UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
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☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the quarterly period ended May 29, 2021 |
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OR |
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☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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For the transition period from to |
Commission File Number: 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
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Delaware
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23-1614034
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30 Hunter Lane,
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17011
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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
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
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Trading Symbol(s) |
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Name of each exchange on which registered |
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Common Stock, $1.00 par value |
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RAD |
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New York Stock Exchange |
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 ⌧ No ◻
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 ⌧ No ◻
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.
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Large Accelerated Filer ⌧ |
Accelerated Filer ◻ |
Non-Accelerated Filer ◻ |
Smaller reporting company ☐ Emerging growth company ☐ |
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. ◻
Indicate by check mark whether registrant is a shell company (as defined in Rule 12b-2 of the Exchange act). Yes ☐ No ⌧
The registrant had 55,086,812 shares of its $1.00 par value common stock outstanding as of June 23, 2021.
RITE AID CORPORATION
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets as of May 29, 2021 and February 27, 2021 |
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Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations |
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2
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:
| ● | the impact of widespread health developments, including the continued impact of the global coronavirus (“COVID-19”) pandemic, and the responses thereto (such as quarantines, shut downs and other restrictions on travel and commercial, social and other activities), including changing consumer behavior and preferences and the reinstitution of more stringent regulations (including mandatory stay at home orders and the availability, rollout and supply chain of vaccines to treat the virus), which could materially and adversely affect, among other things, the economic, financial and labor markets in which we operate, access to credit, our front-end and pharmaceutical operations, supply chain, associates and executive and administrative personnel. These widespread health developments, or an increase in the number of cases, could also materially and adversely affect our third-party service providers, including suppliers, vendors and business partners, and customers. The COVID-19 pandemic may result in further shutdowns or have a negative impact on our cough, cold and flu sales. Any of these developments could result in a material adverse effect on our business, financial conditions and results of operations; |
| ● | our ability to successfully implement RxEvolution, attract and retain a sufficient number of our target consumers, integrate acquisitions, obtain permits required for store remodels, and improve the operating performance of our stores; |
| ● | our high level of indebtedness, the ability to refinance such indebtedness on acceptable terms, and our ability to satisfy our obligations and the other covenants contained in our debt agreements; |
| ● | the nature, cost and outcome of pending and future litigation, other legal or regulatory proceedings, or governmental investigations, including those related to Opioids, “usual and customary” pricing or other matters; |
| ● | general competitive, economic, industry, market, political (including healthcare reform) and regulatory conditions, civil unrest (including any resulting store closures, damage, or loss of inventory), as well as other factors specific to the markets in which we operate; |
| ● | the severity and resulting impact of the cough, cold and flu season; |
| ● | the impact on retail pharmacy business as pharmacy benefit management (“PBM”) payors incent or mandate movement away from retail pharmacies to PBM mail order pharmacies; |
| ● | our ability to achieve the benefits of our efforts to reduce the costs of our generic and other drugs; |
| ● | the risk that changes in federal or state laws or regulations, including to those relating to labor or wages, the Health Care Education Affordability Reconciliation Act, the repeal of all or part of the Patient Protection and the Affordable Care Act (or “ACA”), and decisions of the United States Supreme Court regarding those and other matters relevant to the Company or its operations, and any regulations enacted thereunder may occur; |
| ● | the impact of the loss of one or more major third party payor contracts and the risk that providers and state contract changes may occur; |
| ● | the risk that we may need to take further impairment charges if our future results do not meet our expectations; |
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| ● | our ability to sell our Centers of Medicare and Medicaid Services (“CMS”) receivables, in whole or in part, which could negatively impact our leverage ratio if we do not consummate a sale; |
| ● | our ability to grow prescription count and realize front-end sales growth; |
| ● | our ability to achieve cost savings and the other benefits of our organizational restructuring within our anticipated timeframe, if at all; |
| ● | decisions to close additional stores and distribution centers or undertake additional refinancing activities, which could result in further charges; |
| ● | our ability to manage expenses and our investments in working capital; |
| ● | the continued impact of gross margin pressure in the PBM industries due to continued consolidation and client demand for lower prices while providing enhanced service offerings; |
| ● | risks related to breaches 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, early price renegotiations prior to contract expirations and the risk that we cannot meet client guarantees; |
| ● | our ability to manage our Medicare Part D Plan medical loss ratio (“MLR”) and meet the financial obligations of the plan; |
| ● | the risk that we could experience deterioration in our current Star rating with the CMS or incur CMS penalties and/or sanctions; |
| ● | the expiration or termination of our Medicare or Medicaid managed care contracts by federal or state governments; |
| ● | changes in future exchange or interest rates or credit ratings, changes in tax laws, regulations, rates and policies; and |
| ● | 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 Continuing Operations” included herein and in our Annual Report on Form 10-K for the fiscal year ended February 27, 2021 (the “Fiscal 2021 10-K”), as well as in “Part I – Item 1A. Risk Factors” of the Fiscal 2021 10-K, which we filed with the SEC on April 27, 2021. To the extent that COVID-19 adversely affects our business and financial results, it may also have the effect of heightening many of the risk factors described herein and in our Fiscal 2021 10-K.
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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)
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)
See accompanying notes to condensed consolidated financial statements.
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RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS
(In thousands)
(unaudited)
See accompanying notes to condensed consolidated financial statements.
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RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
(unaudited)
See accompanying notes to condensed consolidated financial statements.
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RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(In thousands, except per share amounts)
(unaudited)
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)
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 Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
1. Basis of Presentation and Significant Accounting Policies
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 week period ended May 29, 2021 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 2021 10-K.
Revenue Recognition
The following table disaggregates the Company’s revenue by major source in each segment for the thirteen week periods ended May 29, 2021 and May 30, 2020:
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May 29, |
May 30, |
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2020 |
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In thousands |
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Retail Pharmacy segment: |
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Pharmacy sales |
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$ |
2,997,044 |
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2,625,544 |
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Front-end sales |
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1,321,699 |
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1,465,467 |
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Other revenue |
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32,939 |
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32,260 |
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Total Retail Pharmacy segment |
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4,351,682 |
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4,123,271 |
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Pharmacy Services segment |
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1,872,282 |
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1,977,246 |
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Intersegment elimination |
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(62,979) |
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(73,141) |
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Total revenue |
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6,160,985 |
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6,027,376 |
The Retail Pharmacy segment offered a chain-wide loyalty card program titled wellness+. Individual customers were able to become members of the wellness+ program. Members participating in the wellness+ loyalty card program earned points on a calendar year basis for eligible front-end merchandise purchases and qualifying prescription purchases. The existing wellness+ program was terminated as of July 1, 2020, with benefits earned as of that date available to be used through the end of calendar 2020. In December 2020, the Company granted a temporary extension of benefits to previous members that were eligible for a discount as of December 31, 2020 such that those prior members will be eligible to continue to receive that discount on purchases made through December 31, 2021 with no additional purchase requirement. New and existing customers who were not already eligible for “Gold” benefits have the opportunity to earn additional discounts on purchases made through December 31, 2021.
Prior to its termination, effective January 1, 2020, members reached specific wellness+ tiers based on points accumulated during the six calendar month periods between January 1st and June 30th, and July 1st through December 31st, which entitled such customers to certain future discounts and other benefits upon reaching that tier. For example, any customer that reaches 500 points during the six calendar month period between January 1st and June 30th achieves the “Gold” tier, enabling him or her to receive a 20% discount on qualifying purchases of front-end merchandise for the
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
remaining portion of that six calendar month period and for the following six calendar months. There is also a similar “Silver” level with a lower threshold and benefit level. Prior to January 1, 2020, the wellness+ tiers were based on points accumulated for a full calendar year, and entitled such customers to wellness+ benefits for the remainder of that calendar year and also the next calendar year.
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 members receive discounted front-end merchandise or when the benefit period expires, the Retail Pharmacy segment recognizes an allocable portion of the deferred contract liability into revenue. For the thirteen week period ended May 29, 2021, the Company recognized $1,613 of deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $2,141 as of May 29, 2021, which is included in other current liabilities. The Retail Pharmacy segment had accrued contract liabilities of $3,754 as of February 27, 2021, which is included in other current liabilities.
Recently Adopted Accounting Pronouncements
In December 2019, the FASB issued ASU 2019-12, Simplifying the Accounting for Income Taxes (Topic 740). This ASU simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 related to the approach for intraperiod tax allocation, the recognition of deferred tax liabilities and the methodology for calculating income taxes in the interim period. The amendments also improve consistent application of and simplify GAAP for other areas of Topic 740 by clarifying and amending existing guidance. This ASU is effective for fiscal years beginning after December 15, 2020 (fiscal 2022). The Company adopted ASU 2019-12 effective February 28, 2021 and the adoption of this standard did not have a material impact on the Company’s financial position.
2. Acquisition
On December 18, 2020, pursuant to that certain stock purchase agreement, dated as of October 7, 2020, by and between the Company and Bartell Drug Company (“Bartell”), the Company acquired Bartell (the “Acquisition”), a Washington corporation, for approximately $89,724 in cash, subject to certain customary post-closing working capital adjustments. Bartell operates 67 retail drug stores and one distribution center in the greater Seattle, Washington area. Bartell will operate as a 100 percent owned subsidiary of the Company within its Retail Pharmacy segment.
The Company financed the Acquisition with borrowings under its Senior Secured Revolving Credit Facility together with cash on hand. The closing balance sheet has not yet been finalized, and therefore, the final purchase price and related purchase price allocation of the Acquisition is subject to change.
The Company’s condensed consolidated financial statements for the thirteen weeks ended May 29, 2021 include Bartell’s results of operations. The Company’s financial statements reflect preliminary purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was preliminarily allocated to the assets acquired and liabilities assumed based upon their estimated fair values on the Acquisition date.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
The following allocation of the purchase price and the estimated transaction costs is preliminary and is based on information available to the Company’s management at the time the consolidated financial statements were prepared. Accordingly, the allocation is subject to change and the impact of such changes may be material.
(1) Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a preliminary valuation prepared by an independent third party. The fair values assigned to identifiable intangible assets were determined through the use of the income approach, specifically the relief from royalty and the multi-period excess earnings methods. The major assumptions used in arriving at the estimated identifiable intangible asset values included management’s preliminary estimates of future cash flows, discounted at an appropriate rate of return which are based on the weighted average cost of capital for both the Company and other market participants, projected customer attrition rates, as well as applicable royalty rates for comparable assets. The useful lives for intangible assets were determined based upon the remaining useful economic lives of the intangible assets that are expected to contribute directly or indirectly to future cash flows. The estimated fair value of intangible assets and related useful lives as included in the preliminary purchase price allocation include:
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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Estimated Fair Value |
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Estimated Useful Life
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Prescription files |
$ |
54,300 |
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10 |
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Tradename |
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14,400 |
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Indefinite |
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Total |
$ |
68,700 |
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The Acquisition resulted in a bargain purchase gain of $47,705 primarily due to fair value adjustments related to prescription files and the tradename compared to book values. The Company believes that the bargain purchase gain was primarily the result of the decision by the Bartell stockholders to sell their interests as Bartell had been experiencing increasing borrowings under its credit agreements to meet its operating needs and increasing net losses. The agreed upon purchase price reflected the fact the seller would have needed to incur further significant debt to cover the operating costs of Bartell, which would have required amendments to its credit arrangements. With the Company’s existing infrastructure, scale and expertise, the Company believes that it has access to the necessary synergies to allow necessary operational improvements to be implemented more efficiently than the seller was capable of.
During the thirteen week periods ended May 29, 2021 and May 30, 2020, acquisition costs of $3,886 and $0 were expensed as incurred. The following unaudited pro forma combined financial data gives effect to the Acquisition as if it had occurred as of March 1, 2019.
The unaudited combined pro forma results do not include any incremental cost savings that may result from the integration. The adjustments are based on information available to the Company at this time. Accordingly, the adjustments are subject to change and the impact of such changes may be material.
The unaudited combined pro forma information is for informational purposes only. The pro forma information is not necessarily indicative of what the combined company’s results actually would have been had the Acquisition been completed as of the beginning of the periods as indicated. In addition, the unaudited pro forma information does not purport to project the future results of the combined company.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
3. Restructuring
Beginning in fiscal 2019, the Company initiated a series of restructuring plans designed to reorganize its executive management team, reduce managerial layers, and consolidate roles. In March 2020, the Company announced the details of its RxEvolution strategy, which includes building tools to work with regional health plans to improve patient health outcomes, rationalizing SKU’s in its front-end offering to free up working capital and update its merchandise assortment, assessing its pricing and promotional strategy, rebranding its retail pharmacy and pharmacy services business, launching its Store of the Future format and further reducing SG&A and headcount, including integrating certain back office functions in the Pharmacy Services segment both within the segment and across Rite Aid. Other strategic initiatives include the expansion of the Company’s digital business, movement to a common client platform at Elixir and investments in talent in sales and underwriting at Elixir.
