UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 28, 2022 |
OR |
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to |
Commission File Number: 1-5742
RITE AID CORPORATION
(Exact name of registrant as specified in its charter)
Delaware | 23-1614034 |
30 Hunter Lane, | 17011 |
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:
Title of each class |
| Trading Symbol(s) |
| Name of each exchange on which registered |
Common Stock, $1.00 par value | RAD | 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.
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 55,626,790 shares of its $1.00 par value common stock outstanding as of June 22, 2022.
RITE AID CORPORATION
TABLE OF CONTENTS
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Condensed Consolidated Balance Sheets as of May 28, 2022 and February 26, 2022 | 6 | |
7 | ||
8 | ||
9 | ||
10 | ||
11 | ||
12 | ||
Management’s Discussion and Analysis of Financial Condition and Results | 37 | |
51 | ||
52 | ||
53 | ||
53 | ||
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53 | ||
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53 |
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CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
This report, as well as our other public filings or public statements, include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are often identified by terms and phrases such as “anticipate,” “believe,” “intend,” “estimate,” “expect,” “continue,” “should,” “could,” “may,” “plan,” “project,” “predict,” “will” and similar expressions and include references to assumptions and relate to our future prospects, developments and business strategies.
Factors that could cause actual results to differ materially from those expressed or implied in such forward-looking statements include, but are not limited to:
| ● | the impact of widespread health developments, including the continued impact of the global coronavirus (“COVID-19”) pandemic, the changing consumer behavior and preferences (including preferred shopping locations, vaccine hesitancy and the emergence of new variants), and the impact of those factors on the broader economy, financial and labor markets, wages, availability and access to credit and capital, our front-end and pharmacy operations and services, supply chain including shipping delays, container and trucker shortages, port congestion and other logistics problems, our associates and executive and administrative personnel, our third-party service providers (including suppliers, vendors and business partners), and customers. In addition, continued shortages of pharmacists, pharmacy technicians and other employee turnover as a result of the ongoing “great resignation” occurring throughout the economy, and the impact of potential vaccine mandates in the markets in which we operate, may inhibit our ability to maintain store hours at preferred levels. 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 our RxEvolution strategy, attract and retain a sufficient number of our target consumers, integrate operations such as Elixir and any acquisitions, implement and integrate information technology and digital services, obtain permits required for store remodels, and improve the operating performance of our stores and pharmacy benefit management (“PBM”) operations; |
| ● | our high level of indebtedness, the ability to refinance such indebtedness on acceptable terms (including the impact of recent actions by the United States Federal Reserve), 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, including impacts of inflation or other pricing environment factors on our costs and our ability to pass on price increases to our customers, including as a result of inflationary and deflationary pressures, a decline in consumer spending or deterioration in consumer financial position, whether due to inflation or other factors, 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 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 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 or the Affordable Care Act (or “ACA”), and decisions of agencies and courts including the United States Supreme Court regarding those and other matters relevant to the Company or its operations, and any regulations enacted thereunder may occur; |
3
| ● | 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; |
| ● | our ability to sell our Centers of Medicare and Medicaid Services (“CMS”) receivables, in whole or in part, which could negatively impact our liquidity and leverage ratio if we do not consummate a sale; |
| ● | our ability to grow prescription count, realize front-end sales growth, and improve and grow the operations of our PBM; |
| ● | 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 industry due to continued consolidation and client demand for lower prices while providing enhanced service offerings; |
| ● | risks related to breaches of our (or our vendors’) 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 (including the impact on our variable rate indebtedness) 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” included herein and in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022 (the “Fiscal 2022 10-K”), as well as in “Part I – Item 1A. Risk Factors” of the Fiscal 2022 10-K, which we filed with the SEC on April 25, 2022. To the extent that COVID-19 adversely affects our business and
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financial results, it may also have the effect of heightening many of the risk factors described herein and in our Fiscal 2022 10-K.
5
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(In thousands, except per share amounts)
(unaudited)
May 28, | February 26, | |||||
| 2022 |
| 2022 | |||
ASSETS | ||||||
Current assets: | ||||||
Cash and cash equivalents | $ | 56,060 | $ | 39,721 | ||
Accounts receivable, net |
| 1,449,745 |
| 1,343,496 | ||
Inventories, net of LIFO reserve of $487,173 and $487,173 |
| 1,974,759 |
| 1,959,389 | ||
Prepaid expenses and other current assets |
| 88,860 |
| 106,749 | ||
Total current assets |
| 3,569,424 |
| 3,449,355 | ||
Property, plant and equipment, net |
| 985,121 |
| 989,167 | ||
Operating lease right-of-use assets | 2,723,405 | 2,813,535 | ||||
Goodwill | 879,136 | 879,136 | ||||
Other intangibles, net |
| 282,950 |
| 291,196 | ||
Deferred tax assets | 20,071 | 20,071 | ||||
Other assets |
| 89,666 |
| 86,543 | ||
Total assets | $ | 8,549,773 | $ | 8,529,003 | ||
LIABILITIES AND STOCKHOLDERS’ EQUITY | ||||||
Current liabilities: | ||||||
Current maturities of long-term debt and lease financing obligations | $ | 5,016 | $ | 5,544 | ||
Accounts payable |
| 1,461,238 |
| 1,571,261 | ||
Accrued salaries, wages and other current liabilities |
| 787,591 |
| 780,632 | ||
Current portion of operating lease liabilities | 574,392 | 575,651 | ||||
Total current liabilities |
| 2,828,237 |
| 2,933,088 | ||
Long-term debt, less current maturities |
| 3,026,456 |
| 2,732,986 | ||
Long-term operating lease liabilities | 2,526,607 | 2,597,090 | ||||
Lease financing obligations, less current maturities |
| 14,392 |
| 14,830 | ||
Other noncurrent liabilities |
| 162,457 |
| 151,976 | ||
Total liabilities |
| 8,558,149 |
| 8,429,970 | ||
Commitments and contingencies |
|
| ||||
Stockholders’ equity: | ||||||
Common stock, par value $1 per share; 75,000 shares authorized; shares and 55,623 and 55,752 |
| 55,623 |
| 55,752 | ||
Additional paid-in capital |
| 5,913,210 |
| 5,910,299 | ||
Accumulated deficit |
| (5,961,772) |
| (5,851,581) | ||
Accumulated other comprehensive loss |
| (15,437) |
| (15,437) | ||
Total stockholders’ equity |
| (8,376) |
| 99,033 | ||
Total liabilities and stockholders’ equity | $ | 8,549,773 | $ | 8,529,003 | ||
See accompanying notes to condensed consolidated financial statements.
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RITE AID CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In thousands, except per share amounts)
(unaudited)
Thirteen Week Period Ended | ||||||
| May 28, 2022 |
| May 29, 2021 | |||
Revenues | $ | 6,014,583 | $ | 6,160,985 | ||
Costs and expenses: | ||||||
Cost of revenues |
| 4,817,854 |
| 4,876,110 | ||
Selling, general and administrative expenses |
| 1,217,929 |
| 1,245,362 | ||
Facility exit and impairment charges |
| 66,571 |
| 8,831 | ||
Interest expense |
| 48,119 |
| 49,121 | ||
Loss on debt retirements, net |
| — |
| 396 | ||
Gain on sale of assets, net |
| (29,196) |
| (6,558) | ||
| 6,121,277 |
| 6,173,262 | |||
Loss before income taxes |
| (106,694) |
| (12,277) | ||
Income tax expense |
| 3,497 |
| 780 | ||
Net loss | $ | (110,191) | $ | (13,057) | ||
Computation of loss attributable to common stockholders: | ||||||
Net loss attributable to common stockholders—basic and diluted | $ | (110,191) | $ | (13,057) | ||
Basic and diluted loss per share | $ | (2.03) | $ | (0.24) | ||
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)
Thirteen Week Period Ended | ||||||
| May 28, 2022 |
| May 29, 2021 | |||
Net loss | $ | (110,191) | $ | (13,057) | ||
Other comprehensive income: | ||||||
Defined benefit pension plans: | ||||||
Amortization of net actuarial losses included in net periodic pension cost, net of $0 and $0 income tax expense |
| — |
| 123 | ||
Change in fair value of interest rate cap | — | 27 | ||||
Total other comprehensive income |
| — |
| 150 | ||
Comprehensive loss | $ | (110,191) | $ | (12,907) | ||
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)
Accumulated | |||||||||||||||||
Additional | Other | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE FEBRUARY 26, 2022 | 55,752 | $ | 55,752 | $ | 5,910,299 | $ | (5,851,581) | $ | (15,437) | $ | 99,033 | ||||||
Net loss |
| (110,191) | (110,191) | ||||||||||||||
Other comprehensive loss: | |||||||||||||||||
Comprehensive loss | (110,191) | ||||||||||||||||
Issuance of restricted stock | 61 | 61 | (61) | — | |||||||||||||
Exchange of restricted shares for taxes | (63) | (63) | (490) | (553) | |||||||||||||
Cancellation of restricted stock | (127) | (127) | 127 | — | |||||||||||||
Amortization of restricted stock balance | 3,324 | 3,324 | |||||||||||||||
Stock-based compensation expense | 201 | 201 | |||||||||||||||
Amortization of performance-based incentive plans | (190) | (190) | |||||||||||||||
BALANCE MAY 28, 2022 | 55,623 | $ | 55,623 | $ | 5,913,210 | $ | (5,961,772) | $ | (15,437) | $ | (8,376) | ||||||
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)
Accumulated | |||||||||||||||||
Additional | Other | ||||||||||||||||
Common Stock | Paid-In | Accumulated | Comprehensive | ||||||||||||||
| Shares |
| Amount |
| Capital |
| Deficit |
| Loss |
| Total | ||||||
BALANCE FEBRUARY 27, 2021 |
| 55,143 | $ | 55,143 | $ | 5,897,168 | $ | (5,313,103) | $ | (24,054) | $ | 615,154 | |||||
Net loss |
| (13,057) | (13,057) | ||||||||||||||
Other comprehensive loss: | |||||||||||||||||
Changes in Defined Benefit Plans, net of $0 tax expense | 123 | 123 | |||||||||||||||
Change in fair value of interest rate cap | 27 | 27 | |||||||||||||||
Comprehensive loss | (12,907) | ||||||||||||||||
Exchange of restricted shares for taxes | (2) | (2) | (33) | (35) | |||||||||||||
Cancellation of restricted stock | (48) | (48) | 48 | — | |||||||||||||
Amortization of restricted stock balance | 1,618 | 1,618 | |||||||||||||||
Stock-based compensation expense | 150 | 150 | |||||||||||||||
BALANCE MAY 29, 2021 | 55,093 | $ | 55,093 | $ | 5,898,951 | $ | (5,326,160) | $ | (23,904) | $ | 603,980 | ||||||
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)
Thirteen Week Period Ended | ||||||
| May 28, 2022 |
| May 29, 2021 | |||
Operating activities: | ||||||
Net loss | $ | (110,191) | $ | (13,057) | ||
Adjustments to reconcile to net cash (used in) provided by operating activities: | ||||||
Depreciation and amortization |
| 70,073 |
| 75,859 | ||
Facility exit and impairment charges |
| 66,571 |
| 8,831 | ||
LIFO credit |
| — |
| (3,993) | ||
Gain on sale of assets, net |
| (29,196) |
| (6,558) | ||
Change in allowances for uncollectible accounts receivable | 3,763 | — | ||||
Stock-based compensation expense |
| 3,334 |
| 2,811 | ||
Loss on debt retirements, net |
| — |
| 396 | ||
Changes in operating assets and liabilities: | ||||||
Accounts receivable |
| (104,458) |
| (149,487) | ||
Inventories |
| (15,827) |
| 11,918 | ||
Accounts payable |
| (137,572) |
| 50,527 | ||
Operating lease right-of-use assets and operating lease liabilities | (14,812) | (5,909) | ||||
Other assets |
| 751 |
| 7,978 | ||
Other liabilities | 15,327 | 34,559 | ||||
Net cash (used in) provided by operating activities |
| (252,237) |
| 13,875 | ||
Investing activities: | ||||||
Payments for property, plant and equipment |
| (73,176) |
| (59,164) | ||
Intangible assets acquired | (12,248) | (5,436) | ||||
Proceeds from dispositions of assets and investments | 30,839 | 2,448 | ||||
Proceeds from sale-leaseback transactions |
| — |
| 7,456 | ||
Net cash used in investing activities |
| (54,585) |
| (54,696) | ||
Financing activities: | ||||||
Net proceeds from revolver |
| 291,000 |
| 39,000 | ||
Principal payments on long-term debt |
| (977) |
| (91,941) | ||
Change in zero balance cash accounts |
| 33,691 |
| 51,957 | ||
Financing fees paid for early debt redemption |
| — |
| (2) | ||
Payments for taxes related to net share settlement of equity awards | (553) | (35) | ||||
Deferred financing costs paid |
| — |
| (580) | ||
Net cash provided by (used in) financing activities |
| 323,161 |
| (1,601) | ||
Increase (decrease) in cash and cash equivalents |
| 16,339 |
| (42,422) | ||
Cash and cash equivalents, beginning of period |
| 39,721 |
| 160,902 | ||
Cash and cash equivalents, end of period | $ | 56,060 | $ | 118,480 | ||
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 28, 2022 and May 29, 2021
(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 28, 2022 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 2022 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 28, 2022 and May 29, 2021:
May 28, |
| May 29, | |||
2022 | 2021 | ||||
In thousands | (13 Weeks) |
| (13 weeks) | ||
Retail Pharmacy segment: |
|
|
| ||
Pharmacy sales | $ | 3,053,449 | $ | 2,997,044 | |
Front-end sales |
| 1,261,206 |
| 1,321,699 | |
Other revenue |
| 30,701 |
| 32,939 | |
Total Retail Pharmacy segment | 4,345,356 | 4,351,682 | |||
Pharmacy Services segment |
| 1,725,857 |
| 1,872,282 | |
Intersegment elimination |
| (56,630) |
| (62,979) | |
Total revenue | $ | 6,014,583 | $ | 6,160,985 | |
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 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. Beginning in December 2020, the Company granted temporary extensions of benefits to certain previous members that were eligible for a discount as of the end of each previous 6 month period such that those prior members were eligible to continue to receive that discount on purchases made through the subsequent 6 months with no additional purchase requirement. New and existing customers who were not already eligible for program benefits also had the opportunity to earn additional discounts on purchases made through each 6 month period. A final extension was granted on December 31, 2021 through February 26, 2022 at which point all discounts were terminated.
