10-Q 1 a18-29008_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 

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

 

For the quarterly period ended September 1, 2018

 

OR

 

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

 

For the transition period from               to               

 

Commission File Number: 1-5742

 

RITE AID CORPORATION

(Exact name of registrant as specified in its charter)

 

Delaware
(State or other jurisdiction of
incorporation or organization)

 

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

 

 

 

30 Hunter Lane,
Camp Hill, Pennsylvania

 

17011

(Address of principal executive offices)

 

(Zip Code)

 

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

 

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

Not Applicable

 

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

 

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

 

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

 

Large Accelerated Filer x

Accelerated Filer o

Non-Accelerated Filer o

Smaller reporting company o

Emerging growth company o

 

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

 

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

 

The registrant had 1,066,574,198 shares of its $1.00 par value common stock outstanding as of September 27, 2018.

 

 

 



Table of Contents

 

RITE AID CORPORATION

 

TABLE OF CONTENTS

 

 

Cautionary Statement Regarding Forward-Looking Statements

3

 

PART I
FINANCIAL INFORMATION

 

ITEM 1.

Financial Statements (unaudited):

 

 

Condensed Consolidated Balance Sheets as of September 1, 2018 and March 3, 2018

5

 

Condensed Consolidated Statements of Operations for the Thirteen Week Periods Ended September 1, 2018 and September 2, 2017

6

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Thirteen Week Periods Ended September 1, 2018 and September 2, 2017

 

7

 

Condensed Consolidated Statements of Operations for the Twenty-Six Week Periods Ended September 1, 2018 and September 2, 2017

8

 

Condensed Consolidated Statements of Comprehensive (Loss) Income for the Twenty-Six Week Periods Ended September 1, 2018 and September 2, 2017

 

9

 

Condensed Consolidated Statements of Cash Flows for the Twenty-Six Week Periods Ended September 1, 2018 and September 2, 2017

10

 

Notes to Condensed Consolidated Financial Statements

11

ITEM 2.

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

37

ITEM 3.

Quantitative and Qualitative Disclosures About Market Risk

50

ITEM 4.

Controls and Procedures

50

 

PART II
OTHER INFORMATION

 

ITEM 1.

Legal Proceedings

51

ITEM 1A.

Risk Factors

51

ITEM 2.

Unregistered Sales of Equity Securities and Use of Proceeds

51

ITEM 3.

Defaults Upon Senior Securities

51

ITEM 4.

Mine Safety Disclosures

51

ITEM 5.

Other Information

51

ITEM 6.

Exhibits

51

 

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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS

 

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

 

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

 

·                  our high level of indebtedness;

 

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

 

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

 

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

 

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

 

·                  the inability to complete the sale of distribution centers to Walgreens Boots Alliance, Inc. (“WBA”), receive the related proceeds and recognize the corresponding expected gain due to the failure to satisfy the minimal remaining conditions applicable only to the distribution centers being transferred at such distribution center closing;

 

·                  the risk that the terminated merger (the “Merger”) with Albertsons Companies, Inc. (“Albertsons”) could have an adverse effect on our ability to retain customers and retain and hire key personnel and maintain relationships with our suppliers and customers and on our operating results and businesses generally;

 

·                  the impact on our business, operating results and relationships with customers, suppliers, third party payors, and employees, resulting from our efforts over the past three years to consummate a significant transaction with WBA and Albertsons;

 

·                  the risk that we will not be able to meet our obligations under our Transition Services Agreement (“TSA”) with WBA, which could expose us to significant financial penalties;

 

·                  the risk that we cannot reduce our selling, general and administrative expenses enough to offset lost revenue from the TSA agreement as the amount of stores serviced under the agreement decreases;

 

·                  the risk that there may be changes to our strategy due to the termination of the Merger, or if the remaining distribution center closing of the Sale do not close, which may include delaying or reducing capital or other expenditures, selling assets or other operations, closing underperforming stores, attempting to restructure or refinance our debt, seeking additional capital or incurring other costs associated with restructuring our business, any of which could have an impact on our stock price;

 

·                  the risk that we may need to take further impairment charges if our future results do not meet our expectations;

 

·                  our ability to refinance our indebtedness on terms favorable to us;

 

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

 

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

 

·                  our ability to hire and retain qualified personnel;

 

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

 

·                  our ability to manage expenses and working capital and our ability to achieve our drug purchasing initiatives;

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

·                  the potential reputational risk to our business during the period in which WBA is operating the Acquired Stores (as defined below) under the Rite Aid banner;

 

·                  the risk that the Tax Cuts and Jobs Act that was enacted on December 22, 2017 may have a negative impact on our financial results;

 

·                  the inability to fully realize the benefits of our tax attributes;

 

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

 

We undertake no obligation to update or revise the forward-looking statements included in this report, whether as a result of new information, future events or otherwise, after the date of this report. Our actual results, performance or achievements could differ materially from the results expressed in, or implied by, these forward-looking statements. Factors that could cause or contribute to such differences are discussed in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended March 3, 2018 (the “Fiscal 2018 10-K”), which we filed with the SEC on April 26, 2018, and our Quarterly Report on Form 10-Q for the thirteen weeks ended June 2, 2018 (the “First Quarter 2019 10-Q”) which we filed on July 6, 2018, as well as in the “Risk Factors” section of the Fiscal 2018 10-K. These documents are available on the SEC’s website at www.sec.gov.

 

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PART I. FINANCIAL INFORMATION

 

ITEM 1.  Financial Statements

 

RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

September 1, 2018

 

March 3, 2018

 

ASSETS

 

 

 

 

 

Current assets:

 

 

 

 

 

Cash and cash equivalents

 

$

132,468

 

$

447,334

 

Accounts receivable, net

 

2,039,605

 

1,869,100

 

Inventories, net of LIFO reserve of $594,413 and $581,090

 

1,848,287

 

1,799,539

 

Prepaid expenses and other current assets

 

169,313

 

181,181

 

Current assets held for sale

 

181,989

 

438,137

 

Total current assets

 

4,371,662

 

4,735,291

 

Property, plant and equipment, net

 

1,350,735

 

1,431,246

 

Goodwill

 

1,108,135

 

1,421,120

 

Other intangibles, net

 

480,520

 

590,443

 

Deferred tax assets

 

635,127

 

594,019

 

Other assets

 

219,489

 

217,208

 

Total assets

 

$

8,165,668

 

$

8,989,327

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

Current liabilities:

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

18,668

 

$

20,761

 

Accounts payable

 

1,733,989

 

1,651,363

 

Accrued salaries, wages and other current liabilities

 

938,940

 

1,231,736

 

Current liabilities held for sale

 

 

560,205

 

Total current liabilities

 

2,691,597

 

3,464,065

 

Long-term debt, less current maturities

 

3,481,741

 

3,340,099

 

Lease financing obligations, less current maturities

 

26,537

 

30,775

 

Other noncurrent liabilities

 

509,843

 

553,378

 

Total liabilities

 

6,709,718

 

7,388,317

 

Commitments and contingencies

 

 

 

Stockholders’ equity:

 

 

 

 

 

Common stock, par value $1 per share; 1,500,000 shares authorized; shares issued and outstanding 1,066,050 and 1,067,318

 

1,066,050

 

1,067,318

 

Additional paid-in capital

 

4,859,462

 

4,850,712

 

Accumulated deficit

 

(4,435,741

)

(4,282,471

)

Accumulated other comprehensive loss

 

(33,821

)

(34,549

)

Total stockholders’ equity

 

1,455,950

 

1,601,010

 

Total liabilities and stockholders’ equity

 

$

8,165,668

 

$

8,989,327

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

September 1, 2018

 

September 2, 2017

 

Revenues

 

$

5,421,362

 

$

5,345,011

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

4,260,211

 

4,183,338

 

Selling, general and administrative expenses

 

1,153,991

 

1,141,844

 

Lease termination and impairment charges

 

39,609

 

3,113

 

Goodwill and intangible asset impairment charges

 

375,190

 

 

Interest expense

 

56,233

 

50,857

 

Walgreens Boots Alliance merger termination fee

 

 

(325,000

)

Gain on sale of assets, net

 

(4,965

)

(14,951

)

 

 

5,880,269

 

5,039,201

 

(Loss) income from continuing operations before income taxes

 

(458,907

)

305,810

 

Income tax (benefit) expense

 

(106,559

)

117,450

 

Net (loss) income from continuing operations

 

(352,348

)

188,360

 

Net loss from discontinued operations, net of tax

 

(6,792

)

(17,644

)

Net (loss) income

 

$

(359,140

)

$

170,716

 

Computation of (loss) income attributable to common stockholders:

 

 

 

 

 

(Loss) income from continuing operations attributable to common stockholders—basic and diluted

 

$

(352,348

)

$

188,360

 

Loss from discontinued operations attributable to common stockholders—basic and diluted

 

(6,792

)

(17,644

)

(Loss) income attributable to common stockholders—basic and diluted

 

$

(359,140

)

$

170,716

 

 

 

 

 

 

 

Basic and diluted (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(0.33

)

$

0.18

 

Discontinued operations

 

$

(0.01

)

$

(0.02

)

Net basic and diluted (loss) income per share

 

$

(0.34

)

$

0.16

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Thirteen Week Period Ended

 

 

 

September 1, 2018

 

September 2, 2017

 

Net (loss) income

 

$

(359,140

)

$

170,716

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $144 and $342 tax expense

 

364

 

515

 

Total other comprehensive income

 

364

 

515

 

Comprehensive (loss) income

 

$

(358,776

)

$

171,231

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

(In thousands, except per share amounts)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 1, 2018

 

September 2, 2017

 

Revenues

 

$

10,809,852

 

$

10,781,534

 

Costs and expenses:

 

 

 

 

 

Cost of revenues

 

8,479,952

 

8,457,918

 

Selling, general and administrative expenses

 

2,306,618

 

2,302,784

 

Lease termination and impairment charges

 

49,468

 

7,151

 

Goodwill and intangible asset impairment charges

 

375,190

 

 

Interest expense

 

119,025

 

101,857

 

Loss on debt retirements, net

 

554

 

 

Walgreens Boots Alliance merger termination fee

 

 

(325,000

)

Gain on sale of assets, net

 

(10,824

)

(20,828

)

 

 

11,319,983

 

10,523,882

 

(Loss) income from continuing operations before income taxes

 

(510,131

)

257,652

 

Income tax (benefit) expense

 

(116,056

)

105,329

 

Net (loss) income from continuing operations

 

(394,075

)

152,323

 

Net income (loss) from discontinued operations, net of tax

 

249,351

 

(56,956

)

Net (loss) income

 

$

(144,724

)

$

95,367

 

Computation of (loss) income attributable to common stockholders:

 

 

 

 

 

(Loss) income from continuing operations attributable to common stockholders—basic and diluted

 

$

(394,075

)

$

152,323

 

Income (loss) from discontinued operations attributable to common stockholders—basic and diluted

 

249,351

 

(56,956

)

(Loss) income attributable to common stockholders—basic and diluted

 

$

(144,724

)

$

95,367

 

 

 

 

 

 

 

Basic and diluted (loss) income per share:

 

 

 

 

 

