ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

9 Months Ended

Nov. 03, 2018

Assets Held-for-sale And Discontinued Operations

ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

NOTE 2: ASSETS HELD-FOR-SALE AND DISCONTINUED OPERATIONS

During the fourth quarter of 2017, Fred’s Board of Directors approved a plan to actively market its specialty pharmacy business (“Entrust”). Accordingly, Entrust met the criteria for “Assets Held-for-Sale” in accordance with ASC 360 as of February 3, 2018. Entrust’s assets and liabilities were reflected as “held-for-sale” on the consolidated balance sheets in accordance with ASC 360 at February 3, 2018. In addition, the results of operations for the Entrust business have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented. On May 4, 2018, Fred’s entered into the Specialty Asset Purchase Agreement with the Specialty Buyer, pursuant to which, the Specialty Buyer agreed to purchase Entrust, consisting of three pharmacy locations, pharmaceutical inventory, and related intellectual property. The Specialty Buyer paid Fred’s $40.0 million for the purchased assets (plus up to an additional $5.5 million for inventory). On June 1, 2018, the sale of the Entrust assets was completed.

The results of the Entrust business were previously allocated to the Pharmacy segment within the sales mix. There were no earnings related to the Entrust business in the third quarter of 2018, but Entrust recorded a loss from discontinued operations, net of tax, of $1.9 million for the third quarter of 2017, and a loss from discontinued operations, net of tax, of $11.5 million and $1.1 million for the first nine months of 2018 and 2017, respectively.

Certain corporate overhead and other costs previously allocated to the specialty pharmacy business for segment reporting purposes did not qualify for classification within discontinued operations and have been reallocated to continuing operations.

On September 7, 2018 the Company, entered into an Asset Purchase Agreement with Walgreen Co., an Illinois corporation. On October 23, 2018, the Company entered into an amendment to the Asset Purchase Agreement (the “Amendment”). Under the Asset Purchase Agreement, as amended by the Amendment (the “Amended WBA Asset Purchase Agreement”), the Company agreed to sell certain prescription files and related data and records, retail pharmaceutical inventory, and certain other assets from 179 of the Company’s 346 retail pharmacy stores (such assets from such 179 retail pharmacy stores collectively referred to as “Retail Pharmacy”) for a cash purchase price of approximately $157 million plus an amount equal to the value of the inventory included in the Retail Pharmacy assets up to an approximately $35 million cap, in each case subject to certain adjustments. The Company decided to sell the assets to raise cash to pay down existing debt. As of November 3, 2018, the Company had not yet completed any dispositions of assets. The Company intends to transfer ownership of the Retail Pharmacy assets to Walgreen Co. in a series of ongoing closings, with the initial closing occurring on November 13, 2018 and the final closing expected to occur in the first quarter of calendar year 2019. During the third quarter the assets therefore met the criteria for “Assets Held-for-Sale” in accordance with ASC 360. Such assets have been reflected as “held-for-sale” on the consolidated balance sheets in accordance with ASC 360. In addition, the results of operations have been presented as discontinued operations in accordance with ASC 205-20 for all periods presented. Assets and liabilities which meet the held for sale criteria are carried at the lesser of fair value less selling costs or carrying value. The Company determined the fair value less costs to sell exceeded the carrying value of the held for sale, therefore no adjustment to the disposal group's net book value was recognized.

The results of the Retail Pharmacy business were previously allocated to the Pharmacy segment within the sales mix. Retail Pharmacy recorded a profit from discontinued operations, net of tax, of $3.4 million and $0.5 million for the third quarter of 2018 and 2017, respectively. Retail Pharmacy recorded a loss from discontinued operations, net of tax, of $0.2 million and a profit from discontinued operations, net of tax, of $2.5 million, for the first nine months of 2018 and 2017, respectively.

The total recorded profit from discontinued operations for Entrust and Retail Pharmacy, net of tax, was $3.4 million for the third quarter of 2018 and the total recorded loss from discontinued operations for Entrust and Retail Pharmacy, net of tax, was $1.4 million for the third quarter 2017. The total recorded loss from discontinued operations for Entrust and Retail Pharmacy, net of tax, was $11.7 million for the first nine months of 2018 and the total recorded profit from discontinued operations for Entrust and Retail Pharmacy, net of tax, was $1.4 million for the first nine months of 2017.

