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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended September 2, 2017

 

OR

 

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

 

For the transition period from               to

 

Commission File Number: 1-5742

 

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

23-1614034
(I.R.S. Employer
Identification No.)

 

 

 

30 Hunter Lane,
Camp Hill, Pennsylvania

 

17011

(Address of principal executive offices)

 

(Zip Code)

 

Registrant’s telephone number, including area code: (717) 761-2633.

 

(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report):

Not Applicable

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (2) has been subject to such filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files).  Yes x  No o

 

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

 

Large Accelerated Filer x

 

Accelerated Filer o

 

Non-Accelerated Filer o
(Do not check if a
smaller reporting company)

 

Smaller reporting company o
Emerging growth companyo

 

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

 

Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange act).  Yes o  No x

 

The registrant had 1,063,959,987 shares of its $1.00 par value common stock outstanding as of September 22, 2017.

 

 

 



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RITE AID CORPORATION

 

TABLE OF CONTENTS

 

 

Cautionary Statement Regarding Forward-Looking Statements

3

 

 

 

 

PART I
FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

Financial Statements (unaudited):

 

 

Condensed Consolidated Balance Sheets as of September 2, 2017 and March 4, 2017

5

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended September 2, 2017 and August 27, 2016

6

 

Condensed Consolidated Statements of Comprehensive Income for the Thirteen Week Periods Ended September 2, 2017 and August 27, 2016

7

 

Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended September 2, 2017 and August 27, 2016

8

 

Condensed Consolidated Statements of Comprehensive Income for the Twenty-Six Week Periods Ended September 2, 2017 and August 27, 2016

9

 

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended September 2, 2017 and August 27, 2016

10

 

Notes to Condensed Consolidated Financial Statements

11

ITEM 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

33

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

45

ITEM 4.

Controls and Procedures

46

 

 

 

 

PART II
OTHER INFORMATION

 

 

 

 

ITEM 1.

Legal Proceedings

47

ITEM 1A.

Risk Factors

47

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

47

ITEM 3.

Defaults Upon Senior Securities

47

ITEM 4.

Mine Safety Disclosures

48

ITEM 5.

Other Information

48

ITEM 6.

Exhibits

49

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.

 

Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:

 

·                  our high level of indebtedness;

 

·                  our ability to make interest and principal payments on our debt and satisfy the other covenants contained in our credit facilities and other debt agreements;

 

·                  the continued impact of private and public third party payors reduction in prescription drug reimbursement rates and their ongoing efforts to limit access to payor networks, including through mail order;

 

·                  our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs, and our ability to achieve drug pricing efficiencies;

 

·                  the impact of the loss of one or more major third party payors;

 

·                  the inability to complete the proposed Sale (as defined in Note 3 below) due to the failure to satisfy the conditions to the completion of the Sale, including receipt of required regulatory approvals, and other risks related to obtaining the requisite consents to the Sale;

 

·                  the impact on our business as a result of, and the uncertainty related to the completion of, a transaction with Walgreens Boots Alliance, Inc. (“WBA”) over the past two years (including the attempted merger (the “Merger”) pursuant to the terminated Merger Agreement, dated as of  October 27, 2015, with WBA and Victoria Merger Sub, Inc. (as amended by Amendment No. 1 thereto, dated as of January 29, 2017, the “Merger Agreement”), the attempted asset sale pursuant to the Original APA (as defined below) and the proposed Sale), including on our business relationships (including, without limitation, customers, suppliers and employees), operating results and business generally. The initial attempts to sell the Company pursuant to the Merger Agreement and to sell a number of stores to WBA pursuant to the Original APA were not able to obtain regulatory approval and resulted in the entry into the Amended and Restated Asset Purchase Agreement for a smaller number of stores;

 

·                  the risk that our stock price may decline significantly if the Sale is not completed;

 

·                  our ability to refinance our indebtedness on terms favorable to us in the event that the Sale is not completed;

 

·                  the risk that a governmental entity may prohibit, delay or refuse to grant approval for the completion of the Sale or may require conditions, limitations or restrictions in connection with such approvals;

 

·                  there may be changes to our strategy in the event that the Sale does not close, which may include delaying or reducing capital or other expenditures, selling assets or other operations, closing underperforming stores, attempting to restructure or refinance our debt, seeking additional capital or incurring other costs associated with restructuring our business;

 

·                  our ability to improve the operating performance of our stores in accordance with our long term strategy;

 

·                  our ability to grow prescription count and realize front-end sales growth;

 

·                  our ability to hire and retain qualified personnel;

 

·                  decisions to close additional stores and distribution centers or undertake additional refinancing activities, which could result in charges to our operating statement;

 

·                  our ability to manage expenses and working capital;

 

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·                  continued consolidation of the drugstore and the pharmacy benefit management (“PBM”) industries;

 

·                  the risk that changes in federal or state laws or regulations, including the Health Care Education Affordability Reconciliation Act, the repeal of all or part of the Patient Protection and the Affordable Care Act (or “Patient Care Act”) and any regulations enacted thereunder may occur;

 

·                  the risk that provider and state contract changes may occur;

 

·                  risks related to compromises of our information or payment systems or unauthorized access to confidential or personal information of our associates or customers;

 

·                  our ability to maintain our current pharmacy services business and obtain new pharmacy services business, including maintaining renewals of expiring contracts, avoiding contract termination rights that may permit certain of our clients to terminate their contracts prior to their expiration and early price renegotiations prior to contract expirations;

 

·                  the continued impact of gross margin pressure in the PBM industry due to increased market competition and client demand for lower prices while providing enhanced service offerings;

 

·                  our ability to maintain our current Medicare Part D business and obtain new Medicare Part D business, as a result of the annual Medicare Part D competitive bidding process;

 

·                  the expiration or termination of our Medicare or Medicaid managed care contracts by federal or state governments;

 

·                  risks related to other business effects, including the effects of industry, market, economic, political or regulatory conditions, future exchange or interest rates or credit ratings, changes in tax laws, regulations, rates and policies or competitive development including aggressive promotional activity from our competitors;

 

·                  the risk that we could experience deterioration in our current Star rating with the Centers of Medicare and Medicaid Services (“CMS”) or incur CMS penalties and/or sanctions;

 

·                  the nature, cost and outcome of pending and future litigation and other legal proceedings or governmental investigations, including any such proceedings related to the Merger or Sale and instituted against us and others;

 

·                  the risk that there may be a material adverse change of the Company or the Acquired Stores;

 

·                  other risks and uncertainties described from time to time in our filings with the Securities and Exchange Commission (the “SEC”).

 

We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 4, 2017 (the “Fiscal 2017 10-K”), which we filed with the SEC on May 3, 2017, and our Quarterly Report on Form 10-Q for the thirteen weeks ended June 3, 2017 (the “First Quarter 2018 10-Q”) which we filed on July 6, 2017, as well as in the “Risk Factors” section of the Fiscal 2017 10-K. These documents are available on the SEC’s website at www.sec.gov.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

September 2, 2017

 

March 4,
2017

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

238,978

 

$

245,410

 

Accounts receivable, net

 

1,843,320

 

1,771,126

 

Inventories, net of LIFO reserve of $1,022,282 and $999,776

 

2,877,427

 

2,837,211

 

Prepaid expenses and other current assets

 

221,644

 

211,541

 

Total current assets

 

5,181,369

 

5,065,288

 

Property, plant and equipment, net

 

2,188,217

 

2,251,692

 

Goodwill

 

1,715,479

 

1,715,479

 

Other intangibles, net

 

747,288

 

835,795

 

Deferred tax assets

 

1,453,291

 

1,505,564

 

Other assets

 

212,664

 

219,934

 

Total assets

 

$

11,498,308

 

$

11,593,752

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

22,491

 

$

21,335

 

Accounts payable

 

1,687,880

 

1,613,909

 

Accrued salaries, wages and other current liabilities

 

1,270,840

 

1,370,004

 

Total current liabilities

 

2,981,211

 

3,005,248

 

Long-term debt, less current maturities

 

7,082,549

 

7,263,288

 

Lease financing obligations, less current maturities

 

37,890

 

44,070

 

Other noncurrent liabilities

 

663,048

 

667,076

 

Total liabilities

 

10,764,698

 

10,979,682

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,062,411 and 1,053,690

 

1,062,411

 

1,053,690

 

Additional paid-in capital

 

4,841,700

 

4,839,854

 

Accumulated deficit

 

(5,129,213

)

(5,237,157

)

Accumulated other comprehensive loss

 

(41,288

)

(42,317

)

Total stockholders’ equity

 

733,610

 

614,070

 

Total liabilities and stockholders’ equity

 

$

11,498,308

 

$

11,593,752

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

September 2, 2017

 

August 27, 2016

 

Revenues

 

$

7,678,903

 

$

8,029,806

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

5,891,900

 

6,113,063

 

Selling, general and administrative expenses

 

1,734,306

 

1,778,247

 

Lease termination and impairment charges

 

3,128

 

7,233

 

Interest expense

 

111,261

 

105,388

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

(Gain) loss on sale of assets, net

 

(14,495

)

174

 

 

 

7,401,100

 

8,004,105

 

Income before income taxes

 

277,803

 

25,701

 

Income tax expense

 

107,087

 

10,928

 

Net income

 

$

170,716

 

$

14,773

 

Computation of income attributable to common stockholders:

 

 

 

 

 

Income attributable to common stockholders—basic and diluted

 

$

170,716

 

$

14,773

 

Basic and diluted income per share

 

$

0.16

 

$

0.01

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

September 2, 2017

 

August 27, 2016

 

Net income

 

$

170,716

 

$

14,773

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $342 and $451 tax expense

 

515

 

681

 

Total other comprehensive income

 

515

 

681

 

Comprehensive income

 

$

171,231

 

$

15,454

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 2, 2017

 

August 27, 2016

 

Revenues

 

$

15,460,356

 

$

16,213,987

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

11,914,319

 

12,402,944

 

Selling, general and administrative expenses

 

3,495,596

 

3,571,494

 

Lease termination and impairment charges

 

7,214

 

13,014

 

Interest expense

 

221,198

 

210,501

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

(Gain) loss on sale of assets, net

 

(20,216

)

1,230

 

 

 

15,293,111

 

16,199,183

 

Income before income taxes

 

167,245

 

14,804

 

Income tax expense

 

71,878

 

4,619

 

Net income

 

$

95,367

 

$

10,185

 

Computation of income attributable to common stockholders:

 

 

 

 

 

Income attributable to common stockholders—basic and diluted

 

$

95,367

 

$

10,185

 

Basic and diluted income per share

 

$

0.09

 

$

0.01

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 2, 2017

 

August 27, 2016

 

Net income

 

$

95,367

 

$

10,185

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $684 and $902 tax expense

 

1,029

 

1,362

 

Total other comprehensive income

 

1,029

 

1,362

 

Comprehensive income

 

$

96,396

 

$

11,547

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 2, 2017

 

August 27, 2016

 

Operating activities:

 

 

 

 

 

Net income

 

$

95,367

 

$

10,185

 

Adjustments to reconcile to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

274,104

 

280,839

 

Lease termination and impairment charges

 

7,214

 

13,014

 

LIFO charge

 

22,506

 

27,511

 

(Gain) loss on sale of assets, net

 

(20,216

)

1,230

 

Stock-based compensation expense

 

15,362

 

23,696

 

Changes in deferred taxes

 

64,850

 

1,998

 

Excess tax benefit on stock options and restricted stock

 

 

(3,248

)

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(73,782

)

(227,255

)

Inventories

 

(62,714

)

(157,471

)

Accounts payable

 

62,552

 

150,339

 

Other assets and liabilities, net

 

(87,412

)

(101,799

)

Net cash provided by operating activities

 

297,831

 

19,039

 

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(120,461

)

(225,718

)

Intangible assets acquired

 

(13,073

)

(28,869

)

Proceeds from dispositions of assets and investments

 

17,407

 

6,833

 

Proceeds from insured loss

 

3,627

 

 

Net cash used in investing activities

 

(112,500

)

(247,754

)

Financing activities:

 

 

 

 

 

Net (payments to) proceeds from revolver

 

(190,000

)

250,000

 

Principal payments on long-term debt

 

(8,096

)

(11,230

)

Change in zero balance cash accounts

 

10,189

 

534

 

Net proceeds from issuance of common stock

 

215

 

3,958

 

Excess tax benefit on stock options and restricted stock

 

 

3,248

 

Payments for taxes related to net share settlement of equity awards

 

(4,071

)

(6,173

)

Net cash (used in) provided by financing activities

 

(191,763

)

240,337

 

(Decrease) increase in cash and cash equivalents

 

(6,432

)

11,622

 

Cash and cash equivalents, beginning of period

 

245,410

 

124,471

 

Cash and cash equivalents, end of period

 

$

238,978

 

$

136,093

 

Supplementary cash flow data:

 

 

 

 

 

Cash paid for interest (net of capitalized amounts of $184 and $101, respectively)

 

$

208,909

 

$

199,966

 

Cash payments of income taxes, net of refunds

 

$

3,119

 

$

5,628

 

Equipment financed under capital leases

 

$

8,615

 

$

2,860

 

Equipment received for noncash consideration

 

$

1,295

 

$

746

 

Reduction in lease financing obligation

 

$

4,740

 

$

 

Gross borrowings from revolver

 

$

1,471,000

 

$

1,937,000

 

Gross payments to revolver

 

$

1,661,000

 

$

1,687,000

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen and Twenty-Six Week Periods Ended September 2, 2017 and August 27, 2016

 

(Dollars and share information in thousands, except per share amounts)

 

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and twenty-six week periods ended September 2, 2017 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal 2017 10-K.