Continuing operations

 

$

(0.37

)

$

0.14

 

Discontinued operations

 

$

0.23

 

$

(0.05

)

Net basic and diluted (loss) income per share

 

$

(0.14

)

$

0.09

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE (LOSS) INCOME

 

(In thousands)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 1, 2018

 

September 2, 2017

 

Net (loss) income

 

$

(144,724

)

$

95,367

 

Other comprehensive income:

 

 

 

 

 

Defined benefit pension plans:

 

 

 

 

 

Amortization of prior service cost, net transition obligation and net actuarial losses included in net periodic pension cost, net of $288 and $684 tax expense

 

728

 

1,029

 

Total other comprehensive income

 

728

 

1,029

 

Comprehensive (loss) income

 

$

(143,996

)

$

96,396

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

(In thousands)

 

(unaudited)

 

 

 

Twenty-Six Week Period Ended

 

 

 

September 1, 2018

 

September 2, 2017

 

Operating activities:

 

 

 

 

 

Net (loss) income

 

$

(144,724

)

$

95,367

 

Net income (loss) from discontinued operations, net of tax

 

249,351

 

(56,956

)

Net (loss) income from continuing operations

 

$

(394,075

)

$

152,323

 

Adjustments to reconcile to net cash (used in) provided by operating activities of continuing operations:

 

 

 

 

 

Depreciation and amortization

 

184,272

 

196,684

 

Lease termination and impairment charges

 

49,468

 

7,151

 

Goodwill and intangible asset impairment charges

 

375,190

 

 

LIFO charge

 

13,324

 

13,609

 

Gain on sale of assets, net

 

(10,824

)

(20,828

)

Stock-based compensation expense

 

10,246

 

15,362

 

Loss on debt retirements, net

 

554

 

 

Changes in deferred taxes

 

(124,807

)

64,850

 

Changes in operating assets and liabilities:

 

 

 

 

 

Accounts receivable

 

(323,724

)

(88,748

)

Inventories

 

(31,650

)

(27,454

)

Accounts payable

 

207,943

 

59,271

 

Other assets

 

(11,232

)

(14,262

)

Other liabilities

 

(245,587

)

(62,485

)

Net cash (used in) provided by operating activities of continuing operations

 

(300,902

)

295,473

 

Investing activities:

 

 

 

 

 

Payments for property, plant and equipment

 

(92,565

)

(79,116

)

Intangible assets acquired

 

(20,519

)

(9,679

)

Proceeds from insured loss

 

 

3,627

 

Proceeds from dispositions of assets and investments

 

15,729

 

17,407

 

Proceeds from sale-leaseback transactions

 

2,587

 

 

Net cash used in investing activities of continuing operations

 

(94,768

)

(67,761

)

Financing activities:

 

 

 

 

 

Net proceeds from (payments to) revolver

 

1,335,000

 

(190,000

)

Principal payments on long-term debt

 

(433,746

)

(4,386

)

Change in zero balance cash accounts

 

(17,101

)

10,189

 

Net proceeds from issuance of common stock

 

1,302

 

215

 

Payments for taxes related to net share settlement of equity awards

 

(2,244

)

(4,071

)

Financing fees paid for early debt redemption

 

(13

)

 

Net cash provided by (used in) financing activities of continuing operations

 

883,198

 

(188,053

)

Cash flows from discontinued operations:

 

 

 

 

 

Operating activities of discontinued operations

 

(62,003

)

2,358

 

Investing activities of discontinued operations

 

603,402

 

(44,739

)

Financing activities of discontinued operations

 

(1,343,793

)

(3,710

)

Net cash used in discontinued operations

 

(802,394

)

(46,091

)

Decrease in cash and cash equivalents

 

(314,866

)

(6,432

)

Cash and cash equivalents, beginning of period

 

447,334

 

245,410

 

Cash and cash equivalents, end of period

 

$

132,468

 

$

238,978

 

 

See accompanying notes to condensed consolidated financial statements.

 

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RITE AID CORPORATION AND SUBSIDIARIES

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

For the Thirteen and Twenty-Six Week Periods Ended September 1, 2018 and September 2, 2017

 

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

 

(unaudited)

 

1. Basis of Presentation

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and twenty-six week periods ended September 1, 2018 are not necessarily indicative of the results to be expected for the full year. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal 2018 10-K.

 

The discussion and presentation of the operating and financial results of our business segments have been impacted by the following event.

 

Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement (the “Amended and Restated Asset Purchase Agreement”), dated as of September 18, 2017, by and among Rite Aid, WBA and Walgreen Co., an Illinois corporation and wholly owned direct subsidiary of WBA (“Buyer”), Buyer agreed to purchase from Rite Aid 1,932 stores (the “Acquired Stores”), three distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of approximately $4,375,000, on a cash free, debt free basis (the “Asset Sale” or the “Sale”). As of March 27, 2018, the Company has sold all 1,932 Acquired Stores and related assets to WBA in exchange for proceeds of $4,156,686, which were used to repay outstanding debt. Based on its magnitude and because the Company is exiting certain markets, the Sale represents a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Asset Sale as required by Accounting Standards Codification 210-05—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the assets and liabilities to be sold, including the 1,932 Acquired Stores, three (3) distribution centers, related inventory and other specified assets and liabilities related thereto (collectively the “Assets to be Sold” or “Disposal Group”) to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended September 1, 2018 and March 3, 2018, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. Additionally, corporate support activities related to the Disposal Group were not reclassified to discontinued operations. Please see additional information as provided in Note 3 Asset Sale to WBA.

 

Recently Adopted Accounting Pronouncements

 

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers (Topic 606). ASU No. 2014-09 outlines a single comprehensive model for companies to use in accounting for revenue arising from contracts with customers and supersedes most current revenue recognition guidance, including industry-specific guidance. In March 2016, the FASB issued ASU No. 2016-08, “Principal Versus Agent Considerations (Reporting Revenue Gross Versus Net),” which amends the principal-versus-agent implementation guidance and in April 2016, the FASB issued ASU No. 2016-10, “Identifying Performance Obligations and Licensing,” which amends the guidance in those areas in the new revenue recognition standard. These ASUs, collectively the “new revenue standard”, are effective for annual reporting periods (including interim reporting periods within those periods) beginning January 1, 2018.

 

The Company adopted the new revenue standard as of March 4, 2018 using the modified retrospective method and applying the new standard to all contracts with customers.  Therefore, the comparative financial information has not been restated and continues to be reported under the accounting standards in effect for those periods.  In connection with the adoption of the new revenue standard, the Company identified one difference in its Retail Pharmacy segment related to the timing of revenue recognition for third party prescription revenues, which was historically recognized at the time the prescription was filled.  Upon adoption of ASU No. 2014-09, this revenue is recognized at the time the customer takes possession of the merchandise. In connection with its March 4, 2018 adoption of the new revenue standard on a modified retrospective basis, the Company recorded a reduction to accounts receivable of $57,897, a reduction to deferred tax assets of $1,772, an increase to inventory of $51,121, and a corresponding increase to accumulated deficit of $8,548 within its Retail Pharmacy segment.

 

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In addition, the Company identified revenues under one specific rebate administration program under which the Company’s Pharmacy Services segment was determined to be the principal and historically recognized revenues and cost of revenues on a gross basis of approximately $123,500 during fiscal 2018. Upon adoption of the new revenue standard, the Company is now recording revenue from this program on a net basis.

 

The following is a discussion of the Company’s revenue recognition policies by segment under the new revenue recognition accounting standard:

 

Revenue Recognition

 

Retail Pharmacy Segment

 

For front end sales, the Retail Pharmacy segment recognizes revenues upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation at the point of sale for front end transactions. The Retail Pharmacy segment front end revenue is measured based on the amount of fixed consideration that we expect to receive, net of an allowance for estimated future returns. Return activity is immaterial to revenues and results of operations in all periods presented.

 

For pharmacy sales, the Retail Pharmacy segment recognizes revenue upon the transfer of control of the goods to the customer. The Company satisfies its performance obligation, upon pickup by the customer, which is when the customer takes title to the product.  Each prescription claim is its own arrangement with the customer and is a performance obligation, separate and distinct from other prescription claims.  The Company’s revenue is measured based on the amount of fixed consideration that we expect to receive, reduced by refunds owed to the third party payor for pricing guarantees and performance against defined value-based service and performance metrics. The inputs to these estimates are not highly subjective or volatile.  The effect of adjustments between estimated and actual amounts have not been material to the Company’s results of operations or financial position. Prescriptions are generally not returnable.

 

The Retail Pharmacy segment offers a chain-wide loyalty card program titled wellness +. Individual customers are able to become members of the wellness + program.  Members participating in the wellness + loyalty card program earn points on a calendar year basis for eligible front end merchandise purchases and qualifying prescription purchases.  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 him or her to receive a 20% discount on qualifying purchases of front end merchandise for the remaining portion of the calendar year and also the next calendar year. There is also a similar “Silver” level with a lower threshold and benefit level.

 

Points earned pursuant to the wellness+ program represent a performance obligation and the Company allocates revenue between the merchandise purchased and the wellness + points based on the relative stand-alone selling price of each performance obligation. The relative value of the wellness + points is initially deferred as a contract liability (included in other current and noncurrent liabilities). As customers redeem the points to receive discounted front end merchandise or when the points expire, the Retail Pharmacy segment recognizes an allocable portion of the deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $68,426 as of September 1, 2018, of which $51,916 is included in other current liabilities and $16,510 is included in noncurrent liabilities. The Retail Pharmacy segment had accrued contract liabilities of $63,851 as of March 3, 2018, of which $50,036 is included in other current liabilities and $13,815 is included in noncurrent liabilities.

 

The wellness + program also allows a customer to earn Bonus Cash based on qualifying purchases. Wellness + Rewards members have the opportunity to redeem their accumulated Bonus Cash on a future purchase with a 60 day expiration window.

 

For a majority of the Bonus Cash issuances, funding is provided by our vendors through contractual arrangements. This funding is treated as a contract liability and remains a contract liability until (i) wellness + Rewards members redeem their Bonus Cash, or (ii) wellness + Rewards members allow the Bonus Cash to expire. Upon redemption or expiration, the Retail Pharmacy segment recognizes an allocable portion of the accrued contract liability into revenue. For Bonus Cash issuances that are not vendor funded, the contract liability is recorded at the time of issuance through a reduction to revenues, and not recognized until the Bonus Cash is redeemed or expires.

 

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Pharmacy Services Segment

 

The Pharmacy Services segment 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 at the contract prices negotiated with its clients, primarily employers, insurance companies, unions, government employee groups, health plans, Managed Medicaid plans, Medicare plans, and other sponsors of health benefit plans, and individuals throughout the United States. Revenues include: (i) the portion of the price the client pays directly to the Pharmacy Services segment, net of any volume-related or other discounts paid back to the client (see “Drug Discounts” below), (ii) the price paid to the Pharmacy Services segment by client plan members for mail order prescriptions (“Mail Co-Payments”) (iii) client plan member copayments made directly to the retail pharmacy network, and (iv) administrative fees. Revenue is recognized when the Pharmacy Services segment meets its performance obligations relative to each transaction type. 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.  At this point the Company has performed all of its performance obligations.

