161 billion
Tranche 6 Term Loan. Borrowings under the revolving credit facility bear interest at a rate per annum between LIBOR plus 2.25% and LIBOR plus 2.75%, if we choose to make LIBOR borrowings, or
between Citibank's base rate plus 1.25% and Citibank's base rate plus 1.75% in each case based upon the amount of revolver availability as defined in the senior secured credit facility. We are
required to pay fees between 0.375% and 0.50% per annum on the daily unused amount of the
26
Table of Contents
revolver,
depending on the amount of revolver availability. Amounts drawn under the revolver become due and payable on February 21, 2018.
Our
ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At June 1, 2013, we had
$542.0 million of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $112.5 million, which resulted in additional borrowing capacity
of $1,140.5 million.
The
credit facility also includes our $1.161 billion senior secured term loan (the "Tranche 6 Term Loan"). The Tranche 6 Term Loan matures on February 21,
2020 and currently bears interest at a rate per annum equal to LIBOR plus 3.00% with a LIBOR floor of 1.00%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 2.00%. We must make
mandatory prepayments of the Tranche 6 Term Loan with the proceeds of certain asset dispositions and casualty events (subject to certain limitations), and with the proceeds of certain issuances
of debt (subject to certain exceptions). If at any time there is a shortfall in our borrowing base under our senior secured credit facility, prepayment of the Tranche 6 Term Loan may also be
required.
The
senior secured credit facility restricts us and the subsidiary guarantors from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are
outstanding (not including cash located in our store deposit accounts, cash necessary to cover our current liabilities and certain other exceptions) and from accumulating cash on hand with revolver
borrowings in excess of $100.0 million over three consecutive business days. The senior secured credit facility also states that if at any time (other than following the exercise of remedies or
acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority
debt) either (a) an event of default exists under our senior secured credit facility or (b) the sum of revolver availability under our senior secured credit facility and
certain amounts held on deposit with the senior collateral agent in a concentration account is less than $100.0 million for three consecutive business days (a "cash sweep period"), the funds in
our deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the senior secured credit facility,
and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of our senior secured credit facility.
The
senior secured credit facility allows us to have outstanding, at any time, up to $1.5 billion in secured second priority debt and unsecured debt in addition to borrowings
under the senior secured credit facility and existing indebtedness, provided that not in excess of $750.0 million of such secured second priority debt and unsecured debt shall mature or require
scheduled payments of principal prior to May 21, 2020. The senior secured credit facility allows us to incur an unlimited amount of unsecured debt with a maturity beyond May 21, 2020;
however, other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence of said debt or other
exemptions are not available. The senior secured credit facility also contains certain restrictions on the amount of secured first priority debt we are able to incur. The senior secured facility also
allows, so long as the senior secured credit facility is not in default and we maintain availability on the revolving credit facility of more than $100.0 million, for the voluntary repurchase
of any debt and the mandatory repurchase of our 8.5% convertible notes due 2015.
Our
senior secured credit facility contains covenants which place restrictions on the incurrence of debt beyond the restrictions described above, the payment of dividends, sale of
assets, mergers and acquisitions and the granting of liens. Our credit facility also has one financial covenant, which is the maintenance of a fixed charge coverage ratio. The covenant requires that,
if availability on the revolving credit facility is less than $150.0 million, we maintain a minimum fixed charge coverage ratio of 1.00 to 1.00. As of June 1, 2013, we were in compliance
with this financial covenant.
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The
senior secured credit facility provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if
we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would
enable, the holder of such debt to accelerate the maturity or require the repurchase of such debt. The mandatory repurchase of the 8.5% convertible notes due 2015 is excluded from this event of
default.
On
February 21, 2013, we entered into a second priority secured term loan facility, which includes a $470.0 million second priority secured term loan (the "Tranche 1
Term Loan"). The Tranche 1 Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75% with a LIBOR floor of 1.00%, if we choose to
make LIBOR borrowings, or at Citibank's base rate plus 3.75%.