 

Recently Adopted Accounting Pronouncements

 

In March 2016, the FASB issued ASU No. 2016-09, Compensation—Stock Compensation, (Topic 718): Improvements to Employee Share-Based Payment Accounting, which amends the accounting for certain aspects of share-based payments to employees in ASC Topic 718, Compensation — Stock Compensation. The new guidance eliminates the accounting for any excess tax benefits and deficiencies through equity and requires all excess tax benefits and deficiencies related to employee share-based compensation arrangements to be recorded in the income statement. This aspect of the new guidance is required to be applied prospectively. The new guidance also requires (i.) the presentation of excess tax benefits on the statement of cash flows as an operating activity rather than a financing activity, a change which may be applied prospectively or retrospectively and (ii.) the presentation of employee taxes paid when an employer withholds shares for tax withholding purposes on the statement of cash flows as a financing activity, a change which must be applied retrospectively. The new guidance further provides an accounting policy election to account for forfeitures as they occur rather than utilizing the estimated amount of forfeitures at the time of issuance. The Company adopted this new guidance effective March 5, 2017. The primary impact of adoption was (i.) the modified retrospective recognition of the cumulative amount of previously unrecognized excess tax benefits as an opening balance sheet adjustment and (ii.) the recognition of excess tax benefits in the income statement on a prospective basis, rather than equity. As a result, the Company (i.) increased the deferred tax asset and reduced accumulated deficit by $12,577 as of the beginning of the twenty-six weeks ended September 2, 2017, and (ii.) the Company recognized a discrete income tax expense of $9,653 in income tax expense for the twenty-six weeks ended September 2, 2017. The Company also elected to adopt the cash flow presentation of the excess tax benefits prospectively commencing in the first quarter of fiscal 2018. The retrospective application of cash paid on employees’ behalf related to shares withheld for tax purposes resulted in an increase to “Net cash provided by operating activities” and a decrease to “Net cash provided by financing activities” of $6,173 for the twenty-six weeks ended August 27, 2016. The Company’s stock-based compensation expense continues to reflect estimated forfeitures. None of the other provisions in this new guidance had a material impact on the Company’s condensed consolidated financial statements.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

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 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 assembled a cross

 

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functional team to identify the population of contracts with customers, for both its Retail Pharmacy and Pharmacy Services segments, and evaluate them under the provisions of ASU 2014-09. The Company intends to adopt the new standard on a modified retrospective basis. Under this implementation method, the Company will recognize the cumulative effect of initially applying the new guidance as an adjustment to the opening retained earnings balance for the annual reporting period of initial application. 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.

 

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 assets—referred 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 (fiscal 2020). The Company believes that the new standard will have a material impact on its financial position. The Company is currently evaluating the impact this standard implementation will have on its results of operations and cash flows.

 

In January 2017, the FASB issued ASU No. 2017-04, Intangibles—Goodwill 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 (fiscal 2020). Early adoption of all the amendments for ASU 2017-04 is permitted. Amendments must be applied prospectively. The Company is in process of 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 acquired 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 has been rebranded as EnvisionRxOptions (“EnvisionRx” or “EnvisionRxOptions”), 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 condensed consolidated financial statements for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016 include EnvisionRx results of operations (please see Note 13 Segment Reporting for the Pharmacy Services segment results included within the condensed consolidated financial statements for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016, which reflects the results of EnvisionRx). The Company’s condensed consolidated financial statements reflect the 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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During fiscal 2017, the Company finalized the valuation of the identifiable assets acquired and the liabilities assumed. The following is the allocation of the purchase price:

 

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. 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.

 

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3. Pending Asset Sale to WBA

 

Termination of Merger Agreement with WBA

 

On June 28, 2017, Rite Aid, WBA and Victoria Merger Sub, Inc. entered into a Termination Agreement (the “Merger Termination Agreement”) under which the parties agreed to terminate the Merger Agreement.  The Merger Termination Agreement provides that WBA would pay to Rite Aid a termination fee in the amount of $325,000. Rite Aid received the termination fee payment on June 30, 2017.  Subject to limited customary exceptions, the Merger Termination Agreement also mutually releases the parties from any claims of liability to one another relating to the contemplated Merger.

 

Entry Into Amended and Restated Asset Purchase Agreement with WBA

 

On September 18, 2017, the Company entered into an Amended and Restated Asset Purchase Agreement (the “Amended and Restated Asset Purchase Agreement”) with WBA and Walgreen Co., an Illinois corporation and wholly owned direct subsidiary of WBA (“Buyer”), which amends and restates in its entirety the previously disclosed Asset Purchase Agreement (the “Original APA”), dated as of June 28, 2017, by and among the Company, WBA and Buyer.  Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer will purchase from the Company 1,932 stores (the “Acquired Stores”) (reduced from 2,186 Rite Aid stores in the Original APA), three (3) distribution centers, related inventory and other specified assets related thereto for a purchase price of approximately $4.375 billion (reduced from $5.175 billion in the Original APA), on a cash-free, debt-free basis (the “Sale”).

 

The Company announced on September 19, 2017 that the waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (the “HSR Act”), expired with respect to the Sale.  The expiration of the waiting period under the HSR Act satisfies one of the conditions to the closing of the Sale.  Completion of the Sale remains subject to various closing conditions, including but not limited to (i)  the absence of a material adverse effect on the stores and distribution centers being acquired in the Sale and (ii) a duplicate copy of the Company’s key information technology systems and prescription dispensing system being operational.

 

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. The Company has agreed to various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the Acquired Stores in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the closing of the Sale, subject to certain exceptions, and the parties’ agreement to use their reasonable best efforts to obtain all authorizations and approvals from governmental authorities.  The Company has agreed to provide transition services to Buyer for up to (3) three years after closing of the Sale.

 

The Amended and Restated Asset Purchase Agreement contains specified termination rights for the Company and WBA, including a mutual termination right in the event any court of competent jurisdiction or other governmental entity shall have issued a final and nonappealable legal restraint that prevents, makes illegal, prohibits, restrains or enjoins the completion of the Sale, and a termination right for WBA prior to the closing of the first set of stores in the Sale in the event the Company enters into an agreement to sell all of the remainder of Rite Aid or over 50% of its stock or assets to a third party. In the event that the Company enters into an agreement to sell all of the remainder of Rite Aid or over 50% of its stock or assets to a third party prior to the end of the transition period under the Transition Services Agreement (“TSA”), any potential acquirer would be obligated to assume the Company’s remaining obligations under the TSA.  Under the terms of the Amended and Restated Asset Purchase Agreement, the Company has the option to purchase pharmaceutical drugs through an affiliate of WBA under terms, including cost, that are substantially equivalent to Walgreen’s for a period of ten (10) years, subject to certain terms and conditions.

 

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.

 

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Table of Contents

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

Numerator for income per share:

 

 

 

 

 

 

 

 

 

Income attributable to common stockholders—basic and diluted

 

$

170,716

 

$

14,773

 

$

95,367

 

$

10,185

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

1,048,548

 

1,044,198

 

1,047,687

 

1,043,317

 

Outstanding options and restricted shares, net

 

18,668

 

17,251

 

22,597

 

17,210

 

Diluted weighted average shares

 

1,067,216

 

1,061,449

 

1,070,284

 

1,060,527

 

Basic and diluted income per share

 

$

0.16

 

$

0.01

 

$

0.09

 

$

0.01

 

 

Due to their antidilutive effect, 9,206 and 3,351 potential common shares related to stock options have been excluded from the computation of diluted income per share for the thirteen week period ended September 2, 2017 and August 27, 2016, respectively. Due to their antidilutive effect, 5,596 and 3,351 potential common shares related to stock options have been excluded from the computation of diluted income per share for the twenty-six week period ended September 2, 2017 and August 27, 2016, respectively.

 

5. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

Impairment charges

 

$

35

 

$

78

 

$

694

 

$

697

 

Lease termination charges

 

3,093

 

7,155

 

6,520

 

12,317

 

 

 

$

3,128

 

$

7,233

 

$

7,214

 

$

13,014

 

 

Impairment Charges

 

These amounts include the write-down of long-lived assets at locations that were assessed for impairment because of management’s intention to relocate or close the location or because of changes in circumstances that indicated the carrying value of an asset may not be recoverable.

 

Lease Termination Charges

 

As part of the Company’s ongoing business activities, the Company assesses stores and distribution centers for potential closure or relocation. Decisions to close or relocate stores or distribution centers in future periods would result in lease termination charges, lease exit costs and inventory liquidation charges, as well as impairment of assets at these locations. The following table reflects the closed store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

Balance—beginning of period

 

$

155,666

 

$

198,990

 

$

165,138

 

$

208,421

 

Provision for present value of noncancellable lease payments of closed stores

 

 

2,530

 

913

 

3,152

 

Changes in assumptions about future sublease income, terminations and changes in interest rates

 

201

 

1,096

 

(348

)

1,907

 

Interest accretion

 

2,907

 

3,618

 

6,002

 

7,396

 

Cash payments, net of sublease income

 

(14,763

)

(15,526

)

(27,694

)

(30,168

)

Balance—end of period

 

$

144,011

 

$

190,708

 

$

144,011

 

$

190,708

 

 

6. Fair Value Measurements

 

The Company utilizes the three-level valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and liabilities within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the following:

 

·                  Level 1—Inputs 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.

 

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·                  Level 2—Inputs 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 3—Inputs to the valuation methodology are unobservable inputs based upon management’s best estimate of inputs market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.

 

Non-Financial Assets Measured on a Non-Recurring Basis

 

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the twenty-six week period ended September 2, 2017, long-lived assets from continuing operations with a carrying value of $999, primarily store assets, were written down to their fair value of $305, resulting in an impairment charge of $694 of which $35 relates to the thirteen week period ended September 2, 2017. During the twenty-six week period ended August 27, 2016, long-lived assets from continuing operations with a carrying value of $2,577, primarily store assets, were written down to their fair value of $1,880, resulting in an impairment charge of $697 of which $78 relates to the thirteen week period ended August 27, 2016.  If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.

 

The following table presents fair values for those assets measured at fair value on a non-recurring basis at September 2, 2017 and August 27, 2016:

 

Fair Value Measurement Using

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
September 2,
2017

 

Long-lived assets held for use

 

$

 

$

 

$

201

 

$

201

 

Long-lived assets held for sale

 

$

 

$

104

 

$

 

$

104

 

Total

 

$

 

$

104

 

$

201

 

$

305

 

 

 

 

Level 1

 

Level 2

 

Level 3

 

Total as of
August 27,
2016

 

Long-lived assets held for use

 

$

 

$

 

$

857

 

$

857

 

Long-lived assets held for sale

 

$

 

$

1,023

 

$

 

$

1,023

 

Total

 

$

 

$

1,023

 

$

857

 

$

1,880

 

 

As of September 2, 2017 and August 27, 2016, the Company did not have any financial assets measured on a recurring basis.

 

Other Financial Instruments

 

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature.  In addition, as of September 2, 2017 the Company has $7,311 of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of other assets.  As of March 4, 2017 the Company has $6,874 of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of prepaid expenses and other current assets.  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 estimated fair value of the Company’s total long-term indebtedness was $7,082,639 and $7,147,454, respectively, as of September 2, 2017. There were no outstanding derivative financial instruments as of September 2, 2017 and March 4, 2017.

 

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7. Income Taxes

 

The Company recorded an income tax expense of $107,087 and $10,928 for the thirteen week periods ended September 2, 2017 and August 27, 2016, respectively, and an income tax expense of $71,878 and $4,619 for the twenty-six week periods ended September 2, 2017 and August 27, 2016, respectively.  The effective tax rate for the thirteen week periods ended September 2, 2017 and August 27, 2016 was 38.5% and 42.5%, respectively.  The effective tax rate for the twenty-six week periods ended September 2, 2017 and August 27, 2016 was 42.9% and 31.2%, respectively.  The effective tax rate for the thirteen and twenty-six week periods ended September 2, 2017 includes an adjustment of 3.0% and 10.4%, respectively, primarily related to the tax impact of the Walgreens Boots Alliance merger termination fee.  The lower effective income tax expense rate for the twenty-six week period ended August 27, 2016 is the result of a discrete income tax benefit recorded for the lapse of a statute of limitations on an uncertain tax position which lowered the Company’s effective income tax expense rate by 8.9%.