 

·                  Revenues generated from prescription drugs sold by the Pharmacy Services segment’s mail service dispensing pharmacy are recognized when the prescription is shipped. At the time of shipment, the Pharmacy Services segment has performed all of its performance obligations under its client contracts, as control of and title to the product has passed to the clients plan member.  The Pharmacy Services segment does not experience a significant level of returns or reshipments.

 

·                  Revenues generated from administrative fees based on membership or claims volume are recognized monthly based on the terms within the individual contracts, either a monthly member based fee, or a claims volume based fee.

 

In the majority of its contracts, the Pharmacy Services segment is the principal because its client contracts give clients the right to obtain access to its pharmacy contracts under which the Pharmacy Services segment directs its pharmacy network to provide the services (drug dispensing, consultation, etc.) and goods (prescription drugs) to the clients’ members at its negotiated pricing. The Pharmacy Services segment’s obligations under its client contracts 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 has control over these transactions until the prescription is transferred to the member and, thus, that it is acting as a principal. As such, the Pharmacy Services segment records the total prescription price contracted with clients in revenues.

 

Amounts paid to pharmacies and amounts charged to clients are exclusive of the applicable co-payment under Pharmacy Services segment contracts. Retail pharmacy co-payments, which we instruct retail pharmacies to collect from members, are included in our revenues and our cost of revenues.

 

For contracts under which the Pharmacy Services segment acts as an agent or does not control the prescription drugs prior to transfer to the client, no revenue is recognized.

 

Drug Discounts—The 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 based on utilization levels and other factors as negotiated with the prescription drug manufacturers or suppliers. Rebates are paid to clients in accordance with the terms of client contracts.

 

Medicare Part D—The Pharmacy Services segment, through its EIC subsidiary, participates in the federal government’s Medicare Part D program as a Prescription Drug Plan (“PDP”). Please refer to Note 8, Medicare Part D.

 

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Disaggregation of Revenue

 

The following tables disaggregate the Company’s revenue by major source in each segment for the thirteen and twenty-six week periods ended September 1, 2018:

 

In thousands

 

For the thirteen week period
ended September 1, 2018

 

For the twenty-six week period
ended September 1, 2018

 

Retail Pharmacy segment:

 

 

 

 

 

Pharmacy sales

 

$

2,573,909

 

$

5,139,194

 

Front end sales

 

1,301,062

 

2,597,209

 

Other revenue

 

36,541

 

72,874

 

Total Retail Pharmacy segment

 

$

3,911,512

 

$

7,809,277

 

 

 

 

 

 

 

Pharmacy Services segment

 

1,561,811

 

3,104,573

 

Intersegment elimination

 

(51,961

)

(103,998

)

Total revenue

 

$

5,421,362

 

$

10,809,852

 

 

Impact of New Revenue Recognition Standard on Financial Statement Line Items

 

The Company adopted the new revenue standard using the modified retrospective method. The cumulative effect of applying the new standard to all contracts was recorded as an adjustment to accumulated deficit as of the adoption date. As a result of applying the modified retrospective method to adopt the new revenue standard, the following adjustments were made to accounts on the condensed consolidated balance sheet as of March 4, 2018:

 

 

 

Impact of Change in Accounting Policy

 

 

 

As Reported

 

 

 

Adjusted

 

In thousands

 

March 3, 2018

 

Adjustments

 

March 4, 2018

 

Condensed Consolidated Balance Sheet:

 

 

 

 

 

 

 

Accounts receivable, net

 

$

1,869,100

 

$

(57,897

)

$

1,811,203

 

Inventories, net

 

1,799,539

 

51,121

 

1,850,660

 

Deferred tax assets

 

594,019

 

(1,772

)

592,247

 

Total assets

 

8,989,327

 

(8,548

)

8,980,779

 

Accumulated deficit

 

(4,282,471

)

(8,548

)

(4,291,019

)

Total shareholders’ equity

 

1,601,010

 

(8,548

)

1,592,462

 

 

Reclassification of the Statements of Cash Flows presentation

 

During the thirteen week period ended September 1, 2018, the Company expanded its disclosure on its Statements of Cash Flows to include changes in other assets separate from changes in other liabilities, which had historically been combined.  Prior period amounts have been reclassified to conform to the current period presentation.

 

Recently Issued Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases, (Topic 842), which is intended to improve financial reporting around leasing transactions. The ASU affects all companies and other organizations that engage in lease transactions (both lessee and lessor) that lease assets such as real estate and manufacturing equipment. This ASU will require organizations that lease assets—referred to as “leases”—to recognize on the balance sheet the assets and liabilities for the rights and obligations created by those leases. ASU No. 2016-02 is effective for fiscal years and interim periods within those years beginning January 1, 2019 (fiscal 2020). During July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements. Among other things, ASU 2018-11 provides administrative relief by allowing entities to implement the lease standard on a modified retrospective basis, similar to the method used by the Company to adopt the revenue standard. Effectively, the modified retrospective basis permits the Company to adopt the lease standard through a cumulative effect adjustment to its opening balance sheet for the first quarter of fiscal 2020, with the cumulative effect accounted for as a component of retained earnings, and report under the new lease standard on a post adoption basis. The Company is currently evaluating the impact this standard implementation will have on its results of operations and cash flows, and we anticipate a material increase in assets and liabilities due to the recording of the required right-of-use asset and corresponding liability for all lease obligations that are currently classified as operating leases.

 

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2. Termination of the Merger Agreement with Albertsons Companies, Inc.

 

On February 18, 2018, Rite Aid entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Albertsons, Ranch Acquisition II LLC, a Delaware limited liability company and a wholly-owned direct subsidiary of Albertsons (“Merger Sub II”) and Ranch Acquisition Corp., a Delaware corporation and a wholly-owned direct subsidiary of Merger Sub II (“Merger Sub” and, together with Merger Sub II, the “Merger Subs”). On August 8, 2018, Rite Aid, Albertsons and Merger Subs entered into a Termination Agreement (the “Merger Termination Agreement”) under which the parties mutually agreed to terminate the Merger Agreement. Subject to limited customary exceptions, the Merger Termination Agreement mutually releases the parties from any claims of liability to one another relating to the contemplated Merger.  Under the terms of the Merger Agreement, neither Rite Aid nor Albertsons is responsible for any payments to the other party as a result of the termination of the Merger Agreement and Rite Aid is no longer subject to the interim operating covenants and restrictions contained in the Merger Agreement.

 

3. Asset Sale to WBA

 

On September 18, 2017, the Company entered into the Amended and Restated Asset Purchase Agreement with WBA and Buyer, which amended and restated in its entirety the previously disclosed Asset Purchase Agreement (the “Original APA”), dated as of June 28, 2017, by and among the Company, WBA and Buyer. Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer agreed to purchase from the Company 1,932 Acquired Stores, three (3) distribution centers, related inventory and other specified assets and liabilities related thereto for a purchase price of $4,375,000, on a cash-free, debt-free basis in the Sale.

 

The Company announced on September 19, 2017 that the waiting period under the HSR Act, expired with respect to the Sale. As of March 27, 2018, the Company has completed the store transfer process, and all 1,932 stores and related assets have been transferred to WBA and the Company has received cash proceeds of $4,156,686. The transfer of the three (3) distribution centers and related assets is expected to begin after September 1, 2018. The closing conditions related to the asset transfer have been satisfied, and the Company has recorded a pre-tax gain on the Sale of the stores of $2,489,389.

 

On September 13, 2018, the Company completed the sale of one of its distribution centers and related assets to WBA for proceeds of $61,251.  The impact of the sale of the distribution center and related assets will be included in the results of operations and cash flows of discontinued operations during the third quarter ending December 1, 2018.  The transfer of the remaining two distribution centers and related assets remains subject to minimal customary closing conditions applicable only to the distribution centers being transferred at such distribution center closings, as specified in the Amended and Restated Asset Purchase Agreement.

 

The parties to the Amended and Restated Asset Purchase Agreement have each made customary representations and warranties. The Company has agreed to various covenants and agreements, including, among others, the Company’s agreement to conduct its business at the distribution centers being sold to WBA in the ordinary course during the period between the execution of the Amended and Restated Asset Purchase Agreement and the distribution center closing. The Company has also agreed to provide transition services to Buyer for up to three (3) years after the initial closing of the Sale. Under the terms of the TSA, the Company provides various services on behalf of WBA, including but not limited to the purchase and distribution of inventory and virtually all selling, general and administrative activities. In connection with these services, the Company purchases the related inventory and incurs cash payments for the selling, general and administrative activities, which, the Company bills on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the thirteen and twenty-six week periods ended September 1, 2018 were $1,835,484 and $3,876,559, respectively, of which $385,936 is included in Accounts receivable, net. The Company charged WBA TSA fees of $23,213 and $46,948 during the thirteen and twenty-six week periods ended September 1, 2018, respectively, which are reflected as a reduction to selling, general and administrative expenses.

 

Under the terms of the Amended and Restated Asset Purchase Agreement, the Company has the option to purchase pharmaceutical drugs through an affiliate of WBA under terms, including cost, that are substantially equivalent to Walgreen’s for a period of ten (10) years, subject to certain terms and conditions.  The Company has until May of 2019 to exercise this option.

 

Based on its magnitude and because the Company is exiting certain markets, the Sale represented a significant strategic shift that has a material effect on the Company’s operations and financial results. Accordingly, the Company has applied discontinued operations treatment for the Sale as required by Accounting Standards Codification 210-05—Discontinued Operations (ASC 205-20). In accordance with ASC 205-20, the Company reclassified the Disposal Group to assets and liabilities held for sale on its consolidated balance sheets as of the periods ended September 1, 2018 and March 3, 2018, and reclassified the financial results of the Disposal Group in its consolidated statements of operations and consolidated statements of cash flows for all periods presented. The Company also revised its discussion and presentation of operating and financial results to be reflective of its continuing operations as required by ASC 205-20.

 

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The carrying amount of the Assets to be Sold, which were included in the Retail Pharmacy segment, have been reclassified from their historical balance sheet presentation to current assets and liabilities held for sale as follows:

 

 

 

September 1,
2018

 

March 3,
2018

 

Inventories

 

$

113,523

 

$

264,286

 

Property and equipment

 

68,466

 

158,433

 

Goodwill(a)

 

 

4,629

 

Intangible assets

 

 

10,789

 

Current assets held for sale

 

$

181,989

 

$

438,137

 

Current maturities of long-term lease financing obligations

 

$

 

$

270

 

Accrued salaries, wages and other current liabilities

 

 

6,146

 

Long-term debt, less current maturities(b)

 

 

549,549

 

Lease financing obligations, less current maturities

 

 

838

 

Other noncurrent liabilities

 

 

3,402

 

Current liabilities held for sale

 

$

 

$

560,205

 

 


(a)                                 The Company had $76,124 of goodwill in its Retail Pharmacy segment resulting from the acquisition of Health Dialog and RediClinic, which is accounted for as Retail Pharmacy segment enterprise goodwill. The Company has allocated a portion of its Retail Pharmacy segment enterprise goodwill to the discontinued operation.

