RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
|
|
|
|
|
Accumulated
Other
Comprehensive
Loss
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Total
|
|
BALANCE MARCH 1, 2014
|
|
|
971,331
|
|
$
|
971,331
|
|
$
|
4,468,149
|
|
$
|
(7,515,848
|
)
|
$
|
(37,334
|
)
|
$
|
(2,113,702
|
)
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
2,109,173
|
|
|
|
|
|
2,109,173
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Defined Benefit Plans, net of $6,042 tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,516
|
)
|
|
(8,516
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,100,657
|
|
Exchange of restricted shares for taxes
|
|
|
(2,115
|
)
|
|
(2,115
|
)
|
|
(13,063
|
)
|
|
|
|
|
|
|
|
(15,178
|
)
|
Issuance of restricted stock
|
|
|
3,303
|
|
|
3,303
|
|
|
(3,303
|
)
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
(454
|
)
|
|
(454
|
)
|
|
454
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock balance
|
|
|
|
|
|
|
|
|
12,441
|
|
|
|
|
|
|
|
|
12,441
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
10,949
|
|
|
|
|
|
|
|
|
10,949
|
|
Tax benefit from exercise of stock options and restricted stock vesting
|
|
|
|
|
|
|
|
|
37,772
|
|
|
|
|
|
|
|
|
37,772
|
|
Stock options exercised
|
|
|
16,485
|
|
|
16,485
|
|
|
7,612
|
|
|
|
|
|
|
|
|
24,097
|
|
Conversion of convertible debt instruments
|
|
|
8
|
|
|
8
|
|
|
12
|
|
|
|
|
|
|
|
|
20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 28, 2015
|
|
|
988,558
|
|
$
|
988,558
|
|
$
|
4,521,023
|
|
$
|
(5,406,675
|
)
|
$
|
(45,850
|
)
|
$
|
57,056
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
165,465
|
|
|
|
|
|
165,465
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Defined Benefit Plans, net of $1,681 tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,931
|
)
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,534
|
|
Exchange of restricted shares for taxes
|
|
|
(2,045
|
)
|
|
(2,045
|
)
|
|
(15,461
|
)
|
|
|
|
|
|
|
|
(17,506
|
)
|
Issuance of restricted stock
|
|
|
2,751
|
|
|
2,751
|
|
|
(2,751
|
)
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
(420
|
)
|
|
(420
|
)
|
|
420
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock balance
|
|
|
|
|
|
|
|
|
28,342
|
|
|
|
|
|
|
|
|
28,342
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
11,164
|
|
|
|
|
|
|
|
|
11,164
|
|
Conversion of convertible debt instruments
|
|
|
24,762
|
|
|
24,762
|
|
|
39,327
|
|
|
|
|
|
|
|
|
64,089
|
|
Tax benefit from exercise of stock options and restricted stock vesting
|
|
|
|
|
|
|
|
|
22,466
|
|
|
|
|
|
|
|
|
22,466
|
|
Stock options exercised
|
|
|
6,394
|
|
|
6,394
|
|
|
4,982
|
|
|
|
|
|
|
|
|
11,376
|
|
Shares issued for EnvisionRx acquisition
|
|
|
27,754
|
|
|
27,754
|
|
|
213,153
|
|
|
|
|
|
|
|
|
240,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE FEBRUARY 27, 2016
|
|
|
1,047,754
|
|
$
|
1,047,754
|
|
$
|
4,822,665
|
|
$
|
(5,241,210
|
)
|
$
|
(47,781
|
)
|
$
|
581,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
4,053
|
|
|
|
|
|
4,053
|
|
Other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Defined Benefit Plans, net of $3,600 tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,464
|
|
|
5,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,517
|
|
Exchange of restricted shares for taxes
|
|
|
(809
|
)
|
|
(809
|
)
|
|
(5,446
|
)
|
|
|
|
|
|
|
|
(6,255
|
)
|
Issuance of restricted stock
|
|
|
3,613
|
|
|
3,613
|
|
|
(3,613
|
)
|
|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
(424
|
)
|
|
(424
|
)
|
|
424
|
|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock balance
|
|
|
|
|
|
|
|
|
12,588
|
|
|
|
|
|
|
|
|
12,588
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
9,989
|
|
|
|
|
|
|
|
|
9,989
|
|
Tax benefit from exercise of stock options and restricted stock vesting
|
|
|
|
|
|
|
|
|
(148
|
)
|
|
|
|
|
|
|
|
(148
|
)
|
Stock options exercised
|
|
|
3,556
|
|
|
3,556
|
|
|
3,395
|
|
|
|
|
|
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BALANCE MARCH 4, 2017
|
|
|
1,053,690
|
|
$
|
1,053,690
|
|
$
|
4,839,854
|
|
$
|
(5,237,157
|
)
|
$
|
(42,317
|
)
|
$
|
614,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
82
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
4,053
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
568,231
|
|
|
509,212
|
|
|
416,628
|
|
Lease termination and impairment charges
|
|
|
55,294
|
|
|
48,423
|
|
|
41,945
|
|
LIFO (credit) charge
|
|
|
(6,620
|
)
|
|
11,163
|
|
|
(18,857
|
)
|
(Gain) loss on sale of assets, net
|
|
|
(4,024
|
)
|
|
3,303
|
|
|
(3,799
|
)
|
Stock-based compensation expense
|
|
|
23,482
|
|
|
37,948
|
|
|
23,390
|
|
Loss on debt retirements, net
|
|
|
|
|
|
33,205
|
|
|
18,512
|
|
Changes in deferred taxes
|
|
|
35,038
|
|
|
79,488
|
|
|
(1,726,487
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
(543
|
)
|
|
(22,884
|
)
|
|
(41,563
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
(166,765
|
)
|
|
291,659
|
|
|
(25,902
|
)
|
Inventories
|
|
|
(133,543
|
)
|
|
181,958
|
|
|
129,985
|
|
Accounts payable
|
|
|
29,528
|
|
|
(21,187
|
)
|
|
(169,952
|
)
|
Other assets and liabilities, net
|
|
|
(178,268
|
)
|
|
(320,351
|
)
|
|
(104,114
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
225,863
|
|
|
997,402
|
|
|
648,959
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
(424,289
|
)
|
|
(541,347
|
)
|
|
(426,828
|
)
|
Intangible assets acquired
|
|
|
(56,822
|
)
|
|
(128,648
|
)
|
|
(112,558
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
|
|
|
(1,778,377
|
)
|
|
(69,793
|
)
|
Proceeds from sale-leaseback transactions
|
|
|
|
|
|
36,732
|
|
|
|
|
Proceeds from dispositions of assets and investments
|
|
|
16,852
|
|
|
9,782
|
|
|
15,494
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(464,259
|
)
|
|
(2,401,858
|
)
|
|
(593,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
|
|
|
1,800,000
|
|
|
1,152,293
|
|
Net proceeds from revolver
|
|
|
330,000
|
|
|
375,000
|
|
|
1,325,000
|
|
Principal payments on long-term debt
|
|
|
(21,239
|
)
|
|
(672,717
|
)
|
|
(2,595,709
|
)
|
Change in zero balance cash accounts
|
|
|
43,080
|
|
|
(62,878
|
)
|
|
1,081
|
|
Net proceeds from the issuance of common stock
|
|
|
6,951
|
|
|
11,376
|
|
|
24,117
|
|
Financing fees paid for early debt redemption
|
|
|
|
|
|
(26,003
|
)
|
|
(13,841
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
543
|
|
|
22,884
|
|
|
41,563
|
|
Deferred financing costs paid
|
|
|
|
|
|
(34,634
|
)
|
|
(20,285
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
359,335
|
|
|
1,413,028
|
|
|
(85,781
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
120,939
|
|
|
8,572
|
|
|
(30,507
|
)
|
Cash and cash equivalents, beginning of year
|
|
|
124,471
|
|
|
115,899
|
|
|
146,406
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
245,410
|
|
$
|
124,471
|
|
$
|
115,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
83
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended March 4, 2017, February 27, 2016 and
February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies
The Company is a Delaware corporation and through its 100 percent owned subsidiaries, operates a pharmacy retail healthcare company in
the United States of America. The Company operates through its two reportable segments: the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy segment operates one of the
largest retail drugstore chains in the United States, with 4,536 stores in operation as of March 4, 2017. The Retail Pharmacy segment's drugstores' primary business is the sale of brand and
generic prescription drugs. The Retail Pharmacy segment also sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line.
The Pharmacy Services segment, acquired by the Company in connection with the June 24, 2015 acquisition of EnvisionRx, operates both a transparent and traditional pharmacy benefit management
("PBM") business; mail-order and specialty pharmacy services through EnvisionPharmacies; access to the nation's largest cash pay infertility discount drug program via Design Rx; a claims adjudication
software platform through Laker Software; and a national Medicare Part D prescription drug plan through Envision Insurance Company ("EIC"). See Note 20 for additional details on the
Company's reportable segments.
Prior
to the June 24, 2015 acquisition of EnvisionRx, the Company's operations consisted solely of the Retail Pharmacy segment. Following the completion of the EnvisionRx
acquisition, the Company organized its operations into the Retail Pharmacy segment and the Pharmacy Services segment. Revenues for the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Retail Pharmacy segment:
|
|
|
|
|
|
|
|
|
|
|
Pharmacy sales
|
|
$
|
18,187,451
|
|
$
|
18,442,557
|
|
$
|
18,114,768
|
|
Front end sales
|
|
|
8,427,256
|
|
|
8,238,450
|
|
|
8,232,256
|
|
Other revenue
|
|
|
201,962
|
|
|
184,924
|
|
|
181,353
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Pharmacy segment
|
|
$
|
26,816,669
|
|
$
|
26,865,931
|
|
$
|
26,528,377
|
|
Pharmacy Services segment revenue
|
|
|
6,393,884
|
|
|
4,103,513
|
|
|
|
|
Intersegment elimination
|
|
|
(365,480
|
)
|
|
(232,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
32,845,073
|
|
$
|
30,736,657
|
|
$
|
26,528,377
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of prescription drugs for our Retail Pharmacy segment represented approximately 68.3%, 69.1% and 68.8% of the Company's total drugstore sales in fiscal years 2017, 2016 and 2015,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
respectively.
The Retail Pharmacy segment's principal classes of products in fiscal 2017 were the following:
|
|
|
|
|
Product Class
|
|
Percentage
of Sales
|
|
Prescription drugs
|
|
|
68.3
|
%
|
Over-the-counter medications and personal care
|
|
|
10.2
|
%
|
Health and beauty aids
|
|
|
4.8
|
%
|
General merchandise and other
|
|
|
16.7
|
%
|
The Company's fiscal year ends on the Saturday closest to February 29 or March 1. The fiscal year ended March 4, 2017
includes 53 weeks. The fiscal years ended February 27, 2016 and February 28, 2015 included 52 weeks.
The consolidated financial statements include the accounts of the Company and all of its 100 percent owned subsidiaries. All significant
intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents consist of cash on hand and highly liquid investments, which are readily convertible to known amounts of cash and
which have original maturities of three months or less when purchased.
Approximately 98.2% of prescription sales are made to customers who are covered by third-party payors, such as insurance companies, government
agencies and employers. The Company recognizes receivables that represent the amount owed to the Company for sales made to customers or employees of those payors that have not yet been paid. The
Company maintains a reserve for the amount of these receivables deemed to be uncollectible. This reserve is calculated based upon historical collection activity adjusted for current conditions.
Inventories are stated at the lower of cost or market. Inventory balances include the capitalization of certain costs related to purchasing,
freight and handling costs associated with placing inventory in its location and condition for sale. The Company uses the last-in, first-out ("LIFO") cost flow assumption for substantially all of its
inventories. The Company calculates its inflation index based on internal product mix and utilizes the link-chain LIFO method.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Asset impairments are recorded when the carrying value of assets are not recoverable. For purposes of recognizing and measuring impairment of
long-lived assets, the Company categorizes assets of operating stores as "Assets to Be Held and Used" and "Assets to Be Disposed Of." The Company evaluates assets at the store level because this is
the lowest level of identifiable cash flows ascertainable to evaluate impairment. Assets being tested for recoverability at the store level include tangible long-lived assets and identifiable,
finite-lived intangibles that arose in purchase business combinations. Corporate assets to be held and used are evaluated for impairment based on excess cash flows from the stores that support those
assets.
The
Company reviews long-lived assets to be held and used for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows
discounted at a rate commensurate with the risks associated with the recovery of the asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. The Company provides for depreciation using
the straight-line method over the following useful lives: buildings30 to 45 years; equipment3 to 15 years.
Leasehold
improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. When determining the amortization
period of a leasehold improvement, the Company considers whether discretionary exercise of a lease renewal option is reasonably assured. If it is determined that the exercise of such option is
reasonably assured, the Company will amortize the leasehold improvement asset over the minimum lease term, plus the option period. This determination depends on the remaining life of the minimum lease
term and any economic penalties that would be incurred if the lease option is not exercised.
Capitalized
lease assets are recorded at the lesser of the present value of minimum lease payments or fair market value and amortized over the estimated useful life of the related
property or term of the lease.
The
Company capitalizes direct internal and external development costs associated with internal-use software. Neither preliminary evaluation costs nor costs associated with the software
after implementation are capitalized. For fiscal years 2017, 2016 and 2015, the Company capitalized costs of approximately $6,189, $7,680 and $7,550, respectively.
The Company recognizes goodwill as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed during
business combinations. The Company accounts for
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
goodwill
under ASC Topic 350, "IntangiblesGoodwill and Other", which does not permit amortization, but instead requires the Company to perform an annual impairment review, or more
frequently if events or circumstances indicate that impairment may be more likely. See Note 12 for additional information on goodwill.
The Company has certain finite-lived intangible assets that are amortized over their useful lives. The value of favorable and unfavorable leases
on stores acquired in business combinations are amortized over the terms of the leases on a straight-line basis. Prescription files acquired in business combinations are amortized over an estimated
useful life of ten years on an accelerated basis, which approximates the anticipated prescription file retention and related cash flows. Purchased prescription files acquired in other than business
combinations are amortized over their estimated useful lives of five years on a straight-line basis. The value of finite-lived trade names are amortized over 10 years on a straight-line basis.
The value of customer relationships, acquired in connection with the Company's acquisition of EnvisionRx, are amortized over a period between 10 and 20 years on a descending percentage method
which matches the pattern of expected discounted cash flows. The Pharmacy Services segment's contract with Centers for Medicare and Medicaid Services ("CMS") for Medicare Part D
("Part D"), which is required in order to act as a national provider of the Part D benefit, is amortized over 25 years on a straight line basis.
Costs incurred to issue debt are deferred and amortized as a component of interest expense over the terms of the related debt agreements.
Amortization expense of deferred financing costs was $19,565, $19,545 and $15,301 for fiscal 2017, 2016 and 2015, respectively.
Revenue Recognition
Retail Pharmacy Segment
For front end sales, the Retail Pharmacy segment recognizes revenue from the sale of merchandise at the time the merchandise is sold. The Retail
Pharmacy segment records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented. For third party payor
pharmacy sales, revenue is recognized at the time the prescription is filled, which is or approximates when the customer picks up the prescription and is recorded net of an allowance for prescriptions
that were filled but will not be picked up by the customer. For all periods presented, there is no material difference between the revenue recognized at the time the prescription is filled and that
which would be recognized when the customer picks up the prescription. For cash prescriptions and patient third party payor co-payments, the Retail Pharmacy segment recognizes revenue when the patient
picks up the prescription and tenders the cash price or patient third party payor co-payment amount at the point of sale. Prescriptions are generally not returnable.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The
Retail Pharmacy segment offers a chain wide loyalty card program titled wellness +. Members participating in the wellness + loyalty card program earn points on a
calendar year basis for eligible front end merchandise purchases and qualifying prescriptions. One point is awarded for each dollar spent towards front end merchandise and 25 points are awarded for
each qualifying prescription.
Members
reach specific wellness + tiers based on the points accumulated during the calendar year, which entitles such customers to certain future discounts and other
benefits upon reaching that tier. For example, any customer that reaches 1,000 points in a calendar year achieves the "Gold" tier, enabling them to receive a 20% discount on qualifying purchases of
front end merchandise for the remaining portion of the calendar year and also the next calendar year. There is also a similar "Silver" level with a lower threshold and benefit level.
As
wellness + customers accumulate points, the Retail Pharmacy segment defers the value of the points earned as deferred revenue (included in other current and noncurrent
liabilities, based on the expected usage). The amount deferred is based on historic and projected customer activity (e.g., tier level, spending level). As customers receive discounted front end
merchandise, the Retail Pharmacy segment recognizes an allocable portion of the deferred revenue. The Retail Pharmacy segment deferred $97,501 as of March 4, 2017 of which $75,833 is included
in other current liabilities and $21,668 is included in noncurrent liabilities. The Retail Pharmacy segment deferred $110,208 as of February 27, 2016 of which $88,470 is included in other
current liabilities and $21,738 is included in noncurrent liabilities.
During
fiscal 2016, the Company partnered with American Express Travel Related Services Company, Inc. to be part of a coalition loyalty program titled Plenti. This awards program
allows a customer to earn points based on qualifying purchases at participating retailers. Each Plenti point is worth the equivalent of $0.01. The customer has the opportunity to redeem their
accumulated points on a future purchase at any of the participating retailers. All points are redeemed using a FIFO methodology (e.g., first points earned are the first to be redeemed). Points
expire on December 31st of each year for any point that has aged a minimum of two years that has not been redeemed by the customer. For a majority of the Plenti point issuances, funding
is provided by our vendors through contractual arrangements. This funding is treated as deferred revenue and remains in deferred revenue until a customer redeems their points. Upon redemption, the
deferred revenue account is decremented with an offsetting credit to sales. For Plenti point redemptions that are not vendor funded, deferred revenue is recorded and not recognized until the points
are redeemed. As of March 4, 2017, the Company had deferred revenue of $35,642 relating to the Plenti program which is included in other current liabilities. As of February 27, 2016, the
Company had deferred revenue of $39,253 relating to the Plenti program which is included in other current liabilities.
The Pharmacy Services segment ("Pharmacy Services") sells prescription drugs indirectly through its retail pharmacy network and directly through
its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and (ii) under retail
pharmacy network contracts where it is the principal using the gross
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
method
at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other
sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of
any volume-related or other discounts paid back to the client (see "Drug Discounts" below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order
prescriptions ("Mail Co-Payments"), (iii) customer copayments made directly to the retail pharmacy network, and (iv) administrative fees. Sales taxes are not included in revenue. Revenue
is recognized when: (i) persuasive evidence that the prescription drug sale has occurred or a contractual arrangement exists, (ii) delivery has occurred or services have been rendered,
(iii) the seller's price to the buyer is fixed or determinable, and (iv) collectability is reasonably assured. The following revenue recognition policies have been established for the
Pharmacy Services segment:
-
-
Revenues generated from prescription drugs sold by third party pharmacies in the Pharmacy Services segment's retail pharmacy network and
associated administrative fees are recognized at the Pharmacy Services segment's point-of-sale, which is when the claim is adjudicated by the Pharmacy Services segment's online claims processing
system.
-
-
Revenues generated from prescription drugs sold by the Pharmacy Services segment's mail service dispensing pharmacy are recognized when the
prescription is delivered. At the time of delivery, the Pharmacy Services segment has performed substantially all of its obligations under its client contracts and does not experience a significant
level of returns or reshipments.
-
-
Revenues generated from administrative fees based on membership or claims volume are recognized monthly upon active membership in the plan or
actual claims volume.
In
the majority of its contracts, the Pharmacy Services segment has determined it is the principal due to it: (i) being the primary obligor in the arrangement,
(ii) latitude in establishing price, (iii) performs part of the service, (iv) having discretion in supplier selection and v) having involvement in the determination of
product or service specifications. The Pharmacy Services segment's obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its
obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Pharmacy Services segment is contractually required to pay the third party
pharmacies in its retail pharmacy network for products sold after payment is received from its clients. The Pharmacy Services segment's responsibilities under its client contracts typically include
validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the
pharmacist to address with the prescriber prior to dispensing, suggesting generic alternatives where clinically appropriate and approving the prescription for dispensing. Although the Pharmacy
Services segment does not have credit risk with respect to its pharmacy benefit manager operations and retail co-payments, management believes that all of the other applicable indicators of gross
revenue reporting are present.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Drug
DiscountsThe Pharmacy Services segment deducts from its revenues that are generated from prescription drugs sold by third party pharmacies any rebates, inclusive of
discounts and fees, earned by its clients. Rebates are paid to clients in accordance with the terms of client contracts.