 

The Company recognizes tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

 

While it is expected that the amount of unrecognized tax benefits will change in the next twelve months, the Company does not expect the change to have a significant impact on the results of operations or the financial position of the Company.

 

The Company regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain.  Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. The Company continues to maintain a valuation allowance against net deferred tax assets of $234,706 and $226,726, which relates primarily to state deferred tax assets at September 2, 2017 and March 4, 2017, respectively.

 

8. Medicare Part D

 

The Company offers Medicare Part D benefits through EIC, which has contracted with Centers of Medicare and Medicaid Services (“CMS”) to be a Prescription Drug Plan (“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 $30,024 as of June 30, 2017. EIC was in excess of the minimum required amounts in these states as of September 2, 2017.

 

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 September 2, 2017, accounts receivable, net included $408,772 due from CMS and accrued salaries, wages and other current liabilities included $187,795 of EIC liabilities under certain reinsurance contracts. 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. EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.

 

9. Goodwill and Other Intangible Assets

 

Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but are 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. During the thirteen and twenty-six weeks ended September 2, 2017 and

 

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the fifty-three weeks ended March 4, 2017, no impairment charges have been taken against the Company’s goodwill or indefinitely-lived intangible assets. No changes were made to the carrying amount of goodwill for the thirteen and twenty-six weeks ended September 2, 2017.

 

The Company’s intangible assets are primarily 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 September 2, 2017 and March 4, 2017.

 

 

 

September 2, 2017

 

March 4, 2017

 

 

 

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

 

$

662,607

 

$

(543,508

)

$

119,099

 

7 years

 

$

664,670

 

$

(531,022

)

$

133,648

 

7 years

 

Prescription files

 

1,587,833

 

(1,427,409

)

160,424

 

3 years

 

1,584,240

 

(1,390,139

)

194,101

 

3 years

 

Customer relationships(a)

 

465,000

 

(142,643

)

322,357

 

15 years

 

465,000

 

(110,653

)

354,347

 

16 years

 

CMS license

 

57,500

 

(5,022

)

52,478

 

23 years

 

57,500

 

(3,872

)

53,628

 

24 years

 

Claims adjudication and other developed software

 

58,990

 

(18,402

)

40,588

 

5 years

 

58,995

 

(14,188

)

44,807

 

6 years

 

Trademarks

 

20,100

 

(4,389

)

15,711

 

8 years

 

20,100

 

(3,383

)

16,717

 

9 years

 

Backlog

 

11,500

 

(8,369

)

3,131

 

1 year

 

11,500

 

(6,453

)

5,047

 

2 years

 

Total finite

 

$

2,863,530

 

$

(2,149,742

)

$

713,788

 

 

 

$

2,862,005

 

$

(2,059,710

)

$

802,295

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

33,500

 

 

33,500

 

Indefinite

 

33,500

 

 

33,500

 

Indefinite

 

Total

 

$

2,897,030

 

$

(2,149,742

)

$

747,288

 

 

 

$

2,895,505

 

$

(2,059,710

)

$

835,795

 

 

 

 


(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 September 2, 2017 and March 4, 2017 are unfavorable lease intangibles with a net carrying amount of $35,409 and $38,242, respectively. These intangible liabilities are amortized over their remaining lease terms at the time of acquisition.

 

Amortization expense for these intangible assets and liabilities was $45,378 and $100,310 for the thirteen and twenty-six week periods ended September 2, 2017, respectively. Amortization expense for these intangible assets and liabilities was $55,409 and $110,912 for the thirteen and twenty-six week periods ended August 27, 2016, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2018—$182,434; 2019—$145,638; 2020—$116,065; 2021—$83,505 and 2022—$54,574.

 

10. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at September 2, 2017 and March 4, 2017:

 

 

 

September 2,
2017

 

March 4,
2017

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due January 2020 ($2,240,000 and $2,430,000 face value less unamortized debt issuance costs of $20,511 and $24,918)

 

$

2,219,489

 

$

2,405,082

 

Tranche 1 Term Loan (second lien) due August 2020 ($470,000 face value less unamortized debt issuance costs of $3,555 and $4,167)

 

466,445

 

465,833

 

Tranche 2 Term Loan (second lien) due June 2021 ($500,000 face value less unamortized debt issuance costs of $2,149 and $2,431)

 

497,851

 

497,569

 

Other secured

 

90

 

90

 

 

 

3,183,875

 

3,368,574

 

Guaranteed Unsecured Debt:

 

 

 

 

 

9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $1,736 and $2,071 and less unamortized debt issuance costs of $6,226 and $7,527)

 

897,510

 

896,544

 

6.75% senior notes due June 2021 ($810,000 face value less unamortized debt issuance costs of $5,618 and $6,360)

 

804,382

 

803,640

 

6.125% senior notes due April 2023 ($1,800,000 face value less unamortized debt issuance costs of $23,846 and $25,984)

 

1,776,154

 

1,774,016

 

 

 

3,478,046

 

3,474,200

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,543 and $1,625)

 

293,457

 

293,375

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $739 and $771)

 

127,261

 

127,229

 

 

 

420,718

 

420,604

 

Lease financing obligations

 

60,291

 

65,315

 

Total debt

 

7,142,930

 

7,328,693

 

Current maturities of long-term debt and lease financing obligations

 

(22,491

)

(21,335

)

Long-term debt and lease financing obligations, less current maturities

 

$

7,120,439

 

$

7,307,358

 

 

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Credit Facility

 

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 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 September 2, 2017, the Company had $2,240,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $59,343 which resulted in additional borrowing capacity of $1,400,657.

 

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.

 

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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 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 September 2, 2017, the Company had availability under its revolver of $1,400,657, 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 15 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

 

Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2018 and thereafter are as follows: 2018—$90; 2019—$0; 2020—$2,240,000; 2021—$1,372,000; 2022—$1,310,000 and $2,223,000 thereafter.

 

11. Stock Options and Stock Awards

 

The Company recognizes share-based compensation expense over the requisite service period of the award, net of an estimate for the impact of forfeitures. Operating results for the twenty-six week periods ended September 2, 2017 and August 27, 2016 include $15,362 and $23,696, respectively, of compensation costs related to the Company’s stock-based compensation arrangements.

 

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. During fiscal 2018, the Company issued performance units to certain of its associates. The performance units will be settled in cash based on the actual performance of the Company relative to certain financial performance goals and the stock price upon vesting. During the twenty-six week periods ended September 2, 2017 and August 27, 2016, the Company incurred $2,170 and $9,112 related to these performance based incentive plans, respectively, which is recorded as a component of stock-based compensation expense.

 

The total number and type of newly awarded grants and the related weighted average fair value for the twenty-six week periods ended September 2, 2017 and August 27, 2016 are as follows:

 

 

 

September 2, 2017

 

August 27, 2016

 

 

 

Shares

 

Weighted
Average
Fair Value

 

Shares

 

Weighted
Average
Fair Value

 

Stock options granted

 

 

$

N/A

 

 

$

N/A

 

Restricted stock awards granted

 

11,241

 

$

2.31

 

3,613

 

$

7.73

 

Total awards

 

11,241

 

 

 

3,613

 

 

 

 

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Typically, stock options granted vest, and are subsequently exercisable in equal annual installments over a four-year period for employees. Restricted stock awards typically vest in equal annual installments over a three-year period.

 

The Company calculates the fair value of stock options using the Black- Scholes-Merton option pricing model.

 

As of September 2, 2017, the total unrecognized pre-tax compensation costs related to unvested stock options and restricted stock awards granted, net of estimated forfeitures and the weighted average period of cost amortization are as follows:

 

 

 

September 2, 2017

 

 

 

Unvested
stock
options

 

Unvested
restricted
stock

 

Unvested
performance
shares

 

Unrecognized pre-tax costs

 

$

8,151

 

$

41,478

 

$

15,104

 

Weighted average amortization period

 

1.5 years

 

2.3 years

 

2.5 years

 

 

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12. Retirement Plans

 

Net periodic pension expense recorded in the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

Twenty-Six Week Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

Service cost

 

$

346

 

$

292

 

$

692

 

$

584

 

Interest cost

 

1,603

 

1,621

 

3,206

 

3,242

 

Expected return on plan assets

 

(1,147

)

(1,142

)

(2,294

)

(2,284

)

Amortization of unrecognized prior service cost

 

 

 

 

 

Amortization of unrecognized net loss

 

857

 

1,132

 

1,713

 

2,264

 

Net periodic pension expense

 

$

1,659

 

$

1,903

 

$

3,317

 

$

3,806

 

 

During the thirteen and twenty-six week period ended September 2, 2017 the Company contributed $0 to the Defined Benefit Pension Plan. During the remainder of fiscal 2018, the Company expects to contribute $4,900 to the Defined Benefit Pension Plan.

 

13. 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, collectively the “Parent Company”.

 

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, Chief Financial Officer, and Executive Vice Presidents-Retail Pharmacy, and the Chief Executive Officer—Pharmacy Services, and Executive Vice Presidents-Pharmacy Services (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.

 

The following table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations (1)

 

Consolidated

 

Thirteen Week Period Ended

 

 

 

 

 

 

 

 

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

6,267,929

 

$

1,492,831

 

$

(81,857

)

$

7,678,903

 

Gross Profit

 

1,683,741

 

103,262

 

 

1,787,003

 

Adjusted EBITDA(2)

 

163,995

 

49,275

 

 

213,270

 

August 27, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

6,485,482

 

$

1,634,876

 

$

(90,552

)

$

8,029,806

 

Gross Profit

 

1,819,349

 

97,394

 

 

1,916,743

 

Adjusted EBITDA(2)

 

262,643

 

50,010

 

 

312,653

 

Twenty-Six Week Period Ended

 

 

 

 

 

 

 

 

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

12,618,137

 

$

3,006,072

 

$

(163,853

)

$

15,460,356

 

Gross Profit

 

3,337,803

 

208,234

 

 

3,546,037

 

Adjusted EBITDA(2)

 

307,960

 

97,874

 

 

405,834

 

August 27, 2016:

 

 

 

 

 

 

 

 

 

Revenues

 

$

13,161,030

 

$

3,237,235

 

$

(184,278

)

$

16,213,987

 

Gross Profit

 

3,624,716

 

186,327

 

 

3,811,043

 

Adjusted EBITDA(2)

 

507,470

 

91,185

 

 

598,655

 

 

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(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 (Loss), Adjusted Net Income (Loss) 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 the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016:

 

 

 

Thirteen Week
Period Ended

 

Twenty-Six Week
Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Net income

 

$

170,716

 

$

14,773

 

$

95,367

 

$

10,185

 

Interest expense

 

111,261

 

105,388

 

221,198

 

210,501

 

Income tax expense

 

107,087

 

10,928

 

71,878

 

4,619

 

Depreciation and amortization expense

 

132,012

 

142,051

 

274,104

 

280,839

 

LIFO charge

 

5,632

 

13,760

 

22,506

 

27,511

 

Lease termination and impairment charges

 

3,128

 

7,233

 

7,214

 

13,014

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

(325,000

)

 

Other

 

8,434

 

18,520

 

38,567

 

51,986

 

Adjusted EBITDA

 

$

213,270

 

$

312,653

 

$

405,834

 

$

598,655

 

 

The following is balance sheet information for the Company’s reportable segments:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations (2)

 

Consolidated

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

8,503,384

 

$

3,163,941

 

$

(169,017

)

$

11,498,308

 

Goodwill

 

76,124

 

1,639,355

 

 

1,715,479

 

Additions to property and equipment and intangible assets

 

126,816

 

6,718

 

 

133,534

 

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(1)

 

468,386

 

12,725

 

 

481,111

 

 

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(1)                                 Includes additions to property and equipment and intangible assets for the fifty-three week period ended March 4, 2017.

 

(2)                                 As of September 2, 2017 and March 4, 2017, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $150,690 and $140,865, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $18,327 and $16,742, 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.

 

14. Commitments and Contingencies

 

Legal Matters

 

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.

 

After the announcement of the proposed Merger between the Company and Walgreens Boots Alliance, Inc. (WBA), a putative class action lawsuit was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (Wilson v. Rite Aid Corp., et al.) 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. The complaint 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 complaint further alleged that the Company, WBA and/or Victoria aided and abetted these alleged breaches of fiduciary duty. The complaint sought, among other things, to enjoin the closing of the Merger as well as money damages and attorneys’ and experts’ fees.

