RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)(Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
Preferred
StockSeries G
|
|
Preferred
StockSeries H
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Stock
|
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|
|
|
|
Accumulated
Other
Comprehensive
Income (Loss)
|
|
|
|
|
|
Additional
Paid-In
Capital
|
|
Accumulated
Deficit
|
|
|
|
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Shares
|
|
Amount
|
|
Total
|
|
Net income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
165,465
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|
|
|
|
|
165,465
|
|
Other comprehensive loss:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Changes in Defined Benefit Plans, net of $1,681 tax benefit
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|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
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|
|
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(1,931
|
)
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|
(1,931
|
)
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
163,534
|
|
Exchange of restricted shares for taxes
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,045
|
)
|
|
(2,045
|
)
|
|
(15,461
|
)
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|
|
|
|
|
|
|
(17,506
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)
|
Issuance of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,751
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|
|
2,751
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|
|
(2,751
|
)
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|
|
|
|
|
|
|
|
|
Cancellation of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
(420
|
)
|
|
(420
|
)
|
|
420
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|
|
|
|
|
|
|
|
|
|
Amortization of restricted stock balance
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
28,342
|
|
|
|
|
|
|
|
|
28,342
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,164
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|
|
|
|
|
|
|
|
11,164
|
|
Conversion of convertible debt instruments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
24,762
|
|
|
24,762
|
|
|
39,327
|
|
|
|
|
|
|
|
|
64,089
|
|
Tax benefit from exercise of stock options and restricted stock vesting
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,466
|
|
|
|
|
|
|
|
|
22,466
|
|
Stock options exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,394
|
|
|
6,394
|
|
|
4,982
|
|
|
|
|
|
|
|
|
11,376
|
|
Shares issued for EnvisionRx acquisition
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,754
|
|
|
27,754
|
|
|
213,153
|
|
|
|
|
|
|
|
|
240,907
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
|
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|
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|
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|
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|
|
BALANCE FEBRUARY 27, 2016
|
|
|
|
|
$
|
|
|
|
|
|
$
|
|
|
|
1,047,754
|
|
$
|
1,047,754
|
|
$
|
4,822,665
|
|
$
|
(5,241,210
|
)
|
$
|
(47,781
|
)
|
$
|
581,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
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|
The
accompanying notes are an integral part of these consolidated financial statements.
82
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
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|
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|
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|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
$
|
249,414
|
|
Adjustments to reconcile to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
509,212
|
|
|
416,628
|
|
|
403,741
|
|
Lease termination and impairment charges
|
|
|
48,423
|
|
|
41,945
|
|
|
41,304
|
|
Gain from lease termination
|
|
|
|
|
|
|
|
|
(8,750
|
)
|
LIFO charge (credit)
|
|
|
11,163
|
|
|
(18,857
|
)
|
|
104,142
|
|
Loss (gain) on sale of assets, net
|
|
|
3,303
|
|
|
(3,799
|
)
|
|
(15,984
|
)
|
Stock-based compensation expense
|
|
|
37,948
|
|
|
23,390
|
|
|
16,194
|
|
Loss on debt retirements, net
|
|
|
33,205
|
|
|
18,512
|
|
|
62,443
|
|
Changes in deferred taxes
|
|
|
79,488
|
|
|
(1,726,487
|
)
|
|
|
|
Excess tax benefit on stock options and restricted stock
|
|
|
(22,884
|
)
|
|
(41,563
|
)
|
|
(26,665
|
)
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
Accounts receivable
|
|
|
291,659
|
|
|
(25,902
|
)
|
|
(28,051
|
)
|
Inventories
|
|
|
181,958
|
|
|
129,985
|
|
|
56,557
|
|
Accounts payable
|
|
|
(21,187
|
)
|
|
(169,952
|
)
|
|
(100,774
|
)
|
Other assets and liabilities, net
|
|
|
(320,351
|
)
|
|
(104,114
|
)
|
|
(51,525
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
|
997,402
|
|
|
648,959
|
|
|
702,046
|
|
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
(541,347
|
)
|
|
(426,828
|
)
|
|
(333,870
|
)
|
Intangible assets acquired
|
|
|
(128,648
|
)
|
|
(112,558
|
)
|
|
(87,353
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(1,778,377
|
)
|
|
(69,793
|
)
|
|
|
|
Proceeds from sale-leaseback transactions
|
|
|
36,732
|
|
|
|
|
|
3,989
|
|
Proceeds from dispositions of assets and investments
|
|
|
9,782
|
|
|
15,494
|
|
|
28,416
|
|
Proceeds from lease termination
|
|
|
|
|
|
|
|
|
8,750
|
|
Proceeds from insured loss
|
|
|
|
|
|
|
|
|
15,144
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities
|
|
|
(2,401,858
|
)
|
|
(593,685
|
)
|
|
(364,924
|
)
|
|
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,800,000
|
|
|
1,152,293
|
|
|
1,310,000
|
|
Net proceeds from (repayments to) revolver
|
|
|
375,000
|
|
|
1,325,000
|
|
|
(265,000
|
)
|
Principal payments on long-term debt
|
|
|
(672,717
|
)
|
|
(2,595,709
|
)
|
|
(1,340,435
|
)
|
Change in zero balance cash accounts
|
|
|
(62,878
|
)
|
|
1,081
|
|
|
(95
|
)
|
Net proceeds from the issuance of common stock
|
|
|
11,376
|
|
|
24,117
|
|
|
33,217
|
|
Payments for the repurchase of preferred stock
|
|
|
|
|
|
|
|
|
(21,034
|
)
|
Financing fees paid for early debt redemption
|
|
|
(26,003
|
)
|
|
(13,841
|
)
|
|
(45,636
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
22,884
|
|
|
41,563
|
|
|
26,665
|
|
Deferred financing costs paid
|
|
|
(34,634
|
)
|
|
(20,285
|
)
|
|
(17,850
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
1,413,028
|
|
|
(85,781
|
)
|
|
(320,168
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Increase (decrease) in cash and cash equivalents
|
|
|
8,572
|
|
|
(30,507
|
)
|
|
16,954
|
|
Cash and cash equivalents, beginning of year
|
|
|
115,899
|
|
|
146,406
|
|
|
129,452
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year
|
|
$
|
124,471
|
|
$
|
115,899
|
|
$
|
146,406
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements.
83
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended February 27, 2016, February 28, 2015 and
March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies
The Company is a Delaware corporation and through its 100 percent owned subsidiaries, operates a pharmacy retail healthcare
company in the United States of America. The Company operates various programs through its two reportable segments: the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy
segment operates one of the largest retail drugstore chains in the United States, with 4,561 stores in operation as of February 27, 2016. The Retail Pharmacy segment's drugstores' primary
business is the sale of brand and generic prescription drugs. The Retail Pharmacy segment also sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a
large private brand product line. The Pharmacy Services segment, acquired by the Company in connection with the June 24, 2015 acquisition of EnvisionRx, operates both a transparent and
traditional pharmacy benefit management ("PBM") business; mail-order and specialty pharmacy services through Orchard Pharmaceutical Services; access to the nation's largest cash pay infertility
discount drug program via Design Rx; a claims adjudication software platform through Laker Software; and a national Medicare Part D prescription drug plan through EIC. See Note 20 for
additional details on the Company's reportable segments.
Prior
to the June 24, 2015 acquisition of EnvisionRx, the Company's operations consisted solely of the Retail Pharmacy segment. Following the completion of the EnvisionRx
acquisition, the Company organized its operations into the Retail Pharmacy segment and the Pharmacy Services segment. Revenues for the Company are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Retail Pharmacy segment:
|
|
|
|
|
|
|
|
|
|
|
Pharmacy sales
|
|
$
|
18,442,557
|
|
$
|
18,114,768
|
|
$
|
17,239,436
|
|
Front end sales
|
|
|
8,238,450
|
|
|
8,232,256
|
|
|
8,168,922
|
|
Other revenue
|
|
|
184,924
|
|
|
181,353
|
|
|
118,055
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Retail Pharmacy segment
|
|
$
|
26,865,931
|
|
$
|
26,528,377
|
|
$
|
25,526,413
|
|
Pharmacy Services segment revenue
|
|
|
4,103,513
|
|
|
|
|
|
|
|
Intersegment elimination
|
|
|
(232,787
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenue
|
|
$
|
30,736,657
|
|
$
|
26,528,377
|
|
$
|
25,526,413
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sales
of prescription drugs for our Retail Pharmacy segment represented approximately 69.1%, 68.8% and 67.9% of the Company's total drugstore sales in fiscal years 2016, 2015 and 2014,
84
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
respectively.
The Retail Pharmacy segment's principal classes of products in fiscal 2016 were the following:
|
|
|
|
|
Product Class
|
|
Percentage
of Sales
|
|
Prescription drugs
|
|
|
69.1
|
%
|
Over-the-counter medications and personal care
|
|
|
9.8
|
%
|
Health and beauty aids
|
|
|
4.8
|
%
|
General merchandise and other
|
|
|
16.3
|
%
|
The Company's fiscal year ends on the Saturday closest to February 29 or March 1. The fiscal years ended
February 27, 2016, February 28, 2015 and March 1, 2014 included 52 weeks.
The consolidated financial statements include the accounts of the Company and all of its 100 percent owned subsidiaries. All
significant intercompany accounts and transactions have been eliminated in consolidation.
Cash and cash equivalents consist of cash on hand and highly liquid investments, which are readily convertible to known amounts of cash
and which have original maturities of three months or less when purchased.
Approximately 97.8% of prescription sales are made to customers who are covered by third-party payors, such as insurance companies,
government agencies and employers. The Company recognizes receivables that represent the amount owed to the Company for sales made to customers or employees of those payors that have not yet been
paid. The Company maintains a reserve for the amount of these receivables deemed to be uncollectible. This reserve is calculated based upon historical collection activity adjusted for current
conditions.
Inventories are stated at the lower of cost or market. Inventory balances include the capitalization of certain costs related to
purchasing, freight and handling costs associated with placing inventory in its location and condition for sale. The Company uses the last-in, first-out ("LIFO") cost flow assumption for substantially
all of its inventories. The Company calculates its inflation index based on internal product mix and utilizes the link-chain LIFO method.
85
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Asset impairments are recorded when the carrying value of assets are not recoverable. For purposes of recognizing and measuring
impairment of long-lived assets, the Company categorizes assets of operating stores as "Assets to Be Held and Used" and "Assets to Be Disposed Of." The Company evaluates assets at the store level
because this is the lowest level of identifiable cash flows ascertainable to evaluate impairment. Assets being tested for recoverability at the store level include tangible long-lived assets and
identifiable, finite-lived intangibles that arose in purchase business combinations. Corporate assets to be held and used are evaluated for impairment based on excess cash flows from the stores that
support those assets.
The
Company reviews long-lived assets to be held and used for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be
recoverable. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the asset, the Company recognizes an impairment loss. Impairment losses are measured as the
amount by which the carrying amount of the asset exceeds the fair value of the asset. When fair values are not available, the Company estimates fair value using the expected future cash flows
discounted at a rate commensurate with the risks associated with the recovery of the asset.
Property, Plant and Equipment
Property, plant and equipment are stated at cost, net of accumulated depreciation and amortization. The Company provides for
depreciation using the straight-line method over the following useful lives: buildings30 to 45 years; equipment3 to 15 years.
Leasehold
improvements are amortized on a straight-line basis over the shorter of the estimated useful life of the asset or the term of the lease. When determining the amortization
period of a leasehold improvement, the Company considers whether discretionary exercise of a lease renewal option is reasonably assured. If it is determined that the exercise of such option is
reasonably assured, the Company will amortize the leasehold improvement asset over the minimum lease term, plus the option period. This determination depends on the remaining life of the minimum lease
term and any economic penalties that would be incurred if the lease option is not exercised.
Capitalized
lease assets are recorded at the lesser of the present value of minimum lease payments or fair market value and amortized over the estimated useful life of the related
property or term of the lease.
The
Company capitalizes direct internal and external development costs associated with internal-use software. Neither preliminary evaluation costs nor costs associated with the software
after implementation are capitalized. For fiscal years 2016, 2015 and 2014, the Company capitalized costs of approximately $7,680, $7,550 and $6,547, respectively.
The Company recognizes goodwill as the excess of the purchase price over the fair value of the assets acquired and liabilities assumed
during business combinations. The Company accounts for
86
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
goodwill
under ASC Topic 350, "IntangiblesGoodwill and Other", which does not permit amortization, but instead requires the Company to perform an annual impairment review, or more
frequently if events or circumstances indicate that impairment may be more likely. See Note 12 for additional information on goodwill.
The Company has certain finite-lived intangible assets that are amortized over their useful lives. The value of favorable and
unfavorable leases on stores acquired in business combinations are amortized over the terms of the leases on a straight-line basis. Prescription files acquired in business combinations are amortized
over an estimated useful life of ten years on an accelerated basis, which approximates the anticipated prescription file retention and related cash flows. Purchased prescription files acquired in
other than business combinations are amortized over their estimated useful lives of five years on a straight-line basis. The value of finite-lived trade names are amortized over 10 years on a
straight-line basis. The value of customer relationships, acquired in connection with the Company's acquisition of EnvisionRx, are amortized over a period between 10 and 20 years on a
descending percentage method which matches the pattern of expected discounted cash flows. The Pharmacy Services segment's contract with CMS for Medicare Part D, which is required in order to
act as a national provider of the Part D benefit, is amortized over 25 years on a straight line basis.
Costs incurred to issue debt are deferred and amortized as a component of interest expense over the terms of the related debt
agreements. Amortization expense of deferred financing costs was $19,545, $15,301 and $15,259 for fiscal 2016, 2015 and 2014, respectively.
Revenue Recognition
Retail Pharmacy Segment
For front end sales, the Retail Pharmacy segment recognizes revenue from the sale of merchandise at the time the merchandise is sold.
The Retail Pharmacy segment records revenue net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented. For third
party payor pharmacy sales, revenue is recognized at the time the prescription is filled, which is or approximates when the customer picks up the prescription and is recorded net of an allowance for
prescriptions that were filled but will not be picked up by the customer. For all periods presented, there is no material difference between the revenue recognized at the time the prescription is
filled and that which would be recognized when the customer picks up the prescription. For cash prescriptions and patient third party payor co-payments, the Retail Pharmacy segment recognizes revenue
when the patient picks up the prescription and tenders the cash price or patient third party payor co-payment amount at the point of sale. Prescriptions are generally not returnable.
The
Retail Pharmacy segment offers a chain wide loyalty card program titled wellness +. Members participating in the wellness + loyalty card program earn points on a
calendar year basis for eligible
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
front
end merchandise purchases and qualifying prescriptions. One point is awarded for each dollar spent towards front end merchandise and 25 points are awarded for each qualifying
prescription.
Members
reach specific wellness + tiers based on the points accumulated during the calendar year, which entitles such customers to certain future discounts and other
benefits upon reaching that tier. For example, any customer that reaches 1,000 points in a calendar year achieves the "Gold" tier, enabling them to receive a 20% discount on qualifying purchases of
front end merchandise for the remaining portion of the calendar year and also the next calendar year. There are also similar "Silver" and "Bronze" levels with lower thresholds and benefit levels.
As
wellness + customers accumulate points, the Retail Pharmacy segment defers the value of the points earned as deferred revenue (included in other current and noncurrent
liabilities, based on the expected usage). The amount deferred is based on historic and projected customer activity (e.g., tier level, spending level). As customers receive discounted front end
merchandise, the Retail Pharmacy segment recognizes an allocable portion of the deferred revenue. The Retail Pharmacy segment deferred $110,208 as of February 27, 2016 of which $88,470 is
included in other current liabilities and $21,738 is included in noncurrent liabilities. The Retail Pharmacy segment deferred $111,208 as of February 28, 2015 of which $89,657 is included in
other current liabilities and $21,551 is included in noncurrent liabilities.
During
fiscal 2016, the Company partnered with American Express Travel Related Services Company, Inc. to be part of a coalition loyalty program titled Plenti. This awards program
allows a customer to earn points based on qualifying purchases at participating retailers. Each Plenti point is worth the equivalent of $0.01. The customer has the opportunity to redeem their
accumulated points on a future purchase at any of the participating retailers. All points are redeemed using a FIFO methodology (e.g., first points earned are the first to be redeemed). Points
expire on December 31st of each year for any point that has aged a minimum of two years that has not been redeemed by the customer. For a majority of the Plenti point issuances, funding
is provided by our vendors through contractual arrangements. This funding is treated as deferred revenue and remains in deferred revenue until a customer redeems their points. Upon redemption, the
deferred revenue account is decremented with an offsetting credit to sales. For Plenti point redemptions that are not vendor funded, deferred revenue is recorded and not recognized until the points
are redeemed. As of February 27, 2016, the Company had deferred revenue of $39,253 relating to the Plenti program which is included in other current liabilities.
The Pharmacy Services segment ("Pharmacy Services") sells prescription drugs indirectly through its retail pharmacy network and
directly through its mail service dispensing pharmacy. The Pharmacy Services segment recognizes revenue from prescription drugs sold by (i) its mail service dispensing pharmacy and
(ii) under retail pharmacy network contracts where it is the principal using the gross method at the contract prices negotiated with its clients, primarily employers, insurance companies,
unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include:
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
(i) the
portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see "Drug Discounts" below),
(ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions ("Mail Co-Payments"), (iii) customer copayments made directly to the retail
pharmacy network, and (iv) administrative fees. Sales taxes are not included in revenue. Revenue is recognized when: (i) persuasive evidence that the prescription drug sale has occurred
or a contractual arrangement exists, (ii) delivery has occurred or services have been rendered, (iii) the seller's price to the buyer is fixed or determinable, and
(iv) collectability is reasonably assured. The following revenue recognition policies have been established for the Pharmacy Services segment:
-
-
Revenues generated from prescription drugs sold by third party pharmacies in the Pharmacy Services segment's retail pharmacy network
and associated administrative fees are recognized at the Pharmacy Services segment's point-of-sale, which is when the claim is adjudicated by the Pharmacy Services segment's online claims processing
system.
-
-
Revenues generated from prescription drugs sold by the Pharmacy Services segment's mail service dispensing pharmacy are recognized
when the prescription is delivered. At the time of delivery, the Pharmacy Services segment has performed substantially all of its obligations under its client contracts and does not experience a
significant level of returns or reshipments.
-
-
Revenues generated from administrative fees based on membership or claims volume are recognized monthly upon active membership in the
plan or actual claims volume.
In
the majority of its contracts, the Pharmacy Services segment has determined it is the principal due to it: (i) being the primary obligor in the arrangement,
(ii) latitude in establishing price, (iii) performs part of the service, (iv) having discretion in supplier selection and v) having involvement in the determination of
product or service specifications. The Pharmacy Services segment's obligations under its client contracts for which revenues are reported using the gross method are separate and distinct from its
obligations to the third party pharmacies included in its retail pharmacy network contracts. Pursuant to these contracts, the Pharmacy Services segment is contractually required to pay the third party
pharmacies in its retail pharmacy network for products sold after payment is received from its clients. The Pharmacy Services segment's responsibilities under its client contracts typically include
validating eligibility and coverage levels, communicating the prescription price and the co-payments due to the third party retail pharmacy, identifying possible adverse drug interactions for the
pharmacist to address with the prescriber prior to dispensing, suggesting generic alternatives where clinically appropriate and approving the prescription for dispensing. Although the Pharmacy
Services segment does not have credit risk with respect to its pharmacy benefit manager operations and retail co-payments, management believes that all of the other applicable indicators of gross
revenue reporting are present.
Drug
DiscountsThe Pharmacy Services segment deducts from its revenues that are generated from prescription drugs sold by third party pharmacies any rebates, inclusive of
discounts and fees, earned by its clients. Rebates are paid to clients in accordance with the terms of client contracts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Medicare
Part DThe Pharmacy Services segment, through its EIC subsidiary, participates in the federal government's Medicare Part D program as a Prescription
Drug Plan ("PDP"). Net revenues include insurance premiums earned by the PDP, which are determined based on the PDP's annual bid and related contractual arrangements with the Centers for Medicare and
Medicaid Services ("CMS"). The insurance premiums include a direct premium paid by CMS and a beneficiary premium, which is the responsibility of the PDP member, but is subsidized by CMS in the case of
low-income members. Premiums collected in advance are initially deferred in accrued expenses and are then recognized in net revenues over the period in which members are entitled to receive benefits.