Medicare
Part DThe Pharmacy Services segment, through its EIC subsidiary, participates in the federal government's Medicare Part D program as a Prescription
Drug Plan ("PDP"). Net revenues include insurance premiums earned by the PDP, which are determined based on the PDP's annual bid and related contractual arrangements with the Centers for Medicare and
Medicaid Services ("CMS"). The insurance premiums include a direct premium paid by CMS and a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of
low-income members. Premiums collected in advance are initially deferred in accrued expenses and are then recognized in net revenues over the period in which members are entitled to receive benefits.
The
Pharmacy Services segment records estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims
management and enrollment systems. Significant estimates arising from its participation in the Medicare Part D program include: (i) estimates of low-income cost subsidy, reinsurance
amounts and coverage gap discount amounts ultimately payable to or receivable from CMS based on a detailed claims reconciliation, (ii) an estimate of amounts receivable from CMS under a
risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid
or contested. Actual amounts of Medicare Part D-related assets and liabilities could differ significantly from amounts recorded. Historically, the effect of these adjustments has not been
material to our results of operations or financial position.
See
Note 20 for additional information about the revenues of the Company's business segments.
Cost of Revenues
Retail Pharmacy Segment
Cost of revenues for the Retail Pharmacy segment includes the following: the cost of inventory sold during the period, including related vendor
rebates and allowances, LIFO credit or charges, costs incurred to return merchandise to vendors, inventory shrink, purchasing costs and warehousing costs, which include inbound freight costs from the
vendor, distribution payroll and benefit costs, distribution center occupancy costs and depreciation expense and delivery expenses to the stores.
The Pharmacy Services segment's cost of revenues includes the cost of prescription drugs sold during the reporting period indirectly through its
retail pharmacy network and directly through its mail service dispensing pharmacy. The cost of prescription drugs sold component of cost of revenues includes: (i) the cost of the prescription
drugs purchased from manufacturers or distributors and shipped to members in clients' benefit plans from the Pharmacy Services segment's
mail service dispensing pharmacy, net of any volume-related or other discounts (see "Vendor allowances and purchase discounts" below) and (ii) the cost of prescription drugs sold through the
Pharmacy Services
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
segment's
retail pharmacy network under contracts where it is the principal, net of any volume-related or other discounts.
See
Note 20 for additional information about the cost of revenues of the Company's business segments.
The Retail Pharmacy segment rebates and allowances received from vendors relate to either buying and merchandising or promoting the product.
Buying and merchandising related rebates and allowances are recorded as a reduction of cost of revenue as product is sold. Buying and merchandising rebates and allowances include all types of vendor
programs such as cash discounts from timely payment of invoices, purchase discounts or rebates, volume purchase allowances, price reduction allowances and slotting allowances. Certain product
promotion related rebates and allowances, primarily related to advertising, are recorded as a reduction in selling, general and administrative expenses when the advertising commitment has been
satisfied.
The Pharmacy Services segment receives purchase discounts on products purchased. The Pharmacy Services segment's contractual arrangements with
vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in one, or a
combination, of the following forms: (i) a direct discount at the time of purchase, or (ii) a discount (or rebate) paid subsequent to dispensing when products are purchased indirectly
from a manufacturer (e.g., through a wholesaler or retail pharmacy). These rebates are recognized when prescriptions are dispensed and are generally billed to manufacturers within
30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and collected has not been
material to the Pharmacy Services segment's results of operations. The Pharmacy Services segment accounts for the effect of any such differences as a change in accounting estimate in the period the
reconciliation is completed. The Pharmacy Services segment also receives additional discounts under its wholesaler contracts and fees from pharmaceutical manufacturers for administrative services.
Purchase discounts and administrative service fees are recorded as a reduction of cost of revenues.
To minimize risk and statutory capital requirements, EIC enters into quota share reinsurance agreements with unaffiliated reinsurers whereby
they assume a quota share percentage of the company's Medicare Part D program. The net revenue and net cost of revenue for EIC has been reduced by the amounts ceded to reinsurers under these
agreements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The Company records rent expense on operating leases on a straight-line basis over the minimum lease term. The Company begins to record rent
expense at the time that the Company has the right to use the property. From time to time, the Company receives incentive
payments from landlords that subsidize lease improvement construction. These leasehold incentives are deferred and recognized on a straight-line basis over the minimum lease term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include store and corporate administrative payroll and benefit costs, occupancy costs which include
retail store and corporate rent costs, facility and leasehold improvement depreciation and utility costs, advertising, repair and maintenance, insurance, equipment depreciation and professional fees.
Routine repairs and maintenance are charged to operations as incurred. Improvements and major repairs, which extend the useful life of an asset,
are capitalized and depreciated.
Advertising costs, net of specific vendor advertising allowances, are expensed in the period the advertisement first takes place. Advertising
expenses, net of vendor advertising allowances, for fiscal 2017, 2016 and 2015 were $289,871, $307,817 and $318,157, respectively.
The Company is self-insured for certain general liability and workers' compensation claims. For claims that are self-insured, stop-loss
insurance coverage is maintained for workers' compensation occurrences exceeding $1,000 and general liability occurrences exceeding $3,000. The Company utilizes actuarial studies as the basis for
developing reported claims and estimating
claims incurred but not reported relating to the Company's self-insurance. Workers' compensation claims are discounted to present value using a risk-free interest rate.
The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the plan.
The Company records expense related to these plans using actuarially determined amounts that are calculated under the provisions of ASC 715, "CompensationRetirement Benefits." Key
assumptions used in the actuarial valuations include the discount rate, the expected rate of return on plan assets and the rate of increase in future compensation levels.
The Company has several stock option plans, which are described in detail in Note 16. The Company accounts for stock-based compensation
under ASC 718, "CompensationStock Compensation." The Company recognizes option expense over the requisite service period of the award, net of an estimate for the impact of award
forfeitures.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Costs incurred prior to the opening of a new or relocated store, associated with a remodeled store or related to the opening of a distribution
facility are charged against earnings when incurred.
The Company is involved in litigation on an ongoing basis. The Company accrues its best estimate of the probable loss related to legal claims.
Such estimates are developed in consultation with in-house counsel, and are based upon a combination of litigation and settlement strategies.
When a store or distribution center is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to the
present value at current credit adjusted risk-free interest rates of the remaining lease obligations and anticipated ancillary occupancy costs, net of estimated sublease income. Other store or
distribution center closing and liquidation costs are expensed when incurred.
Deferred income taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities. Deferred
income tax expense (benefit) represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions. Deferred tax
assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion of the deferred tax assets will
not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change.
The
Company has net operating loss ("NOL") carryforwards that can be utilized to offset future income for federal and state tax purposes. These NOLs generate a significant
deferred tax asset. The Company regularly reviews the deferred tax assets for recoverability considering historical profitability, projected taxable income, the expected timing of the reversals of
existing temporary differences and tax planning strategies.
The
Company recognizes tax liabilities in accordance with ASC 740, "Income Taxes" and the Company 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.
Sales taxes collected from customers and remitted to various governmental agencies are presented on a net basis (excluded from revenues) in the
Company's statement of operations.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company's pharmacy sales were primarily to customers covered by health plan contracts, which typically contract with a third party payor
that agrees to pay for all or a portion of a customer's eligible prescription purchases. During fiscal 2017, the top five third party payors
accounted for approximately 75.6% of the Company's pharmacy sales. The largest third party payor, Caremark, represented 27.3%, of pharmacy sales during fiscal 2017. The largest third party payor
during fiscal 2016 and 2015, Express Scripts, represented 25.3% and 27.8% of fiscal 2016 and 2015 pharmacy sales, respectively. Third party payors are entities such as an insurance company,
governmental agency, health maintenance organization or other managed care provider, and typically represent several health care contracts and customers.
During
fiscal 2017, state sponsored Medicaid agencies and related managed care Medicaid payors accounted for approximately 19.8% of the Company's pharmacy sales, the largest of which was
approximately 1.2% of the Company's pharmacy sales. During fiscal 2017, approximately 33.0% of the Company's pharmacy sales were to customers covered by Medicare Part D. Any significant loss of
third-party payor business could have a material adverse effect on the Company's business and results of operations.
During
fiscal 2017, the Company purchased brand and generic pharmaceuticals, which amounted to approximately 97.1% of the dollar volume of its prescription drugs from McKesson
Corporation "McKesson" under its expanded five-year agreement executed on February 17, 2014 for pharmaceutical purchasing and distribution (our "Purchasing and Delivery Agreement") whereby
McKesson assumed responsibility for purchasing essential all of the brand and generic medications the Company dispenses as well as providing a new direct store delivery model to all of the Company's
stores. If the Company's relationship with McKesson was disrupted, it could temporarily have difficulty filling prescriptions for brand-named and generic drugs until it executed a replacement
wholesaler agreement or developed and implemented self- distribution processes.
The Pharmacy Services segment, through its EIC subsidiary, participates in the federal government's Medicare Part D program as a PDP.
During fiscal 2017 and fiscal 2016, net revenues of $223,077 (0.7% of consolidated revenues) and $162,620 (0.5% of consolidated revenues), respectively, include insurance premiums earned by the PDP,
which are determined based on the PDP's annual bid and related contractual arrangements with CMS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
EIC
has entered into a quota share reinsurance agreement with Swiss Re Life & Health America Inc. ("Swiss Re") whereby they assume a quota share percentage of the company's
Medicare Part D
program. Fifty percent of the net revenue and net cost of revenue for EIC has been ceded to Swiss Re under this agreement.
The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate debt, when
the Company deems it prudent to do so. Upon inception of interest rate swap agreements, or modifications thereto, the Company performs a comprehensive review of the interest rate swap agreements based
on the criteria as provided by ASC 815, "Derivatives and Hedging." As of March 4, 2017 and February 27, 2016, the Company had no interest rate swap arrangements or other
derivatives.
In August 2014, the FASB issued ASU No. 2014-15,
Presentation of Financial StatementsGoing
Concern
(Subtopic 205-40):
Disclosure of Uncertainties about an Entity's Ability to Continue as a Going Concern
(ASU
No. 2014-15). This ASU amended ASC 205-40
Presentation of Financial StatementsGoing Concern
and requires management to
evaluate whether there are conditions and events that raise substantial doubt about an entity's ability to continue as a going concern within one year after the financial statements are available to
be issued and provide related disclosures of such conditions and events. The adoption of ASU 2014-15 did not have a material impact on the Company's financial position or results of operations and
cash flows.
In
May 2015, the FASB issued ASU 2015-07,
Fair Value Measurement (Topic 820) Disclosures for Investments in Certain Entities That Calculate Net Asset Value per
Share (or Its Equivalent)
. This ASU eliminates the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net
asset value per share practical expedient. The ASU also eliminates certain disclosures for all investments that are eligible to be measured at fair value using the net asset value per share practical
expedient. Instead, the ASU limits those disclosures to investments for which the entity has elected to measure the fair value using that practical expedient. ASU No. 2015-07 is effective for
fiscal years and interim periods within those years after December 15, 2015. The ASU is to be applied retrospectively to all periods presented. Early adoption of this ASU is permitted. The
adoption of this guidance in fiscal 2017 did not materially affect the Company's financial position, results of operations or cash flows.
In
August 2015, the FASB issued ASU 2015-14,
Revenue from Contracts with Customers (Topic 606)
, an update to ASU 2014-09. This ASU amends
ASU 2014-09 to defer the effective date by one year for annual reporting periods beginning after December 15, 2017 (fiscal 2019). Subsequently, the FASB has also issued accounting standards
updates which clarify the guidance. This ASU removes inconsistencies, complexities and allows transparency and comparability of revenue transactions across entities, industries, jurisdictions and
capital markets by providing a single comprehensive principles-based model with additional disclosures regarding uncertainties. The principles-based revenue recognition model has 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
95
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
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. Early adoption is permitted for annual reporting
periods beginning after December 15, 2016 (fiscal 2018). 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 does not intend to early adopt the new standard. The Company has a team to assess and implement the new standard. While the Company is continuing its
assessment of all of the potential impacts of the new standard, it does not expect the implementation of the standard to have a material impact on the Company's consolidated financial position,
results of operations or cash flow. The Company intends to adopt the new standard on a modified retrospective basis.
In
February 2016, the FASB issued ASU No. 2016-02,
Leases, (Topic 842)
, which is intended to improve financial reporting around
leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor) that lease assets such as real estate and manufacturing
equipment. This ASU will require organizations that lease assetsreferred to as "leases"to recognize on the balance sheet the assets and liabilities for the rights and
obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019. The Company believes that the new
standard will have a material impact on its financial position. The Company is currently evaluating the impact of this standard implementation will have on its results of operations and cash flows.
In
March 2016, the FASB issued ASU No. 2016-09,
CompensationStock Compensation, (Topic 718): Improvements to Employee Share-Based
Payment Accounting
, which is intended to simplify aspects of the accounting for share-based payment transactions. The ASU simplifies the accounting of stock compensation,
including income tax implications, the balance sheet classification of awards as either equity or liabilities, and the cash flow classification of employee share based payment transactions. ASU
No. 2016-09 is effective for fiscal years and interim periods within those years beginning after December 15, 2016. Early adoption of all the amendments for ASU 2016-09 is permitted.
Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement must be applied prospectively. Amendments related to the presentation of excess tax benefits on the
statement of cash flows may be applied either prospectively or retrospectively based on the Company's election. Amendments related to the statement of cash flows presentation of employee taxes
paid when an employer withholds shares must be applied retrospectively. The Company is in process of assessing the impact of the adoption of ASU No. 2016-09 on its financial position, results
of operations and cash flows.
In
January 2017, the FASB issued ASU No. 2017-04,
IntangiblesGoodwill and Other, (Topic 350): Simplifying the Test for Goodwill
Impairment
, which is intended to simplify the subsequent measurement and impairment of goodwill. The ASU simplifies the complexity of evaluating goodwill for impairment by
eliminating the second step of the impairment test, which compares the implied fair value of a reporting unit's goodwill to the carrying amount of that goodwill. Instead, the ASU requires entities to
compare the fair value of a reporting unit to its carrying amount in order to determine the amount of goodwill impairment recognized. ASU No. 2017-04 is effective for fiscal years and interim
periods within those years beginning after December 15, 2019. Early adoption of all the amendments for ASU 2017-04 is permitted. Amendments must be applied prospectively. The Company is in
process of
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
assessing
the impact of the adoption of ASU No. 2017-04 on its financial position, results of operations and cash flows.
2. Acquisition
On June 24, 2015, the Company completed its acquisition of TPG VI Envision BL, LLC and Envision Topco Holdings, LLC ("EnvisionRx"), pursuant to the terms of an
agreement ("Agreement") dated February 10, 2015 (the "Acquisition"). EnvisionRx, which was a portfolio company of TPG Capital L.P. prior to its acquisition by the Company, is a
full-service pharmacy services provider. EnvisionRx provides both transparent and traditional pharmacy benefit manager ("PBM") service options through its EnvisionRx and MedTrak PBMs, respectively.
EnvisionRx also offers fully integrated mail-order and
specialty pharmacy services through EnvisionPharmacies; access to the nation's largest cash pay infertility discount drug program via Design Rx; an innovative claims adjudication software platform in
Laker Software; and a national Medicare Part D prescription drug plan through Envision Insurance Company's ("EIC") EnvisionRx Plus Silver product for the low income auto-assign market and its
Clear Choice product for the chooser market. EnvisionRx is headquartered in Twinsburg, Ohio and operates as a 100 percent owned subsidiary of the Company.
Pursuant
to the terms of the Agreement, as consideration for the Acquisition, the Company paid $1,882,211 in cash and issued 27,754 shares of Rite Aid common stock. The Company financed
the cash portion of the Acquisition with borrowings under its Amended and Restated Senior Secured Revolving Credit Facility, and the net proceeds from the April 2, 2015 issuance of $1,800,000
aggregate principal amount of 6.125% senior notes due 2023 (the "6.125% Notes"). The consideration associated with the common stock was $240,907 based on a stock price of $8.68 per share, representing
the closing price of the Company's common stock on the closing date of the Acquisition.
The
Company's consolidated financial statements for fiscal 2017 include EnvisionRx results of operations. The Company's consolidated financial statements for fiscal 2016 includes
EnvisionRx results of operations from the Acquisition date of June 24, 2015 through February 27, 2016 (please see Note 20 Segment Reporting for the Pharmacy Services segment
results included within the consolidated financial statements for the fifty-three week period ended March 4, 2017 and the fifty-two week period ended February 27, 2016, which reflects
the results of EnvisionRx). The Company's consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 "Business Combinations", whereby the purchase
price was allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
2. Acquisition (Continued)
The
following allocation of the purchase price is final:
|
|
|
|
|
Final purchase price
|
|
|
|
|
Cash consideration
|
|
$
|
1,882,211
|
|
Stock consideration
|
|
|
240,907
|
|
|
|
|
|
|
Total
|
|
$
|
2,123,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Final purchase price allocation
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,834
|
|
Accounts receivable
|
|
|
892,678
|
|
Inventories
|
|
|
7,276
|
|
Prepaid expenses and other current assets
|
|
|
13,386
|
|
|
|
|
|
|
Total current assets
|
|
|
1,017,174
|
|
Property and equipment
|
|
|
13,196
|
|
Intangible assets(1)
|
|
|
646,600
|
|
Goodwill
|
|
|
1,639,355
|
|
Other assets
|
|
|
7,219
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,323,544
|
|
|
|
|
|
|
Accounts payable
|
|
|
491,672
|
|
Reinsurance funds held
|
|
|
381,225
|
|
Other current liabilities(2)
|
|
|
215,770
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,088,667
|
|
Other long term liabilities(3)
|
|
|
111,759
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,200,426
|
|
|
|
|
|
|
Net assets acquired
|
|
$
|
2,123,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Intangible
assets are recorded at estimated fair value, as determined by management based on available information which includes a final valuation prepared by an
independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period
excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management's estimates of future cash flows, discounted at an appropriate
rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for
comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly
to future cash flows.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
2. Acquisition (Continued)
The
estimated fair value of intangible assets and related useful lives as included in the final purchase price allocation include:
|
|
|
|
|
|
|
|
|
|
Estimated
Fair Value
|
|
Estimated
Useful Life
(In Years)
|
|
Customer relationships
|
|
$
|
465,000
|
|
|
17
|
|
CMS license
|
|
|
57,500
|
|
|
25
|
|
Claims adjudication and other developed software
|
|
|
59,000
|
|
|
7
|
|
Trademarks
|
|
|
20,100
|
|
|
10
|
|
Backlog
|
|
|
11,500
|
|
|
3
|
|
Trademarks
|
|
|
33,500
|
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
646,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(2)
-
Other
current liabilities includes $116,057 due to TPG under the terms of the Agreement, representing the amounts due to EnvisionRx from CMS, less corresponding
amounts due to various reinsurance providers under certain reinsurance programs, for CMS activities that relate to the year ended December 31, 2014. This liability was satisfied with a payment
to TPG on November 5, 2015.
-
(3)
-
Primarily
relates to deferred tax liabilities.
The
above goodwill represents future economic benefits expected to be recognized from the Company's expansion into the pharmacy services market, as well as expected future synergies and
operating efficiencies from combining operations with EnvisionRx. Goodwill resulting from the Acquisition of $1,639,355 has been allocated to the Pharmacy Services segment of which $1,368,657 is
deductible for tax purposes.
During
fiscal 2017, 2016 and 2015, acquisition costs of $6, $27,402 and $15,442, respectively, were expensed as incurred. The following unaudited pro forma combined financial data gives
effect to the Acquisition as if it had occurred as of March 1, 2014.
These
unaudited pro forma combined results have been prepared by combining the historical results of the Company and historical results of EnvisionRx. The unaudited pro forma combined
financial data for all periods presented were adjusted to give effect to pro forma events that 1) are directly attributable to the aforementioned transaction, 2) factually supportable,
and 3) expected to have a continuing impact on the consolidated results of operations. Specifically, these adjustments reflect:
-
-
Incremental interest expense relating to the $1,800,000 6.125% Notes issued on April 2, 2015, the net proceeds of which were used to
finance the cash portion of the Acquisition.
-
-
Incremental amortization resulting from increased fair value of the identifiable intangible assets as noted in the final purchase price
allocation.