The
second priority secured term loan facilities and the indentures that govern our secured and guaranteed unsecured notes contain restrictions on the amount of additional secured and
unsecured debt that can be incurred by us. As of June 1, 2013, the amount of additional secured debt that could be incurred under the second priority secured term loan facilities and these
indentures was approximately $1.227 billion (which amount does not include the ability to enter into certain sale and leaseback transactions). However, we currently cannot incur any additional
secured debt assuming a fully drawn revolver and the outstanding letters of credit. The ability to issue additional unsecured debt under these indentures is generally governed by an interest coverage
ratio test. As of June 1, 2013, we had the ability to issue additional unsecured debt under the second lien credit facility and other indentures.
On June 21, 2013, we entered into a new second priority secured term loan facility, which includes a $500.0 million
second priority secured term loan (the "Tranche 2 Term Loan"). The Tranche 2 Term Loan matures on June 21, 2021 and currently bears interest at a rate per annum equal to LIBOR
plus 3.875% with a LIBOR floor of 1.00%, if we choose to make LIBOR borrowings, or at Citibank's base rate plus 2.875%. In June 2013, we used the net proceeds from the Tranche 2 Term Loan,
borrowings under our revolving credit facility and available cash to repurchase and repay all of our outstanding $500.0 million aggregate principal of 7.5% senior secured notes due 2017.
On
July 2, 2013, we issued $810.0 million of our 6.75% senior notes due 2021. Our obligations under the notes are fully and unconditionally guaranteed, jointly and
severally, on an unsubordinated basis, by all of our subsidiaries that guarantee our obligations under our senior secured credit facility, our second priority secured term loan facilities and our
outstanding 8.00% senior secured notes due 2020, 10.25% senior secured notes due 2019, 9.5% senior notes due 2017 and 9.25% senior notes due 2020. We intend to use the net proceeds of the 6.75% notes,
borrowings under our revolving credit facility and/or available cash to repurchase and repay all of our outstanding $810.0 million aggregate principal of 9.5% senior notes due 2017 pursuant to
a tender offer and redemption of any remaining 9.5% notes.
In
connection with these refinancing transactions, we will record a loss on debt retirement, including tender and call premium and interest, unamortized debt issue costs and unamortized
discount of $63.0 million during the second quarter of fiscal 2014.
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Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash provided by operating activities was $184.4 million in the thirteen week period ended June 1, 2013. Operating cash
flow was positively impacted by net income and a reduction in accounts receivable relating to the timing of payments from third party payors, partially offset by a use of cash in other assets and
liabilities, net, primarily due to reductions of payroll related accruals and vendor revenue deferrals.
Cash
used in investing activities in the thirteen week period ended June 1, 2013 was $82.1 million. Cash used for the purchase of property, plant, equipment and
prescription files as well as proceeds from the sale of assets were higher compared to the prior year.
Cash
used in financing activities was $122.9 million for the thirteen week period ended June 1, 2013 due to the reduction of borrowings on our revolving credit facility.
During the thirteen week period ended June 1, 2013, we spent $92.7 million on capital expenditures, consisting of
$50.6 million related to new store construction, store relocation and store remodel projects, $30.3 million related to technology enhancements, improvements to distribution centers and
other corporate requirements, and $11.8 million related to the purchase of prescription files from other retail pharmacies. We plan on making total capital expenditures of approximately
$400.0 million during fiscal 2014, consisting of approximately 55% related to store relocations and remodels and new store construction, 29% related to infrastructure and maintenance
requirements and 16% related to prescription file purchases. Management expects that these capital expenditures will be financed primarily with cash flow from operating activities.
We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing;
(ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less
debt; (iv) render us more vulnerable to general adverse economic and industry conditions; and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Based
upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the senior secured credit facility and other sources of liquidity will be
adequate to meet our requirements for working capital, debt service and capital expenditures at least for the next twelve months. Based on our liquidity position, which we expect to remain strong
throughout the year, we do not expect the restriction on our credit facility, that could result if we fail to meet the fixed charge covenant in our senior secured credit facility, to impact our
business in the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance, and other relevant
circumstances. Although it is not likely, should we determine, at any time, that it is necessary to obtain additional short-term liquidity, we will evaluate our alternatives and take
appropriate steps to obtain sufficient additional funds. There can be no assurance that any such supplemental funding, if sought, could be obtained or if obtained, would be on terms acceptable to us.