 

Also in connection with the proposed merger, an 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 (Hering v. Rite Aid Corp., et al.).  The complaint in the Hering action alleged, among other things, that the Rite Aid Defendants disseminated an allegedly false and materially misleading proxy and 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 Hering 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 Hering complaint.  At a 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 Hering, 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 Hering action for all purposes pending consummation of the Merger.

 

On March 17, 2017, the Hering plaintiffs filed a motion to lift the stay for the purpose of filing a proposed amended complaint.  Defendants opposed the motion, and briefing concluded on April 17, 2017.  The proposed amended complaint asserted state law breach of fiduciary duty claims against the Individual Defendants, a claim of aiding and abetting the alleged breaches of fiduciary duty against Rite Aid, WBA and Victoria, as well as claims for violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria, claims for violations of Section 10(b) of the Exchange Act and SEC

 

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Rule 10b-5 against the Rite Aid Defendants, WBA, Victoria and certain WBA executives, and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants, WBA and Victoria.  On July 12, 2017, the Hering plaintiffs filed a motion to set a status conference.  Later the same day, the Pennsylvania District Court ordered the plaintiffs to submit a letter advising the court of the purpose of the requested status conference, any claims that the plaintiffs believe remain in light of the dissolution of the merger, and if any claims remain, the relief the plaintiffs seek.  Pursuant to the court’s order, the plaintiffs’ letter was submitted on July 21, 2017, and the Rite Aid Defendants submitted a letter in response on July 28, 2017.  On August 4, 2017, the Pennsylvania District Court entered an order lifting the stay, noting that the original claims in this matter are now moot, and directed the plaintiffs to file a motion for leave to amend the complaint, with brief in support thereof, on or before September 15, 2017.  On September 12, 2017, the Pennsylvania District Court granted the plaintiffs’ unopposed motion to extend time, extending the deadline for the plaintiffs to file their motion to September 22, 2017.

 

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 August 3, 2017, the court entered an order granting plaintiff’s unopposed motion for preliminary approval of the settlement and notice of the settlement was issued to putative class members on September 7, 2017.  A final approval hearing is scheduled on January 11, 2018.  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 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 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

 

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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 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 states and the District of Columbia named in the lawsuit have elected not to intervene in this action.  The Company has filed a motion to dismiss the complaint, which remains pending.  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 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 August 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 had entered into tolling agreements with the United States with respect to both the civil and grand jury investigations, which expired on June 30, 2017 and August 3, 2016, respectively.  There has been no request to renew the agreements.  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 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 (“DUR”) and prescription dispensing protocol and the dispensing of drugs designated as “Code 1” by the State of California (DUR/Code 1).  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 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 received a draft copy of the government’s complaint, which has yet to be filed with the court.  At this stage of the proceedings, the Company is not able to either predict the outcome of this matter or estimate a potential range of loss with respect to this matter, and is vigorously defending this potential lawsuit.

 

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.  On October 5, 2016, Rite Aid’s demurrer to the Second Amended Complaint was granted, with leave for Relator to file an amended complaint.  Relator filed his Third Amended Complaint to which Rite Aid filed a second demurrer, which the Court granted with leave for Relator to amend on April 20, 2017.  Relator filed his Fourth Amended Complaint on May 1, 2017.  On July 7, 2017, the Company’s demurrer to the Fourth Amended Complaint was sustained without leave for Relator to amend.  The court entered a final judgment of dismissal of each of Relator’s claims on August 3, 2017.  Relator’s time to appeal the judgment has yet to expire.  At this stage of the proceedings, and due to the legal issues Relator may attempt to raise on appeal, Rite Aid is unable to predict the outcome of any potential appeal by Relator.

 

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

 

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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.

 

15. 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, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes, are minor.

 

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 non-guarantor subsidiaries at September 2, 2017, March 4, 2017, and for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016. Separate financial statements for Subsidiary Guarantors are not presented.

 

 

 

Rite Aid Corporation

 

 

 

Condensed Consolidating Balance Sheet

 

 

 

September 2, 2017

 

 

 

(unaudited)

 

 

 

Rite Aid
Corporation (Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

199,978

 

$

39,000

 

$

 

$

238,978

 

Accounts receivable, net

 

 

1,430,626

 

412,694

 

 

1,843,320

 

Intercompany receivable

 

 

 

298,450

 

 

(298,450

)(a)

 

Inventories, net of LIFO reserve of $0, $1,022,282, $0, $0, and $1,022,282

 

 

2,877,427

 

 

 

2,877,427

 

Prepaid expenses and other current assets

 

 

220,344

 

1,300

 

 

221,644

 

Total current assets

 

 

5,026,825

 

452,994

 

(298,450

)

5,181,369

 

Property, plant and equipment, net

 

 

2,188,217

 

 

 

2,188,217

 

Goodwill

 

 

1,715,479

 

 

 

1,715,479

 

Other intangibles, net

 

 

694,810

 

52,478

 

 

747,288

 

Deferred tax assets

 

 

1,453,291

 

 

 

1,453,291

 

Investment in subsidiaries

 

15,275,200

 

49,148

 

 

(15,324,348

)(b)

 

Intercompany receivable

 

 

7,392,091

 

 

(7,392,091

)(a)

 

Other assets

 

 

205,353

 

7,311

 

 

212,664

 

Total assets

 

$

15,275,200

 

$

18,725,214

 

$

512,783

 

$

(23,014,889

)

$

11,498,308

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

22,401

 

$

 

$

 

$

22,491

 

Accounts payable

 

 

1,680,524

 

7,356

 

 

1,687,880

 

Intercompany payable

 

 

 

298,450

 

(298,450

)(a)

 

Accrued salaries, wages and other current liabilities

 

66,860

 

1,067,239

 

136,741

 

 

1,270,840

 

Total current liabilities

 

66,950

 

2,770,164

 

442,547

 

(298,450

)

2,981,211

 

Long-term debt, less current maturities

 

7,082,549

 

 

 

 

7,082,549

 

Lease financing obligations, less current maturities

 

 

37,890

 

 

 

37,890

 

Intercompany payable

 

7,392,091

 

 

 

(7,392,091

)(a)

 

Other noncurrent liabilities

 

 

641,960

 

21,088

 

 

663,048

 

Total liabilities

 

14,541,590

 

3,450,014

 

463,635

 

(7,690,541

)

10,764,698

 

Commitments and contingencies

 

 

 

 

 

 

Total stockholders’ equity

 

733,610

 

15,275,200

 

49,148

 

(15,324,348

)(b)

733,610

 

Total liabilities and stockholders’ equity

 

$

15,275,200

 

$

18,725,214

 

$

512,783

 

$

(23,014,889

)

$

11,498,308

 

 

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(a)  Elimination of intercompany accounts receivable and accounts payable amounts.

(b)  Elimination of investments in consolidated subsidiaries.

 

 

 

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

 

 

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(a)                                 Elimination of intercompany accounts receivable and accounts payable amounts.

(b)                                 Elimination of investments in consolidated subsidiaries.

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended September 2, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

7,657,233

 

$

41,877

 

$

(20,207

)(a)

$

7,678,903

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

5,872,689

 

39,961

 

(20,750

)(a)

5,891,900

 

Selling, general and administrative expenses

 

 

1,732,288

 

1,475

 

543

(a)

1,734,306

 

Lease termination and impairment expenses

 

 

3,128

 

 

 

3,128

 

Interest expense

 

105,384

 

5,889

 

(12

)

 

111,261

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

 

 

(325,000

)

Gain on sale of assets, net

 

 

(14,495

)

 

 

(14,495

)

Equity in earnings of subsidiaries, net of tax

 

48,900

 

(456

)

 

(48,444

)(b)

 

 

 

(170,716

)

7,599,043

 

41,424

 

(68,651

)

7,401,100

 

Income before income taxes

 

170,716

 

58,190

 

453

 

48,444

 

277,803

 

Income tax expense (benefit)

 

 

107,090

 

(3

)

 

107,087

 

Net income (loss)

 

$

170,716

 

$

(48,900

)

$

456

 

$

48,444

(b)

$

170,716

 

Total other comprehensive income (loss)

 

515

 

515

 

 

(515

)

515

 

Comprehensive income (loss)

 

$

171,231

 

$

(48,385

)

$

456

 

$

47,929

 

$

171,231

 

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

29



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Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Thirteen Weeks Ended August 27, 2016
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

7,995,349

 

$

60,581

 

$

(26,124

)(a)

$

8,029,806

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

6,080,299

 

57,767

 

(25,003

)(a)

6,113,063

 

Selling, general and administrative expenses

 

 

1,776,135

 

3,233

 

(1,121

)(a)

1,778,247

 

Lease termination and impairment expenses

 

 

7,233

 

 

 

7,233

 

Interest expense

 

100,933

 

4,447

 

8

 

 

105,388

 

Loss on sale of assets, net

 

 

174

 

 

 

174

 

Equity in earnings of subsidiaries, net of tax

 

(115,706

)

593

 

 

115,113

(b)

 

 

 

(14,773

)

7,868,881

 

61,008

 

88,989

 

8,004,105

 

Income (loss) before income taxes

 

14,773

 

126,468

 

(427

)

(115,113

)

25,701

 

Income tax expense

 

 

10,762

 

166

 

 

10,928

 

Net income (loss)

 

$

14,773

 

$

115,706

 

$

(593

)

$

(115,113

)(b)

$

14,773

 

Total other comprehensive income (loss)

 

681

 

681

 

 

(681

)

681

 

Comprehensive income (loss)

 

$

15,454

 

$

116,387

 

$

(593

)

$

(115,794

)

$

15,454

 

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Twenty-Six Weeks Ended September 2, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

15,417,291

 

$

81,327

 

$

(38,262

)(a)

$

15,460,356

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

11,875,730

 

77,863

 

(39,274

)(a)

11,914,319

 

Selling, general and administrative expenses

 

 

3,489,908

 

4,676

 

1,012

(a)

3,495,596

 

Lease termination and impairment expenses

 

 

7,214

 

 

 

7,214

 

Interest expense

 

211,317

 

9,855

 

26

 

 

221,198

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

 

 

(325,000

)

Gain on sale of assets, net

 

 

(20,216

)

 

 

(20,216

)

Equity in earnings of subsidiaries, net of tax

 

18,316

 

856

 

 

(19,172

)(b)

 

 

 

(95,367

)

15,363,347

 

82,565

 

(57,434

)

15,293,111

 

Income before income taxes

 

95,367

 

53,944

 

(1,238

)

19,172

 

167,245

 

Income tax expense (benefit)

 

 

72,260

 

(382

)

 

71,878

 

Net income (loss)

 

$

95,367

 

$

(18,316

)

$

(856

)

$

19,172

(b)

$

95,367

 

Total other comprehensive income (loss)

 

1,029

 

1,029

 

 

(1,029

)

1,029

 

Comprehensive income (loss)

 

$

96,396

 

$

(17,287

)

$

(856

)

$

18,143

 

$

96,396

 

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

30



Table of Contents

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Twenty-Six Weeks Ended August 27, 2016
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

Revenues

 

$

 

$

16,163,541

 

$

119,109

 

$

(68,663

)(a)

$

16,213,987

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

 

 

Cost of revenues

 

 

12,355,746

 

113,613

 

(66,415

)(a)

12,402,944

 

Selling, general and administrative expenses

 

 

3,567,772

 

5,970

 

(2,248

)(a)

3,571,494

 

Lease termination and impairment expenses

 

 

13,014

 

 

 

13,014

 

Interest expense

 

201,380

 

9,114

 

7

 

 

210,501

 

Loss on sale of assets, net

 

 

1,230

 

 

 

1,230

 

Equity in earnings of subsidiaries, net of tax

 

(211,565

)

645

 

 

210,920

(b)

 

 

 

(10,185

)

15,947,521

 

119,590

 

142,257

 

16,199,183

 

Income (loss) before income taxes

 

10,185

 

216,020

 

(481

)

(210,920

)

14,804

 

Income tax expense

 

 

4,455

 

164

 

 

4,619

 

Net income (loss)

 

$

10,185

 

$

211,565

 

$

(645

)

$

(210,920

)(b)

$

10,185

 

Total other comprehensive income (loss)

 

1,362

 

1,362

 

 

(1,362

)

1,362

 

Comprehensive income (loss)

 

$

11,547

 

$

212,927

 

$

(645

)

$

(212,282

)

$

11,547

 

 


(a)                                 Elimination of intercompany revenues and expenses.

(b)                                 Elimination of equity in earnings of subsidiaries.