The
Pharmacy Services segment records estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims
management and enrollment systems. Significant estimates arising from its participation in the Medicare Part D program include: (i) estimates of low-income cost subsidy, reinsurance
amounts and coverage gap discount amounts ultimately payable to or receivable from CMS based on a detailed claims reconciliation, (ii) an estimate of amounts receivable from CMS under a
risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid
or contested. Actual amounts of Medicare Part D-related assets and liabilities could differ significantly from amounts recorded. Historically, the effect of these adjustments has not been
material to our results of operations or financial position.
See
Note 20 for additional information about the revenues of the Company's business segments.
Cost of Revenues
Retail Pharmacy Segment
Cost of revenues for the Retail Pharmacy segment includes the following: the cost of inventory sold during the period, including
related vendor rebates and allowances, LIFO credit or charges, costs incurred to return merchandise to vendors, inventory shrink, purchasing costs and warehousing costs, which include inbound freight
costs from the vendor, distribution payroll and benefit costs, distribution center occupancy costs and depreciation expense and delivery expenses to the stores.
The Pharmacy Services segment's cost of revenues includes the cost of prescription drugs sold during the reporting period indirectly
through its retail pharmacy network and directly through its mail service dispensing pharmacy. The cost of prescription drugs sold component of cost of revenues includes: (i) the cost of the
prescription drugs purchased from manufacturers or
distributors and shipped to members in clients' benefit plans from the Pharmacy Services segment's mail service dispensing pharmacy, net of any volume-related or other discounts (see "Vendor
allowances and purchase discounts" below) and (ii) the cost of prescription drugs sold through the Pharmacy Services segment's retail pharmacy network under contracts where it is the principal,
net of any volume-related or other discounts.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
As
a result of the Acquisition, and the related addition of the Pharmacy Services segment, the Company now refers to its cost of goods sold as its cost of revenues, as these costs are
now inclusive of the cost of prescription drugs sold through the Pharmacy Services segment's retail pharmacy network under contracts where it is the principal.
See
Note 20 for additional information about the cost of revenues of the Company's business segments.
The Retail Pharmacy segment rebates and allowances received from vendors relate to either buying and merchandising or promoting the
product. Buying and merchandising related rebates and allowances are recorded as a reduction of cost of revenue as product is sold. Buying and merchandising rebates and allowances include all types of
vendor programs such as cash discounts from timely payment of invoices, purchase discounts or rebates, volume purchase allowances, price reduction allowances and slotting allowances. Certain product
promotion related rebates and allowances, primarily related to advertising, are recorded as a reduction in selling, general and administrative expenses when the advertising commitment has been
satisfied.
The Pharmacy Services segment receives purchase discounts on products purchased. The Pharmacy Services segment's contractual
arrangements with vendors, including manufacturers, wholesalers and retail pharmacies, normally provide for the Pharmacy Services segment to receive purchase discounts from established list prices in
one, or a combination, of the following forms: (i) a direct discount at the time of purchase, or (ii) a discount (or rebate) paid subsequent to dispensing when products are purchased
indirectly from a manufacturer (e.g., through a wholesaler or retail pharmacy). These rebates are recognized when prescriptions are dispensed and are generally calculated and billed to
manufacturers within 30 days of the end of each completed quarter. Historically, the effect of adjustments resulting from the reconciliation of rebates recognized to the amounts billed and
collected has not been material to the Pharmacy Services segment's results of operations. The Pharmacy Services segment accounts for the effect of any such differences as a change in accounting
estimate in the period the reconciliation is completed. The Pharmacy Services segment also receives additional discounts under its wholesaler contracts. In addition, the Pharmacy Services segment
receives fees from pharmaceutical manufacturers for administrative services. Purchase discounts and administrative service fees are recorded as a reduction of cost of revenues.
To minimize risk and statutory capital requirements, EIC enters into quota share reinsurance agreements with unaffiliated reinsurers
whereby they assume a quota share percentage of the company's Medicare Part D program. The net revenue and net cost of revenue for EIC has been reduced by the amounts ceded to reinsurers under
these agreements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The Company records rent expense on operating leases on a straight-line basis over the minimum lease term. The Company begins to record
rent expense at the time that the Company has the right to use the property. From time to time, the Company receives incentive payments from landlords that subsidize lease improvement construction.
These leasehold incentives are deferred and recognized on a straight-line basis over the minimum lease term.
Selling, General and Administrative Expenses
Selling, general and administrative expenses include store and corporate administrative payroll and benefit costs, occupancy costs
which include retail store and corporate rent costs, facility and leasehold improvement depreciation and utility costs, advertising, repair and maintenance, insurance, equipment depreciation and
professional fees.
Routine repairs and maintenance are charged to operations as incurred. Improvements and major repairs, which extend the useful life of
an asset, are capitalized and depreciated.
Advertising costs, net of specific vendor advertising allowances, are expensed in the period the advertisement first takes place.
Advertising expenses, net of vendor advertising allowances, for fiscal 2016, 2015 and 2014 were $307,817, $318,157 and $322,843, respectively.
The Company is self-insured for certain general liability and workers' compensation claims. For claims that are self-insured, stop-loss
insurance coverage is maintained for workers' compensation occurrences exceeding $1,000 and general liability occurrences exceeding $3,000. The Company utilizes actuarial studies as the basis for
developing reported claims and estimating claims incurred but not reported relating to the Company's self-insurance. Workers' compensation claims are discounted to present value using a risk-free
interest rate.
The Company has several defined benefit plans, under which participants earn a retirement benefit based upon a formula set forth in the
plan. The Company records expense related to these plans using actuarially determined amounts that are calculated under the provisions of ASC 715, "CompensationRetirement
Benefits." Key assumptions used in the actuarial valuations include the discount rate, the expected rate of return on plan assets and the rate of increase in future compensation levels.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The Company has several stock option plans, which are described in detail in Note 16. The Company accounts for stock-based
compensation under ASC 718, "CompensationStock Compensation." The Company recognizes option expense over the requisite service period of the award, net of an estimate for the
impact of award forfeitures.
Costs incurred prior to the opening of a new or relocated store, associated with a remodeled store or related to the opening of a
distribution facility are charged against earnings when incurred.
The Company is involved in litigation on an ongoing basis. The Company accrues its best estimate of the probable loss related to legal
claims. Such estimates are developed in consultation with in-house counsel, and are based upon a combination of litigation and settlement strategies.
When a store or distribution center is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to
the present value at current credit adjusted risk-free interest rates of the remaining lease obligations and anticipated ancillary occupancy costs, net of estimated sublease income. Other store or
distribution center closing and liquidation costs are expensed when incurred.
Deferred income taxes are determined based on the difference between the financial reporting and tax basis of assets and liabilities.
Deferred income tax expense (benefit) represents the change during the reporting period in the deferred tax assets and deferred tax liabilities, net of the effect of acquisitions and dispositions.
Deferred tax assets include tax loss and credit carryforwards and are reduced by a valuation allowance if, based on available evidence, it is more likely than not that some portion of the deferred tax
assets will not be realized. Changes in valuation allowances from period to period are included in the tax provision in the period of change.
The
Company has net operating loss ("NOL") carryforwards that can be utilized to offset future income for federal and state tax purposes. These NOLs generate a significant deferred tax
asset. The Company regularly reviews the deferred tax assets for recoverability considering historical profitability, projected taxable income, the expected timing of the reversals of existing
temporary differences and tax planning strategies.
The
Company recognizes tax liabilities in accordance with ASC 740, "Income Taxes" and the Company adjusts these liabilities with changes in judgment as a result of the evaluation of new
information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of
the tax liabilities.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
Sales taxes collected from customers and remitted to various governmental agencies are presented on a net basis (excluded from
revenues) in the Company's statement of operations.
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates.
The Company's pharmacy sales were primarily to customers covered by health plan contracts, which typically contract with a third party
payor that agrees to pay for all or a portion of a customer's eligible prescription purchases. During fiscal 2016, the top five third party payors accounted for approximately 70.4% of the Company's
pharmacy sales. The largest third party payor, Express Scripts, represented 25.3%, 27.8% and 31.6% of pharmacy sales during fiscal 2016, 2015 and 2014, respectively. Third party payors are entities
such as an insurance company, governmental agency, health maintenance organization or other managed care provider, and typically represent several health care contracts and customers.
During
fiscal 2016, state sponsored Medicaid agencies and related managed care Medicaid payors accounted for approximately 19.9% of the Company's pharmacy sales, the largest of which was
approximately 1.5% of the Company's pharmacy sales. During fiscal 2016, approximately 31.9% of the Company's pharmacy sales were to customers covered by Medicare Part D. Any significant loss of
third-party payor business could have a material adverse effect on the Company's business and results of operations.
On
February 17, 2014, the Company executed an expanded five-year agreement with McKesson Corporation ("McKesson") for pharmaceutical purchasing and distribution (our "Purchasing
and Delivery Arrangement"). As part of its Purchasing and Delivery Arrangement, McKesson assumed responsibility for purchasing essentially all of the brand and generic medications the Company
dispenses as well as providing a new direct store delivery model to all of the Company's stores. During fiscal 2016, the Company purchased brand and generic pharmaceuticals, which amounted to
approximately 97.5% of the dollar volume of its prescription drugs from McKesson. If the Company's relationship with McKesson was disrupted, it could temporarily have difficulty filling prescriptions
for brand-named and generic drugs until it executed a replacement wholesaler agreement or developed and implemented self- distribution processes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
The Pharmacy Services segment, through its EIC subsidiary, participates in the federal government's Medicare Part D program as a
PDP. Net revenues of $162,620 (0.5% of consolidated revenues) include insurance premiums earned by the PDP, which are determined based on the PDP's annual bid and related contractual arrangements with
CMS.
EIC
has entered into a quota share reinsurance agreement with Swiss Re Life & Health America Inc. ("Swiss Re") whereby they assume a quota share percentage of the company's
Medicare Part D program. Fifty percent of the net revenue and net cost of revenue for EIC has been ceded to Swiss Re under this agreement.
The Company may enter into interest rate swap agreements to hedge the exposure to increasing rates with respect to its variable rate
debt, when the Company deems it prudent to do so. Upon inception of interest rate swap agreements, or modifications thereto, the Company performs a comprehensive review of the interest rate swap
agreements based on the criteria as provided by ASC 815, "Derivatives and Hedging." As of February 27, 2016 and February 28, 2015, the Company had no interest rate swap arrangements or
other derivatives.
In February 2016, the FASB issued ASU No. 2016-02,
Leases, (Topic 842)
, which is
intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor) that lease assets
such as real estate and manufacturing equipment. This ASU will require organizations that lease assetsreferred to as "leases"to recognize on the balance sheet the assets and
liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019. The
Company is in process of assessing the impact of the adoption of ASU No. 2016-02 on its financial position, results of operations and cash flows.
In
May 2014, the FASB issued ASU No. 2014-09,
Revenue from Contracts with Customers.
This ASU supersedes the revenue recognition
requirements in Accounting Standards Codification 605Revenue Recognition and most industry-specific guidance throughout the Codification. The standard requires that an entity recognizes
revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or
services. This ASU is effective for fiscal years beginning after December 15, 2017, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of
the adoption of ASU 2014-09 on its financial position, results of operations and cash flows.
In
February 2015, the FASB issued ASU No. 2015-02,
ConsolidationAmendments to the Consolidation Analysis
(Topic 810).
This ASU requires reporting entities to reevaluate whether they should consolidate certain legal entities under the revised consolidation model. This standard modifies
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
the
evaluation of whether limited partnerships and similar legal entities are variable interest entities (VIEs), eliminates the presumption that a general partner should consolidate a limited
partnership, and affects the consolidation analysis of reporting entities that are involved with VIEs, especially those that have fee arrangements and related party relationships. This ASU is
effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. The Company is in the process of assessing the impact of the adoption of ASU
2015-02 on its financial position, results of operations and cash flows.
In
April 2015, the FASB issued ASU No. 2015-03,
InterestImputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt
Issuance Costs
. This ASU simplifies the presentation of debt issuance costs by requiring that debt issuance costs related to a recognized debt liability be presented in the
balance sheet as a direct reduction from the carrying amount of the debt liability, which is consistent with the treatment of debt discounts. Recognition and measurement of debt issuance costs were
not affected by this amendment. The new guidance should be applied on a retrospective basis, and upon transition, an entity is required to comply with the applicable disclosures necessary for a change
in accounting principle. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. As permitted, the Company early adopted
this standard beginning in the fourth quarter of fiscal 2016. The effect of the adoption of ASU 2015-03 on the Company's consolidated balance sheet is a reduction of other assets and long-term
debt of $85,827 as of February 28, 2015. The following is a reconciliation of the effect of this reclassification on the Company's consolidated balance sheet as of February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
As Previously
Reported
|
|
Adjustments
|
|
As Revised
|
|
Other assets
|
|
$
|
286,172
|
|
$
|
(85,827
|
)
|
$
|
200,345
|
|
Total assets
|
|
|
8,863,252
|
|
|
(85,827
|
)
|
|
8,777,425
|
|
Long-term debt, less current maturities
|
|
|
5,483,415
|
|
|
(85,827
|
)
|
|
5,397,588
|
|
Total liabilities
|
|
|
8,806,196
|
|
|
(85,827
|
)
|
|
8,720,369
|
|
Total liabilities and stockholders' equity
|
|
|
8,863,252
|
|
|
(85,827
|
)
|
|
8,777,425
|
|
In
April 2015, the FASB issued ASU No. 2015-04,
CompensationRetirement Benefits (Topic 715): Practical Expedient for the Measurement Date of
an Employer's Defined Benefit Obligation and Plan Assets.
This ASU allows an employer whose fiscal year-end does not coincide with a calendar month-end, for example, an entity
that has a 52-week or 53-week fiscal year, the ability as a practical expedient, to measure defined benefit retirement obligations and related plan assets as of the month-end that is closest to its
fiscal year-end. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption of this ASU is permitted. The
Company adopted this guidance in the fiscal fourth quarter of fiscal 2016 and consequently measured its plan assets as of February 29, 2016. This adoption did not materially affect the
Company's financial position, results of operations or cash flows.
In
September 2015, the FASB issued ASU No. 2015-16,
Business Combinations (Topic 805)Simplifying the Accounting for Measurement-Period
Adjustments
. This ASU requires
an acquirer to recognize provisional adjustments identified during the measurement period in the reporting period in
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
1. Summary of Significant Accounting Policies (Continued)
which
the adjustment amounts are determined. This amendment requires an acquirer to record the income statement effects, if any, as a result of the change in provisional amounts in the period's
financial statements when the adjustment is determined, calculated as if the accounting had been completed at the acquisition date. This amendment eliminates the requirement to retrospectively account
for provisional adjustments. This ASU is effective for fiscal years beginning after December 15, 2015, and for interim periods within those fiscal years. Early adoption of this ASU is
permitted. The adoption of this guidance in the fiscal fourth quarter of fiscal 2016 did not materially affect the Company's financial position, results of operations or cash flows.
In
November 2015, the FASB issued ASU No. 2015-17,
Income Taxes (Topic 740)Balance Sheet Classification of Deferred
Taxes
. This ASU requires an entity to classify deferred income tax assets and liabilities as noncurrent on the entity's classified statement of financial position. This
amendment eliminates the current requirement to classify deferred tax assets and liabilities as either current or noncurrent on the entity's statement of financial position. This amendment may be
applied either prospectively to all deferred tax liabilities and assets or retrospective to all periods presented. If applied prospectively, the entity should disclose in the first interim and first
annual period of change, the nature of and the reason for the change in accounting principle and a statement that prior periods were not retrospectively adjusted. If applied retrospectively, the
entity should disclose in the first interim and first annual period of change, the nature of and reason for the change in accounting principle and quantitative information about the effects of the
accounting change on prior periods. This ASU is effective for fiscal years beginning after December 15, 2016, and for interim periods within those fiscal years. Earlier application is permitted
as of the beginning of an interim or annual reporting period. The Company has elected to early adopt this ASU and consequently classified deferred income tax assets and liabilities as noncurrent
beginning with the fiscal year ending February 27, 2016.
2. Acquisition
On June 24, 2015, the Company completed its previously announced acquisition of TPG VI Envision BL, LLC and Envision Topco Holdings, LLC ("EnvisionRx"), pursuant to
the terms of an agreement ("Agreement") dated February 10, 2015. EnvisionRx, which was a portfolio company of TPG Capital L.P. prior to its acquisition by the Company, is a full-service
pharmacy services provider. EnvisionRx provides both transparent and traditional PBM options through its EnvisionRx and MedTrak PBMs, respectively. EnvisionRx also offers fully integrated mail-order
and specialty pharmacy services through Orchard Pharmaceutical Services; 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 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
97
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
2. Acquisition (Continued)
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 closing balance sheet has not yet been finalized, as the Company is still in process of finalizing the
valuation, and therefore, the final purchase price and related purchase price allocation of the Acquisition is subject to change.
The
Company's consolidated financial statements for fiscal 2016 includes EnvisionRx results of operations from the Acquisition date of June 24, 2015 through February 27,
2016 (please see Note 20 Segment Reporting for the Pharmacy Services segment results included within the consolidated financial statements for the fifty-two week period ended
February 27, 2016, which reflects the results of EnvisionRx). The Company's financial statements reflect preliminary purchase accounting adjustments in accordance with ASC 805 "Business
Combinations", whereby the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.
The
following allocation of the purchase price and the estimated transaction costs is preliminary and is based on information available to the Company's management at the time the
consolidated
98
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
2. Acquisition (Continued)
financial
statements were prepared. Accordingly, the allocation is subject to change and the impact of such changes may be material.
|
|
|
|
|
Preliminary purchase price
|
|
|
|
|
Cash consideration
|
|
$
|
1,882,211
|
|
Stock consideration
|
|
|
240,907
|
|
|
|
|
|
|
Total
|
|
$
|
2,123,118
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preliminary purchase price allocation
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
103,834
|
|
Accounts receivable
|
|
|
896,473
|
|
Inventories
|
|
|
7,276
|
|
Prepaid expenses and other current assets
|
|
|
13,386
|
|
|
|
|
|
|
Total current assets
|
|
|
1,020,969
|
|
Property and equipment
|
|
|
13,196
|
|
Intangible assets(1)
|
|
|
646,600
|
|
Goodwill
|
|
|
1,637,351
|
|
Other assets
|
|
|
7,219
|
|
|
|
|
|
|
Total assets acquired
|
|
|
3,325,335
|
|
|
|
|
|
|
Accounts payable
|
|
|
491,672
|
|
Reinsurance funds held
|
|
|
381,225
|
|
Other current liabilities(2)
|
|
|
216,937
|
|
|
|
|
|
|
Total current liabilities
|
|
|
1,089,834
|
|
Other long term liabilities(3)
|
|
|
112,383
|
|
|
|
|
|
|
Total liabilities assumed
|
|
|
1,202,217
|
|
|
|
|
|
|
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 preliminary 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 preliminary 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
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
2. Acquisition (Continued)
directly
or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the preliminary 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 $116,500 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 $1,637,351 has been allocated to the Pharmacy Services segment of which $1,360,156 is
deductible for tax purposes. At the time the financial statements were issued, initial accounting for the business combination related to tax matters were preliminary and may be adjusted during the
measurement period. During the fourth quarter of fiscal 2016, the Company made measurement period adjustments to reflect facts and circumstances in existence as of the acquisition date. These
adjustments resulted in an increase in goodwill of $158,278, mostly due to a reduction of intangible assets of $178,500 and offset by certain corresponding tax adjustments. As a result of the
reduction of intangible assets during the fourth quarter of fiscal 2016, the Company recorded a reduction to its amortization expense of $4,739, which adjusts the amortization expense to the amount
that would have been recorded in previous interim reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date.
During
fiscal 2016 and fiscal 2015, acquisition costs of $27,402 and $15,442, respectively, were expensed as incurred. The following unaudited pro forma combined financial data gives
effect to the Acquisition as if it had occurred as of March 1, 2014.
These
unaudited pro forma combined results have been prepared by combining the historical results of the Company and historical results of EnvisionRx. The unaudited pro forma combined
financial data for all periods presented were adjusted to give effect to pro forma events that 1) are directly attributable to the aforementioned transaction, 2) factually supportable,
and 3) expected to
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Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
2. Acquisition (Continued)
have
a continuing impact on the consolidated results of operations. Specifically, these adjustments reflect:
-
-
Incremental interest expense relating to the $1,800,000 6.125% Notes issued on April 2, 2015, the net proceeds of which were
used finance the cash portion of the Acquisition.
-
-
Incremental amortization resulting from increased fair value of the identifiable intangible assets as noted in the preliminary
purchase price allocation.