 

(b)                                 In connection with the Sale, the Company had estimated that the Sale would generate excess cash proceeds of approximately $4,027,400 which would be used to repay outstanding indebtedness. During the twenty-six week period ended September 1, 2018, the Company has a use of cash for financing purposes of $1,343,793 in its discontinued operations and, based on refinements to its calculations, reduced its estimate of excess cash proceeds by approximately $24,500 and reclassified that amount to assets held and used. Consequently, the Company has classified $0 and $549,549 of estimated cash proceeds to be used for debt repayment to liabilities held for sale as of September 1, 2018 and March 3, 2018, respectively. For the twenty-six week period ended September 1, 2018, the Company repaid outstanding indebtedness of $1,343,793 with Sale proceeds.  For the fifty-two week period ended March 3, 2018, the Company repaid outstanding indebtedness of $3,135,000 with the proceeds from the Sale.

 

The operating results of the discontinued operations that are reflected on the unaudited condensed consolidated statements of operations within net income (loss) from discontinued operations are as follows:

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

September 1,
2018

 

September 2,
2017

 

Revenues

 

$

4,716

 

$

2,366,086

 

$

28,116

 

$

4,743,943

 

Costs and expenses:

 

 

 

 

 

 

 

 

 

Cost of revenues(a)

 

182

 

1,740,758

 

17,263

 

3,521,523

 

Selling, general and administrative expenses(a)

 

2,570

 

592,172

 

16,445

 

1,192,812

 

Lease termination and impairment charges

 

 

15

 

 

63

 

Loss on debt retirements, net

 

18,075

 

 

22,645

 

 

Interest expense (b)

 

 

60,404

 

4,615

 

119,341

 

Loss (gain) on stores sold to Walgreens Boots Alliance

 

15

 

 

(360,542

)

 

Loss on sale of assets, net

 

11

 

768

 

11

 

612

 

 

 

20,853

 

2,394,117

 

(299,563

)

4,834,351

 

(Loss) income from discontinued operations before income taxes

 

(16,137

)

(28,031

)

327,679

 

(90,408

)

Income tax (benefit) expense

 

(9,345

)

(10,387

)

78,328

 

(33,452

)

Net (loss) income from discontinued operations, net of tax

 

$

(6,792

)

$

(17,644

)

$

249,351

 

$

(56,956

)

 

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(a)                                 Cost of revenues and selling, general and administrative expenses for the discontinued operations excludes corporate overhead. These charges are reflected in continuing operations.

 

(b)                                 In accordance with ASC 205-20, the operating results for the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017, respectively, for the discontinued operations include interest expense relating to outstanding indebtedness repaid with the estimated excess proceeds from the Sale.

 

The operating results reflected above do not fully represent the Disposal Group’s historical operating results, as the results reported within net income from discontinued operations only include expenses that are directly attributable to the Disposal Group.

 

4. Income (Loss) Per Share

 

Basic income (loss) 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 (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company subject to anti-dilution limitations.

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

September 1,
2018

 

September 2,
2017

 

Basic and diluted (loss) income per share:

 

 

 

 

 

 

 

 

 

Numerator:

 

 

 

 

 

 

 

 

 

Net (loss) income from continuing operations

 

$

(352,348

)

$

188,360

 

$

(394,075

)

$

152,323

 

Net (loss) income from discontinued operations, net of tax

 

(6,792

)

(17,644

)

249,351

 

(56,956

)

(Loss) income attributable to common stockholders — basic and diluted

 

$

(359,140

)

$

170,716

 

$

(144,724

)

$

95,367

 

Denominator:

 

 

 

 

 

 

 

 

 

Basic weighted average shares

 

1,056,464

 

1,048,548

 

1,055,424

 

1,047,687

 

Outstanding options and restricted shares, net

 

 

18,668

 

 

22,597

 

Diluted weighted-average shares

 

1,056,464

 

1,067,216

 

1,055,424

 

1,070,284

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted (loss) income per share:

 

 

 

 

 

 

 

 

 

Continuing operations

 

$

(0.33

)

$

0.18

 

$

(0.37

)

$

0.14

 

Discontinued operations

 

(0.01

)

(0.02

)

0.23

 

(0.05

)

Net basic and diluted (loss) income per share

 

$

(0.34

)

$

0.16

 

$

(0.14

)

$

0.09

 

 

Due to their antidilutive effect, 25,163 and 9,206 potential common shares related to stock options have been excluded from the computation of diluted income per share for the thirteen week period ended September 1, 2018 and September 2, 2017, respectively. Due to their antidilutive effect, 25,163 and 5,596 potential common shares related to stock options have been excluded from the computation of diluted income per share for the twenty-six week period ended September 1, 2018 and September 2, 2017, respectively.  Also, excluded from the computation of diluted income per share for the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017 are restricted shares of 7,811 and 0, respectively, which are included in shares outstanding.

 

5. Lease Termination and Impairment Charges

 

Lease termination and impairment charges consist of amounts as follows:

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

September 1,
2018

 

September 2,
2017

 

Impairment charges

 

$

33,562

 

$

 

$

33,845

 

$

659

 

Lease termination charges

 

6,047

 

3,113

 

15,623

 

6,492

 

 

 

$

39,609

 

$

3,113

 

$

49,468

 

$

7,151

 

 

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Impairment Charges

 

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

 

During the thirteen week period ended September 1, 2018, due to changes in circumstances at its Retail Pharmacy segment relative to a decline in its current and anticipated operating results and related cash flows as compared to its original projections as announced on August 6, 2018, the Company determined that an active store impairment assessment was required.  Based on the results of the active store impairment assessment, the Company recorded impairment charges of $19,277 relating to 288 active stores.  Additionally, during the thirteen week period ended September 1, 2018, the Company terminated a project to replace the point of sale software in its stores, which resulted in an impairment charge of $14,285 due to the write-off of the related assets.

 

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

 

·                  Level 1—Inputs to the valuation methodology are unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access at the measurement date.

 

·                  Level 2—Inputs to the valuation methodology are quoted prices for similar assets and liabilities in active markets, quoted prices in markets that are not active or inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the instrument.

 

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

 

Non-Financial Assets Measured on a Non-Recurring Basis

 

Long-lived non-financial assets are measured at fair value on a nonrecurring basis for purposes of calculating impairment using Level 2 and Level 3 inputs as defined in the fair value hierarchy. The fair value of long-lived assets using Level 2 inputs is determined by evaluating the current economic conditions in the geographic area for similar use assets. The fair value of long-lived assets using Level 3 inputs is determined by estimating the amount and timing of net future cash flows (which are unobservable inputs) and discounting them using a risk-adjusted rate of interest (which is Level 1). The Company estimates future cash flows based on its experience and knowledge of the market in which the store is located. Significant increases or decreases in actual cash flows may result in valuation changes. During the twenty-six week period ended September 1, 2018, long-lived assets from continuing operations with a carrying value of $40,488, primarily store assets, were written down to their fair value of $6,643, resulting in an impairment charge of $33,845 of which $33,562 relates to the thirteen week period ended September 1, 2018. During the twenty-six week period ended September 2, 2017, long-lived assets from continuing operations with a carrying value of $964, primarily store assets, were written down to their fair value of $305, resulting in an impairment charge of $659. There was no impairment charge in the thirteen week period ended September 2, 2017. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.

 

The 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 September 1, 2018 and September 2, 2017:

 

 

 

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
September 1,
2018

 

Long-lived assets held and used

 

$

 

$

 

$

6,643

 

$

6,643

 

$

(33,562

)

Long-lived assets held for sale

 

 

1,292

 

 

1,292

 

(283

)

Total

 

$

 

$

1,292

 

$

6,643

 

$

7,935

 

$

(33,845

)

 

 

 

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
September 2,
2017

 

Long-lived assets held and used

 

$

 

$

 

$

201

 

$

201

 

$

(211

)

Long-lived assets held for sale

 

 

104

 

 

104

 

(448

)

Total

 

$

 

$

104

 

$

201

 

$

305

 

$

(659

)

 

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The above assets reflected in the caption Long-lived assets held for sale are separate and apart from the Assets to be Sold and due to their immateriality, have not been reclassified to assets held for sale.

 

Lease Termination Charges

 

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

 

 

 

Thirteen Week Period
Ended

 

Twenty-Six Week Period
Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

September 1,
2018

 

September 2,
2017

 

Balance—beginning of period

 

$

131,182

 

$

155,666

 

$

133,290

 

$

165,138

 

Provision for present value of noncancellable lease payments of closed stores

 

3,201

 

 

11,331

 

913

 

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

 

324

 

201

 

(714

)

(348

)

Interest accretion

 

2,556

 

2,907

 

5,241

 

6,002

 

Cash payments, net of sublease income

 

(15,075

)

(14,763

)

(26,960

)

(27,694

)

Balance—end of period

 

$

122,188

 

$

144,011

 

$

122,188

 

$

144,011

 

 

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 September 1, 2018 and September 2, 2017, the Company did not have any financial assets measured on a recurring basis.

 

Other Financial Instruments

 

Financial instruments other than long-term indebtedness include cash and cash equivalents, accounts receivable and accounts payable. These instruments are recorded at book value, which we believe approximate their fair values due to their short term nature.  In addition, as of September 1, 2018 and March 3, 2018 the Company has $7,217 and $7,282, respectively, of investments, carried at amortized cost as these investments are being held to maturity, which are included as a component of other assets.  The Company believes the carrying value of these investments approximates their fair value.

 

The fair value for LIBOR-based borrowings under the Company’s senior secured credit facility is 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 $3,481,831 and $3,231,901, respectively, as of September 1, 2018. There were no outstanding derivative financial instruments as of September 1, 2018 and March 3, 2018.

 

7. Income Taxes

 

The new federal tax legislation commonly referred to as the Tax Cut and Jobs Act (the “Tax Act”) enacted on December 22, 2017 (the “Enactment Date”) introduced significant changes to U.S. income tax law. Effective for tax years beginning on or after January 1, 2018, the Tax Act reduced the U.S. federal corporate income tax rate from 35% to 21%.

 

The Company recorded an income tax benefit from continuing operations of $106,559 and income tax expense of $117,450 for the thirteen week periods ended September 1, 2018 and September 2, 2017, respectively, and an income tax benefit from continuing operations of $116,056 and income tax expense from continuing operations of $105,329 for the twenty-six week periods ended September 1, 2018 and September 2, 2017, respectively. The effective tax rate for the thirteen week periods ended September 1,

 

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2018 and September 2, 2017 was 23.2% and 38.4%, respectively. The effective tax rate for the twenty-six week periods ended September 1, 2018 and September 2, 2017 was 22.8% and 40.9%, respectively. The effective tax rate for the thirteen and twenty-six week periods ended September 1, 2018 includes an adjustment of (4.2)% and (3.9)%, respectively, to increase the valuation allowance related to certain state deferred taxes. The tax expense for the thirteen and twenty-six week periods ended September 2, 2017 is higher in comparison to 2018, as it is based on a federal statutory rate of 35%, and includes increases to the valuation allowance primarily related to state deferred taxes.