 

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Table of Contents

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended September 2, 2017
(unaudited)

 

 

 

Rite Aid
Corporation
(Parent
Company
Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Operating activities:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

123,440

 

$

167,697

 

$

6,694

 

$

 

$

297,831

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(120,461

)

 

 

(120,461

)

Intangible assets acquired

 

 

(13,073

)

 

 

(13,073

)

Intercompany activity

 

 

(66,345

)

 

66,345

 

 

Proceeds from dispositions of assets and investments

 

 

17,407

 

 

 

17,407

 

Proceeds from insured loss

 

 

3,627

 

 

 

3,627

 

Net cash (used in) provided by investing activities

 

 

(178,845

)

 

66,345

 

(112,500

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net payments to revolver

 

(190,000

)

 

 

 

(190,000

)

Principal payments on long-term debt

 

 

(8,096

)

 

 

(8,096

)

Change in zero balance cash accounts

 

 

10,189

 

 

 

10,189

 

Net proceeds from issuance of common stock

 

215

 

 

 

 

215

 

Payments for taxes related to net share settlement of equity awards

 

 

(4,071

)

 

 

(4,071

)

Intercompany activity

 

66,345

 

 

 

(66,345

)

 

Net cash provided by (used in) financing activities

 

(123,440

)

(1,978

)

 

(66,345

)

(191,763

)

(Decrease) increase in cash and cash equivalents

 

 

(13,126

)

6,694

 

 

(6,432

)

Cash and cash equivalents, beginning of period

 

 

213,104

 

32,306

 

 

245,410

 

Cash and cash equivalents, end of period

 

$

 

$

199,978

 

$

39,000

 

$

 

$

238,978

 

 

 

 

Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Twenty-Six Weeks Ended August 27, 2016
(unaudited)

 

 

 

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

 

$

(192,321

)

$

211,970

 

$

(610

)

$

 

$

19,039

 

Investing activities:

 

 

 

 

 

 

 

 

 

 

 

Payments for property, plant and equipment

 

 

(225,718

)

 

 

(225,718

)

Intangible assets acquired

 

 

(28,869

)

 

 

(28,869

)

Intercompany activity

 

 

61,637

 

 

(61,637

)

 

Proceeds from dispositions of assets and investments

 

 

6,833

 

 

 

6,833

 

Net cash (used in) provided by investing activities

 

 

(186,117

)

 

(61,637

)

(247,754

)

Financing activities:

 

 

 

 

 

 

 

 

 

 

 

Net proceeds from revolver

 

250,000

 

 

 

 

250,000

 

Principal payments on long-term debt

 

 

(11,230

)

 

 

(11,230

)

Change in zero balance cash accounts

 

 

534

 

 

 

534

 

Net proceeds from issuance of common stock

 

3,958

 

 

 

 

3,958

 

Excess tax benefit on stock options and restricted stock

 

 

3,248

 

 

 

3,248

 

Payments for taxes related to net share settlement of equity awards

 

 

(6,173

)

 

 

(6,173

)

Intercompany activity

 

(61,637

)

 

 

61,637

 

 

Net cash provided by (used in) financing activities

 

192,321

 

(13,621

)

 

61,637

 

240,337

 

Increase (decrease) in cash and cash equivalents

 

 

12,232

 

(610

)

 

11,622

 

Cash and cash equivalents, beginning of period

 

 

90,569

 

33,902

 

 

124,471

 

Cash and cash equivalents, end of period

 

$

 

$

102,801

 

$

33,292

 

$

 

$

136,093

 

 

32



Table of Contents

 

ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Overview

 

We are a pharmacy retail healthcare company, providing our customers and communities with a high level of care and service through various programs we offer through our two reportable business segments, our Retail Pharmacy segment and our Pharmacy Services segment. We accomplish our goal of delivering comprehensive care to our customers through our retail drugstores, RediClinic walk-in retail health clinics and transparent and traditional EnvisionRx and MedTrak PBMs. We also offer fully integrated mail-order and specialty pharmacy services through EnvisionPharmacies. Additionally through EIC, EnvisionRx also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with our retail platform, this comprehensive suite of services allows us to provide value and choice to customers, patients and payors and allows us to succeed in today’s evolving healthcare marketplace.

 

We have two reportable business segments: Retail Pharmacy segment and Pharmacy Services segment.

 

Retail Pharmacy Segment

 

Our Retail Pharmacy segment sells brand and generic prescription drugs, as well as an assortment of front-end products including health and beauty aids, personal care products, seasonal merchandise, and a large private brand product line. Our Retail Pharmacy segment generates the majority of its revenue through the sale of prescription drugs and front-end products at our 4,507 retail stores. We replenish our retail stores through a combination of direct store delivery of pharmaceutical products facilitated through our pharmacy Purchasing and Delivery Agreement with McKesson Corporation, and the majority of our front end products through our network of ten distribution centers. In addition, the Retail Pharmacy segment includes 99 RediClinic walk-in retail clinics, of which 63 are located within Rite Aid retail stores in the Baltimore/Washington D.C, Philadelphia, Seattle and New Jersey markets.

 

Pharmacy Services Segment

 

Our Pharmacy Services segment, which was formed on June 24, 2015 through our acquisition of EnvisionRx, provides a full range of pharmacy benefit services. The Pharmacy Services segment provides both transparent and traditional pharmacy benefit management (“PBM”) 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 EIC’s EnvisionRx Plus product offering. The segment’s clients are primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, other sponsors of health benefit plans and individuals throughout the United States.

 

Pending Asset Sale to WBA

 

On September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement with WBA and Buyer, which amends and restates in its entirety the Original APA. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer will purchase from us 1,932 stores, three (3) distribution centers, related inventory and other specified assets related thereto for a purchase price of approximately $4.375 billion, on a cash-free, debt-free basis, plus Buyer’s assumption of certain liabilities of Rite Aid and its affiliates.  On September 19, 2017, we announced that the waiting period under the HSR Act expired with respect to the Sale.  The expiration of the waiting period under the HSR Act satisfies one of the conditions to the closing of the Sale.  Completion of the Sale remains subject to various closing conditions, including but not limited to (i)  the absence of a material adverse effect on the stores and distribution centers being acquired in the Sale and (ii) a duplicate copy of our key information technology systems and prescription dispensing system being operational.

 

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Table of Contents

 

We, WBA and Buyer have each made customary representations and warranties. We have agreed to various covenants and agreements, including, among others, our agreement to conduct our business at the Acquired Stores in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the closing of the Sale, subject to certain exceptions, and our, WBA and Buyer’s agreement to use our respective reasonable best efforts to obtain all authorizations and approvals from governmental authorities.  We have agreed to provide transition services to Buyer for up to (3) three years after closing of the Sale.

 

The Amended and Restated Asset Purchase Agreement contains specified termination rights for us and WBA, including a mutual termination right in the event any court of competent jurisdiction or other governmental entity shall have issued a final and nonappealable legal restraint that prevents, makes illegal, prohibits, restrains or enjoins the completion of the Sale, and a termination right for WBA prior to the closing of the first set of stores in the Sale in the event we enter into an agreement to sell all of the remainder of Rite Aid or over 50% of its stock or assets to a third party. In the event that we enter into an agreement to sell all of the remainder of Rite Aid or over 50% of our stock or assets to a third party prior to the end of the transition period under the TSA, any potential acquirer would be obligated to assume our remaining obligations under the TSA.  Under the terms of the Amended and Restated Asset Purchase Agreement, we have the option to purchase pharmaceutical drugs through an affiliate of WBA under terms, including cost, that are substantially equivalent to Walgreen’s for a period of ten (10) years, subject to certain terms and conditions.

 

Overview of Financial Results

 

Our net income for the thirteen and twenty-six week periods ended September 2, 2017 was $170.7 million or $0.16 per basic and diluted share and $95.4 million or $0.09 per basic and diluted share, respectively, compared to net income of $14.8 million or $0.01 per basic and diluted share and $10.2 million or $0.01 per basic and diluted share for the thirteen and twenty-six week periods ended August 27, 2016. The increase in the thirteen and twenty-six week operating results was due primarily to the receipt of the $325.0 million termination fee from WBA for the termination of the merger agreement, effective June 28, 2017, partially offset by a decrease in Adjusted EBITDA and higher income tax expense.

 

Our Adjusted EBITDA for the thirteen and twenty-six week periods ended September 2, 2017 was $213.3 million or 2.8 percent of revenues and $405.8 million or 2.6 percent of revenues, respectively, compared $312.7 million or 3.9 percent of revenues and $598.7 million or 3.7  percent of revenues for the thirteen and twenty-six week periods ended August 27, 2016, respectively.  The decline in Adjusted EBITDA for the thirteen week period ended September 2, 2017 was due primarily to a decrease of $98.6 million in the Retail Pharmacy segment. The decrease in the Retail Pharmacy segment Adjusted EBITDA was primarily driven by a decline in pharmacy gross profit, which was due to a decline in reimbursement rates, which we were unable to fully offset with generic purchasing efficiencies, and lower script counts. The decline in pharmacy gross profit was partially offset by a reduction of SG&A expenses of $49.8 million resulting from cost control initiatives in our Retail Pharmacy segment. Adjusted EBITDA in the Pharmacy Services segment was flat as compared to the prior year.

 

The decline in our Adjusted EBITDA for the twenty-six week period ended September 2, 2017 was due primarily to a decrease of $199.5 million in the Retail Pharmacy segment driven by lower reimbursement rates and a decrease in prescription count. The decline in pharmacy reimbursement rates were partially offset by generic drug purchasing efficiencies and a reduction of SG&A expenses of $91.3 million resulting from expense reduction initiatives in our Retail Pharmacy segment. The decline in Retail Pharmacy segment Adjusted EBITDA was partially offset by an increase of $6.7 million of Pharmacy Services segment Adjusted EBITDA driven by strong operating results in the current year. Please see the sections entitled “Segment Analysis” and “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.

 

For the remainder of the year, we expect reimbursement rate pressures to be only partially offset by generic drug purchasing efficiencies and SG&A expense reductions.

 

Consolidated Results of Operations

 

Revenues and Other Operating Data

 

 

 

Thirteen Week Period Ended

 

Twenty-Six Week Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands except per share amounts)

 

Revenues(a)

 

$

7,678,903

 

$

8,029,806

 

$

15,460,356

 

$

16,213,987

 

Revenue (decline) growth

 

(4.4

)%

4.8

%

(4.6

)%

13.3

%

Net income

 

$

170,716

 

$

14,773

 

$

95,367

 

$

10,185

 

Net income per diluted share

 

$

0.16

 

$

0.01

 

$

0.09

 

$

0.01

 

Adjusted EBITDA(b)

 

$

213,270

 

$

312,653

 

$

405,834

 

$

598,655

 

Adjusted Net (Loss) Income(b)

 

$

(15,602

)

$

36,381

 

$

(62,506

)

$

53,173

 

Adjusted Net (Loss) Income per Diluted Share(b)

 

$

(0.01

)

$

0.03

 

$

(0.06

)

$

0.05

 

 

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Table of Contents

 


(a)                                 Revenues for the thirteen and twenty-six weeks ended September 2, 2017 exclude $81,857 and $163,853, respectively, of inter-segment activity that is eliminated in consolidation. Revenues for the thirteen and twenty-six weeks ended August 27, 2016 exclude $90,552 and $184,278, respectively, of inter-segment activity that is eliminated in consolidation.

 

(b)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

 

Revenues

 

Revenues decreased 4.4% and 4.6% for the thirteen and twenty-six weeks ended September 2, 2017, respectively, compared to an increase of 4.8% and 13.3% for the thirteen and twenty-six weeks ended August 27, 2016. Revenues for the thirteen week period ended September 2, 2017 were negatively impacted by a $217.6 million decrease in Retail Pharmacy segment revenues and a $142.0 million decrease in Pharmacy Services segment revenues.  Revenues for the twenty-six week period ended September 2, 2017 were negatively impacted by a $542.9 million decrease in Retail Pharmacy segment revenues and a $231.2 million decrease in Pharmacy Services segment revenues.  Same store sales trends for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016 are described in the “Segment Analysis” section below.

 

Please see the section entitled “Segment Analysis” below for additional details regarding revenues.

 

Costs and Expenses

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Cost of revenues (a)

 

$

5,891,900

 

$

6,113,063

 

$

11,914,319

 

$

12,402,944

 

Gross profit

 

1,787,003

 

1,916,743

 

3,546,037

 

3,811,043

 

Gross margin

 

23.3

%

23.9

%

22.9

%

23.5

%

Selling, general and administrative expenses

 

1,734,306

 

1,778,247

 

3,495,596

 

3,571,494

 

Selling, general and administrative expenses as a percentage of revenues

 

22.6

%

22.1

%

22.6

%

22.0

%

Lease termination and impairment charges

 

3,128

 

7,233

 

7,214

 

13,014

 

Interest expense

 

111,261

 

105,388

 

221,198

 

210,501

 

(Gain) loss on sale of assets, net

 

(14,495

)

174

 

(20,216

)

1,230

 

 


(a)                                 Cost of revenues for the thirteen and twenty-six weeks ended September 2, 2017 exclude $81,857 and $163,853, respectively, of inter-segment activity that is eliminated in consolidation. Cost of revenues for the thirteen and twenty-six weeks ended August 27, 2016 exclude $90,552 and $184,278, respectively, of inter-segment activity that is eliminated in consolidation.