A new loyalty program, Rite Aid Rewards, was initiated on February 27, 2022. Customers that enroll in the new program earn points for each dollar spent on front of store purchases as well as for eligible pharmacy prescriptions. Points can then be converted into a “Rite Aid Rewards” coupon that can be tendered as payment in a future purchase. Each point is worth $0.002. Customers must accumulate 1,000 points and create an online account in order to convert
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RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
earned points to a “Rite Aid Rewards” coupon. Unused/unconverted points expire after 90 days. Unredeemed “Rite Aid Rewards” coupons expire 30 days after conversion from points earned.
Points earned pursuant to the Rite Aid Rewards program represent a performance obligation. The value of unredeemed Rite Aid Rewards points is deferred as a contract liability (included in other current liabilities). As members redeem points in the form of a Rite Aid Rewards coupon or when points or unredeemed Rite Aid Rewards coupons expire, the Retail Pharmacy segment recognizes the redeemed/expired portion of the deferred contract liability into revenue. For the thirteen week period ended May 28, 2022, the Company recognized $713 of deferred contract liability into revenue. The Retail Pharmacy segment had accrued contract liabilities of $5,577 and $0 as of May 28, 2022 and February 26, 2022, respectively.
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 was 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. The Company financed the Acquisition with borrowings under its Senior Secured Revolving Credit Facility together with cash on hand. Bartell operated 67 retail drug stores and one distribution center in the greater Seattle, Washington area. Bartell operates as a 100 percent owned subsidiary of the Company within its Retail Pharmacy segment.
The Company’s condensed consolidated financial statements for the thirteen week periods ended May 28, 2022 and May 29, 2021 include Bartell’s results of operations. The Company’s condensed consolidated financial statements reflect the final purchase accounting adjustments in accordance with ASC 805 “Business Combinations”, whereby the purchase price was 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 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
The following allocation of the purchase price and the estimated transaction costs is final:
(1) Intangible assets are recorded at estimated fair value, as determined by management based on available information which includes a final 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 final 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 final 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 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Estimated Fair Value | Estimated Useful Life | |||
Prescription files | $ | 54,300 | 10 | |
Tradename |
| 14,400 | Indefinite | |
Total | $ | 68,700 | ||
During the thirteen week period ended February 27, 2021, the Company recorded a gain on Bartell acquisition of $47,705 primarily due to fair value adjustments related to prescription files and the tradename compared to book values. During the thirteen week period ended November 27, 2021, in connection with determining its final purchase price allocation, the Company recorded a loss on Bartell acquisition of $5,346 primarily due to contract termination charges, inventory valuation adjustments and changes in deferred income taxes, resulting in a net bargain purchase gain of $42,359. 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 28, 2022 and May 29, 2021, acquisition costs of $0 and $3,886 were expensed as incurred.
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, replacing and updating the Company’s financial systems to improve efficiency, and movement to a common client platform at Elixir. In April 2022, the Company announced further strategic initiatives to reduce costs through the closure of unprofitable stores, reducing corporate administration expenses and improving efficiencies in worked payroll and other store labor costs as well as expense reductions at the Pharmacy Services segment. These and future restructuring activities are expected to provide future growth and expense efficiency benefits. There can be no assurance that the Company’s current and future restructuring charges will achieve the cost savings and remerchandising benefits in the amounts or time anticipated.
15
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
For the thirteen week period ended May 28, 2022, the Company incurred total restructuring-related costs of $22,646, which are included as a component of SG&A. These costs are as follows:
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:
A summary of activity for the thirteen week period ended May 28, 2022 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) | – Professional and other fees include costs incurred in connection with the identification and implementation of initiatives associated with restructuring activities. |
The Company anticipates incurring approximately $60,000 during fiscal 2023 in connection with its continued restructuring activities.
16
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
4. Income (Loss) Per Share
Basic income (loss) per share is computed by dividing income available to common stockholders by the weighted average number of shares of common stock outstanding for the period. Diluted income (loss) per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the income of the Company, subject to anti-dilution limitations.
Due to their antidilutive effect, 700 and 773 potential shares related to stock options have been excluded from the computation of diluted income (loss) per share for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. Also, excluded from the computation of diluted income (loss) per share for the thirteen week periods ended May 28, 2022 and May 29, 2021 are restricted shares of 1,247 and 1,240, respectively, which are included in shares outstanding.
5. Facility Exit and Impairment Charges
Facility exit and impairment charges consist of amounts as follows:
| Thirteen Week Period | |||||
| Ended | |||||
May 28, |
| May 29, | ||||
| 2022 |
| 2021 | |||
Impairment charges | $ | 35,036 |
| $ | 4,313 | |
Facility exit charges |
| 31,535 |
| 4,518 | ||
$ | 66,571 |
| $ | 8,831 | ||
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.
17
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(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 28, 2022, long-lived assets with a carrying value of $39,228, primarily right-of-use assets in connection with stores or leased office spaces, were written down to their fair value of $4,192, resulting in an impairment charge of $35,036. During the thirteen week period ended May 29, 2021, long-lived assets 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. 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 28, 2022 and May 29, 2021:
18
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Fair Values | Total | ||||||||||||||
as of | Charges | ||||||||||||||
| Level 1 |
| Level 2 |
| Level 3 |
| Impairment Date |
| May 29, 2021 | ||||||
Long-lived assets held for use | $ | — | $ | — | $ | — | $ | — | $ | (4,313) | |||||
Long-lived assets held for sale | $ | — | $ | — | $ | — | $ | — | $ | — | |||||
Total | $ | — | $ | — | $ | — | $ | — | $ | (4,313) | |||||
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:
6. Fair Value Measurements
The Company utilizes the three-level valuation hierarchy as described in Note 5, 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 28, 2022 and February 26, 2022, the Company has $7,186 and $7,406, 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.
19
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(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 $3,026,456 and $2,677,190, respectively, as of May 28, 2022. The carrying amount and estimated fair value of the Company's total long-term indebtedness was $2,732,986 and $2,661,122, respectively, as of February 26, 2022.
7. Income Taxes
The Company recorded an income tax expense of $3,497 and $780 for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. The effective tax rate for the thirteen week periods ended May 28, 2022 and May 29, 2021 was (3.3)% and (6.4)%, respectively. The effective tax rate for the thirteen week periods ended May 28, 2022 and May 29, 2021 was net of an adjustment of (37.6)% and (18.5)%, 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 $25,130 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 material 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 $1,862,823 and $1,822,710, 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 28, 2022 and February 26, 2022, respectively.
8. 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
20
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(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 $8,323 as of March 31, 2022. EI was in excess of the minimum required amounts in these states as of May 28, 2022.
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 or receivable from 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 August 12, 2021, the Company entered into a receivable purchase agreement (the “August 2021 Receivable Purchase Agreement”) with Bank of America, N.A. (the “Purchaser”).
Pursuant to the terms and conditions set forth in the August 2021 Receivable Purchase Agreement, the Company sold $271,829, a portion of its calendar 2021 CMS receivable, for $258,116, of which $239,360 was received on August 12, 2021. The remaining $18,756, which is included in accounts receivable, net as of May 28, 2022, 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 $13,713, which is included as a component of loss (gain) on sale of assets, net during the thirteen week period ended August 28, 2021.
On August 12, 2021, concurrent with the August 2021 Receivable Purchase Agreement, the Company entered into an indemnity agreement (the “August 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 August 2021 Indemnity Agreement. Based on its evaluation of the August 2021 Indemnity Agreement, the Company has determined that it is highly unlikely that the events covered under the August 2021 Indemnity Agreement would occur, and consequently, the Company has not recorded any indemnification liability associated with the August 2021 Indemnity Agreement.
On January 24, 2022, the Company entered into a receivable purchase agreement (the “January 2022 Receivable Purchase Agreement”) with Purchaser.
Pursuant to the terms and conditions set forth in the January 2022 Receivable Purchase Agreement, the Company sold $400,680, a portion of its calendar 2021 CMS receivable, for $387,035, of which $359,388 was received on January 24, 2022. The remaining $27,647, which is included in accounts receivable, net as of May 28, 2022, 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 $13,645, which is included as a component of loss (gain) on sale of assets, net during the thirteen week period ended February 26, 2022.
On January 24, 2022, concurrent with the January 2022 Receivable Purchase Agreement, the Company entered into an indemnity agreement (the “January 2022 Indemnity Agreement”), whereby the Company has agreed to
21
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 January 2022 Indemnity Agreement. Based on its evaluation of the January 2022 Indemnity Agreement, the Company has determined that it is highly unlikely that the events covered under the January 2022 Indemnity Agreement would occur, and consequently, the Company has not recorded any indemnification liability associated with the January 2022 Indemnity Agreement.
As of May 28, 2022 and February 26, 2022 accounts receivable, net included $36,147 and $34,898 due from the Purchaser, subject to final CMS claim reconciliation adjustments, upon receipt of the final remittance for the respective calendar years from CMS.
As of May 28, 2022, and February 26, 2022, accounts receivable, net included $155,397 and $63,203 due from CMS.
9. Manufacturer Rebates Receivables
The Pharmacy Services Segment has manufacturer rebates receivables due directly from manufacturers and from our rebate aggregator of $563,389 and $535,620 included in accounts receivable, net of an allowance for uncollectible rebates of $15,295 and $18,796, as of May 28, 2022 and February 26, 2022, respectively.
10. Goodwill and Other Intangible Assets
At May 28, 2022, the goodwill related to the Pharmacy Services segment is at risk of future impairment if the fair value of this segment, and its associated assets, decrease in value due to further declines in its operating results or an inability to execute management’s business strategies. Future cash flow estimates are, by their nature, subjective, and actual results may differ materially from the Company's estimates. If the Company's ongoing cash flow projections are not met or if market factors utilized in the impairment test deteriorate, including an unfavorable change in the terminal growth rate or the weighted-average cost of capital, the Company may have to record impairment charges in future periods. As of May 28, 2022, the Pharmacy Services segment had goodwill of $835,644.