 

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

 

The Company believes that it is reasonably possible that a decrease of up to $13,498 in unrecognized tax benefits related to state exposures may be necessary in the next twelve months however 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 regularly evaluates valuation allowances established for deferred tax assets for which future realization is uncertain considering historical profitability, projected taxable income, the expected timing of the reversals of existing temporary differences and tax planning strategies.  Management will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. The Company continues to maintain a valuation allowance against net deferred tax assets of $920,059 and $896,800, which relates primarily to state deferred tax assets at September 1, 2018 and March 3, 2018, respectively.

 

8. 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 $31,920 as of June 30, 2018. EIC was in excess of the minimum required amounts in these states as of September 1, 2018.

 

The Company has recorded estimates of various assets and liabilities arising from its participation in the Medicare Part D program based on information in its claims management and enrollment systems. Significant estimates arising from its participation in this program include: (i) estimates of low-income cost subsidies, reinsurance amounts, and coverage gap discount amounts ultimately payable to CMS based on a detailed claims reconciliation that will occur in the following year; (ii) an estimate of amounts receivable from CMS under a risk-sharing feature of the Medicare Part D program design, referred to as the risk corridor and (iii) estimates for claims that have been reported and are in the process of being paid or contested and for our estimate of claims that have been incurred but have not yet been reported.

 

As of September 1, 2018, accounts receivable, net included $473,211 due from CMS and accrued salaries, wages and other current liabilities included $140,992 of EIC liabilities under certain reinsurance contracts. As of March 3, 2018, accounts receivable, net included $350,563 due from CMS and accrued salaries, wages and other current liabilities included $183,318 of EIC liabilities under certain reinsurance contracts. During calendar 2017, EIC limited its exposure to loss and recovered a portion of benefits paid by utilizing quota-share reinsurance with a commercial reinsurance company. Beginning calendar 2018, EIC does not have a reinsurance agreement in place related to its individual and certain group Medicare Part D Plans.

 

9. Manufacturer Rebates Receivables

 

The Pharmacy Services Segment has manufacturer rebates receivables of $474,244 and $370,861 included in Accounts receivable, net, as of September 1, 2018 and March 3, 2018, respectively.

 

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10. Goodwill and Other Intangible Assets

 

Goodwill and indefinitely-lived assets, such as certain trademarks acquired in connection with acquisition transactions, are not amortized, but are instead evaluated for impairment on an annual basis at the end of the fiscal year, or more frequently if events or circumstances indicate it may be more likely than not that the fair value of a reporting unit is less than its carrying amount. If the Company determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, the Company performs a quantitative goodwill impairment test. The fair value estimates used in the quantitative impairment test are calculated using an average of the income and market approaches. The income approach is based on the present value of future cash flows of each reporting unit, while the market approach is based on certain multiples of selected guideline public companies or selected guideline transactions. The approaches, which qualify as Level 3 within the fair value hierarchy, incorporate a number of market participant assumptions including future growth rates, discount rates, income tax rates and market activity in assessing fair value and are reporting unit specific. If the carrying amount exceeds the reporting unit’s fair value, the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. In addition, the Company considers the income tax effect of any tax deductible goodwill when measuring a goodwill impairment loss.

 

During the thirteen week period ended September 1, 2018, the Company lowered its outlook for fiscal 2019.  Based upon the change in outlook, the Company determined that a quantitative goodwill impairment assessment was required.  The quantitative assessment concluded that the carrying amount of the Pharmacy Services segment exceeded its fair value principally due to a reduction of the projected growth for its business compared to the growth assumptions used in the Company’s previous assessment. This resulted in a goodwill impairment charge of $312,985 ($235,698 net of the related income tax benefit) during the thirteen-week period ended September 1, 2018, which adjusted the carrying amount of the Pharmacy Services segment to its fair value of $1,849,949.  As of September 1, 2018 and March 3, 2018, the accumulated impairment losses for the Pharmacy Services segment was $574,712 and $261,727, respectively.

 

Below is a summary of the changes in the carrying amount of goodwill by segment for the fiscal years ended September 1, 2018 and March 3, 2018:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Total

 

Balance, March 3, 2018

 

$

43,492

 

$

1,377,628

 

$

1,421,120

 

Goodwill impairment

 

 

(312,985

)

(312,985

)

Balance, September 1, 2018

 

$

43,492

 

$

1,064,643

 

$

1,108,135

 

 

The Company’s intangible assets are primarily finite-lived and amortized over their useful lives. Following is a summary of the Company’s finite-lived and indefinite-lived intangible assets as of September 1, 2018 and March 3, 2018.

 

 

 

September 1, 2018

 

March 3, 2018

 

 

 

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 (a)

 

$

375,817

 

$

(317,972

)

$

57,845

 

7 years

 

$

379,355

 

$

(316,798

)

$

62,557

 

7 years

 

Prescription files

 

908,563

 

(817,427

)

91,136

 

3 years

 

900,111

 

(801,706

)

98,405

 

3 years

 

Customer relationships(a)

 

388,000

 

(172,010

)

215,990

 

13 years

 

465,000

 

(172,635

)

292,365

 

15 years

 

CMS license

 

57,500

 

(7,321

)

50,179

 

22 years

 

57,500

 

(6,172

)

51,328

 

23 years

 

Claims adjudication and other developed software

 

58,985

 

(26,816

)

32,169

 

4 years

 

58,985

 

(22,617

)

36,368

 

5 years

 

Trademarks

 

20,100

 

(6,399

)

13,701

 

7 years

 

20,100

 

(5,394

)

14,706

 

8 years

 

Backlog

 

11,500

 

(11,500

)

 

0 years

 

11,500

 

(10,286

)

1,214

 

1 years

 

Total finite

 

$

1,820,465

 

$

(1,359,445

)

$

461,020

 

 

 

$

1,892,551

 

$

(1,335,608

)

$

556,943

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Trademarks

 

19,500

 

 

19,500

 

Indefinite

 

33,500

 

 

33,500

 

Indefinite

 

Total

 

$

1,839,965

 

$

(1,359,445

)

$

480,520

 

 

 

$

1,926,051

 

$

(1,335,608

)

$

590,443

 

 

 

 


(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.

 

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During the thirteen week period ended September 1, 2018, due to the loss of access to a fertility drug for a direct to consumer program that the Pharmacy Services segment administered, the Company has recorded an impairment charge to reduce the book value of customer relationships by $48,205 (gross carrying amount of $77,000 less accumulated amortization of $28,795), and indefinite lived trademarks by $14,000, both of which charges are included within Goodwill and intangible asset impairment charges within the condensed consolidated statement of operations.

 

Also included in other non-current liabilities as of September 1, 2018 and March 3, 2018 are unfavorable lease intangibles with a net carrying amount of $16,654 and $18,888, respectively. These intangible liabilities are amortized over their remaining lease terms at the time of acquisition.

 

Amortization expense for these intangible assets and liabilities was $32,500 and $67,900 for the thirteen and twenty-six week periods ended September 1, 2018, respectively. Amortization expense for these intangible assets and liabilities was $36,321 and $77,283 for the thirteen and twenty-six week periods ended September 2, 2017, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2019—$121,801; 2020—$95,500; 2021—$72,591; 2022—$51,650 and 2023—$36,113.

 

11. Indebtedness and Credit Agreements

 

Following is a summary of indebtedness and lease financing obligations at September 1, 2018 and March 3, 2018:

 

 

 

September
1, 2018

 

March 3,
2018

 

Secured Debt:

 

 

 

 

 

Senior secured revolving credit facility due January 2020 ($1,335,000 and $0 face value less unamortized debt issuance costs of $8,633 and $13,076)

 

$

1,326,367

 

$

(13,076

)

Other secured

 

90

 

90

 

 

 

1,326,457

 

(12,986

)

Guaranteed Unsecured Debt:

 

 

 

 

 

9.25% senior notes due March 2020 ($0 and $902,000 face value plus unamortized premium of $0 and $1,400 and less unamortized debt issuance costs of $0 and $4,924)

 

 

898,476

 

6.75% senior notes due June 2021 ($0 and $810,000 face value less unamortized debt issuance costs of $0 and $4,877)

 

 

805,123

 

6.125% senior notes due April 2023 ($1,753,490 and $1,800,000 face value less unamortized debt issuance costs of $19,064 and $21,708)

 

1,734,426

 

1,778,292

 

 

 

1,734,426

 

3,481,891

 

Unguaranteed Unsecured Debt:

 

 

 

 

 

7.7% notes due February 2027 ($295,000 face value less unamortized debt issuance costs of $1,377 and $1,460)

 

293,623

 

293,540

 

6.875% fixed-rate senior notes due December 2028 ($128,000 face value less unamortized debt issuance costs of $675 and $707)

 

127,325

 

127,293

 

 

 

420,948

 

420,833

 

Lease financing obligations

 

45,115

 

52,554

 

Total debt

 

3,526,946

 

3,942,292

 

Current maturities of long-term debt and lease financing obligations

 

(18,668

)

(21,031

)

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

 

$

3,508,278

 

$

3,921,261

 

 

Reconciliation of indebtedness included in continuing operations and discontinued operations:

 

 

 

March 3, 2018

 

 

 

Debt

 

Lease Financing
Obligations

 

Total Debt and
Lease Financing
Obligations

 

Balance, March 3, 2018 — per above table

 

$

3,889,738

 

$

52,554

 

$

3,942,292

 

Amounts reclassified as current and noncurrent liabilities held for sale in connection with the Sale (a)

 

(549,549

)

(1,108

)

(550,657

)

Total debt and lease financing obligations

 

3,340,189

 

51,446

 

3,391,635

 

Current maturities of long-term debt and lease financing obligations — continuing operations

 

(90

)

(20,671

)

(20,761

)

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

 

$

3,340,099

 

$

30,775

 

$

3,370,874

 

 

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Table of Contents

 


(a)         In connection with the Sale, the Company had estimated that the Sale would generate excess cash proceeds of approximately $4,027,400 which would be used to repay outstanding indebtedness. During the twenty-six week period ended September 1, 2018, the Company has a use of cash for financing purposes of $1,343,793 in its discontinued operations and, based on refinements to its calculations, reduced its estimate of excess cash proceeds by approximately $24,500 and reclassified that amount to assets held and used. Consequently, the Company has classified $0 and $549,549 of estimated cash proceeds to be used for debt repayment to liabilities held for sale as of September 1, 2018 and March 3, 2018, respectively. Additionally, as part of the Sale, the Company will be relieved of approximately $0 and $1,108, respectively, of capital lease obligations as of September 1, 2018 and March 3, 2018. These amounts are also reflected as liabilities held for sale. Please see Note 3 for additional details.

 

Credit Facility

 

The Company’s Amended and Restated Senior Secured Credit Facility has a borrowing capacity of $2,700,000 and matures in January 2020. Borrowings under the revolver bear interest at a rate per annum between (i) LIBOR plus 1.50% and LIBOR plus 2.00% with respect to Eurodollar borrowings and (ii) the alternate base rate plus 0.50% and the alternate base rate plus 1.00% with respect to ABR borrowings, in each case, based upon the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the revolver, depending on the Average Revolver Availability (as defined in the Amended and Restated Senior Secured Credit Facility). Amounts drawn under the revolver become due and payable on January 13, 2020.