 

Gross Profit and Cost of Revenues

 

Gross profit decreased by $129.7 million for the thirteen week period ended September 2, 2017 compared to the thirteen week period ended August 27, 2016. Gross profit decreased by $265.0 million for the twenty-six week period ended September 2, 2017 compared to the twenty-six week period ended August 27, 2016. Gross profit for the thirteen week period ended September 2, 2017 includes a decline of $135.6 million in our Retail Pharmacy segment, partially offset by increased gross profit of $5.9 million in our Pharmacy Services segment. Gross profit for the twenty-six week period ended September 2, 2017 includes a decline of $286.9 million in our Retail Pharmacy segment, partially offset by increased gross profit of $21.9 million in our Pharmacy Services segment. Gross margin was 23.3% and 22.9%, respectively for the thirteen and twenty-six week periods ended September 2, 2017 compared to 23.9% and 23.5%, respectively, for the thirteen and twenty-six week periods ended August 27, 2016. The decrease in gross margin for the thirteen and twenty-six week periods ended September 2, 2017 is due primarily to lower reimbursement rates in the Retail Pharmacy segment that were not fully offset by generic drug purchasing efficiencies. Please see the section entitled “Segment Analysis” for a more detailed description of gross profit and gross margin results by segment.

 

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Table of Contents

 

Selling, General and Administrative Expenses

 

SG&A decreased $43.9 million and $75.9 million for the thirteen and twenty-six week periods ended September 2, 2017, respectively, compared to the thirteen and twenty-six week periods ended August 27, 2016.  The decrease in SG&A for the thirteen week period ended September 2, 2017 includes a decrease of $49.8 million relating to our Retail Pharmacy segment, partially offset by an increase of $5.8 million relating to our Pharmacy Services segment. The decrease in SG&A for the twenty-six week period ended September 2, 2017 includes a decrease of $91.3 million relating to our Retail Pharmacy segment, partially offset by an increase of $15.4 million relating to our Pharmacy Services segment. Please see the section entitled “Segment Analysis” below for additional details regarding SG&A.

 

Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

Impairment charges

 

$

35

 

$

78

 

$

694

 

$

697

 

Lease termination charges

 

3,093

 

7,155

 

6,520

 

12,317

 

 

 

$

3,128

 

$

7,233

 

$

7,214

 

$

13,014

 

 

Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Lease Termination and Impairment Charges” included in our Fiscal 2017 10-K for a detailed description of our impairment and lease termination methodology.

 

Interest Expense

 

Interest expense was $111.3 million and $221.2 million for the thirteen and twenty-six week periods ended September 2, 2017, respectively, compared to $105.4 million and $210.5 million for the thirteen and twenty-six week periods ended August 27, 2016, respectively. Interest expense was higher due to higher average outstanding borrowings on our Amended and Restated Senior Secured Credit Facility. The weighted average interest rates on our indebtedness for the twenty-six week periods ended September 2, 2017 and August 27, 2016 were 5.5% and 5.3%, respectively.

 

Income Taxes

 

We recorded an income tax expense of $107.1 million and $10.9 million for the thirteen week periods ended September 2, 2017 and August 27, 2016, respectively, and an income tax expense of $71.9 million and $4.6 million for the twenty-six week periods ended September 2, 2017 and August 27, 2016, respectively.  The effective tax rate for the thirteen week periods ended September 2, 2017 and August 27, 2016 was 38.5% and 42.5%, respectively.  The effective tax rate for the twenty-six week periods ended September 2, 2017 and August 27, 2016 was 42.9% and 31.2%, respectively.  The effective tax rate for the thirteen and twenty-six week periods ended September 2, 2017 includes an adjustment of 3.0% and 10.4%, respectively, related to the tax impact of the Walgreens Boots Alliance merger termination fee.  The lower effective income tax expense rate for the twenty-six week period ended August 27, 2016 is the result of a discrete income tax benefit recorded for the lapse of a statute of limitations on an uncertain tax position which lowered the Company’s effective income tax expense rate by 8.9%.

 

We recognize tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.

 

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.

 

We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain.  We will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. We continue to maintain a valuation allowance against net deferred tax assets of $234.7 million and $226.7 million, which relates primarily to state deferred tax assets at September 2, 2017 and March 4, 2017, respectively.

 

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Table of Contents

 

Segment Analysis

 

We evaluate the Retail Pharmacy and Pharmacy Services segments’ performance based on revenue, gross profit, and Adjusted EBITDA.  The following is a reconciliation of our segments to the condensed consolidated financial statements:

 

 

 

Retail
Pharmacy
Segment

 

Pharmacy Services
Segment

 

Intersegment
Eliminations (1)

 

Consolidated
Totals

 

Thirteen Week Period Ended

 

 

 

 

 

 

 

 

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,267,929

 

$

1,492,831

 

$

(81,857

)

$

7,678,903

 

Gross Profit

 

1,683,741

 

103,262

 

 

1,787,003

 

Adjusted EBITDA(*)

 

163,995

 

49,275

 

 

213,270

 

August 27, 2016:

 

 

 

 

 

 

 

 

 

Revenue

 

$

6,485,482

 

$

1,634,876

 

$

(90,552

)

$

8,029,806

 

Gross Profit

 

1,819,349

 

97,394

 

 

1,916,743

 

Adjusted EBITDA(*)

 

262,643

 

50,010

 

 

312,653

 

Twenty-Six Week Period Ended

 

 

 

 

 

 

 

 

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenue

 

$

12,618,137

 

$

3,006,072

 

$

(163,853

)

$

15,460,356

 

Gross Profit

 

3,337,803

 

208,234

 

 

3,546,037

 

Adjusted EBITDA(*)

 

307,960

 

97,874

 

 

405,834

 

August 27, 2016:

 

 

 

 

 

 

 

 

 

Revenue

 

$

13,161,030

 

$

3,237,235

 

$

(184,278

)

$

16,213,987

 

Gross Profit

 

3,624,716

 

186,327

 

 

3,811,043

 

Adjusted EBITDA(*)

 

507,470

 

91,185

 

 

598,655

 

 


(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.

 

(*)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

 

Retail Pharmacy Segment Results of Operations

 

Revenues and Other Operating Data

 

 

 

Thirteen Week Period Ended

 

Twenty-Six Week Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Revenues

 

$

6,267,929

 

$

6,485,482

 

$

12,618,137

 

$

13,161,030

 

Revenue decline

 

(3.4

)%

(2.4

)%

(4.1

)%

(1.0

)%

Same store sales decline

 

(3.4

)%

(2.5

)%

(3.7

)%

(1.0

)%

Pharmacy sales decline

 

(5.1

)%

(3.7

)%

(5.2

)%

(1.8

)%

Same store prescription count (decline) growth, adjusted to 30-day equivalents

 

(1.8

)%

0.4

%

(1.4

)%

0.9

%

Same store pharmacy sales decline

 

(4.6

)%

(3.6

)%

(4.8

)%

(1.8

)%

Pharmacy sales as a % of total retail sales

 

67.8

%

68.5

%

67.8

%

68.7

%

Third party sales as a % of total pharmacy sales

 

98.3

%

98.1

%

98.3

%

98.0

%

Front-end sales (decline) growth

 

(1.2

)%

0.0

%

(1.5

)%

0.6

%

Same store front-end sales (decline) growth

 

(0.9

)%

0.1

%

(1.2

)%

0.7

%

Front-end sales as a % of total retail sales

 

32.2

%

31.5

%

32.2

%

31.3

%

Adjusted EBITDA(*)

 

$

163,995

 

$

262,643

 

$

307,960

 

$

507,470

 

Store data:

 

 

 

 

 

 

 

 

 

Total stores (beginning of period)

 

4,523

 

4,560

 

4,536

 

4,561

 

New stores

 

1

 

3

 

2

 

7

 

Store acquisitions

 

 

1

 

 

2

 

Closed stores

 

(17

)

(14

)

(31

)

(20

)

Total stores (end of period)

 

4,507

 

4,550

 

4,507

 

4,550

 

Relocated stores

 

1

 

6

 

5

 

10

 

Remodeled and expanded stores

 

55

 

85

 

123

 

164

 

 

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(*)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

 

Revenues

 

Revenues decreased 3.4% for the thirteen weeks ended September 2, 2017 compared to a decrease of 2.4% for the thirteen weeks ended August 27, 2016. The decrease in revenues for the thirteen week period ended September 2, 2017 was primarily a result of the decrease in pharmacy same store sales.

 

Pharmacy same store sales decreased by 4.6% for the thirteen week period ended September 2, 2017 compared to the 3.6% decrease in the thirteen week period ended August 27, 2016. The decrease in the current period is due primarily to the 1.8% decrease in same store prescription count compared to the prior year period driven in part by being excluded from certain pharmacy networks that we participated in last year.  Same store prescription sales were also impacted by continued lower reimbursement rates and an approximate 1.9% negative impact from generic introductions.

 

Front-end same store sales decreased 0.9% during the thirteen week period ended September 2, 2017 compared to an increase of 0.1% during the thirteen week period ended August 27, 2016. The decrease in front end same store sales is due to a highly competitive retail sales environment.

 

Revenues decreased 4.1% for the twenty-six weeks ended September 2, 2017 compared to a decrease of 1.0% for the twenty-six weeks ended August 27, 2016. The decrease in revenues for the twenty-six week period ended September 2, 2017 was primarily a result of the decrease in pharmacy same store sales.

 

Pharmacy same store sales decreased by 4.8% for the twenty-six week period ended September 2, 2017 compared to the 1.8% decrease in the twenty-six week period ended August 27, 2016. The decrease in the current period is due primarily to continued lower reimbursement rates, an approximate 2.1% negative impact from generic introductions, and a 1.4% decrease in same store prescription count.

 

Front-end same store sales decreased by 1.2% during the twenty-six week period ended September 2, 2017 compared to the 0.7% increase in the twenty-six week period ended August 27, 2016. The decrease in front end same store sales is due to a highly competitive retail sales environment.

 

We include in same store sales all stores that have been open at least one year. Relocation stores are not included in same store sales until one year has lapsed.

 

Costs and Expenses

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Cost of revenues

 

$

4,584,188

 

$

4,666,133

 

$

9,280,334

 

$

9,536,314

 

Gross profit

 

1,683,741

 

1,819,349

 

3,337,803

 

3,624,716

 

Gross margin

 

26.9

%

28.1

%

26.5

%

27.5

%

FIFO gross profit(*)

 

1,689,373

 

1,833,109

 

3,360,309

 

3,652,227

 

FIFO gross margin(*)

 

27.0

%

28.3

%

26.6

%

27.8

%

Selling, general and administrative expenses

 

1,658,873

 

1,708,633

 

3,341,264

 

3,432,536

 

Selling, general and administrative expenses as a percentage of revenues

 

26.5

%

26.4

%

26.5

%

26.1

%

 


(*)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

 

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Gross Profit and Cost of Revenues

 

Gross profit decreased $135.6 million for the thirteen week period ended September 2, 2017 as compared to the thirteen week period ended August 27, 2016.  Gross profit was negatively impacted by lower reimbursement rates that were not fully offset by generic drug purchasing efficiencies and a decrease in prescription count.

 

Gross profit decreased $286.9 million for the twenty-six week period ended September 2, 2017 as compared to the twenty-six week period ended August 27, 2016. Gross profit was negatively impacted by the decrease in pharmacy gross profit due to lower reimbursement rates that were not fully offset by generic drug purchasing efficiencies and a decrease in prescription count.

 

Gross margin was 26.9% and 26.5% of sales for the thirteen and twenty-six week periods ended September 2, 2017, respectively, compared to 28.1% and 27.5% of sales for the thirteen and twenty-six week periods ended August 27, 2016, respectively. The decrease in gross margin for the thirteen and twenty-six week period was due primarily to lower reimbursement rates that were not fully offset by generic drug purchasing efficiencies, partially offset by a lower estimated LIFO charge.

 

We use the last-in, first-out (“LIFO”) method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and inventory levels are final. Therefore, LIFO costs for interim period financial statements are estimated. LIFO charges were $5.6 million and $22.5 million for the thirteen and twenty-six week periods ended September 2, 2017, respectively, compared to $13.8 million and $27.5 million for the thirteen and twenty-six week periods ended August 27, 2016, respectively.

 

Selling, General and Administrative Expenses

 

SG&A expenses as a percentage of revenues were 26.5% in the thirteen week period ended September 2, 2017 compared to 26.4% in the thirteen week period ended August 27, 2016. The increase in SG&A as a percentage of revenues was due primarily to fixed costs increasing as a percentage of revenues, as revenues declined. SG&A dollars decreased by $49.8 million due to expense efficiency initiatives that resulted in reduced payroll and operating expenses.