-
-
Removal of costs incurred in connection with the Acquisition by both the Company and EnvisionRx, including bridge loan commitment fees
of $15,375.
-
-
Removal of interest expense incurred by EnvisionRx as the underlying debt was repaid upon the acquisition date.
-
-
Removal of debt extinguishment charges incurred by EnvisionRx.
-
-
Inclusion of the 27,754 shares of Rite Aid common stock issued to fund the stock portion of the purchase price in the basic and
diluted share calculation.
The
unaudited pro forma combined results do not include any incremental cost savings that may result from the integration. The adjustments are based on information available to the
Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material.
101
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
2. Acquisition (Continued)
The unaudited pro forma combined information is not necessarily indicative of what the combined company's results actually would have been had the Acquisition been completed as of the
beginning of the periods as indicated. In addition, the unaudited pro forma combined information does not purport to project the future results of the combined company.
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 weeks)
|
|
February 28,
2015
(52 weeks)
|
|
|
|
Pro forma
|
|
Pro forma
|
|
Net revenues as reported
|
|
$
|
30,736,657
|
|
$
|
26,528,377
|
|
EnvisionRx revenue, prior to the acquisition
|
|
|
1,735,635
|
|
|
4,273,016
|
|
Less pre-acquisition intercompany revenue
|
|
|
(103,363
|
)
|
|
(272,530
|
)
|
|
|
|
|
|
|
|
|
Pro forma combined revenues
|
|
$
|
32,368,929
|
|
$
|
30,528,863
|
|
Net income as reported
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
EnvisionRx net (loss) income before income taxes, prior to the acquisition
|
|
|
(45,307
|
)
|
|
14,031
|
|
Incremental interest expense on the 6.125% Notes issued on April 2, 2015
|
|
|
(11,097
|
)
|
|
(115,407
|
)
|
Incremental amortization resulting from fair value adjustments of the identifiable intangible assets
|
|
|
(14,297
|
)
|
|
(48,586
|
)
|
Transaction costs incurred by both the Company and EnvisionRx
|
|
|
56,194
|
|
|
16,199
|
|
Interest expense incurred by EnvisionRx
|
|
|
21,984
|
|
|
56,884
|
|
Debt extinguishment charges incurred by EnvisionRx
|
|
|
31,601
|
|
|
|
|
Income tax expense relating to pro forma adjustments
|
|
|
(15,866
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Pro forma net income
|
|
$
|
188,677
|
|
$
|
2,032,294
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.18
|
|
$
|
2.03
|
|
Diluted income per share
|
|
$
|
0.18
|
|
$
|
1.95
|
|
3. Pending Merger
On October 27, 2015, Rite Aid entered into an Agreement and Plan of Merger (the "Merger Agreement") with WBA, and Victoria Merger Sub, Inc., a Delaware corporation and a
wholly owned direct subsidiary of WBA ("Victoria Merger Sub"). Pursuant to the terms and subject to the conditions set forth in the Merger Agreement, Victoria Merger Sub will merge with and into Rite
Aid (the "Merger"), with Rite Aid surviving the Merger as a 100 percent owned direct subsidiary of WBA. On February 4, 2016, the proposal to adopt the Merger Agreement was approved by
holders of approximately 74% of our outstanding common stock entitled to vote as of the record date of the special meeting. Completion of the Merger is subject to various closing conditions, including
but not limited to (i) the expiration or earlier termination of the waiting period under the Hart-Scott-Rodino
102
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
3. Pending Merger (Continued)
Antitrust
Improvements Act of 1976, as amended, (ii) the absence of any law or order prohibiting the Merger, and (iii) the absence of a material adverse effect on Rite Aid, as defined in
the Merger Agreement. Under the terms of the Merger Agreement, at the effective time of the Merger, each share of Rite Aid's common stock, par value $1.00 per share, issued and outstanding immediately
prior to the effective time (other than shares owned by (i) WBA, Victoria Merger Sub or Rite Aid (which will be cancelled), (ii) stockholders who have properly exercised and perfected
appraisal rights under Delaware law, or (iii) any direct or indirect 100 percent owned subsidiary of Rite Aid or WBA (which will be converted into shares of common stock of the surviving
corporation)) will be converted into the right to receive $9.00 per share in cash, without interest.
Rite
Aid and WBA and Victoria Merger Sub have each made customary representations, warranties and covenants in the Merger Agreement, including, among other things, that (i) Rite
Aid and its subsidiaries will continue to conduct our business in the ordinary course consistent with past practice between the execution of the Merger Agreement and the closing of the Merger and
(ii) Rite Aid will not solicit proposals relating to alternative transactions to the Merger or engage in discussions or
negotiations with respect thereto, subject to certain exceptions. Additionally, the Merger Agreement limits the Company's ability to incur indebtedness for borrowed money and issue additional capital
stock, among other things. The Company currently anticipates that the Merger will close in the second half of calendar 2016.
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
103
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
4. Income Per Share (Continued)
stock
were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company subject to anti- dilution limitations.
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Numerator for income per share:
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
$
|
249,414
|
|
Accretion of redeemable preferred stock
|
|
|
|
|
|
|
|
|
(77
|
)
|
Cumulative preferred stock dividends
|
|
|
|
|
|
|
|
|
(8,318
|
)
|
Conversion of Series G and H preferred stock
|
|
|
|
|
|
|
|
|
(25,603
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersbasic
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
$
|
215,416
|
|
Add backinterest on convertible notes
|
|
|
|
|
|
5,456
|
|
|
5,456
|
|
|
|
|
|
|
|
|
|
|
|
|
Income attributable to common stockholdersdiluted
|
|
$
|
165,465
|
|
$
|
2,114,629
|
|
$
|
220,872
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average shares
|
|
|
1,024,377
|
|
|
971,102
|
|
|
922,199
|
|
Outstanding options and restricted shares, net
|
|
|
17,985
|
|
|
21,967
|
|
|
32,093
|
|
Convertible notes
|
|
|
|
|
|
24,792
|
|
|
24,800
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average shares
|
|
|
1,042,362
|
|
|
1,017,861
|
|
|
979,092
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share
|
|
$
|
0.16
|
|
$
|
2.17
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share
|
|
$
|
0.16
|
|
$
|
2.08
|
|
$
|
0.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due
to their anti-dilutive effect, the following potential common shares have been excluded from the computation of diluted income per share as of February 27, 2016,
February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Stock options
|
|
|
3,464
|
|
|
2,777
|
|
|
4,044
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On
September 30, 2013, the Company redeemed all of its outstanding Series G and Series H Convertible Preferred Stock (collectively the "Convertible Preferred Stock")
at the Company's election. The Convertible Preferred Stock was convertible into common stock of the Company, at the holder's option, at a conversion rate of $5.50 per share or 34,621,117 shares of
common stock on September 30, 2013. The Convertible Preferred Stock was redeemable by the Company for cash at 105% of the
104
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
4. Income Per Share (Continued)
Cumulative
Preferred Stock's $100.00 per share liquidation preference or $199,937. In an individually negotiated exchange transaction, the Company exchanged 40,000,000 shares of its common stock, par
value of $1.00 per share, with a market value of $190,400 at the $4.76 per share closing price on September 30, 2013, for all of the outstanding Convertible Preferred Stock. Accordingly, income
attributable to common stock holders was reduced by $25,603, or $0.03 per diluted share, the value of the additional 5,378,883 shares of common stock issued upon conversion at the $4.76 per share
closing price.
During
May 2015, $64,089 of the Company's 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms.
5. Lease Termination and Impairment Charges
The Company evaluates long-lived assets for impairment whenever events or changes in circumstances indicate that an asset group has a
carrying value that may not be recoverable. The individual operating store is the lowest level for which cash flows are identifiable. As such, the Company evaluates individual stores for
recoverability of assets. To determine if a store needs
to be tested for recoverability, the Company considers items such as decreases in market prices, changes in the manner in which the store is being used or physical condition, changes in legal factors
or business climate, an accumulation of losses significantly in excess of budget, a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection
of continuing losses, or an expectation that the store will be closed or sold.
The
Company monitors new and recently relocated stores against operational projections and other strategic factors such as regional economics, new competitive entries and other local
market considerations to determine if an impairment evaluation is required. For other stores, it performs a recoverability analysis if it has experienced current-period and historical cash flow
losses.
In
performing the recoverability test, the Company compares the expected future cash flows of a store to the carrying amount of its assets. Significant judgment is used to estimate
future cash flows. Major assumptions that contribute to its future cash flow projections include expected sales, gross profit, and distribution expenses; expected costs such as payroll, occupancy
costs and advertising expenses; and estimates for other significant selling, and general and administrative expenses. Many long-term macro-economic and industry factors are considered, both
quantitatively and qualitatively, in the future cash flow assumptions. In addition to current and expected economic conditions such as inflation, interest and unemployment rates that affect customer
shopping patterns, the Company considers that it operates in a highly competitive industry which includes the actions of other national and regional drugstore chains, independently owned drugstores,
supermarkets, mass merchandisers, dollar stores and internet pharmacies. Additionally, the Company takes into consideration that certain operating stores are executing specific improvement plans which
are monitored quarterly to recoup recent capital investments, such as an acquisition of an independent pharmacy, which it has made to respond to specific competitive or local market conditions, or
have specific programs tailored towards a specific geography or market.
105
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
The
Company recorded impairment charges of $17,219 in fiscal 2016, $14,438 in fiscal 2015 and $13,077 in fiscal 2014. The Company's methodology for recording impairment charges has been
consistently applied in the periods presented.
At
February 27, 2016, $2.077 billion of the Company's long-lived assets, including intangible assets, were associated with 4,561 active operating stores.
If
an operating store's estimated future undiscounted cash flows are not sufficient to cover its carrying value, its carrying value is reduced to fair value which is its estimated future
discounted cash flows. The discount rate is commensurate with the risks associated with the recovery of a similar asset.
An
impairment charge is recorded in the period that the store does not meet its original return on investment and/or has an operating loss for the last 2 years and its projected
cash flows do not exceed its current asset carrying value. The amount of the impairment charge is the entire difference between the current asset carrying value and the estimated fair value of the
assets using discounted future cash flows. Most stores are fully impaired in the period that the impairment charge is originally recorded.
The
Company recorded impairment charges for active stores of $16,106 in fiscal 2016, $12,126 in fiscal 2015 and $11,748 in fiscal 2014.
The
Company reviews key performance results for active stores on a quarterly basis and approves certain stores for closure. Impairment for closed stores, if any (many stores are closed
on lease expiration), are recorded in the quarter the closure decision is approved. Closure decisions are made on an individual store or regional basis considering all of the macro-economic, industry
and other factors, in addition to, the active store's individual operating results. The Company recorded impairment charges for closed facilities of $1,113 in fiscal 2016, $2,312 in fiscal 2015 and
$1,329 in fiscal 2014.
106
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
The
following table summarizes the impairment charges and number of locations, segregated by closed facilities and active stores that have been recorded in fiscal 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27, 2016
|
|
February 28, 2015
|
|
March 1, 2014
|
|
(in thousands, except number of stores)
|
|
Number
|
|
Charge
|
|
Number
|
|
Charge
|
|
Number
|
|
Charge
|
|
Active stores:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stores previously impaired(1)
|
|
|
357
|
|
$
|
9,183
|
|
|
376
|
|
$
|
6,949
|
|
|
378
|
|
$
|
4,162
|
|
New, relocated and remodeled stores(2)
|
|
|
3
|
|
|
1,649
|
|
|
2
|
|
|
1,108
|
|
|
1
|
|
|
4,028
|
|
Remaining stores not meeting the recoverability test(3)
|
|
|
29
|
|
|
5,274
|
|
|
16
|
|
|
4,069
|
|
|
17
|
|
|
3,558
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment chargesactive stores
|
|
|
389
|
|
|
16,106
|
|
|
394
|
|
|
12,126
|
|
|
396
|
|
|
11,748
|
|
Total impairment charges-closed facilities
|
|
|
27
|
|
|
1,113
|
|
|
35
|
|
|
2,312
|
|
|
38
|
|
|
1,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total impairment chargesall locations
|
|
|
416
|
|
$
|
17,219
|
|
|
429
|
|
$
|
14,438
|
|
|
434
|
|
$
|
13,077
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
These
charges are related to stores that were impaired for the first time in prior periods. Most active stores, requiring an impairment charge, are fully
impaired in the first period that they do not meet their asset recoverability test. However, we do often make capital additions to certain stores to improve their operating results or to meet
geographical competition, which if later are deemed to be unrecoverable, will be impaired in future periods. Of this total, 351, 369 and 375 stores for fiscal years 2016, 2015 and 2014 respectively
have been fully impaired. Also included in these charges are an insignificant number of stores, which were only partially impaired in prior years based on our analysis that supported a reduced net
book value greater than zero, but now require additional charges.
-
(2)
-
These
charges are related to new stores (open at least 3 years) and relocated stores (relocated in the last 2 years) and significant strategic
remodels (remodeled in the last year) that did not meet their recoverability test during the current period. These stores have not met their original return on investment projections and have a
historical loss of at least 2 years. Their future cash flow projections do not recover their current carrying value. Of this total, 3, 1 and 1 stores for fiscal years 2016, 2015 and 2014
respectively have been fully impaired.
-
(3)
-
These
charges are related to the remaining active stores that did not meet the recoverability test during the current period. These stores have a historical
loss of at least 2 years. Their future cash flow projections do not recover their current carrying value. Of this total, 27, 14 and 14 stores for fiscal years 2016, 2015 and 2014 respectively
have been fully impaired.
The
primary drivers of its impairment charges are each store's current and historical operating performance and the assumptions that the Company makes about each store's operating
performance in future periods. Projected cash flows are updated based on the next year's operating budget which includes the qualitative factors noted above. The Company utilizes the three-level
valuation hierarchy for the recognition and disclosure of fair value measurements. The categorization of assets and
107
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
liabilities
within this hierarchy is based upon the lowest level of input that is significant to the measurement of fair value. The three levels of the hierarchy consist of the
following:
-
-
Level 1Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or
liabilities that the Company has the ability to access at the measurement date.
-
-
Level 2Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets,
quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.
-
-
Level 3Inputs to the valuation methodology are unobservable inputs based upon management's best estimate of inputs
market participants could use in pricing the asset or liability at the measurement date, including assumptions about risk.
Long-lived
non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the
fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The
fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a
risk-adjusted rate of interest (which is Level 1). The
Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation
changes.
The
table below sets forth by level within the fair value hierarchy the long-lived assets as of the impairment measurement date for which an impairment assessment was performed and total
losses as of February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Fair Values
as of
Impairment
Date
|
|
Total Charges
February 27,
2016
|
|
Long-lived assets held and used
|
|
$
|
|
|
$
|
3,641
|
|
$
|
17,645
|
|
$
|
21,286
|
|
$
|
(16,672
|
)
|
Long-lived assets held for sale
|
|
|
|
|
|
3,283
|
|
|
189
|
|
|
3,472
|
|
|
(547
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
6,924
|
|
$
|
17,834
|
|
$
|
24,758
|
|
$
|
(17,219
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Other
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Fair Values
as of
Impairment
Date
|
|
Total Charges
February 28,
2015
|
|
Long-lived assets held and used
|
|
$
|
|
|
$
|
3,692
|
|
$
|
16,992
|
|
$
|
20,684
|
|
$
|
(12,503
|
)
|
Long-lived assets held for sale
|
|
|
|
|
|
6,024
|
|
|
|
|
|
6,024
|
|
|
(1,935
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
9,716
|
|
$
|
16,992
|
|
$
|
26,708
|
|
$
|
(14,438
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
Charges to close a store, which principally consist of continuing lease obligations, are recorded at the time the store is closed and
all inventory is liquidated, pursuant to the guidance set forth in ASC 420, "Exit or Disposal Cost Obligations." The Company calculates the liability for closed stores on a store-by-store
basis. The calculation includes the discounted effect of future minimum lease payments and related ancillary costs, from the date of closure to the end of the remaining lease term, net of estimated
cost recoveries that may be achieved through subletting or favorable lease terminations. The Company evaluates these assumptions each quarter and adjusts the liability accordingly.
In
fiscal 2016, 2015 and 2014, the Company recorded lease termination charges of $31,204, $27,507 and $28,227, respectively. These charges related to changes in future assumptions,
interest accretion and provisions for 23 stores in fiscal 2016, 10 stores in fiscal 2015, and 15 stores in fiscal 2014.
As
part of its ongoing business activities, the Company assesses stores and distribution centers for potential closure. Decisions to close or relocate stores or distribution centers in
future periods would result in lease termination charges for lease exit costs and liquidation of inventory, as well as impairment of assets at these locations. The following table reflects the closed
store and distribution center charges that relate to new closures, changes in assumptions and interest accretion:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Balancebeginning of year
|
|
$
|
241,047
|
|
$
|
284,270
|
|
$
|
323,757
|
|
Provision for present value of noncancellable lease payments of closed stores
|
|
|
9,709
|
|
|
1,661
|
|
|
11,646
|
|
Changes in assumptions about future sublease income, terminations and change in interest rates
|
|
|
5,655
|
|
|
7,560
|
|
|
(4,343
|
)
|
Interest accretion
|
|
|
16,463
|
|
|
18,988
|
|
|
21,250
|
|
Cash payments, net of sublease income
|
|
|
(64,453
|
)
|
|
(71,432
|
)
|
|
(68,040
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of year
|
|
$
|
208,421
|
|
$
|
241,047
|
|
$
|
284,270
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's revenues and income before income taxes for fiscal 2016, 2015, and 2014 included results from stores that have been closed or are approved for closure as of
February 27, 2016. The
109
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
5. Lease Termination and Impairment Charges (Continued)
revenue,
operating expenses and income before income taxes of these stores for the periods are presented as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
|
|
February 28,
2015
|
|
March 1,
2014
|
|
Revenues
|
|
$
|
30,403
|
|
$
|
75,174
|
|
$
|
147,559
|
|
Operating expenses
|
|
|
35,409
|
|
|
84,855
|
|
|
162,357
|
|
Gain from sale of assets
|
|
|
(5,607
|
)
|
|
(5,536
|
)
|
|
(13,114
|
)
|
Other expenses (income)
|
|
|
384
|
|
|
389
|
|
|
(8,482
|
)
|
Income (loss) before income taxes
|
|
|
217
|
|
|
(4,534
|
)
|
|
6,798
|
|
Included in these stores' (loss) income before income taxes are:
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
138
|
|
|
296
|
|
|
838
|
|
Inventory liquidation charges
|
|
|
295
|
|
|
222
|
|
|
552
|
|
The
above results are not necessarily indicative of the impact that these closures will have on revenues and operating results of the Company in the future, as the Company often
transfers the business of a closed store to another Company store, thereby retaining a portion of these revenues and operating expenses.
6. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy as described in Note 5,
Lease Termination and Impairment Charges
, for the
recognition and disclosure of fair value measurements.
As
of February 27, 2016 and February 28, 2015, the Company did not have any financial assets measured on a recurring basis. Please see Note 5 for fair value
measurements of non-financial assets measured on a non-recurring basis.
Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable.
These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature. In addition, the Company has $6,069 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 February 27, 2016. The Company believes the carrying value of these investments
approximates their fair value.
The
fair value for LIBOR-based borrowings under the Company's senior secured credit facility and first and second lien term loans are estimated based on the quoted market price of the
financial instrument which is considered Level 1 of the fair value hierarchy. The fair values of substantially all of the Company's other long-term indebtedness are estimated based on quoted
market prices of the financial instruments which are considered Level 1 of the fair value hierarchy. The carrying amount and estimated fair value of the Company's total long-term indebtedness
was $6,914,483 and $7,235,916,
110
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
6. Fair Value Measurements (Continued)
respectively,
as of February 27, 2016. The carrying amount and estimated fair value of the Company's total long-term indebtedness was $5,467,123 and $5,880,626, respectively, as of
February 28, 2015. There were no outstanding derivative financial instruments as of February 27, 2016 and February 28, 2015.