 

The Company’s ability to borrow under the revolver is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At September 1, 2018, the Company had $1,335,000 of borrowings outstanding under the revolver and had letters of credit outstanding against the revolver of $55,780 which resulted in additional borrowing capacity of $1,309,220.

 

The Amended and Restated Senior Secured Credit Facility restricts the Company and the Subsidiary Guarantors (as defined herein) from accumulating cash on hand, and under certain circumstances, requires the funds in the Company’s deposit accounts to be applied first to the repayment of outstanding revolving loans under the Amended and Restated Senior Secured Credit Facility and then to be held as collateral for the senior obligations.

 

The Amended and Restated Senior Secured Credit Facility allows the Company to have outstanding, at any time, up to $1,500,000 in secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Amended and Restated Senior Secured Credit Facility and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority term loan debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest of (a) the fifth anniversary of the effectiveness of the Amended and Restated Senior Secured Credit Facility and (b) the latest maturity date of any Term Loan or Other Revolving Loan (each as defined in the Amended and Restated Senior Secured Credit Facility) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date and, with respect to any escrow notes issued by Rite Aid, excluding any special mandatory redemption of the type described in clause (iii) of the definition of “Escrow Notes” in the Amended and Restated Senior Secured Credit Facility). Subject to the limitations described in clauses (a) and (b) of the immediately preceding sentence, the Amended and Restated Senior Secured Credit Facility additionally allows the Company to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Amended and Restated Senior Secured Credit Facility) is not in effect; provided, however, that certain of the Company’s other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Amended and Restated Senior Secured Credit Facility also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended and Restated Senior Secured Credit Facility also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended and Restated Senior Secured Credit Facility is not in default and the Company maintains availability under its revolver of more than $365,000.

 

The Amended and Restated Senior Secured Credit Facility has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (a) on any date on which availability under the revolver is less than $200,000 or (b) on the third consecutive business day on which availability under the revolver is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than $250,000. As of September 1, 2018, the Company had availability under its revolver of $1,309,220, its fixed

 

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charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the senior secured credit facility’s financial covenant. The Amended and Restated Senior Secured Credit Facility also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, sale of assets, mergers and acquisitions and the granting of liens.

 

The Amended and Restated Senior Secured Credit Facility also provides for customary events of default.

 

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 and unsecured guaranteed notes. The Amended and Restated Senior Secured Credit Facility is secured, on a senior priority basis, 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, 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 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 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 16 “Guarantor and Non-Guarantor Condensed Consolidating Financial Information” for additional disclosure.

 

Fiscal 2018 and 2019 Transactions

 

During January 2018, the Company used proceeds from the Asset Sale to repay and retire all of its outstanding second lien $470,000 tranche 1 term loan and $500,000 tranche 2 term loan principal (the “Second Lien Term Loan Prepayment”). During February 2018, the Company reduced the borrowing capacity on its Amended and Restated Senior Secured Credit Facility from $3,700,000 to $3,000,000 (which was subsequently further reduced as described below). In connection with the transactions, the Company recorded a loss on debt retirement of $8,180, which included interest and unamortized debt issuance costs. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On February 27, 2018, the Company announced that it had commenced an offer to purchase up to $900,000 of the outstanding 9.25% senior notes due 2020 (the “9.25% Notes”), the 6.75% senior notes due 2021 (the “6.75% Notes”) and the 6.125% Senior Notes due 2023 (the “6.125% Notes”), pursuant to the asset sale provisions of the indentures of such notes. On March 29, 2018, the Company accepted for payment, pursuant to its offer to purchase, $3,454 principal amount of the 9.25% Notes, representing 0.38% of the outstanding principal amount of the 9.25% Notes, $3,471 principal amount of the 6.75% Notes, representing 0.43% of the outstanding principal amount of the 6.75% Notes, and $41,751 principal amount of the 6.125% Notes, representing 2.32% of the outstanding principal amount of the 6.125% Notes.  In connection therewith, the Company recorded a loss on debt retirement of $49 which included unamortized debt issuance costs, partially offset by unamortized discount.  The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations. The debt repayment and related loss on debt retirement of $498 for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

 

On March 13, 2018, the Company issued a notice of redemption for all of the 9.25%. Notes that were outstanding on April 12, 2018, pursuant to the terms of the indenture of the 9.25% Notes. On April 12, 2018, the Company redeemed 100% of the remaining outstanding 9.25% Notes.  In connection therewith, the Company recorded a loss on debt retirement of $3,422 which included unamortized debt issuance costs, partially offset by unamortized discount.  The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On April 19, 2018, the Company announced that it had commenced an offer to purchase up to $700,000 of its outstanding 6.75% Notes and its 6.125% Notes pursuant to the asset sale provisions of such indentures. On May 21, 2018, the Company accepted for payment, pursuant to its offer to purchase, $1,360 aggregate principal amount of the 6.75% Notes and $4,759 aggregate principal amount of the 6.125% Notes.  The debt repayment and related loss on debt retirement of $8 for the 6.75% Notes is included in the results of operations and cash flows of discontinued operations.  The debt repayment and related loss on debt retirement of $56 for the 6.125% Notes is included in the results of operations and cash flows of continuing operations.

 

On April 29, 2018, the Company further reduced the borrowing capacity on its Amended and Restated Senior Secured Credit Facility from $3,000,000 to $2,700,000. In connection therewith, the Company recorded a loss on debt retirement of $1,091, which included unamortized debt issuance costs. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

On June 25, 2018, the Company redeemed the remaining $805,169 of its 6.75% Notes, which resulted in a loss on debt retirement of $18,075. The loss on debt retirement is included in the results of operations and cash flows of discontinued operations.

 

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Maturities

 

The aggregate annual principal payments of long-term debt for the remainder of fiscal 2019 and thereafter are as follows: 2019—$90; 2020—$1,335,000; 2021—$0; 2022—$0; 2023—$0 and $2,176,490 thereafter.

 

12. Retirement Plans

 

Net periodic pension expense recorded in the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017, for the Company’s defined benefit plan includes the following components:

 

 

 

Defined Benefit
Pension Plan

 

Defined Benefit
Pension Plan

 

 

 

Thirteen Week Period Ended

 

Twenty-Six Week Period Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

September 1,
2018

 

September 2,
2017

 

Service cost

 

$

312

 

$

346

 

$

624

 

$

692

 

Interest cost

 

1,578

 

1,603

 

3,156

 

3,206

 

Expected return on plan assets

 

(1,435

)

(1,147

)

(2,869

)

(2,294

)

Amortization of unrecognized prior service cost

 

 

 

 

 

Amortization of unrecognized net loss

 

507

 

857

 

1,015

 

1,713

 

Net periodic pension expense

 

$

962

 

$

1,659

 

$

1,926

 

$

3,317

 

 

During the thirteen and twenty-six week periods ended September 1, 2018 the Company contributed $991 and $1,804, respectively, to the Defined Benefit Pension Plan. During the remainder of fiscal 2019, the Company expects to contribute $900 to the Defined Benefit Pension Plan.

 

13. Segment Reporting

 

The Company has two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments, collectively the “Parent Company”.

 

The Retail Pharmacy segment’s primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit management services including plan design and administration, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

 

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

 

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

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Eliminations (1)

 

Consolidated

 

September 1, 2018:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

5,503,071

 

$

2,675,295

 

$

(12,698

)

$

8,165,668

 

Goodwill

 

43,492

 

1,064,643

 

 

1,108,135

 

Additions to property and equipment and intangible assets

 

105,369

 

7,715

 

 

113,084

 

March 3, 2018:

 

 

 

 

 

 

 

 

 

Total Assets

 

$

6,089,343

 

$

2,954,953

 

$

(54,969

)

$

8,989,327

 

Goodwill

 

43,492

 

1,377,628

 

 

1,421,120

 

Additions to property and equipment and intangible assets

 

199,437

 

15,327

 

 

214,764

 

 

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(1)                                 As of September 1, 2018 and March 3, 2018, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $0 and $38,713, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $12,698 and $16,256, 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.

 

The following table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017:

 

 

 

Retail
Pharmacy

 

Pharmacy
Services

 

Intersegment
Eliminations (1)

 

Consolidated

 

Thirteen Week Period Ended

 

 

 

 

 

 

 

 

 

September 1, 2018:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,911,512

 

$

1,561,811

 

$

(51,961

)

$

5,421,362

 

Gross Profit

 

1,051,637

 

109,514

 

 

1,161,151

 

Adjusted EBITDA (2)

 

103,618

 

44,963

 

 

148,581

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

3,901,842

 

$

1,492,831

 

$

(49,662

)

$

5,345,011

 

Gross Profit

 

1,058,411

 

103,262

 

 

1,161,673

 

Adjusted EBITDA (2)

 

87,627

 

49,275

 

 

136,902

 

Twenty-Six Week Period Ended

 

 

 

 

 

 

 

 

 

September 1, 2018:

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,809,277

 

$

3,104,573

 

$

(103,998

)

$

10,809,852

 

Gross Profit

 

2,121,094

 

208,806

 

 

2,329,900

 

Adjusted EBITDA (2)

 

207,747

 

78,826

 

 

286,573

 

September 2, 2017:

 

 

 

 

 

 

 

 

 

Revenues

 

$

7,874,193

 

$

3,006,072

 

$

(98,731

)

$

10,781,534

 

Gross Profit

 

2,115,382

 

208,234

 

 

2,323,616

 

Adjusted EBITDA (2)

 

165,078

 

97,874

 

 

262,952

 

 


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

 

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

 

The following is a reconciliation of net (loss) income to Adjusted EBITDA for the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017:

 

 

 

Thirteen Week
Period Ended

 

Twenty-Six Week
Period Ended

 

 

 

September 1,
2018

 

September 2,
2017(a)

 

September 1,
2018

 

September 2,
2017(a)

 

 

 

(dollars in thousands)

 

Net (loss) income

 

$

(352,348

)

$

188,360

 

$

(394,075

)

$

152,323

 

Interest expense

 

56,233

 

50,857

 

119,025

 

101,857

 

Income tax (benefit) expense

 

(106,559

)

117,450

 

(116,056

)

105,329

 

Depreciation and amortization expense

 

89,743

 

95,655

 

184,272

 

196,684

 

LIFO charge

 

3,358

 

3,436

 

13,324

 

13,609

 

Lease termination and impairment charges

 

39,609

 

3,113

 

49,468

 

7,151

 

Goodwill and intangible asset impairment charges

 

375,190

 

 

375,190

 

 

Loss on debt retirements, net

 

 

 

554

 

 

Merger and Acquisition-related costs

 

19,031

 

9,632

 

26,219

 

10,848

 

Stock based compensation expense

 

5,215

 

6,324

 

10,246

 

15,362

 

Inventory write-downs related to store closings

 

1,300

 

1,348

 

5,133

 

3,766

 

Litigation settlement

 

18,000

 

 

18,000

 

 

Gain on sale of assets, net

 

(4,965

)

(14,951

)

(10,824

)

(20,828

)

Walgreens Boots Alliance merger termination fee

 

 

(325,000

)

 

(325,000

)

Other

 

4,774

 

678

 

6,097

 

1,851

 

Adjusted EBITDA

 

$

148,581

 

$

136,902

 

$

286,573

 

$

262,952

 

 

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(a)         During the thirteen week period ended September 1, 2018, the Company revised its definition of Adjusted EBITDA to no longer exclude the impact of revenue deferrals related to its customer loyalty program and further revised its disclosure by presenting certain amounts previously included within Other as separate reconciling items.  Consequently, the Company revised Adjusted EBITDA for the thirteen and twenty-six week periods ended September 2, 2017 to conform with the revised definition and present separate reconciling items previously included in Other.