 

SG&A expenses as a percentage of revenues were 26.5% in the twenty-six week period ended September 2, 2017 compared to 26.1% in the twenty-six week period ended August 27, 2016. The increase in SG&A as a percentage of revenues was due primarily to fixed costs increasing as a percentage of revenues, as revenues declined. SG&A dollars decreased by $91.3 million due to expense efficiency initiatives that resulted in reduced payroll and operating expenses.

 

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Pharmacy Services Segment Results of Operations

 

Acquisition of EnvisionRx

 

On June 24, 2015, we completed our acquisition of EnvisionRx, pursuant to the terms of the agreement (“Agreement”) dated February 10, 2015. EnvisionRx, our Pharmacy Services segment, is a full-service pharmacy benefit provider. EnvisionRx provides both transparent and traditional PBM options through its EnvisionRx and MedTrak PBMs. 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 EIC’s EnvisionRx Plus Silver product for the low income auto-assign market and its Clear Choice product for the chooser market. EnvisionRx operates as our 100 percent owned subsidiary. The acquisition of EnvisionRx enabled us to expand our retail healthcare platform and enhance our health and wellness offerings by combining EnvisionRx’s broad suite of PBM and pharmacy-related businesses with our established retail platform to provide our customers and patients with an integrated offering across retail, specialty and mail-order channels.

 

Revenues and Other Operating Data

 

 

 

Thirteen Week Period Ended

 

Twenty-Six Week Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars and plan
members in thousands)

 

Revenues

 

$

1,492,831

 

$

1,634,876

 

$

3,006,072

 

$

3,237,235

 

Revenue decline (1)

 

(8.7

)%

N/A

 

(7.1

)%

N/A

 

Adjusted EBITDA(*)

 

$

49,275

 

$

50,010

 

$

97,874

 

$

91,185

 

Plan Members

 

3,765

 

4,064

 

3,765

 

4,064

 

 


(*)                                 See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.

(1)                                 The August 27, 2016 amounts are labeled N/A as we do not have a full comparable period.

 

Revenues

 

Pharmacy Services segment revenue for the thirteen week period ended September 2, 2017 was $1,492.8 million as compared to revenue of $1,634.9 million for the thirteen week period ended August 27, 2016. Pharmacy Services segment revenue for the twenty-six week period ended September 2, 2017 was $3,006.1 million compared to revenue of $3,237.2 million for the twenty-six week period ended August 27, 2016. The decrease in the thirteen and twenty-six week revenue for the segment is due to our election to participate in fewer Medicare Part D regions, which caused a decrease in covered lives at EIC.

 

Costs and Expenses

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Cost of revenues

 

$

1,389,569

 

$

1,537,482

 

$

2,797,838

 

$

3,050,908

 

Gross profit

 

103,262

 

97,394

 

208,234

 

186,327

 

Gross margin

 

6.9

%

6.0

%

6.9

%

5.8

%

Selling, general and administrative expenses

 

75,433

 

69,614

 

154,332

 

138,958

 

Selling, general and administrative expenses as a percentage of revenues

 

5.1

%

4.3

%

5.1

%

4.3

%

 

Gross Profit and Cost of Revenues

 

Gross profit for the thirteen week period ended September 2, 2017 was $103.3 million as compared to gross profit of $97.4 million for the thirteen week period ended August 27, 2016. Gross profit for the twenty-six week period ended September 2, 2017 was $208.2 million as compared to gross profit of $186.3 million for the twenty-six week period ended August 27, 2016. The increase in the thirteen and twenty-six week gross profit for the segment is primarily due to improved customer mix.

 

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Gross margin was 6.9% of sales for the thirteen week period ended September 2, 2017 compared to 6.0% of sales for the thirteen week period ended August 27, 2016. Gross margin was 6.9% of sales for the twenty-six week period ended September 2, 2017 compared to 5.8% of sales for the twenty-six week period ended August 27, 2016. The increase in the thirteen and twenty-six week gross margin for the segment is due primarily to improved customer mix.

 

Selling, General and Administrative Expenses

 

Pharmacy Services segment selling, general and administrative expenses for the thirteen week period ended September 2, 2017 was $75.4 million or 5.1% of revenues as compared to $69.6 million or 4.3% of revenues for the thirteen week period ended August 27, 2016. Pharmacy Services segment selling, general and administrative expenses for the twenty-six week period ended September 2, 2017 was $154.3 million or 5.1% of revenues as compared to $139.0 million or 4.3% of revenues for the twenty-six week period ended August 27, 2016. The increase in the thirteen and twenty-six week period selling, general and administrative expenses is primarily the result of additional payroll costs.

 

Liquidity and Capital Resources

 

General

 

We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our Amended and Restated Senior Secured Credit Facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures. Total liquidity as of September 2, 2017 was $1,448.6 million, which consisted of revolver borrowing capacity of $1,400.7 million and invested cash of $47.9 million.

 

Credit Facilities

 

Our Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $3.7 billion 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). We are 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 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.

 

Our ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At September 2, 2017, we had $2,240.0 million of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $59.3 million, which resulted in additional borrowing capacity of $1,400.7 million. If at any time the total credit exposure outstanding under our Amended and Restated Senior Secured Credit Facility and the principal amount of our other senior obligations exceeds the borrowing base, we will be required to make certain other mandatory prepayments to eliminate such shortfall.

 

The Amended and Restated Senior Secured Credit Facility restricts us and all of our subsidiaries that guarantee our 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”) from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are outstanding (not including cash located in our store and lockbox deposit accounts and cash necessary to cover our current liabilities) and from accumulating cash on hand with revolver borrowings in excess of $100.0 million over three consecutive business days. The Amended and Restated Senior Secured Credit Facility also states that if at any time (other than following the exercise of remedies or acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority debt) either (a) an event of default exists under our Amended and Restated Senior Secured Credit Facility or (b) the sum of revolver availability under our Amended and Restated Senior Secured Credit Facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $275.0 million for three consecutive business days or less than or equal to $200.0 million on any day (a “cash sweep period”), the funds in our deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the Amended and Restated Senior Secured Credit Facility, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of our Amended and Restated Senior Secured Credit Facility.

 

The Amended and Restated Senior Secured Credit Facility allows us to have outstanding, at any time, up to $1.5 billion 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 $750.0 million of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall

 

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Table of Contents

 

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 us 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 our 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 we are 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 we maintain availability under our revolver of more than $365.0 million.

 

The Amended and Restated Senior Secured Credit Facility has a financial covenant that requires us 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 $200.0 million or (b) on the third consecutive business day on which availability under the revolver is less than $250.0 million 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 $250.0 million. As of September 2, 2017, we had availability under our revolver of $1,400.7 million, our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were 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 provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment repurchase, redemption or defeasance of such debt.

 

We also have 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 we choose 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 we choose to make LIBOR borrowings, or at Citibank’s base rate plus 2.875%.

 

The second priority secured term loan facilities and the indentures that govern our secured and guaranteed unsecured notes contain restrictions on the amount of additional secured and unsecured debt that can be incurred by us. As of September 2, 2017, the amount of additional secured debt that could be incurred under the most restrictive covenant of the second priority secured term loan facilities and these indentures was approximately $1.8 billion (which amount does not include the ability to enter into certain sale and leaseback transactions). Assuming a fully drawn revolver and the outstanding letters of credit, we could incur an additional $350.0 million in secured debt. The ability to issue additional unsecured debt under these indentures is generally governed by an interest coverage ratio test. As of September 2, 2017, we had the ability to issue additional unsecured debt under the second lien credit facilities and other indentures.

 

Net Cash Provided by/Used in Operating, Investing and Financing Activities

 

Cash flow provided by operating activities was $297.8 million and $19.0 million in the twenty-six week periods ended September 2, 2017 and August 27, 2016, respectively. Operating cash flow was positively impacted by the $325.0 million WBA merger termination fee, the corresponding change in deferred taxes, and an increase in accounts payable. Accounts payable increased due to the timing of inventory purchases at our Retail Pharmacy segment and increased amounts payable to our pharmacy network in our Pharmacy Services segment. These positive working capital changes were partially offset by increases in accounts receivable, inventory and other assets and liabilities.  Accounts receivable increased primarily due to increased receivables at our Pharmacy Services segment, based on their normal business cycle.  Front end inventory increased at our Retail Pharmacy segment due to seasonal inventory build.  Other assets and liabilities increased due to the timing of rent payments in our Retail Pharmacy segment.

 

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Table of Contents

 

Cash used in investing activities was $112.5 million and $247.8 million for the twenty-six week periods ended September 2, 2017 and August 27, 2016, respectively. Cash used for the purchase of property, plant, and equipment was lower than in the prior year primarily due to fewer Wellness store remodels in the current year.

 

Cash used in financing activities was $191.8 million for the twenty-six week period ended September 2, 2017 as compared to cash provided by financing activities of $240.3 million for the twenty-six week period ended August 27, 2016. Cash used in financing activities for the twenty-six week period ended September 2, 2017 reflects net payments on the revolver and scheduled payments on our long-term debt and capital leases.

 

Capital Expenditures

 

During the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016 capital expenditures were as follows:

 

 

 

Thirteen Week
Period Ended

 

Twenty-Six Week
Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

New store construction, store relocation and store remodel projects

 

$

37,086

 

$

66,079

 

$

79,711

 

$

127,491

 

Technology enhancements, improvements to distribution centers and other corporate requirements

 

22,637

 

53,562

 

40,750

 

98,227

 

Purchase of prescription files from other retail pharmacies

 

4,839

 

12,488

 

13,073

 

28,869

 

Total capital expenditures

 

$

64,562

 

$

132,129

 

$

133,534

 

$

254,587

 

 

Future Liquidity

 

We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing; (ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less debt; (iv) render us more vulnerable to general adverse economic and industry conditions; and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Based upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the revolver and other sources of liquidity will be adequate to meet our requirements for working capital, debt service and capital expenditures at least for the next twelve months, or until the closing of the Amended and Restated Asset Purchase Agreement, at which time we anticipate a significant reduction in our debt levels. Based on our liquidity position, which we expect to remain strong throughout the year, we do not expect to be subject to the fixed charge covenant in our Amended and Restated Senior Secured Credit Facility in the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance, and other relevant circumstances. From time to time, we may seek additional deleveraging transactions, including entering into transactions to exchange debt for shares of common stock, issuance of equity (including preferred stock and convertible securities), repurchase or redemption of outstanding indebtedness, or seek to refinance our outstanding debt (including our Amended and Restated Senior Secured Credit Facility) or may otherwise seek transactions to reduce interest expense and extend debt maturities. Any of these transactions could impact our financial results.

 

Critical Accounting Policies and Estimates

 

For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates” included in our Fiscal 2017 10-K.

 

Factors Affecting Our Future Prospects

 

For a discussion of risks related to our financial condition, operations and industry, refer to “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in our Fiscal 2017 10-K.

 

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Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures

 

In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP metrics serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments, charges or credits for facility closing and impairment, inventory write-downs related to store closings, debt retirements, the Walgreens Boots Alliance merger termination fee, and other items (including stock-based compensation expense, merger and acquisition-related costs, severance and costs related to distribution center closures, gain or loss on sale of assets, and revenue deferrals related to our customer loyalty program). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.

 

The following is a reconciliation of our net income to Adjusted EBITDA for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016:

 

 

 

Thirteen Week
Period Ended

 

Twenty-Six Week
Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Net income

 

$

170,716

 

$

14,773

 

$

95,367

 

$

10,185

 

Interest expense

 

111,261

 

105,388

 

221,198

 

210,501

 

Income tax expense

 

107,087

 

10,928

 

71,878

 

4,619

 

Depreciation and amortization expense

 

132,012

 

142,051

 

274,104

 

280,839

 

LIFO charge

 

5,632

 

13,760

 

22,506

 

27,511

 

Lease termination and impairment charges

 

3,128

 

7,233

 

7,214

 

13,014

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

(325,000

)

 

Other

 

8,434

 

18,520

 

38,567

 

51,986

 

Adjusted EBITDA

 

$

213,270

 

$

312,653

 

$

405,834

 

$

598,655

 

 

The following is a reconciliation of our net income to Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016. Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization of EnvisionRx intangible assets, merger and acquisition-related costs, loss on debt retirements, LIFO adjustments, and the Walgreens Boots Alliance merger termination fee. We calculate Adjusted Net Income (Loss) per Diluted Share using our above-referenced definition of Adjusted Net Income (Loss). We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share serve as appropriate measures to be used in evaluating the performance of our business and help our investors better compare our operating performance over multiple periods.