There was no goodwill impairment charge for the thirteen week period ended May 28, 2022. At May 28, 2022 and February 26, 2022, accumulated impairment losses for the Pharmacy Services segment was $803,712.
22
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(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 28, 2022 and February 26, 2022.
| (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. |
The Company is continuing to reposition its approach to the Elixir Insurance Part D business including an expectation of a purposeful shrinkage of the business. As a result, at the end of fiscal 2022, the Company adjusted the remaining amortization period of the CMS License to 5 years. Prior to such adjustment, the remaining life was 19 years.
Amortization expense for these intangible assets and liabilities was $20,626 and $20,460 for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. The anticipated annual amortization expense for these intangible assets and liabilities is 2023—$71,185; 2024—$57,613; 2025—$46,393; 2026—$35,802 and 2027—$28,815.
23
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
11. Indebtedness and Credit Agreement
Following is a summary of indebtedness and lease financing obligations at May 28, 2022 and February 26, 2022:
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”; and the Credit Agreement, as further amended by the Second Amendment (as defined below), the “Amended Credit Agreement”), which Credit Agreement provided for facilities consisting of a $2,700,000 senior secured asset-based revolving credit facility (“Initial Senior Secured Revolving Credit Facility”) and a $450,000 “first-in, last out” senior secured term loan facility (“Initial Senior Secured Term Loan,” and together with the Initial Senior Secured Revolving Credit Facility, collectively, the “Initial Facilities”). In December 2018, the Company used proceeds from the Initial Facilities to refinance its prior $2,700,000 existing credit agreement.
On August 20, 2021, the Company entered in to the Second Amendment to Credit Agreement (the “Second Amendment”), which, among other things, amended the Credit Agreement to provide for a $2,800,000 senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility” or “revolver”) and a $350,000 “first-in,
24
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
last out” senior secured term loan facility (“Senior Secured Term Loan” or “Term Loan” and together with the Senior Secured Revolving Credit Facility, collectively, the “Amended Facilities”) and incorporate customary “hardwired” LIBOR transition provisions. The Amended 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 equal to, at the Company’s option, a base rate (determined in a customary manner) plus a margin of between 0.25% to 0.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of between 1.25% and 1.75%, in each case based upon the Average ABL Availability (as defined in the Amended Credit Agreement). Borrowings under the Senior Secured Term Loan bear interest at a rate per annum equal to, at the Company’s option, (x) a base rate (determined in a customary manner) plus a margin of 1.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of 2.75%. 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 (as defined in the Amended Credit Agreement). The Amended Facilities are scheduled to mature on August 20, 2026 (subject to a springing maturity if certain of the Company’s existing secured notes are not refinanced or repaid prior to the date that is 91 days prior to the stated maturity thereof).
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 28, 2022, the Company had $1,350,000 of borrowings outstanding under the Amended Facilities and had letters of credit outstanding under the Senior Secured Revolving Credit Facility in a face amount of $127,696, which resulted in remaining borrowing capacity under the Senior Secured Revolving Credit Facility of $1,672,304. If at any time the total credit exposure outstanding under the Senior Secured Revolving Credit Facility exceeds the borrowing base, the Company will be required to repay amounts outstanding to eliminate such shortfall.
The Amended Credit Agreement restricts the Company and all of its subsidiaries that guarantee its obligations under the Amended 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 Amended 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 Amended 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 $275,000 for three consecutive business days or less than or equal to $200,000 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 Amended Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of the Amended Facilities.
With the exception of EI, substantially all of Rite Aid Corporation’s 100% owned subsidiaries guarantee the obligations under the Amended Facilities, the secured guaranteed notes and unsecured guaranteed notes. The Company’s obligations under the Amended 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
25
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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 Amended Facilities, the secured guaranteed notes and, on an unsecured basis, the unsecured guaranteed notes, are full and unconditional and joint and several. The Company has no independent assets or operations. Other than EI, the subsidiaries, including joint ventures, that do not guarantee the Amended Facilities and applicable notes, are minor.
The Amended 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 in addition to borrowings under the Amended 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 Amended 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 Amended 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 Amended 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 Amended Credit Agreement also contains certain restrictions on the amount of secured first priority debt the Company is able to incur. The Amended Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended Facilities are not in default and the Company maintains availability under its revolver of more than $365,000.
The Amended 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 28, 2022, the Company’s fixed charge coverage ratio was greater than 1.00 to 1.00, and the Company was in compliance with the Amended Credit Agreement’s financial covenant. The Amended 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 Amended 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 $50,000 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.
26
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Fiscal 2022 and 2023 Transactions
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.
On August 20, 2021, the Company entered into the Second Amendment in order to, among other things, increase the aggregate principal amount of commitments under the Senior Secured Revolving Credit Facility from $2,700,000 to $2,800,000 and decrease the aggregate principal amount of loans outstanding under the Senior Secured Term Loan from $450,000 to $350,000. In connection therewith, the Company recorded a loss on debt modification and retirement of $2,839 which included unamortized debt issuance costs. The debt repayment and related loss on debt modification and retirement is included in the results of operations and cash flows.
On June 13, 2022, the Company announced the commencement of a series of cash tender offers to purchase up to $150,000 aggregate principal amount of the Company’s 7.50% Senior Secured Notes due 2025 (the “2025 Notes”), 8.0% Senior Secured Notes due 2026, 7.70% Notes due 2027 (the “2027 Notes”) and 6.875% Notes due 2028 (the “2028 Notes”), subject to prioritized acceptance levels, a subcap of $100,000 with respect to the 2025 Notes and proration. On June 29, 2022, pursuant to an early settlement, the Company purchased an aggregate principal amount of $114,942 of its 2025 Notes, $51,695 aggregate principal amount of its 2027 Notes and $26,955 aggregate principal amount of its 2028 Notes. The Company anticipates that the purchase will be considered a debt retirement and accordingly, anticipates a gain on debt retirement during the second quarter of fiscal 2023.
Maturities
The aggregate annual principal payments of long-term debt for the remainder of fiscal 2023 and thereafter are as follows: 2023—$0; 2024—$0; 2025—$0; 2026—$600,000; 2027—$2,437,304 and $29,001 thereafter.
12. Leases
The Company leases most of its retail stores and certain distribution facilities under 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.
27
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
The following table is a summary of the Company’s components of net lease cost for the thirteen week periods ended May 28, 2022 and May 29, 2021:
Supplemental cash flow information related to leases for the thirteen week periods ended May 28, 2022 and May 29, 2021:
28
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Supplemental balance sheet information related to leases as of May 28, 2022 and February 26, 2022 (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 28, 2022:
| (1) | – Future operating lease payments have not been reduced by minimum sublease rentals of $34 million due in the future under noncancelable leases. |
29
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
During the thirteen week period ended May 28, 2022, the Company did not enter into any sale-leaseback transactions. 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.
The Company has additional capacity under its outstanding debt agreements to enter into additional sale-leaseback transactions.
13. Retirement Plans
Net periodic pension expense for the thirteen week periods ended May 28, 2022 and May 29, 2021, for the Company’s defined benefit plan includes the following components:
Defined Benefit | |||||||
Pension Plan | |||||||
Thirteen Week Period Ended | |||||||
May 28, | May 29, | ||||||
| 2022 |
| 2021 |
| |||
Service cost | $ | 107 | $ | 128 | |||
| 1,264 |
| 1,232 | ||||
| (1,402) |
| (1,313) | ||||
| — |
| 123 | ||||
Net periodic pension expense | $ | (31) | $ | 170 | |||
During the thirteen week period ended May 28, 2022 the Company contributed $0 to the Defined Benefit Pension Plan. During the remainder of fiscal 2023, the Company expects to contribute $0 to the Defined Benefit Pension Plan.
14. 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.
30
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
The Company’s chief operating decision makers are its Chief Executive Officer, Chief Financial Officer and several other members of the Executive Leadership Team, (collectively the “CODM”). The CODM has ultimate responsibility for enterprise decisions. The CODM determines, in particular, resource allocation for, and monitors performance of, the consolidated enterprise, the Retail Pharmacy segment and the Pharmacy Services segment. The Retail Pharmacy and Pharmacy Services segment managers have responsibility for operating decisions, allocating resources and assessing performance within their respective segments. The CODM relies on internal management reporting that analyzes enterprise results on certain key performance indicators, namely, revenues, gross profit, and Adjusted EBITDA.
The following is balance sheet information for the Company’s reportable segments:
| (1) | As of May 28, 2022 and February 26, 2022, 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 $15,619 and $21,823, 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 28, 2022 and May 29, 2021:
31
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
| (1) | Intersegment eliminations include intersegment revenues and corresponding cost of revenues that occur when Pharmacy Services segment customers use Retail Pharmacy segment stores to purchase covered products. When this occurs, both the Retail Pharmacy and Pharmacy Services segments record the revenue on a stand-alone basis. |
| (2) | See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” in MD&A for additional details. |
The following is a reconciliation of net income (loss) to Adjusted EBITDA for the thirteen week periods ended May 28, 2022 and May 29, 2021:
15. 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), audits by counter parties under our contracts, 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. Substantial damages are sought from the Company in virtually all of these matters. 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
32
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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.
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 including findings made by juries; (viii) the exercise of discretion in enforcement actions including 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 (ix) changes in priorities following any change in political administration at the state or federal level.
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”). The Company also is defending a putative employment collective and class action filed in federal court in New York, which raises similar allegations in addition to others about the payment frequency for certain employees (the “New York Case”). Substantial damages are sought from the Company in virtually all of these matters. From time to time, one or more of these matters may be settled.
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. 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 million and has concluded, while the other involving distribution center associates was settled for $1.75 million and remains subject to court approval. On October 1, 2021, the Company agreed to settle for $12 million allegations made by a purported class of California store associates that it required such associates to purchase uniforms, and the matter has concluded. 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.
33
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
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. Substantial damages are sought from the Company in virtually all of these matters.
The Company is a defendant 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 offered to uninsured and underinsured customers through its Rx Savings Program. Although a stay pending the Company’s unsuccessful attempt to compel arbitration has been lifted, the cases are now stayed pending mediation of these matters and another lawsuit raising usual and customary pricing allegations filed in the United States District Court for the Eastern District of Pennsylvania.
On February 6, 2019, Humana, Inc., filed a claim pursuant to a binding arbitration provision of the parties’ agreement 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 arbitration hearing was held in this matter in November 2021.
On April 22, 2022, the arbitrator issued an Opinion and Final Award against the Company for breach of contract awarding Humana $122.6 million, which includes $40.7 million in prejudgment interest (the “Arbitration Award”). The Company believes that the Arbitration Award contains a number of significant factual and legal errors. On June 20, 2022, the Company both opposed Humana’s effort to confirm the Arbitration Award and petitioned the United States District Court for Western District of Kentucky for vacatur of the Arbitration Award, as is its right under the Federal Arbitration Act (“FAA”). As such, the Company has determined that it is not probable that a loss has occurred.
The FAA, as interpreted and applied by federal courts, permits vacatur when, among other things, an arbitrator’s decision: (1) is irreconcilable with the terms of a contract between the parties; (2) rests on a plain legal error that manifests disregard for the law; or (3) incorporates a refusal to consider pertinent, material evidence. Similarly, the FAA, as interpreted and applied by federal courts, permits modification of an arbitrator’s decision to correct an evident material miscalculation of figures. Although the Company cannot make any assurances of success in its efforts, it is the Company’s view that the errors in the Arbitration Award support both vacatur and modification under the FAA, the effect of either of which could be to set aside the Arbitration Award or reduce or eliminate the damages provided for in the Arbitration Award.
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. The Company is also defending a lawsuit filed in Delaware state court in 2019 by multiple Centene entities alleging that the
34
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
Company overcharged for prescriptions by improperly reporting usual and customary prices that did not include Rx Savings Program pricing. The Company is defending a similar lawsuit filed in 2022 by WellCare in Florida state court.
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 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. Substantial damages are sought from the Company in this matter. No trial date has been set and as discovery continues, the parties are participating in a mediation process.
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 (“JPML”) 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. On June 1, 2022, the JPML ordered that newly filed cases will no longer be transferred to the MDL. 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 in which it remains a defendant 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.
Substantial damages are sought from the Company in virtually all of these matters.