 

14. Commitments, Contingencies and Guarantees

 

Legal Matters and Regulatory Proceedings

 

The Company is involved in legal proceedings and is subject to investigations, inspections, claims, audits, inquiries, and similar actions by governmental authorities arising in the ordinary course of its business, including, without limitation, the matters described below. The Company records accruals for outstanding legal matters and applicable regulatory proceedings 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 and regulatory proceedings that could affect the amount of any existing accrual and developments that would make a loss contingency both probable and reasonably estimable, and as a result, warrant an account. If a loss contingency is not both probable and estimable, the Company does not establish an accrued liability.  None of the Company’s accruals for outstanding legal matters or regulatory proceedings are material individually or in the aggregate to the Company’s consolidated financial position.

 

The Company’s contingencies are subject to significant uncertainties, many of which are beyond the Company’s control, 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 qui tam lawsuit (“whistleblower” action) has been filed and whether the government agency makes a decision to intervene in the lawsuit following investigation.  While the Company cannot predict the outcome of any of the contingencies, the Company’s management does not believe that the outcome of any of these legal matters or regulatory proceedings will be material to the Company’s consolidated financial position.  It is possible, however, the Company’s results of operations or cash flows could be materially affected by unfavorable outcomes in outstanding legal matters or regulatory proceedings.

 

After the announcement of the then proposed merger between the Company and Walgreens Boots Alliance, Inc. (“WBA”), a putative class action lawsuit was filed in Pennsylvania in the Court of Common Pleas of Cumberland County (Wilson v. Rite Aid Corp., et al.) by a purported Company stockholder against the Company, its directors (the Individual Defendants, together with the Company, the Rite Aid Defendants), WBA and Victoria Merger Sub Inc. (Victoria) challenging the transactions contemplated by the merger agreement. The complaint alleged primarily that the Individual Defendants breached their fiduciary duties by, among other things, agreeing to an allegedly unfair and inadequate price, agreeing to deal protection devices that allegedly prevented the directors from obtaining higher offers from other interested buyers for the Company and allegedly failing to protect against certain purported conflicts of interest in connection with the merger. The complaint further alleged that the Company, WBA and/or Victoria aided and abetted these alleged breaches of fiduciary duty. The complaint sought, among other things, to enjoin the closing of the merger as well as money damages and attorneys’ and experts’ fees. The matter remains pending, but inactive.

 

Also in connection with a proposed merger between the Company and WBA, a lawsuit was filed in the United States District Court for the Middle District of Pennsylvania (the “Pennsylvania District Court”), asserting a claim for violations of Section 14(a) of the Exchange Act and SEC Rule 14a-9 against the Rite Aid Defendants, WBA and Victoria and a claim for violations of Section 20(a) of the Exchange Act against the Individual Defendants and WBA (Hering v. Rite Aid Corp., et al.). The complaint in the Hering action alleged, among other things, that the Rite Aid Defendants disseminated an allegedly false and materially misleading proxy and sought to enjoin the shareholder vote on the proposed merger, a declaration that the proxy was materially false and misleading in violation of federal securities laws and an award of money damages and attorneys’ and experts’ fees. On January 14 and 16, 2016, respectively, the plaintiff in the Hering action filed a motion for preliminary injunction and a motion for expedited

 

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discovery. On January 21, 2016, the Rite Aid Defendants filed a motion to dismiss the Hering complaint. At a hearing held on January 25, 2016, the Pennsylvania District Court orally denied the plaintiff’s motion for expedited discovery and subsequently denied the plaintiff’s motion for preliminary injunction on January 28, 2016. On March 14, 2016, the Pennsylvania District Court appointed Jerry Hering, Don Michael Hussey and Joanna Pauli Hussey as lead plaintiffs for the putative class and approved their selection of Robbins Geller Rudman & Dowd LLP as lead counsel. On April 14, 2016, the Pennsylvania District Court granted the lead plaintiffs’ unopposed motion to stay the Hering action for all purposes pending consummation of the merger.

 

On August 4, 2017, the Pennsylvania District Court entered an order lifting the stay, noting that the original claims in this matter were now moot and directed the plaintiffs to file a motion for leave to amend the complaint, with brief in support thereof, which motion was subsequently filed on September 22, 2017. Also on September 22, 2017, the lead plaintiffs gave notice that plaintiffs Don Michael Hussey and Joanna Pauli Hussey were withdrawing as lead plaintiffs, and that plaintiff Jerry Hering (the “Lead Plaintiff”) would continue to represent the proposed class in the Hering action going forward. On November 27, 2017, the Pennsylvania District Court granted Lead Plaintiff’s motion to amend the complaint, and Lead Plaintiff filed the amended complaint (the “Amended Complaint”) on December 11, 2017. The amended complaint alleged claims for violations of Sections 10(b) and 20(a) of the Exchange Act and SEC Rule 10b-5 against the Rite Aid Defendants, WBA, and certain WBA executives. On February 14, 2018, the Rite Aid Defendants moved to dismiss the Amended Complaint, which the Pennsylvania District Court granted on July 11, 2018, dismissing all claims alleged against the Rite Aid Defendants.

 

In connection with the then proposed merger between the Company and Albertsons Companies, Inc. (“ACI”), on April 24, 2018, a Rite Aid stockholder filed a putative class action lawsuit in the Court of Chancery of the State of Delaware against Rite Aid, ACI, Ranch Acquisition Corp. (Merger Sub I), Ranch Acquisition II LLC (Merger Sub II, together with ACI and Merger Sub I, the ACI defendants) and each of the Rite Aid directors (the Director defendants, together with Rite Aid, the Rite Aid defendants), Del. C.A. No. 2018-0305-AGB (Akile v. Rite Aid Corp., et al). Plaintiff contended that Rite Aid stockholders had appraisal rights under Section 262 of the DGCL. Plaintiff alleged breach of fiduciary duty claims against the Director defendants for their alleged failure to provide alleged statutory appraisal rights under Delaware law and for allegedly falsely informing Rite Aid stockholders that they would not have appraisal rights. Plaintiff further contended that the proxy statement/prospectus related to the proposed merger, and which was filed on April 6, 2018, was deficient under Section 262(d)(1) of the DGCL for failure to inform stockholders of their alleged appraisal rights. Plaintiff sought declarations from the Court of Chancery that the action was a proper class action and that the Director defendants breached their fiduciary duties by failing to adequately inform class members of their appraisal rights under Delaware law, to enjoin the then proposed transaction from closing until such time as class members were afforded the ability to seek appraisal of their shares, or otherwise permit class members to petition the Court of Chancery for appraisal, and attorneys’ fees, expenses, and costs to plaintiff. On May 9, 2018, the Court of Chancery denied plaintiff’s motion to expedite and declined to schedule a preliminary injunction hearing, ruling that plaintiff failed to state a colorable claim. On August 13, 2018, the parties filed a Stipulation and Proposed Order of Voluntary Dismissal Pursuant to Court of Chancery Rule 41(1)(a)(ii), which the Court of Chancery entered on August 14, 2018.

 

Between June 29, 2018, and August 3, 2018, three purported stockholders of the Company each separately filed a Verified Complaint to Compel Inspection of Books and Records under 8 Del. C. §220 in the Delaware Court of Chancery against the Company, seeking to inspect books and records in order to determine whether wrongdoing or mismanagement has taken place such that it would be appropriate to file claims for breach of fiduciary duty, and to investigate the independence and disinterestedness of the Company’s directors with respect to the then proposed merger with ACI. On August 9, 2018, one of the purported stockholders filed a Notice and Proposed Order Voluntarily Dismissing Action, which order the Court entered on August 10, 2018. On September 6, 2018, another of the purported stockholders filed a Notice of Dismissal. The Company filed a motion to dismiss the remaining action on August 20, 2018.

 

The Company is currently a defendant in several lawsuits filed in 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”). Some of the California Cases purport or may be determined to be class actions and seek substantial damages and penalties. The single-plaintiff and multi-plaintiff California Cases regarding violations of wage-and-hour laws, failure to pay overtime and failure to pay for missed meals and rest periods, in the aggregate, seek substantial damages. The Company believes that its defenses and assertions in the California Cases, as well as other lawsuits, have merit. The Company has aggressively challenged the merits of the lawsuits and, where applicable, the allegations that the lawsuits should be certified as class or representative actions. Additionally, at this time the Company is not able to predict either the outcome of or estimate a potential range of loss with respect to the California Cases and is vigorously defending them.

 

In the employee seating lawsuit (Hall v. Rite Aid Corporation, San Diego County Superior Court), the parties reached a class action settlement for $18 million plus institution of a two-year pilot seating program for front-end checkstands.  On September 14, 2018, the Court granted preliminary approval of the settlement.  The hearing for final approval is scheduled to occur on January 11, 2019.

 

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Following service of subpoenas on the Company in 2011 and 2013 by the United States Attorney’s Office for the Eastern District of Michigan (“USAO”) and the State of Indiana’s Office of the Attorney General, respectively, the Company cooperated with inquiries regarding the relationship of Rite Aid’s Rx Savings Program to the reporting of usual and customary charges to publicly funded health programs. In January 2017, the USAO, 18 states and the District of Columbia declined to intervene in a sealed False Claims Act (“FCA”) lawsuit filed by qui tam plaintiff Azam Rahimi (“Relator”) in the District Court for the Eastern District of Michigan. On January 19, 2017, the court unsealed Relator’s Second Amended Complaint against the Company; it alleges that the Company failed to report Rx Savings prices as its usual and customary charges under the Medicare Part D program and to federal and state Medicaid programs in 18 states and the District of Columbia; and that the Company is thus liable under the federal FCA and similar state statutes. In its ruling on the Company’s motion to dismiss the complaint, the Court held that Relator’s complaint was deficient, but allowed Relator the opportunity to re-plead.  Relator filed a Third Amended Complaint on May 11, 2018.  The Company filed a motion to dismiss the Third Amended Complaint on May 25, 2018, which is pending. At this stage of the proceedings, the Company is not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

On April 26, 2012, the Company received an administrative subpoena from the U.S. Drug Enforcement Administration (“DEA”), Albany, New York District Office, requesting information regarding the Company’s sale of products containing pseudoephedrine (“PSE”). In April 2012, it also received a communication from the U.S. Attorney’s Office (“USAO”) for the Northern District of New York concerning an investigation of possible civil violations of the Combat Methamphetamine Epidemic Act of 2005 (“CMEA”). Additional subpoenas were issued in 2013, 2014, and 2015 seeking broader documentation regarding PSE sales and recordkeeping requirements. Assistant U.S. Attorneys from the Northern and Eastern Districts of New York and the Southern District of West Virginia are currently investigating, but no lawsuits have been filed. Violations of the CMEA could result in the imposition of administrative and/or civil penalties against the Company. The Company has entered into tolling agreements with the United States, and discussions have been held to attempt to resolve these matters with those USAOs and the Department of Justice, but whether any agreements can be reached and on what terms is uncertain. At this stage of the investigation, the Company is not able to predict the outcome of the investigation.