7. Income Taxes
The provision for income tax expense (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Current tax:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
(52
|
)
|
$
|
|
|
$
|
|
|
State
|
|
|
9,396
|
|
|
6,011
|
|
|
4,748
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,344
|
|
|
6,011
|
|
|
4,748
|
|
Deferred tax and other:
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
117,200
|
|
|
(1,544,344
|
)
|
|
|
|
State
|
|
|
(13,605
|
)
|
|
(144,020
|
)
|
|
(30,609
|
)
|
Tax expense recorded as an increase of additional paid-in-capital
|
|
|
|
|
|
|
|
|
26,665
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
103,595
|
|
|
(1,688,364
|
)
|
|
(3,944
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax (benefit) expense
|
|
$
|
112,939
|
|
$
|
(1,682,353
|
)
|
$
|
804
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A
reconciliation of the expected statutory federal tax and the total income tax expense (benefit) was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Federal statutory rate
|
|
|
35.0
|
%
|
|
35.0
|
%
|
|
35.0
|
%
|
Nondeductible expenses
|
|
|
2.3
|
|
|
0.2
|
|
|
0.3
|
|
State income taxes, net
|
|
|
8.6
|
|
|
2.7
|
|
|
17.7
|
|
Decrease of previously recorded liabilities
|
|
|
|
|
|
(0.9
|
)
|
|
(8.4
|
)
|
Nondeductible compensation
|
|
|
2.2
|
|
|
1.2
|
|
|
17.7
|
|
Acquisition Costs
|
|
|
2.4
|
|
|
|
|
|
|
|
Release of indemnification asset
|
|
|
|
|
|
|
|
|
2.4
|
|
Valuation allowance
|
|
|
(9.5
|
)
|
|
(431.4
|
)
|
|
(64.4
|
)
|
Other
|
|
|
(0.4
|
)
|
|
(1.0
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total income tax expense (benefit)
|
|
|
40.6
|
%
|
|
(394.2
|
)%
|
|
0.3
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
111
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
7. Income Taxes (Continued)
Net
income for fiscal 2016 included income tax expense of $112,939 based on the effective tax rate above, which included a benefit of $26,358 related to a reduction in valuation
allowance primarily for an increase in estimated utilization of state NOLs and for expiring carryforwards.
The
fiscal 2015 income tax benefit of $1,682,353 was primarily attributable to the reduction of the deferred tax valuation allowance. The reduction of the valuation allowance was based
upon the Company's achievement of cumulative profitability over a three year window, reported earnings for ten consecutive quarters, utilization of federal and state net operating losses against
taxable income for the last three years and the Company's historical ability of predicting earnings. Based upon the Company's projections for future taxable income over the periods in which the
deferred tax assets are recoverable, management believed that it was more likely than not that the Company would realize the benefits of substantially all the net deferred tax assets existing at
February 28, 2015.
Net
Income for fiscal 2014 included income tax expense of $804 resulting from an increase in the deferred tax valuation allowance for the windfall tax benefits recorded in additional
paid-in capital ("APIC") pursuant to the tax law ordering approach offset by adjustments to unrecognized tax benefits due to the lapse of statute of limitations.
The
tax effect of temporary differences that gave rise to significant components of deferred tax assets and liabilities consisted of the following at February 27, 2016 and
February 28, 2015:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
Accounts receivable
|
|
$
|
72,883
|
|
$
|
68,582
|
|
Accrued expenses
|
|
|
198,636
|
|
|
207,553
|
|
Liability for lease exit costs
|
|
|
81,704
|
|
|
98,906
|
|
Pension, retirement and other benefits
|
|
|
182,394
|
|
|
175,081
|
|
Long-lived assets
|
|
|
487,944
|
|
|
475,187
|
|
Other
|
|
|
6,203
|
|
|
5,232
|
|
Credits
|
|
|
64,382
|
|
|
63,826
|
|
Net operating losses
|
|
|
1,182,440
|
|
|
1,300,964
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
2,276,586
|
|
|
2,395,331
|
|
Valuation allowance
|
|
|
(212,023
|
)
|
|
(231,679
|
)
|
|
|
|
|
|
|
|
|
Total deferred tax assets
|
|
|
2,064,563
|
|
|
2,163,652
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
Outside basis difference
|
|
|
108,860
|
|
|
|
|
Inventory
|
|
|
416,562
|
|
|
437,165
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax liabilities
|
|
|
525,422
|
|
|
437,165
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
1,539,141
|
|
$
|
1,726,487
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
7. Income Taxes (Continued)
A
reconciliation of the beginning and ending amount of unrecognized tax benefits was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Unrecognized tax benefits
|
|
$
|
9,514
|
|
$
|
10,143
|
|
$
|
30,020
|
|
Increases to prior year tax positions
|
|
|
1,667
|
|
|
1,003
|
|
|
|
|
Decreases to tax positions in prior periods
|
|
|
(577
|
)
|
|
(984
|
)
|
|
(3,215
|
)
|
Increases to current year tax positions
|
|
|
72
|
|
|
123
|
|
|
|
|
Settlements
|
|
|
|
|
|
(681
|
)
|
|
|
|
Lapse of statute of limitations
|
|
|
|
|
|
(90
|
)
|
|
(16,662
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized tax benefits balance
|
|
$
|
10,676
|
|
$
|
9,514
|
|
$
|
10,143
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
amount of the above unrecognized tax benefits at February 27, 2016, February 28, 2015 and March 1, 2014 which would impact the Company's effective tax rate, if
recognized, was $2,084, $440 and $876, respectively. Additionally, any impact on the effective rate may be mitigated by the valuation allowance that is remaining against the Company's net deferred tax
assets.
While
it is expected that the amount of unrecognized tax benefits will change in the next twelve months, management does not expect the change to have a significant impact on the results
of operations or the financial position of the Company.
The
Company recognizes interest and penalties related to tax contingencies as income tax expense. Prior to the adoption of ASC 740, "Income Taxes," the Company included interest as
income tax expense and penalties as an operating expense. The Company recognized an expense/(benefit) for interest and penalties in connection with tax matters of $60, ($5,250) and ($16,833) for
fiscal years
2016, 2015 and 2014, respectively. As of February 27, 2016 and February 28, 2015 the total amount of accrued income tax-related interest and penalties was $539 and $115, respectively.
The
Company files U.S. federal income tax returns as well as income tax returns in those states where it does business. The consolidated federal income tax returns are closed for
examination through fiscal year 2012. However, any net operating losses that were generated in these prior closed years may be subject to examination by the IRS upon utilization. Tax examinations by
various state taxing authorities could generally be conducted for a period of three to five years after filing of the respective return. However, as a result of filing amended returns, the Company has
statutes open in some states from fiscal year 2005.
At February 27, 2016, the Company had federal net operating loss (NOL) carryforwards of approximately $2,865,598. Of these,
$1,673,912 will expire, if not utilized, between fiscal 2020 and 2028. An additional $1,173,321 will expire, if not utilized, between fiscal 2029 and 2036.
At
February 27, 2016, the Company had state NOL carryforwards of approximately $4,538,030, the majority of which will expire between fiscal 2023 and 2027.
113
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
7. Income Taxes (Continued)
The Company's federal and state net operating loss carryforwards include federal deductions of $18,365 and state deductions of $79,442 for windfall tax benefits that have not yet been
recognized in the financial statements at February 27, 2016. These tax benefits will be credited to additional paid-in capital when they reduce current taxable income consistent with the tax
law ordering approach.
At
February 27, 2016, the Company had federal business tax credit carryforwards of $50,165, the majority of which will expire between 2019 and 2021. In addition to these credits,
the Company had alternative minimum tax credit carryforwards of $3,234.
The valuation allowances as of February 27, 2016 and February 28, 2015 apply to the net deferred tax assets of the
Company. The Company maintained a valuation allowance of $212,023 and $231,679, which relates primarily to state deferred tax assets at February 27, 2016 and February 28, 2015,
respectively.
8. Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable based upon the expected collectability of accounts receivable. The allowance for uncollectible accounts at
February 27, 2016 and February 28, 2015 was $32,820 and $31,247 respectively. The Company's accounts receivable are due primarily from third-party payors (e.g., pharmacy benefit
management companies, insurance companies or governmental agencies) and are recorded net of any allowances provided for under the respective plans. Since payments due from third-party payors are
sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually and adjusted for accounts deemed uncollectible by management.
9. Medicare Part D
The Company offers Medicare Part D benefits through EIC, which has contracted with CMS to be a PDP and, pursuant to the Medicare Prescription Drug, Improvement and Modernization
Act of 2003, must be a risk-bearing entity regulated under state insurance laws or similar statutes.
EIC
is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EIC must file quarterly and annual reports with the
National Association of Insurance Commissioners ("NAIC") and certain state regulators, must maintain certain minimum amounts of capital and surplus under formulas established by certain states and
must, in certain circumstances, request and receive the approval of certain state regulators before making dividend payments or other capital distributions to the Company. The Company does not believe
these limitations on dividends and distributions materially impact its financial position. EIC is subject to minimum capital and surplus requirements in certain states. The minimum amount of capital
and surplus required to satisfy regulatory requirements in these states is $19,627 as of December 31, 2015. EIC was in excess of the minimum required amounts in these states as of
February 27, 2016.
114
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
9. Medicare Part D (Continued)
The
Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management
and enrollment systems. Significant estimates arising from its participation in this program include: (i) estimates of low-income cost subsidies, reinsurance amounts, and coverage gap discount
amounts ultimately payable to CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of amounts receivable from CMS under a risk-sharing feature
of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for
our estimate of claims that have been incurred but have not yet been reported.
As
of February 27, 2016, accounts receivable, net included $275,032 due from CMS and accrued salaries, wages and other current liabilities included $166,238 of EIC liabilities
under certain reinsurance contracts. EIC limits its exposure to loss and recovers a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company.
10. Inventory
At February 27, 2016 and February 28, 2015, inventories were $1,006,396 and $997,528, respectively, lower than the amounts that would have been reported using the first-in,
first-out ("FIFO") cost flow assumption. The Company calculates its FIFO inventory valuation using the retail method for store inventories and the cost method for distribution facility inventories.
The Company recorded a LIFO charge for fiscal year 2016 of $11,163, compared to a LIFO credit of $18,857 for fiscal year 2015 and a LIFO charge of $104,142 for fiscal year 2014. During fiscal 2016,
2015 and 2014, a reduction in inventories related to working capital initiatives resulted in the liquidation of applicable LIFO inventory quantities carried at lower costs in prior years. This LIFO
liquidation resulted in a $60,653, $38,867 and $13,894 cost of revenues decrease, with a corresponding reduction to the adjustment to LIFO for fiscal 2016, fiscal 2015 and fiscal 2014, respectively.
11. Property, Plant and Equipment
Following is a summary of property, plant and equipment, including capital lease assets, at February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Land
|
|
$
|
221,409
|
|
$
|
232,785
|
|
Buildings
|
|
|
764,497
|
|
|
761,262
|
|
Leasehold improvements
|
|
|
2,245,307
|
|
|
2,078,974
|
|
Equipment
|
|
|
2,416,316
|
|
|
2,377,481
|
|
Software
|
|
|
6,111
|
|
|
|
|
Construction in progress
|
|
|
153,236
|
|
|
95,672
|
|
|
|
|
|
|
|
|
|
|
|
|
5,806,876
|
|
|
5,546,174
|
|
Accumulated depreciation
|
|
|
(3,551,478
|
)
|
|
(3,454,805
|
)
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net
|
|
$
|
2,255,398
|
|
$
|
2,091,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
115
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
11. Property, Plant and Equipment (Continued)
Depreciation
expense, which included the depreciation of assets recorded under capital leases, was $322,396, $298,523 and $284,603 in fiscal 2016, 2015 and 2014, respectively.
Included
in property, plant and equipment was the carrying amount, which approximates fair value, of assets to be disposed of totaling $3,256 and $6,317 at February 27, 2016 and
February 28, 2015, respectively.
12. Goodwill and Other Intangibles
Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but is instead evaluated for impairment on an
annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate that impairment may be more likely. When evaluating goodwill for possible impairment, the Company
performs a qualitative assessment in the fourth quarter of the fiscal year to determine if it is more likely than not that the carrying value of the goodwill exceeds the fair value of the goodwill.
During the Company's qualitative assessment it makes significant estimates, assumptions, and judgments, including, but not limited to, the overall economy, industry and market conditions, financial
performance of the Company, changes in the Company's share price, and forecasts of revenue, profit, working capital requirements, and cash flows. The Company considers its two reporting units', the
Retail Pharmacy segment and the Pharmacy Services segment, historical results and operating trends when determining these assumptions. If the Company determines that it is more likely than not that
the carrying value of the goodwill exceeds the fair value of the goodwill, it performs the first step of the impairment process, which compares the fair value of a reporting unit to its carrying
amount, including the goodwill. The Company estimates the fair value of its reporting units using a combination of a future discounted cash flow valuation model and a comparable market transaction
model. If the carrying value of a reporting unit exceeds the fair value, the second step of the impairment process is performed and the implied fair value of a reporting unit is compared to the
carrying amount of the goodwill. The implied fair value of the goodwill is determined the same way as the goodwill recognized in a business combination. The Company assigns the fair value of a
reporting unit to all of the assets and liabilities of that unit (including unrecognized intangible assets) and any excess goes to the goodwill (its implied fair value). Any excess carrying amount of
the goodwill over the implied fair value of the goodwill, is the amount of the impairment loss recognized.
In
the fiscal fourth quarter the Company completed a qualitative goodwill impairment assessment, and after evaluating the results, events and circumstances of the reporting units, the
Company concluded that sufficient evidence existed to assert qualitatively that it is more likely than not that the fair values of the reporting units exceeded their carrying values. Therefore, a two-
step impairment assessment was not necessary and no goodwill impairment charge was assessed for the fiscal years ended February 27, 2016 and February 28, 2015.
116
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
12. Goodwill and Other Intangibles (Continued)
Below
is a summary of the changes in the carrying amount of goodwill by segment for the fiscal years ended February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Total
|
|
Balance, March 1, 2014
|
|
$
|
|
|
|
|
|
|
|
|
Acquisitions
|
|
|
76,124
|
|
|
|
|
|
76,124
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 28, 2015
|
|
$
|
76,124
|
|
$
|
|
|
$
|
76,124
|
|
Acquisition (see Note 2. Acquisition)
|
|
|
|
|
|
1,637,351
|
|
|
1,637,351
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, February 27, 2016
|
|
$
|
76,124
|
|
$
|
1,637,351
|
|
$
|
1,713,475
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company's intangible assets are finite-lived and amortized over their useful lives. Following is a summary of the Company's finite-lived and indefinitely-lived intangible assets as
of February 27, 2016 and February 28, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
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
|
|
$
|
665,197
|
|
$
|
(507,776
|
)
|
$
|
157,421
|
|
8 years
|
|
$
|
653,377
|
|
$
|
(481,041
|
)
|
$
|
172,336
|
|
8 years
|
Prescription files
|
|
|
1,541,518
|
|
|
(1,285,633
|
)
|
|
255,885
|
|
3 years
|
|
|
1,440,154
|
|
|
(1,191,010
|
)
|
|
249,144
|
|
3 years
|
Customer relationships(a)
|
|
|
465,000
|
|
|
(44,203
|
)
|
|
420,797
|
|
17 years
|
|
|
|
|
|
|
|
|
|
|
|
CMS license
|
|
|
57,500
|
|
|
(1,572
|
)
|
|
55,928
|
|
25 years
|
|
|
|
|
|
|
|
|
|
|
|
Claims adjudication and other developed software
|
|
|
59,000
|
|
|
(5,760
|
)
|
|
53,240
|
|
7 years
|
|
|
|
|
|
|
|
|
|
|
|
Trademarks
|
|
|
20,100
|
|
|
(1,373
|
)
|
|
18,727
|
|
10 years
|
|
|
|
|
|
|
|
|
|
|
|
Backlog
|
|
|
11,500
|
|
|
(2,619
|
)
|
|
8,881
|
|
3 years
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total finite
|
|
$
|
2,819,815
|
|
$
|
(1,848,936
|
)
|
|
970,879
|
|
|
|
$
|
2,093,531
|
|
$
|
(1,672,051
|
)
|
$
|
421,480
|
|
|
Trademarks
|
|
|
33,500
|
|
|
|
|
|
33,500
|
|
Indefinite
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,853,315
|
|
$
|
(1,848,936
|
)
|
$
|
1,004,379
|
|
|
|
$
|
2,093,531
|
|
$
|
(1,672,051
|
)
|
$
|
421,480
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(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 February 27, 2016 and February 28, 2015 are unfavorable lease intangibles with a net carrying amount of $46,947 and
$55,571, respectively. These intangible liabilities are amortized over their remaining lease terms at time of acquisition.
117
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
12. Goodwill and Other Intangibles (Continued)
Amortization
expense for these intangible assets and liabilities was $186,816, $118,105 and $119,138 for fiscal 2016, 2015 and 2014, respectively. The anticipated annual amortization
expense for these intangible assets and liabilities is 2017$211,622; 2018$168,788; 2019$131,417; 2020$101,961 and 2021$69,252.
13. Accrued Salaries, Wages and Other Current Liabilities
Accrued salaries, wages and other current liabilities consisted of the following at February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Accrued wages, benefits and other personnel costs
|
|
$
|
457,135
|
|
$
|
444,278
|
|
Accrued interest
|
|
|
65,729
|
|
|
57,539
|
|
Accrued sales and other taxes payable
|
|
|
155,999
|
|
|
137,236
|
|
Accrued store expense
|
|
|
231,900
|
|
|
244,031
|
|
Accrued reinsurance
|
|
|
166,238
|
|
|
|
|
Other
|
|
|
350,249
|
|
|
310,335
|
|
|
|
|
|
|
|
|
|
|
|
$
|
1,427,250
|
|
$
|
1,193,419
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
118
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement
Following is a summary of indebtedness and lease financing obligations at February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Secured Debt:
|
|
|
|
|
|
|
|
Senior secured revolving credit facility due January 2020 ($2,100,000 and $1,725,000 face value less unamortized debt issuance costs of $33,903 and
$42,782)
|
|
$
|
2,066,097
|
|
$
|
1,682,218
|
|
8.00% senior secured notes (senior lien) due August 2020 ($650,000 face value less unamortized debt issuance costs of $7,773)
|
|
|
|
|
|
642,227
|
|
Tranche 1 Term Loan (second lien) due August 2020 ($470,000 face value less unamortized debt issuance costs of $5,414 and $6,638)
|
|
|
464,586
|
|
|
463,362
|
|
Tranche 2 Term Loan (second lien) due June 2021 ($500,000 face value less unamortized debt issuance costs of $3,007 and $3,572)
|
|
|
496,993
|
|
|
496,428
|
|
Other secured
|
|
|
90
|
|
|
5,367
|
|
|
|
|
|
|
|
|
|
|
|
|
3,027,766
|
|
|
3,289,602
|
|
Guaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
9.25% senior notes due March 2020 ($902,000 face value plus unamortized premium of $2,743 and $3,415 and less unamortized debt issuance costs of $10,180
and $12,783)
|
|
|
894,563
|
|
|
892,632
|
|
6.75% senior notes due June 2021 ($810,000 face value less unamortized debt issuance costs of $7,872 and $9,355)
|
|
|
802,128
|
|
|
800,645
|
|
6.125% senior notes due April 2023 ($1,800,000 face value less unamortized debt issuance costs of $30,343)
|
|
|
1,769,657
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,466,348
|
|
|
1,693,277
|
|
Unguaranteed Unsecured Debt:
|
|
|
|
|
|
|
|
8.5% convertible notes due May 2015 ($64,168 face value less unamortized debt issuance costs of $63)
|
|
|
|
|
|
64,105
|
|
7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,794 and $1,959)
|
|
|
293,206
|
|
|
293,041
|
|
6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $837 and $902)
|
|
|
127,163
|
|
|
127,098
|
|
|
|
|
|
|
|
|
|
|
|
|
420,369
|
|
|
484,244
|
|
Lease financing obligations
|
|
|
79,653
|
|
|
91,993
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
6,994,136
|
|
|
5,559,116
|
|
Current maturities of long-term debt and lease financing obligations
|
|
|
(26,848
|
)
|
|
(100,376
|
)
|
|
|
|
|
|
|
|
|
Long-term debt and lease financing obligations, less current maturities
|
|
$
|
6,967,288
|
|
$
|
5,458,740
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
119
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
On January 13, 2015, the Company amended and restated its senior secured credit facility ("Amended and Restated Senior Secured
Credit Facility" or "revolver"), which, among other things, increased borrowing capacity from $1,795,000 to $3,000,000 (which further increased to $3,700,000 upon the redemption of its 8.00% senior
secured notes due August 2020 ("8.00% Notes") on August 15, 2015), and extended the maturity to January 2020 from February 2018. The Company used borrowings under the revolver to repay and
retire all of the $1,143,650 outstanding under its Tranche 7 Senior Secured Term Loan due 2020, along with associated fees and expenses. 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.