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 settlement and/or judgment
35
RITE AID CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
For the Thirteen Week Periods Ended May 28, 2022 and May 29, 2021
(Dollars and share information in thousands, except per share amounts)
(unaudited)
costs that may be paid for the opioid-related lawsuits. The action seeks declaratory relief with respect to the obligations of the insurers under the policies at issue in the action and asserts claims for breach of contract and statutory remedies against one of these insurers. Although the trial court determined on the Company’s motion for partial summary judgment that this insurer was obligated to reimburse the Company for its defense costs, on January 10, 2022, the Delaware Supreme Court reversed the trial court’s order and ruled that the insurer had no duty to defend the first MDL suits set for trial based on the specific allegations at issue in those cases. The matter has been remanded to the lower court for further proceedings.
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 and certain employees 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. The Company is also defending a lawsuit asserting numerous claims based on allegations surrounding the Company’s use of a certain font including in the Company’s rebranded logo.
16. Supplementary Cash Flow Data
Thirteen Week Period Ended | |||||||
| May 28, 2022 |
| May 29, 2021 | ||||
Cash paid for interest | $ | 11,230 | $ | 12,813 | |||
Cash payments for income taxes, net | $ | 13,290 | $ | 556 | |||
Equipment financed under capital leases | $ | — | $ | 1,585 | |||
Gross borrowings from revolver | $ | 860,000 | $ | 1,546,000 | |||
Gross repayments to revolver | $ | 569,000 | $ | 1,507,000 | |||
Significant components of cash provided by Other Liabilities of $15,327 for the thirteen week period ended May 28, 2022 include cash provided from an increase in accruals relating to store closures and litigation matters.
36
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results
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 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 provides 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 2,300 retail pharmacy locations across 17 states and through our e-commerce platform available at www.riteaid.com. 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 2.3 million covered lives, including approximately 0.7 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, replacing and updating the Company’s financial systems to improve efficiency, and movement to a common client platform at Elixir. In April 2022, we announced further strategic initiatives to reduce costs through the closure of unprofitable stores, reducing corporate administration expenses and improving efficiencies in worked payroll and other store labor costs as well as expense reductions at our Pharmacy Services segment. 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.
37
Impact of COVID-19
In March 2020, the outbreak of COVID-19 caused by a novel strain of the coronavirus was recognized as a pandemic by the World Health Organization. The COVID-19 pandemic has severely impacted the economies of the United States and other countries around the world.
Since the onset of the COVID-19 pandemic, Rite Aid has been on the front lines of providing communities with essential care, services and products, including the administration of COVID-19 testing and vaccines. We have taken numerous steps to ensure that Rite Aid can continue providing these vital services during this time of great need, including hiring additional full and part-time associates to support our stores and distribution center teams, providing our front line associates with our Hero Pay and Hero Bonus programs and instituted a Pandemic Pay policy that ensures associates are compensated if diagnosed with the virus or quarantined due to exposure. We also implemented safety protocols to keep our associates and customers safe, and transitioned our office-based associates to a remote work environment. Our strong local presence and scale in communities in our markets enables us to play a central role in the response to COVID-19, as well as provide seamless support for our customers wherever they need it; at our stores and at their homes through our delivery services.
The COVID-19 pandemic had a significant impact on our operating results for the thirteen week periods ended May 28, 2022 and May 29, 2021 and will continue to have an impact on several factors underlying our operating results in fiscal 2023. Those factors include the number of individuals that receive a COVID-19 vaccine or booster; demand for COVID-19 testing; the timing and extent to which elective procedures return to pre-pandemic levels; the demand for flu and other immunizations and the length and severity of the upcoming cough, cold and flu season.
Overview of Financial Results
Our net loss for the thirteen week period ended May 28, 2022 was $110.2 million or $2.03 per basic and diluted share compared to a net loss of $13.1 million or $0.24 per basic and diluted share for the thirteen week period ended May 29, 2021. The increase in net loss for the thirteen week period ended May 28, 2022 was due primarily to higher facility exit and impairment charges driven by the Company’s previously announced store closure decisions and a decrease in Adjusted EBITDA. These items were partially offset by an increase in gain on sale of assets resulting from script file sales of certain of the store closures.
Our Adjusted EBITDA for the thirteen week period ended May 28, 2022 was $100.1 million or 1.7% of revenues compared to $138.9 million or 2.3% of revenues for the thirteen week period ended May 29, 2021. The decrease in Adjusted EBITDA for the thirteen week period ended May 28, 2022 was due to declines in both the Retail Pharmacy segment and the Pharmacy Services segment. Adjusted EBITDA decreased $21.2 million in the Retail Pharmacy segment due primarily to a decrease in gross profit, partially offset by a decrease in Adjusted EBITDA selling, general and administrative expenses of $40.5 million. Adjusted EBITDA in the Pharmacy Services segment decreased $17.5 million due primarily to the decline in revenues associated with lost clients and an increase in the medical loss ratio at EI, partially offset by higher retained rebates from our new rebate aggregation arrangement.
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.
38
Consolidated Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended | ||||||||
| May 28, |
| May 29, |
| ||||
2022 | 2021 | |||||||
(dollars in thousands except per share amounts) | ||||||||
Revenues(a) | $ | 6,014,583 | $ | 6,160,985 | ||||
Revenue (decline) growth |
| (2.4) | % |
| 2.2 | % | ||
Net loss | $ | (110,191) | $ | (13,057) | ||||
Net loss per diluted share | $ | (2.03) | $ | (0.24) | ||||
Adjusted EBITDA(b) | $ | 100,130 | $ | 138,877 | ||||
Adjusted Net (Loss) Income (b) | $ | (32,829) | $ | 20,934 | ||||
Adjusted Net (Loss) Income per Diluted Share(b) | $ | (0.60) | $ | 0.38 | ||||
| (a) | Revenues for the thirteen week periods ended May 28, 2022 and May 29, 2021 exclude $56,630 and $62,979, 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 decreased 2.4% for the thirteen weeks ended May 28, 2022, compared to an increase of 2.2% for the thirteen weeks ended May 29, 2021. Revenues for the thirteen week period ended May 28, 2022 were impacted by a $6.3 million decrease in Retail Pharmacy segment revenues and a $146.4 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 28, |
| May 29, |
|
| |||
2022 | 2021 | |||||||
(dollars in thousands) | ||||||||
Cost of revenues(a) | $ | 4,817,854 | $ | 4,876,110 | ||||
Gross profit |
| 1,196,729 |
| 1,284,875 | ||||
Gross margin |
| 19.9 | % |
| 20.9 | % | ||
Selling, general and administrative expenses | $ | 1,217,929 | $ | 1,245,362 | ||||
Selling, general and administrative expenses as a percentage of revenues |
| 20.2 | % |
| 20.2 | % | ||
Facility exit and impairment charges |
| 66,571 |
| 8,831 | ||||
Interest expense |
| 48,119 |
| 49,121 | ||||
Loss on debt retirements, net |
| — |
| 396 | ||||
Gain on sale of assets, net |
| (29,196) |
| (6,558) | ||||
| (a) | Cost of revenues for the thirteen week periods ended May 28, 2022 and May 29, 2021 exclude $56,630 and $62,979, respectively, of inter-segment activity that is eliminated in consolidation. |
Gross Profit and Cost of Revenues
Gross profit decreased by $88.1 million for the thirteen week period ended May 28, 2022 compared to the thirteen week period ended May 29, 2021. Gross profit for the thirteen week period ended May 28, 2022 includes a decrease of $72.5 million in our Retail Pharmacy segment and a decrease of $15.6 million in our Pharmacy Services
39
segment. Gross margin was 19.9% for the thirteen week period ended May 28, 2022 compared to 20.9% for the thirteen week period ended May 29, 2021. 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 decreased by $27.4 million for the thirteen week period ended May 28, 2022, compared to the thirteen week period ended May 29, 2021. The decrease in SG&A for the thirteen week period ended May 28, 2022 includes a decrease of $38.8 million relating to our Retail Pharmacy segment, partially offset by an increase of $11.4 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 28, |
| May 29, | |||
2022 |
| 2021 | ||||
Impairment charges | $ | 35,036 |
| $ | 4,313 | |
Facility exit charges |
| 31,535 |
| 4,518 | ||
$ | 66,571 |
| $ | 8,831 | ||
Please refer to “Management’s Discussion and Analysis of Financial Condition and Results—Facility Exit and Impairment Charges” included in our Fiscal 2022 10-K for a detailed description of our impairment and lease termination methodology.
Interest Expense
Interest expense was $48.1 million and $49.1 million for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. The weighted average interest rate on our indebtedness for the thirteen week periods ended May 28, 2022 and May 29, 2021 was 5.6% and 5.3%, respectively.
Income Taxes
We recorded an income tax expense of $3.5 million and $0.8 million for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. The effective tax rate for the thirteen week periods ended May 28, 2022 and May 29, 2021 was (3.3)% and (6.4)%, respectively. The effective tax rate for the thirteen week periods ended May 28, 2022 and May 29, 2021 was net of an adjustment of (37.6)% and (18.5)%, 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 $25.1 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 material 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 $1,862.8 million and $1,822.7 million, which relates to federal and
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state deferred tax assets that may not be realized based on our future projections of taxable income at May 28, 2022 and February 26, 2022, 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:
| Retail |
| Pharmacy |
| Intersegment |
| ||||||
Pharmacy | Services | Eliminations(1) | Consolidated | |||||||||
Thirteen Week Period Ended | ||||||||||||
May 28, 2022: | ||||||||||||
Revenues | $ | 4,345,356 | $ | 1,725,857 | $ | (56,630) | $ | 6,014,583 | ||||
Gross Profit |
| 1,097,357 |
| 99,372 |
| — |
| 1,196,729 | ||||
Adjusted EBITDA(*) |
| 73,682 |
| 26,448 |
| — |
| 100,130 | ||||
May 29, 2021: | ||||||||||||
Revenues | $ | 4,351,682 | $ | 1,872,282 | $ | (62,979) | $ | 6,160,985 | ||||
Gross Profit |
| 1,169,934 |
| 114,941 |
| — |
| 1,284,875 | ||||
Adjusted EBITDA(*) |
| 94,914 |
| 43,963 |
| — |
| 138,877 | ||||
| (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.
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Retail Pharmacy Segment Results of Operations
Revenues and Other Operating Data
Thirteen Week Period Ended | ||||||||
| May 28, |
| May 29, |
|
| |||
2022 | 2021 | |||||||
(dollars in thousands) | ||||||||
Revenues | $ | 4,345,356 | $ | 4,351,682 | ||||
Revenue (decline) growth |
| (0.1) | % |
| 5.5 | % | ||
Same store sales growth |
| 4.6 | % |
| 1.4 | % | ||
Pharmacy sales growth |
| 1.9 | % |
| 14.1 | % | ||
Same store prescription count growth, adjusted to 30-day equivalents |
| 0.9 | % |
| 11.2 | % | ||
Same store pharmacy sales growth |
| 6.6 | % |
| 8.2 | % | ||
Pharmacy sales as a % of total retail sales |
| 70.8 | % |
| 68.9 | % | ||
Front-end sales decline |
| (4.6) | % |
| (9.8) | % | ||
Same store front-end sales decline |
| (0.5) | % |
| (12.0) | % | ||
Front-end sales as a % of total retail sales |
| 29.2 | % |
| 31.1 | % | ||
Adjusted EBITDA(*) | $ | 73,682 | $ | 94,914 | ||||
Store data: |
|
|
| |||||
Total stores (beginning of period) |
| 2,450 |
| 2,510 | ||||
New stores |
| — |
| 1 | ||||
Store acquisitions |
| — |
| — | ||||
Closed stores |
| (89) |
| (5) | ||||
Total stores (end of period) |
| 2,361 |
| 2,506 | ||||
Relocated stores |
| 1 |
| — | ||||
Remodeled and expanded stores |
| 2 |
| 6 | ||||
(*) 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 0.1% for the thirteen weeks ended May 28, 2022 compared to an increase of 5.5% for the thirteen weeks ended May 29, 2021. The decrease in revenues for the thirteen week period ended May 28, 2022 was driven by a reduction in COVID vaccine and testing revenue as well as store closures, offset by an increase in non-COVID prescriptions.
Pharmacy same store sales increased by 6.6% for the thirteen week period ended May 28, 2022 compared to an increase of 8.2% in the thirteen week period ended May 29, 2021. 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 0.9% for the thirteen week period ended May 28, 2022 driven primarily by an increase in non-COVID same store prescriptions of 3.7%, with same store maintenance prescriptions increasing 1.4% and other same store acute prescriptions increasing 11.9%.