 

 

 

Thirteen Week
Period Ended

 

Twenty-Six Week
Period Ended

 

 

 

September 2,
2017

 

August 27,
2016

 

September 2,
2017

 

August 27,
2016

 

 

 

(dollars in thousands)

 

Net income

 

$

170,716

 

$

14,773

 

$

95,367

 

$

10,185

 

Add back—Income tax expense

 

107,087

 

10,928

 

71,878

 

4,619

 

Income before income taxes

 

277,803

 

25,701

 

167,245

 

14,804

 

Adjustments:

 

 

 

 

 

 

 

 

 

Amortization of EnvisionRx intangible assets

 

19,560

 

20,853

 

40,276

 

41,168

 

LIFO charge

 

5,632

 

13,760

 

22,506

 

27,511

 

Merger and Acquisition-related costs

 

13,883

 

1,402

 

21,121

 

4,158

 

Walgreens Boots Alliance merger termination fee

 

(325,000

)

 

(325,000

)

 

Adjusted (loss) income before income taxes

 

(8,122

)

61,716

 

(73,852

)

87,641

 

Adjusted income tax expense (benefit)(a)

 

7,480

 

25,335

 

(11,346

)

34,468

 

Adjusted net (loss) income

 

$

(15,602

)

$

36,381

 

$

(62,506

)

$

53,173

 

Net income per diluted share

 

$

0.16

 

$

0.01

 

$

0.09

 

$

0.01

 

Adjusted net (loss) income per diluted share

 

$

(0.01

)

$

0.03

 

$

(0.06

)

$

0.05

 

 

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(a)                                 The fiscal year 2018 and 2017 annual effective tax rates, adjusted to exclude amortization of EnvisionRx intangible assets, LIFO charges, Merger and Acquisition-related costs and the Walgreens Boots Alliance merger termination fee from book income, are used for the thirteen and twenty-six weeks ended September 2, 2017 and August 27, 2016, respectively.

 

In addition to Adjusted EBITDA, Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges), and Free Cash Flow (Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, acquisition costs and the change in working capital).

 

We include these non-GAAP financial measures in our earnings announcements in order to provide transparency to our investors and enable investors to better compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.

 

ITEM 3.  Quantitative and Qualitative Disclosures About Market Risk

 

Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our major market risk exposure is changing interest rates. Increases in interest rates would increase our interest expense. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions. We currently do not have any derivative transactions outstanding.

 

The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted average interest rates by expected maturity dates as of September 2, 2017.

 

Fiscal Year

 

2018

 

2019

 

2020

 

2021

 

2022

 

Thereafter

 

Total

 

Fair Value
at
09/02/2017

 

 

 

(dollars in thousands)

 

Long-term debt, including current portion, excluding capital lease obligations

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Fixed Rate

 

$

90

 

$

 

$

 

$

902,000

 

$

810,000

 

$

2,223,000

 

$

3,935,090

 

$

3,932,679

 

Average Interest Rate

 

7.61

%

0.00

%

0.00

%

9.25

%

6.75

%

6.38

%

7.11

%

 

 

Variable Rate

 

$

 

$

 

$

2,240,000

 

$

470,000

 

$

500,000

 

$

 

$

3,210,000

 

$

3,214,775

 

Average Interest Rate

 

0.00

%

0.00

%

2.92

%

5.75

%

4.88

%

0.00

%

3.64

%

 

 

 

Our ability to satisfy interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations could be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed.

 

The interest rate on our variable rate borrowings, which include our revolving credit facility, Tranche 1 Term Loan and our Tranche 2 Term Loan, are all based on LIBOR. However, the interest rate on our Tranche 1 Term Loan and Tranche 2 Term Loan have a LIBOR floor of 100 basis points. If the market rates of interest for LIBOR changed by 100 basis points as of September 2, 2017, our annual interest expense would change by approximately $34.4 million.

 

A change in interest rates does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures. Increases in interest rates would also impact our ability to refinance existing maturities on favorable terms.

 

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ITEM 4.  Controls and Procedures

 

(a)  Disclosure Controls and Procedures

 

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.

 

(b)  Changes in Internal Control over Financial Reporting

 

There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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PART II. OTHER INFORMATION

 

ITEM 1.  Legal Proceedings

 

Certain legal proceedings in which we are involved are discussed in Part I, Item 3 of our Fiscal Year 2017 10-K filed with the SEC on May 3, 2017, and in Part II, Item 1 of our Fiscal Year 2018, first quarter 10-Q filed with the SEC on July 6, 2017.  The following discussion is limited to certain recent developments concerning our legal proceedings and should be read in conjunction with the 10-K and our Fiscal Year 2018, first quarter 10-Q.

 

On July 12, 2017, the Hering plaintiffs filed a motion to set a status conference.  Later the same day, the Pennsylvania District Court ordered the plaintiffs to submit a letter advising the court of the purpose of the requested status conference, any claims that the plaintiffs believe remain in light of the dissolution of the merger, and if any claims remain, the relief the plaintiffs seek.  Pursuant to the court’s order, the plaintiffs’ letter was submitted on July 21, 2017, and the Rite Aid Defendants submitted a letter in response on July 28, 2017.  On August 4, 2017, the Pennsylvania District Court entered an order lifting the stay, noting that the original claims in this matter are now moot, and directed the plaintiffs to file a motion for leave to amend the complaint, with brief in support thereof, on or before September 15, 2017.  On September 12, 2017, the Pennsylvania District Court granted the plaintiffs’ unopposed motion to extend time, extending the deadline for the plaintiffs to file their motion to September 22, 2017.

 

On August 3, 2017 in the Indergit lawsuit, the court entered an order granting plaintiff’s unopposed motion for preliminary approval of the settlement and notice of the settlement was sent to putative class members on September 7, 2017.  A final approval hearing is scheduled for January 11, 2018.  In the event the settlement does not receive final approval by the court, the litigation may resume. If such occurs, we presently are not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit.

 

In the DUR/Code 1 matter, we received a draft copy of the government’s complaint, which has yet to be filed.  At this stage of the proceedings, we are not able to either predict the outcome or estimate a potential range of loss with respect to this matter, and are vigorously defending this potential lawsuit.

 

On July 7, 2017 in the Omlansky lawsuit, our demurrer to the Fourth Amended Complaint was sustained without leave for Relator to amend.  The court entered a final judgment of dismissal of each of Relator’s claims on August 3, 2017.  Relator’s time to appeal the judgment has yet to expire.  At this stage of the proceedings, and due to the legal issues Relator may attempt to raise on appeal, we are unable to predict the outcome of any potential appeal by Relator.

 

ITEM 1A.  Risk Factors

 

In addition to the information set forth in this Quarterly Report, you should carefully consider the factors discussed in Part I, Item 1A, “Risk Factors” in our Fiscal 2017 10-K, which could materially affect our business, financial condition or future results.

 

ITEM 2.  Unregistered Sales of Equity Securities and Use of Proceeds

 

Issuer Repurchases of Equity Securities.  The table below is a listing of repurchases of common stock during the second quarter of fiscal 2018.

 

Fiscal period:

 

Total
Number of
Shares
Repurchased

 

Average
Price Paid
Per Share

 

Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs

 

Maximum Number of
Shares that may yet be
Purchased under the
Plans or Programs

 

June 4 to July 1, 2017(1)

 

849

 

$

3.10

 

 

 

July 2 to July 29, 2017(1)

 

536

 

$

2.32

 

 

 

July 30 to September 2, 2017(1)

 

24

 

$

2.22

 

 

 

 


(1)                                 Represents shares withheld by the Company, at the election of certain holders of vested restricted stock, with a market value approximating the amount of withholding taxes due.

 

ITEM 3.  Defaults Upon Senior Securities

 

Not applicable.

 

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ITEM 4.  Mine Safety Disclosures

 

Not applicable.

 

ITEM 5.  Other Information

 

Not applicable.

 

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ITEM 6.  Exhibits

 

(a)                                 The following exhibits are filed as part of this report.

 

Exhibit
Numbers

 

Description

 

Incorporation By Reference To

2.1

 

Amended and Restated Asset Purchase Agreement, dated September 18, 2017, among Rite Aid Corporation, Walgreens Boots Alliance, Inc. and Walgreen Co.

 

Exhibit 2.1 to Form 8-K, filed on September 19, 2017

3.1

 

Amended and Restated Certificate of Incorporation, dated January 22, 2014

 

Exhibit 3.1 to Form 10-K, filed on April 23, 2014

3.2

 

Amended and Restated By-Laws

 

Exhibit 3.2 to Form 10-Q, filed on January 6, 2016

4.1

 

Indenture, dated as of February 27, 2012, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., as trustee, related to the Company’s 9.25% Senior Notes due 2020

 

Exhibit 4.1 to Form 8-K, filed on February 27, 2012

4.2

 

First Supplemental Indenture, dated as of May 15, 2012, among Rite Aid Corporation, the subsidiaries named therein and The Bank of New York Mellon Trust Company, N.A. to the Indenture, dated as of February 27, 2012, among Rite Aid Corporation, the subsidiary guarantors named therein and The Bank of New York Trust Company, N.A., related to the Company’s 9.25% Senior Notes due 2020

 

Exhibit 4.23 to the Registration Statement on Form S-4, File No. 181651, filed on May 24, 2012

4.3

 

Indenture, dated as of August 1, 1993, between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company’s 7.70% Notes due 2027

 

Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993

4.4

 

Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and U.S. Bank Trust National Association (as successor trustee to Morgan Guaranty Trust Company of New York) to the Indenture dated as of August 1, 1993, between Rite Aid Corporation and Morgan Guaranty Trust Company of New York, relating to the Company’s 7.70% Notes due 2027

 

Exhibit 4.1 to Form 8-K filed on February 7, 2000

4.5

 

Indenture, dated as of December 21, 1998, between Rite Aid Corporation, as issuer, and Harris Trust and Savings Bank, as trustee, related to the Company’s 6.875% Notes due 2028

 

Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999

4.6

 

Supplemental Indenture, dated as of February 3, 2000, between Rite Aid Corporation and Harris Trust and Savings Bank to the Indenture, dated December 21, 1998, between Rite Aid Corporation and Harris Trust and Savings Bank, related to the Company’s 6.875% Notes due 2028

 

Exhibit 4.4 to Form 8-K, filed on February 7, 2000

4.7

 

Indenture, dated as of July 2, 2013, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.75% Senior Notes due 2021

 

Exhibit 4.1 to Form 8-K, filed on July 2, 2013

4.8

 

Indenture, dated as of April 2, 2015, among Rite Aid Corporation, as issuer, the subsidiary guarantors named therein and The Bank of New York Mellon Trust Company, N.A., related to the Company’s 6.125% Senior Notes due 2023

 

Exhibit 4.1 to Form 8-K, filed on April 2, 2015

10.1

 

Amendment and Restated Employment Agreement by and between Rite Aid Corporation and Bryan Everett, dated as of August 29, 2017

 

Filed herewith

10.2

 

Retention Agreement, dated August 11, 2017, by and between Douglas Donley

 

Filed herewith

10.3

 

Retention Agreement, dated August 11, 2017, by and between Bryan Everett

 

Filed herewith

10.4

 

Retention Agreement, dated August 11, 2017, by and between Darren Karst

 

Filed herewith

10.5

 

Retention Agreement, dated August 11, 2017, by and between Jocelyn Konrad

 

Filed herewith

10.6

 

Retention Agreement, dated August 11, 2017, by and between Enio Montini

 

Filed herewith

10.7

 

Retention Agreement, dated August 11, 2017, by and between David Abelman

 

Filed herewith

11

 

Statement regarding computation of earnings per share (See Note 4 to the condensed consolidated financial statements)

 

Filed herewith

 

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Exhibit
Numbers

 

Description

 

Incorporation By Reference To

31.1

 

Certification of CEO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended

 

Filed herewith

31.2

 

Certification of CFO pursuant to Rule 13a-14(a) or Rule 15d-14(a) under the Securities Exchange Act of 1934, as amended

 

Filed herewith

32

 

Certification of CEO and CFO pursuant to 18 United States Code, Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002

 

Filed herewith

101.

 

The following materials are formatted in Extensible Business Reporting Language (XBRL): (i) Condensed Consolidated Balance Sheets at September 2, 2017 and March 4, 2017, (ii) Condensed Consolidated Statements of Operations for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016, (iii) Condensed Consolidated Statements of Comprehensive Income for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016, (iv) Condensed Consolidated Statements of Cash Flows for the twenty-six week periods ended September 2, 2017 and August 27, 2016 and (v) Notes to Condensed Consolidated Financial Statements, tagged in detail.

 

 

 

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SIGNATURES

 

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

 

Date: October 5, 2017

RITE AID CORPORATION

 

 

 

By:

/s/ DARREN W. KARST

 

 

Darren W. Karst

 

 

Senior Executive Vice President, Chief Financial Officer and Chief Administrative Officer

 

 

 

Date: October 5, 2017

By:

/s/ DOUGLAS E. DONLEY

 

 

Douglas E. Donley

 

 

Senior Vice President and Chief Accounting Officer

 

51