 

In December 2017, Rite Aid executed a non-prosecution agreement with the United States Attorney’s Office for the Southern District of West Virginia (countersigned by the government in January 2018), which concluded the previous criminal investigation into Rite Aid’s PSE sales. Pursuant to that agreement, the government agreed not to bring any criminal charges against Rite Aid, and Rite Aid agreed to pay an immaterial amount of money as restitution.  The civil investigation is ongoing.

 

In June 2013, the Company was served with a Civil Investigative Demand (“CID”) by the United States Attorney’s Office for the Eastern District of California (the “USAO”) regarding (1) the Company’s Drug Utilization Review (“DUR”) and prescription dispensing protocol; and (2) the dispensing of drugs designated as “Code 1” by the State of California. The Company cooperated with the investigation, researched the government’s allegations, and refuted the government’s position. The Company produced documents including certain prescription files related to Code 1 drugs to the USAO’s office and the State of California Department of Justice’s Bureau of Medical Fraud and Elder Abuse (“CADOJ”). In August 2014, the USAO and 8 states’ attorneys general declined to intervene in a California False Claim Act (“FCA”) action (“Action”) filed under seal in the Eastern District of California by qui tam plaintiff Loyd F. Schmuckley (“Relator”) based on DUR and Code 1 allegations. In July 2016, the Commonwealth of Massachusetts and the District of Columbia also declined to intervene in the Action. On May 15, 2017, Relator and the CADOJ stipulated to dismiss all DUR-related claims and 18 other state-based claims. On September 21, 2017, the CADOJ filed a sealed complaint-in-intervention in the Action, asserting causes under the FCA, for unjust enrichment and for payment by mistake related to the Code 1 allegations. The Action was unsealed on September 26, 2017. On September 28, 2017, Relator filed a First Amended Complaint under the FCA also concerning the Code 1 allegations. The Company filed a motion to dismiss Relator’s and CADOJ’s respective complaints in January 2018, the hearing was held on March 23, 2018.  On September 5, 2018, the court issued an order denying the motion to dismiss. At this stage of the proceedings, the Company is not able to either predict the outcome of this matter or estimate a potential range of loss with respect to this matter and is vigorously defending this lawsuit.

 

The State of Mississippi, by and through its Attorney General, filed a First Amended Complaint against the Company and various purported related entities on September 27, 2016 alleging violations of the Mississippi Medicaid Fraud Control Act, violations of the Mississippi Unfair and Deceptive Trade Practices Act, fraud and unjust enrichment. The Complaint alleges the Company failed to accurately report usual and customary prices to Mississippi’s Division of Medicaid. On November 14, 2016, the Company filed motions to dismiss based on substantive and jurisdictional grounds, as well as a motion to transfer venue. These motions are pending and the substantive and jurisdictional grounds, as well as a motion to transfer venue, all of which were stayed pending the resolution of related litigation on appeal.  In September 2018, the stay of the case was lifted.  At this stage of the proceedings, the Company is

 

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not able to either predict the outcome of this lawsuit or estimate a potential range of loss with respect to the lawsuit and is vigorously defending this lawsuit.

 

In December 2017, the United States Judicial Panel on multidistrict litigation ordered consolidated numerous lawsuits filed against various defendants by plaintiffs such as counties, cities, hospitals, and third-party payors, alleging claims generally concerning the impacts of widespread opioid abuse. The consolidated multidistrict litigation is In re National Prescription Opiate Litigation (MDL No. 2804), pending in the U.S. District Court for the Northern District of Ohio. This multidistrict litigation includes relevant federal court lawsuits that name the Company, including lawsuits filed by counties and municipalities in California, Georgia, Idaho, Indiana, Iowa, Louisiana, Maine, Maryland, Massachusetts, Michigan, Minnesota, Missouri, New Jersey, New Mexico, North Carolina, Ohio, Puerto Rico, Texas, West Virginia, and Wisconsin.  Similar lawsuits that name the Company in some capacity have been filed in state courts, including lawsuits filed by Shelby County, Tennessee, Shelby County (Tennessee) v. Purdue Pharma, L.P. et al.; Brooke County, West Virginia, Brooke County (West Virginia) et al. v. Purdue Pharma L.P., et al.; the city of Strongsville, Ohio, The City of Strongsville, Ohio v. Purdue Pharma L.P., et al.; the County of Fannin, Georgia, County of Fannin (Georgia) v. Rite Aid of Georgia, Inc. et al.; the City of Fitchburg, Massachusetts, City of Fitchburg (Massachusetts) v. Purdue Pharma L.P. et al.; and lawsuits filed by 23 South Carolina counties, which have been consolidated in front of Judge Perry H. Gravely for purposes of discovery as In re: South Carolina Opioid Litigation.  At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuits and is vigorously defending them.

 

The Company is involved in two putative consumer class action lawsuits in the United States District Court for the Southern District of California, alleging that it has overcharged customers’ insurance companies for prescription drug purchases, resulting in overpayment of co-pays.  The first lawsuit, Byron Stafford v. Rite Aid Corp., Case No. 17-CV-01340-AJB-JLB, was filed on June 30, 2017, and the second case, Robert Josten v. Rite Aid Corp., Case No. 18-CV-00152-AJB-JLB, was filed on January 23, 2018.  Each lawsuit alleges that (1) the Company was obligated to charge the plaintiffs’ insurance companies a “usual and customary” price for their prescription drugs; and (2) the Company failed to do so properly because the prices it reported were not equal to or adjusted to account for the discount prices that Rite Aid offers to uninsured and underinsured customers through its Rx Savings Program.  On December 19, 2017, the court granted the Company’s motion to dismiss Stafford’s complaints with leave to amend for failure to plead compliance with the applicable statutes of limitations.  After Stafford amended the complaint on January 9, 2018, the Company filed another motion to dismiss on January 23, 2018, and a similar motion to dismiss Josten’s complaint on March 16, 2018.  Both motions are fully briefed and are awaiting a decision from the court.  At this stage of the proceedings, the Company is not able to either predict the outcome of these lawsuits or estimate a potential range of loss with respect to the lawsuit and is vigorously defending these lawsuits.

 

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 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.

 

15. Supplementary Cash Flow Data

 

 

 

Twenty-Six Weeks Ended

 

 

 

September 1,
2018

 

September 2,
2017

 

Cash paid for interest (net of capitalized amounts of $3 and $184, respectively)(a)

 

$

165,995

 

$

208,909

 

Cash payments for income taxes, net(a)

 

$

19,314

 

$

3,119

 

Equipment financed under capital leases

 

$

2,275

 

$

8,615

 

Equipment received for noncash consideration

 

$

 

$

1,295

 

Reduction in lease financing obligation

 

$

 

$

4,740

 

Gross borrowings from revolver(a)

 

$

2,237,000

 

$

1,471,000

 

Gross repayments to revolver(a)

 

$

902,000

 

$

1,661,000

 

 


(a)—Amounts are presented on a total company basis.

 

Significant components of cash used by Other Liabilities of $245,587 for the twenty-six week period ended September 1, 2018 includes cash used resulting from changes in accrued wages, benefits and other personnel costs of $131,724 and changes in the amounts due to pharmacy network providers of $78,000.

 

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16. 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 and unsecured guaranteed notes (the “Subsidiary Guarantors”). Additionally, with the exception of EIC, the subsidiaries, including joint ventures, that do not guarantee the Amended and Restated Senior Secured Credit Facility and unsecured guaranteed notes, are minor.

 

For the purposes of preparing the information below, Rite Aid Corporation uses the equity method to account for its investment in subsidiaries. The equity method has been used by Subsidiary Guarantors with respect to investments in the non-guarantor subsidiaries. The subsidiary guarantees related to the Company’s Amended and Restated Senior Secured Credit Facility, and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. Presented below is condensed consolidating financial information for Rite Aid Corporation, the Subsidiary Guarantors, and the non-guarantor subsidiaries at September 1, 2018, March 3, 2018, and for the thirteen and twenty-six week periods ended September 1, 2018 and September 2, 2017. Separate financial statements for Subsidiary Guarantors are not presented.

 

 

 

Rite Aid Corporation

 

 

 

Condensed Consolidating Balance Sheet

 

 

 

September 1, 2018
(unaudited)

 

 

 

Rite Aid
Corporation (Parent
Company Only)

 

Subsidiary
Guarantors

 

Non-
Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

 

 

(in thousands)

 

ASSETS

 

 

 

 

 

 

 

 

 

 

 

Current assets:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

 

$

103,349

 

$

29,119

 

$

 

$

132,468

 

Accounts receivable, net

 

 

1,565,035

 

474,570

 

 

2,039,605

 

Intercompany receivable

 

 

 

310,291

 

 

(310,291

)(a)

 

Inventories, net of LIFO reserve of $0, $594,413, $0, $0, and $594,413

 

 

1,848,287

 

 

 

1,848,287

 

Prepaid expenses and other current assets

 

 

167,078

 

2,235

 

 

169,313

 

Current assets held for sale

 

 

181,989

 

 

 

181,989

 

Total current assets

 

 

4,176,029

 

505,924

 

(310,291

)

4,371,662

 

Property, plant and equipment, net

 

 

1,350,735

 

 

 

1,350,735

 

Goodwill

 

 

1,108,135

 

 

 

1,108,135

 

Other intangibles, net

 

 

430,342

 

50,178

 

 

480,520

 

Deferred tax assets

 

 

635,127

 

 

 

635,127

 

Investment in subsidiaries

 

8,661,543

 

53,443

 

 

(8,714,986

)(b)

 

Intercompany receivable

 

 

3,709,374

 

 

(3,709,374

)(a)

 

Other assets

 

 

212,272

 

7,217

 

 

219,489

 

Total assets

 

$

8,661,543

 

$

11,675,457

 

$

563,319

 

$

(12,734,651

)

$

8,165,668

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

 

 

 

Current maturities of long-term debt and lease financing obligations

 

$

90

 

$

18,578

 

$

 

$

 

$

18,668

 

Accounts payable

 

 

1,726,014

 

7,975

 

 

1,733,989

 

Intercompany payable

 

 

 

310,291

 

(310,291

)(a)

 

Accrued salaries, wages and other current liabilities

 

14,388

 

751,080

 

173,472

 

 

938,940

 

Total current liabilities

 

14,478

 

2,495,672

 

491,738

 

(310,291

)

2,691,597

 

Long-term debt, less current maturities

 

3,481,741

 

 

 

 

3,481,741

 

Lease financing obligations, less current maturities

 

 

26,537

 

 

 

26,537

 

Intercompany payable

 

3,709,374

 

 

 

(3,709,374

)(a)

 

Other noncurrent liabilities

 

 

491,705

 

18,138

 

 

509,843

 

 

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Rite Aid Corporation

 

 

 

Condensed Consolidating Balance Sheet