Front-end same store sales decreased 0.5% during the thirteen week period ended May 28, 2022 compared to a decrease of 12.0% during the thirteen week period ended May 29, 2021. Front-end same store sales, excluding cigarettes and tobacco products, were flat. Front-end same store sales were driven by increases in over-the-counter products, offset by decreases in alcohol and seasonal sales, due to supply chain disruptions.
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.
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Costs and Expenses
Thirteen Week Period Ended | ||||||||
| May 28, |
| May 29, |
|
| |||
2022 | 2021 | |||||||
(dollars in thousands) | ||||||||
Cost of revenues | $ | 3,247,999 |
| $ | 3,181,748 |
| ||
Gross profit |
| 1,097,357 |
| 1,169,934 | ||||
Gross margin |
| 25.3 | % |
| 26.9 | % | ||
FIFO gross profit(*) |
| 1,097,357 |
| 1,165,941 | ||||
FIFO gross margin(*) |
| 25.3 | % |
| 26.8 | % | ||
Selling, general and administrative expenses | 1,117,214 | 1,156,039 | ||||||
Selling, general and administrative expenses as a percentage of revenues |
| 25.7 | % |
| 26.6 | % | ||
(*) 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 decreased $72.5 million for the thirteen week period ended May 28, 2022 compared to the thirteen week period ended May 29, 2021. The decrease in gross profit was driven by the decline in COVID-19 vaccinations and testing. The gross profit headwind from reduced COVID related services was partially offset by an increase in prescriptions filled and improved front end gross margin.
Gross margin was 25.3% of sales for the thirteen week period ended May 28, 2022 compared to 26.9% of sales for the thirteen week period ended May 29, 2021. The decline in gross margin as a percentage of revenues is due primarily to the reduction in COVID-19 vaccinations and testing.
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 charges were $0 for the thirteen week period ended May 28, 2022, compared to LIFO credits of $4.0 million for the thirteen week period ended May 29, 2021. The reduction in LIFO credits in the thirteen week period ended May 28, 2022 was mostly due to higher anticipated front-end inflation in fiscal 2023.
Selling, General and Administrative Expenses
SG&A expenses decreased $38.8 million for the thirteen week period ended May 28, 2022 due primarily to lower payroll, occupancy and other operating costs due to store closures and cost control initiatives. SG&A expenses as a percentage of revenues for the thirteen week period ended May 28, 2022 was 25.7% compared to 26.6% for the thirteen week period ended May 29, 2021. The decrease is due primarily to the items noted above.
Pharmacy Services Segment Results of Operations
Revenues and Other Operating Data
| Thirteen Week Period Ended |
|
| |||||
May 28, |
| May 29, | ||||||
| 2022 |
| 2021 | |||||
(dollars in thousands) | ||||||||
Revenues | $ | 1,725,857 | $ | 1,872,282 | ||||
Revenue decline |
| (7.8) | % |
| (5.3) | % | ||
Adjusted EBITDA(*) | $ | 26,448 | $ | 43,963 | ||||
(*) See “Adjusted EBITDA, Adjusted Net Income (Loss), Adjusted Net Income (Loss) per Diluted Share and Other Non-GAAP Measures” for additional details.
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Revenues
Revenues decreased $146.4 million for the thirteen week period ended May 28, 2022 compared to the thirteen week period ended May 29, 2021. The decrease in revenues was primarily the result of a planned decrease in EI membership and a previously announced client loss due to industry consolidation, offset by higher retained rebates from our new rebate aggregation arrangement and increased utilization of higher cost drugs.
Costs and Expenses
| Thirteen Week Period Ended |
|
| |||||
| May 28, |
| May 29, | |||||
2022 | 2021 | |||||||
(dollars in thousands) | ||||||||
Cost of revenues | $ | 1,626,485 | $ | 1,757,341 | ||||
Gross profit |
| 99,372 |
| 114,941 | ||||
Gross margin |
| 5.8 | % |
| 6.1 | % | ||
Selling, general and administrative expenses | 100,715 | 89,323 | ||||||
Selling, general and administrative expenses as a percentage of revenues |
| 5.8 | % |
| 4.8 | % | ||
Gross Profit and Cost of Revenues
Gross profit decreased $15.6 million for the thirteen week period ended May 28, 2022 compared to the thirteen week period ended May 29, 2021. The decrease in gross profit is primarily due to the decline in revenues associated with lost clients, as discussed above, and an increase in the medical loss ratio at EI, partially offset by higher retained rebates from our new rebate aggregation arrangement.
Gross margin was 5.8% of sales for the thirteen week period ended May 28, 2022 compared to 6.1% of sales for the thirteen week period ended May 29, 2021. The decline in gross margin is due primarily to the items noted above.
Selling, General and Administrative Expenses
SG&A expenses increased $11.4 million for the thirteen week period ended May 28, 2022 compared to the thirteen week period ended May 29, 2021 due primarily to increased litigation and other contractual settlements related to manufacturer audit disputes from the former rebate aggregation business and restructuring expenses, partially offset by further consolidation of administrative functions. SG&A expenses as a percentage of revenue was 5.8% for the thirteen week period ended May 28, 2022 compared to 4.8% for the thirteen week period ended May 29, 2021. The increase in the thirteen week period selling, general and administrative expenses as a percentage of revenues is due primarily to the items noted above and the loss of sales volume.
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 28, 2022 was $1,709.5 million, which consisted of revolver borrowing capacity of $1,672.3 million and invested cash of $37.2 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”; and the Credit Agreement, as further amended by the Second Amendment (as defined below), the “Amended Credit Agreement”), which Credit Agreement
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provided for facilities consisting of a $2.7 billion senior secured asset-based revolving credit facility (“Initial Senior Secured Revolving Credit Facility”) and a $450.0 million “first-in, last out” senior secured term loan facility (“Initial Senior Secured Term Loan,” and together with the Initial Senior Secured Revolving Credit Facility, collectively, the “Initial Facilities”). In December 2018, we used proceeds from the Initial Facilities to refinance our prior $2.7 billion existing credit agreement.
On August 20, 2021, we entered in to the Second Amendment to Credit Agreement (the “Second Amendment”), which, among other things, amended the Credit Agreement to provide for a $2.8 billion senior secured asset-based revolving credit facility (“Senior Secured Revolving Credit Facility”) and a $350 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 “Amended Facilities”) and incorporate customary “hardwired” LIBOR transition provisions. The Amended 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 equal to, at our option, (x) a base rate (determined in a customary manner) plus a margin of between 0.25% to 0.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of between 1.25% and 1.75%, in each case based upon the Average ABL Availability (as defined in the Amended Credit Agreement). Borrowings under the Senior Secured Term Loan bear interest at a rate per annum equal to, at our option, of (x) a base rate (determined in a customary manner) plus a margin of 1.75% or (y) an adjusted LIBOR rate (determined in a customary manner) plus a margin of 2.75%. 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 Amended Facilities are scheduled to mature on August 20, 2026 (subject to a springing maturity if certain of our existing secured notes are not refinanced or repaid prior to the date that is 91 days prior to the stated maturity thereof).
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 28, 2022, we had approximately $1,350.0 million of borrowings outstanding under the Amended Facilities and had letters of credit outstanding under the Senior Secured Revolving Credit Facility in a face amount of approximately $127.7 million, which resulted in remaining borrowing capacity under the Senior Secured Revolving Credit Facility of $1,672.3 million. If at any time the total credit exposure outstanding under the Senior Secured Revolving Credit Facility exceeds the borrowing base, we will be required to repay amounts outstanding to eliminate such shortfall.
The Amended Credit Agreement restricts us and all of our subsidiaries, including the subsidiaries that guarantee our obligations under the Amended 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 Amended 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 Amended 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 Amended Facilities, and then held as collateral for the senior obligations until such cash sweep period is rescinded pursuant to the terms of the Amended Facilities.
Our obligations under the Amended 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.
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The Amended 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 Amended 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 Amended 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 Amended 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 Amended 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 Amended Credit Agreement also contains certain restrictions on the amount of secured first priority debt we are able to incur. The Amended Credit Agreement also allows for the voluntary repurchase of any debt or other convertible debt, so long as the Amended Facilities are not in default and we maintain availability under our revolver of more than $365.0 million.
The Amended 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 28, 2022, our fixed charge coverage ratio was greater than 1.00 to 1.00, and we were in compliance with the Amended Credit Agreement’s financial covenant. The Amended 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 Amended 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 unsecured notes and secured notes contain restrictions on the amount of additional secured and unsecured debt that we may incur. As of May 28, 2022, we had the ability to issue additional secured and unsecured debt under the indentures governing our unguaranteed unsecured notes, including the ability to draw the full amount of our Senior Secured Revolving Credit Facility and enter into certain sale and leaseback transactions.
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, the 7.500% Notes and the 8.00% Notes (collectively, the "Guaranteed Notes"). As discussed in Note 11 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, the 8.00% 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 Amended Facilities.
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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.
May 28, |
| February 26, | ||||
In millions | 2022 | 2022 | ||||
Due from EI | $ | 95.7 | $ | 26.5 | ||
Other current assets | 3,361.0 | 3,314.9 | ||||
Total current assets | $ | 3,456.7 | $ | 3,341.4 | ||
Operating lease right-of-use assets | $ | 2,723.4 | $ | 2,813.5 | ||
Goodwill | 879.1 | 879.1 | ||||
Other noncurrent assets | 1,417.6 | 1,428.8 | ||||
Total noncurrent assets | $ | 5,020.1 | $ | 5,121.4 | ||
Due to EI | $ | — | $ | — | ||
Other current liabilities |
| 2,779.4 |
| 2,891.1 | ||
Total current liabilities | $ | 2,779.4 | $ | 2,891.1 | ||
Long-term debt less current maturities | $ | 3,026.5 | $ | 2,733.0 | ||
Long-term operating lease liabilities | 2,526.6 | 2,597.1 | ||||
Other noncurrent liabilities | 152.7 | 142.7 | ||||
Total noncurrent liabilities | $ | 5,705.8 | $ | 5,472.8 | ||
| Thirteen Week Period Ended | ||
In millions |
| May 28, 2022 | |
Revenues (a) | $ | 5,877.8 | |
Cost of revenues (b) |
| 4,682.1 | |
Gross profit |
| 1,195.7 | |
Net loss | $ | (105.8) | |
Net loss attributable to Rite Aid | $ | (110.2) | |
| (a) | Includes $36.1 million of revenues generated from the non-guarantor for the thirteen week period ended May 28, 2022. |
| (b) | Includes $36.0 million of cost of revenues incurred in transactions with the non-guarantor for the thirteen week period ended May 28, 2022. |
Net Cash Provided by/Used in Operating, Investing and Financing Activities
Cash used in operating activities was $252.2 million compared to cash provided by operating activities of $13.9 million for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. Operating cash flow was
47
negatively impacted by the build of the CMS receivable, increases in rebates receivable and timing of accounts payable payments.
Cash used in investing activities was $54.6 million and $54.7 million for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. During the thirteen week period ended May 28, 2022, we spent $73.2 million on the purchase of property, plant and equipment, $12.2 million on prescription file purchases and received proceeds of $30.8 million from prescription file sales driven by our store closures.
Cash flow provided by financing activities was $323.2 million compared to cash used by financing activities of $1.6 million for the thirteen week periods ended May 28, 2022 and May 29, 2021, respectively. Cash provided by financing activities for the thirteen weeks ended May 28, 2022 reflects incremental revolver borrowings and the change in our zero balance accounts due to timing of payments.
Capital Expenditures
During the thirteen week periods ended May 28, 2022 and May 29, 2021 capital expenditures were as follows:
| Thirteen Week Period Ended |
| |||||
| May 28, |
| May 29, | ||||
2022 | 2021 | ||||||
New store construction, store relocation and store remodel projects | $ | 11,775 | $ | 33,294 | |||
Technology enhancements, improvements to distribution centers and other corporate requirements |
| 61,401 |
| 25,870 | |||
Purchase of prescription files from other retail pharmacies |
| 12,248 |
| 5,436 | |||
Total capital expenditures | $ | 85,424 | $ | 64,600 | |||
The Company anticipates incurring approximately $250,000 of capital expenditures during fiscal 2023.