-
-
Removal of costs incurred in connection with the Acquisition by both the Company and EnvisionRx, including bridge loan commitment fees of
$15,375.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
2. Acquisition (Continued)
-
-
Removal of interest expense incurred by EnvisionRx as the underlying debt was repaid upon the acquisition date.
-
-
Removal of debt extinguishment charges incurred by EnvisionRx.
-
-
Inclusion of the 27,754 shares of Rite Aid common stock issued to fund the stock portion of the purchase price in the basic and diluted share
calculation.
The
unaudited pro forma combined information is not necessarily indicative of what the combined company's results actually would have been had the Acquisition been completed as of the
beginning of the periods as indicated. In addition, the unaudited pro forma combined information does not purport to project the future results of the combined company.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 weeks)
|
|
February 27,
2016
(52 weeks)
|
|
February 28,
2015
(52 weeks)
|
|
|
|
Pro forma
|
|
Pro forma
|
|
Pro forma
|
|
Net revenues as reported
|
|
$
|
32,845,073
|
|
$
|
30,736,657
|
|
$
|
26,528,377
|
|
EnvisionRx revenue, prior to the acquisition
|
|
|
|
|
|
1,735,635
|
|
|
4,273,016
|
|
Less pre-acquisition intercompany revenue
|
|
|
|
|
|
(103,363
|
)
|
|
(272,530
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma combined revenues
|
|
$
|
32,845,073
|
|
$
|
32,368,929
|
|
$
|
30,528,863
|
|
Net income as reported
|
|
$
|
4,053
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
EnvisionRx net (loss) income before income taxes, prior to the acquisition
|
|
|
|
|
|
(45,307
|
)
|
|
14,031
|
|
Incremental interest expense on the 6.125% Notes issued on April 2, 2015
|
|
|
|
|
|
(11,097
|
)
|
|
(115,407
|
)
|
Incremental amortization resulting from fair value adjustments of the identifiable intangible assets
|
|
|
|
|
|
(14,297
|
)
|
|
(48,586
|
)
|
Transaction costs incurred by both the Company and EnvisionRx
|
|
|
|
|
|
56,194
|
|
|
16,199
|
|
Interest expense incurred by EnvisionRx
|
|
|
|
|
|
21,984
|
|
|
56,884
|
|
Debt extinguishment charges incurred by EnvisionRx
|
|
|
|
|
|
31,601
|
|
|
|
|
Income tax expense relating to pro forma adjustments
|
|
|
|
|
|
(15,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
4,053
|
|
$
|
188,677
|
|
$
|
2,032,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.00
|
|
$
|
0.18
|
|
$
|
2.03
|
|
Diluted income per share
|
|
$
|
0.00
|
|
$
|
0.18
|
|
$
|
1.95
|
|
The
unaudited pro forma combined financial information for fiscal 2017 is identical to the actual results reported by the Company because EnvisionRx results were included in the
consolidated operations of the Company for the entire period.
3. Pending Merger
On January 30, 2017, Walgreens Boots Alliance, Inc. (NASDAQ: WBA) ("WBA") and Rite Aid Corporation ("Rite Aid") announced that they had entered into an amendment and
extension of their
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
3. Pending Merger (Continued)
previously
announced definitive Agreement and Plan of Merger, dated as of October 27, 2015 (as amended by Amendment No. 1 thereto (the "Amendment") on January 29, 2017, the
"Merger Agreement"), with Victoria Merger Sub, Inc., a Delaware corporation and wholly owned direct subsidiary of WBA ("Victoria Merger Sub"). Pursuant to the terms and subject to the
conditions set forth in the Merger Agreement, Victoria Merger Sub will merge with and into Rite Aid (the "Merger"), with Rite Aid surviving the Merger as a 100 percent owned direct subsidiary
of WBA. Completion of the Merger is subject to various closing conditions, including but not limited to (i) approval of the Merger Agreement by the holders of Rite Aid's common stock,
(ii) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, (iii) the absence of any law or order
prohibiting the Merger, and (iv) the absence of a material adverse effect on Rite Aid, as defined in the Merger Agreement. Under the terms of the Merger Agreement, at the effective time of the
Merger, each share of Rite Aid's common stock, par value $1.00 per share, issued and outstanding immediately prior to the effective time (other than shares owned by (i) WBA, Victoria Merger Sub
or Rite Aid (which will be cancelled), (ii) stockholders who have properly exercised and perfected appraisal rights under Delaware law, or (iii) any direct or indirect 100 percent
owned subsidiary of Rite Aid or WBA (which will be converted into shares of common stock of the surviving corporation)) will be converted into the right to receive a maximum of $7.00 in cash per share
and a minimum of $6.50 in cash per share, without interest. The exact per share merger consideration will be determined based on the number of retail stores that WBA agrees to divest in connection
with the parties' efforts to obtain the required regulatory approvals for the Merger, with the price set at $7.00 per share if 1,000 stores or fewer retail stores are required to be divested and at
$6.50 per share if 1,200 retail stores are required to be divested (or more, if WBA agrees to sell more). If the required divestitures fall between 1,000 and 1,200 stores, then there will be a
pro-rata adjustment of the price per share. While the exact per share merger consideration is not known as of the date of
this report, based on discussions with the Federal Trade Commission ("FTC") regarding potential remedies after filing the preliminary proxy statement, if the Merger is completed, Rite Aid believes
that the per share merger consideration would likely be $6.50 per share.
Rite
Aid and WBA and Victoria Merger Sub have each made customary representations, warranties and covenants in the Merger Agreement, including, among other things, that (i) Rite
Aid and its subsidiaries will continue to conduct our business in the ordinary course consistent with past practice between the execution of the Merger Agreement and the closing of the Merger and
(ii) Rite Aid will not solicit proposals relating to alternative transactions to the Merger or engage in discussions or negotiations with respect thereto, subject to certain exceptions.
Additionally, the Merger Agreement limits the Company's ability to incur indebtedness for borrowed money and issue additional capital stock, among other things.
Pursuant
to the Amendment, Rite Aid and WBA extended the "End Date" (as defined in the Merger Agreement) to July 31, 2017.
On
December 20, 2016, WBA and Rite Aid announced that they had entered into an Asset Purchase Agreement, dated as of December 19, 2016 (the "Asset Purchase Agreement"),
with Fred's, Inc. (Nasdaq: FRED), a Tennessee corporation ("Fred's") (solely for the purposes set forth in the Asset Purchase Agreement), and AFAE, LLC, a Tennessee limited liability
company and wholly owned subsidiary of Fred's ("Buyer"). Pursuant to the terms and subject to the conditions set forth in
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
3. Pending Merger (Continued)
the
Asset Purchase Agreement, Rite Aid agreed to sell 865 Rite Aid stores (the "Acquired Stores") and certain specified assets related thereto for a purchase price of $950,000 plus Buyer's assumption
of certain liabilities of Rite Aid and its affiliates (the "Sale"). Completion of the Sale is subject to various closing conditions, including but not limited to (i) the closing of the proposed
acquisition of Rite Aid by WBA (the "Rite Aid Acquisition"), (ii) the FTC having issued publicly the proposed final judgment relating to the Acquired Stores in connection with the Rite Aid
Acquisition identifying Buyer as being preliminarily approved as the purchaser of the assets purchased under the Asset Purchase Agreement, (iii) filings with or receipt of approval from the
applicable state boards of pharmacy, and (iv) the absence of a material adverse effect on the stores being acquired in the Sale.
The
parties to the Asset Purchase Agreement have each made customary representations and warranties. Rite Aid has agreed to various covenants and agreements, including, among others,
Rite Aid's agreement to conduct its business at the Acquired Stores in the ordinary course during the period between the execution of the Asset Purchase Agreement and the closing of the Sale, subject
to certain exceptions. Fred's and Buyer have also agreed to various covenants and agreements in the Asset Purchase Agreement, including, among other things, (i) Fred's and Buyer's agreement to
use their
reasonable best efforts to obtain all authorizations and approvals from governmental authorities and (ii) Fred's and Buyer's agreement to (x) prepare and furnish all necessary
information and documents reasonably requested by the FTC, (y) use reasonable best efforts to demonstrate to the FTC that each of Fred's and Buyer is an acceptable purchaser of, and will
compete effectively using, the assets purchased in the Sale, and (z) reasonably cooperate with WBA and us in obtaining all FTC approvals. In the event that the FTC requests changes to the Asset
Purchase Agreement, the parties agreed to negotiate in good faith to make the necessary changes. To the extent the FTC requests that additional stores be sold, and WBA agrees to sell such stores, each
of Fred's and Buyer has agreed to buy those stores.
The
Asset Purchase Agreement contains specified termination rights for Rite Aid, WBA and Buyer, including a mutual termination right (i) in the event of the issuance of a final,
nonappealable governmental order permanently restraining the Sale or (ii) in the event that the Merger Agreement is terminated in accordance with its terms. WBA has additional termination
rights, if, among others thing, (i) Buyer or Fred's is not preliminarily approved by the FTC or other necessary governmental authority as purchaser of the assets in the Sale or (ii) the
FTC informs WBA or its affiliates in writing that the Director of the Bureau of Competition will not recommend approval of Fred's or Buyer as purchaser of the assets in the Sale.
Rite
Aid expects that the Asset Purchase Agreement will be amended to, among other things, make certain changes contemplated by the Amendment.
While
WBA and Rite Aid are actively engaged in discussions with the FTC regarding the transaction and are working towards a close of the Merger by July 31, 2017, there can be no
assurance that the requisite regulatory approvals will be obtained, or that the Merger or the Sale will be completed within the time periods contemplated by the Merger Agreement and Asset Purchase
Agreement on the current terms, if at all. In the event the Merger Agreement is terminated in certain circumstances involving a failure to obtain required regulatory approvals or if the Merger is not
completed by July 31, 2017, WBA is required to pay Rite Aid a $325,000 termination fee; provided that
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
3. Pending Merger (Continued)
such
termination fee is reduced to $162,500 if (i) on the termination date Rite Aid's fails to satisfy the EBITDA threshold set forth in the Merger Agreement (the "EBITDA test") or
(ii) if WBA exercises its right to terminate the Merger Agreement as a result of Rite Aid's failure to satisfy the EBITDA test as of the End Date or as of the date on which closing is required
to occur.
4. Income Per Share
Basic income per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted income
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 issuance of common
stock that then shared in the income of the Company subject to anti- dilution limitations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Numerator for income per share:
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic
|
|
$
|
4,053
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
Add backinterest on convertible notes
|
|
|
|
|
|
|
|
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted
|
|
$
|
4,053
|
|
$
|
165,465
|
|
$
|
2,114,629
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
1,044,427
|
|
|
1,024,377
|
|
|
971,102
|
|
Outstanding options and restricted shares, net
|
|
|
16,399
|
|
|
17,985
|
|
|
21,967
|
|
Convertible notes
|
|
|
|
|
|
|
|
|
24,792
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
1,060,826
|
|
|
1,042,362
|
|
|
1,017,861
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.00
|
|
$
|
0.16
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.00
|
|
$
|
0.16
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to their antidilutive effect, 3,200, 3,464 and 2,777 potential common shares related to stock options have been excluded from the computation of diluted income per share as of
March 4, 2017, February 27, 2016 and February 28, 2015, respectively.
During
May 2015, $64,089 of the Company's 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms.
5. Lease Termination and Impairment Charges
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that an asset group has a carrying
value that may not be recoverable. The individual operating store is the lowest level for which cash flows are identifiable. As such, the Company evaluates individual stores for recoverability of
assets. To determine if a store needs to be
103
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
tested
for recoverability, the Company considers items such as decreases in market prices, changes in the manner in which the store is being used or physical condition, changes in legal factors or
business climate, an accumulation of losses significantly in excess of budget, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection of
continuing losses, or an expectation that the store will be closed or sold.
The
Company monitors new and recently relocated stores against operational projections and other strategic factors such as regional economics, new competitive entries and other local
market considerations to determine if an impairment evaluation is required. For other stores, it performs a recoverability analysis if it has experienced current-period and historical cash flow
losses.
In
performing the recoverability test, the Company compares the expected future cash flows of a store to the carrying amount of its assets. Significant judgment is used to estimate
future cash flows. Major assumptions that contribute to its future cash flow projections include expected sales, gross profit, and distribution expenses; expected costs such as payroll, occupancy
costs and advertising expenses; and estimates for other significant selling, and general and administrative expenses. Many long-term macro-economic and industry factors are considered, both
quantitatively and qualitatively, in the future cash flow assumptions. In addition to current and expected economic conditions such as inflation, interest and unemployment rates that affect customer
shopping patterns, the Company considers that it operates in a highly competitive industry which includes the actions of other national and regional drugstore chains, independently owned drugstores,
supermarkets, mass merchandisers, dollar stores and internet pharmacies. Additionally, the Company takes into consideration that certain operating stores are executing specific improvement plans which
are monitored quarterly to recoup recent capital investments, such as an acquisition of an independent pharmacy, which it has made to respond to specific competitive or local market conditions, or
have specific programs tailored towards a specific geography or market.
The
Company recorded impairment charges of $32,147 in fiscal 2017, $17,219 in fiscal 2016 and $14,438 in fiscal 2015. The Company's methodology for recording impairment charges has been
consistently applied in the periods presented.
At
March 4, 2017, $2.015 billion of the Company's long-lived assets, including intangible assets, were associated with 4,536 active operating stores.
If
an operating store's estimated future undiscounted cash flows are not sufficient to cover its carrying value, its carrying value is reduced to fair value which is its estimated future
discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset.
An
impairment charge is recorded in the period that the store does not meet its original return on investment and/or has an operating loss for the last 2 years and its projected
cash flows do not exceed its current asset carrying value. The amount of the impairment charge is the entire difference between the current asset carrying value and the estimated fair value of the
assets using discounted future cash flows. Most stores are fully impaired in the period that the impairment charge is originally recorded.
The
Company recorded impairment charges for active stores of $30,109 in fiscal 2017, $16,106 in fiscal 2016 and $12,126 in fiscal 2015.
104
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
The Company reviews key performance results for active stores on a quarterly basis and approves certain stores for closure. Impairment for closed stores, if any (many stores are closed
on lease expiration), are recorded in the quarter the closure decision is approved. Closure decisions are made on an individual store or regional basis considering all of the macro-economic, industry
and other factors, in addition to, the active store's individual operating results. The Company recorded impairment charges for closed facilities of $2,038 in fiscal 2017, $1,113 in fiscal 2016 and
$2,312 in fiscal 2015.
The
following table summarizes the impairment charges and number of locations, segregated by closed facilities and active stores that have been recorded in fiscal 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4, 2017
|
|
February 27, 2016
|
|
February 28, 2015
|
|
(in thousands, except number of stores)
|
|
Number
|
|
Charge
|
|
Number
|
|
Charge
|
|
Number
|
|
Charge
|
|
Active stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores previously impaired(1)
|
|
|
428
|
|
$
|
9,426
|
|
|
357
|
|
$
|
9,183
|
|
|
376
|
|
$
|
6,949
|
|
New, relocated and remodeled stores(2)
|
|
|
22
|
|
|
13,232
|
|
|
3
|
|
|
1,649
|
|
|
2
|
|
|
1,108
|
|
Remaining stores not meeting the recoverability test(3)
|
|
|
50
|
|
|
7,451
|
|
|
29
|
|
|
5,274
|
|
|
16
|
|
|
4,069
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment chargesactive stores
|
|
|
500
|
|
|
30,109
|
|
|
389
|
|
|
16,106
|
|
|
394
|
|
|
12,126
|
|
Total impairment chargesclosed facilities
|
|
|
53
|
|
|
2,038
|
|
|
27
|
|
|
1,113
|
|
|
35
|
|
|
2,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment chargesall locations
|
|
|
553
|
|
$
|
32,147
|
|
|
416
|
|
$
|
17,219
|
|
|
429
|
|
$
|
14,438
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
These
charges are related to stores that were impaired for the first time in prior periods. Most active stores, requiring an impairment charge, are fully impaired in
the first period that they do not meet their asset recoverability test. However, we do often make capital additions to certain stores to improve their operating results or to meet geographical
competition, which if later are deemed to be unrecoverable, will be impaired in future periods. Of this total, 424, 351 and 369 stores for fiscal years 2017, 2016 and 2015 respectively have been fully
impaired. Also included in these charges are an insignificant number of stores, which were only partially impaired in prior years based on our analysis that supported a reduced net book value greater
than zero, but now require additional charges.
-
(2)
-
These
charges are related to new stores (open at least 3 years) and relocated stores (relocated in the last 2 years) and significant strategic remodels
(remodeled in the last year) that did not meet their recoverability test during the current period. These stores have not met their original return on investment projections and have a historical loss
of at least 2 years. Their future cash flow projections do not recover their current carrying value. Of this total, 18, 3 and 1 stores for fiscal years 2017, 2016 and 2015 respectively have
been fully impaired.
-
(3)
-
These
charges are related to the remaining active stores that did not meet the recoverability test during the current period. These stores have a historical loss of
at least 2 years. Their future cash flow projections do not recover their current carrying value. Of this total, 48, 27 and 14 stores for fiscal years 2017, 2016 and 2015 respectively have been
fully impaired.
105
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
The
primary drivers of its impairment charges are each store's current and historical operating performance and the assumptions that the Company makes about each store's operating
performance in future periods. Projected cash flows are updated based on the next year's operating budget which includes the qualitative factors noted above. 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 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.
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.
The
table below sets forth by level within the fair value hierarchy the long-lived assets as of the impairment measurement date for which an impairment assessment was performed and total
losses as of March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Fair Values
as of
Impairment
Date
|
|
Total
Charges
March 4,
2017
|
|
Long-lived assets held and used
|
|
$
|
|
|
$
|
924
|
|
$
|
19,827
|
|
$
|
20,751
|
|
$
|
(32,076
|
)
|
Long-lived assets held for sale
|
|
|
|
|
|
1,260
|
|
|
|
|
|
1,260
|
|
|
(71
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
2,184
|
|
$
|
19,827
|
|
$
|
22,011
|
|
$
|
(32,147
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
106
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Fair Values
as of
Impairment
Date
|
|
Total
Charges
February 27,
2016
|
|
Long-lived assets held and used
|
|
$
|
|
|
$
|
3,641
|
|
$
|
17,645
|
|
$
|
21,286
|
|
$
|
(16,672
|
)
|
Long-lived assets held for sale
|
|
|
|
|
|
3,283
|
|
|
189
|
|
|
3,472
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
6,924
|
|
$
|
17,834
|
|
$
|
24,758
|
|
$
|
(17,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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." The Company calculates the 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 or favorable lease terminations. The Company evaluates these assumptions each quarter and adjusts the liability accordingly.
In
fiscal 2017, 2016 and 2015, the Company recorded lease termination charges of $23,147, $31,204 and $27,507, respectively. These charges related to changes in future assumptions,
interest accretion and provisions for 17 stores in fiscal 2017, 23 stores in fiscal 2016, and 10 stores in fiscal 2015.
As
part of its ongoing business activities, the Company assesses stores and distribution centers for potential closure. Decisions to close or relocate stores or distribution centers in
future periods would result in lease termination charges for lease exit costs and liquidation of inventory, 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Balancebeginning of year
|
|
$
|
208,421
|
|
$
|
241,047
|
|
$
|
284,270
|
|
Provision for present value of noncancellable lease payments of closed stores
|
|
|
6,503
|
|
|
9,709
|
|
|
1,661
|
|
Changes in assumptions about future sublease income, terminations and change in interest rates
|
|
|
2,633
|
|
|
5,655
|
|
|
7,560
|
|
Interest accretion
|
|
|
14,186
|
|
|
16,463
|
|
|
18,988
|
|
Cash payments, net of sublease income
|
|
|
(66,605
|
)
|
|
(64,453
|
)
|
|
(71,432
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of year
|
|
$
|
165,138
|
|
$
|
208,421
|
|
$
|
241,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's revenues and income before income taxes for fiscal 2017, 2016, and 2015 included results from stores that have been closed or are approved for closure as of March 4,
2017. The
107
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
revenue,
operating expenses and income before income taxes of these stores for the periods are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Revenues
|
|
$
|
132,790
|
|
$
|
143,339
|
|
$
|
193,757
|
|
Operating expenses
|
|
|
151,978
|
|
|
159,967
|
|
|
212,753
|
|
Gain from sale of assets
|
|
|
(1,364
|
)
|
|
(5,607
|
)
|
|
(5,529
|
)
|
Other expenses
|
|
|
2,544
|
|
|
1,676
|
|
|
2,889
|
|
Loss before income taxes
|
|
|
(20,368
|
)
|
|
(12,697
|
)
|
|
(16,356
|
)
|
Included in these stores' loss before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
1,166
|
|
|
1,162
|
|
|
1,650
|
|
Inventory liquidation charges
|
|
|
346
|
|
|
295
|
|
|
222
|
|
The
above results are not necessarily indicative of the impact that these closures will have on revenues and operating results of the Company in the future, as the Company often
transfers the business of a closed store to another Company store, thereby retaining a portion of these revenues and operating expenses.
6. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy as described in Note 5,
Lease Termination and Impairment Charges
, for the
recognition and disclosure of fair value measurements.
As
of March 4, 2017 and February 27, 2016, the Company did not have any financial assets measured on a recurring basis. Please see Note 5 for fair value measurements
of non-financial assets measured on a non-recurring basis.
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. In addition, as of March 4, 2017 and February 27, 2016, the Company
has $6,874 and $6,069, respectively, of investments carried at amortized cost as these investments are being held to maturity. These investments are included as a component of prepaid expenses and
other current assets as of March 4, 2017 and are included as a component of other assets as of February 27, 2016. The Company believes the carrying value of these investments
approximates their fair value.
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
108
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
6. Fair Value Measurements (Continued)
estimated
fair value of the Company's total long-term indebtedness was $7,263,378 and $7,556,599, respectively, as of March 4, 2017. The carrying amount and estimated fair value of the
Company's total long-term indebtedness was $6,914,483 and $7,235,916, respectively, as of February 27, 2016. There were no outstanding derivative financial instruments as of March 4,
2017 and February 27, 2016.
7. Income Taxes
The provision for income tax expense (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Current tax:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
|
|
$
|
(52
|
)
|
$
|
|
|
State
|
|
|
14,596
|
|
|
9,396
|
|
|
6,011
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14,596
|
|
|
9,344
|
|
|
6,011
|
|
Deferred tax and other:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
10,341
|
|
|
117,200
|
|
|
(1,544,344
|
)
|
State
|
|
|
19,455
|
|
|
(13,605
|
)
|
|
(144,020
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
29,796
|
|
|
103,595
|
|
|
(1,688,364
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
44,392
|
|
$
|
112,939
|
|
$
|
(1,682,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the expected statutory federal tax and the total income tax expense (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Federal statutory rate
|
|
$
|
16,957
|
|
$
|
97,441
|
|
$
|
149,389
|
|
Nondeductible expenses
|
|
|
2,479
|
|
|
6,518
|
|
|
805
|
|
State income taxes, net
|
|
|
8,219
|
|
|
23,828
|
|
|
11,565
|
|
Decrease of previously recorded liabilities
|
|
|
(955
|
)
|
|
|
|
|
(3,698
|
)
|
Nondeductible compensation
|
|
|
1,157
|
|
|
6,057
|
|
|
5,136
|
|
Acquisition Costs
|
|
|
4,023
|
|
|
6,782
|
|
|
|
|
Valuation allowance
|
|
|
14,703
|
|
|
(26,358
|
)
|
|
(1,841,304
|
)
|
Other
|
|
|
(2,191
|
)
|
|
(1,329
|
)
|
|
(4,246
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
$
|
44,392
|
|
$
|
112,939
|
|
|
(1,682,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income for fiscal 2017 included income tax expense of $44,392, which included an increase in valuation allowance of $14,703 primarily related to a reduction in estimated utilization
of state NOLs and for expiring carryforwards.
109
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
7. Income Taxes (Continued)
Net
income for fiscal 2016 included income tax expense of $112,939 based on the effective tax rate above, which included a benefit of $26,358 related to a reduction in valuation
allowance primarily for an increase in estimated utilization of state NOLs and for expiring carryforwards.
The
fiscal 2015 income tax benefit of $1,682,353 was primarily attributable to the reduction of the deferred tax valuation allowance. The reduction of the valuation allowance was based
upon the Company's then achievement of cumulative profitability over a three year window, reported earnings for ten consecutive quarters, utilization of federal and state net operating losses against
taxable income for the last three years and the Company's historical ability of predicting earnings. Based upon the Company's projections for future taxable income over the periods in which the
deferred tax assets are recoverable, management believed that it was more likely than not that the Company would realize the benefits of substantially all the net deferred tax assets existing at
February 28, 2015.
The
tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at March 4, 2017 and
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
68,320
|
|
$
|
72,883
|
|
Accrued expenses
|
|
|
194,884
|
|
|
198,636
|
|
Liability for lease exit costs
|
|
|
68,411
|
|
|
81,704
|
|
Pension, retirement and other benefits
|
|
|
168,274
|
|
|
182,394
|
|
Long-lived assets
|
|
|
509,283
|
|
|
487,944
|
|
Other
|
|
|
1,630
|
|
|
6,203
|
|
Credits
|
|
|
65,971
|
|
|
64,382
|
|
Net operating losses
|
|
|
1,207,650
|
|
|
1,182,440
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
2,284,423
|
|
|
2,276,586
|
|
Valuation allowance
|
|
|
(226,726
|
)
|
|
(212,023
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,057,697
|
|
|
2,064,563
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Outside basis difference
|
|
|
112,509
|
|
|
108,860
|
|
Inventory
|
|
|
439,624
|
|
|
416,562
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
552,133
|
|
|
525,422
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,505,564
|
|
$
|
1,539,141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
7. Income Taxes (Continued)
A
reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Unrecognized tax benefits
|
|
$
|
10,676
|
|
$
|
9,514
|
|
$
|
10,143
|
|
Increases to prior year tax positions
|
|
|
16
|
|
|
1,667
|
|
|
1,003
|
|
Decreases to tax positions in prior periods
|
|
|
(626
|
)
|
|
(577
|
)
|
|
(984
|
)
|
Increases to current year tax positions
|
|
|
26
|
|
|
72
|
|
|
123
|
|
Settlements
|
|
|
|
|
|
|
|
|
(681
|
)
|
Lapse of statute of limitations
|
|
|
(1,153
|
)
|
|
|
|
|
(90
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance
|
|
$
|
8,939
|
|
$
|
10,676
|
|
$
|
9,514
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of the above unrecognized tax benefits at March 4, 2017, February 27, 2016 and February 28, 2015 which would impact the Company's effective tax rate, if
recognized, was $892, $2,084 and $440, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is remaining against the Company's net deferred tax
assets.
While
it is expected that the amount of unrecognized tax benefits will change in the next twelve months, management does not expect the change to have a significant impact on the results
of operations or the financial position of the Company.
The
Company recognizes interest and penalties related to tax contingencies as income tax expense. The Company recognized an expense/(benefit) for interest and penalties in connection
with tax matters of $(276), $60 and ($5,250) for fiscal years 2017, 2016 and 2015, respectively. As of March 4, 2017 and
February 27, 2016 the total amount of accrued income tax-related interest and penalties was $263 and $539, respectively.
The
Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The consolidated federal income tax returns are closed for
examination through fiscal year 2013. Prior year returns for acquired subsidiaries remain open for 2012 and 2013 due to IRS examination. However, any net operating losses that were generated in these
prior closed years may be subject to examination by the IRS upon utilization. Tax examinations by various state taxing authorities could generally be conducted for a period of three to five years
after filing of the respective return. However, as a result of filing amended returns, the Company has statutes open in some states from fiscal year 2005.
At March 4, 2017, the Company had federal net operating loss carryforwards of approximately $2,936,612. Of these, $1,658,482 will expire,
if not utilized, between fiscal 2020 and 2028. An additional $1,278,130 will expire, if not utilized, between fiscal 2029 and 2037.
At
March 4, 2017, the Company had state net operating loss carryforwards of approximately $5,093,651, the majority of which will expire between fiscal 2028 and 2037.
111
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
7. Income Taxes (Continued)
The
Company's federal and state net operating loss carryforwards include federal deductions of $35,935 and state deductions of $88,614 for windfall tax benefits that have not yet been
recognized in the financial statements at March 4, 2017. Previously, these tax benefits would be credited to additional paid-in capital when they reduce current taxable income consistent with
the tax law ordering approach. However, due to the adoption of ASU 2016-09, they will be recognized in the first quarter of fiscal 2018.
At
March 4, 2017, the Company had federal business tax credit carryforwards of $51,869, the majority of which will expire between 2019 and 2021. In addition to these credits, the
Company had alternative minimum tax credit carryforwards of $3,234.
The valuation allowances as of March 4, 2017 and February 27, 2016 apply to the net deferred tax assets of the Company. The
Company maintained a valuation allowance of $226,726 and $212,023, which relates primarily to state deferred tax assets at March 4, 2017 and February 27, 2016, respectively.
8. Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable. The allowance for uncollectible accounts at
March 4, 2017 and February 27, 2016 was $30,891 and $32,820 respectively. The Company's accounts receivable are due primarily from third-party payors (e.g., pharmacy benefit
management companies, insurance companies or governmental agencies) and are recorded net of any allowances provided for under the respective plans. Since payments due from third-party payors are
sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually and adjusted for accounts deemed uncollectible by management.
9. Medicare Part D
The Company offers Medicare Part D benefits through EIC, which has contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003, must be a risk-bearing entity regulated under state insurance laws or similar statutes.
EIC
is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EIC must file quarterly and annual reports with the
National Association of Insurance Commissioners ("NAIC") and certain state regulators, must maintain certain minimum amounts of capital and surplus under formulas established by certain states and
must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe
these limitations on dividends and distributions materially impact its financial position. EIC is subject to minimum capital and surplus requirements in certain states. The minimum amount of capital
and surplus required to satisfy regulatory requirements in these states is $18,962 as of December 31, 2016. EIC was in excess of the minimum required amounts in these states as of
March 4, 2017.
112
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
9. Medicare Part D (Continued)
The
Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management
and enrollment systems. Significant estimates arising from its participation in this program include: (i) estimates of low-income cost subsidies, reinsurance amounts, and coverage gap discount
amounts ultimately payable to CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of amounts receivable from CMS under a risk-sharing feature
of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for
our estimate of claims that have been incurred but have not yet been reported.
As
of March 4, 2017, accounts receivable, net included $245,766 due from CMS and accrued salaries, wages and other current liabilities included $145,903 of EIC liabilities under
certain reinsurance contracts. As of February 27, 2016, accounts receivable, net included $275,032 due from CMS and accrued salaries, wages and other current liabilities included $166,238 of
EIC liabilities under certain reinsurance contracts. EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.
10. Inventory
At March 4, 2017 and February 27, 2016, inventories were $999,776 and $1,006,396, respectively, lower than the amounts that would have been reported using the first-in,
first-out ("FIFO") cost flow assumption. The Company calculates its FIFO inventory valuation using the retail method for store inventories and the cost method for distribution facility inventories.
The Company recorded a LIFO credit for fiscal year 2017 of $6,620, compared to a LIFO charge of $11,163 for fiscal year 2016 and a LIFO credit of $18,857 for fiscal year 2015. During fiscal 2017, a
reduction in non-pharmacy inventories resulted in the liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. During fiscal 2016 and 2015, a reduction in inventories
related to working capital initiatives resulted in similar LIFO liquidation. This LIFO liquidation resulted in a $4,225, $60,653 and $38,867 cost of revenues decrease, with a corresponding reduction
to the adjustment to LIFO for fiscal 2017, fiscal 2016 and fiscal 2015, respectively.
11. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital lease assets, at March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Land
|
|
$
|
217,112
|
|
$
|
221,409
|
|
Buildings
|
|
|
754,289
|
|
|
764,497
|
|
Leasehold improvements
|
|
|
2,353,066
|
|
|
2,245,307
|
|
Equipment
|
|
|
2,512,748
|
|
|
2,416,316
|
|
Software
|
|
|
16,316
|
|
|
6,111
|
|
Construction in progress
|
|
|
71,954
|
|
|
153,236
|
|
|
|
|
|
|
|
|
|
|
|
|
5,925,485
|
|
|
5,806,876
|
|
Accumulated depreciation
|
|
|
(3,673,793
|
)
|
|
(3,551,478
|
)
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,251,692
|
|
$
|
2,255,398
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
11. Property, Plant and Equipment (Continued)
Depreciation expense, which included the depreciation of assets recorded under capital leases, was $346,081, $322,396 and $298,523 in fiscal 2017, 2016 and 2015, respectively.
Included
in property, plant and equipment was the carrying amount, which approximates fair value, of assets to be disposed of totaling $1,057 and $3,256 at March 4, 2017 and
February 27, 2016, respectively.
12. Goodwill and Other Intangibles
Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but is instead evaluated for impairment on an
annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. When evaluating goodwill for possible impairment, the Company
typically performs a qualitative assessment in the fourth quarter of the fiscal year to determine if it is more likely than not that the carrying value of the goodwill exceeds the fair value of the
goodwill. However, as part of this
qualitative assessment, a quantitative assessment is performed at least once every three years to re-establish a baseline fair value that can be used in current and future qualitative assessments.
During the Company's qualitative assessment it makes significant estimates, assumptions, and judgments, including, but not limited to, the overall economy, industry and market conditions, financial
performance of the Company, changes in the Company's share price, and forecasts of revenue, profit, working capital requirements, and cash flows. The Company considers its two reporting units', the
Retail Pharmacy segment and the Pharmacy Services segment, historical results and operating trends when determining these assumptions. If the Company determines that it is more likely than not that
the carrying value of the goodwill exceeds the fair value of the goodwill, it performs the first step of the impairment process, which compares the fair value of a reporting unit to its carrying
amount, including the goodwill. The Company estimates the fair value of its reporting units using a combination of a future discounted cash flow valuation model and a comparable market transaction
models. If the carrying value of a reporting unit exceeds the fair value, the second step of the impairment process is performed and the implied fair value of a reporting unit is compared to the
carrying amount of the goodwill. The implied fair value of the goodwill is determined the same way as the goodwill recognized in a business combination. The Company assigns the fair value of a
reporting unit to all of the assets and liabilities of that unit (including unrecognized intangible assets) and any excess goes to the goodwill (its implied fair value). Any excess carrying amount of
the goodwill over the implied fair value of the goodwill, is the amount of the impairment loss recognized.
In
the fiscal fourth quarter the Company completed a qualitative goodwill impairment assessment, which included a quantitative assessment to re-establish baseline fair value where
necessary, and after evaluating the results, events and circumstances of the reporting units, the Company concluded that sufficient evidence existed to assert qualitatively that it is more likely than
not that the fair values of the reporting units exceeded their carrying values. Therefore, a two- step impairment assessment was not necessary and no goodwill impairment charge was assessed for the
fiscal years ended March 4, 2017 and February 27, 2016.
114
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
12. Goodwill and Other Intangibles (Continued)
Below
is a summary of the changes in the carrying amount of goodwill by segment for the fiscal years ended March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Total
|
|
Balance, February 28, 2015
|
|
$
|
76,124
|
|
$
|
|
|
$
|
76,124
|
|
Acquisition (see Note 2. Acquisition)
|
|
|
|
|
|
1,637,351
|
|
|
1,637,351
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 27, 2016
|
|
$
|
76,124
|
|
$
|
1,637,351
|
|
$
|
1,713,475
|
|
Acquisition (see Note 2. Acquisition)
|
|
|
|
|
|
|
|
|
|
|
Change in goodwill resulting from changes to the final purchase price allocation
|
|
|
|
|
|
2,004
|
|
|
2,004
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, March 4, 2017
|
|
$
|
76,124
|
|
$
|
1,639,355
|
|
$
|
1,715,479
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company's finite-lived and indefinite-lived intangible assets as of
March 4, 2017 and February 27, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Remaining
Weighted
Average
Amortization
Period
|
|
Gross
Carrying
Amount
|
|
Accumulated
Amortization
|
|
Net
|
|
Remaining
Weighted
Average
Amortization
Period
|
Favorable leases and other
|
|
$
|
664,670
|
|
$
|
(531,022
|
)
|
$
|
133,648
|
|
7 years
|
|
$
|
665,197
|
|
$
|
(507,776
|
)
|
$
|
157,421
|
|
8 years
|
Prescription files
|
|
|
1,584,240
|
|
|
(1,390,139
|
)
|
|
194,101
|
|
3 years
|
|
|
1,541,518
|
|
|
(1,285,633
|
)
|
|
255,885
|
|
3 years
|
Customer relationships(a)
|
|
|
465,000
|
|
|
(110,653
|
)
|
|
354,347
|
|
16 years
|
|
|
465,000
|
|
|
(44,203
|
)
|
|
420,797
|
|
17 years
|
CMS license
|
|
|
57,500
|
|
|
(3,872
|
)
|
|
53,628
|
|
24 years
|
|
|
57,500
|
|
|
(1,572
|
)
|
|
55,928
|
|
25 years
|
Claims adjudication and other developed software
|
|
|
58,995
|
|
|
(14,188
|
)
|
|
44,807
|
|
6 years
|
|
|
59,000
|
|
|
(5,760
|
)
|
|
53,240
|
|
7 years
|
Trademarks
|
|
|
20,100
|
|
|
(3,383
|
)
|
|
16,717
|
|
9 years
|
|
|
20,100
|
|
|
(1,373
|
)
|
|
18,727
|
|
10 years
|
Backlog
|
|
|
11,500
|
|
|
(6,453
|
)
|
|
5,047
|
|
2 years
|
|
|
11,500
|
|
|
(2,619
|
)
|
|
8,881
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite
|
|
$
|
2,862,005
|
|
$
|
(2,059,710
|
)
|
$
|
802,295
|
|
|
|
$
|
2,819,815
|
|
$
|
(1,848,936
|
)
|
$
|
970,879
|
|
|
Trademarks
|
|
|
33,500
|
|
|
|
|
|
33,500
|
|
Indefinite
|
|
|
33,500
|
|
|
|
|
|
33,500
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,895,505
|
|
$
|
(2,059,710
|
)
|
$
|
835,795
|
|
|
|
$
|
2,853,315
|
|
$
|
(1,848,936
|
)
|
$
|
1,004,379
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Amortized
on an accelerated basis which is determined based on the remaining useful economic lives of the customer relationships that are expected to contribute
directly or indirectly to future cash flows.
Also
included in other non-current liabilities as of March 4, 2017 and February 27, 2016 are unfavorable lease intangibles with a net carrying amount of $38,242 and
$46,947, respectively. These intangible liabilities are amortized over their remaining lease terms at time of acquisition.
115
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
12. Goodwill and Other Intangibles (Continued)
Amortization
expense for these intangible assets and liabilities was $222,150, $186,816 and $118,105 for fiscal 2017, 2016 and 2015, respectively. The anticipated annual amortization
expense for these
intangible assets and liabilities is 2018$180,560; 2019$143,150; 2020$113,607; 2021$80,891 and 2022$51,883.
13. Accrued Salaries, Wages and Other Current Liabilities
Accrued salaries, wages and other current liabilities consisted of the following at March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Accrued wages, benefits and other personnel costs
|
|
$
|
426,097
|
|
$
|
457,135
|
|
Accrued interest
|
|
|
66,352
|
|
|
65,729
|
|
Accrued sales and other taxes payable
|
|
|
141,420
|
|
|
155,999
|
|
Accrued store expense
|
|
|
202,599
|
|
|
231,900
|
|
Accrued reinsurance
|
|
|
145,904
|
|
|
166,238
|
|
Other
|
|
|
387,632
|
|
|
350,249
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,370,004
|
|
$
|
1,427,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
116
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement
Following is a summary of indebtedness and lease financing obligations at March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Secured Debt:
|
|
|
|
|
|
|
|
Senior secured revolving credit facility due January 2020 ($2,430,000 and $2,100,000 face value less unamortized debt issuance costs of $24,918 and
$33,903)
|
|
$
|
2,405,082
|
|
$
|
2,066,097
|
|
Tranche 1 Term Loan (second lien) due August 2020 ($470,000 face value less unamortized debt issuance costs of $4,167 and $5,414)
|
|
|
465,833
|
|
|
464,586
|
|
Tranche 2 Term Loan (second lien) due June 2021 ($500,000 face value less unamortized debt issuance costs of $2,431 and $3,007)
|
|
|
497,569
|
|
|
496,993
|
|
Other secured
|
|
|
90
|
|
|
90
|
|
|
|
|
|
|
|
|
|
|
|
|
3,368,574
|
|
|
3,027,766
|
|
Guaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $2,071 and $2,743 and less unamortized debt issuance costs of $7,527
and $10,180)
|
|
|
896,544
|
|
|
894,563
|
|
6.75% senior notes due June 2021 ($810,000 face value less unamortized debt issuance costs of $6,360 and $7,872)
|
|
|
803,640
|
|
|
802,128
|
|
6.125% senior notes due April 2023 ($1,800,000 face value less unamortized debt issuance costs of $25,984 and $30,343)
|
|
|
1,774,016
|
|
|
1,769,657
|
|
|
|
|
|
|
|
|
|
|
|
|
3,474,200
|
|
|
3,466,348
|
|
Unguaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,625 and $1,794)
|
|
|
293,375
|
|
|
293,206
|
|
6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $771 and $837)
|
|
|
127,229
|
|
|
127,163
|
|
|
|
|
|
|
|
|
|
|
|
|
420,604
|
|
|
420,369
|
|
Lease financing obligations
|
|
|
65,315
|
|
|
79,653
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
7,328,693
|
|
|
6,994,136
|
|
Current maturities of long-term debt and lease financing obligations
|
|
|
(21,335
|
)
|
|
(26,848
|
)
|
|
|
|
|
|
|
|
|
Long-term debt and lease financing obligations, less current maturities
|
|
$
|
7,307,358
|
|
$
|
6,967,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company's Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $3,700,000 and matures in January 2020. Borrowings
under the revolver bear interest at a rate per annum between (i) LIBOR plus 1.50% and LIBOR plus 2.00% with respect to Eurodollar borrowings and (ii) the alternate base rate plus 0.50%
and the alternate base rate plus 1.00% with respect to ABR borrowings, in each case, based upon the average revolver availability (as defined in the Amended and Restated Senior Secured Credit
Facility). The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the revolver, depending on the Average Revolver
117
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
Availability
(as defined in the Amended and Restated Senior Secured Credit Facility). Amounts drawn under the revolver become due and payable on January 13, 2020.