For the thirteen week period ended May 29, 2021, the Company incurred total restructuring-related costs of $5,932, which are included as a component of SG&A. These costs are as follows:
For the thirteen week period ended May 30, 2020, the Company incurred total restructuring-related costs of $35,735, of which $9,972 is included as a component of SG&A and $25,763 is included as a component of cost of revenues. These costs are as follows:
In addition, during the thirteen week period ended May 30, 2020, the Company incurred intangible asset impairment charges of $29,852 in connection with its rebranding initiatives as described in Note 11, Goodwill and Other Intangible Assets.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
A summary of activity for the thirteen week period ended May 29, 2021 in the restructuring-related liabilities associated with the programs noted above, which is included in accrued salaries, wages and other current liabilities, is as follows:
| (a) | – Severance and related costs reflect severance accruals, executive search fees, outplacement services and other similar charges associated with ongoing reorganization efforts. |
| (b) | – As part of its March 2019 reorganization, the Company incurred costs with the implementation of a retention plan for certain of its key associates. |
| (c) | – Professional and other fees include costs incurred in connection with the identification and implementation of initiatives associated with restructuring activities. |
| (d) | – Inventory reserve on product lines the Company is exiting and will no longer carry as part of its rebranding initiative. |
The Company anticipates incurring approximately $30,000 during fiscal 2022 in connection with its continued restructuring activities.
4. Asset Sale to WBA
On September 18, 2017, the Company entered into the Amended and Restated Asset Purchase Agreement with Walgreens Boots Alliance, Inc. (“WBA”) and Walgreen Co., an Illinois corporation and 100% owned subsidiary of WBA (“Buyer”), which amended and restated in its entirety the previously disclosed Asset Purchase Agreement, dated as of June 28, 2017, by and among the Company, WBA and Buyer (the “Original Asset Purchase Agreement”). Pursuant to the terms and subject to the conditions set forth in the Amended and Restated Asset Purchase Agreement, Buyer purchased from the Company 1,932 stores (the “Acquired Stores”), three 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 (the “Asset Sale” or “Sale”). The Company completed the store transfer process in March of 2018, which resulted in the transfer of all 1,932 stores and related assets to WBA, and received cash proceeds of $4,156,686.
During fiscal 2019, 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 resulted in a pre-tax gain of $14,151, which has been included in the results of operations and cash flows of discontinued operations during the fifty-two week period ended March 2, 2019. During fiscal 2020, the Company completed the sale of the second distribution center and related assets to WBA for proceeds of $62,774. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $19,268, which has been included in the results of operations and cash flows of discontinued operations during the fifty-two week period ended February 29, 2020. During the first quarter of fiscal 2021, the Company completed the sale of the final distribution center and related assets to WBA for proceeds of
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
$94,289. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $12,690, which was included in the results of operations and cash flows of discontinued operations during the thirteen week period ended May 30, 2020. The transfer of the final distribution center and related assets constitutes the final closing under the Amended and Restated Asset Purchase Agreement.
The Company had agreed to provide transition services to Buyer for up to three years after the initial closing of the Sale. Under the terms of the Transition Services Agreement (“TSA”), the Company provided 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. The term of the TSA had been extended to October 17, 2020, unless earlier terminated. In connection with these services, the Company purchased the related inventory and incurred cash payments for the selling, general and administrative activities, which, the Company billed on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the thirteen week periods ended May 29, 2021 and May 30, 2020 were $0 and $31,005, respectively, of which $0 and $4,398 is included in Accounts receivable, net. The Company recorded WBA TSA fees of $0 and $1,080 during the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively, which are reflected as a reduction to selling, general and administrative expenses. In conjunction with the transfer of the final distribution center during the quarter ended May 30, 2020, the Company has substantially completed its obligations under the TSA. On July 14, 2020, the Company entered into a letter agreement with WBA to terminate the services under the TSA, other than certain specified services relating to real estate, accounting, tax, and accounts receivable systems that continued until October 17, 2020 and certain specified services relating to human resources to be performed after October 17, 2020.
Based on its magnitude and because the Company exited 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 May 29, 2021 and February 27, 2021, 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.
As of February 27, 2021, there are no assets and liabilities classified as held for sale relating to the Asset Sale to WBA.
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
The operating results of the discontinued operations that are reflected on the consolidated statements of operations within net income from discontinued operations are as follows:
| (a) | Cost of revenues and selling, general and administrative expenses for the discontinued operations excludes corporate overhead. These charges are reflected in continuing operations. |
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.
5. 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.
18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Due to their antidilutive effect, 773 and 1,264 potential common shares related to stock options have been excluded from the computation of diluted income (loss) per share for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. Also, excluded from the computation of diluted income (loss) per share for the thirteen week periods ended May 29, 2021 and May 30, 2020 are restricted shares of 1,240 and 1,198, respectively, which are included in shares outstanding.
6. Facility Exit and Impairment Charges
Facility exit and impairment charges consist of amounts as follows:
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Thirteen Week Period |
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Ended |
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May 29, |
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May 30, |
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2021 |
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2020 |
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Impairment charges |
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$ |
4,313 |
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$ |
2,203 |
|
Facility exit charges |
|
|
4,518 |
|
|
1,550 |
|
|
|
$ |
8,831 |
|
$ |
3,753 |
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.
19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 thirteen week period ended May 29, 2021, long-lived assets from continuing operations with a carrying value of $4,313, primarily right-of-use assets in connection with leased office spaces, were written down to their fair value of $0, resulting in an impairment charge of $4,313. During the thirteen week period ended May 30, 2020, long-lived assets from continuing operations with a carrying value of $2,203, were written down to their fair value of $0, resulting in an impairment charge of $2,203. Of the $2,203, $1,919 relates to terminated software project and $284 relates to store assets. If our actual future cash flows differ from our projections materially, certain stores that are either not impaired or partially impaired in the current period may be further impaired in future periods.
The following table presents fair values for those assets measured at fair value on a non-recurring basis at May 29, 2021 and May 30, 2020:
20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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.
Facility Exit 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 facility exit charges and inventory liquidation charges, as well as impairment of assets at these locations. When a store or distribution center is closed, the Company records an expense for unrecoverable costs and accrues a liability equal to the present value at current credit adjusted risk-free interest rates of any anticipated executory costs which are not included within the store or distribution center's respective lease liability under Topic 842. Other store or distribution center closing and liquidation costs are expensed when incurred.
The following table reflects changes in the Company’s closed store liability relating to closed store and distribution center charges for new closures, changes in assumptions and interest accretion:
7. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy as described in Note 6, Facility Exit and Impairment Charges, for the recognition and disclosure of fair value measurements.
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 May 29, 2021 and February 27, 2021, the Company has $7,043 and $7,041, 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.
21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 $3,014,517 and $3,100,602, respectively, as of May 29, 2021. The carrying amount and estimated fair value of the Company's total long-term indebtedness was $3,063,087 and $3,176,322, respectively, as of February 27, 2021.
8. Income Taxes
The Company recorded an income tax expense from continuing operations of $780 and an income tax benefit from continuing operations of $8,018 for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. The effective tax rate for the thirteen week periods ended May 29, 2021 and May 30, 2020 was (6.4)% and 9.9%, respectively. The effective tax rate for the thirteen week periods ended May 29, 2021 and May 30, 2020 was net of an adjustment of (18.5)%, and (10.6)%, respectively, to adjust the valuation allowance against deferred tax assets.
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 $11,851 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. 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 $1,660,547 and $1,657,562, which relates to federal and state deferred tax assets that may not be realized based on the Company's future projections of taxable income at May 29, 2021 and February 27, 2021, respectively.
9. Medicare Part D
The Company offers Medicare Part D benefits through Elixir Insurance (“EI”), which has contracted with CMS to be a Prescription Drug Plan (“PDP”) and, pursuant to the Medicare Prescription Drug, Improvement and Modernization Act of 2003, must be a risk-bearing entity regulated under state insurance laws or similar statutes.
EI is a licensed domestic insurance company under the applicable laws and regulations. Pursuant to these laws and regulations, EI 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
22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
believe these limitations on dividends and distributions materially impact its financial position. EI 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 $14,767 as of March 31, 2021. EI was in excess of the minimum required amounts in these states as of May 29, 2021.
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.
On February 19, 2020, the Company entered into a receivable purchase agreement (the “2019 Receivable Purchase Agreement”) with Bank of America, N.A. (the “Purchaser”).
Pursuant to the terms and conditions set forth in the 2019 Receivable Purchase Agreement, the Company sold $501,422 of its calendar 2019 CMS receivable for $484,547, of which $449,949 was received on February 19, 2020 and the remainder was received in fiscal 2021 upon receipt of the final remittance from CMS. In connection therewith, the Company recognized a loss of $16,875, which was included as a component of loss on sale of assets, net in the fourth quarter of fiscal 2020.
On February 19, 2020, concurrent with the 2019 Receivable Purchase Agreement, the Company entered into an indemnity agreement (the “2019 Indemnity Agreement”), whereby the Company has agreed to indemnify, reimburse and hold Purchaser harmless from certain liabilities and expenses actually suffered or incurred by the Purchaser resulting from the occurrence of certain events as specified in the 2019 Indemnity Agreement. Based on its evaluation of the 2019 Indemnity Agreement, the Company has determined that it is highly unlikely that the events covered under the 2019 Indemnity Agreement would occur, and consequently, the Company has not recorded any indemnification liability associated with the 2019 Indemnity Agreement.
On November 12, 2020, the Company entered into a receivable purchase agreement (the “November 2020 Receivable Purchase Agreement”) with Purchaser, which was on terms similar to the 2019 Receivable Purchase Agreement.
Pursuant to the terms and conditions set forth in the November 2020 Receivable Purchase Agreement, the Company sold $464,019, a portion of its calendar 2020 CMS receivable, for $444,812, of which $412,795 was received on November 12, 2020. The remaining $32,017, which is included in accounts receivable, net as of May 29, 2021, is payable to the Company, subject to final CMS claim reconciliation adjustments, upon receipt of the final remittance from CMS. In connection therewith, the Company recognized a loss of $19,207, which is included as a component of gain on sale of assets, net.
On November 12, 2020, concurrent with the November 2020 Receivable Purchase Agreement, the Company entered into an indemnity agreement (the “November 2020 Indemnity Agreement”), whereby the Company has agreed to indemnify, reimburse and hold Purchaser harmless from certain liabilities and expenses actually suffered or incurred by
23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
the Purchaser resulting from the occurrence of certain events as specified in the November 2020 Indemnity Agreement. Based on its evaluation of the November 2020 Indemnity Agreement, the Company has determined that it is highly unlikely that the events covered under the November 2020 Indemnity Agreement would occur, and consequently, the Company has not recorded any indemnification liability associated with the November 2020 Indemnity Agreement.
On February 18, 2021, the Company entered into a receivable purchase agreement (the “February 2021 Receivable Purchase Agreement”) with Purchaser, which was on terms similar to the 2019 Receivable Purchase Agreement.
Pursuant to the terms and conditions set forth in the February 2021 Receivable Purchase Agreement, the Company sold $300,015, the remaining portion of its calendar 2020 CMS receivable, for $290,613, of which $269,912 was received on February 18, 2021. The remaining $20,701, which is included in accounts receivable, net as of May 29, 2021, is payable to the Company, subject to final CMS claim reconciliation adjustments, upon receipt of the final remittance from CMS. In connection therewith, the Company recognized a loss of $9,403, which is included as a component of gain on sale of assets, net.
On February 18, 2021, concurrent with the February 2021 Receivable Purchase Agreement, the Company entered into an indemnity agreement (the “February 2021 Indemnity Agreement”), whereby the Company has agreed to indemnify, reimburse and hold Purchaser harmless from certain liabilities and expenses actually suffered or incurred by the Purchaser resulting from the occurrence of certain events as specified in the February 2021 Indemnity Agreement. Based on its evaluation of the February 2021 Indemnity Agreement, the Company has determined that it is highly unlikely that the events covered under the February 2021 Indemnity Agreement would occur, and consequently, the Company has not recorded any indemnification liability associated with the February 2021 Indemnity Agreement.
As of May 29, 2021, and February 27, 2021, accounts receivable, net included $257,860 and $69,800 due from CMS.
10. Manufacturer Rebates Receivables
The Pharmacy Services Segment has manufacturer rebates receivables of $570,030 and $632,267 included in Accounts receivable, net, as of May 29, 2021 and February 27, 2021, respectively.
11. Goodwill and Other Intangible Assets
There was no goodwill impairment charge for the thirteen week period ended May 29, 2021. At May 29, 2021 and February 27, 2021, accumulated impairment losses for the Pharmacy Services segment was $574,712.