On
February 10, 2015, the Company amended the Amended and Restated Senior Secured Credit Facility to, among other things, increase the flexibility of Rite Aid to incur and/or
issue unsecured indebtedness, including in connection with the Acquisition, and made certain other modifications to the covenants applicable to Rite Aid and its subsidiaries.
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 February 27,
2016, the Company had $2,100,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $69,301, which resulted in additional borrowing capacity of
$1,530,699.
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 (or $1,800,000 solely to the extent incurred for the purpose
of funding of the Acquisition) 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
120
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
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 revolving credit facility of more than $365,000.
The
Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on
any date on which availability under the revolving credit facility is less than $200,000 or (b) on the third consecutive business day on which availability under the revolving credit facility
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 revolving credit
facility is equal to or greater than $250,000. As of February 27, 2016, the availability was at a level that did not trigger this 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 first includes a $470,000 second priority secured term loan (the "Tranche 1 Term Loan"). The
Tranche 1 Term Loan matures on August 21, 2020 and currently bears interest at a rate per annum equal to LIBOR plus 4.75% 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 second includes a $500,000 second priority secured term loan (the "Tranche 2 Term Loan"). The Tranche 2 Term Loan matures on
June 21, 2021 and currently bears interest at a rate per
annum equal to LIBOR plus 3.875% with a LIBOR floor of 1.00%, if 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
121
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
loan
facilities and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several, and there are no restrictions on the ability of the Company to obtain
funds from its subsidiaries. The Company has no independent assets or operations. Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended
and Restated Senior Secured Credit Facility, the credit facility, second priority secured term loan facilities and applicable notes, were minor. Accordingly, condensed consolidating financial
information for the Company and subsidiaries is not presented for those periods. Subsequent to the Acquisition, other than EIC, the subsidiaries, including joint ventures, that do not guarantee the
credit facility, second priority secured term loan facilities and applicable notes, are minor. As such, condensed consolidating financial information for the Company, its guaranteeing subsidiaries and
non-guaranteeing subsidiaries is presented for those periods subsequent to the Acquisition. See Note 24 "Guarantor and Non-Guarantor Condensed Consolidating Financial Information" for
additional disclosure.
Other 2016 Transactions
On April 2, 2015, the Company issued $1,800,000 aggregate principal amount of its 6.125% Notes, the net proceeds of which, along
with other available cash and borrowings under its Amended and Restated Senior Secured Credit Facility, were used to finance the cash portion of the Acquisition, which closed on June 24, 2015.
The Company's obligations under the notes are fully and unconditionally guaranteed, jointly and severally, on an unsubordinated basis, by all of its subsidiaries that guarantee the Company's
obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, the 9.25% senior notes due 2020 (the "9.25% Notes") and the 6.75% senior notes
due 2021 (the "6.75% Notes") (the "Rite Aid Subsidiary Guarantors"), including EnvisionRx and certain of its domestic subsidiaries other than, among others, EIC (the "EnvisionRx Subsidiary Guarantors"
and, together with the Rite Aid Subsidiary Guarantors, the "Subsidiary Guarantors"). The guarantees are unsecured. The 6.125% Notes
are unsecured, unsubordinated obligations of Rite Aid Corporation and rank equally in right of payment with all of its other unsecured, unsubordinated indebtedness.
During
May 2015, $64,089 of the Company's 8.5% convertible notes due 2015 were converted into 24,762 shares of common stock, pursuant to their terms. The remaining $79 of the Company's
8.5% convertible notes due 2015 were repaid by the Company upon maturity.
On
August 15, 2015, the Company completed the redemption of all of its outstanding $650,000 aggregate principal amount of its 8.00% Notes. In connection with the redemption, the
Company recorded a loss on debt retirement, including call premium and unamortized debt issue costs, of $33,205 during the second quarter of fiscal 2016.
2015 Transactions
On October 15, 2014, the Company completed the redemption of all of its outstanding $270,000 aggregate principal amount of its
10.25% senior notes due October 2019 at their contractually determined early redemption price of 105.125% of the principal amount, plus accrued interest. The Company funded this redemption with
borrowings under its revolving credit facility. The Company recorded a loss on debt retirement of $18,512 related to this transaction.
122
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
14. Indebtedness and Credit Agreement (Continued)
2014 Transactions
In June 2013, the Company completed a tender offer for its 7.5% senior secured notes due 2017 in which $419,237 aggregate principal
amount of the outstanding 7.5% notes were tendered and repurchased. In July 2013, the Company redeemed the remaining 7.5% notes for $85,154, which included the call premium and interest to the
redemption date. The tender offer for, and redemption of, the 7.5% notes were funded using the proceeds from the Tranche 2 Term Loan, borrowings under the Company's revolving credit facility
and available cash.
On
July 2, 2013, the Company issued $810,000 of its 6.75% senior notes due 2021. The Company's obligations under the notes are fully and unconditionally guaranteed, jointly and
severally, on an unsubordinated basis, by all of its subsidiaries that guarantee the Company's obligations under the senior secured credit facility, the second priority secured term loan facilities
and the outstanding 8.00% senior secured notes due 2020, 10.25% senior secured notes due 2019 and 9.25% senior notes due 2020. The Company used the net proceeds of the 6.75% notes, borrowings under
its revolving credit facility and available cash to repurchase and repay all of the Company's outstanding $810,000 aggregate principal of 9.5% senior notes due 2017.
In
July 2013, the Company completed a tender offer for its 9.5% notes in which $739,642 aggregate principal amount of the outstanding 9.5% notes were tendered and repurchased. In August
2013, the Company redeemed the remaining 9.5% notes for $73,440, which included the call premium and interest to the redemption date.
In
connection with these refinancing transactions, the Company recorded a loss on debt retirement, including tender and call premium and interest, unamortized debt issue costs and
unamortized discount of $62,172.
As
of March 2, 2013, Rite Aid Lease Management Company, a 100 percent owned subsidiary of the Company, had 213,000 shares of its Cumulative Preferred Stock, Class A,
par value $100 per share ("RALMCO Cumulative Preferred Stock"), outstanding. The carrying amount of the RALMCO Cumulative Preferred Stock as of November 29, 2013 was $20,763 and was recorded in
Other Noncurrent Liabilities. On November 29, 2013, the Company repurchased all of the outstanding RALMCO Cumulative Preferred Stock for $21,034. In connection with this transaction, the
Company recorded a loss on debt retirement of $271.
The annual weighted average interest rate on the Company's indebtedness was 5.4%, 5.8%, and 6.4% for fiscal 2016, 2015, and 2014,
respectively.
The
aggregate annual principal payments of long-term debt for the five succeeding fiscal years are as follows: 2017$90; 2018$0; 2019$0;
2020$2,100,000 and $4,905,000 in 2021 and thereafter.
123
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
15. Leases
The Company leases most of its retail stores and certain distribution facilities under noncancellable operating and capital leases, most of which have initial lease terms ranging from 5
to 22 years. The Company also leases certain of its equipment and other assets under noncancellable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum
rental payments, certain store leases require additional payments based on sales volume, as well as reimbursements for taxes, maintenance and insurance. Most leases contain renewal options, certain of
which involve rent increases. Total rental expense, net of sublease income of $8,995, $8,559, and $8,369, was $973,347, $964,484, and $952,777 in fiscal 2016, 2015, and 2014, respectively. These
amounts include contingent rentals of $17,755, $18,919 and $18,679 in fiscal 2016, 2015, and 2014, respectively.
During
fiscal 2016, the Company sold 10 owned operating stores to independent third parties. Net proceeds from the sale were $36,732. Concurrent with these sales, the Company entered
into agreements to lease the stores back from the purchasers over minimum lease terms of 20 years. Eight leases were accounted for as operating leases and the remaining two were accounted for
as capital leases. The transactions resulted in a gain for certain stores of $670 which is deferred over the life of the leases. In addition, the transaction resulted in a loss for certain stores of
$546 which is included in the loss on sale of assets, net for the fifty-two weeks ended February 27, 2016.
During
fiscal 2015, the Company did not enter into any sale-leaseback transactions whereby the Company sold owned operating stores to independent third parties and concurrent with the
sale, entered into an agreement to lease the store back from the purchasers.
During
fiscal 2014, the Company sold one owned operating store to an independent third party. Net proceeds from the sale were $3,989. Concurrent with this sale, the Company entered into
an agreement to lease the store back from the purchaser over a minimum lease term of 20 years. The Company accounted for this lease as an operating lease. The transaction resulted in a gain of
$269 which is included in the gain on sale of assets, net for the fifty-two weeks ended March 1, 2014.
The
net book values of assets under capital leases and sale-leasebacks accounted for under the financing method at February 27, 2016 and February 28, 2015 are summarized as
follows:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Land
|
|
$
|
5,063
|
|
$
|
5,063
|
|
Buildings
|
|
|
136,416
|
|
|
133,177
|
|
Leasehold improvements
|
|
|
1,612
|
|
|
1,330
|
|
Equipment
|
|
|
33,919
|
|
|
36,934
|
|
Accumulated depreciation
|
|
|
(128,168
|
)
|
|
(123,581
|
)
|
|
|
|
|
|
|
|
|
|
|
$
|
48,842
|
|
$
|
52,923
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
124
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
15. Leases (Continued)
Following
is a summary of lease finance obligations at February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
Obligations under financing leases
|
|
$
|
74,913
|
|
$
|
87,253
|
|
Sale-leaseback obligations
|
|
|
4,740
|
|
|
4,740
|
|
Less current obligation
|
|
|
(26,758
|
)
|
|
(30,841
|
)
|
|
|
|
|
|
|
|
|
Long-term lease finance obligations
|
|
$
|
52,895
|
|
$
|
61,152
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Following
are the minimum lease payments for all properties under a lease agreement that will have to be made in each of the years indicated based on non-cancelable leases in effect as
of February 27, 2016:
|
|
|
|
|
|
|
|
Fiscal year
|
|
Lease Financing
Obligations
|
|
Operating
Leases
|
|
2017
|
|
$
|
32,650
|
|
$
|
1,041,231
|
|
2018
|
|
|
14,277
|
|
|
989,087
|
|
2019
|
|
|
12,848
|
|
|
906,242
|
|
2020
|
|
|
8,784
|
|
|
784,162
|
|
2021
|
|
|
5,259
|
|
|
656,268
|
|
Later years
|
|
|
30,780
|
|
|
3,393,866
|
|
|
|
|
|
|
|
|
|
Total minimum lease payments
|
|
|
104,598
|
|
$
|
7,770,856
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount representing interest
|
|
|
(24,945
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Present value of minimum lease payments
|
|
$
|
79,653
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16. Stock Option and Stock Award Plans
The Company recognizes share-based compensation expense in accordance with ASC 718, "CompensationStock Compensation." Expense is recognized over the requisite service period
of the award, net of an estimate for the impact of forfeitures. Operating results for fiscal 2016, 2015 and 2014 include $37,948, $23,390 and $16,194 of compensation costs related to the Company's
stock-based compensation arrangements.
In
December 2000, the Company adopted the 2000 Omnibus Equity Plan (the 2000 Plan) under which 22,000 shares of common stock are reserved for granting of restricted stock, stock options,
phantom stock, stock bonus awards and other stock awards at the discretion of the Board of Directors.
In
February 2001, the Company adopted the 2001 Stock Option Plan (the 2001 Plan) which was approved by the shareholders under which 20,000 shares of common stock are authorized for
granting of stock options at the discretion of the Board of Directors.
In
April 2004, the Board of Directors adopted the 2004 Omnibus Equity Plan, which was approved by the shareholders. Under the plan, 20,000 shares of common stock are authorized for
granting of
125
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
restricted
stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors.
In
January 2007, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2006 Omnibus Equity Plan. Under the plan, 50,000 shares of Rite Aid common
stock are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors.
In
June 2010, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2010 Omnibus Equity Plan. Under the plan, 35,000 shares of Rite Aid common stock
are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors. The adoption of the 2010
Omnibus Equity Plan became effective on June 23, 2010.
In
June 2012, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2012 Omnibus Equity Plan. Under the plan, 28,500 shares of Rite Aid common stock
are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and other equity based awards at the discretion of the Board of Directors. The adoption of the 2012
Omnibus Equity Plan became effective on June 21, 2012.
In
June 2014, the stockholders of Rite Aid Corporation approved the adoption of the Rite Aid Corporation 2014 Omnibus Equity Plan. Under the plan, 58,000 shares of Rite Aid common stock
plus any shares of common stock remaining available for grant under the Rite Aid Corporation 2010 Omnibus Equity Plan and the Rite Aid Corporation 2012 Omnibus Equity Plan as of the effective date of
the 2014 Plan (provided that no more than 25,000 shares may be granted as incentive stock options) are available for granting of restricted stock, stock options, phantom stock, stock bonus awards and
other equity based awards at the discretion of the Board of Directors. The adoption of the 2014 Omnibus Equity Plan became effective on June 19, 2014.
All
of the plans provide for the Board of Directors (or at its election, the Compensation Committee) to determine both when and in what manner options may be exercised; however, it may
not be more than 10 years from the date of grant. All of the plans provide that stock options may be granted at prices that are not less than the fair market value of a share of common stock on
the date of grant. The aggregate number of shares authorized for issuance for all plans is 61,446 as of February 27, 2016.
126
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
The Company determines the fair value of stock options issued on the date of grant using the Black-Scholes-Merton option-pricing model.
The following weighted average assumptions were used for options granted in fiscal 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
Expected stock price volatility(1)
|
|
|
56
|
%
|
|
74
|
%
|
|
85
|
%
|
Expected dividend yield(2)
|
|
|
0.00
|
%
|
|
0.00
|
%
|
|
0.00
|
%
|
Risk-free interest rate(3)
|
|
|
1.70
|
%
|
|
1.70
|
%
|
|
1.45
|
%
|
Expected option life(4)
|
|
|
5.5 years
|
|
|
5.5 years
|
|
|
5.5 years
|
|
-
(1)
-
The
expected volatility is based on the historical volatility of the stock price over the most recent period equal to expected life of the option.
-
(2)
-
The
dividend rate that will be paid out on the underlying shares during the expected term of the options. The Company does not currently pay dividends on
its common stock, as such, the dividend rate is assumed to be zero percent.
-
(3)
-
The
risk free interest rate is equal to the rate available on United States Treasury zero-coupon issues as of the grant date of the option with a remaining
term equal to the expected term.
-
(4)
-
The
period of time for which the option is expected to be outstanding. The Company analyzed historical exercise behavior.
127
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
The
weighted average fair value of options granted during fiscal 2016, 2015 and 2014 was $4.45, $4.43 and $1.91, respectively. Following is a summary of stock option transactions for the
fiscal years ended February 27, 2016, February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Exercise
Price
Per Share
|
|
Weighted
Average
Remaining
Contractual
Term
|
|
Aggregate
Intrinsic
Value
|
|
Outstanding at March 2, 2013
|
|
|
81,000
|
|
$
|
1.48
|
|
|
|
|
|
|
|
Granted
|
|
|
4,828
|
|
|
2.76
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,873
|
)
|
|
1.24
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(2,989
|
)
|
|
2.46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 1, 2014
|
|
|
55,966
|
|
$
|
1.65
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,097
|
|
|
7.04
|
|
|
|
|
|
|
|
Exercised
|
|
|
(16,485
|
)
|
|
1.46
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(910
|
)
|
|
3.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 28, 2015
|
|
|
41,668
|
|
$
|
2.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,579
|
|
|
8.68
|
|
|
|
|
|
|
|
Exercised
|
|
|
(6,400
|
)
|
|
1.78
|
|
|
|
|
|
|
|
Cancelled
|
|
|
(722
|
)
|
|
4.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at February 27, 2016
|
|
|
38,125
|
|
$
|
2.73
|
|
|
5.64
|
|
$
|
202,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested or expected to vest at February 27, 2016
|
|
|
36,062
|
|
$
|
2.65
|
|
|
5.54
|
|
$
|
193,716
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at February 27, 2016
|
|
|
27,836
|
|
$
|
1.77
|
|
|
4.78
|
|
$
|
172,288
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As
of February 27, 2016, there was $21,933 of total unrecognized pre-tax compensation costs related to unvested stock options, net of forfeitures. These costs are expected to be
recognized over a weighted average period of 2.65 years.
Cash
received from stock option exercises for fiscal 2016, 2015 and 2014 was $11,376, $24,117 and $33,217, respectively. The income tax benefit from stock options for fiscal 2016, 2015
and 2014 was
$11,764, $30,099 and $23,660, respectively. The total intrinsic value of stock options exercised for fiscal 2016, 2015 and 2014 was $42,207, $92,355 and $80,598, respectively.
Typically,
stock options granted vest, and are subsequently exercisable in equal annual installments over a four-year period for employees.
The Company provides restricted stock grants to associates under plans approved by the stockholders. Shares awarded under the plans
typically vest in equal annual installments over a three-year period. Unvested shares are forfeited upon termination of employment. Following is a
128
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
16. Stock Option and Stock Award Plans (Continued)
summary
of restricted stock transactions for the fiscal years ended February 27, 2016, February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
Shares
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Balance at March 2, 2013
|
|
|
12,677
|
|
$
|
1.25
|
|
Granted
|
|
|
2,743
|
|
|
2.79
|
|
Vested
|
|
|
(4,152
|
)
|
|
1.23
|
|
Cancelled
|
|
|
(1,212
|
)
|
|
1.48
|
|
|
|
|
|
|
|
|
|
Balance at March 1, 2014
|
|
|
10,056
|
|
$
|
1.66
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
3,303
|
|
|
7.01
|
|
Vested
|
|
|
(5,239
|
)
|
|
1.54
|
|
Cancelled
|
|
|
(454
|
)
|
|
5.00
|
|
|
|
|
|
|
|
|
|
Balance at February 28, 2015
|
|
|
7,666
|
|
$
|
3.84
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,752
|
|
|
8.60
|
|
Vested
|
|
|
(5,140
|
)
|
|
2.94
|
|
Cancelled
|
|
|
(420
|
)
|
|
6.89
|
|
|
|
|
|
|
|
|
|
Balance at February 27, 2016
|
|
|
4,858
|
|
$
|
7.23
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At
February 27, 2016, there was $26,040 of total unrecognized pre-tax compensation costs related to unvested restricted stock grants, net of forfeitures. These costs are expected
to be recognized over a weighted average period of 2.06 years.
The
total fair value of restricted stock vested during fiscal years 2016, 2015 and 2014 was $15,104, $8,090 and $5,098, respectively.
Beginning in fiscal 2015, the Company provided certain of its associates with performance based incentive plans under which the
associates will receive a certain number of shares of the Company's common stock based on the Company meeting certain financial and performance goals. The Company incurred $12,634, $1,769 and $0
related to these performance based incentive plans for fiscal 2016, 2015, and 2014, respectively, which is recorded as a component of stock-based compensation expense.
129
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
17. Reclassifications from Accumulated Other Comprehensive Loss
The following table summarizes the components of accumulated other comprehensive loss and the changes in balances of each component of accumulated other comprehensive loss, net of tax as
applicable, for the fiscal years ended February 27, 2016, February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Defined
benefit
pension
plans
|
|
Accumulated
other
comprehensive
loss
|
|
Accumulated other comprehensive loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balancebeginning of period
|
|
$
|
(45,850
|
)
|
$
|
(45,850
|
)
|
$
|
(37,334
|
)
|
$
|
(37,334
|
)
|
$
|
(61,369
|
)
|
$
|
(61,369
|
)
|
Other comprehensive (loss) income before reclassifications, net of $3,162, $7,506, and $0 tax benefit
|
|
|
(3,633
|
)
|
|
(3,633
|
)
|
|
(10,578
|
)
|
|
(10,578
|
)
|
|
19,211
|
|
|
19,211
|
|
Amounts reclassified from accumulated other comprehensive loss to net income, net of $1,481, $1,464, and $0 tax expense
|
|
|
1,702
|
|
|
1,702
|
|
|
2,062
|
|
|
2,062
|
|
|
4,824
|
|
|
4,824
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balanceend of period
|
|
$
|
(47,781
|
)
|
$
|
(47,781
|
)
|
$
|
(45,850
|
)
|
$
|
(45,850
|
)
|
$
|
(37,334
|
)
|
$
|
(37,334
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
130
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
17. Reclassifications from Accumulated Other Comprehensive Loss (Continued)
The
following table summarizes the effects on net income of significant amounts classified out of each component of accumulated other comprehensive loss for the fiscal years ended
February 27, 2016, February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Years Ended February 27, 2016,
February 28, 2015 and March 1, 2014
|
|
|
Amount reclassified from
accumulated other comprehensive loss
|
|
|
Details about accumulated other
comprehensive loss components
|
|
February 27,
2016
(52 Weeks)
|
|
February 28,
2015
(52 Weeks)
|
|
March 1,
2014
(52 Weeks)
|
|
Affected line item in the
consolidated
statements of operations
|
Defined benefit pension plans
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost(a)
|
|
$
|
(67
|
)
|
$
|
(240
|
)
|
$
|
(240
|
)
|
Selling, general and administrative expenses
|
Amortization of unrecognized net loss(a)
|
|
|
(3,116
|
)
|
|
(3,286
|
)
|
|
(4,584
|
)
|
Selling, general and administrative expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,183
|
)
|
|
(3,526
|
)
|
|
(4,824
|
)
|
Total before income tax expense
|
|
|
|
1,481
|
|
|
1,464
|
|
|
|
|
Income tax benefit(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
(1,702
|
)
|
$
|
(2,062
|
)
|
$
|
(4,824
|
)
|
Net of income tax benefit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)See Note 18, Retirement Plans for additional details.