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 March 4, 2017,
the Company had $2,430,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $62,272 which resulted in additional borrowing capacity of
$1,207,728. The Merger Agreement contains a requirement that the Company's borrowings under the revolver not exceed $3,000,000 in the aggregate immediately prior to the closing of the Merger.
The
Amended and Restated Senior Secured Credit Facility restricts the Company and the Subsidiary Guarantors (as defined herein) from accumulating 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 Amended and Restated Senior Secured Credit Facility
and then to be held as collateral for the senior obligations.
The
Amended and Restated Senior Secured Credit Facility allows the Company to have outstanding, at any time, up to $1,500,000 in secured second priority debt, split-priority term loan
debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Amended and Restated Senior Secured Credit Facility and existing indebtedness, provided that not in excess of
$750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to
90 days after the latest of (a) the fifth anniversary of the effectiveness of the Amended and Restated Senior Secured Credit Facility and (b) the latest maturity date of any Term
Loan or Other Revolving Loan (each as defined in the Amended and Restated Senior Secured Credit Facility) (excluding bridge facilities allowing extensions on customary terms to at least the date that
is 90 days after such date and, with respect to any escrow notes issued by Rite Aid, excluding any special mandatory redemption of the type described in clause (iii) of the definition of
"Escrow Notes" in the Amended and Restated Senior Secured Credit Facility). Subject to the limitations described in clauses (a) and (b) of the immediately preceding sentence, the Amended
and Restated Senior Secured Credit Facility additionally allows the Company to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant
Effectiveness Period (as defined in the Amended and Restated Senior Secured Credit Facility) is not in effect; provided, however, that certain of the Company's 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 or other exemptions are not available. The Amended and Restated Senior
Secured Credit Facility also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended and Restated Senior Secured Credit Facility also
allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended and Restated Senior Secured Credit Facility is not in default and the Company maintains availability
under its revolver of more than $365,000.
The
Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on
any date on which availability under the revolver is less than $200,000 or (b) on the third consecutive business day
118
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
on
which availability under the revolver is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which
availability under the revolver is equal to or greater than $250,000. As of March 4, 2017, the Company had availability under its revolver of $1,207,728, its fixed charge coverage ratio was
greater than 1.00 to 1.00, and the Company was in compliance with the senior secured credit facility's financial covenant. The Amended and Restated Senior Secured Credit Facility also contains
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
Amended and Restated Senior Secured Credit Facility also provides for customary events of default.
The
Company also has two second priority secured term loan facilities, the Tranche 1 Term Loan and the Tranche 2 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 the Company chooses to make LIBOR borrowings, or at Citibank's base
rate plus 3.75%. 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%.
With
the exception of EIC, substantially all of Rite Aid Corporation's 100 percent owned subsidiaries guarantee the obligations under the Amended and Restated Senior Secured
Credit Facility, second priority secured term loan facilities, and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities
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 Amended and Restated Senior Secured Credit Facility and second priority secured term loan facilities 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. The Company has no independent assets or operations.
Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility, the credit facility, second priority
secured term loan facilities and applicable notes, were minor. Accordingly, condensed consolidating financial information for the Company and subsidiaries is not presented for those periods.
Subsequent to the Acquisition, other than EIC, the subsidiaries, including joint ventures, that do not guarantee the credit facility, second priority secured term loan facilities and applicable notes,
are minor. As such, condensed consolidating financial
information for the Company, its guaranteeing subsidiaries and non-guaranteeing subsidiaries is presented for those periods subsequent to the Acquisition. See Note 24 "Guarantor and
Non-Guarantor Condensed Consolidating Financial Information" for additional disclosure.
2016 Transactions
On April 2, 2015, the Company issued $1,800,000 aggregate principal amount of its 6.125% Notes, the net proceeds of which, along with
other available cash and borrowings under its Amended and
119
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
Restated
Senior Secured Credit Facility, were used to finance the cash portion of the Acquisition, which closed on June 24, 2015. The Company's obligations under the notes are fully and
unconditionally guaranteed, jointly and severally, on an unsubordinated basis, by all of its subsidiaries that guarantee the Company's obligations under the Amended and Restated Senior Secured Credit
Facility, second priority secured term loan facilities, the 9.25% senior notes due 2020 (the "9.25% Notes") and the 6.75% senior notes due 2021 (the "6.75% Notes") (the "Rite Aid Subsidiary
Guarantors"), including EnvisionRx and certain of its domestic subsidiaries other than, among others, EIC (the "EnvisionRx Subsidiary Guarantors" and, together with the Rite Aid Subsidiary Guarantors,
the "Subsidiary Guarantors"). The guarantees are unsecured. The 6.125% Notes are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of its
other unsecured, unsubordinated indebtedness.
During
May 2015, $64,089 of the Company's 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms. The remaining $79 of the Company's
8.5% convertible notes due 2015 were repaid by the Company upon maturity.
On
August 15, 2015, the Company completed the redemption of all of its outstanding $650,000 aggregate principal amount of its 8.00% Notes. In connection with the redemption, the
Company recorded a loss on debt retirement, including call premium and unamortized debt issue costs, of $33,205 during the second quarter of fiscal 2016.
2015 Transactions
On October 15, 2014, the Company completed the redemption of all of its outstanding $270,000 aggregate principal amount of its 10.25%
senior notes due October 2019 at their contractually determined early redemption price of 105.125% of the principal amount, plus accrued interest. The Company funded this redemption with borrowings
under its revolver. The Company recorded a loss on debt retirement of $18,512 related to this transaction.
The annual weighted average interest rate on the Company's indebtedness was 5.4%, 5.4%, and 5.8% for fiscal 2017, 2016, and 2015, respectively.
The
aggregate annual principal payments of long-term debt for the five succeeding fiscal years are as follows: 2018$90; 2019$0; 2020$2,430,000;
2021$1,372,000 and $3,533,000 in 2022 and thereafter.
15. Leases
The Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from 5
to 22 years. The
Company also leases certain of its equipment and other assets under noncancellable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum rental payments,
certain store leases require additional payments based on sales volume, as well as reimbursements for taxes,
120
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
15. Leases (Continued)
maintenance
and insurance. Most leases contain renewal options, certain of which involve rent increases. Total rental expense, net of sublease income of $7,310, $8,995, and $8,559, was $1,017,316,
$973,347, and $964,484 in fiscal 2017, 2016, and 2015, respectively. These amounts include contingent rentals of $15,522, $17,755 and $18,919 in fiscal 2017, 2016, and 2015, respectively.
During
fiscal 2017, the Company did not enter into any sale-leaseback transactions whereby the Company sold owned operating stores to independent third parties and concurrent with the
sale, entered into an agreement to lease the store back from the purchasers.
During
fiscal 2016, the Company sold 10 owned operating stores to independent third parties. Net proceeds from the sale were $36,732. Concurrent with these sales, the Company entered
into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. Eight leases were accounted for as operating leases and the remaining two were accounted for
as capital leases. The transactions resulted in a gain for certain stores of $670 which is deferred over the life of the leases. In addition, the transaction resulted in a loss for certain stores of
$546 which is included in the loss on sale of assets, net for the fifty-two weeks ended February 27, 2016.
During
fiscal 2015, the Company did not enter into any sale-leaseback transactions whereby the Company sold owned operating stores to independent third parties and concurrent with the
sale, entered into an agreement to lease the store back from the purchasers.
The
net book values of assets under capital leases and sale-leasebacks accounted for under the financing method at March 4, 2017 and February 27, 2016 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Land
|
|
$
|
5,063
|
|
$
|
5,063
|
|
Buildings
|
|
|
135,434
|
|
|
136,416
|
|
Leasehold improvements
|
|
|
1,470
|
|
|
1,612
|
|
Equipment
|
|
|
31,219
|
|
|
33,919
|
|
Accumulated depreciation
|
|
|
(132,105
|
)
|
|
(128,168
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
41,081
|
|
$
|
48,842
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
is a summary of lease finance obligations at March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
Obligations under financing leases
|
|
$
|
60,575
|
|
$
|
74,913
|
|
Sale-leaseback obligations
|
|
|
4,740
|
|
|
4,740
|
|
Less current obligation
|
|
|
(21,245
|
)
|
|
(26,758
|
)
|
|
|
|
|
|
|
|
|
Long-term lease finance obligations
|
|
$
|
44,070
|
|
$
|
52,895
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
15. Leases (Continued)
Following
are the minimum lease payments for all properties under a lease agreement that will have to be made in each of the years indicated based on non-cancelable leases in effect as
of March 4, 2017:
|
|
|
|
|
|
|
|
Fiscal year
|
|
Lease
Financing
Obligations
|
|
Operating
Leases
|
|
2018
|
|
$
|
26,184
|
|
$
|
1,050,834
|
|
2019
|
|
|
15,448
|
|
|
988,754
|
|
2020
|
|
|
10,668
|
|
|
868,907
|
|
2021
|
|
|
6,800
|
|
|
743,598
|
|
2022
|
|
|
5,037
|
|
|
640,073
|
|
Later years
|
|
|
25,743
|
|
|
3,054,697
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
89,880
|
|
$
|
7,346,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(24,565
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
65,315
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Stock Option and Stock Award Plans
The Company recognizes share-based compensation expense in accordance with ASC 718, "CompensationStock Compensation." Expense is recognized over the requisite service period
of the award, net of an estimate for the impact of forfeitures. Operating results for fiscal 2017, 2016 and 2015 include $23,482, $37,948 and $23,390 of compensation costs related to the Company's
stock-based compensation arrangements.
In
December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000 Plan) under which 22,000 shares of common stock are reserved for granting of restricted stock, stock options,
phantom stock, stock bonus awards and other stock awards at the discretion of the Board of Directors.
In
February 2001, the Company adopted the 2001 Stock Option Plan (the 2001 Plan) which was approved by the shareholders under which 20,000 shares of common stock are authorized for
granting of stock options at the discretion of the Board of Directors.
In
April 2004, the Board of Directors adopted the 2004 Omnibus Equity Plan, which was approved by the shareholders. Under the plan, 20,000 shares of common stock are authorized for
granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors.
In
January 2007, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2006 Omnibus Equity Plan. Under the plan, 50,000 shares of Rite Aid common
stock are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors.
122
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
In June 2010, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2010 Omnibus Equity Plan. Under the plan, 35,000 shares of Rite Aid common stock
are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors. The adoption of the 2010
Omnibus Equity Plan became effective on June 23, 2010.
In
June 2012, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2012 Omnibus Equity Plan. Under the plan, 28,500 shares of Rite Aid common stock
are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors. The adoption of the 2012
Omnibus Equity Plan became effective on June 21, 2012.
In
June 2014, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2014 Omnibus Equity Plan. Under the plan, 58,000 shares of Rite Aid common stock
plus any shares of common stock remaining available for grant under the Rite Aid Corporation 2010 Omnibus Equity Plan and the Rite Aid Corporation 2012 Omnibus Equity Plan as of the effective date of
the 2014 Plan (provided that no more than 25,000 shares may be granted as incentive stock options) are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and
other equity based awards at the discretion of the Board of Directors. The adoption of the 2014 Omnibus Equity Plan became effective on June 19, 2014.
All
of the plans provide for the Board of Directors (or at its election, the Compensation Committee) to determine both when and in what manner options may be exercised; however, it may
not be more than 10 years from the date of grant. All of the plans provide that stock options may be granted at prices that are not less than the fair market value of a share of common stock on
the date of grant. The aggregate number of shares authorized for issuance for all plans is 54,337 as of March 4, 2017.
The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes-Merton option-pricing model. The
following weighted average assumptions were used for options granted in fiscal 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Expected stock price volatility(1)
|
|
|
N/A
|
|
|
56
|
%
|
|
74
|
%
|
Expected dividend yield(2)
|
|
|
N/A
|
|
|
0.00
|
%
|
|
0.00
|
%
|
Risk-free interest rate(3)
|
|
|
N/A
|
|
|
1.70
|
%
|
|
1.70
|
%
|
Expected option life(4)
|
|
|
N/A
|
|
|
5.5 years
|
|
|
5.5 years
|
|
-
(1)
-
The
expected volatility is based on the historical volatility of the stock price over the most recent period equal to expected life of the option.
123
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
-
(2)
-
The
dividend rate that will be paid out on the underlying shares during the expected term of the options. The Company does not currently pay dividends on its common
stock, as such, the dividend rate is assumed to be zero percent.
-
(3)
-
The
risk free interest rate is equal to the rate available on United States Treasury zero-coupon issues as of the grant date of the option with a remaining term
equal to the expected term.
-
(4)
-
The
period of time for which the option is expected to be outstanding. The Company analyzed historical exercise behavior to estimate the life.
The
weighted average fair value of options granted during fiscal 2017, 2016 and 2015 was $0.00, $4.45 and $4.43, respectively. Following is a summary of stock option transactions for the
fiscal years ended March 4, 2017, February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 1, 2014
|
|
|
55,966
|
|
$
|
1.65
|
|
|
|
|
|
|
|
Granted
|
|
|
3,097
|
|
|
7.04
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,485
|
)
|
|
1.46
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(910
|
)
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2015
|
|
|
41,668
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,579
|
|
|
8.68
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,400
|
)
|
|
1.78
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(722
|
)
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 27, 2016
|
|
|
38,125
|
|
$
|
2.73
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
|
|
N/A
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,556
|
)
|
|
1.95
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(679
|
)
|
|
5.60
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 4, 2017
|
|
|
33,890
|
|
$
|
2.75
|
|
|
4.76
|
|
$
|
107,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at March 4, 2017
|
|
|
32,960
|
|
$
|
2.66
|
|
|
4.69
|
|
$
|
106,158
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at March 4, 2017
|
|
|
29,198
|
|
$
|
2.08
|
|
|
4.31
|
|
$
|
104,365
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of March 4, 2017, there was $12,376 of total unrecognized pre-tax compensation costs related to unvested stock options, net of forfeitures. These costs are expected to be
recognized over a weighted average period of 1.87 years.
Cash
received from stock option exercises for fiscal 2017, 2016 and 2015 was $6,951, $11,376 and $24,117, respectively. The income tax benefit from stock options for fiscal 2017, 2016
and 2015 was
124
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
$421,
$11,764 and $30,099, respectively. The total intrinsic value of stock options exercised for fiscal 2017, 2016 and 2015 was $20,475, $42,207 and $92,355, respectively.
Typically,
stock options granted vest, and are subsequently exercisable in equal annual installments over a four-year period for employees.
The Company provides restricted stock grants to associates under plans approved by the stockholders. Shares awarded under the plans typically
vest in equal annual installments over a three-year period. Unvested shares are forfeited upon termination of employment. Following is a summary of restricted stock transactions for the fiscal years
ended March 4, 2017, February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance at March 1, 2014
|
|
|
10,056
|
|
$
|
1.66
|
|
Granted
|
|
|
3,303
|
|
|
7.01
|
|
Vested
|
|
|
(5,239
|
)
|
|
1.54
|
|
Cancelled
|
|
|
(454
|
)
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2015
|
|
|
7,666
|
|
$
|
3.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,752
|
|
|
8.60
|
|
Vested
|
|
|
(5,140
|
)
|
|
2.94
|
|
Cancelled
|
|
|
(420
|
)
|
|
6.89
|
|
|
|
|
|
|
|
|
|
Balance at February 27, 2016
|
|
|
4,858
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,613
|
|
|
7.73
|
|
Vested
|
|
|
(2,222
|
)
|
|
6.28
|
|
Cancelled
|
|
|
(426
|
)
|
|
7.84
|
|
|
|
|
|
|
|
|
|
Balance at March 4, 2017
|
|
|
5,823
|
|
$
|
7.87
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
March 4, 2017, there was $31,605 of total unrecognized pre-tax compensation costs related to unvested restricted stock grants, net of forfeitures. These costs are expected to
be recognized over a weighted average period of 1.95 years.
The
total fair value of restricted stock vested during fiscal years 2017, 2016 and 2015 was $13,951, $15,104 and $8,090, respectively.
Beginning in fiscal 2015, the Company provided certain of its associates with performance based incentive plans under which the associates will
receive a certain number of shares of the Company's common stock based on the Company meeting certain financial and performance goals. If such goals
125
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
are
not met, no stock-based compensation expense is recognized and any recognized stock-based compensation expense is reversed. The Company incurred $(6,070), $12,634 and $1,769 related to these
performance based incentive plans for fiscal 2017, 2016 and 2015, respectively, which is recorded as a component of stock-based compensation expense.
17. Reclassifications from Accumulated Other Comprehensive Loss
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 fiscal years ended March 4, 2017, February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 4, 2017
(53 Weeks)
|
|
February 27, 2016
(52 Weeks)
|
|
February 28, 2015
(52 Weeks)
|
|
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
(47,781
|
)
|
$
|
(47,781
|
)
|
$
|
(45,850
|
)
|
$
|
(45,850
|
)
|
$
|
(37,334
|
)
|
$
|
(37,334
|
)
|
Other comprehensive (loss) income before reclassifications, net of $1,553, $(3,162), and $(7,506) tax expense (benefit)
|
|
|
2,356
|
|
|
2,356
|
|
|
(3,633
|
)
|
|
(3,633
|
)
|
|
(10,578
|
)
|
|
(10,578
|
)
|
Amounts reclassified from accumulated other comprehensive loss to net income, net of $2,047, $1,481, and $1,464 tax expense
|
|
|
3,108
|
|
|
3,108
|
|
|
1,702
|
|
|
1,702
|
|
|
2,062
|
|
|
2,062
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
(42,317
|
)
|
$
|
(42,317
|
)
|
$
|
(47,781
|
)
|
$
|
(47,781
|
)
|
$
|
(45,850
|
)
|
$
|
(45,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
126
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
17. Reclassifications from Accumulated Other Comprehensive Loss (Continued)
The
following table summarizes the effects on net income of significant amounts classified out of each component of accumulated other comprehensive loss for the fiscal years ended
March 4, 2017, February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
|
|
|
Amount reclassified from
accumulated other comprehensive loss
|
|
|
Details about
accumulated other
comprehensive loss
components
|
|
March 4,
2017
(53 Weeks)
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
Affected line item in the
consolidated statements of operations
|
Defined benefit pension plans
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a)
|
|
$
|
|
|
$
|
(67
|
)
|
$
|
(240
|
)
|
Selling, general and administrative expenses
|
Amortization of unrecognized net loss(a)
|
|
|
(5,155
|
)
|
|
(3,116
|
)
|
|
(3,286
|
)
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,155
|
)
|
|
(3,183
|
)
|
|
(3,526
|
)
|
Total before income tax expense
|
|
|
|
2,047
|
|
|
1,481
|
|
|
1,464
|
|
Income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(3,108
|
)
|
$
|
(1,702
|
)
|
$
|
(2,062
|
)
|
Net of income tax expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
See
Note 18, Retirement Plans for additional details.