24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 May 29, 2021 and February 27, 2021.
| (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. |
In connection with the RxEvolution initiatives previously announced on March 16, 2020, the Company rebranded its EnvisionRxOptions and MedTrak subsidiaries to its new brand name, Elixir. These trademarks qualify as Level 3 within the fair value hierarchy. Upon the implementation of the rebranding initiatives during the first quarter of fiscal 2021, the Company has determined that the carrying value exceeded the fair value and consequently the Company incurred an impairment charge of $29,852 for these trademarks, which is included within intangible asset impairment charges within the condensed consolidated statement of operations.
Amortization expense for these intangible assets and liabilities was $20,460 and $24,420 for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2022—$73,637; 2023—$58,620; 2024—$44,936; 2025—$33,650 and 2026—$23,045.
25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
12. Indebtedness and Credit Agreements
Following is a summary of indebtedness and lease financing obligations at May 29, 2021 and February 27, 2021:
Credit Facility
On December 20, 2018, the Company entered into a senior secured credit agreement (as amended by the First Amendment to Credit Agreement, dated as of January 6, 2020, the “Credit Agreement”), consisting of a $2,700,000 senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a $450,000 “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan,” and together with the Senior Secured Revolving Credit Facility, collectively, the “Existing Facilities”). The Company used proceeds from the Existing Facilities to refinance its prior $2,700,000 existing credit agreement (the “Old Facility”). The Existing Facilities extend the Company’s debt maturity profile and provide additional liquidity. Borrowings under the Senior Secured Revolving Credit Facility bear interest at a rate per annum between LIBOR plus 1.25% and LIBOR plus 1.75% based upon the
26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Average ABL Availability (as defined in the Credit Agreement). Borrowings under the Senior Secured Term Loan bear interest at a rate per annum of LIBOR plus 3.00%. The Company is required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the commitments under the Senior Secured Revolving Credit Facility, depending on Average ABL Availability. The Existing Facilities mature on December 20, 2023.
The Company’s borrowing capacity under the Senior Secured Revolving Credit Facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At May 29, 2021, the Company had $1,339,000 of borrowings outstanding under the Existing Facilities and had letters of credit outstanding against the Senior Secured Revolving Credit Facility of $122,023 which resulted in additional borrowing capacity under the Senior Secured Revolving Credit Facility of $1,688,977. If at any time the total credit exposure outstanding under the Existing Facilities and the principal amount of our other senior obligations exceed the borrowing base, the Company will be required to make certain other mandatory prepayments to eliminate such shortfall.
The Credit Agreement restricts the Company and all of its subsidiaries that guarantee its obligations under the Existing Facilities, the secured guaranteed notes and unsecured guaranteed notes (collectively, the “Subsidiary Guarantors”) from accumulating cash on hand in excess of $200,000 at any time when revolving loans are outstanding (not including cash located in store and lockbox deposit accounts and cash necessary to cover current liabilities). The Credit Agreement also states that if at any time (other than following the exercise of remedies or acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority debt) either (i) an event of default exists under the Existing Facilities or (ii) the sum of the Company’s borrowing capacity under the Senior Secured Revolving Credit Facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $275.0 million for three consecutive business days or less than or equal to $200.0 million on any day (a “cash sweep period”), the funds in the Company’s deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the Existing Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of the Existing Facilities.
With the exception of EI, substantially all of Rite Aid Corporation’s 100% owned subsidiaries guarantee the obligations under the Existing Facilities, the secured guaranteed notes and unsecured guaranteed notes. The Company’s obligations under the Existing Facilities and the Subsidiary Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivable, inventory, prescription files (including eligible script lists), intellectual property (prior to the repayment of the Senior Secured Term Loan) and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL priority collateral”) and (ii) a second-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property (following the repayment of the Senior Secured Term Loan) and all other assets that do not constitute ABL priority collateral, in each case, subject to customary exceptions and limitations. The subsidiary guarantees related to the Company’s Existing Facilities, the secured guaranteed notes 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. Other than EI, the subsidiaries, including joint ventures, that do not guarantee the Existing Facilities and applicable notes, are minor.
The Credit Agreement allows the Company to have outstanding, at any time, up to an aggregate principal amount of $1,500,000 in secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock
27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
in addition to borrowings under the Existing Facilities and existing indebtedness, provided that not in excess of $750,000 of such secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest maturity date of any Term Loan or Other Revolving Commitment (each as defined in the Credit Agreement) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date). Subject to the limitations described in clauses (i) and (ii) of the immediately preceding sentence, the Credit Agreement 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 Credit Agreement) 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 Credit Agreement also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Existing Facilities are not in default and the Company maintains availability under its revolver of more than $365,000.
The Credit Agreement has a financial covenant that requires the Company to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the Senior Secured Revolving Credit Facility is less than $200,000 or (ii) on the third consecutive business day on which availability under the Senior Secured Revolving Credit Facility is less than $250,000 and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than $250,000. As of May 29, 2021, the Company’s fixed charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the Credit Agreement’s financial covenant. The Credit Agreement also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, the making of investments, sale of assets, mergers and acquisitions and the granting of liens.
The Credit Agreement provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if the Company fails to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment, repurchase, redemption or defeasance of such debt.
Fiscal 2020, 2021 and 2022 Transactions
On October 11, 2019, the Company completed a privately negotiated purchase from a noteholder and its affiliated funds of $84,097 aggregate principal amount of the 7.70% Notes due 2027 (the “7.70% Notes”) and 6.875% fixed-rate Senior Notes due 2028 (the “6.875% Notes”) for $51,300. In connection therewith, the Company recorded a gain on debt retirement of $32,416, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.
On October 15, 2019, the Company commenced an offer to purchase up to $100,000 of its outstanding 7.70% Notes and its 6.875% Notes. In November 2019, the Company accepted for payment $18,075 aggregate principal amount of the 7.70% Notes and $39,441 aggregate principal amount of the 6.875% Notes for $38,392. In connection therewith, the Company recorded a gain on debt retirement of $18,510, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.
28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
During November 2019, the Company made additional purchases of $15,000 aggregate principal amount of the 7.70% Notes for $10,012. In connection therewith, the Company recorded a gain on debt retirement of $4,766, which included unamortized debt issuance costs. The debt repayment and related gain on debt retirement is included in the results of operations and cash flows of continuing operations.
On January 6, 2020, the Company commenced an offer to exchange up to $600,000 aggregate principal amount of the outstanding 6.125% Notes for newly issued 7.500% Senior Secured Notes due 2025 (the “7.500% Notes”). On February 5, 2020, the Company announced that the exchange offer was oversubscribed and accepted for payment $600,000 aggregate principal amount of the 6.125% Notes in exchange for newly issued 7.500% Notes. The Company accounted for the exchange as a debt modification and accordingly did not record a loss on debt retirement.
The 7.500% Notes mature on July 1, 2025, and are guaranteed on a senior secured basis by the same Subsidiary Guarantors that guarantee the Existing Facilities and the 6.125% Notes. The 7.500% Notes and the obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property (following the repayment of the Senior Secured Term Loan) and other collateral to the extent it does not constitute ABL priority collateral (as defined below), and (ii) a second-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivables, payment intangibles, inventory, prescription files (including eligible script lists) and, intellectual property (prior to the repayment of the Senior Secured Term Loan (collectively, the “ABL priority collateral”), which, in each case, also secure the Existing Facilities.
On June 25, 2020, the Company commenced an offer to exchange (the “June 25, 2020 Exchange Offer”) up to $750,000 aggregate principal amount of the outstanding 6.125% Notes for a combination of $600,000 newly issued 8.0% Senior Secured Notes due 2026 (the “8.0% Notes”) and $145,500 cash. On July 10, 2020, the Company increased the maximum amount of 6.125% Notes that may be accepted for exchange from $750,000 to $1,125,000 and, on July 24, 2020, the Company announced that it accepted for payment $1,062,682 aggregate principal amount of the 6.125% Notes in exchange for $849,918 aggregate principal amount of newly issued 8.0% Notes and $206,373 in cash. In connection therewith, the Company recorded a gain on debt modification of $5,274 which is included in the results of operations and cash flows of continuing operations. The 8.0% Notes are secured on an equal and ratable basis by the same assets that secure the 7.500% Notes. The 8.0% Notes are guaranteed on a senior secured basis by the same subsidiaries that guarantee the 7.500% Notes. In conjunction with the June 25, 2020 Exchange Offer, the Company also commenced a solicitation of consents from the holders of outstanding 6.125% Notes to certain proposed amendments to the indenture governing the 6.125% Notes. On July 9, 2020, following the receipt of the requisite number of consents, the Company entered into a supplemental indenture, which modified certain limitations in the debt covenant to allow for the creation of the 8.0% Notes.
On April 28, 2021, the Company issued a notice of redemption for all of the 6.125% Notes that were outstanding on May 28, 2021, pursuant to the terms of the indenture of the 6.125% Notes. On May 28, 2021, the Company redeemed 100% of the remaining outstanding 6.125% Notes at par. In connection therewith, the Company recorded a loss on debt retirement of $396 which included unamortized debt issuance costs. The debt repayment and related loss on debt retirement is included in the results of operations and cash flows of continuing operations.
29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Maturities
The aggregate annual principal payments of long-term debt for the remainder of fiscal 2022 and thereafter are as follows: 2022—$0; 2023—$0; 2024—$1,339,000; 2025—$0; 2026—$600,000 and $1,116,305 thereafter.
13. Leases
The Company leases most of its retail stores and certain distribution facilities under noncancelable operating and finance leases, most of which have initial lease terms ranging from 5 to 22 years. The Company also leases certain of its equipment and other assets under noncancelable operating leases with initial terms ranging from 3 to 10 years. In addition to minimum rental payments, certain store leases require additional payments based on sales volume, as well as reimbursements for taxes, maintenance and insurance. Most leases contain renewal options, certain of which involve rent increases.
The following table is a summary of the Company’s components of net lease cost for the thirteen week periods ended May 29, 2021 and May 30, 2020:
Supplemental cash flow information related to leases for the thirteen week periods ended May 29, 2021 and May 30, 2020:
30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Supplemental balance sheet information related to leases as of May 29, 2021 and February 27, 2021 (in thousands, except lease term and discount rate):
The following table summarizes the maturity of lease liabilities under finance and operating leases as of May 29, 2021:
| (1) | – Future operating lease payments have not been reduced by minimum sublease rentals of $39 million due in the future under noncancelable leases. |
31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
During the thirteen week period ended May 29, 2021, the Company sold two owned and operating stores to independent third parties. Net proceeds from the sales were $7,456 for the thirteen week period ended May 29, 2021. Concurrent with these sales, the Company entered into agreements to lease the properties back from the purchasers over a minimum lease term of 15 years. The Company accounted for these leases as operating lease right-of-use assets and corresponding operating lease liabilities in accordance with the Lease Standard. The transaction resulted in a gain of $3,688 which is included in the gain on sale of assets, net for the thirteen week period ended May 29, 2021. During the thirteen week period ended May 30, 2020, the Company did not enter into any sale-leaseback transactions. The Company has additional capacity under its outstanding debt agreements to enter into additional sale-leaseback transactions.
14. Retirement Plans
Net periodic pension expense for the thirteen week periods ended May 29, 2021 and May 30, 2020, for the Company’s defined benefit plan includes the following components:
During the thirteen week period ended May 29, 2021 the Company contributed $805 to the Defined Benefit Pension Plan. During the remainder of fiscal 2022, the Company expects to contribute $3,040 to the Defined Benefit Pension Plan.
15. Segment Reporting
The Company has two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments.
The Retail Pharmacy segment’s primary business is the sale of prescription drugs and related consultation to its customers. Additionally, the Retail Pharmacy segment sells a full selection of health and beauty aids and personal care products, seasonal merchandise and a large private brand product line. The Pharmacy Services segment offers a full range of pharmacy benefit management services including plan design and administration, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.
The Company’s chief operating decision makers are its Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer, (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
32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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:
| (1) | As of May 29, 2021 and February 27, 2021, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $0 against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $13,694 and $14,512, 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 consolidated financial statements for the thirteen week periods ended May 29, 2021 and May 30, 2020:
| (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. |
33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
| (2) | See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” in MD&A for additional details. |
The following is a reconciliation of net income (loss) to Adjusted EBITDA for the thirteen week periods ended May 29, 2021 and May 30, 2020:
16. Commitments, Contingencies and Guarantees
Legal Matters and Regulatory Proceedings
The Company is regularly involved in a variety of legal matters including arbitration, litigation (and related settlement discussions), and other claims, and is subject to regulatory proceedings including audits, inspections, inquiries, investigations, and similar actions by health care, insurance, pharmacy, tax and other 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 has been 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 or that warrant an accrual. If a loss contingency is not both probable and estimable, the Company typically does not establish an accrued liability. With respect to the litigation and other legal proceedings described below, the Company is unable to estimate the amount or range of reasonably possible loss due to the inherent difficulty of predicting the outcome of and uncertainties regarding such litigation and legal proceedings.