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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 or a decline in the overall economy; 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 Amended 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, including our recent cash tender offers whereby we purchased $150.0 million of certain of our outstanding series of senior notes as announced on June 13, 2022, or seek to refinance our outstanding debt (including the Amended 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 or other transactions to optimize our asset base. Any of these transactions could impact our financial results, including additional changes or realization of cancellation of indebtedness-income.
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—Critical Accounting Policies and Estimates” included in our Fiscal 2022 10-K, which we filed with the SEC on April 25, 2022.
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” included in our Fiscal 2022 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 and other contractual settlements, severance, restructuring-related costs and costs related to facility closures, gain or loss on sale of assets and the loss on Bartell acquisition). 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.
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The following is a reconciliation of our net income (loss) to Adjusted EBITDA for the thirteen week periods ended May 28, 2022 and May 29, 2021:
The following is a reconciliation of our net income (loss) to Adjusted Net Income (Loss) and Adjusted Net Income (Loss) per Diluted Share for the thirteen week periods ended May 28, 2022 and May 29, 2021. Adjusted Net Income (Loss) is defined as net income (loss) excluding the impact of amortization expense, merger and acquisition-related costs, non-recurring litigation and other contractual 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, restructuring-related costs, and the loss on Bartell acquisition. 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.
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| (a) | The fiscal year 2023 and 2022 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 28, 2022 and May 29, 2021, 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 28, 2022.
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 28, 2022, our annual interest expense would change by approximately $13.5 million.
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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.
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PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
The information in response to this item is incorporated herein by reference to Note 15, 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 2022 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 2023.
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. |
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Exhibit |
| Description |
| Incorporation By Reference To |
|---|---|---|---|---|
2.4 | Exhibit 2.1 to Form 8-K, filed on January 24, 2022 | |||
2.5 | Exhibit 2.2 to Form 8-K, filed on January 24, 2022 | |||
3.1 | Exhibit 3.1 to Form 8-K, filed on April 18, 2019 | |||
3.2 | Exhibit 3.1 to Form 8-K, filed on April 17, 2020 | |||
4.1 | Indenture, dated as of August 1, 1993, between Rite Aid Corporation, as issuer, and Morgan Guaranty Trust Company of New York, as trustee, related to the Company’s 7.70% Notes due 2027 | Exhibit 4A to Registration Statement on Form S-3, File No. 033-63794, filed on June 3, 1993 | ||
4.2 | Exhibit 4.1 to Form 8-K filed on February 7, 2000 | |||
4.3 | Exhibit 4.1 to Registration Statement on Form S-4, File No. 333-74751, filed on March 19, 1999 | |||
4.4 | Exhibit 4.4 to Form 8-K, filed on February 7, 2000 | |||
4.5 | Exhibit 4.1 to Form 8-K filed on February 5, 2020 | |||
4.6 | Exhibit 4.9 to Form 10-K filed on April 27, 2020 | |||
4.7 | Exhibit 4.1 to Form 8-K filed on July 27, 2020 | |||
4.8 | Exhibit 4.12 to Form 10-Q filed on October 5, 2021 | |||
4.9 | Exhibit 4.13 to Form 10-Q filed on October 5, 2021 |
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Exhibit |
| Description |
| Incorporation By Reference To |
|---|---|---|---|---|
4.10 | Filed herewith | |||
4.11 | Filed herewith | |||
10.1 | † | Exhibit 10.1 to Form 8-K, filed on June 25, 2010 | ||
10.2 | † | Amendment No. 1, dated September 21, 2010, to the 2010 Omnibus Equity Plan | Exhibit 10.7 to Form 10-Q, filed on October 7, 2010 | |
10.3 | † | Amendment No. 2, dated January 16, 2013, to the 2010 Omnibus Equity Plan | Exhibit 10.8 to Form 10-K, filed on April 23, 2013 | |
10.4 | † | Exhibit 10.1 to Form 8-K, filed on June 25, 2012 | ||
10.5 | † | Amendment No. 1, dated January 16, 2013, to the 2012 Omnibus Equity Plan | Exhibit 10.10 to Form 10-K, filed on April 23, 2013 | |
10.6 | † | Exhibit 10.1 to Form 8-K, filed on June 23, 2014 | ||
10.7 | † | Exhibit 10.2 to Form 8-K, filed on May 15, 2012 | ||
10.8 | † | Executive Incentive Plan for Officers of Rite Aid Corporation | Exhibit 10.1 to Form 8-K, filed on February 24, 2012 | |
10.9 | † | Exhibit 10.1 to Form 10-Q, filed on January 6, 2016 | ||
10.10 | Exhibit 10.1 to Form 8-K, filed on December 20, 2018 | |||
10.11 | Exhibit 10.1 to Form 8-K, filed on January 7, 2020 | |||
10.12 | Exhibit 9.01 to Form 8-K, filed on August 23, 2021 | |||
10.13 | Exhibit 10.3 to Form 8-K, filed on June 11, 2009 |
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Exhibit |
| Description |
| Incorporation By Reference To |
|---|---|---|---|---|
10.14 | † | Exhibit 10.32 to Form 10-Q, filed on July 11, 2019 | ||
10.15 | † | Exhibit 10.33 to Form 10-Q, filed on July 11, 2019 | ||
10.16 | † | Exhibit 10.34 to Form 10-Q, filed on July 11, 2019 | ||
10.17 | † | Exhibit 10.35 to Form 10-Q, filed on July 11, 2019 | ||
10.18 | † | Exhibit 10.36 to Form 10-Q, filed on July 11, 2019 | ||
10.19 | † | Exhibit 10.37 to Form 10-Q, filed on July 11, 2019 | ||
10.20 | †* | Exhibit 10.38 to Form 10-Q, filed on July 11, 2019 | ||
10.21 | †** | Employment Agreement by and between Rite Aid Corporation and Heyward Donigan, dated August 8, 2019 | Exhibit 10.1 to Form 8-K, filed on August 12, 2019 | |
10.22 | † | Exhibit 10.2 to Form 8-K, filed on August 12, 2019 | ||
10.23 | † | Employment Agreement dated October 2, 2019 by and between Rite Aid Corporation and James Peters | Exhibit 10.1 to Form 8-K, filed on October 2, 2019 | |
10.24 | † | Exhibit 10.43 to Form 10-K filed on April 27, 2020 | ||
10.25 | † | Amendment to Employment Agreement by and between Jessica Kazmaier, dated as of November 6, 2019 | Exhibit 10.44 to Form 10-K filed on April 27, 2020 | |
10.26 | † | Employment Agreement by and between Justin Mennen, dated as of December 7, 2018 | Exhibit 10.45 to Form 10-K filed on April 27, 2020 | |
10.27 | † | Amendment to Employment Agreement by and between Justin Mennen, dated November 6, 2019 | Exhibit 10.46 to Form 10-K filed on April 27, 2020 | |
10.28 | † | Exhibit 10.47 to Form 10-K filed on April 27, 2020 | ||
10.29 | † | Employment Agreement by and between RxOptions, LLC and Dan Robson, dated as of December 12, 2019 | Exhibit 10.48 to Form 10-K filed on April 27, 2020 | |
10.30 | † | Employment Agreement by and between Rite Aid Corporation and Paul D. Gilbert, as of July 29, 2020 | Exhibit 10.46 to Form 10-Q filed on October 6, 2020 | |
10.31 | †* | Separation Agreement by and between Rite Aid Corporation and Dan Robson, as of January 27, 2021 | Exhibit 10.32 to Form 10-K filed on April 27, 2021 | |
10.32 | † | Rite Aid Corporation Amended and Restated 2020 Omnibus Equity Plan | Appendix B-1 to Schedule 14A (Definitive Proxy Statement) filed on May 20, 2021 | |
10.33 | † | Form Award Agreement (Executive) under the Rite Aid Corporation 2020 Omnibus Equity Plan | Exhibit 10.2 to Form 8-K filed on July 8, 2020 | |
10.34 | † | Form Award Agreement (Non-employee Director) under the Rite Aid Corporation 2020 Omnibus Equity Plan | Exhibit 10.3 to Form 8-K filed on July 8, 2020 | |
10.35 | Filed herewith |
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Exhibit |
| Description |
| Incorporation By Reference To |
|---|---|---|---|---|
10.36 | Separation Agreement by and between Rite Aid Corporation and James Peters, as of March 7, 2022 | Filed herewith | ||
22 | Filed herewith | |||
31.1 | Filed herewith | |||
31.2 | Filed herewith | |||
32 | Filed herewith | |||
101.INS | XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith | ||
101.SCH | XBRL Taxonomy Extension Schema Document. | Filed herewith | ||
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document. | Filed herewith | ||
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document. | Filed herewith | ||
101.LAB | XBRL Taxonomy Extension Label Linkbase Document. | Filed herewith | ||
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document. | Filed herewith | ||
104 | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. | Filed herewith |
* 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.
† Management contract or compensatory plan or arrangement.
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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.
Date: July 6, 2022 | RITE AID CORPORATION | |
By: | /s/ MATTHEW C. SCHROEDER | |
Matthew C. Schroeder | ||
Executive Vice President and Chief Financial Officer | ||
Date: July 6, 2022 | By: | /s/ BRIAN T. HOOVER |
Brian T. Hoover | ||
Senior Vice President and Chief Accounting Officer | ||
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Exhibit 4.10
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this “Supplemental Indenture”) dated as of March 31, 2022, among Tonic Procurement Solutions, LLC, an Ohio limited liability company (the “New Subsidiary Guarantor”), a subsidiary of Rite Aid Corporation (or its successor), a Delaware corporation (the “Company”), the Company on behalf of itself and the Subsidiary Guarantors (the “Existing Subsidiary Guarantors”) under the indenture referred to below, and The Bank of New York Mellon Trust Company, N.A., a banking association organized under the laws of the United States of America, as trustee (in such capacity, “Trustee”) and as notes collateral agent (in such capacity, “Notes Collateral Agent”) under the indenture referred to below.
W I T N E S S E T H :
WHEREAS the Company and the Existing Subsidiary Guarantors have heretofore executed and delivered to the Trustee an Indenture (the “Indenture”) dated as of February 5, 2020, as amended on August 27, 2021, providing for the issuance of an unlimited aggregate principal amount of 7.500% Senior Secured Notes due 2025 (the “Securities”);
WHEREAS Section 4.09 of the Indenture provides that under certain circumstances the Company is required to cause the New Subsidiary Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the New Subsidiary Guarantor shall unconditionally guarantee all the Company’s obligations under the Securities pursuant to a Subsidiary Guarantee on the terms and conditions set forth herein; and
WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee, the Company and the Existing Subsidiary Guarantors are authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Subsidiary Guarantor, the Company, the Existing Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities as follows:
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written.
TONIC PROCUREMENT SOLUTIONS, LLC
By: /s/ Matthew Schroeder
Name:Matthew Schroeder
Title:Vice President & Assistant Secretary
RITE AID CORPORATION, on behalf of itself and the existing subsidiary guarantors
By: /s/ Paul Gilbert
Name:Paul Gilbert
Title:Executive Vice President, General Counsel and Corporate Secretary
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as trustee
By: /s/ Manjari Dahlia Purkayastha
Name:Manjari Dahlia Purkayastha
Title:Vice President
2022-03-29
09:31-07:00
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as notes collateral agent,
By: /s/ Manjari Dahlia Purkayastha
Name:Manjari Dahlia Purkayastha
Title:Vice President
2022-03-29
09:31-07:00
[Signature Page to Supplemental Indenture for the 2025 Notes]
Exhibit 4.11
SUPPLEMENTAL INDENTURE
SUPPLEMENTAL INDENTURE (this “Supplemental Indenture”) dated as of March 31, 2022, among Tonic Procurement Solutions, LLC, an Ohio limited liability company (the “New Subsidiary Guarantor”), a subsidiary of Rite Aid Corporation (or its successor), a Delaware corporation (the “Company”), the Company on behalf of itself and the Subsidiary Guarantors (the “Existing Subsidiary Guarantors”) under the indenture referred to below, and The Bank of New York Mellon Trust Company, N.A., a banking association organized under the laws of the United States of America, as trustee (in such capacity, “Trustee”) and as notes collateral agent (in such capacity, “Notes Collateral Agent”) under the indenture referred to below.
