Segment Reporting

6 Months Ended

Aug. 27, 2016

Segment Reporting

Segment Reporting

14. 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 CEO—Retail Pharmacy, CEO—Pharmacy Services, Chief Financial Officer and its Senior Executive Vice Presidents (collectively the “CODM”). The CODM has ultimate responsibility for enterprise decisions. The CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. The CODM relies on internal management reporting that analyzes enterprise results on certain key performance indicators, namely, revenues, gross profit, and Adjusted EBITDA.

The following table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen and twenty-six week periods ended August 27, 2016 and August 29, 2015:

	Retail Pharmacy		Pharmacy Services		Intersegment Eliminations (1)			Consolidated
Thirteen Week Period Ended
August 27, 2016:
Revenues	$	6,485,482	$	1,634,876	$	(90,552	)	$	8,029,806
Gross Profit	1,819,349		97,394		—			1,916,743
Adjusted EBITDA(2)	262,643		50,010		—			312,653
August 29, 2015:
Revenues	$	6,647,243	$	1,071,889	$	(54,356	)	$	7,664,776
Gross Profit	1,860,513		61,778		—			1,922,291
Adjusted EBITDA(2)	313,602		33,222		—			346,824
Twenty-Six Week Period Ended
August 27, 2016:
Revenues	$	13,161,030	$	3,237,235	$	(184,278	)	$	16,213,987
Gross Profit	3,624,716		186,327		—			3,811,043
Adjusted EBITDA(2)	507,470		91,185		—			598,655
August 29, 2015:
Revenues	$	13,294,804	$	1,071,889	$	(54,356	)	$	14,312,337
Gross Profit	3,720,043		61,778		—			3,781,821
Adjusted EBITDA(2)	612,865		33,222		—			646,087

(1) Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis.

(2) See “Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income per Diluted Share and Other Non-GAAP Measures” in MD&A for additional details.

The following is a reconciliation of net income to Adjusted EBITDA for the thirteen and twenty-six week periods ended August 27, 2016 and August 29, 2015:

	Thirteen Week Period Ended				Twenty-Six Week Period Ended
	August 27, 2016		August 29, 2015		August 27, 2016		August 29, 2015
	(dollars in thousands)
Net income	$	14,773	$	21,469	$	10,185	$	40,305
Interest expense	105,388		115,410		210,501		239,017
Income tax expense	10,928		16,463		4,619		28,904
Depreciation and amortization expense	142,051		127,699		280,839		237,348
LIFO charge	13,760		5,986		27,511		11,973
Lease termination and impairment charges	7,233		9,637		13,014		14,659
Loss on debt retirements, net	—		33,205		—		33,205
Other	18,520		16,955		51,986		40,676
Adjusted EBITDA	$	312,653	$	346,824	$	598,655	$	646,087

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

	Retail Pharmacy		Pharmacy Services		Eliminations (2)			Consolidated
August 27, 2016:
Total Assets	$	8,703,457	$	3,049,163	$	(141,651	)	$	11,610,969
Goodwill	76,124		1,639,355		—			1,715,479
Additions to property and equipment and intangible assets	248,477		6,110		—			254,587
February 27, 2016:
Total Assets	$	8,468,186	$	2,948,548	$	(139,724	)	$	11,277,010
Goodwill	76,124		1,637,351		—			1,713,475
Additions to property and equipment and intangible assets	667,719		2,276		—			669,995

(2) As of August 27, 2016 and February 27, 2016, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $122,070 and $116,027, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $19,581 and $23,697, respectively, that represents amounts owed from the Pharmacy Services segment to the Retail Pharmacy segment that are created when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products.