34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
None of the Company’s accruals for outstanding legal matters or regulatory proceedings are currently material, individually or in the aggregate, to the Company’s consolidated financial position. However, during the course of any proceeding, developments may result in the creation or an increase of an accrual that could be material. Additionally, unfavorable or unexpected outcomes in outstanding legal matters or regulatory proceedings could exceed any accrual and impact the Company’s financial position. Further, even if the Company is successful in its legal proceedings, the Company may incur significant costs and expenses defending itself or others that it is required to indemnify, and such costs and expenses may not be subject to or exceed reimbursement pursuant to any applicable insurance.
The Company’s contingencies are subject to significant uncertainties, many of which are beyond the Company’s control, including, among other factors: (i) the stage of any proceeding and delays in scheduling; (ii) whether class or collective action status is sought and the likelihood of a class being certified; (iii) the outcome of pending or potential appeals, motions and settlement discussions; (iv) the range and magnitude 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 or advanced; (vii) whether there are significant factual issues to be resolved; (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, and/or (viii) changes in priorities following any change in political administration at the state or federal level.
California Employment Litigation.
The Company is currently a defendant in several lawsuits filed in courts in California that contain allegations regarding violations of the California Business and Professions Code, various California employment laws and regulations, industry wage orders, wage-and-hour laws, rules and regulations pertaining primarily to failure to pay overtime, failure to pay premiums for missed meals and rest periods, failure to provide accurate wage statements, and failure to reimburse business expenses (the “California Cases”). Some of the California Cases purport or may be determined to be class actions or representative actions under the California Private Attorneys General Act and seek substantial damages and penalties. These single-plaintiff and multi-plaintiff California Cases in the aggregate, seek substantial damages. In June 2021, the Company agreed to settle two of the California Cases in which the plaintiffs brought class-based claims alleging that they and all other similarly-situated associates were not paid for time waiting for their bags to be checked. One set of cases involving store associates was settled for $9,000, while the other involving distribution center associates was settled for $1,750. As class actions, both settlements must be approved by the court. The Company believes that it has meritorious defenses in the California Cases. The Company has aggressively defended itself and challenged the merits of the lawsuits and, where applicable, allegations that the lawsuits should be certified as class or representative actions.
Usual and Customary Litigation.
The Company is named as a defendant in a number of lawsuits, including the cases below, that allege that the Company’s retail stores overcharged for prescription drugs by not submitting the price available to members of the Rite Aid’s Rx Savings Program as the pharmacy’s usual and customary price, and related theories. The Company is defending itself against these claims.
In January 2017, qui tam plaintiff Azam Rahimi (“Relator”) filed a sealed False Claims Act (“FCA”) lawsuit in the United States District Court for the Eastern District of Michigan. The United States Attorney’s Office for the Eastern
35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
District of Michigan, 18 states, and the District of Columbia declined to intervene. The unsealed lawsuit alleges that the Company failed to report its Rx Savings Program prices as its usual and customary prices under the Medicare Part D program, federal and state Medicaid programs, and other publicly funded health care programs, and that the Company is thus liable under the federal FCA and similar state statutes. On December 12, 2019, the court granted the Company’s motion to dismiss and judgment on the pleadings based upon the FCA’s public disclosure bar. The Relator filed a motion for reconsideration which was denied. The Relator has appealed from the order granting the Company’s motion to dismiss and for judgment on the pleadings, and also from the order denying his motion for reconsideration. That appeal has been fully argued and briefed and is now awaiting decision.
The State of Mississippi, by and through its Attorney General, filed a lawsuit against the Company and various purported related entities on September 27, 2016 alleging the Company failed to accurately report usual and customary prices to Mississippi’s Division of Medicaid.
The Company is involved in a putative consumer class action lawsuit in the United States District Court for the Southern District of California captioned Byron Stafford v. Rite Aid Corp. A separate lawsuit, Robert Josten v. Rite Aid Corp., was consolidated with this lawsuit in November, 2019. The lawsuit contains allegations that (i) the Company was obligated to charge the plaintiffs’ insurance companies its usual and customary prices for their prescription drugs; and (ii) the Company failed to do so because the prices it reported were not equal to or adjusted to account for the prices that Rite Aid offers to uninsured and underinsured customers through its Rx Savings Program. The cases are currently stayed pending an appeal of an order denying a motion to compel arbitration of claims in Stafford.
On February 6, 2019, Humana, Inc., filed an arbitration claim alleging that the Company improperly submitted various usual and customary overcharges by failing to report its Rx Savings Program prices as its usual and customary prices to Humana. An arbitral hearing is scheduled to commence in September 2021.
The Company is a defendant in two consolidated lawsuits pending in the United States District Court for the District of Minnesota filed in 2020 by various Blue Cross/Blue Shield plans that operate in eight different states (North Carolina, North Dakota, Alabama, Utah, Minnesota, Oregon, Washington and New Jersey) alleging that the Company improperly submitted various usual and customary overcharges by failing to report its Rx Savings Program pricing to several Pharmacy Benefit Managers with which Rite Aid and the insurers had independent contracts.
Drug Utilization Review and Code 1 Litigation
In June 2012, qui tam plaintiff, Loyd F. Schmuckley (“Relator”) filed a complaint under seal against the Company alleging that it failed to comply with certain requirements of California’s Medicaid program between 2007 and 2014. 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 regarding (1) the Company’s Drug Utilization Review and prescription dispensing protocol; and (2) the dispensing of drugs designated as “Code 1” by the State of California. Specifically, the Relator alleged that the Company did not perform special verification and documentation for certain medications known as “Code 1” drugs. While the complaint remained under seal, the United States Department of Justice conducted an extensive investigation and ultimately declined to intervene. Although numerous states declined to intervene, in September 2017, the State of California filed a complaint in intervention. The Company filed a motion to dismiss Relator’s and the State of California Department of Justice’s Bureau of Medical Fraud and Elder Abuse
36
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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. No trial date has been set.
Controlled Substances Litigation, Audits and Investigations
The Company, along with various other defendants, is named in multiple opioid-related lawsuits filed by counties, cities, municipalities, Native American tribes, hospitals, third-party payers, and others across the United States. In December 2017, the U.S. Judicial Panel on Multidistrict Litigation consolidated and transferred more than a thousand federal opioid-related lawsuits that name the Company as a defendant to the multi-district litigation (“MDL”) pending in the United States District Court for the Northern District of Ohio under In re National Prescription Opiate Litigation (Case No. 17-MD-2804). A significant number of similar cases that are not part of the MDL and name the Company as a defendant are also pending in state courts. The plaintiffs in these opioid-related lawsuits generally allege claims that include public nuisance and negligence theories of liability resulting from the impacts of widespread opioid abuse against defendants along the pharmaceutical supply chain, including manufacturers, wholesale distributors, and retail pharmacies. At this stage of the proceedings, the Company is not able to predict the outcome of the opioid-related lawsuits or estimate a potential range of loss regarding the lawsuits, and is defending itself against all relevant claims. From time to time, some of these cases may be settled, dismissed or otherwise terminated, and additional such cases may be filed.
The Company also has received warrants, subpoenas, CIDs, and other requests for documents and information from, and is being investigated by, the federal and state governments regarding opioids and other controlled substances. The Company has been cooperating with and responding to these investigatory inquiries.
In April 2019, the Company initiated a coverage action styled Rite Aid Corporation et al. v. ACE American Ins. Co. et al. Through this action, the Company is seeking the recovery of defense costs and future settlement and/or judgment costs for the opioid-related lawsuits. The action seeks declaratory relief with respect to the obligations of the insurers under all of the policies at issue in the action and asserts claims for breach of contract and statutory remedies against an insurer. While the Company prevailed on a partial summary judgment motion that this insurer has a past and continuing duty to reimburse defense costs for the suits in excess of a satisfied $3,000 retention, that insurer has appealed the ruling and has refused to reimburse the Company for any of its defense costs. The briefing on the insurer’s appeal has been submitted. The Delaware Supreme Court has not yet set a date of oral argument or alternatively a date for disposition without argument.
Miscellaneous Litigation and Investigations.
The U.S. Securities and Exchange Commission (“SEC”) is investigating trading in the Company’s securities that occurred in or around January 2017, and has subpoenaed information from the Company in connection with that investigation. The Company is cooperating with the SEC in this matter. The Company has received a CID and requests for information with respect to consumer protection laws.
37
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 29, 2021 and May 30, 2020
(Dollars and share information in thousands, except per share amounts)
(unaudited)
17. Supplementary Cash Flow Data
| (a) | — Amounts are presented on a total company basis. |
A significant component of cash provided by Other Liabilities of $34,559 for the thirteen week period ended May 29, 2021 includes cash provided from an increase in accrued interest of $33,211.
38
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations
Overview
We are a healthcare company with a retail footprint, providing our customers and communities with a high level of care and service through various programs we offer through our two reportable business segments, our Retail Pharmacy segment and our Pharmacy Services segment. We accomplish our goal of delivering comprehensive care to our customers through our retail drugstores and our PBM, Elixir. We also offer fully integrated mail-order and specialty pharmacy services through Elixir Pharmacy. Additionally, through Elixir Insurance (“EI”), Elixir also serves one of the fastest-growing demographics in healthcare: seniors enrolled in Medicare Part D. When combined with our retail platform, this comprehensive suite of services allows us to provide value and choice to customers, patients and payors and allows us to compete in today's evolving healthcare marketplace.
Retail Pharmacy Segment
Our Retail Pharmacy segment sells brand and generic prescription drugs and various other pharmacy services, as well as an assortment of front-end products including health and beauty aids, personal care products, seasonal merchandise, and a large private brand product line. Our Retail Pharmacy segment generates the majority of its revenue through the sale of prescription drugs and front-end products at our over 2,500 retail pharmacy locations across 17 states. We replenish our retail stores through a combination of direct store delivery of pharmaceutical products facilitated through our pharmaceutical Purchasing and Delivery Agreement with McKesson, and the majority of our front-end products through our network of distribution centers.
Pharmacy Services Segment
Our Pharmacy Services segment provides a fully integrated suite of PBM offerings including technology solutions, mail delivery services, specialty pharmacy, network and rebate administration, claims adjudication and pharmacy discount programs. Elixir also provides prescription discount programs and Medicare Part D insurance offerings for individuals and groups. Elixir provides services to various clients across its different lines of business, including major health plans, commercial employers, labor groups and state and local governments, representing approximately 3.2 million covered lives, including approximately 1 million covered lives through our Medicare Part D insurance offerings. Elixir continues to focus its efforts and offerings to its target market of small to mid-market employers, labor unions and regional health plans, including provider-led health plans and government sponsored Medicaid and Medicare plans.
Restructuring
Beginning in Fiscal 2019, we initiated a series of restructuring plans designed to reorganize our executive management team, reduce managerial layers, and consolidate roles. In March 2020, we announced the details of our RxEvolution strategy, which includes building tools to work with regional health plans to improve patient health outcomes, rationalizing SKU’s in our front-end offering to free up working capital and update our merchandise assortment, assessing our pricing and promotional strategy, rebranding our retail pharmacy and pharmacy services business, launching our Store of the Future format and further reducing SG&A and headcount, including integrating certain back office functions in the Pharmacy Services segment both within the segment and across Rite Aid. Other strategic initiatives include the expansion of our digital business, movement to a common client platform at Elixir and investments in talent in sales and underwriting at Elixir.
These and future restructuring activities are expected to provide future growth and expense efficiency benefits. There can be no assurance that our current and future restructuring charges will achieve the cost savings and remerchandising benefits in the amounts or time anticipated.
39
Asset Sale to WBA
On September 18, 2017, we entered into the Amended and Restated Asset Purchase Agreement with Walgreens Boots Alliance, Inc. (“WBA”) and Walgreen Co., an Illinois corporation and 100% owned subsidiary of WBA (“Buyer”), in which the Buyer purchased from Rite Aid 1,932 stores, three distribution centers, related inventory and other specified assets and liabilities for a total purchase price of $4,375,000, on a cash-free, debt-free basis.
During the first quarter of fiscal 2021, we completed the sale of the final distribution center and related assets to WBA for proceeds of $94,289. The impact of the sale of the distribution center and related assets resulted in a pre-tax gain of $12,690, which was included in the results of operations and cash flows of discontinued operations during the thirteen week period ended May 30, 2020. The transfer of the final distribution center and related assets constitutes the final closing under the Amended and Restated Asset Purchase Agreement.