(b)Income tax expense is $0 for fiscal 2014 due to the valuation allowance. See Note 7, Income Taxes for additional details.
18. Retirement Plans
The Company and its subsidiaries sponsor several retirement plans that are primarily 401(k) defined contribution plans covering
nonunion associates and certain union associates. The Company does not contribute to all of the plans. In accordance with those plan provisions, the Company matches 100% of a participant's pretax
payroll contributions, up to a maximum of 3% of such participant's pretax annual compensation. Thereafter, the Company will match 50% of the participant's additional pretax payroll contributions, up
to a maximum of 2% of such participant's additional pretax annual compensation. Total expense recognized for the above plans was $65,118 in fiscal 2016, $60,552 in fiscal 2015 and $57,857 in fiscal
2014.
The
Company sponsors a Supplemental Executive Retirement Plan ("SERP") for its officers, which is a defined contribution plan that is subject to a five year graduated vesting schedule.
The expense recognized for the SERP was $1,377 in fiscal 2016, $8,748 in fiscal 2015 and $11,531 in fiscal 2014.
The Company and its subsidiaries also sponsor a qualified defined benefit pension plan that requires benefits to be paid to eligible
associates based upon years of service and, in some cases, eligible compensation. The Company's funding policy for The Rite Aid Pension Plan (The "Defined
131
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
Benefit
Pension Plan") is to contribute the minimum amount required by the Employee Retirement Income Security Act of 1974. However, the Company may, at its sole discretion, contribute additional
funds to the plan. The Company made contributions of $0 in fiscal 2016, $1,159 in fiscal 2015 and $8,000 in fiscal 2014.
The
Company also maintains a nonqualified executive retirement plan for certain former employees who, pursuant to their employment agreements, did not participate in the SERP. The
Company no longer enrolls new participants into this plan. These participants generally receive an annual benefit payable monthly over fifteen years. This nonqualified defined benefit plan is
unfunded.
Net
periodic pension expense and other changes recognized in other comprehensive income for the defined benefit pension plans and the nonqualified executive retirement plan included the
following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Service cost
|
|
$
|
1,498
|
|
$
|
2,543
|
|
$
|
3,341
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Interest cost
|
|
|
6,398
|
|
|
6,474
|
|
|
6,120
|
|
|
475
|
|
|
542
|
|
|
541
|
|
Expected return on plan assets
|
|
|
(6,330
|
)
|
|
(7,339
|
)
|
|
(6,738
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service cost
|
|
|
67
|
|
|
240
|
|
|
240
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net loss (gain)
|
|
|
3,690
|
|
|
2,392
|
|
|
4,935
|
|
|
(574
|
)
|
|
894
|
|
|
(351
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net pension expense
|
|
$
|
5,323
|
|
$
|
4,310
|
|
$
|
7,898
|
|
$
|
(99
|
)
|
$
|
1,436
|
|
$
|
190
|
|
Other changes recognized in other comprehensive loss:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrecognized net (gain) loss arising during period
|
|
$
|
7,369
|
|
$
|
17,190
|
|
$
|
(18,860
|
)
|
$
|
(574
|
)
|
$
|
894
|
|
$
|
(351
|
)
|
Prior service cost arising during period
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized prior service costs
|
|
|
(67
|
)
|
|
(240
|
)
|
|
(240
|
)
|
|
|
|
|
|
|
|
|
|
Amortization of unrecognized net (loss) gain
|
|
|
(3,690
|
)
|
|
(2,392
|
)
|
|
(4,935
|
)
|
|
574
|
|
|
(894
|
)
|
|
351
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in other comprehensive loss
|
|
|
3,612
|
|
|
14,558
|
|
|
(24,035
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized in pension expense and other comprehensive loss
|
|
$
|
8,935
|
|
$
|
18,868
|
|
$
|
(16,137
|
)
|
$
|
(99
|
)
|
$
|
1,436
|
|
$
|
190
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
132
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
The
table below sets forth reconciliation from the beginning of the year for both the benefit obligation and plan assets of the Company's defined benefit plans, as well as the funded
status and amounts recognized in the Company's balance sheet as of February 27, 2016 and February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified Executive
Retirement Plan
|
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
Change in benefit obligations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of prior year
|
|
$
|
167,256
|
|
$
|
148,596
|
|
$
|
12,685
|
|
$
|
12,865
|
|
Service cost
|
|
|
1,498
|
|
|
2,543
|
|
|
|
|
|
|
|
Interest cost
|
|
|
6,398
|
|
|
6,474
|
|
|
475
|
|
|
542
|
|
Distributions
|
|
|
(7,408
|
)
|
|
(12,190
|
)
|
|
(1,540
|
)
|
|
(1,616
|
)
|
Change due to change in assumptions
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial (gain) loss
|
|
|
(11,270
|
)
|
|
21,833
|
|
|
(574
|
)
|
|
894
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of year
|
|
$
|
156,474
|
|
$
|
167,256
|
|
$
|
11,046
|
|
$
|
12,685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
|
$
|
129,934
|
|
$
|
128,984
|
|
$
|
|
|
$
|
|
|
Employer contributions
|
|
|
|
|
|
1,159
|
|
|
1,540
|
|
|
1,616
|
|
Actual return on plan assets
|
|
|
(12,309
|
)
|
|
11,981
|
|
|
|
|
|
|
|
Distributions (including expenses paid by the plan)
|
|
|
(7,408
|
)
|
|
(12,190
|
)
|
|
(1,540
|
)
|
|
(1,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of year
|
|
$
|
110,217
|
|
$
|
129,934
|
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status
|
|
$
|
(46,257
|
)
|
$
|
(37,322
|
)
|
$
|
(11,046
|
)
|
$
|
(12,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(46,257
|
)
|
$
|
(37,322
|
)
|
$
|
(11,046
|
)
|
$
|
(12,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts recognized in consolidated balance sheets consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prepaid pension cost
|
|
$
|
|
|
$
|
|
|
$
|
|
|
$
|
|
|
Accrued pension liability
|
|
|
(46,257
|
)
|
|
(37,322
|
)
|
|
(11,046
|
)
|
|
(12,685
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net amount recognized
|
|
$
|
(46,257
|
)
|
$
|
(37,322
|
)
|
$
|
(11,046
|
)
|
$
|
(12,685
|
)
|
Amounts recognized in accumulated other comprehensive loss consist of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net actuarial loss
|
|
$
|
(53,825
|
)
|
$
|
(50,146
|
)
|
$
|
|
|
$
|
|
|
Prior service cost
|
|
|
|
|
|
(67
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount recognized
|
|
$
|
(53,825
|
)
|
$
|
(50,213
|
)
|
$
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
estimated net actuarial loss and prior service cost amounts that will be amortized from accumulated other comprehensive loss into net periodic pension expense in fiscal 2017 are
$4,529 and $0, respectively.
The
accumulated benefit obligation for the defined benefit pension plan was $156,474 and $167,256 as of February 27, 2016 and February 28, 2015, respectively. The
accumulated benefit
133
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
obligation
for the nonqualified executive retirement plan was $11,046 and $12,685 as of February 27, 2016 and February 28, 2015, respectively.
The
significant actuarial assumptions used for all defined benefit plans to determine the benefit obligation as of February 27, 2016, February 28, 2015 and March 1,
2014 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified
Executive
Retirement Plan
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Discount rate
|
|
|
4.25
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
|
4.25
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
Rate of increase in future compensation levels
|
|
|
N/A
|
|
|
N/A
|
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
6.50
|
%
|
|
6.50
|
%
|
|
7.75
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Weighted
average assumptions used to determine net cost for the fiscal years ended February 27, 2016, February 28, 2015 and March 1, 2014 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified
Executive
Retirement Plan
|
|
|
|
2016
|
|
2015
|
|
2014
|
|
2016
|
|
2015
|
|
2014
|
|
Discount rate
|
|
|
4.00
|
%
|
|
4.50
|
%
|
|
4.00
|
%
|
|
4.00
|
%
|
|
4.50
|
%
|
|
4.00
|
%
|
Rate of increase in future compensation levels
|
|
|
N/A
|
|
|
N/A
|
|
|
4.50
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
Expected long-term rate of return on plan assets
|
|
|
6.50
|
%
|
|
7.75
|
%
|
|
7.75
|
%
|
|
N/A
|
|
|
N/A
|
|
|
N/A
|
|
To
develop the expected long-term rate of return on assets assumption, the Company considered the historical returns and the future expectations for returns for each asset class, as well
as the target asset
allocation of the pension portfolio. This resulted in the selection of the 6.50% long-term rate of return on plan assets assumption for fiscal 2016, 6.50% for fiscal 2015 and 7.75% for fiscal 2014.
The
Company's pension plan asset allocations at February 27, 2016 and February 28, 2015 by asset category were as follows:
|
|
|
|
|
|
|
|
|
|
February 27,
2016
|
|
February 28,
2015
|
|
Equity securities
|
|
|
49
|
%
|
|
53
|
%
|
Fixed income securities
|
|
|
51
|
%
|
|
47
|
%
|
|
|
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
investment objectives of the Defined Benefit Pension Plan, the only defined benefit plan with assets, are to:
-
-
Achieve a rate of return on investments that exceeds inflation over a full market cycle and is consistent with actuarial assumptions;
134
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
-
-
Balance the correlation between assets and liabilities by diversifying the portfolio among various asset classes to address return
risk and interest rate risk;
-
-
Balance the allocation of assets between the investment managers to minimize concentration risk;
-
-
Maintain liquidity in the portfolio sufficient to meet plan obligations as they come due; and
-
-
Control administrative and management costs.
The
asset allocation established for the pension investment program reflects the risk tolerance of the Company, as determined by:
-
-
the current and anticipated financial strength of the Company;
-
-
the funded status of the plan; and
-
-
plan liabilities.
Investments
in both the equity and fixed income markets will be maintained, recognizing that historical results indicate that equities (primarily common stocks) have higher expected
returns than fixed income investments. It is also recognized that the correlation between assets and liabilities must be balanced to address higher volatility of equity investments (return risk) and
interest rate risk.
The
following targets are to be applied to the allocation of plan assets.
|
|
|
|
|
Category
|
|
Target
Allocation
|
|
U.S. equities
|
|
|
36
|
%
|
International equities
|
|
|
13
|
%
|
U.S. fixed income
|
|
|
51
|
%
|
|
|
|
|
|
Total
|
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Company expects to contribute $0 to the Defined Benefit Pension Plan and make payments of $1,602 to participants of the Nonqualified Executive Retirement Plan during fiscal 2017.
135
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
The
following table sets forth by level within the fair value hierarchy a summary of the plan's investments measured at fair value on a recurring basis as of February 27, 2016 and
February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 27, 2016
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
|
|
$
|
|
|
$
|
14,414
|
|
$
|
|
|
$
|
14,414
|
|
Large Cap
|
|
|
|
|
|
28,188
|
|
|
|
|
|
28,188
|
|
Small-Mid Cap
|
|
|
|
|
|
11,684
|
|
|
|
|
|
11,684
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Credit Bond Index
|
|
|
|
|
|
43,130
|
|
|
|
|
|
43,130
|
|
20+ Year Treasury STRIPS
|
|
|
|
|
|
10,929
|
|
|
|
|
|
10,929
|
|
Intermediate Fixed Income
|
|
|
|
|
|
41
|
|
|
|
|
|
41
|
|
Other types of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
|
|
|
|
1,831
|
|
|
|
|
|
1,831
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
110,217
|
|
$
|
|
|
$
|
110,217
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements at February 28, 2015
|
|
|
|
Quoted Prices in
Active Markets
for Identical
Assets (Level 1)
|
|
Significant
Observable
Inputs (Level 2)
|
|
Significant
Unobservable
Inputs (Level 3)
|
|
Total
|
|
Equity Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
International equity
|
|
$
|
|
|
$
|
17,071
|
|
$
|
|
|
$
|
17,071
|
|
Large Cap
|
|
|
|
|
|
35,524
|
|
|
|
|
|
35,524
|
|
Small-Mid Cap
|
|
|
|
|
|
15,977
|
|
|
|
|
|
15,977
|
|
Fixed Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Credit Bond Index
|
|
|
|
|
|
47,249
|
|
|
|
|
|
47,249
|
|
Intermediate Fixed Income
|
|
|
|
|
|
13,612
|
|
|
|
|
|
13,612
|
|
Other types of investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short Term Investments
|
|
|
|
|
|
501
|
|
|
|
|
|
501
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
$
|
129,934
|
|
$
|
|
|
$
|
129,934
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is a description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the
valuation hierarchy.
Common and Collective Trusts
Common collective trust funds are stated at fair value as determined by the issuer of the common collective trust funds based on the
fair market value of the underlying investments.
136
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
18. Retirement Plans (Continued)
Following are the future benefit payments expected to be paid for the Defined Benefit Pension Plan and the nonqualified executive retirement plan during the years indicated:
|
|
|
|
|
|
|
|
Fiscal Year
|
|
Defined Benefit
Pension Plan
|
|
Nonqualified
Executive
Retirement Plan
|
|
2017
|
|
$
|
7,971
|
|
$
|
1,602
|
|
2018
|
|
|
8,153
|
|
|
1,234
|
|
2019
|
|
|
8,134
|
|
|
1,209
|
|
2020
|
|
|
8,332
|
|
|
1,129
|
|
2021
|
|
|
8,495
|
|
|
961
|
|
2022 - 2026
|
|
|
44,253
|
|
|
3,818
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
85,338
|
|
$
|
9,953
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company participates in various multi-employer union pension plans that are not sponsored by the Company. Total expenses recognized
for the multi-employer plans were $25,966 in fiscal 2016, $24,261 in fiscal 2015 and $26,617 in fiscal 2014.
19. Multiemployer Plans that Provide Pension Benefits
The Company contributes to a number of multiemployer defined benefit pension plans under the terms of collective-bargaining agreements that cover certain of its union-represented
employees. The risks of participating in these multiemployer plans are different from single-employer plans. Assets contributed to the multiemployer plan by one employer may be used to provide
benefits to employees of other participating employers. If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating
employers. Additionally, if the Company chooses to stop participating in some of its multiemployer plans, the Company may be required to pay those plans an amount based on the underfunded status of
the plan, referred to as a withdrawal liability.
The
Company's participation in these plans for the annual period ended February 27, 2016 is outlined in the table below. The "EIN/Pension Plan Number" column provides the Employer
Identification Number (EIN) and the three- digit plan number, if applicable. The most recent Pension Protection Act (PPA) zone status available for fiscal 2016 and fiscal 2015 is for the plan year-
ends as indicated below. The zone status is based on information that the Company received from the plan and is certified by the plan's actuary. Among other factors, plans in the red zone are
generally less than 65 percent funded, plans in the yellow zone are less than 80 percent funded, and plans in the green zone are at least 80 percent funded. The "FIP/RP Status
Pending/Implemented" column indicates plans for which a financial improvement plan (FIP) or a rehabilitation plan (RP) is either pending or has been implemented. In addition to regular plan
contributions, the Company may be subject to a surcharge if the plan is in the red zone. The "Surcharge Imposed" column indicates whether a surcharge has been imposed on contributions to the plan. The
last two columns list the expiration
137
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
19. Multiemployer Plans that Provide Pension Benefits (Continued)
date(s)
of the collective- bargaining agreement(s) to which the plans are subject and any minimum funding requirements. There have been no significant changes that affect the comparability of total
employer contributions of fiscal years 2016, 2015, and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contributions of the
Company
|
|
|
|
Expiration
Date of
Collective-
Bargaining
Agreement
|
|
|
|
|
|
|
Pension Protection Act Zone Status
|
|
FIP/ RP
Status
Pending/
Implemented
|
|
|
|
|
|
|
|
|
Surcharge Imposed
|
|
Minimum Funding Requirements
|
Pension
|
|
EIN/Pension Plan Number
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
2014
|
1199 SEIU Health Care Employees Pension Fund
|
|
|
13-3604862-001
|
|
|
Green12/31/2014
|
|
|
Green12/31/2013
|
|
No
|
|
$
|
12,959
|
|
$
|
11,568
|
|
$
|
14,093
|
|
No
|
|
|
4/18/2015
|
|
Contribution rate of 11.25% of gross wages earned per associate through 12/31/2014. Contribution rate of 10.22% of gross wages earned per associate beginning 01/01/2015.
|
Southern California United Food and Commercial Workers Unions and Drug Employers Pension Fund
|
|
|
51-6029925-001
|
|
|
Red12/31/2015
|
|
|
Red12/31/2014
|
|
Implemented
|
|
|
7,552
|
|
|
7,002
|
|
|
6,476
|
|
No
|
|
|
7/14/2018
|
|
Subsequent to 01/01/2015 contributions of $1.328 per hour worked for pharmacists and $0.602 per hour worked for non pharmacists. Prior to 01/01/2015 contributions of $1.242 per hour worked for pharmacists
and $0.563 per hour worked for non pharmacists.
|
UFCW Pharmacists, Clerks and Drug Employers Pension Trust (formerly the Northern California Pharmacists, Clerks and Drug Employers Pension Plan)
|
|
|
94-2518312-001
|
|
|
Green12/31/2015
|
|
|
Green12/31/2014
|
|
No
|
|
|
3,006
|
|
|
2,938
|
|
|
2,900
|
|
No
|
|
|
7/13/2019
|
|
Effective 09/01/2014, contribution rate frozen at $0.55 per hour worked for associates. Prior to 9/01/2014, contribution rate of $0.57 per hour worked for associates.
|
United Food and Commercial Workers Union-Employer Pension Fund
|
|
|
34-6665155-001
|
|
|
Red9/30/2015
|
|
|
Red9/30/2014
|
|
Implemented
|
|
|
732
|
|
|
667
|
|
|
629
|
|
No
|
|
|
12/31/2017
|
|
Contribution rate of $1.49 per hour worked. Effective 02/02/2015 contribution rate of $1.62 per hour worked.
|
United Food and Commercial Workers Union Local 880Mercantile Employers Joint Pension Fund
|
|
|
51-6031766-001
|
|
|
Yellow9/30/2015
|
|
|
Yellow9/30/2014
|
|
Implemented
|
|
|
454
|
|
|
480
|
|
|
441
|
|
No
|
|
|
12/31/2017
|
|
Contribution rate of $1.52 per hour worked. Effective 10/01/2014 contribution rate of $1.73 per hour worked. Effective 01/01/2015 contribution rate of $1.61 per hour worked.
|
Other Funds
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,263
|
|
|
1,606
|
|
|
2,078
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
25,966
|
|
$
|
24,261
|
|
$
|
26,617
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
138
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
19. Multiemployer Plans that Provide Pension Benefits (Continued)
The
Company was listed in these plans Forms 5500 as providing more than 5 percent of the total contributions for the following plans and plan years:
|
|
|
Pension Fund
|
|
Year Contributions to Plan
Exceeded More Than 5 Percent
of Total Contributions (as of
the Plan's Year-End)
|
UFCW Pharmacists, Clerks and Drug Employers Pension Trust
|
|
12/31/2014 and 12/31/2013
|
Southern California United Food and Commercial Workers Unions and Drug Employers Pension Fund
|
|
12/31/2014 and 12/31/2013
|
United Food & Commercial Workers Union- Employer Pension Fund
|
|
9/30/2014 and 9/30/2013
|
United Food & Commercial Workers Union Local 880Mercantile Employers Joint Pension Fund
|
|
9/30/2014 and 9/30/2013
|
At
the date the Company's financial statements were issued, certain Forms 5500 were not available.