W I T N E S S E T H :
WHEREAS the Company and the Existing Subsidiary Guarantors have heretofore executed and delivered to the Trustee an Indenture (the “Indenture”) dated as of July 27, 2020, as amended on August 27, 2021, providing for the issuance of an unlimited aggregate principal amount of 8.000% Senior Secured Notes due 2026 (the “Securities”);
WHEREAS Section 4.09 of the Indenture provides that under certain circumstances the Company is required to cause the New Subsidiary Guarantor to execute and deliver to the Trustee a supplemental indenture pursuant to which the New Subsidiary Guarantor shall unconditionally guarantee all the Company’s obligations under the Securities pursuant to a Subsidiary Guarantee on the terms and conditions set forth herein; and
WHEREAS pursuant to Section 9.01 of the Indenture, the Trustee, the Company and the Existing Subsidiary Guarantors are authorized to execute and deliver this Supplemental Indenture.
NOW THEREFORE, in consideration of the foregoing and for other good and valuable consideration, the receipt of which is hereby acknowledged, the New Subsidiary Guarantor, the Company, the Existing Subsidiary Guarantors and the Trustee mutually covenant and agree for the equal and ratable benefit of the Holders of the Securities as follows:
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed as of the date first above written.
TONIC PROCUREMENT SOLUTIONS, LLC
By: /s/ Matthew Schroeder
Name:Matthew Schroeder
Title:Vice President & Assistant Secretary
RITE AID CORPORATION, on behalf of itself and the existing subsidiary guarantors
By: /s/ Paul Gilbert
Name:Paul Gilbert
Title:Executive Vice President, General Counsel and Corporate Secretary
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as trustee
By: /s/ Manjari Dahlia Purkayastha
Name:Manjari Dahlia Purkayastha
Title:Vice President
2022-03-29
09:31-07:00
THE BANK OF NEW YORK MELLON TRUST COMPANY, N.A., as notes collateral agent,
By: /s/ Manjari Dahlia Purkayastha
Name:Manjari Dahlia Purkayastha
Title:Vice President
2022-03-29
09:31-07:00
[Signature Page to Supplemental Indenture for the 2026 Notes]
Exhibit 10.35
March 7, 2022
Jocelyn Z. Konrad
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Re:Separation of Employment
Dear Jocy:
This letter agreement (this “Agreement”) confirms our understanding and agreement with respect to your separation of employment with Rite Aid Corporation (the “Company,” each a “Party” and together with you, the “Parties”). Capitalized terms not otherwise defined herein will have the meanings attributed to them in the employment agreement by and between you and the Company dated August 15, 2015, as amended (the “Employment Agreement”).
| 1. | Separation of Employment. Your last day of employment with the Company is March 7, 2022 (the “Separation Date”). As of the Separation Date, you irrevocably resign from all positions you currently hold with the Company and its subsidiaries, including as EVP, Chief Pharmacy Officer, and you agree to execute the resignation letter attached hereto as Appendix A. You agree that, following the Separation Date, you will not represent yourself to be associated in any capacity with the Company or any of its subsidiaries or affiliates. |
| 2. | Accrued Benefits; Severance. |
| (a) | Whether or not this Agreement becomes effective pursuant to its terms, the Company will pay you the Accrued Benefits (as defined in Appendix B hereto), and pay in lieu of notice, as set forth in Section 2(g ) of Appendix B hereto, less all applicable withholdings and deductions. |
| (b) | Provided that this Agreement becomes effective on the Release Effective Date (as defined in Section 5(c) below) and you remain in compliance in all material respects with this Agreement, the Company will pay you the severance amount and fulfill the obligations set forth on Appendix B items 2(a) through 2(f), in each case less all applicable withholdings and deductions, at the time and in the form set forth on Appendix B for each item (the “Release Consideration”). |
| 3. | Release. |
| (a) | You hereby release, discharge and forever acquit the Company, and its affiliates and subsidiaries and each of their past, present and future stockholders, directors, employees, agents, successors and assigns of the foregoing, in their personal and representative capacities (individually, “Company Party,” and collectively, the “Company Parties”), from liability for, and hereby waive, any and all claims, charges, liabilities, causes of action, rights, complaints, sums of money, suits, debts, covenants, contracts, agreements, promises, benefits, obligations, damages, demands or liabilities of every nature, kind and description, in law, equity or |
| otherwise, whether known or unknown, suspected or unsuspected (collectively, “Claims”) which you or your heirs, executors, administrators, spouse, relatives, successors or assigns ever had, now have or may hereafter claim to have by reason of any matter, cause or thing whatsoever: (i) arising from the beginning of time through the date upon which you execute this Agreement including, but not limited to (A) any such Claims relating in any way to your employment relationship with the Company or any other Company Parties, and (B) any such Claims arising under any federal, state, local or foreign statute or regulation, including, without limitation, the Age Discrimination in Employment Act of 1967, as amended by the Older Workers Benefit Protection Act (the “ADEA”), Title VII of the Civil Rights Act of 1964, the Americans with Disabilities Act of 1990, the Employee Retirement Income Security Act of 1974, the Pennsylvania Human Relations Act, the Pennsylvania Equal Pay Law and any other federal, state, local or foreign law (statutory, regulatory or otherwise) that may be legally waived and released; (ii) relating to wrongful employment termination; or (iii) arising under or relating to any policy, agreement, understanding or promise, written or oral, formal or informal, between the Company or any of the other Company Parties and you, including, without limitation, the Employment Agreement and any incentive compensation plan or equity plan with any Company Party. Notwithstanding the above, this release does not extend to (A) claims for Accrued Benefits; (B) claims for worker’s compensation benefits or for an occupational disease; (C) any whistleblower claims arising under the Sarbanes-Oxley Act or Dodd-Frank Wall Street Reform and Consumer Protection Act; (D) claims to require the Company to honor its commitments set forth in this Agreement; (E) claims for indemnification and officers and directors liability insurance coverage under Section 4.7 of the Employment Agreement, the Company’s charter, by-laws or applicable law; and/or (F) claims that cannot be waived as a matter of law pursuant to federal, state, or local law (collectively, clauses (A) through (F) are the “Excluded Claims”). |
| (b) | You further acknowledge and agree that, except with respect to the Accrued Benefits, the Company Parties have fully satisfied any and all obligations whatsoever owed to you arising out of your employment with the Company or any other Company Party, and that no further payments or benefits are owed to you by the Company or any other Company Party except as provided for in this Agreement. |
| 4. | Attorney Consultation; Voluntary Agreement. You acknowledge that (a) the Company has advised you to consult with an attorney of your own choosing before signing this Agreement, (b) you have been given the opportunity to seek the advice of counsel, (c) you have carefully read and fully understand all of the provisions of this Agreement, including the release in Section 3 (the “Release”), (d) the Release specifically applies to any rights or claims you may have against the Company Parties pursuant to the ADEA, (e) you are entering into this Agreement knowingly, freely and voluntarily in exchange for good and valuable consideration to which you are not otherwise entitled, including the payments and benefits referenced in items 2(a) through 2(f) of Appendix B of this Agreement and (f) you have the full power, capacity and authority to enter into this Agreement. |
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| 5. | Review and Revocation Period. |
| (a) | You have twenty-one days following your receipt of this Agreement to review its terms, including the Release, and to reflect upon them and consider whether you want to sign it, although you may sign it sooner; provided, however, that you may not sign this Agreement prior to the Separation Date. You acknowledge and agree that changes to this Agreement (including Appendix B), whether material or immaterial, do not restart the running of this twenty-one day period. You understand and agree that you may consent to this Agreement, including the Release, by signing and returning this Agreement within the applicable time frame to the CHRO (as defined on Appendix B). |
| (b) | You may revoke your consent to the Release within the seven day period beginning on the date you execute this Agreement (such seven day period being referred to herein as the “Release Revocation Period”). To be effective, such revocation must be in writing signed by you and delivered to the Company at the above address before 11:59 p.m., Eastern Standard time, on the last day of the Release Revocation Period. |
| (c) | In the event of such revocation by you, the Release shall be of no force or effect, and you will not have any rights and the Company will not have any obligations under Section 2(b) of this Agreement. Provided that you do not revoke your consent to the Release within the Release Revocation Period, the Release shall become effective on the eighth (8th) calendar day after the date upon which you execute this Agreement (the “Release Effective Date”). |
| 6. | Restrictive Covenants. You acknowledge and agree that the confidentiality obligations and the restrictive covenants and agreements set forth in Sections 6 and 7 of the Employment Agreement, respectively, and any other written restrictive covenants and confidentiality agreements in effect with the Company, are incorporated herein by reference and fully made a part hereof for all purposes and remain in full force and effect. You agree to keep the contents of this Agreement strictly confidential except as necessary to obtain the advice of your tax and legal advisors. |
| 7. | Cooperation. You agree that, at mutually agreeable times, you will meet with representatives of the Company, or its respective parent or subsidiary company representatives and provide any information you acquired during the course of your employment relating in any way to any legal disputes involving the Company. You further agree that you will cooperate fully with the Company relating to any such litigation matter or other legal proceeding in which you were involved or on which you have knowledge by virtue of your employment with the Company, including any existing or future litigation or other legal proceeding involving the Company, whether administrative, civil or criminal in nature in which and to the extent the Company deems your cooperation necessary. You will be entitled to reimbursement by the Company of reasonable costs and expenses incurred by you in connection with complying with your obligations under Section 7 of this Agreement. |
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| 8. | Non-Disparagement. You agree that you will not make any negative comments or disparaging remarks, in writing, orally or electronically (“Disparaging Remarks”), about the Company or any of the other Company Parties and their respective products and services. The Company agrees to instruct members of its senior management team not to, for as long as such individuals remain affiliated with the Company, make any Disparaging Remarks about you; provided, however, that nothing in this Section 8 shall prohibit you from (a) making truthful and accurate statements or disclosures that are required by applicable law or legal process; (b) making any voluntary disclosure of information or documents concerning possible violations of law to any governmental agency or legislative body, or any self-regulatory organization; or (c) exercising protected rights to the extent that such rights, by law, cannot be waived by agreement. |
| 9. | Permitted Disclosures. Pursuant to 18 U.S.C. § 1833(b), you will not be held criminally or civilly liable under any Federal or State trade secret law for the disclosure of a trade secret of the Company that (a) is made (i) in confidence to a Federal, State, or local government official, either directly or indirectly, or to your attorney and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (b) is made in a complaint or other document that is filed under seal in a lawsuit or other proceeding. If you file a lawsuit for retaliation by the Company for reporting a suspected violation of law, you may disclose the trade secret to your attorney and use the trade secret information in the court proceeding if you (I) file any document containing the trade secret under seal and (II) do not disclose the trade secret except pursuant to court order. Nothing in this Agreement or any other agreement you have with the Company is intended to conflict with 18 U.S.C. § 1833(b) or create liability for disclosures of trade secrets that are expressly allowed by such section. Further, nothing in any agreement you have with the Company will prohibit or restrict you from making any voluntary disclosure of information or documents related to any violation of law to any governmental agency or legislative body, or any self-regulatory organization, in each case, without advance notice to the Company. |
| 10. | No Admission. Nothing herein will be deemed to constitute an admission of wrongdoing by you or any of the Company Parties. Neither this Agreement nor any of its terms may be used as an admission or introduced as evidence as to any issue of law or fact in any proceeding, suit or action, other than an action to enforce this Agreement. |
| 11. | Counterparts. This Agreement may be executed in counterparts, and each counterpart, when so executed and delivered, will be deemed to be an original and both counterparts, taken together, will constitute one and the same Agreement. A faxed, .pdf-ed or other e-sign signature such as through DocuSign will operate the same as an original signature. |
| 12. | Successors and Assigns. This Agreement will inure to the benefit of and be binding upon the Company and any successor organization which shall succeed to the Company by acquisition, merger, consolidation or operation of law, or by acquisition of assets of the Company and any assigns. You may not assign this Agreement, except with respect to the rights provided under Section 2 of this Agreement, which will inure to the benefit of your heirs, executors and administrators. In the event of your death at any time, your estate will receive all unpaid payments and benefits due you under this Agreement, including under Appendix B. |
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| 13. | Severability; Blue-Penciling. The provisions of this Agreement are severable and the invalidity of any one or more provisions will not affect the validity of any other provision. In the event that a court of competent jurisdiction shall determine that any provision of this Agreement or the application thereof is unenforceable in whole or in part because of the scope thereof, the Parties hereto agree that said court in making such determination shall have the power to reduce the scope of such provision to the extent necessary to make it enforceable, and that this Agreement in its reduced form shall be valid and enforceable to the full extent permitted by law. |
| 14. | Governing Law. This Agreement will be governed by and construed in accordance with the laws of the Commonwealth of Pennsylvania, without regard to any conflict of law principles thereof that would give rise to the application of the laws of any other jurisdiction. |
| 15. | Entire Agreement/No Oral Modifications. This Agreement including Appendix B constitutes the entire agreement between you and any of the Company Parties with respect to the subject matter hereof and supersedes all prior discussions, negotiations, representations, arrangements or agreements relating thereto, whether written or oral, including but not limited to the Employment Agreement, provided, however, that (i) Section 4.7 of the Employment Agreement shall survive the Separation Date, (ii) Sections 6 and 7 of the Employment Agreement shall remain in effect, for the duration and on the terms set forth therein, and (iii) any other defined terms contained in the Employment Agreement shall not be superseded hereby to the extent necessary for the interpretation, application, or enforcement of this Agreement. You represent that in executing this Agreement, you have not relied on any representation or statement not set forth herein. No amendment or modification of this Agreement shall be valid or binding on the Parties unless in writing and signed by both Parties. |
***
5
March 7, 2022
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
To Whom it may Concern:
I hereby irrevocably resign, effective as of March 7, 2022, from all positions and offices I hold with the Company and its subsidiaries, including as Chief Pharmacy Officer.