In connection with the asset sale, we agreed to provide transition services to Buyer. Under the terms of the Transition Services Agreement (“TSA”), we provided 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, we purchased the related inventory and incurred cash payments for the selling, general and administrative activities, which, we billed on a cash neutral basis to WBA in accordance with terms as outlined in the TSA. Total billings for these items during the thirteen week periods ended May 29, 2021 and May 30, 2020 were $0 and $31,005, respectively, of which $0 and $4,398 is included in Accounts receivable, net. We recorded WBA TSA fees of $0 and $1,080 during the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively, which are reflected as a reduction to selling, general and administrative expenses. In conjunction with the transfer of the final distribution center during the quarter ended May 30, 2020, we have substantially completed our obligations under the TSA.
Based on its magnitude and because we exited certain markets, the Sale represented a significant strategic shift that had a material effect on our operations and financial results. Accordingly, we have applied discontinued operations treatment for the Sale as required by GAAP.
Overview of Financial Results from Continuing Operations
Our net loss from continuing operations for the thirteen week period ended May 29, 2021 was $13.1 million or $0.24 per basic and diluted share compared to a net loss of $72.7 million or $1.36 per basic and diluted share for the thirteen week period ended May 30, 2020. The improvement in net loss for the thirteen week period ended May 29, 2021 was due primarily to improved operating results in the Retail Pharmacy segment, higher intangible asset impairment charges in the prior year first quarter, and lower restructuring-related costs as a result of last year’s rebranding initiatives. These benefits were partially offset by litigation settlements in the current quarter, a lower LIFO credit, and an increase in income tax expense.
Our Adjusted EBITDA from continuing operations for the thirteen week period ended May 29, 2021 was $138.9 million or 2.3% of revenues, compared to $107.4 million or 1.8% of revenues, for the thirteen week period ended May 30, 2020. The improvement in Adjusted EBITDA for the thirteen week period ended May 29, 2021 was due to an increase in Adjusted EBITDA in the Retail Pharmacy segment. Adjusted EBITDA increased $31.9 million in the Retail Pharmacy segment due primarily to an increase in gross profit resulting from higher pharmacy same store sales, partially offset by pharmacy reimbursement rate pressures that were not fully offset by generic drug cost reductions and a decline in front end gross profit as we cycled the impact of the prior year’s COVID-19 buying surge. Adjusted EBITDA in the Pharmacy Services segment was flat to the prior year. Please see the sections entitled “Segment Analysis” and “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” below for additional details.
40
Consolidated Results of Operations-Continuing Operations
Revenues and Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands except per share amounts) |
|
|
||||
|
Revenues(a) |
|
$ |
6,160,985 |
|
$ |
6,027,376 |
|
|
|
Revenue growth |
|
|
2.2 |
% |
|
12.2 |
% |
|
|
Net loss |
|
$ |
(13,057) |
|
$ |
(72,702) |
|
|
|
Net loss per diluted share |
|
$ |
(0.24) |
|
$ |
(1.36) |
|
|
|
Adjusted EBITDA(b) |
|
$ |
138,877 |
|
$ |
107,392 |
|
|
|
Adjusted Net Income (Loss) (b) |
|
$ |
20,934 |
|
$ |
(2,011) |
|
|
|
Adjusted Net Income (Loss) per Diluted Share(b) |
|
$ |
0.38 |
|
$ |
(0.04) |
|
|
| (a) | Revenues for the thirteen week periods ended May 29, 2021 and May 30, 2020 exclude $62,979 and $73,141, respectively, of inter-segment activity that is eliminated in consolidation. |
| (b) | See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details. |
Revenues
Revenues increased 2.2% for the thirteen weeks ended May 29, 2021, compared to an increase of 12.2% for the thirteen weeks ended May 30, 2020. Revenues for the thirteen week period ended May 29, 2021 were positively impacted by a $228.4 million increase in Retail Pharmacy segment revenues, partially offset by a $105.0 million decrease in Pharmacy Services segment revenues.
Please see the section entitled “Segment Analysis” below for additional details regarding revenues.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands) |
|
|
||||
|
Cost of revenues(a) |
|
$ |
4,876,110 |
|
$ |
4,829,057 |
|
|
|
Gross profit |
|
|
1,284,875 |
|
|
1,198,319 |
|
|
|
Gross margin |
|
|
20.9 |
% |
|
19.9 |
% |
|
|
Selling, general and administrative expenses |
|
$ |
1,245,362 |
|
$ |
1,197,147 |
|
|
|
Selling, general and administrative expenses as a percentage of revenues |
|
|
20.2 |
% |
|
19.9 |
% |
|
|
Facility exit and impairment charges |
|
|
8,831 |
|
|
3,753 |
|
|
|
Intangible asset impairment charges |
|
|
— |
|
|
29,852 |
|
|
|
Interest expense |
|
|
49,121 |
|
|
50,547 |
|
|
|
Loss on debt retirements, net |
|
|
396 |
|
|
— |
|
|
|
Gain on sale of assets, net |
|
|
(6,558) |
|
|
(2,260) |
|
|
| (a) | Cost of revenues for the thirteen week periods ended May 29, 2021 and May 30, 2020 exclude $62,979 and $73,141, respectively, of inter-segment activity that is eliminated in consolidation. |
Gross Profit and Cost of Revenues
Gross profit increased by $86.6 million for the thirteen week period ended May 29, 2021 compared to the thirteen week period ended May 30, 2020. Gross profit for the thirteen week period ended May 29, 2021 includes an
41
increase of $88.4 million in our Retail Pharmacy segment, partially offset by a decrease of $1.8 million in our Pharmacy Services segment. Gross margin was 20.9% for the thirteen week period ended May 29, 2021 compared to 19.9% for the thirteen week period ended May 30, 2020. Please see the section entitled “Segment Analysis” for a more detailed description of gross profit and gross margin results by segment.
Selling, General and Administrative Expenses
SG&A increased by $48.2 million for the thirteen week period ended May 29, 2021, compared to the thirteen week period ended May 30, 2020. The increase in SG&A for the thirteen week period ended May 29, 2021 includes an increase of $47.1 million relating to our Retail Pharmacy segment and an increase of $1.2 million relating to our Pharmacy Services segment. Please see the section entitled “Segment Analysis” below for additional details regarding SG&A.
Facility Exit and Impairment Charges
Facility exit and impairment charges consist of amounts as follows:
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week |
||||
|
|
|
Period Ended |
||||
|
|
|
May 29, |
|
May 30, |
||
|
|
|
2021 |
|
2020 |
||
|
Impairment charges |
|
$ |
4,313 |
|
$ |
2,203 |
|
Facility exit charges |
|
|
4,518 |
|
|
1,550 |
|
|
|
$ |
8,831 |
|
$ |
3,753 |
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Lease Termination and Impairment Charges” included in our Fiscal 2021 10-K for a detailed description of our impairment and lease termination methodology for fiscal 2021.
Interest Expense
Interest expense was $49.1 million for the thirteen week period ended May 29, 2021, compared to $50.5 million for the thirteen week period ended May 30, 2020. The weighted average interest rate on our indebtedness for the thirteen week periods ended May 29, 2021 and May 30, 2020 was 5.3% and 4.9%, respectively.
Income Taxes
We recorded an income tax expense from continuing operations of $0.8 million and an income tax benefit from continuing operations of $8.0 million for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. The effective tax rate for the thirteen week periods ended May 29, 2021 and May 30, 2020 was (6.4)% and 9.9%, respectively. The effective tax rate for the thirteen week periods ended May 29, 2021 and May 30, 2020 was net of an adjustment of (18.5)% and (10.6)%, respectively, to adjust the valuation allowance against deferred tax assets.
We recognize tax liabilities in accordance with the guidance for uncertain tax positions and management adjusts these liabilities with changes in judgment as a result of the evaluation of new information not previously available. Due to the complexity of some of these uncertainties, the ultimate resolution may result in a payment that is materially different from the current estimate of the tax liabilities.
We believe that it is reasonably possible that a decrease of up to $11.9 million 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.
We regularly evaluate valuation allowances established for deferred tax assets for which future realization is uncertain. We will continue to monitor all available evidence related to the net deferred tax assets that may change the most recent assessment, including events that have occurred or are anticipated to occur. We continue to maintain a valuation allowance against net deferred tax assets of $1,660.5 million and $1,657.6 million, which relates to federal and
42
state deferred tax assets that may not be realized based on our future projections of taxable income at May 29, 2021 and February 27, 2021, respectively.
Segment Analysis
We evaluate the Retail Pharmacy and Pharmacy Services segments’ performance based on revenue, gross profit, and Adjusted EBITDA. The following is a reconciliation of our segments to the condensed consolidated financial statements:
| (1) | Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis. |
(*) See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.
43
Retail Pharmacy Segment Results of Operations
Revenues and Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands) |
|
|
||||
|
Revenues |
|
$ |
4,351,682 |
|
$ |
4,123,271 |
|
|
|
Revenue growth |
|
|
5.5 |
% |
|
6.7 |
% |
|
|
Same store sales growth |
|
|
1.4 |
% |
|
6.6 |
% |
|
|
Pharmacy sales growth |
|
|
14.1 |
% |
|
2.4 |
% |
|
|
Same store prescription count growth, adjusted to 30-day equivalents |
|
|
11.2 |
% |
|
0.4 |
% |
|
|
Same store pharmacy sales growth |
|
|
8.2 |
% |
|
2.2 |
% |
|
|
Pharmacy sales as a % of total retail sales |
|
|
68.9 |
% |
|
64.2 |
% |
|
|
Front-end sales (decline) growth |
|
|
(9.8) |
% |
|
15.8 |
% |
|
|
Same store front-end sales (decline) growth |
|
|
(12.0) |
% |
|
14.2 |
% |
|
|
Front-end sales as a % of total retail sales |
|
|
31.1 |
% |
|
35.8 |
% |
|
|
Adjusted EBITDA(*) |
|
$ |
94,914 |
|
$ |
62,982 |
|
|
|
Store data: |
|
|
|
|
|
|
|
|
|
Total stores (beginning of period) |
|
|
2,510 |
|
|
2,461 |
|
|
|
New stores |
|
|
1 |
|
|
— |
|
|
|
Store acquisitions |
|
|
— |
|
|
— |
|
|
|
Closed stores |
|
|
(5) |
|
|
(4) |
|
|
|
Total stores (end of period) |
|
|
2,506 |
|
|
2,457 |
|
|
|
Relocated stores |
|
|
— |
|
|
— |
|
|
|
Remodeled and expanded stores |
|
|
6 |
|
|
1 |
|
|
(*) See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.
Revenues
Revenues increased 5.5% for the thirteen weeks ended May 29, 2021 compared to an increase of 6.7% for the thirteen weeks ended May 30, 2020. The increase in revenues for the thirteen week period ended May 29, 2021 was primarily a result of an increase in same store sales and incremental sales from our recently acquired Bartell stores.
Pharmacy same store sales increased by 8.2% for the thirteen week period ended May 29, 2021 compared to an increase of 2.2% in the thirteen week period ended May 30, 2020. The increase in pharmacy same store sales is due to the increase in same store prescription count. Same store prescription count, adjusted to 30-day equivalents, increased 11.2% for the thirteen week period ended May 29, 2021 driven primarily by our COVID-19 vaccination program and increases in other acute and maintenance prescriptions.
Front-end same store sales decreased 12.0% during the thirteen week period ended May 29, 2021 compared to an increase of 14.2% during the thirteen week period ended May 30, 2020. Front-end same store sales, excluding cigarettes and tobacco products, decreased 11.5%, driven by decreases in general cleaning products, sanitizers, wipes, paper products, liquor, and over-the-counter products resulting from the pandemic driven surge in the prior year quarter.
We include in same store sales all stores that have been open at least one year. Relocated and acquired stores are not included in same store sales until one year has lapsed.
44
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands) |
|
|
||||
|
Cost of revenues |
|
$ |
3,181,748 |
|
$ |
3,041,735 |
|
|
|
Gross profit |
|
|
1,169,934 |
|
|
1,081,536 |
|
|
|
Gross margin |
|
|
26.9 |
% |
|
26.2 |
% |
|
|
FIFO gross profit(*) |
|
|
1,165,941 |
|
|
1,069,470 |
|
|
|
FIFO gross margin(*) |
|
|
26.8 |
% |
|
25.9 |
% |
|
|
Selling, general and administrative expenses |
|
|
1,156,039 |
|
|
1,108,976 |
|
|
|
Selling, general and administrative expenses as a percentage of revenues |
|
|
26.6 |
% |
|
26.9 |
% |
|
(*) See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.
Gross Profit and Cost of Revenues
Gross profit increased $88.4 million for the thirteen week period ended May 29, 2021 compared to the thirteen week period ended May 30, 2020. The increase in gross profit was driven by higher pharmacy same stores sales in the current year, incremental gross profit from our recently acquired Bartell stores, and cycling a prior year restructuring charge of $25.8 million related to exiting product lines as part of our rebranding initiatives. These increases were partially offset by pharmacy reimbursement rate pressures that were not fully offset by generic drug cost reductions and a decline in front end gross profit as we cycled the impact of the prior year’s COVID-19 buying surge.