During
fiscal 2016 and 2015, the Company did not withdrawal from any plans or incur any additional withdrawal liabilities.
During
fiscal 2014, the Company incurred an additional withdrawal liability of $1,000 associated with the withdrawal from the Central Ohio Locals 1059 and 75 effective March 31,
2013.
20. Segment Reporting
Prior to June 24, 2015, the Company's operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal
management reporting to reflect two reportable segments, its retail drug stores ("Retail Pharmacy"), and its pharmacy services ("Pharmacy Services") segments.
The
Retail Pharmacy segment's primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full
selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit
management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy
Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government's Medicare Part D program.
The
Parent Company's chief operating decision makers are its Parent Company Chief Executive Officer, Parent Company President and CEORetail Pharmacy,
CEOPharmacy Services, Chief Financial Officer and its Senior Executive Vice Presidents (collectively the "CODM"). The CODM has ultimate responsibility for enterprise decisions. The CODM
determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and
Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their
139
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
20. Segment Reporting (Continued)
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 consolidated financial statements for the fiscal years ended February 27, 2016,
February 28, 2015 and March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Intersegment
Eliminations(1)
|
|
Consolidated
|
|
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,865,931
|
|
$
|
4,103,513
|
|
$
|
(232,787
|
)
|
$
|
30,736,657
|
|
Gross Profit
|
|
|
7,595,429
|
|
|
230,826
|
|
|
|
|
|
7,826,255
|
|
Adjusted EBITDA(2)
|
|
|
1,300,905
|
|
|
101,357
|
|
|
|
|
|
1,402,262
|
|
February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
26,528,377
|
|
$
|
|
|
$
|
|
|
$
|
26,528,377
|
|
Gross Profit
|
|
|
7,576,732
|
|
|
|
|
|
|
|
|
7,576,732
|
|
Adjusted EBITDA(2)
|
|
|
1,322,843
|
|
|
|
|
|
|
|
|
1,322,843
|
|
March 1, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
25,526,413
|
|
$
|
|
|
$
|
|
|
$
|
25,526,413
|
|
Gross Profit
|
|
|
7,323,734
|
|
|
|
|
|
|
|
|
7,323,734
|
|
Adjusted EBITDA(2)
|
|
|
1,324,959
|
|
|
|
|
|
|
|
|
1,324,959
|
|
-
(1)
-
Intersegment
eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail
Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis.
-
(2)
-
See
"Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per Diluted Share and Other Non-GAAP Measures" in MD&A for additional details.
140
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
20. Segment Reporting (Continued)
The
following is a reconciliation of net income to Adjusted EBITDA for fiscal 2016, 2015 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
February 27,
2016
(52 weeks)
|
|
February 28,
2015
(52 weeks)
|
|
March 1,
2014
(52 weeks)
|
|
Net income
|
|
$
|
165,465
|
|
$
|
2,109,173
|
|
$
|
249,414
|
|
Interest expense
|
|
|
449,574
|
|
|
397,612
|
|
|
424,591
|
|
Income tax expense
|
|
|
139,297
|
|
|
158,951
|
|
|
161,883
|
|
Income tax valuation allowance reduction
|
|
|
(26,358
|
)
|
|
(1,841,304
|
)
|
|
(161,079
|
)
|
Depreciation and amortization expense
|
|
|
509,212
|
|
|
416,628
|
|
|
403,741
|
|
LIFO charge (credit)
|
|
|
11,163
|
|
|
(18,857
|
)
|
|
104,142
|
|
Lease termination and impairment charges
|
|
|
48,423
|
|
|
41,945
|
|
|
41,304
|
|
Loss on debt retirements, net
|
|
|
33,205
|
|
|
18,512
|
|
|
62,443
|
|
Other
|
|
|
72,281
|
|
|
40,183
|
|
|
38,520
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted EBITDA
|
|
$
|
1,402,262
|
|
$
|
1,322,843
|
|
$
|
1,324,959
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
following is balance sheet information for the Company's reportable segments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Retail
Pharmacy
|
|
Pharmacy
Services
|
|
Eliminations(2)
|
|
Consolidated
|
|
February 27, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,468,186
|
|
$
|
2,948,548
|
|
$
|
(139,724
|
)
|
$
|
11,277,010
|
|
Goodwill
|
|
|
76,124
|
|
|
1,637,351
|
|
|
|
|
|
1,713,475
|
|
Additions to property and equipment and intangible assets
|
|
|
667,719
|
|
|
2,276
|
|
|
|
|
|
669,995
|
|
February 28, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Assets
|
|
$
|
8,777,425
|
|
$
|
|
|
$
|
|
|
$
|
8,777,425
|
|
Goodwill
|
|
|
76,124
|
|
|
|
|
|
|
|
|
76,124
|
|
Additions to property and equipment and intangible assets
|
|
|
539,386
|
|
|
|
|
|
|
|
|
539,386
|
|
-
(2)
-
Intersegment
eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $116,027 against the Retail Pharmacy segment
long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $23,697, as of February 27, 2016, 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.
141
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees
The Company is a party to legal proceedings, investigations and claims in the ordinary course of its business, including the matters
described below. The Company records accruals for outstanding legal matters when it believes it is probable that a loss will be incurred and the amount can be reasonably estimated. The Company
evaluates, on a quarterly basis, developments in legal matters that could affect the amount of any accrual and developments that would make a loss contingency both probable and reasonably estimable.
If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.
The
Company's contingencies are subject to significant uncertainties, including, among other factors: (i) proceedings are in early stages; (ii) whether class or collective
action status is sought and the likelihood of a class being certified; (iii) the outcome of pending appeals or motions; (iv) the extent of potential damages, fines or penalties, which
are often unspecified or indeterminate; (v) the impact of discovery on the matter; (vi) whether novel or unsettled legal theories are at issue; (vii) there are significant factual
issues to be resolved; and/or (viii) in the case of certain government agency investigations, whether a sealed qui tam lawsuit ("whistleblower" action) has been filed and whether the government
agency makes a decision to intervene in the lawsuit following investigation.
As
of February 27, 2016, the Company was aware of ten (10) putative class action lawsuits that were filed by purported Company stockholders, against the Company, its
directors (the Individual Defendants, together with the Company, the Rite Aid Defendants), Walgreens Boots Alliance, Inc. ("WBA") and Victoria Merger Sub Inc., (Victoria) challenging the
transactions contemplated by the Merger agreement between the Company and WBA. Eight (8) of these actions were filed in the Court
of Chancery of the State of Delaware (
Smukler v. Rite Aid Corp., et al.
,
Hirschler v. Standley, et al.
,
Catelli v. Rite Aid Corp.,
et al.
,
Orr v. Rite Aid Corp., et al.
,
DePietro v.
Standley, et al.
,
Abadi v. Rite Aid Corp., et al.
,
Mortman v. Rite Aid Corp., et
al.
). One (1) action was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (
Wilson v. Rite Aid Corp., et
al.
,
Sachs Investment Grp., et al. v. Standley, et al.
). The complaints in these nine (9) actions alleged primarily that
the Company's directors breached their fiduciary duties by, among other things, agreeing to an allegedly unfair and inadequate price, agreeing to deal protection devices that allegedly prevented the
directors from obtaining higher offers from other interested buyers for the Company and allegedly failing to protect against certain purported conflicts of interest in connection with the Merger. The
Complaints further allege that the Company, WBA and/or Victoria aided and abetted these alleged breaches of fiduciary duty. The complaints sought, among other things, to enjoin the closing of the
Merger as well as money damages and attorneys' and experts' fees.
On
December 23, 2015, the eight (8) Delaware actions were consolidated in an action captioned
In re Rite Aid Corporation Stockholders
Litigation,
Consol. C.A. No. 11663-CB (the Consolidated Action). In addition to the claims asserted in the nine (9) complaints discussed above, the operative
pleading in the Consolidated Action also included allegations that the preliminary proxy statement contained material omissions, including with respect to the process that resulted in the Merger
agreement and the fairness opinion rendered by the Company's banker. On December 28, 2015, the plaintiffs in the Consolidated Action filed a motion for expedited proceedings, which the Court
orally
142
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
denied
at a hearing held on January 5, 2016. On March 11, 2016, the Court granted the plaintiffs' notice and proposed order voluntarily dismissing the Consolidated Action as moot, while
retaining jurisdiction solely for the purpose of adjudicating plaintiffs' counsel's anticipated application for an award of attorneys' fees and reimbursement of expenses. On April 15, 2016, the
Company reached a settlement in principle related to this matter for an immaterial amount.
A
tenth action was filed in the United States District Court for the Middle District of Pennsylvania (the Pennsylvania District Court), asserting a claim for violations of
Section 14(a) of the Exchange Act and SEC Rule 14a-9 against all defendants and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants and
WBA (
Herring v. Rite Aid Corp., et al.
). The
Herring
complaint alleges, among other things, that Rite
Aid and its Board of Directors disseminated an allegedly false and materially misleading proxy. The complaint sought to enjoin the shareholder vote on the proposed Merger, a declaration that the proxy
was materially false and misleading in violation of federal securities laws, and an award of money damages and attorneys' and experts' fees. On January 14 and 16, 2016, respectively, the
plaintiff in the Herring action filed a motion for preliminary injunction and a motion for expedited discovery. On January 21, 2016, the Rite Aid Defendants filed a motion to dismiss the
Herring complaint. At a hearing held on January 25, 2016, the Pennsylvania District Court orally denied the plaintiff's motion for expedited discovery and subsequently denied the plaintiff's
motion for preliminary injunction on January 28, 2016. On March 14, 2016, the Pennsylvania District Court appointed Jerry Herring, Don Michael Hussey and Joanna Pauli Hussey as lead
plaintiffs for the putative class and approved their selection of Robbins Geller Rudman & Dowd LLP as lead counsel. On
April 14, 2016, the Pennsylvania District Court granted the plaintiffs' unopposed motion to stay the
Herring
action for all purposes pending
consummation of the Merger.
The
Company has been named in a collective and class action lawsuit,
Indergit v. Rite Aid Corporation et al.
pending in the United States
District Court for the Southern District of New York, filed purportedly on behalf of current and former store managers working in the Company's stores at various locations around the country. The
lawsuit alleges that the Company failed to pay overtime to store managers as required under the FLSA and under certain New York state statutes. The lawsuit also seeks other relief, including
liquidated damages, punitive damages, attorneys' fees, costs and injunctive relief arising out of state and federal claims for overtime pay. On April 2, 2010, the Court conditionally certified
a nationwide collective group of individuals who worked for the Company as store managers since March 31, 2007. The Court ordered that Notice of the
Indergit
action be sent to the purported members
of the collective group (approximately 7,000 current and former store managers) and approximately 1,550
joined the
Indergit
action. Discovery as to certification issues has been completed. 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
143
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
the
merits of the claims is ongoing. At this time, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit. The
Company's management believes, however, that this lawsuit is without merit and 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
lawsuits 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.
With
respect to cases involving pharmacist meal and rest periods (
Chase
and
Scherwin v. Rite Aid
Corporation
pending in Los Angeles County Superior Court and
Kyle v. Rite Aid Corporation
pending in
Sacramento County Superior Court), during the period ended March 1, 2014, the Company recorded a legal accrual with respect to these matters. The Company settled the lawsuit for
$9.0 million. Following final approval by the Court earlier in the year, all settlement funds were disbursed in March 2016.
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 are stayed pending a decision by the California Supreme Court in two similar cases. That decision was rendered on April 4, 2016. The
Company is conferring with counsel about next steps in the litigation. A further status conference in the case is scheduled for May 13, 2016. With respect to the California Cases (other than
Chase
and
Scherwin and Kyle)
, 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.
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 has responded to both of the subpoenas. To enable the parties to discuss a possible resolution, the Medicaid
Fraud Control Units of the several states, commonwealths and the District of Columbia and Rite Aid have entered into an agreement tolling the statute of limitations until October 7, 2015. The
parties agreed to extend
144
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
the
tolling agreement until April 7, 2016. At this stage of the proceedings, Rite Aid is unable to predict the outcome of any review by the government of such information.
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 charges have been filed. On September 2, 2015 and March 11, 2016, the Company received grand jury subpoenas from the U.S. District Court for the Southern
District of West Virginia
seeking additional information in connection with the investigation of violations of the CMEA and/or the Controlled Substances Act ("CSA"). Violations of the CMEA or the CSA could result in the
imposition of administrative, civil and/or criminal penalties against the Company. The Company is cooperating with the government and continues to provide information responsive to the subpoenas. The
Company has entered into a tolling agreement with the USAOs in the Northern and Eastern Districts of New York and entered into a separate tolling agreement with the USAO in the Southern District of
West Virginia. Discussions are underway to resolve these matters with those USAOs, 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 unable to predict the outcome of the investigation.
In
January 2013, the DEA, Los Angeles District Office, served an administrative subpoena on the Company seeking documents related to prescriptions by a certain prescriber. The USAO,
Central District of California, also contacted the Company about a related investigation into allegations that Rite Aid pharmacies filled certain controlled substance prescriptions for a number of
practitioners after their DEA registrations had expired or otherwise become invalid in violation of the federal Controlled Substances Act and DEA regulations. The Company responded to the
administrative subpoena and subsequent informal requests for information from the USAO. The Company met with the USAO and DEA in January 2014 and is involved in ongoing discussions with the government
regarding this matter. The Company has entered into a tolling agreement with the USAO. The Company recorded a legal accrual during the period ended March 1, 2014, which was revised during the
period ending August 29, 2015. However, Rite Aid cannot predict at this time whether an agreement can be reached and the terms of any agreement.
The
Company was served with a Civil Investigative Demand ("CID") dated June 21, 2013 by the USAO for the Eastern District of California and the Attorney General's Office of the
State of California (the "AG"). The CID requested records and responses to interrogatories regarding Rite Aid's Drug Utilization Review and prescription dispensing protocol and the dispensing of drugs
designated "Code 1" by the State of California. The Company produced responsive documents and interrogatory responses to the USAO and AG. The Company and the government are in the process of
145
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
21. Commitments, Contingencies and Guarantees (Continued)
evaluating
the government's allegations and documents produced and have been exchanging position letters concerning the merits of the government's claims. At this stage, Rite Aid is unable to predict
the outcome of the investigation.
In
addition to the above described matters, the Company is subject from time to time to various claims and lawsuits and governmental investigations arising in the ordinary course of
business. While the Company's management cannot predict the outcome of any of the claims, the Company's management does not believe that the outcome of any of these legal matters will be material to
the Company's
consolidated financial position. It is possible, however, that the Company's results of operations or cash flows could be materially affected by an unfavorable resolution of pending litigation or
contingencies.
The California Department of Health Care Services ("DHCS"), the agency responsible for administering the State of California Medicaid
program, implemented retroactive reimbursement rate reductions effective June 1, 2011, impacting the medical provider community in California, including pharmacies. Numerous medical providers,
including representatives of both chain and independent pharmacies, filed suits against DHCS in Federal District Court in California and obtained preliminary injunctions against the rate cuts, subject
to a trial on the merits. DHCS appealed the preliminary injunctions to the Ninth Circuit Court of Appeals, which Court vacated the injunctions. Based upon the actions of DHCS and the decision of the
Appeals Court, the Company recorded an appropriate accrual. In January 2014, the Center for Medicare and Medicaid Services approved a state plan amendment that excluded certain drugs from the
retroactive reimbursement rate reductions effective March 31, 2012. Accordingly, the Company adjusted its accrual during that fiscal year to take into account this exclusion. In December 2015,
DHCS provided notice that it adjudicated all claims related to this retroactive reimbursement and the Company has adjusted its accrual to the total amount that will be recouped by DHCS.
146
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
22. Supplementary Cash Flow Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended
|
|
|
|
February 27,
2016
|
|
February 28,
2015
|
|
March 1,
2014
|
|
Cash paid for interest (net of capitalized amounts of $196, $145 and $197)
|
|
$
|
403,727
|
|
$
|
384,329
|
|
$
|
414,692
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash payments for income taxes, net
|
|
$
|
4,856
|
|
$
|
6,665
|
|
$
|
3,191
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment financed under capital leases
|
|
$
|
9,614
|
|
$
|
6,157
|
|
$
|
18,065
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equipment received for noncash consideration
|
|
$
|
3,011
|
|
$
|
1,600
|
|
$
|
2,825
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock dividends paid in additional shares
|
|
$
|
|
|
$
|
|
|
$
|
8,318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued capital expenditures
|
|
$
|
69,417
|
|
$
|
87,916
|
|
$
|
72,841
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross borrowings from revolver
|
|
$
|
4,729,000
|
|
$
|
6,078,000
|
|
$
|
2,668,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross repayments to revolver
|
|
$
|
4,354,000
|
|
$
|
4,753,000
|
|
$
|
2,933,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23. Related Party Transactions
There were receivables from related parties of $48 and $15 at February 27, 2016 and February 28, 2015, respectively.
As
contemplated by the pending Merger with WBA, on December 31, 2015, the Board of Directors of the Company approved the adoption of a retention and severance program upon the
recommendation of the Compensation Committee of the Board (the "Committee"), which was advised by the Committee's independent compensation consultant, to enhance employee retention and corporate
performance through the closing of the Merger, and authorized the Company to enter into individual retention award agreements with certain of its executive officers. The individual retention award
agreements provide for the lump-sum payment of the retention award on the one hundred twentieth day following the closing of the Merger (the "retention date"), subject to continued employment through
such retention date or upon the earlier termination of the recipient's employment by the Company without "cause" or by the recipient for "good reason" (as such terms are defined in the Company's 2014
Omnibus Equity Plan) (each referred to as a "qualifying termination"). The Company executed retention award agreements on December 31, 2015 with certain Company executive officers, which
provided for the grant of retention awards under the terms described above and, for tax planning purposes, provide for the accelerated payment of the executive's fiscal year 2016 bonus in 2015, the
accelerated lapse of restrictions on certain time-based restricted stock awards in 2015 and, to the extent necessary for one executive officer, the accelerated payment of the retention award in 2015,
in each case subject to repayment requirements on the part of the executive if the executive would not have otherwise become entitled to such payments. During fiscal 2016, the Company made advance
payments to certain executives of $500 for retention bonuses and $1,778 of fiscal 2016 performance bonuses for tax planning purposes.
147
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
23. Related Party Transactions (Continued)
On July 22, 2013, the Jean Coutu Group announced that it had sold all of its 65,401,162 shares of Rite Aid's common stock. As a result of this sale, the Jean Coutu Group was
required to cause its last designee to resign from Rite Aid's board of directors and, accordingly, Francois J. Coutu resigned from Rite Aid's board of directors effective November 8, 2013.
On
September 26, 2013, the Company agreed to exchange eight shares of 7% Series G Convertible Preferred Stock (the "Series G preferred stock") and 1,876,013 shares
of 6% Series H Convertible Preferred Stock (the "Series H preferred stock", collectively the "Preferred Stock") of the Company (the "Exchange"), held by Green Equity Investors
III, L.P. ("LGP") for 40,000,000 shares of the Company's common stock, par value $1.00 per share, with a market value of $190,400 at the $4.76 per share closing price on the Settlement Date (as
hereinafter defined), pursuant to an individually negotiated exchange transaction. The Exchange settled on September 30, 2013 (the "Settlement Date"). The Preferred Stock, including additional
shares representing earned but unpaid dividends as of the Settlement Date, was redeemable by the Company for cash at 105% of the Preferred Stock's $100 per share liquidation preference or $199,937.
The Company agreed to the Exchange as it was prohibited under several of its debt instruments from using cash to effect the redemption of the Preferred Stock. Following the Settlement Date, no shares
of the Series G preferred stock or Series H preferred stock remained outstanding and the Company's restated certificate of incorporation was amended to eliminate all references to the
Series G preferred stock and Series H preferred stock. In accordance with the terms of the Exchange, John M. Baumer, a member of the board of directors of the Company and a limited
partner of Leonard Green & Partners, L.P., an affiliate of the LGP, resigned from the Company's board of directors.
The
Series G preferred stock had a liquidation preference of $100 per share and paid quarterly dividends in additional shares at 7% of liquidation preference and could be redeemed
at the Company's election. The Series H preferred stock paid quarterly dividends in additional shares at 6% of liquidation preference and could be redeemed at the Company's election. The
Series G preferred stock and Series H preferred stock were convertible into common stock of the Company, at the holder's option, at a conversion rate of $5.50 per share.