From time to time, we may seek deleveraging transactions, including entering into transactions to exchange debt for shares of common stock, issuance of equity (including preferred stock and
convertible securities), repurchase outstanding indebtedness, or seek to refinance our outstanding debt or may otherwise seek transactions to reduce interest expense and extend debt maturities. Any of
these transactions could impact our financial results.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer
to "Management's Discussion and Analysis of Financial Condition
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and
Results of OperationsCritical Accounting Policies and Estimates" included in our Fiscal 2013 10-K.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and industry, refer to "Risk Factors" and "Management's
Discussion and Analysis of Financial Condition and Results of Operations" included in our Fiscal 2013 10-K.
Adjusted EBITDA and Other Non-GAAP Measures
In addition to net income determined in accordance with GAAP, we use certain non-GAAP measures, such as "Adjusted EBITDA",
in assessing our operating performance. We believe the non-GAAP metrics serve as an appropriate measure to be used in evaluating the performance of our business. We define Adjusted EBITDA
as net income (loss) excluding the impact of income taxes (and any corresponding adjustments to tax indemnification asset), interest expense, depreciation and amortization, LIFO adjustments, charges
or credits for facility closing and impairment, inventory write-downs related to store closings, stock- based compensation expense, debt retirements, sale of assets and investments, revenue deferrals
related to customer loyalty program and other items. We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information
that facilitates internal comparisons to the historical operating performance of prior periods and external comparisons to competitors' historical operating performance. In addition, incentive
compensation is based on Adjusted EBITDA and we base certain of our forward- looking estimates on Adjusted EBITDA to facilitate
quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.
The
following is a reconciliation of Adjusted EBITDA to our net income (loss) for the thirteen week periods ended June 1, 2013 and June 2, 2012:
|
|
|
|
|
|
|
|
|
|
Thirteen Week
Period Ended
|
|
|
|
June 1,
2013
|
|
June 2,
2012
|
|
|
|
(dollars in thousands)
|
|
Net income (loss)
|
|
$
|
89,662
|
|
$
|
(28,088
|
)
|
Interest expense
|
|
|
113,064
|
|
|
130,588
|
|
Income tax (benefit) expense
|
|
|
3,212
|
|
|
(61,729
|
)
|
Adjustments to tax indemnification asset(1)
|
|
|
(613
|
)
|
|
60,237
|
|
Depreciation and amortization expense
|
|
|
101,246
|
|
|
106,371
|
|
LIFO charges
|
|
|
12,000
|
|
|
18,750
|
|
Lease termination and impairment charges
|
|
|
10,972
|
|
|
12,143
|
|
Stock-based compensation expense
|
|
|
4,240
|
|
|
3,958
|
|
Gain on sale of assets, net
|
|
|
(5,180
|
)
|
|
(10,051
|
)
|
Loss on debt retirements, net
|
|
|
|
|
|
17,842
|
|
Closed facility liquidation expense
|
|
|
939
|
|
|
1,456
|
|
Customer loyalty card program revenue deferral
|
|
|
14,602
|
|
|
23,180
|
|
Other
|
|
|
634
|
|
|
(492
|
)
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
344,778
|
|
$
|
274,165
|
|
|
|
|
|
|
|
-
(1)
-
Note:
The income tax benefit from the IRS settlement described in Note 5 in our condensed consolidated financial statements and the corresponding
reduction of the tax indemnification asset had no net effect on Adjusted EBITDA.
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In
addition to Adjusted EBITDA, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business
and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding
non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin (gross margin before LIFO charges) and Free Cash Flow
(Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures and the change in working capital).
We
include these non-GAAP financial measures in our earnings announcements and guidance in order to provide transparency to our investors and enable investors to better
compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA or other
non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as
determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.