Gross margin was 26.9% of sales for the thirteen week period ended May 29, 2021 compared to 26.2% of sales for the thirteen week period ended May 30, 2020. The improvement in gross margin as a percentage of revenues is due primarily to higher gross margin associated with COVID-19 vaccines and the cycling of the prior year restructuring charge and markdowns related to the prior year’s COVID-19 buying surge. These improvements are partially offset by continued pharmacy reimbursement rate pressures that were not fully offset by generic drug cost reductions.
We use the last-in, first-out (“LIFO”) method of inventory valuation, which is estimated on a quarterly basis and is finalized at year end when inflation rates and inventory levels are final. Therefore, LIFO costs for interim period financial statements are estimated. LIFO credits were $4.0 million for the thirteen week period ended May 29, 2021, respectively, compared to LIFO credits of $12.1 million for the thirteen week period ended May 30, 2020. The LIFO credit in the thirteen week period ended May 29, 2021 was mostly due to the planned reduction in front-end inventory, partially offset by higher anticipated front-end inflation in fiscal 2022.
Selling, General and Administrative Expenses
SG&A expenses increased $47.1 million for the thirteen week period ended May 29, 2021 due primarily to incremental costs from our recently acquired Bartell stores, costs incurred to support our COVID-19 vaccination program and litigation settlements, partially offset by labor savings due to the cycling of the prior year’s Hero Pay and Hero Bonus programs and the COVID-19 buying surge. SG&A expenses as a percentage of revenues for the thirteen week period ended May 29, 2021 was 26.6% compared to 26.9% for the thirteen week period ended May 30, 2020 due primarily to the increase in revenues.
45
Pharmacy Services Segment Results of Operations
Revenues and Other Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands) |
|
|
||||
|
Revenues |
|
$ |
1,872,282 |
|
$ |
1,977,246 |
|
|
|
Revenue growth |
|
|
(5.3) |
% |
|
26.2 |
% |
|
|
Adjusted EBITDA(*) |
|
$ |
43,963 |
|
$ |
44,410 |
|
|
(*) See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.
Revenues
Revenues decreased $105.0 million for the thirteen week period ended May 29, 2021 compared to the thirteen week period ended May 30, 2020. The decrease in revenues was primarily the result of a decrease in lives stemming from the loss of a large customer account and a decrease in Medicare Part D membership.
Costs and Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
||||
|
|
|
Thirteen Week Period Ended |
|
|
||||
|
|
|
May 29, |
|
May 30, |
|
|
||
|
|
|
2021 |
|
2020 |
|
|
||
|
|
|
(dollars in thousands) |
|
|
||||
|
Cost of revenues |
|
$ |
1,757,341 |
|
$ |
1,860,463 |
|
|
|
Gross profit |
|
|
114,941 |
|
|
116,783 |
|
|
|
Gross margin |
|
|
6.1 |
% |
|
5.9 |
% |
|
|
Selling, general and administrative expenses |
|
|
89,323 |
|
|
88,171 |
|
|
|
Selling, general and administrative expenses as a percentage of revenues |
|
|
4.8 |
% |
|
4.5 |
% |
|
Gross Profit and Cost of Revenues
Gross profit decreased $1.8 million for the thirteen week period ended May 29, 2021 compared to the thirteen week period ended May 30, 2020. The decrease in gross profit is primarily due to the reduction in covered lives in our commercial business and the decrease in our Medicare Part D membership, partially offset by improvements in our discount card business and good network management.
Gross margin was 6.1% of sales for the thirteen week period ended May 29, 2021 compared to 5.9% of sales for the thirteen week period ended May 30, 2020. The improvement in gross margin is due primarily to improvements in our discount card business and good network management, partially offset by an increase in the medical loss ratio tied to our Medicare Part D business.
Selling, General and Administrative Expenses
SG&A expenses increased $1.1 million for the thirteen week period ended May 29, 2021 compared to the thirteen week period ended May 30, 2020 due primarily to increased restructuring charges and higher discount card program costs, partially offset by further consolidation of administrative functions. SG&A expenses as a percentage of revenue was 4.8% for the thirteen week period ended May 29, 2021 compared to 4.5% for the thirteen week period ended May 30, 2020. The increase in the thirteen week period selling, general and administrative expenses as a percentage of revenues is due primarily to the decrease in revenues relating to the loss of lives from a large customer account and the decrease in Medicare Part D membership.
46
Liquidity and Capital Resources
General
We have two primary sources of liquidity: (i) cash provided by operating activities and (ii) borrowings under our revolving credit facility. Our principal uses of cash are to provide working capital for operations, to service our obligations to pay interest and principal on debt and to fund capital expenditures. Total liquidity as of May 29, 2021 was $1,690.2 million, which consisted of revolver borrowing capacity of $1,689.0 million and invested cash of $1.2 million.
Credit Facilities
On December 20, 2018, we entered into a senior secured credit agreement (as amended by the First Amendment to Credit Agreement, dated as of January 6, 2020, the “Credit Agreement”), consisting of a $2.7 billion senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a $450.0 million “first-in, last out” senior secured term loan facility (“Senior Secured Term Loan,” and together with the Senior Secured Revolving Credit Facility, collectively, the “Existing Facilities”). We used proceeds from the Existing Facilities to refinance our prior $2.7 billion existing credit agreement (the “Old Facility”). The Existing Facilities extend our debt maturity profile and provide additional liquidity. Borrowings under the Senior Secured Revolving Credit Facility bear interest at a rate per annum between LIBOR plus 1.25% and LIBOR plus 1.75% based upon the Average ABL Availability (as defined in the Credit Agreement). Borrowings under the Senior Secured Term Loan bear interest at a rate per annum of LIBOR plus 3.00%. We are required to pay fees between 0.250% and 0.375% per annum on the daily unused amount of the commitments under the Senior Secured Revolving Credit Facility, depending on Average ABL Availability. The Existing Facilities mature on December 20, 2023.
Our borrowing capacity under the Senior Secured Revolving Credit Facility is based upon a specified borrowing base consisting of accounts receivable, inventory and prescription files. At May 29, 2021, we had approximately $1,339.0 million of borrowings outstanding under the Existing Facilities and had letters of credit outstanding against the Senior Secured Revolving Credit Facility of approximately $122.0 million, which resulted in additional borrowing capacity under the Senior Secured Revolving Credit Facility of $1,689.0 million. If at any time the total credit exposure outstanding under the Existing Facilities and the principal amount of our other senior obligations exceed the borrowing base, we will be required to make certain other mandatory prepayments to eliminate such shortfall.
The Credit Agreement restricts us and all of our subsidiaries, including the subsidiaries that guarantee our obligations under the Existing Facilities, the secured guaranteed notes and unsecured guaranteed notes (collectively, the “Subsidiary Guarantors”) from accumulating cash on hand in excess of $200.0 million at any time when revolving loans are outstanding (not including cash located in our store and lockbox deposit accounts and cash necessary to cover our current liabilities). The Credit Agreement also states that if at any time (other than following the exercise of remedies or acceleration of any senior obligations or second priority debt and receipt of a triggering notice by the senior collateral agent from a representative of the senior obligations or the second priority debt) either (i) an event of default exists under the Existing Facilities or (ii) the sum of our borrowing capacity under our Senior Secured Revolving Credit Facility and certain amounts held on deposit with the senior collateral agent in a concentration account is less than $275.0 million for three consecutive business days or less than or equal to $200.0 million on any day (a “cash sweep period”), the funds in our deposit accounts will be swept to a concentration account with the senior collateral agent and will be applied first to repay outstanding revolving loans under the Existing Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of the Existing Facilities.
Our obligations under the Existing Facilities and the Subsidiary Guarantors’ obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivable, inventory, prescription files (including eligible script lists), intellectual property (prior to the repayment of the Senior Secured Term Loan) and certain other assets arising therefrom or related thereto (including substantially all of their deposit accounts, collectively, the “ABL priority collateral”) and (ii) a second-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property
47
(following the repayment of the Senior Secured Term Loan) and all other assets that do not constitute ABL priority collateral, in each case, subject to customary exceptions and limitations.
The Credit Agreement allows us to have outstanding, at any time, up to an aggregate principal amount of $1.5 billion in secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock in addition to borrowings under the Existing Facilities and other existing indebtedness, provided that not in excess of $750.0 million of such secured second priority debt, split-priority debt, unsecured debt and disqualified preferred stock shall mature or require scheduled payments of principal prior to 90 days after the latest maturity date of any Term Loan or Other Revolving Commitment (each as defined in the Credit Agreement) (excluding bridge facilities allowing extensions on customary terms to at least the date that is 90 days after such date). Subject to the limitations described in the immediately preceding sentence, the Credit Agreement additionally allows us to issue or incur an unlimited amount of unsecured debt and disqualified preferred stock so long as a Financial Covenant Effectiveness Period (as defined in the Credit Agreement) is not in effect; provided, however, that certain of our other outstanding indebtedness limits the amount of unsecured debt that can be incurred if certain interest coverage levels are not met at the time of incurrence or other exemptions are not available. The Credit Agreement also contains certain restrictions on the amount of secured first priority debt we are able to incur. The Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Existing Facilities are not in default and we maintain availability under our revolver of more than $365.0 million.
The Credit Agreement has a financial covenant that requires us to maintain a minimum fixed charge coverage ratio of 1.00 to 1.00 (i) on any date on which availability under the Senior Secured Revolving Credit Facility is less than $200.0 million or (ii) on the third consecutive business day on which availability under the Senior Secured Revolving Credit Facility is less than $250.0 million and, in each case, ending on and excluding the first day thereafter, if any, which is the 30th consecutive calendar day on which availability under the revolver is equal to or greater than $250.0 million. As of May 29, 2021, our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were in compliance with the Credit Agreement’s financial covenant. The Credit Agreement also contains covenants which place restrictions on the incurrence of debt, the payments of dividends, the making of investments, sale of assets, mergers and acquisitions and the granting of liens.
The Credit Agreement provides for customary events of default including nonpayment, misrepresentation, breach of covenants and bankruptcy. It is also an event of default if we fail to make any required payment on debt having a principal amount in excess of $50.0 million or any event occurs that enables, or which with the giving of notice or the lapse of time would enable, the holder of such debt to accelerate the maturity or require the repayment repurchase, redemption or defeasance of such debt.
The indentures that govern our guaranteed unsecured notes and our guaranteed secured notes contain restrictions on the amount of additional secured and unsecured debt that we may incur. As of May 29, 2021, we had the ability to (i) draw the full amount under our revolving credit facility, or (ii) incur additional secured debt. In addition, we have the ability to enter into certain sale and leaseback transactions. The ability to issue additional unsecured debt under the indenture is generally governed by an interest coverage ratio test. As of May 29, 2021, we had the ability to issue additional secured and unsecured debt under the indentures governing our unguaranteed unsecured notes.
Guarantor Summarized Financial Information
Certain of our subsidiaries, which are listed on Exhibit 22 to this Quarterly Report on Form 10-Q, have guaranteed our obligations under the 6.125% Notes and the 7.500% Notes (collectively, the "Guaranteed Notes"). As discussed in Note 12 to the condensed consolidated financial statements, the Guaranteed Notes were issued by us, as the parent company, and are guaranteed by substantially all of the parent company’s consolidated subsidiaries (the “guarantors” or “Subsidiary Guarantors”) except for EI (the “non-guarantor”). The parent company and guarantors are referred to as the “obligor group”. The Subsidiary Guarantors fully and unconditionally and jointly and severally guarantee the Guaranteed Notes. The 6.125% Notes and the obligations under the related guarantees are unsecured. The 7.500% Notes and the obligations under the related guarantees are secured by (i) a first-priority lien on all of the Subsidiary Guarantors’ equipment, fixtures, investment property (other than equity interests in subsidiaries), intellectual property (following the repayment of the Senior Secured Term Loan) and other collateral to the extent it does not
48
constitute ABL priority collateral (as defined below), and (ii) a second-priority lien on all of the Subsidiary Guarantors’ cash and cash equivalents, accounts receivables, payment intangibles, inventory, prescription files (including eligible script lists) and, intellectual property (prior to the repayment of the Senior Secured Term Loan) (collectively, the “ABL priority collateral”), which, in each case, also secure the Existing Facilities.
Under certain circumstances, subsidiaries may be released from their guarantees without consent of the note holders. Our subsidiaries conduct substantially all of our operations and have significant liabilities, including trade payables. If the subsidiary guarantees are invalid or unenforceable or are limited by fraudulent conveyance or other laws, the registered debt will be structurally subordinated to the substantial liabilities of our subsidiaries.