18. Retirement Plans
The Company and its subsidiaries sponsor several retirement plans that are primarily 401(k) defined contribution plans covering nonunion
associates and certain union associates. The Company does not contribute to all of the plans. In accordance with those plan provisions, the Company matches 100% of a participant's pretax payroll
contributions, up to a maximum of 3% of such participant's pretax annual compensation. Thereafter, the Company will match 50% of the participant's additional pretax payroll contributions, up to a
maximum of 2% of such participant's additional pretax annual compensation. Total expense recognized for the above plans was $68,393 in fiscal 2017, $65,118 in fiscal 2016 and $60,552 in fiscal 2015.
The
Company sponsors a Supplemental Executive Retirement Plan ("SERP") for its officers, which is a defined contribution plan that is subject to a five year graduated vesting schedule.
The expense recognized for the SERP was $16,921 in fiscal 2017, $1,377 in fiscal 2016 and $8,748 in fiscal 2015.
127
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
The Company and its subsidiaries also sponsor a qualified defined benefit pension plan that requires benefits to be paid to eligible associates
based upon years of service and, in some cases, eligible compensation. The Company's funding policy for The Rite Aid Pension Plan (The "Defined Benefit Pension Plan") is to contribute the minimum
amount required by the Employee Retirement Income Security Act of 1974. However, the Company may, at its sole discretion, contribute additional funds to the plan. The Company made contributions of $0
in fiscal 2017, $0 in fiscal 2016 and $1,159 in fiscal 2015.
The
Company also maintains a nonqualified executive retirement plan for certain former employees who, pursuant to their employment agreements, did not participate in the SERP. The
Company no longer enrolls new participants into this plan. These participants generally receive an annual benefit payable monthly over fifteen years. This nonqualified defined benefit plan is
unfunded.
Net
periodic pension expense and other changes recognized in other comprehensive income for the defined benefit pension plans and the nonqualified executive retirement plan included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
Service cost
|
|
$
|
1,291
|
|
$
|
1,498
|
|
$
|
2,543
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
|
6,634
|
|
|
6,398
|
|
|
6,474
|
|
|
436
|
|
|
475
|
|
|
542
|
|
Expected return on plan assets
|
|
|
(4,512
|
)
|
|
(6,330
|
)
|
|
(7,339
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
|
|
|
67
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss (gain)
|
|
|
5,085
|
|
|
3,690
|
|
|
2,392
|
|
|
70
|
|
|
(574
|
)
|
|
894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
8,498
|
|
$
|
5,323
|
|
$
|
4,310
|
|
$
|
506
|
|
$
|
(99
|
)
|
$
|
1,436
|
|
Other changes recognized in other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net (gain) loss arising during period
|
|
$
|
(3,979
|
)
|
$
|
7,369
|
|
$
|
17,190
|
|
$
|
70
|
|
$
|
(574
|
)
|
$
|
894
|
|
Prior service cost arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service costs
|
|
|
|
|
|
(67
|
)
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net (loss)
gain
|
|
|
(5,085
|
)
|
|
(3,690
|
)
|
|
(2,392
|
)
|
|
(70
|
)
|
|
574
|
|
|
(894
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in other comprehensive loss
|
|
|
(9,064
|
)
|
|
3,612
|
|
|
14,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in pension expense and other comprehensive loss
|
|
$
|
(566
|
)
|
$
|
8,935
|
|
$
|
18,868
|
|
$
|
506
|
|
$
|
(99
|
)
|
$
|
1,436
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
128
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
The table below sets forth reconciliation from the beginning of the year for both the benefit obligation and plan assets of the Company's defined benefit plans, as well as the funded
status and amounts recognized in the Company's balance sheet as of March 4, 2017 and February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of prior year
|
|
$
|
156,474
|
|
$
|
167,256
|
|
$
|
11,046
|
|
$
|
12,685
|
|
Service cost
|
|
|
1,291
|
|
|
1,498
|
|
|
|
|
|
|
|
Interest cost
|
|
|
6,634
|
|
|
6,398
|
|
|
436
|
|
|
475
|
|
Distributions
|
|
|
(7,449
|
)
|
|
(7,408
|
)
|
|
(1,504
|
)
|
|
(1,540
|
)
|
Change due to change in assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial loss (gain)
|
|
|
7,399
|
|
|
(11,270
|
)
|
|
70
|
|
|
(574
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
164,349
|
|
$
|
156,474
|
|
$
|
10,048
|
|
$
|
11,046
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
110,217
|
|
$
|
129,934
|
|
$
|
|
|
$
|
|
|
Employer contributions
|
|
|
|
|
|
|
|
|
1,504
|
|
|
1,540
|
|
Actual return on plan assets
|
|
|
15,890
|
|
|
(12,309
|
)
|
|
|
|
|
|
|
Distributions (including expenses paid by the plan)
|
|
|
(7,449
|
)
|
|
(7,408
|
)
|
|
(1,504
|
)
|
|
(1,540
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
118,658
|
|
$
|
110,217
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(45,691
|
)
|
$
|
(46,257
|
)
|
$
|
(10,048
|
)
|
$
|
(11,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(45,691
|
)
|
$
|
(46,257
|
)
|
$
|
(10,048
|
)
|
$
|
(11,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Accrued pension liability
|
|
|
(45,691
|
)
|
|
(46,257
|
)
|
|
(10,048
|
)
|
|
(11,046
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(45,691
|
)
|
$
|
(46,257
|
)
|
$
|
(10,048
|
)
|
$
|
(11,046
|
)
|
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(44,761
|
)
|
$
|
(53,825
|
)
|
$
|
|
|
$
|
|
|
Prior service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
(44,761
|
)
|
$
|
(53,825
|
)
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
estimated net actuarial loss and prior service cost amounts that will be amortized from accumulated other comprehensive loss into net periodic pension expense in fiscal 2018 are
$3,425 and $0, respectively.
The
accumulated benefit obligation for the defined benefit pension plan was $164,349 and $156,474 as of March 4, 2017 and February 27, 2016, respectively. The accumulated
benefit obligation
129
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
for
the nonqualified executive retirement plan was $10,048 and $11,046 as of March 4, 2017 and February 27, 2016, respectively.
The
significant actuarial assumptions used for all defined benefit plans to determine the benefit obligation as of March 4, 2017, February 27, 2016 and February 28,
2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
Discount rate
|
|
|
4.00
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
Rate of increase in future compensation levels
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
6.50
|
%
|
|
6.50
|
%
|
|
6.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Weighted
average assumptions used to determine net cost for the fiscal years ended March 4, 2017, February 27, 2016 and February 28, 2015 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
|
Discount rate
|
|
|
4.25
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Rate of increase in future compensation levels
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
6.50
|
%
|
|
6.50
|
%
|
|
7.75
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
To
develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well
as the target asset
allocation of the pension portfolio. This resulted in the selection of the 6.50% long-term rate of return on plan assets assumption for fiscal 2017, 2016 and 2015.
The
Company's pension plan asset allocations at March 4, 2017 and February 27, 2016 by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
March 4,
2017
|
|
February 27,
2016
|
|
Equity securities
|
|
|
52
|
%
|
|
49
|
%
|
Fixed income securities
|
|
|
48
|
%
|
|
51
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
investment objectives of the Defined Benefit Pension Plan, the only defined benefit plan with assets, are to:
-
-
Achieve a rate of return on investments that exceeds inflation over a full market cycle and is consistent with actuarial assumptions;
-
-
Balance the correlation between assets and liabilities by diversifying the portfolio among various asset classes to address return risk and
interest rate risk;
130
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
-
-
Balance the allocation of assets between the investment managers to minimize concentration risk;
-
-
Maintain liquidity in the portfolio sufficient to meet plan obligations as they come due; and
-
-
Control administrative and management costs.
The
asset allocation established for the pension investment program reflects the risk tolerance of the Company, as determined by:
-
-
the current and anticipated financial strength of the Company;
-
-
the funded status of the plan; and
-
-
plan liabilities.
Investments
in both the equity and fixed income markets will be maintained, recognizing that historical results indicate that equities (primarily common stocks) have higher expected
returns than fixed income investments. It is also recognized that the correlation between assets and liabilities must be balanced to address higher volatility of equity investments (return risk) and
interest rate risk.
The
following targets are to be applied to the allocation of plan assets.
|
|
|
|
|
Category
|
|
Target
Allocation
|
|
U.S. equities
|
|
|
39
|
%
|
International equities
|
|
|
13
|
%
|
U.S. fixed income
|
|
|
48
|
%
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company expects to contribute $4,900 to the Defined Benefit Pension Plan and make payments of $1,241 to participants of the Nonqualified Executive Retirement Plan during fiscal 2018.
Common and Collective Trusts
Common collective trust funds are stated at fair value as determined by the issuer of the common collective trust funds based on the net asset
value ("NAV") of the underlying investments in accordance with ASC 820. There are generally no restrictions on redemptions from these funds and no unfunded commitments to invest. In accordance with
ASC subtopic 820-10, certain investments that were measured at NAV per shared (or its equivalent) have not been classified in the fair value hierarchy. The underlying investments mainly consist of
equity and fixed income securities funds that are valued based on the daily closing price as reported by the fund.
The
proceeding methods described may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, although the
Company believes its valuation methods are appropriate and consistent with other market participants, the use of different
131
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
methodologies
or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement at March 4, 2017.
The
following table sets forth by level within the fair value hierarchy a summary of the plan's investments measured at fair value on a recurring basis as of March 4, 2017 and
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at March 4, 2017
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
15,348
|
|
Large Cap
|
|
|
|
|
|
|
|
|
|
|
|
32,413
|
|
Small-Mid Cap
|
|
|
|
|
|
|
|
|
|
|
|
14,083
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Credit Bond Index
|
|
|
|
|
|
|
|
|
|
|
|
47,694
|
|
20+ Year Treasury STRIPS
|
|
|
|
|
|
|
|
|
|
|
|
7,563
|
|
Intermediate Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
639
|
|
Other types of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
918
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
118,658
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 27, 2016
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
14,414
|
|
Large Cap
|
|
|
|
|
|
|
|
|
|
|
|
28,188
|
|
Small-Mid Cap
|
|
|
|
|
|
|
|
|
|
|
|
11,684
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Credit Bond Index
|
|
|
|
|
|
|
|
|
|
|
|
43,130
|
|
20+ Year Treasury STRIPS
|
|
|
|
|
|
|
|
|
|
|
|
10,929
|
|
Intermediate Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
41
|
|
Other types of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
|
|
|
|
|
|
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
110,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the
valuation hierarchy.
132
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
Following
are the future benefit payments expected to be paid for the Defined Benefit Pension Plan and the nonqualified executive retirement plan during the years indicated:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified
Executive
Retirement Plan
|
|
2018
|
|
$
|
8,091
|
|
$
|
1,241
|
|
2019
|
|
|
8,190
|
|
|
1,217
|
|
2020
|
|
|
8,408
|
|
|
1,137
|
|
2021
|
|
|
8,587
|
|
|
969
|
|
2022
|
|
|
8,785
|
|
|
874
|
|
2023 - 2027
|
|
|
45,960
|
|
|
3,550
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
88,021
|
|
$
|
8,988
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company participates in various multi-employer union pension plans that are not sponsored by the Company. Total expenses recognized for the
multi-employer plans were $26,104 in fiscal 2017, $25,966 in fiscal 2016 and $24,261 in fiscal 2015.
19. Multiemployer Plans that Provide Pension Benefits
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of its union-represented
employees. The risks of participating in these multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide
benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating
employers. Additionally, if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of
the plan, referred to as a withdrawal liability.
133
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
19. Multiemployer Plans that Provide Pension Benefits (Continued)
The Company's participation in these plans for the annual period ended March 4, 2017 is outlined in the table below. The "EIN/Pension Plan Number" column provides the Employer
Identification Number (EIN) and the three- digit plan number, if applicable. The most recent Pension Protection Act (PPA) zone status available for fiscal 2017 and fiscal 2016 is for the plan
year- ends as indicated below. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are
generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The "FIP/RP Status
Pending/Implemented" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. In addition to regular plan
contributions, the Company may be subject to a surcharge if the plan is in the red zone. The "Surcharge Imposed" column indicates whether a surcharge has been imposed on contributions to the plan. The
last two columns list the expiration date(s) of the collective-bargaining agreement(s) to which the plans are subject and any minimum funding requirements. There have been no significant changes that
affect the comparability of total employer contributions of fiscal years 2017, 2016, and 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection
Act Zone Status
|
|
|
|
Contributions of the
Company
|
|
|
|
Expiration
Date of
Collective-
Bargaining
Agreement
|
|
|
|
|
|
|
FIP/ RP
Status
Pending/
Implemented
|
|
|
|
|
|
|
EIN/Pension
Plan Number
|
|
Surcharge
Imposed
|
|
Minimum Funding
Requirements
|
Pension
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2015
|
1199 SEIU Health Care Employees Pension Fund
|
|
|
13-3604862-001
|
|
|
Green
12/31/2015
|
|
|
Green
12/31/2014
|
|
No
|
|
$
|
11,920
|
|
$
|
12,959
|
|
$
|
11,568
|
|
No
|
|
|
4/18/2015
|
|
Contribution rate of 10.76% of gross wages earned per associate beginning 01/01/2016.
Contribution rate of 10.22% of gross wages earned per associate from 01/01/2015
through 12/31/2015. Contribution rate of 11.25% of gross wages earned per associate through 12/31/2014.
|
Southern California United Food and Commercial Workers Unions and Drug Employers Pension Fund
|
|
|
51-6029925-001
|
|
|
Red
12/31/2016
|
|
|
Red
12/31/2015
|
|
Implemented
|
|
|
8,021
|
|
|
7,552
|
|
|
7,002
|
|
No
|
|
|
7/14/2018
|
|
Subsequent to 01/01/2016 contributions of $1.41 per hour worked.
From 01/01/2015 through 12/31/2015 contributions of $1.328 per hour worked for pharmacists and $0.602 per
hour worked for non pharmacists.
Prior to 01/01/2015 contributions of $1.242 per hour worked for pharmacists and $0.563 per hour worked for non pharmacists.
|
134
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
19. Multiemployer Plans that Provide Pension Benefits (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Protection
Act Zone Status
|
|
|
|
Contributions of the
Company
|
|
|
|
Expiration
Date of
Collective-
Bargaining
Agreement
|
|
|
|
|
|
|
FIP/ RP
Status
Pending/
Implemented
|
|
|
|
|
|
|
EIN/Pension
Plan Number
|
|
Surcharge
Imposed
|
|
Minimum Funding
Requirements
|
Pension
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2015
|
UFCW Pharmacists, Clerks and Drug Employers Pension Trust
|
|
|
94-2518312-001
|
|
|
Green
12/31/2016
|
|
|
Green
12/31/2015
|
|
No
|
|
|
2,970
|
|
|
3,006
|
|
|
2,938
|
|
No
|
|
|
7/13/2019
|
|
Effective 09/01/2014, contribution rate frozen at $0.55 per hour worked for associates. Prior to 9/01/2014, contribution rate of $0.57 per
hour worked for associates.
|
United Food and Commercial Workers Union-Employer Pension Fund
|
|
|
34-6665155-001
|
|
|
Red
9/30/2016
|
|
|
Red
9/30/2015
|
|
Implemented
|
|
|
827
|
|
|
732
|
|
|
667
|
|
No
|
|
|
12/31/2017
|
|
Effective 02/05/207 contribution rate of $1.89 per hour worked.
Effective 02/07/2016 through 02/04/2017 contribution rate of $1.76 per hour worked.
Effective 02/02/2015 through 02/06/2016 contribution rate of $1.62 per hour worked. Contribution rate of $1.49 per hour worked prior to 02/02/2015.
|
United Food and Commercial Workers Union Local 880Mercantile Employers Joint Pension Fund
|
|
|
51-6031766-001
|
|
|
Yellow
9/30/2016
|
|
|
Yellow
9/30/2015
|
|
Implemented
|
|
|
504
|
|
|
454
|
|
|
480
|
|
No
|
|
|
12/31/2017
|
|
Effective 01/01/2017 contribution rate $1.88 per hour worked.
Effective 01/01/2016 through 12/31/2016 contribution rate of $1.79 per hour worked.
Effective 10/01/2015 through 12/31/2015 contribution rate of $1.70 per hour worked.
Effective 01/01/2015 through
09/30/2015 contribution rate of $1.61 per hour worked.
Effective 10/01/2014 through 12/31/2014 contribution rate of $1.73 per hour worked.
Contribution of $1.52 per hour worked prior to 10/01/2014.
|
Other Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,862
|
|
|
1,263
|
|
|
1,606
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
26,104
|
|
$
|
25,966
|
|
$
|
24,261
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
135
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
19. Multiemployer Plans that Provide Pension Benefits (Continued)
The
Company was listed in these plans Forms 5500 as providing more than 5 percent of the total contributions for the following plans and plan years:
|
|
|
Pension Fund
|
|
Year Contributions to Plan
Exceeded More Than 5 Percent
of Total Contributions (as of
the Plan's Year-End)
|
UFCW Pharmacists, Clerks and Drug Employers Pension Trust
|
|
12/31/2015 and 12/31/2014
|
Southern California United Food and Commercial Workers Unions and Drug Employers Pension Fund
|
|
12/31/2015 and 12/31/2014
|
United Food & Commercial Workers Union- Employer Pension Fund
|
|
9/30/2015 and 9/30/2014
|
United Food & Commercial Workers Union Local 880Mercantile Employers Joint Pension Fund
|
|
9/30/2015 and 9/30/2014
|
At
the date the Company's financial statements were issued, certain Forms 5500 were not available.
During
fiscal 2017, 2016 and 2015, the Company did not withdraw from any plans or incur any additional withdrawal liabilities.
20. Segment Reporting
Prior to June 24, 2015, the Company's operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal
management reporting to reflect two reportable segments, its retail drug stores ("Retail Pharmacy"), and its pharmacy services ("Pharmacy Services") segments.
The
Retail Pharmacy segment's primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full
selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit
management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy
Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government's Medicare Part D program.
The
Parent Company's chief operating decision makers are its Parent Company Chief Executive Officer, Parent Company President and CEORetail Pharmacy,
CEOPharmacy Services, Chief Financial Officer and its Senior Executive Vice Presidents (collectively the "CODM"). The CODM has ultimate responsibility for enterprise decisions. The CODM
determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and
Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. The CODM relies on internal management
reporting that analyzes enterprise results on certain key performance indicators, namely, revenues, gross profit, and Adjusted EBITDA.
136
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
20. Segment Reporting (Continued)
The
following table is a reconciliation of the Company's business segments to the consolidated financial statements for the fiscal years ended March 4, 2017, February 27,
2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Intersegment
Eliminations(1)
|
|
Consolidated
|
|
March 4, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,816,669
|
|
$
|
6,393,884
|
|
$
|
(365,480
|
)
|
$
|
32,845,073
|
|
Gross Profit
|
|
|
7,381,333
|
|
|
392,732
|
|
|
|
|
|
7,774,065
|
|
Adjusted EBITDA(2)
|
|
|
948,906
|
|
|
188,235
|
|
|
|
|
|
1,137,141
|
|
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,865,931
|
|
$
|
4,103,513
|
|
$
|
(232,787
|
)
|
$
|
30,736,657
|
|
Gross Profit
|
|
|
7,595,429
|
|
|
230,826
|
|
|
|
|
|
7,826,255
|
|
Adjusted EBITDA(2)
|
|
|
1,300,905
|
|
|
101,357
|
|
|
|
|
|
1,402,262
|
|
February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,528,377
|
|
$
|
|
|
$
|
|
|
$
|
26,528,377
|
|
Gross Profit
|
|
|
7,576,732
|
|
|
|
|
|
|
|
|
7,576,732
|
|
Adjusted EBITDA(2)
|
|
|
1,322,843
|
|
|
|
|
|
|
|
|
1,322,843
|
|
-
(1)
-
Intersegment
eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy
segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis.
-
(2)
-
See
"Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per Diluted Share and Other Non-GAAP Measures" in MD&A for additional details.