As
of the Settlement Date, LGP held 1,904,161 shares of Series G preferred stock and Series H preferred stock, which included 28,140 shares of earned and unpaid dividends.
The Series G preferred stock and Series H preferred stock would have converted into 34,621,117 shares of common stock at the contracted conversion rate of $5.50 per share. Accordingly,
income attributable to common stockholders was reduced by $25,603, or $0.03 per diluted share, the value of the additional 5,378,883 shares of common stock issued upon conversion at the $4.76 per
share closing price on the Settlement Date.
148
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information
Rite Aid Corporation conducts the majority of its business through its subsidiaries. With the exception of EIC, substantially all of Rite Aid Corporation's 100 percent owned
subsidiaries guarantee the obligations under the Amended and Restated Senior Secured Credit Facility, second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed
notes (the "Subsidiary Guarantors"). Additionally, prior to the Acquisition, the subsidiaries, including joint ventures, that did not guarantee the Amended and Restated Senior Secured Credit Facility,
second priority secured term loan facilities, secured guaranteed notes and unsecured guaranteed notes, were minor. Accordingly, condensed consolidating financial information for the Company and
subsidiaries is not presented for those periods. Condensed consolidating financial information for the Company, its Subsidiary Guarantors and non-guarantor subsidiaries, is presented for periods
subsequent to the Acquisition.
For
the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by
Subsidiary Guarantors
with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company's Amended and Restated Senior Secured Credit Facility, second priority secured term loan
facilities and secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating
financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the
149
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
non-guarantor
subsidiaries at February 27, 2016 and for the fiscal year ended February 27, 2016. Separate financial statements for Subsidiary Guarantors are not presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Balance Sheet
February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
|
|
$
|
90,569
|
|
$
|
33,902
|
|
$
|
|
|
$
|
124,471
|
|
Accounts receivable, net
|
|
|
|
|
|
1,316,797
|
|
|
284,211
|
|
|
|
|
|
1,601,008
|
|
Intercompany receivable
|
|
|
|
|
|
224,220
|
|
|
|
|
|
(224,220
|
)(a)
|
|
|
|
Inventories, net of LIFO reserve of $0, $1,006,396, $0, $0, and $1,006,396
|
|
|
|
|
|
2,697,104
|
|
|
|
|
|
|
|
|
2,697,104
|
|
Prepaid expenses and other current assets
|
|
|
|
|
|
121,684
|
|
|
6,460
|
|
|
|
|
|
128,144
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets
|
|
|
|
|
|
4,450,374
|
|
|
324,573
|
|
|
(224,220
|
)
|
|
4,550,727
|
|
Property, plant and equipment, net
|
|
|
|
|
|
2,255,398
|
|
|
|
|
|
|
|
|
2,255,398
|
|
Goodwill
|
|
|
|
|
|
1,713,475
|
|
|
|
|
|
|
|
|
1,713,475
|
|
Other intangibles, net
|
|
|
|
|
|
948,451
|
|
|
55,928
|
|
|
|
|
|
1,004,379
|
|
Deferred tax assets
|
|
|
|
|
|
1,539,141
|
|
|
|
|
|
|
|
|
1,539,141
|
|
Investment in subsidiaries
|
|
|
14,832,523
|
|
|
57,167
|
|
|
|
|
|
(14,889,690
|
)(b)
|
|
|
|
Intercompany receivable
|
|
|
|
|
|
7,270,869
|
|
|
|
|
|
(7,270,869
|
)(a)
|
|
|
|
Other assets
|
|
|
|
|
|
207,821
|
|
|
6,069
|
|
|
|
|
|
213,890
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
14,832,523
|
|
$
|
18,442,696
|
|
$
|
386,570
|
|
$
|
(22,384,779
|
)
|
$
|
11,277,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt and lease financing obligations
|
|
$
|
90
|
|
$
|
26,758
|
|
$
|
|
|
$
|
|
|
$
|
26,848
|
|
Accounts payable
|
|
|
|
|
|
1,541,984
|
|
|
813
|
|
|
|
|
|
1,542,797
|
|
Intercompany payable
|
|
|
|
|
|
|
|
|
224,220
|
|
|
(224,220
|
)(a)
|
|
|
|
Accrued salaries, wages and other current liabilities
|
|
|
65,743
|
|
|
1,274,074
|
|
|
87,433
|
|
|
|
|
|
1,427,250
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities
|
|
|
65,833
|
|
|
2,842,816
|
|
|
312,466
|
|
|
(224,220
|
)
|
|
2,996,895
|
|
Long-term debt, less current maturities
|
|
|
6,914,393
|
|
|
|
|
|
|
|
|
|
|
|
6,914,393
|
|
Lease financing obligations, less current maturities
|
|
|
|
|
|
52,895
|
|
|
|
|
|
|
|
|
52,895
|
|
Intercompany payable
|
|
|
7,270,869
|
|
|
|
|
|
|
|
|
(7,270,869
|
)(a)
|
|
|
|
Other noncurrent liabilities
|
|
|
|
|
|
714,462
|
|
|
16,937
|
|
|
|
|
|
731,399
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities
|
|
|
14,251,095
|
|
|
3,610,173
|
|
|
329,403
|
|
|
(7,495,089
|
)
|
|
10,695,582
|
|
Commitments and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity
|
|
|
581,428
|
|
|
14,832,523
|
|
|
57,167
|
|
|
(14,889,690
|
)
|
|
581,428
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders' equity
|
|
$
|
14,832,523
|
|
$
|
18,442,696
|
|
$
|
386,570
|
|
$
|
(22,384,779
|
)
|
$
|
11,277,010
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany accounts receivable and accounts payable amounts.
-
(b)
-
Elimination
of investments in consolidated subsidiaries.
150
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Operations
For the Year Ended February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Revenues
|
|
$
|
|
|
$
|
30,731,771
|
|
$
|
162,620
|
|
$
|
(157,734
|
)(a)
|
$
|
30,736,657
|
|
Costs and expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost of revenues
|
|
|
|
|
|
22,910,402
|
|
|
154,838
|
|
|
(154,838
|
)(a)
|
|
22,910,402
|
|
Selling, general and administrative expenses
|
|
|
|
|
|
7,004,321
|
|
|
11,921
|
|
|
(2,896
|
)(a)
|
|
7,013,346
|
|
Lease termination and impairment expenses
|
|
|
|
|
|
48,423
|
|
|
|
|
|
|
|
|
48,423
|
|
Interest expense
|
|
|
415,304
|
|
|
34,268
|
|
|
2
|
|
|
|
|
|
449,574
|
|
Loss on debt retirement, net
|
|
|
33,205
|
|
|
|
|
|
|
|
|
|
|
|
33,205
|
|
Loss on sale of assets, net
|
|
|
|
|
|
3,303
|
|
|
|
|
|
|
|
|
3,303
|
|
Equity in earnings of subsidiaries, net of tax
|
|
|
(613,974
|
)
|
|
3,972
|
|
|
|
|
|
610,002
|
(b)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(165,465
|
)
|
|
30,004,689
|
|
|
166,761
|
|
|
452,268
|
|
|
30,458,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes
|
|
|
165,465
|
|
|
727,082
|
|
|
(4,141
|
)
|
|
(610,002
|
)
|
|
278,404
|
|
Income tax expense (benefit)
|
|
|
|
|
|
113,108
|
|
|
(169
|
)
|
|
|
|
|
112,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss)
|
|
$
|
165,465
|
|
$
|
613,974
|
|
$
|
(3,972
|
)
|
$
|
(610,002
|
)
|
$
|
165,465
|
|
Total other comprehensive (loss) income
|
|
|
(1,931
|
)
|
|
(1,931
|
)
|
|
|
|
|
1,931
|
|
|
(1,931
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss)
|
|
$
|
163,534
|
|
$
|
612,043
|
|
$
|
(3,972
|
)
|
$
|
(608,071
|
)
|
$
|
163,534
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(a)
-
Elimination
of intercompany revenues and expenses.
-
(b)
-
Elimination
of equity in earnings of subsidiaries.
151
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
24. Guarantor and Non-Guarantor Condensed Consolidating Financial Information (Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rite Aid Corporation
Condensed Consolidating Statement of Cash Flows
For the Year Ended February 27, 2016
|
|
|
|
Rite Aid
Corporation
(Parent
Company Only)
|
|
Subsidiary
Guarantors
|
|
Non-
Guarantor
Subsidiaries
|
|
Eliminations
|
|
Consolidated
|
|
|
|
(in thousands)
|
|
Operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by operating activities
|
|
$
|
(387,871
|
)
|
$
|
1,391,759
|
|
$
|
(6,486
|
)
|
$
|
|
|
$
|
997,402
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property, plant and equipment
|
|
|
|
|
|
(541,347
|
)
|
|
|
|
|
|
|
|
(541,347
|
)
|
Intangible assets acquired
|
|
|
|
|
|
(128,648
|
)
|
|
|
|
|
|
|
|
(128,648
|
)
|
Acquisition of businesses, net of cash acquired
|
|
|
(1,778,377
|
)
|
|
|
|
|
|
|
|
|
|
|
(1,778,377
|
)
|
Intercompany activity
|
|
|
(103,834
|
)
|
|
(794,422
|
)
|
|
|
|
|
898,256
|
|
|
|
|
Proceeds from sale-leaseback transaction
|
|
|
|
|
|
36,732
|
|
|
|
|
|
|
|
|
36,732
|
|
Proceeds from dispositions of assets and investments
|
|
|
|
|
|
9,782
|
|
|
|
|
|
|
|
|
9,782
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash (used in) provided by investing activities
|
|
|
(1,882,211
|
)
|
|
(1,417,903
|
)
|
|
|
|
|
898,256
|
|
|
(2,401,858
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt
|
|
|
1,800,000
|
|
|
|
|
|
|
|
|
|
|
|
1,800,000
|
|
Net proceeds from revolver
|
|
|
375,000
|
|
|
|
|
|
|
|
|
|
|
|
375,000
|
|
Principal payments on long-term debt
|
|
|
(650,079
|
)
|
|
(22,638
|
)
|
|
|
|
|
|
|
|
(672,717
|
)
|
Change in zero balance cash accounts
|
|
|
|
|
|
(62,878
|
)
|
|
|
|
|
|
|
|
(62,878
|
)
|
Net proceeds from issuance of common stock
|
|
|
11,376
|
|
|
|
|
|
|
|
|
|
|
|
11,376
|
|
Financing fees paid for early debt redemption
|
|
|
(26,003
|
)
|
|
|
|
|
|
|
|
|
|
|
(26,003
|
)
|
Excess tax benefit on stock options and restricted stock
|
|
|
|
|
|
22,884
|
|
|
|
|
|
|
|
|
22,884
|
|
Deferred financing costs paid
|
|
|
(34,634
|
)
|
|
|
|
|
|
|
|
|
|
|
(34,634
|
)
|
Intercompany activity
|
|
|
794,422
|
|
|
63,446
|
|
|
40,388
|
|
|
(898,256
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) financing activities
|
|
|
2,270,082
|
|
|
814
|
|
|
40,388
|
|
|
(898,256
|
)
|
|
1,413,028
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Decrease) increase in cash and cash equivalents
|
|
|
|
|
|
(25,330
|
)
|
|
33,902
|
|
|
|
|
|
8,572
|
|
Cash and cash equivalents, beginning of period
|
|
|
|
|
|
115,899
|
|
|
|
|
|
|
|
|
115,899
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period
|
|
$
|
|
|
$
|
90,569
|
|
$
|
33,902
|
|
$
|
|
|
$
|
124,471
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
152
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
25. Interim Financial Results (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2016
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
|
Revenues
|
|
$
|
6,647,561
|
|
$
|
7,664,776
|
|
$
|
8,154,184
|
|
$
|
8,270,136
|
|
$
|
30,736,657
|
|
Cost of revenues
|
|
|
4,788,031
|
|
|
5,742,485
|
|
|
6,151,305
|
|
|
6,228,581
|
|
|
22,910,402
|
|
Selling, general and administrative expenses
|
|
|
1,699,585
|
|
|
1,725,826
|
|
|
1,777,647
|
|
|
1,810,288
|
|
|
7,013,346
|
|
Lease termination and impairment charges
|
|
|
5,022
|
|
|
9,637
|
|
|
7,011
|
|
|
26,753
|
|
|
48,423
|
|
Interest expense
|
|
|
123,607
|
|
|
115,410
|
|
|
106,879
|
|
|
103,678
|
|
|
449,574
|
|
Loss on debt retirements, net
|
|
|
|
|
|
33,205
|
|
|
|
|
|
|
|
|
33,205
|
|
Loss (gain) on sale of assets, net
|
|
|
39
|
|
|
281
|
|
|
3,331
|
|
|
(348
|
)
|
|
3,303
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,616,284
|
|
|
7,626,844
|
|
|
8,046,173
|
|
|
8,168,952
|
|
|
30,458,253
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
31,277
|
|
|
37,932
|
|
|
108,011
|
|
|
101,184
|
|
|
278,404
|
|
Income tax expense
|
|
|
12,441
|
|
|
16,463
|
|
|
48,468
|
|
|
35,567
|
|
|
112,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
18,836
|
|
$
|
21,469
|
|
$
|
59,543
|
|
$
|
65,617
|
|
$
|
165,465
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share(1)
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share(1)
|
|
$
|
0.02
|
|
$
|
0.02
|
|
$
|
0.06
|
|
$
|
0.06
|
|
$
|
0.16
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2015
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
|
Year
|
|
Revenues
|
|
$
|
6,465,531
|
|
$
|
6,522,584
|
|
$
|
6,692,333
|
|
$
|
6,847,929
|
|
$
|
26,528,377
|
|
Cost of revenues
|
|
|
4,662,552
|
|
|
4,628,005
|
|
|
4,769,020
|
|
|
4,892,068
|
|
|
18,951,645
|
|
Selling, general and administrative expenses
|
|
|
1,644,354
|
|
|
1,640,524
|
|
|
1,692,437
|
|
|
1,718,327
|
|
|
6,695,642
|
|
Lease termination and impairment charges
|
|
|
4,848
|
|
|
7,111
|
|
|
8,702
|
|
|
21,284
|
|
|
41,945
|
|
Interest expense
|
|
|
100,820
|
|
|
100,950
|
|
|
97,400
|
|
|
98,442
|
|
|
397,612
|
|
Loss on debt retirements, net
|
|
|
|
|
|
|
|
|
18,512
|
|
|
|
|
|
18,512
|
|
Gain on sale of assets, net
|
|
|
(370
|
)
|
|
(1,715
|
)
|
|
(455
|
)
|
|
(1,259
|
)
|
|
(3,799
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,412,204
|
|
|
6,374,875
|
|
|
6,585,616
|
|
|
6,728,862
|
|
|
26,101,557
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
53,327
|
|
|
147,709
|
|
|
106,717
|
|
|
119,067
|
|
|
426,820
|
|
Income tax expense (benefit)
|
|
|
11,881
|
|
|
19,860
|
|
|
1,871
|
|
|
(1,715,965
|
)
|
|
(1,682,353
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
41,446
|
|
$
|
127,849
|
|
$
|
104,846
|
|
$
|
1,835,032
|
|
$
|
2,109,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share(1)
|
|
$
|
0.04
|
|
$
|
0.13
|
|
$
|
0.11
|
|
$
|
1.88
|
|
$
|
2.17
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share(1)
|
|
$
|
0.04
|
|
$
|
0.13
|
|
$
|
0.10
|
|
$
|
1.79
|
|
$
|
2.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
-
(1)
-
Income
per share amounts for each quarter may not necessarily total to the yearly income per share due to the weighting of shares outstanding on a quarterly
and year-to-date basis.
153
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
For the Years Ended February 27, 2016, February 28, 2015 and March 1, 2014
(In thousands, except per share amounts)
25. Interim Financial Results (Unaudited) (Continued)
During
the second quarter of 2016, the Company recorded a loss on debt retirement related to the August 2015 redemption of the outstanding 8.00% Notes as discussed in Note 14.
During the fourth quarter of fiscal 2016, the Company recorded facilities impairment charges of $16,401 and a LIFO credit of $6,796 due to lower deflation on pharmacy generics as compared to a larger
LIFO credit recognized at prior year end caused by lower pharmacy inventory due to its Purchasing and Delivery Arrangement.
During
the third quarter of 2015, the Company recorded a loss on debt retirement related to the October 2014 redemption of the outstanding 10.25% senior notes due 2019 as discussed in
Note 14. During the fourth quarter of fiscal 2015, the Company recorded facilities impairment charges of $13,105 and a LIFO credit of $23,489 due to lower pharmacy inventory in both its stores
and distribution centers in connection with its Purchasing and Delivery Arrangement as compared to a LIFO charge recognized at prior year end caused by higher pharmacy inflation rates.
26. Financial Instruments
The carrying amounts and fair values of financial instruments at February 27, 2016 and February 28, 2015 are listed as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
2015
|
|
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Carrying
Amount
|
|
Fair
Value
|
|
Variable rate indebtedness
|
|
$
|
3,027,675
|
|
$
|
3,025,500
|
|
$
|
2,642,008
|
|
$
|
2,649,825
|
|
Fixed rate indebtedness
|
|
$
|
3,886,808
|
|
$
|
4,210,416
|
|
$
|
2,825,115
|
|
$
|
3,230,801
|
|
Cash,
trade receivables and trade payables are carried at market value, which approximates their fair values due to the short-term maturity of these instruments. In addition, the Company
has $6,069 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 February 27, 2016. The Company
believes the carrying value of these investments approximates their fair value.
The
following methods and assumptions were used in estimating fair value disclosures for financial instruments:
The carrying amounts for LIBOR-based borrowings under the credit facilities, term loans and term notes are estimated based on the
quoted market price of the financial instruments.
The fair values of long-term indebtedness are estimated based on the quoted market prices of the financial instruments. If quoted
market prices were not available, the Company estimated the fair value based on the quoted market price of a financial instrument with similar characteristics.
154
Table of Contents
RITE AID CORPORATION AND SUBSIDIARIES
SCHEDULE IIVALUATION AND QUALIFYING ACCOUNTS
For the Years Ended February 27, 2016, February 28, 2015, and March 1, 2014
(dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowances deducted from
accounts receivable
for estimated uncollectible
amounts:
|
|
Balance at
Beginning
of Period
|
|
Additions
Charged to
Costs and
Expenses
|
|
Deductions
|
|
Balance at
End of
Period
|
|
Year ended February 27, 2016
|
|
$
|
31,247
|
|
$
|
71,984
|
|
$
|
70,411
|
|
$
|
32,820
|
|
Year ended February 28, 2015
|
|
$
|
26,873
|
|
$
|
66,319
|
|
$
|
61,945
|
|
$
|
31,247
|
|
Year ended March 1, 2014
|
|
$
|
28,271
|
|
$
|
43,524
|
|
$
|
44,922
|
|
$
|
26,873
|
|
155
Table of Contents
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
|
|
|
|
RITE AID CORPORATION
|
|
|
By:
|
|
/s/ JOHN T. STANDLEY
John T. Standley
Chairman and Chief Executive Officer
|
|
|
Dated: April 25, 2016
|
Pursuant
to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in their respective
capacities on April 25, 2016.
|
|
|
Signature
|
|
Title
|
|
|
|
/s/ JOHN T. STANDLEY
John T. Standley
|
|
Chairman, Chief Executive Officer and Director (principal executive officer)
|
/s/ DARREN W. KARST
Darren W. Karst
|
|
Chief Financial Officer Chief Administrative Officer and Senior Executive Vice President (principal financial officer)
|
/s/ DOUGLAS E. DONLEY
Douglas E. Donley
|
|
Chief Accounting Officer and Senior Vice President (principal accounting officer)
|
/s/ JOSEPH B. ANDERSON, JR
Joseph B. Anderson, Jr
|
|
Director
|
/s/ BRUCE G. BODAKEN
Bruce G. Bodaken
|
|
Director
|
/s/ DAVID R. JESSICK
David R. Jessick
|
|
Director
|
/s/ KEVIN E. LOFTON
Kevin E. Lofton
|
|
Director
|
156
Table of Contents
|
|
|
Signature
|
|
Title
|
|
|
|
/s/ MYRTLE S. POTTER
Myrtle S. Potter
|
|
Director
|
/s/ MICHAEL N. REGAN
Michael N. Regan
|
|
Director
|
/s/ FRANK A. SAVAGE
Frank A. Savage
|
|
Director
|
/s/ MARCY SYMS
Marcy Syms
|
|
Director
|
157
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