Condensed Combined Financial Information
The following tables include summarized financial information of the obligor group. Investments in and the equity in the earnings of EI, which is not a member of the obligor group, have been excluded. The summarized financial information of the obligor group is presented on a combined basis with intercompany balances and transactions between entities in the obligor group eliminated. The obligor group’s amounts due to/from and transactions with EI have been presented in separate line items, if material.
49
| (a) | Includes $22.2 million of revenues generated from the non-guarantor for the thirteen week period ended May 29, 2021. |
| (b) | Includes $22.2 million of cost of revenues incurred in transactions with the non-guarantor for the thirteen week period ended May 29, 2021. |
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash provided by operating activities was $13.9 million compared to cash used in operating activities of $118.3 million for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. Operating cash flow was positively impacted by the timing of payments to Elixir’s pharmacy network, a reduction of manufacturer rebates receivables, increases in operating expense accruals and inventory reductions. These are partially offset by growth in our CMS receivable and higher receivables from third-party payors mostly due to our COVID-19 vaccination program.
Cash used in investing activities was $54.7 million and $36.4 million for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. Cash used for the purchase of property, plant, and equipment was higher than the prior year due to signage costs associated with our store rebranding activities in the current year. During the thirteen week period ended May 29, 2021, we remodeled six stores, spent $5.4 million on prescription file purchases and received proceeds of $7.5 million from sale-leaseback transactions.
Cash flow used in financing activities was $1.6 million compared to cash provided by financing activities $212.7 million for the thirteen week periods ended May 29, 2021 and May 30, 2020, respectively. Cash used in financing activities for the thirteen weeks ended May 29, 2021 reflects the repayment of our 6.125% Notes, partially offset by net revolver borrowings and the change in our zero balance accounts due to timing of payments.
Capital Expenditures
During the thirteen week periods ended May 29, 2021 and May 30, 2020 capital expenditures were as follows:
50
Future Liquidity
We are highly leveraged. Our high level of indebtedness could: (i) limit our ability to obtain additional financing; (ii) limit our flexibility in planning for, or reacting to, changes in our business and the industry; (iii) place us at a competitive disadvantage relative to our competitors with less debt; (iv) render us more vulnerable to general adverse economic and industry conditions, including those resulting from COVID-19; and (v) require us to dedicate a substantial portion of our cash flow to service our debt. Based upon our current levels of operations, we believe that cash flow from operations together with available borrowings under the revolver and other sources of liquidity will be adequate to meet our requirements for working capital, debt service, capital expenditures and other strategic investments at least for the next twelve months. Based on our liquidity position, which we expect to remain strong, we do not expect to be subject to the minimum fixed charge covenant in the Existing Facilities in the next twelve months. We will continue to assess our liquidity position and potential sources of supplemental liquidity in light of our operating performance, and other relevant circumstances, and we may evaluate alternative sources of liquidity, including further opportunities related to any receivable due to us from CMS, sale and leaseback transactions, and other transactions to optimize our asset base. From time to time, we may seek additional deleveraging or refinancing transactions, including entering into transactions to exchange debt for shares of common stock or other debt securities (including additional secured debt), issuance of equity (including preferred stock and convertible securities), repurchase or redemption of outstanding indebtedness, or seek to refinance our outstanding debt (including the Existing Facilities) or may otherwise seek transactions to reduce interest expense and extend debt maturities. We may also look to make additional investments in our business to further our strategic objectives, including targeted acquisitions. Any of these transactions could impact our financial results.
Critical Accounting Policies and Estimates
For a description of the critical accounting policies that require the use of significant judgments and estimates by management, refer to “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations—Critical Accounting Policies and Estimates” included in our Fiscal 2021 10-K, which we filed with the SEC on April 27, 2021.
Factors Affecting Our Future Prospects
For a discussion of risks related to our financial condition, operations and industry, refer to “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Continuing Operations” included in our Fiscal 2021 10-K.
Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures
In addition to net income (loss) determined in accordance with GAAP, we use certain non-GAAP measures, such as “Adjusted EBITDA”, in assessing our operating performance. We believe the non-GAAP measures serve as an appropriate measure in evaluating the performance of our business. We define Adjusted EBITDA as net income (loss) excluding the impact of income taxes, interest expense, depreciation and amortization, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), charges or credits for facility closing and impairment, goodwill and intangible asset impairment charges, inventory write-downs related to store closings, gains or losses on debt modifications and retirements, and other items (including stock-based compensation expense, merger and acquisition-related costs, non-recurring litigation settlements, severance, restructuring-related costs and costs related to facility closures and gain or loss on sale of assets). We reference this particular non-GAAP financial measure frequently in our decision-making because it provides supplemental information that facilitates internal comparisons to the historical periods and external comparisons to competitors. In addition, incentive compensation is primarily based on Adjusted EBITDA and we base certain of our forward-looking estimates on Adjusted EBITDA to facilitate quantification of planned business activities and enhance subsequent follow-up with comparisons of actual to planned Adjusted EBITDA.
51
The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the thirteen week periods ended May 29, 2021 and May 30, 2020:
The following is a reconciliation of our net income (loss) from continuing operations to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share for the thirteen week periods ended May 29, 2021 and May 30, 2020. Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization expense, merger and acquisition-related costs, non-recurring litigation settlements, gains or losses on debt modifications and retirements, LIFO adjustments (which removes the entire impact of LIFO, and effectively reflects the results as if we were on a FIFO inventory basis), goodwill and intangible asset impairment charges, and restructuring-related costs. We calculate Adjusted Net Income (Loss) per Diluted Share using our above-referenced definition of Adjusted Net Income (Loss). We believe Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share are useful indicators of our operating performance over multiple periods.
52
| (a) | The fiscal year 2022 and 2021 annual effective tax rates, calculated using a federal rate plus a net state rate that excluded the impact of state NOL’s, state credits and valuation allowance, was used for the thirteen weeks ended May 29, 2021 and May 30, 2020, respectively. |
In addition to Adjusted EBITDA, Adjusted Net (Loss) Income and Adjusted Net (Loss) Income per Diluted Share, we occasionally refer to several other Non-GAAP measures, on a less frequent basis, in order to describe certain components of our business and how we utilize them to describe our results. These measures include but are not limited to Adjusted EBITDA Gross Margin and Gross Profit (gross margin/gross profit excluding non-Adjusted EBITDA items), Adjusted EBITDA SG&A (SG&A expenses excluding non-Adjusted EBITDA items), FIFO Gross Margin and FIFO Gross Profit (gross margin/gross profit before LIFO charges), and Free Cash Flow (Adjusted EBITDA less cash paid for interest, rent on closed stores, capital expenditures, restructuring-related costs and the change in working capital).
We include these non-GAAP financial measures in our earnings announcements in order to provide transparency to our investors and enable investors to better compare our operating performance with the operating performance of our competitors including with those of our competitors having different capital structures. Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share or other non-GAAP measures should not be considered in isolation from, and are not intended to represent an alternative measure of, operating results or of cash flows from operating activities, as determined in accordance with GAAP. Our definition of these non-GAAP measures may not be comparable to similarly titled measurements reported by other companies.
ITEM 3. Quantitative and Qualitative Disclosures About Market Risk
Our future earnings, cash flow and fair values relevant to financial instruments are dependent upon prevalent market rates. Market risk is the risk of loss from adverse changes in market prices and interest rates. Our major market risk exposure is changing interest rates. Increases in interest rates would increase our interest expense. We enter into debt obligations to support capital expenditures, acquisitions, working capital needs and general corporate purposes. Our policy is to manage interest rates through the use of a combination of variable-rate credit facilities, fixed-rate long-term obligations and derivative transactions.
The table below provides information about our financial instruments that are sensitive to changes in interest rates. The table presents principal payments and the related weighted average interest rates by expected maturity dates as of May 29, 2021.
Our ability to satisfy interest payment obligations on our outstanding debt will depend largely on our future performance, which, in turn, is subject to prevailing economic conditions and to financial, business and other factors beyond our control. If we do not have sufficient cash flow to service our interest payment obligations on our outstanding indebtedness and if we cannot borrow or obtain equity financing to satisfy those obligations, our business and results of operations could be materially adversely affected. We cannot be assured that any replacement borrowing or equity financing could be successfully completed.
The interest rate on our variable rate borrowings, which include our revolving credit facility and our term loan facility, are based on LIBOR. If the market rates of interest for LIBOR changed by 100 basis points as of May 29, 2021, our annual interest expense would change by approximately $13.4 million.
53
A change in interest rates does not have an impact upon our future earnings and cash flow for fixed-rate debt instruments. As fixed-rate debt matures, however, and if additional debt is acquired to fund the debt repayment, future earnings and cash flow may be affected by changes in interest rates. This effect would be realized in the periods subsequent to the periods when the debt matures. Increases in interest rates would also impact our ability to refinance existing maturities on favorable terms.
ITEM 4. Controls and Procedures
(a) Disclosure Controls and Procedures
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective.
(b) Changes in Internal Control over Financial Reporting
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
54
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The information in response to this item is incorporated herein by reference to Note 16, Commitments, Contingencies and Guarantees, of the Consolidated Condensed Financial Statements of this Quarterly Report.
ITEM 1A. Risk Factors
In addition to the information set forth in this Quarterly Report, you should carefully consider the factors discussed in “Part I — Item 1A. Risk Factors” in our Fiscal 2021 10-K, which could materially affect our business, financial condition or future results.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Issuer Repurchases of Equity Securities. The table below is a listing of repurchases of common stock during the first quarter of fiscal 2022.
ITEM 3. Defaults Upon Senior Securities
Not applicable.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
Not applicable.
ITEM 6. Exhibits
| (a) | The following exhibits are filed as part of this report. |
55
56
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Exhibit
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Description |
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Incorporation By Reference To |
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4.11 |
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Exhibit 4.3 to Form 8-K filed on July 27, 2020 |
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10.1 |
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Exhibit 10.1 to Form 8-K, filed on June 25, 2010 |
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10.2 |
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Amendment No. 1, dated September 21, 2010, to the 2010 Omnibus Equity Plan |
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Exhibit 10.7 to Form 10-Q, filed on October 7, 2010 |
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10.3 |
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Amendment No. 2, dated January 16, 2013, to the 2010 Omnibus Equity Plan |
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Exhibit 10.8 to Form 10-K, filed on April 23, 2013 |
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10.4 |
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Exhibit 10.1 to Form 8-K, filed on June 25, 2012 |
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10.5 |
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Amendment No. 1, dated January 16, 2013, to the 2012 Omnibus Equity Plan |
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Exhibit 10.10 to Form 10-K, filed on April 23, 2013 |
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10.6 |
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Exhibit 10.1 to Form 8-K, filed on June 23, 2014 |
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10.7 |
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Exhibit 10.2 to Form 8-K, filed on May 15, 2012 |
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10.8 |
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Executive Incentive Plan for Officers of Rite Aid Corporation |
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Exhibit 10.1 to Form 8-K, filed on February 24, 2012 |
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10.9 |
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Exhibit 10.1 to Form 10-Q, filed on January 6, 2016 |
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10.10 |
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Exhibit 10.1 to Form 8-K, filed on December 20, 2018 |
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10.11 |
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Exhibit 10.3 to Form 8-K, filed on June 11, 2009 |
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10.12 |
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Exhibit 10.32 to Form 10-Q, filed on July 11, 2019 |
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10.13 |
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Exhibit 10.33 to Form 10-Q, filed on July 11, 2019 |
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10.14 |
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Exhibit 10.34 to Form 10-Q, filed on July 11, 2019 |
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10.15 |
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Exhibit 10.35 to Form 10-Q, filed on July 11, 2019 |
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Exhibit
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Description |
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Incorporation By Reference To |
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10.16 |
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Exhibit 10.36 to Form 10-Q, filed on July 11, 2019 |
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10.17 |
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Exhibit 10.37 to Form 10-Q, filed on July 11, 2019 |
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10.18 |
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Exhibit 10.38 to Form 10-Q, filed on July 11, 2019 |
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10.19 |
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Employment Agreement by and between Rite Aid Corporation and Heyward Donigan, dated August 8, 2019** |
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Exhibit 10.1 to Form 8-K, filed on August 12, 2019 |
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10.20 |
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Exhibit 10.2 to Form 8-K, filed on August 12, 2019 |
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10.21 |
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Employment Agreement dated October 2, 2019 by and between Rite Aid Corporation and James Peters |
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Exhibit 10.1 to Form 8-K, filed on October 2, 2019 |
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10.22 |
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Exhibit 10.41 to Form 10-K filed on April 27, 2020 |
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10.23 |
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Amendment to Employment Agreement by and between James J. Comitale, dated November 6, 2019 |
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Exhibit 10.42 to Form 10-K filed on April 27, 2020 |
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10.24 |
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Exhibit 10.43 to Form 10-K filed on April 27, 2020 |
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10.25 |
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Amendment to Employment Agreement by and between Jessica Kazmaier, dated November 6, 2019 |
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Exhibit 10.44 to Form 10-K filed on April 27, 2020 |
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10.26 |
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Employment Agreement by and between Justin Mennen, dated as of December 7, 2018 |
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Exhibit 10.45 to Form 10-K filed on April 27, 2020 |
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10.27 |
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Amendment to Employment Agreement by and between Justin Mennen, dated November 6, 2019 |
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Exhibit 10.46 to Form 10-K filed on April 27, 2020 |
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10.28 |
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Exhibit 10.47 to Form 10-K filed on April 27, 2020 |
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10.29 |
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Employment Agreement by and between RxOptions, LLC and Dan Robson, dated as of December 12, 2019 |
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Exhibit 10.48 to Form 10-K filed on April 27, 2020 |
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10.30 |
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Separation Agreement by and between Rite Aid Corporation and James C. Comitale, as of May 21, 2020 |
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Exhibit 10.45 to Form 10-Q filed on July 2, 2020 |
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10.31 |
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Employment Agreement by and between Rite Aid Corporation and Paul D. Gilbert, as of July 29, 2020 |
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Exhibit 10.46 to Form 10-Q filed on October 6, 2020 |
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10.32 |
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Separation Agreement by and between Rite Aid Corporation and Dan Robson, as of January 27, 2021* |
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Exhibit 10.32 to Form 10-K filed on April 27, 2021 |
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10.33 |
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Appendix B to Schedule 14A (Definitive Proxy Statement) filed on May 26, 2020 |
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10.34 |
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Form Award Agreement (Executive) under the Rite Aid Corporation 2020 Omnibus Equity Plan |
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Exhibit 10.2 to Form 8-K filed on July 8, 2020 |
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10.35 |
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Form Award Agreement (Non-employee Director) under the Rite Aid Corporation 2020 Omnibus Equity Plan |
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Exhibit 10.3 to Form 8-K filed on July 8, 2020 |
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22 |
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Filed herewith |
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31.1 |
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Filed herewith |
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31.2 |
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Filed herewith |
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32 |
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Filed herewith |
58
* Confidential portions of this Exhibit were redacted pursuant to Item 601(b)(10) of Regulation S-K and Rite Aid Corporation agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.