The
following is a reconciliation of net income to Adjusted EBITDA for fiscal 2017, 2016 and 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 4,
2017
(53 weeks)
|
|
February 27,
2016
(52 weeks)
|
|
February 28,
2015
(52 weeks)
|
|
Net income
|
|
$
|
4,053
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
Interest expense
|
|
|
431,991
|
|
|
449,574
|
|
|
397,612
|
|
Income tax expense
|
|
|
29,689
|
|
|
139,297
|
|
|
158,951
|
|
Income tax valuation allowance increase/ (release)
|
|
|
14,703
|
|
|
(26,358
|
)
|
|
(1,841,304
|
)
|
Depreciation and amortization expense
|
|
|
568,231
|
|
|
509,212
|
|
|
416,628
|
|
LIFO (credit) charge
|
|
|
(6,620
|
)
|
|
11,163
|
|
|
(18,857
|
)
|
Lease termination and impairment charges
|
|
|
55,294
|
|
|
48,423
|
|
|
41,945
|
|
Loss on debt retirements, net
|
|
|
|
|
|
33,205
|
|
|
18,512
|
|
Other
|
|
|
39,800
|
|
|
72,281
|
|
|
40,183
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,137,141
|
|
$
|
1,402,262
|
|
$
|
1,322,843
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
137
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
20. Segment Reporting (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Eliminations(2)
|
|
Consolidated
|
|
March 4, 2017:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,664,216
|
|
$
|
3,087,143
|
|
$
|
(157,607
|
)
|
$
|
11,593,752
|
|
Goodwill
|
|
|
76,124
|
|
|
1,639,355
|
|
|
|
|
|
1,715,479
|
|
Additions to property and equipment and intangible assets
|
|
|
468,386
|
|
|
12,725
|
|
|
|
|
|
481,111
|
|
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,468,186
|
|
$
|
2,948,548
|
|
$
|
(139,724
|
)
|
$
|
11,277,010
|
|
Goodwill
|
|
|
76,124
|
|
|
1,637,351
|
|
|
|
|
|
1,713,475
|
|
Additions to property and equipment and intangible assets
|
|
|
667,719
|
|
|
2,276
|
|
|
|
|
|
669,995
|
|
-
(2)
-
As
of March 4, 2017 and February 27, 2016, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability
of $140,865 and $116,027, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of
$16,742 and $23,697, respectively, that represents amounts owed from the Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail
Pharmacy segment stores to purchase covered products.
21. Commitments, Contingencies and Guarantees
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.
138
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
After the announcement of the proposed Merger between the Company and Walgreens Boots Alliance, Inc. (WBA), ten (10) putative class action lawsuits were filed by purported
Company stockholders against the Company, its directors (the Individual Defendants, together with the Company, the Rite Aid Defendants), WBA and Victoria Merger Sub Inc. (Victoria) challenging
the transactions contemplated by the Merger agreement. Eight (8) of these actions were filed in the Court of Chancery of the State of Delaware (
Smukler v. Rite
Aid Corp., et al.
,
Hirschler v. Standley, et al.
,
Catelli v. Rite Aid Corp., et
al.
,
Orr v. Rite Aid Corp., et al.
,
DePietro v. Standley, et al.
,
Abadi v. Rite Aid Corp., et
al.
,
Mortman v. Rite Aid Corp., et al., Sachs Investment Grp., et al v. Standley, et
al
.). One (1) action was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (
Wilson v. Rite Aid Corp., et
al.
). The complaints in these nine (9) actions alleged primarily that the Individual Defendants breached their fiduciary duties by, among other things, agreeing to an
allegedly unfair and inadequate price, agreeing to deal protection devices that allegedly prevented the directors from obtaining higher offers from other interested buyers for the Company and
allegedly failing to protect against certain purported conflicts of interest in connection with the Merger. The complaints further alleged that the Company, WBA and/or Victoria aided and abetted these
alleged breaches of fiduciary duty. The complaints sought, among other things, to enjoin the closing of the Merger as well as money damages and attorneys' and experts' fees.
On
December 23, 2015, the eight (8) Delaware actions were consolidated in an action captioned
In re Rite Aid Corporation Stockholders
Litigation,
Consol. C.A. No. 11663-CB (the Consolidated Action). In addition to the claims asserted in the nine (9) complaints discussed above, the operative
pleading in the Consolidated Action also included allegations that the preliminary proxy statement contained material omissions, including with respect to the process that resulted in the Merger
agreement and the fairness opinion rendered by the Company's banker. On December 28, 2015, the plaintiffs in the Consolidated Action filed a motion for expedited proceedings, which the Court
orally denied at a hearing held on January 5, 2016. On March 11, 2016, the Court granted the plaintiffs' notice and proposed order voluntarily dismissing the Consolidated Action as moot,
while retaining jurisdiction solely for the purpose of adjudicating plaintiffs' counsel's anticipated application for an award of attorneys' fees and reimbursement of expenses. On April 15,
2016, the Company reached a settlement in principle related to this matter for an immaterial amount. On May 11, 2016, the Court entered a stipulated order regarding notice of payment thereof
and final dismissal of this matter.
A
tenth action was filed in the United States District Court for the Middle District of Pennsylvania (the Pennsylvania District Court), asserting a claim for violations of
Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria and a claim for violations of Section 20(a) of the Exchange Act against the
Individual Defendants and WBA (
Herring v. Rite Aid Corp., et al.
). The complaint in the
Herring
action alleges, among other things, that the Company and the Individual Defendants disseminated an allegedly false and materially misleading proxy. The complaint sought to enjoin the shareholder vote
on the proposed Merger, a declaration that the proxy was materially false and misleading in violation of federal securities laws and an award of money damages and attorneys' and experts' fees. On
January 14 and 16, 2016, respectively, the plaintiff in the
Herring
action filed a motion for preliminary injunction and a motion for expedited
discovery. On January 21, 2016, the Rite Aid Defendants filed a motion to dismiss the
Herring
complaint. At a
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
hearing
held on January 25, 2016, the Pennsylvania District Court orally denied the plaintiff's motion for expedited discovery and subsequently denied the plaintiff's motion for preliminary
injunction on January 28, 2016. On March 14, 2016, the Pennsylvania District Court appointed Jerry Herring, Don Michael Hussey and Joanna Pauli Hussey as lead plaintiffs for the
putative class and approved their selection of Robbins Geller Rudman & Dowd LLP as lead counsel. On April 14, 2016, the Pennsylvania District Court granted the lead plaintiffs'
unopposed motion to stay the
Herring
action for all purposes pending consummation of the Merger.
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, 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. On September 26, 2013, the Court granted Rule 23 class
certification of the New York store manager claims as to liability only, but denied it as to damages, and denied the Company's motion for decertification of the nationwide collective action claims.
The Company filed a motion seeking reconsideration of the Court's September 26, 2013 decision which motion was denied in June 2014. The Company subsequently filed a petition for an
interlocutory appeal of the Court's September 26, 2013 ruling with the U. S. Court of Appeals for the Second Circuit which petition was denied in September 2014. Notice of the Rule 23
class certification as to liability only has been sent to approximately 1,750 current and former store managers in the state of New York. Discovery related to the merits of the claims is ongoing. On
January 12, 2017, the parties reached a settlement in principle of this matter, for an immaterial amount of money, which is subject to preliminary and final approval by the court. On
January 19, 2017, the court entered an order staying the case indefinitely pending preliminary and final court approval. In the event the settlement does not receive preliminary and/or final
approval by the court, the litigation will
resume. If such occurs, the Company presently 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 is vigorously defending this lawsuit.
The
Company is currently a defendant in several 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, failure to pay for missed meals and rest periods, failure to reimburse business expenses and failure to provide employee seating (the "California Cases"). The
class actions pertaining to failure to reimburse business expenses and provide employee seating purport to be class actions and seek substantial damages. The single-plaintiff and multi-plaintiff
lawsuits regarding failure to pay overtime and failure to pay for missed meals and rest periods, in the aggregate, seek substantial damages. The
140
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
Company
has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the cases should be certified as class or representative actions.
In
the business expense class action (
Fenley v. Rite Aid Corporation, Santa Clara Superior Court
), the parties reached a settlement
pursuant to which the Company will pay an immaterial amount to settle the class claims. The court granted final approval of the settlement on February 3, 2017.
In
the employee seating case (
Hall v. Rite Aid Corporation, San Diego County Superior Court
), the Court, in October 2011, granted
the plaintiff's motion for class certification. The Company filed its motion for decertification, which motion was granted in November 2012. Plaintiff subsequently appealed the Court's order which
appeal was granted in May 2014. The Company filed a petition for review of the appellate court's decision with the California Supreme Court, which petition was denied in August 2014. Proceedings in
the
Hall
case were stayed pending a decision by the California Supreme Court in two similar cases. That decision was rendered on April 4, 2016. A
status conference in the case was held on November 18, 2016, at which time the court lifted the stay and scheduled the case for trial on January 26, 2018.
With
respect to the California Cases, the Company, at this time, is not able to predict either the outcome of these lawsuits or estimate a potential range of loss with respect to said
lawsuits and is vigorously defending them.
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 the relationship of Rite Aid's Rx Savings Program to 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 requesting additional information regarding both Rite Aid's Rx Savings Program and usual and customary charges. The Company responded to both of the
subpoenas. To enable the parties to discuss a possible resolution, the Medicaid Fraud Control Units of the several states, commonwealths, and the District of Columbia and the Company entered into an
agreement tolling the statute of limitations until October 7, 2015. The parties agreed to extend the tolling agreement and continue to exchange pertinent claims data in the near future. On
January 19, 2017, the District Court for the Eastern District of Michigan unsealed Relator's Second Amended Complaint against the Company. In its Complaint, Relator alleges that the Company
failed to report Rx Savings prices as its usual and customary charges under the Medicare Part D program and to federal and state Medicaid programs in 18 (eighteen) states and the District of
Columbia; and that the Company is thus liable under the federal False Claims Act and similar False Claims Act statutes operative in the states named in the Complaint. The federal government and the 18
(eighteen) states and the District of Columbia named in the lawsuit have elected not to intervene in this action. At this stage of the proceedings, 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 and is vigorously defending this lawsuit.
On
April 26, 2012, the Company received an administrative subpoena from the U.S. 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
141
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
received
a communication from the U.S. Attorney's Office ("USAO") for the Northern District of New York concerning an investigation of possible civil violations of the Combat Methamphetamine
Epidemic Act of 2005 ("CMEA"). Additional subpoenas were issued in 2013, 2014, and 2015 seeking broader documentation regarding PSE sales and recordkeeping requirements. Assistant U.S. Attorneys from
the Northern and Eastern Districts of New York and the Southern District of West Virginia are currently investigating, but no lawsuits or charges have been filed. Between September 2015 and
January 2017, the Company received several grand jury subpoenas from the U.S. District Court for the Southern District of West Virginia seeking additional information in connection with the
investigation of violations of the CMEA and/or the Controlled Substances Act ("CSA"). Violations of the CMEA or the CSA could result in the imposition of administrative, civil and/or criminal
penalties against the Company. The Company is cooperating with the government and continues to provide information responsive to the subpoenas. The Company has entered into a tolling agreement with
the USAOs in the Northern and Eastern Districts of New York and entered into a separate tolling agreement with the USAO in the Southern District of West Virginia. Discussions are underway to
attempt to resolve these matters with those USAOs and the Department of Justice, but whether an agreement can be reached and on what terms is uncertain. While the Company's management cannot predict
the outcome of these matters, it is possible that the Company's results of operations or cash flows could be materially affected by an unfavorable resolution. At this stage of the investigation, Rite
Aid is not able to predict the outcome of the investigation.
In
January 2013, the DEA, Los Angeles District Office, served an administrative subpoena on the Company seeking documents related to prescriptions by a certain prescriber. The USAO,
Central District of California, also contacted the Company about a related investigation into allegations that Rite Aid pharmacies filled certain controlled substance prescriptions for a number of
prescribers after their DEA registrations had expired or otherwise become invalid in violation of the federal Controlled Substances Act and DEA regulations. The Company responded to the administrative
subpoena and subsequent informal requests for information from the USAO. The Company met with the USAO and DEA in January 2014 regarding this matter. The Company entered into a tolling agreement with
the USAO. The Company recorded a legal accrual during the period ended March 1, 2014, which was revised during the period ending August 29, 2015. On February 28, 2017, the USAO,
Central District of California, and the Company entered into a settlement agreement resolving this matter for an immaterial amount. The settlement agreement is not an admission of liability by the
Company.
In
June 2013, the Company was served with a Civil Investigative Demand ("CID") by the United States Attorney's Office for the Eastern District of California (the "USAO"). The CID
requested records and responses to interrogatories regarding the Company's Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs designated as "Code 1" by the State
of California. The Company researched the government's allegations and refuted the government's position in writing and on conference calls. Subsequently, the USAO's office, along with the State of
California, Department of Justice, Bureau of Medical Fraud and Elder Abuse (the "Bureau"), requested the Company to produce certain prescription files related to Code 1 drugs. There has been a series
of four document productions in which the Company has produced prescription and associated documentation concerning Code 1 drugs: (i) on May 15, 2014, the government requested that the
142
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
Company
produce 60 prescriptions; (ii) on July 30, 2014, the government requested that the Company produce 30 prescriptions; (iii) on June 15, 2015, the government
requested that the Company produce 80 prescriptions; and (iv) on September 30, 2016, the Company agreed to produce an additional 242 prescriptions. The Company is continuing
discussions with the government.
Relator,
Matthew Omlansky, filed a
qui tam
action, State of California ex rel. Matthew Omlansky v. Rite Aid Corporation, on
behalf of the State of California against Rite Aid in the Superior Court of the State of California. In his Complaint, Relator alleges that Rite Aid violated the California False Claims Act by
(i) failing to comply with California rules governing the Company's reporting of its usual and customary prices; (ii) failing to dispense the least expensive equivalent generic drug in
certain circumstances, in violation of applicable regulations; and (iii) dispensing, and seeking reimbursement for, restricted brand name drugs without prior approval. Relator filed his Second
Amended Complaint on April 19, 2016 and Rite Aid filed its demurrer on July 29, 2016. On October 5, 2016, Rite Aid's demurrer was granted and plaintiff's complaint was dismissed
with leave for plaintiff to file an amended complaint. Plaintiff filed a Third Amended Complaint to which Rite Aid filed a second demurrer, which is pending. At this stage of the proceedings, Rite Aid
is unable to predict the outcome of its demurrer and Relator's suit.
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
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 could be materially affected by an unfavorable resolution of pending
litigation or contingencies.
22. Supplementary Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
March 4,
2017
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Cash paid for interest (net of capitalized amounts of $195, $196 and $145)
|
|
$
|
409,692
|
|
$
|
403,727
|
|
$
|
384,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
17,081
|
|
$
|
4,856
|
|
$
|
6,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
7,551
|
|
$
|
9,614
|
|
$
|
6,157
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment received for noncash consideration
|
|
$
|
746
|
|
$
|
3,011
|
|
$
|
1,600
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
37,325
|
|
$
|
69,417
|
|
$
|
87,916
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross borrowings from revolver
|
|
$
|
3,608,000
|
|
$
|
4,729,000
|
|
$
|
6,078,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross repayments to revolver
|
|
$
|
3,278,000
|
|
$
|
4,354,000
|
|
$
|
4,753,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
143
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
23. Related Party Transactions
There were receivables from related parties of $34 and $48 at March 4, 2017 and February 27, 2016, respectively.
As
contemplated by the pending Merger with WBA, on December 31, 2015, the Board of Directors of the Company approved the adoption of a retention and severance program upon the
recommendation of the Compensation Committee of the Board (the "Committee"), which was advised by the Committee's independent compensation consultant, to enhance employee retention and corporate
performance through the closing of the Merger, and authorized the Company to enter into individual retention award agreements with certain of its executive officers. The individual retention award
agreements provide for the lump-sum payment of the retention award on the one hundred twentieth day following the closing of the Merger (the "retention date"), subject to continued employment through
such retention date or upon the earlier termination of the recipient's employment by the Company without "cause" or by the recipient for "good reason" (as such terms are defined in the Company's 2014
Omnibus Equity Plan) (each referred to as a "qualifying termination"). The Company executed retention award agreements on December 31, 2015 with certain Company executive officers, which
provided for the grant of retention awards under the terms described above and, for tax planning purposes, provide for the accelerated payment of the executive's fiscal year 2016 bonus in 2015, the
accelerated lapse of restrictions on certain time-based restricted stock awards in 2015 and, to the extent necessary for one executive officer, the accelerated payment of the retention award in 2015,
in each case subject to repayment requirements on the part of the executive if the executive would not have otherwise become entitled to such payments. During fiscal 2016, the Company made advance
payments to certain executives of $500 for retention bonuses and $1,778 of fiscal 2016 performance bonuses for tax planning purposes.
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information
Rite Aid Corporation conducts the majority of its business through its subsidiaries. With the exception of EIC, substantially all of Rite Aid Corporation's 100 percent owned
subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed
notes (the "Subsidiary Guarantors"). Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility,
second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes, were minor. Accordingly, condensed consolidating financial information for the Company and
subsidiaries is not presented for those periods. Condensed consolidating financial information for the Company, its Subsidiary Guarantors and non-guarantor subsidiaries, is presented for periods
subsequent to the Acquisition.
For
the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by
Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company's Amended and Restated 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. Presented below is
condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the
144
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
non-guarantor
subsidiaries at March 4, 2017, February 27, 2016 and for the fiscal years ended March 4, 2017 and February 27, 2016. Separate financial statements for
Subsidiary Guarantors are not presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Balance Sheet
March 4, 2017
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
213,104
|
|
$
|
32,306
|
|
$
|
|
|
$
|
245,410
|
|
Accounts receivable, net
|
|
|
|
|
|
1,506,288
|
|
|
264,838
|
|
|
|
|
|
1,771,126
|
|
Intercompany receivable
|
|
|
|
|
|
215,862
|
|
|
|
|
|
(215,862
|
)(a)
|
|
|
|
Inventories, net of LIFO reserve of $0, $999,776, $0, $0, and $999,776
|
|
|
|
|
|
2,837,211
|
|
|
|
|
|
|
|
|
2,837,211
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
203,033
|
|
|
8,508
|
|
|
|
|
|
211,541
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
4,975,498
|
|
|
305,652
|
|
|
(215,862
|
)
|
|
5,065,288
|
|
Property, plant and equipment, net
|
|
|
|
|
|
2,251,692
|
|
|
|
|
|
|
|
|
2,251,692
|
|
Goodwill
|
|
|
|
|
|
1,715,479
|
|
|
|
|
|
|
|
|
1,715,479
|
|
Other intangibles, net
|
|
|
|
|
|
782,167
|
|
|
53,628
|
|
|
|
|
|
835,795
|
|
Deferred tax assets
|
|
|
|
|
|
1,505,564
|
|
|
|
|
|
|
|
|
1,505,564
|
|
Investment in subsidiaries
|
|
|
15,275,488
|
|
|
50,004
|
|
|
|
|
|
(15,325,492
|
)(b)
|
|
|
|
Intercompany receivable
|
|
|
|
|
|
7,331,675
|
|
|
|
|
|
(7,331,675
|
)(a)
|
|
|
|
Other assets
|
|
|
|
|
|
219,934
|
|
|
|
|
|
|
|
|
219,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
15,275,488
|
|
$
|
18,832,013
|
|
$
|
359,280
|
|
$
|
(22,873,029
|
)
|
$
|
11,593,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations
|
|
$
|
90
|
|
$
|
21,245
|
|
$
|
|
|
$
|
|
|
$
|
21,335
|
|
Accounts payable
|
|
|
|
|
|
1,609,025
|
|
|
4,884
|
|
|
|
|
|
1,613,909
|
|
Intercompany payable
|
|
|
|
|
|
|
|
|
215,862
|
|
|
(215,862
|
)(a)
|
|
|
|
Accrued salaries, wages and other current liabilities
|
|
|
66,365
|
|
|
1,236,297
|
|
|
67,342
|
|
|
|
|
|
1,370,004
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
66,455
|
|
|
2,866,567
|
|
|
288,088
|
|
|
(215,862
|
)
|
|
3,005,248
|
|
Long-term debt, less current maturities
|
|
|
7,263,288
|
|
|
|
|
|
|
|
|
|
|
|
7,263,288
|
|
Lease financing obligations, less current maturities
|
|
|
|
|
|
44,070
|
|
|
|
|
|
|
|
|
44,070
|
|
Intercompany payable
|
|
|
7,331,675
|
|
|
|
|
|
|
|
|
(7,331,675
|
)(a)
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
645,888
|
|
|
21,188
|
|
|
|
|
|
667,076
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,661,418
|
|
|
3,556,525
|
|
|
309,276
|
|
|
(7,547,537
|
)
|
|
10,979,682
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
614,070
|
|
|
15,275,488
|
|
|
50,004
|
|
|
(15,325,492
|
)(b)
|
|
614,070
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
15,275,488
|
|
$
|
18,832,013
|
|
$
|
359,280
|
|
$
|
(22,873,029
|
)
|
$
|
11,593,752
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany accounts receivable and accounts payable amounts.