Summarized Discontinued Operations Financial Information

The following table provides a reconciliation of the carrying amounts of major classes of assets and liabilities which are included in assets and liabilities held-for-sale in the accompanying consolidated balance sheet for each of the periods presented:

	Entrust Discontinued Operations				Retail Pharmacy Discontinued Operations				Total Discontinued Operations
	November 3,		February 3,		November 3,		February 3,		November 3,		February 3,
	2018		2018		2018		2018		2018		2018
(in thousands)	(unaudited)				(unaudited)				(unaudited)
Current assets:
Receivables, less allowance for doubtful accounts	$	—	$	15,983	$	—	$	—	$	—	$	15,983
Inventories		—		3,756		13,849		15,344		13,849		19,100
Other non-trade receivables		—		152		—		—		—		152
Prepaid expenses and other current assets		—		12		—		—		—		12
Total current assets held-for-sale	$	—	$	19,903	$	13,849	$	15,344	$	13,849	$	35,247
Property and equipment, less accumulated depreciation and amortization		—		1,036		—		—		—		1,036
Goodwill		—		30,609		—		—		—		30,609
Intangible assets, net		—		9,533		16,471		20,541		16,471		30,074
Other noncurrent assets, net		—		539		—		—		—		539
Total noncurrent assets held-for-sale	$	—	$	41,717	$	16,471	$	20,541	$	16,471	$	62,258
Current liabilities:
Accounts payable		—		22,045		—		—		—		22,045
Accrued expenses and other		—		4,527		—		—		—		4,527
Total current liabilities held-for-sale	$	—	$	26,572	$	—	$	—	$	—	$	26,572
Deferred income taxes		—		—		—		—		—		—
Other noncurrent liabilities		—		48		—		—		—		48
Total noncurrent liabilities held-for-sale	$	—	$	48	$	—	$	—	$	—	$	48

The following tables summarize the results of discontinued operations for the thirteen and thirty nine weeks ended November 3, 2018, and October 28, 2017, respectively:

Discontinued Operations - Entrust 

	For the Thirteen Weeks Ended					For the Thirty Nine Weeks Ended
	(unaudited)					(unaudited)
	November 3,		October 28,			November 3,			October 28,
(in thousands)	2018		2017			2018			2017
Net Sales	$	—	$	68,168		$	90,112		$	205,626
Cost of goods sold		—		66,238			88,454			196,097
Gross profit		—		1,930			1,658			9,529
Depreciation and amortization		—		631			796			2,010
Selling, general and administrative expenses		—		2,763			12,398			8,424
Loss from discontinued operations		—		(1,464	)		(11,536	)		(905	)
Income tax expense		—		394			—			244
Loss from discontinued operations, net of tax	$	—	$	(1,858	)	$	(11,536	)	$	(1,149	)

Discontinued Operations - Retail Pharmacy

	For the Thirteen Weeks Ended					For the Thirty Nine Weeks Ended
	(unaudited)					(unaudited)
	November 3,		October 28,			November 3,			October 28,
(in thousands)	2018		2017			2018			2017
Net Sales	$	100,403	$	101,088		$	298,933		$	303,136
Cost of goods sold		80,948		78,432			241,695			230,847
Gross profit		19,455		22,656			57,238			72,289
Depreciation and amortization		616		1,751			4,071			5,549
Selling, general and administrative expenses		15,401		20,971			53,376			61,962
Income (loss) from discontinued operations		3,438		(66	)		(209	)		4,778
Income tax (benefit) expense		—		(546	)		—			2,253
Income (loss) from discontinued operations, net of tax	$	3,438	$	480		$	(209	)	$	2,525

Total Discontinued Operations

	For the Thirteen Weeks Ended					For the Thirty Nine Weeks Ended
	(unaudited)					(unaudited)
	November 3,		October 28,			November 3,			October 28,
(in thousands)	2018		2017			2018			2017
Net Sales	$	100,403	$	169,256		$	389,045		$	508,762
Cost of goods sold		80,948		144,670			330,149			426,944
Gross profit		19,455		24,586			58,896			81,818
Depreciation and amortization		616		2,382			4,867			7,559
Selling, general and administrative expenses		15,401		23,734			65,774			70,386
Income (loss) from discontinued operations		3,438		(1,530	)		(11,745	)		3,873
Income tax (benefit) expense		—		(152	)		—			2,497
Income (loss) from discontinued operations, net of tax	$	3,438	$	(1,378	)	$	(11,745	)	$	1,376