** Certain schedules and exhibits to this agreement have been omitted pursuant to Item 601(b)(2) of Regulation S-K and Rite Aid Corporation agrees to furnish supplementally to the Securities and Exchange Commission a copy of any omitted schedule and/or exhibit upon request.
59
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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Date: July 6, 2021 |
RITE AID CORPORATION |
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By: |
/s/ MATTHEW C. SCHROEDER |
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Matthew C. Schroeder |
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Executive Vice President and Chief Financial Officer |
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Date: July 6, 2021 |
By: |
/s/ BRIAN T. HOOVER |
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Brian T. Hoover |
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Senior Vice President and Chief Accounting Officer |
60
Exhibit 22
List of Guarantor Subsidiaries
The Guaranteed Notes are jointly and severally guaranteed on a full and unconditional basis by Rite Aid Corporation (incorporated in Delaware) and the following 100% owned subsidiaries of Rite Aid Corporation as of May 29, 2021:
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|---|---|
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Entity |
Jurisdiction of Incorporation or Organization |
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Harco, Inc. |
Alabama |
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K & B Alabama Corporation |
Alabama |
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Rite Aid Lease Management Company (a California corporation) |
California |
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Thrifty Corporation (a California corporation) |
California |
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Thrifty PayLess, Inc. (a California corporation) |
California |
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Rite Aid of Connecticut, Inc. |
Connecticut |
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1515 West State Street Boise, Idaho, LLC (a Delaware limited liability company) |
Delaware |
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Ascend Health Technology, LLC (a Delaware limited liability company) |
Delaware |
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Design Rx Holdings, LLC (a Delaware limited liability company) |
Delaware |
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Eckerd Corporation (a Delaware corporation) |
Delaware |
|
Envision Pharmaceutical Holdings LLC (a Delaware limited liability company) |
Delaware |
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EnvisionRx Puerto Rico, Inc. (a Delaware corporation) |
Delaware |
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Genovese Drug Stores, Inc. (a Delaware corporation) |
Delaware |
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Health Dialog Services Corporation (a Delaware corporation) |
Delaware |
|
Hunter Lane, LLC (a Delaware limited liability company) |
Delaware |
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JCG (PJC) USA, LLC (a Delaware limited liability company) |
Delaware |
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JCG Holdings (USA), Inc. (a Delaware corporation) |
Delaware |
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K & B, Incorporated (a Delaware corporation) |
Delaware |
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Maxi Drug North, Inc. (a Delaware corporation) |
Delaware |
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Maxi Drug South, L.P. (a Delaware limited partnership) |
Delaware |
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Maxi Drug, Inc. (a Delaware corporation) |
Delaware |
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Munson & Andrews, LLC (a Delaware limited liability company) |
Delaware |
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Name Rite, LLC (a Delaware limited liability company) |
Delaware |
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P.J.C. Distribution, Inc. (a Delaware corporation) |
Delaware |
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P.J.C. Realty Co., Inc. (a Delaware corporation) |
Delaware |
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PJC Lease Holdings, Inc. (a Delaware corporation) |
Delaware |
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PJC Manchester Realty LLC (a Delaware limited liability company) |
Delaware |
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PJC Peterborough Realty LLC |
Delaware |
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PJC Revere Realty LLC (a Delaware limited liability company) |
Delaware |
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PJC Special Realty Holdings, Inc. (a Delaware corporation) |
Delaware |
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RediClinic Associates, Inc. (a Delaware corporation) |
Delaware |
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RediClinic LLC (a Delaware limited liability company) |
Delaware |
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|---|---|
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Entity |
Jurisdiction of Incorporation or Organization |
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RediClinic of PA, LLC (a Delaware limited liability company) |
Delaware |
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Rite Aid Corporation (PARENT) |
Delaware |
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Rite Aid Drug Palace, Inc. (a Delaware corporation) |
Delaware |
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Rite Aid Hdqtrs. Corp. (a Delaware corporation) |
Delaware |
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Rite Aid Hdqtrs. Funding, Inc. (a Delaware corporation) |
Delaware |
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Rite Aid of Delaware, Inc. (a Delaware corporation) |
Delaware |
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Rite Aid Online Store Inc. (a Delaware corporation) |
Delaware |
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Rite Aid Payroll Management Inc. (a Delaware corporation) |
Delaware |
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Rite Aid Realty Corp. (a Delaware corporation) |
Delaware |
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Rite Aid Specialty Pharmacy LLC (a Delaware limited liability company) |
Delaware |
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Rite Aid Transport, Inc. (a Delaware corporation) |
Delaware |
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Rite Investments Corp. (a Delaware corporation) |
Delaware |
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Rite Investments Corp., LLC (a Delaware limited liability company) |
Delaware |
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Rx Choice, Inc. (a Delaware corporation) |
Delaware |
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The Jean Coutu Group (PJC) USA, Inc. (a Delaware corporation) |
Delaware |
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Thrift Drug Inc. (a Delaware corporation) |
Delaware |
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Advance Benefits, LLC |
Florida |
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Elixir Savings, LLC |
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First Florida Insurers of Tampa, LLC |
Florida |
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Rite Aid of Georgia, Inc. |
Georgia |
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Rite Aid of Indiana, Inc. |
Indiana |
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Rite Aid of Kentucky, Inc. |
Kentucky |
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K & B Louisiana Corporation |
Louisiana |
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K & B Services, Incorporated |
Louisiana |
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Rite Aid of Maine, Inc. |
Maine |
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GDF, Inc. |
Maryland |
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READ'S, Inc. |
Maryland |
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Rite Aid of Maryland, Inc. |
Maryland |
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PJC of Massachusetts, Inc. (a Massachusetts corporation) |
Massachusetts |
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PJC Realty MA, Inc. (a Massachusetts corporation) |
Massachusetts |
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1740 Associates, LLC |
Michigan |
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Apex Drug Stores, Inc. |
Michigan |
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PDS-1 Michigan, Inc. |
Michigan |
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Perry Distributors, Inc. |
Michigan |
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Perry Drug Stores, Inc. |
Michigan |
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RDS Detroit, Inc. |
Michigan |
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Rite Aid of Michigan, Inc. |
Michigan |
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Laker Software, LLC |
Minnesota |
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K & B Mississippi Corporation |
Mississippi |
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Elixir Rx Solutions, LLC |
Missouri |
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Elixir Rx Solutions of Nevada |
Nevada |
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Rite Aid of New Hampshire, Inc. |
New Hampshire |
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Lakehurst and Broadway Corporation |
New Jersey |
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|---|---|
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Entity |
Jurisdiction of Incorporation or Organization |
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Rite Aid of New Jersey, Inc. |
New Jersey |
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Rite Aid of New York, Inc. (a New York corporation) |
New York |
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Rite Aid Rome Distribution Center, Inc. (a New York corporation) |
New York |
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EDC Drug Stores, Inc. |
North Carolina |
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Rite Aid of North Carolina, Inc. |
North Carolina |
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4042 Warrensville Center Road - Warrensville Ohio, Inc. |
Ohio |
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5600 Superior Properties, Inc. |
Ohio |
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Broadview and Wallings-Broadview Heights Ohio, Inc. |
Ohio |
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Elixir Rx Solutions, LLC |
Ohio |
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Gettysburg and Hoover - Dayton, Ohio, LLC |
Ohio |
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Elixir Pharmacy, LLC |
Ohio |
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Rite Aid of Ohio, Inc. |
Ohio |
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Elixir Rx Options, LLC |
Ohio |
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The Lane Drug Company |
Ohio |
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Rite Aid of Pennsylvania, LLC (Formerly Rite Aid of Pennsylvania, Inc.) |
Pennsylvania |
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PJC of Rhode Island, Inc. |
Rhode Island |
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Rite Aid of South Carolina, Inc. |
South Carolina |
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K & B Tennessee Corporation |
Tennessee |
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Rite Aid of Tennessee, Inc. |
Tennessee |
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K & B Texas Corporation (a Texas corporation) |
Texas |
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RCMH, LLC (a Texas limited liability company) |
Texas |
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Rx Initiatives, L.L.C. |
Utah |
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Maxi Green, Inc. |
Vermont |
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PJC of Vermont, Inc. |
Vermont |
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Rite Aid of Vermont, Inc. |
Vermont |
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Rite Aid of Virginia, Inc. |
Virginia |
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Rite Aid of Washington, D.C., Inc. |
Wash. D.C. |
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5277 Associates, Inc. |
Washington |
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The Bartell Drug Company |
Washington |
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Rite Aid of West Virginia, Inc. |
West Virginia |
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Design Rx, LLC |
Wyoming |
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Design Rxclusives, LLC |
Wyoming |
Exhibit 31.1
Certification of Chief Executive Officer
I, Heyward Donigan, President and Chief Executive Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
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Date: July 6, 2021 |
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By: |
/s/ HEYWARD DONIGAN |
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Heyward Donigan |
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President and Chief Executive Officer |
Exhibit 31.2
Certification of Chief Financial Officer
I, Matthew C. Schroeder, Executive Vice President and Chief Financial Officer, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Rite Aid Corporation (the “Registrant”);
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the Registrant as of, and for, the periods presented in this report;
4. The Registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the Registrant and have:
a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the Registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. Evaluated the effectiveness of the Registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and
d. Disclosed in this report any change in the Registrant’s internal control over financial reporting that occurred during the Registrant’s most recent fiscal quarter (the Registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the Registrant’s internal control over financial reporting; and
5. The Registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the Registrant’s auditors and the audit committee of the Registrant’s board of directors:
a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the Registrant’s ability to record, process, summarize and report financial information; and
b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the Registrant’s internal control over financial reporting.
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Date: July 6, 2021 |
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By: |
/s/ MATTHEW C. SCHROEDER |
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Matthew C. Schroeder |
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Executive Vice President and Chief Financial Officer |
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Exhibit 32
Certification of CEO and CFO Pursuant to
18 U.S.C. Section 1350,
as Adopted Pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report on Form 10-Q of Rite Aid Corporation (the “Company”) for the quarterly period ended May 29, 2021 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), Heyward Donigan, as President and Chief Executive Officer of the Company, and Matthew C. Schroeder, as Executive Vice President and Chief Financial Officer of the Company, each hereby certifies, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that to the best of his knowledge:
(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
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/s/ HEYWARD DONIGAN |
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Name: |
Heyward Donigan |
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Title: |
President and Chief Executive Officer |
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Date: |
July 6, 2021 |
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/s/ MATTHEW C. SCHROEDER |
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Name: |
Matthew C. Schroeder |
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|
Title: |
Executive Vice President and Chief Financial Officer |
|
|
Date: |
July 6, 2021 |
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