-
(b)
-
Elimination
of investments in consolidated subsidiaries.
145
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Balance Sheet
February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
90,569
|
|
$
|
33,902
|
|
$
|
|
|
$
|
124,471
|
|
Accounts receivable, net
|
|
|
|
|
|
1,316,797
|
|
|
284,211
|
|
|
|
|
|
1,601,008
|
|
Intercompany receivable
|
|
|
|
|
|
224,220
|
|
|
|
|
|
(224,220)
|
(a)
|
|
|
|
Inventories, net of LIFO reserve of $0, $1,006,396, $0, $0, and $1,006,396
|
|
|
|
|
|
2,697,104
|
|
|
|
|
|
|
|
|
2,697,104
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
121,684
|
|
|
6,460
|
|
|
|
|
|
128,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
4,450,374
|
|
|
324,573
|
|
|
(224,220
|
)
|
|
4,550,727
|
|
Property, plant and equipment, net
|
|
|
|
|
|
2,255,398
|
|
|
|
|
|
|
|
|
2,255,398
|
|
Goodwill
|
|
|
|
|
|
1,713,475
|
|
|
|
|
|
|
|
|
1,713,475
|
|
Other intangibles, net
|
|
|
|
|
|
948,451
|
|
|
55,928
|
|
|
|
|
|
1,004,379
|
|
Deferred tax assets
|
|
|
|
|
|
1,539,141
|
|
|
|
|
|
|
|
|
1,539,141
|
|
Investment in subsidiaries
|
|
|
14,832,523
|
|
|
57,167
|
|
|
|
|
|
(14,889,690)
|
(b)
|
|
|
|
Intercompany receivable
|
|
|
|
|
|
7,270,869
|
|
|
|
|
|
(7,270,869)
|
(a)
|
|
|
|
Other assets
|
|
|
|
|
|
207,821
|
|
|
6,069
|
|
|
|
|
|
213,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,832,523
|
|
$
|
18,442,696
|
|
$
|
386,570
|
|
$
|
(22,384,779
|
)
|
$
|
11,277,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations
|
|
$
|
90
|
|
$
|
26,758
|
|
$
|
|
|
$
|
|
|
$
|
26,848
|
|
Accounts payable
|
|
|
|
|
|
1,541,984
|
|
|
813
|
|
|
|
|
|
1,542,797
|
|
Intercompany payable
|
|
|
|
|
|
|
|
|
224,220
|
|
|
(224,220)
|
(a)
|
|
|
|
Accrued salaries, wages and other current liabilities
|
|
|
65,743
|
|
|
1,274,074
|
|
|
87,433
|
|
|
|
|
|
1,427,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
65,833
|
|
|
2,842,816
|
|
|
312,466
|
|
|
(224,220
|
)
|
|
2,996,895
|
|
Long-term debt, less current maturities
|
|
|
6,914,393
|
|
|
|
|
|
|
|
|
|
|
|
6,914,393
|
|
Lease financing obligations, less current maturities
|
|
|
|
|
|
52,895
|
|
|
|
|
|
|
|
|
52,895
|
|
Intercompany payable
|
|
|
7,270,869
|
|
|
|
|
|
|
|
|
(7,270,869)
|
(a)
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
714,462
|
|
|
16,937
|
|
|
|
|
|
731,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,251,095
|
|
|
3,610,173
|
|
|
329,403
|
|
|
(7,495,089
|
)
|
|
10,695,582
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
581,428
|
|
|
14,832,523
|
|
|
57,167
|
|
|
(14,889,690)
|
(b)
|
|
581,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
14,832,523
|
|
$
|
18,442,696
|
|
$
|
386,570
|
|
$
|
(22,384,779
|
)
|
$
|
11,277,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany accounts receivable and accounts payable amounts.
-
(b)
-
Elimination
of investments in consolidated subsidiaries.
146
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Year Ended March 4, 2017
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
|
|
$
|
32,739,473
|
|
$
|
223,077
|
|
$
|
(117,477)
|
(a)
|
$
|
32,845,073
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
24,975,538
|
|
|
213,225
|
|
|
(117,755)
|
(a)
|
|
25,071,008
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
7,228,540
|
|
|
13,541
|
|
|
278
|
(a)
|
|
7,242,359
|
|
Lease termination and impairment expenses
|
|
|
|
|
|
55,294
|
|
|
|
|
|
|
|
|
55,294
|
|
Interest expense
|
|
|
414,208
|
|
|
17,796
|
|
|
(13
|
)
|
|
|
|
|
431,991
|
|
Gain on sale of assets, net
|
|
|
|
|
|
(4,024
|
)
|
|
|
|
|
|
|
|
(4,024
|
)
|
Equity in earnings of subsidiaries, net of tax
|
|
|
(418,261
|
)
|
|
5,101
|
|
|
|
|
|
413,160
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4,053
|
)
|
|
32,278,245
|
|
|
226,753
|
|
|
295,683
|
|
|
32,796,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
4,053
|
|
|
461,228
|
|
|
(3,676
|
)
|
|
(413,160
|
)
|
|
48,445
|
|
Income tax expense
|
|
|
|
|
|
42,967
|
|
|
1,425
|
|
|
|
|
|
44,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
4,053
|
|
$
|
418,261
|
|
$
|
(5,101
|
)
|
$
|
(413,160)
|
(b)
|
$
|
4,053
|
|
Total other comprehensive income (loss)
|
|
|
5,464
|
|
|
5,464
|
|
|
|
|
|
(5,464
|
)
|
|
5,464
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
9,517
|
|
$
|
423,725
|
|
$
|
(5,101
|
)
|
$
|
(418,624
|
)
|
$
|
9,517
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany revenues and expenses.
-
(b)
-
Elimination
of equity in earnings of subsidiaries.
147
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
|
|
$
|
30,731,771
|
|
$
|
162,620
|
|
$
|
(157,734)
|
(a)
|
$
|
30,736,657
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
22,910,402
|
|
|
154,838
|
|
|
(154,838)
|
(a)
|
|
22,910,402
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
7,004,321
|
|
|
11,921
|
|
|
(2,896)
|
(a)
|
|
7,013,346
|
|
Lease termination and impairment expenses
|
|
|
|
|
|
48,423
|
|
|
|
|
|
|
|
|
48,423
|
|
Interest expense
|
|
|
415,304
|
|
|
34,268
|
|
|
2
|
|
|
|
|
|
449,574
|
|
Loss on debt retirement, net
|
|
|
33,205
|
|
|
|
|
|
|
|
|
|
|
|
33,205
|
|
Loss on sale of assets, net
|
|
|
|
|
|
3,303
|
|
|
|
|
|
|
|
|
3,303
|
|
Equity in earnings of subsidiaries, net of tax
|
|
|
(613,974
|
)
|
|
3,972
|
|
|
|
|
|
610,002
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165,465
|
)
|
|
30,004,689
|
|
|
166,761
|
|
|
452,268
|
|
|
30,458,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
165,465
|
|
|
727,082
|
|
|
(4,141
|
)
|
|
(610,002
|
)
|
|
278,404
|
|
Income tax expense (benefit)
|
|
|
|
|
|
113,108
|
|
|
(169
|
)
|
|
|
|
|
112,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
165,465
|
|
$
|
613,974
|
|
$
|
(3,972
|
)
|
$
|
(610,002)
|
(b)
|
$
|
165,465
|
|
Total other comprehensive (loss) income
|
|
|
(1,931
|
)
|
|
(1,931
|
)
|
|
|
|
|
1,931
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
163,534
|
|
$
|
612,043
|
|
$
|
(3,972
|
)
|
$
|
(608,071
|
)
|
$
|
163,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany revenues and expenses.
-
(b)
-
Elimination
of equity in earnings of subsidiaries.
148
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended March 4, 2017
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(394,768
|
)
|
$
|
622,227
|
|
$
|
(1,596
|
)
|
$
|
|
|
$
|
225,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
|
|
|
(424,289
|
)
|
|
|
|
|
|
|
|
(424,289
|
)
|
Intangible assets acquired
|
|
|
|
|
|
(56,822
|
)
|
|
|
|
|
|
|
|
(56,822
|
)
|
Intercompany activity
|
|
|
|
|
|
(57,817
|
)
|
|
|
|
|
57,817
|
|
|
|
|
Proceeds from dispositions of assets and investments
|
|
|
|
|
|
16,852
|
|
|
|
|
|
|
|
|
16,852
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
|
|
|
(522,076
|
)
|
|
|
|
|
57,817
|
|
|
(464,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net proceeds from revolver
|
|
|
330,000
|
|
|
|
|
|
|
|
|
|
|
|
330,000
|
|
Principal payments on long-term debt
|
|
|
|
|
|
(21,239
|
)
|
|
|
|
|
|
|
|
(21,239
|
)
|
Change in zero balance cash accounts
|
|
|
|
|
|
43,080
|
|
|
|
|
|
|
|
|
43,080
|
|
Net proceeds from issuance of common stock
|
|
|
6,951
|
|
|
|
|
|
|
|
|
|
|
|
6,951
|
|
Excess tax benefit on stock options and restricted stock
|
|
|
|
|
|
543
|
|
|
|
|
|
|
|
|
543
|
|
Intercompany activity
|
|
|
57,817
|
|
|
|
|
|
|
|
|
(57,817
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
394,768
|
|
|
22,384
|
|
|
|
|
|
(57,817
|
)
|
|
359,335
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
|
|
|
122,535
|
|
|
(1,596
|
)
|
|
|
|
|
120,939
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
90,569
|
|
|
33,902
|
|
|
|
|
|
124,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
$
|
213,104
|
|
$
|
32,306
|
|
$
|
|
|
$
|
245,410
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company
Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(387,871
|
)
|
$
|
1,391,759
|
|
$
|
(6,486
|
)
|
$
|
|
|
$
|
997,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
|
|
|
(541,347
|
)
|
|
|
|
|
|
|
|
(541,347
|
)
|
Intangible assets acquired
|
|
|
|
|
|
(128,648
|
)
|
|
|
|
|
|
|
|
(128,648
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(1,778,377
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,778,377
|
)
|
Intercompany activity
|
|
|
(103,834
|
)
|
|
(794,422
|
)
|
|
|
|
|
898,256
|
|
|
|
|
Proceeds from sale-leaseback transaction
|
|
|
|
|
|
36,732
|
|
|
|
|
|
|
|
|
36,732
|
|
Proceeds from dispositions of assets and investments
|
|
|
|
|
|
9,782
|
|
|
|
|
|
|
|
|
9,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,882,211
|
)
|
|
(1,417,903
|
)
|
|
|
|
|
898,256
|
|
|
(2,401,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
1,800,000
|
|
Net proceeds from revolver
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
375,000
|
|
Principal payments on long-term debt
|
|
|
(650,079
|
)
|
|
(22,638
|
)
|
|
|
|
|
|
|
|
(672,717
|
)
|
Change in zero balance cash accounts
|
|
|
|
|
|
(62,878
|
)
|
|
|
|
|
|
|
|
(62,878
|
)
|
Net proceeds from issuance of common stock
|
|
|
11,376
|
|
|
|
|
|
|
|
|
|
|
|
11,376
|
|
Financing fees paid for early debt redemption
|
|
|
(26,003
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,003
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
|
|
|
22,884
|
|
|
|
|
|
|
|
|
22,884
|
|
Deferred financing costs paid
|
|
|
(34,634
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,634
|
)
|
Intercompany activity
|
|
|
794,422
|
|
|
63,446
|
|
|
40,388
|
|
|
(898,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,270,082
|
|
|
814
|
|
|
40,388
|
|
|
(898,256
|
)
|
|
1,413,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
|
|
|
(25,330
|
)
|
|
33,902
|
|
|
|
|
|
8,572
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
115,899
|
|
|
|
|
|
|
|
|
115,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
$
|
90,569
|
|
$
|
33,902
|
|
$
|
|
|
$
|
124,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
25. Interim Financial Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2017
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter(2)
|
|
Year
|
|
Revenues
|
|
$
|
8,184,181
|
|
$
|
8,029,806
|
|
$
|
8,089,726
|
|
$
|
8,541,360
|
|
$
|
32,845,073
|
|
Cost of revenues
|
|
|
6,289,881
|
|
|
6,113,063
|
|
|
6,194,866
|
|
|
6,473,198
|
|
|
25,071,008
|
|
Selling, general and administrative expenses
|
|
|
1,793,247
|
|
|
1,778,247
|
|
|
1,773,862
|
|
|
1,897,003
|
|
|
7,242,359
|
|
Lease termination and impairment charges
|
|
|
5,781
|
|
|
7,233
|
|
|
7,265
|
|
|
35,015
|
|
|
55,294
|
|
Interest expense
|
|
|
105,113
|
|
|
105,388
|
|
|
106,309
|
|
|
115,181
|
|
|
431,991
|
|
Loss (gain) on sale of assets, net
|
|
|
1,056
|
|
|
174
|
|
|
501
|
|
|
(5,755
|
)
|
|
(4,024
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,195,078
|
|
|
8,004,105
|
|
|
8,082,803
|
|
|
8,514,642
|
|
|
32,796,628
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income before income taxes
|
|
|
(10,897
|
)
|
|
25,701
|
|
|
6,923
|
|
|
26,718
|
|
|
48,445
|
|
Income tax (benefit) expense
|
|
|
(6,309
|
)
|
|
10,928
|
|
|
(8,087
|
)
|
|
47,860
|
|
|
44,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(4,588
|
)
|
$
|
14,773
|
|
$
|
15,010
|
|
$
|
(21,142
|
)
|
$
|
4,053
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted (loss) income per share(1)
|
|
$
|
(0.00
|
)
|
$
|
0.01
|
|
$
|
0.01
|
|
$
|
(0.02
|
)
|
$
|
0.00
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
|
Revenues
|
|
$
|
6,647,561
|
|
$
|
7,664,776
|
|
$
|
8,154,184
|
|
$
|
8,270,136
|
|
$
|
30,736,657
|
|
Cost of revenues
|
|
|
4,788,031
|
|
|
5,742,485
|
|
|
6,151,305
|
|
|
6,228,581
|
|
|
22,910,402
|
|
Selling, general and administrative expenses
|
|
|
1,699,585
|
|
|
1,725,826
|
|
|
1,777,647
|
|
|
1,810,288
|
|
|
7,013,346
|
|
Lease termination and impairment charges
|
|
|
5,022
|
|
|
9,637
|
|
|
7,011
|
|
|
26,753
|
|
|
48,423
|
|
Interest expense
|
|
|
123,607
|
|
|
115,410
|
|
|
106,879
|
|
|
103,678
|
|
|
449,574
|
|
Loss on debt retirements, net
|
|
|
|
|
|
33,205
|
|
|
|
|
|
|
|
|
33,205
|
|
Loss (gain) on sale of assets, net
|
|
|
39
|
|
|
281
|
|
|
3,331
|
|
|
(348
|
)
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,616,284
|
|
|
7,626,844
|
|
|
8,046,173
|
|
|
8,168,952
|
|
|
30,458,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31,277
|
|
|
37,932
|
|
|
108,011
|
|
|
101,184
|
|
|
278,404
|
|
Income tax expense
|
|
|
12,441
|
|
|
16,463
|
|
|
48,468
|
|
|
35,567
|
|
|
112,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,836
|
|
$
|
21,469
|
|
$
|
59,543
|
|
$
|
65,617
|
|
$
|
165,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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Basic income per share(1)
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.16
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Diluted income per share(1)
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.16
|
|
|
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-
(1)
-
Income
per share amounts for each quarter may not necessarily total to the yearly income per share due to the weighting of shares outstanding on a quarterly and
year-to-date basis.
-
(2)
-
The
interim financial results for the fourth quarter of fiscal 2017 includes 14 weeks.
151
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended March 4, 2017, February 27, 2016 and February 28, 2015
(In thousands, except per share amounts)
25. Interim Financial Results (Unaudited) (Continued)
During
the fourth quarter of fiscal 2017, the Company recorded facilities impairment charges of $30,493 and a LIFO credit of $47,881 due to lower deflation on pharmacy generics as
compared to a lower LIFO credit recognized at prior year end due to lower deflation on pharmacy generics.
During
the second quarter of 2016, the Company recorded a loss on debt retirement related to the August 2015 redemption of the outstanding 8.00% Notes as discussed in Note 14.
During the fourth quarter of fiscal 2016, the Company recorded facilities impairment charges of $16,401 and a LIFO credit of $6,796 due to lower deflation on pharmacy generics as compared to a larger
LIFO credit recognized at prior year end caused by lower pharmacy inventory due to its Purchasing and Delivery Arrangement.
26. Financial Instruments
The carrying amounts and fair values of financial instruments at March 4, 2017 and February 27, 2016 are listed as follows:
|
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2017
|
|
2016
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Variable rate indebtedness
|
|
$
|
3,368,484
|
|
$
|
3,404,225
|
|
$
|
3,027,675
|
|
$
|
3,025,500
|
|
Fixed rate indebtedness
|
|
$
|
3,894,894
|
|
$
|
4,152,374
|
|
$
|
3,886,808
|
|
$
|
4,210,416
|
|
Cash,
trade receivables and trade payables are carried at market value, which approximates their fair values due to the short-term maturity of these instruments. In addition, as of
March 4, 2017 and February 27, 2016, the Company had $6,874 and $6,069, respectively, of investments carried at amortized cost, as these investments are being held to maturity. As of
March 4, 2017, these investments are included as a component of prepaid expenses and other current assets. As of February 27, 2016, these investments are included as a component of other
assets. The Company believes the carrying value of these investments approximates their fair value.
The
following methods and assumptions were used in estimating fair value disclosures for financial instruments:
The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes are estimated based on the quoted market
price of the financial instruments.
The fair values of long-term indebtedness are estimated based on the quoted market prices of the financial instruments. If quoted market prices
were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics.
152
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
For the Years Ended March 4, 2017, February 27, 2016, and February 28, 2015
(dollars in
thousands)
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|
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|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from
accounts receivable
for estimated uncollectible
amounts:
|
|
Balance at
Beginning
of Period
|
|
Additions
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance at
End of
Period
|
|
Year ended March 4, 2017
|
|
$
|
32,820
|
|
$
|
72,876
|
|
$
|
74,805
|
|
$
|
30,891
|
|
Year ended February 27, 2016
|
|
$
|
31,247
|
|
$
|
71,984
|
|
$
|
70,411
|
|
$
|
32,820
|
|
Year ended February 28, 2015
|
|
$
|
26,873
|
|
$
|
66,319
|
|
$
|
61,945
|
|
$
|
31,247
|
|
153
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
|
|
|
|
|
|
|
RITE AID CORPORATION
|
|
|
By:
|
|
/s/ JOHN T. STANDLEY
John T. Standley
|
|
|
|
|
Chairman and Chief Executive Officer
|
|
|
Dated: May 3, 2017
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their respective
capacities on May 3, 2017.
|
|
|
Signature
|
|
Title
|
|
|
|
/s/ JOHN T. STANDLEY
John T. Standley
|
|
Chairman, Chief Executive Officer and Director (principal executive officer)
|
/s/ DARREN W. KARST
Darren W. Karst
|
|
Chief Financial Officer, Chief Administrative Officer and Senior Executive Vice President (principal financial officer)
|
/s/ DOUGLAS E. DONLEY
Douglas E. Donley
|
|
Chief Accounting Officer and Senior Vice President (principal accounting officer)
|
/s/ JOSEPH B. ANDERSON, JR
Joseph B. Anderson, Jr
|
|
Director
|
/s/ BRUCE G. BODAKEN
Bruce G. Bodaken
|
|
Director
|
/s/ DAVID R. JESSICK
David R. Jessick
|
|
Director
|
/s/ KEVIN E. LOFTON
Kevin E. Lofton
|
|
Director
|
154
Table of Contents
|
|
|
Signature
|
|
Title
|
|
|
|
/s/ MYRTLE S. POTTER
Myrtle S. Potter
|
|
Director
|
/s/ MICHAEL N. REGAN
Michael N. Regan
|
|
Director
|
/s/ FRANK A. SAVAGE
Frank A. Savage
|
|
Director
|
/s/ MARCY SYMS
Marcy Syms
|
|
Director
|
155
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