/s/ Jocelyn Konrad
Jocelyn Z. Konrad
APPENDIX B
ACCRUED BENEFITS AND SEVERANCE BENEFITS
The term “CHRO” means and refers to Jessica Kazmaier, Executive Vice President and Chief Human Resources Officer, Rite Aid Corporation, 30 Hunter Lane, Camp Hill, PA 17011 or by e-mail at jkazmaier@riteaid.com.
| 1. | Accrued Benefits: The Company will pay you (i) your Base Salary earned through the Separation Date; (ii) any reimbursements owed to you pursuant to Section 4.2 of the Employment Agreement for expenses incurred prior to the Separation Date; and (iii) the amounts accrued and credited to your account under the Company’s 401(k) Savings Plan, and other applicable tax-qualified retirements plans in accordance with the terms and conditions of such employee benefit plans, programs or arrangements (the “Accrued Benefits”). You acknowledge that there is no accrued or unpaid vacation payable to you under the Company’s unlimited paid time off policy. |
| 2. | Severance Benefits: You will be paid or provided with the following payments/benefits: |
| a. | $1,224,000 representing two (2) times your current Base Salary, payable in equal installments over the two year period following the Release Effective Date in accordance with the Company’s regular payroll practices, commencing with the first regular payroll date that occurs after the Release Effective Date. Notwithstanding the foregoing, to the extent necessary to avoid adverse tax consequences, and except as described below, any payment to which you become entitled under the Agreement, or any arrangement or plan referenced in this Agreement, that constitutes “deferred compensation” under Internal Revenue Code Section 409A (“409A”), and is (a) payable upon your termination of employment; (b) at a time when you are a “specified employee” as defined by 409A shall not be made until the first payroll date after the earliest of: (1) the expiration of the six (6) month period (the “Deferral Period”) measured from the date of your “separation from service” within the meaning of such term under 409A; or (2) your date of death following such separation from service. Upon the expiration of the Deferral Period, any payments that would have otherwise been made during that period (whether in a single sum or in installments) will be paid in a single cash lump sum payment to you (or your beneficiary, as applicable). Each installment or amount to be paid or benefit to be provided to you will be construed as a “separate identified payment” for purposes of 409A to the fullest extent permitted therein. |
| b. | Payment of your annual bonus for FY 2022 based on actual performance following determination by the Compensation Committee (or the Board) that the Company has achieved or exceeded its annual performance targets for the fiscal year, paid at the same time as annual performance bonus amounts are paid to the Company’s similarly situated active associates generally in respect of FY 2022. |
| c. | Payment of a pro rata portion of your annual bonus for FY 2023 based on actual performance (as determined on a basis consistent with the methodology applied to the |
8
| Company’s senior leadership team) following determination by the Compensation Committee (or the Board) that the Company has achieved or exceeded its annual performance targets for the fiscal year, determined by multiplying your then Annual Target Bonus (on the date hereof, one hundred percent (100%) of your Base Salary) by a fraction (x) the numerator of which is the number of days between the beginning of the then current fiscal year of the Company and the date of termination of employment and (y) the denominator of which is 365, paid at the same time as annual performance bonus amounts are paid to the Company’s executive team in respect of FY 2023. |
| d. | Accelerated vesting as of the Release Effective Date with respect to those stock options and time-based restricted stock awards that would have vested within the two (2) year period following the Separation Date. |
| e. | $54,876.48 representing payments equal to the aggregate cost of COBRA continuation coverage (COBRA premiums) for you and your eligible dependents for eighteen (18) months following the Separation Date, plus six (6) additional months’ of COBRA premiums, paid in a lump sum within ten (10) days following the Release Effective Date. |
| f. | Payment with respect to the 2019 – 2021 PSU awards for which the performance period has ended as of February 26, 2022, to the extent vested based on actual performance after certification by the Committee, paid at the same time as such PSU payments are made to other active PSU award recipients generally. |
| g. | $51,000 representing payment of thirty (30) days’ Base Salary in lieu of the notice period provided in the Employment Agreement, payable in a lump sum as soon as practicable following the Separation Date in accordance with the Company’s regular payroll schedule. |
| h. | Once the Company confirms that its information has been removed or “wiped”, you may retain the MacBook and printer previously provided to you by the Company. |
9
Exhibit 10.36
March 7, 2022
James Peters
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
Re:Separation of Employment
Dear Jim:
This letter agreement (this “Agreement”) confirms our understanding and agreement with respect to your separation of employment with Rite Aid Corporation (the “Company,” each a “Party” and together with you, the “Parties”). Capitalized terms not otherwise defined herein will have the meanings attributed to them in the employment agreement by and between you and the Company dated October 2, 2019 (the “Employment Agreement”).
2
3
***
4
IN WITNESS WHEREOF, the Parties have signed this Agreement as of the dates indicated below.
Rite Aid Corporation | James Peters |
| |
| |
By: /s/ Paul Gilbert_______ Date: April 13, 2022 | __/s/ James Peters__________________ Date: April 13, 2022 |
APPENDIX A
March 7, 2022
Rite Aid Corporation
30 Hunter Lane
Camp Hill, PA 17011
To Whom it may Concern:
I hereby irrevocably resign, effective as of March 7, 2022, from all positions and offices I hold with the Company and its subsidiaries, including as Chief Operating Officer.
Very truly yours,
/s/ James Peters
_________________
James Peters
APPENDIX B
ACCRUED BENEFITS AND SEVERANCE BENEFITS
The term “CHRO” means and refers to Jessica Kazmaier, Executive Vice President and Chief Human Resources Officer, Rite Aid Corporation, 30 Hunter Lane, Camp Hill, PA 17011 or by e-mail at jkazmaier@riteaid.com.
| 1. | Accrued Benefits: The Company will pay you (i) your Base Salary earned through the Separation Date; (ii) any reimbursements owed to you pursuant to Section 4.2 of the Employment Agreement for expenses incurred prior to the Separation Date; and (iii) the amounts accrued and credited to your account under the Company’s 401(k) Savings Plan, and other applicable tax-qualified retirements plans in accordance with the terms and conditions of such employee benefit plans, programs or arrangements (the “Accrued Benefits”). You acknowledge that there is no accrued or unpaid vacation payable to you under the Company’s unlimited paid time off policy. |
| 2. | Severance Benefits: You will be paid or provided with the following payments/benefits: |
| a. | $3,712,500 representing two (2) times the sum of your current Base Salary and Annual Target Bonus, payable in equal installments over the two year period following the Release Effective Date in accordance with the Company’s regular payroll practices, commencing with the first regular payroll date that occurs after the Release Effective Date. Notwithstanding the foregoing, to the extent necessary to avoid adverse tax consequences, and except as described below, any payment to which you become entitled under the Agreement, or any arrangement or plan referenced in this Agreement, that constitutes “deferred compensation” under Internal Revenue Code Section 409A (“409A”), and is (a) payable upon your termination of employment; (b) at a time when you are a “specified employee” as defined by 409A shall not be made until the first payroll date after the earliest of: (1) the expiration of the six (6) month period (the “Deferral Period”) measured from the date of your “separation from service” within the meaning of such term under 409A; or (2) your date of death following such separation from service. Upon the expiration of the Deferral Period, any payments that would have otherwise been made during that period (whether in a single sum or in installments) will be paid in a single cash lump sum payment to you (or your beneficiary, as applicable). Each installment or amount to be paid or benefit to be provided to you will be construed as a “separate identified payment” for purposes of 409A to the fullest extent permitted therein. |
| b. | Payment of your annual bonus for FY 2022 based on actual performance following determination by the Compensation Committee (or the Board) that the Company has achieved or exceeded its annual performance targets for the fiscal year, paid at the same time as annual performance bonus amounts are paid to the Company’s similarly situated active associates generally in respect of FY 2022. |
| c. | Payment of a pro rata portion of your annual bonus for FY 2023 at the same time as is paid to other eligible participants in the bonus plan, following determination by the Compensation Committee (or the Board) of the Company’s performance under the applicable annual performance goals for the fiscal year, determined by multiplying the performance level achieved (relative to Executive’s Annual Target Bonus amount) by a |
7
| fraction (x) the numerator of which is the number of fiscal periods (months) in which Executive is employed (in this case, this amounts to 9/30 months, or 0.3 months, and (y) the denominator of which is 12, which would result in the payment of $25,781.25 at target), paid at the same time as annual performance bonus amounts are paid to the Company's executive team in respect of FY 2023. |
| d. | Accelerated vesting as of the Release Effective Date with respect to those stock options and time-based restricted stock awards that would have vested within the two (2) year period following the Separation Date; any vested stock options shall remain exercisable for a period of ninety (90) days following the Separation Date. E*Trade will be instructed to promptly reflect the vested awards in your E*Trade account. |
| e. | (i) $41,560.92 representing payments equal to the aggregate cost of COBRA continuation coverage in respect of medical, vision and dental coverage for you and your eligible dependents for eighteen (18) months following the Separation Date, and (ii) $5,000 in respect of your financial planning allowance, in each case paid in a lump sum within ten (10) days following the Release Effective Date. |
| f. | Continued use of Clarks Summit office for remainder of the current lease (but in no event longer than 6 months), subject to Rite Aid’s existing obligations to pay rent. You agree to reimburse the Company for any incremental costs or expenses due to your use during the remaining term and to abide by any notice requirements in the lease (which shall promptly be provided to the Company if received by or given by you). |
| g. | $68,750 representing payment of thirty (30) days’ Base Salary in lieu of the notice period provided in the Employment Agreement, payable in a lump sum as soon as practicable following the Separation Date in accordance with the Company’s regular payroll schedule. |
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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 28, 2022:
Entity | Jurisdiction of Incorporation or Organization |
|---|---|
| |
Harco, Inc. | Alabama |
K & B Alabama Corporation | Alabama |
Rite Aid Lease Management Company (a California corporation) | California |
Thrifty Corporation (a California corporation) | California |
Thrifty PayLess, Inc. (a California corporation) | California |
Rite Aid of Connecticut, Inc. | Connecticut |
1515 West State Street Boise, Idaho, LLC (a Delaware limited liability company) | Delaware |
Ascend Health Technology, LLC (a Delaware limited liability company) | Delaware |
Design Rx Holdings, LLC (a Delaware limited liability company) | Delaware |
Eckerd Corporation (a Delaware corporation) | Delaware |
Elixir Puerto Rico, Inc. (a Delaware corporation) | Delaware |
Genovese Drug Stores, Inc. (a Delaware corporation) | Delaware |
Health Dialog Services Corporation (a Delaware corporation) | Delaware |
Hunter Lane, LLC (a Delaware limited liability company) | Delaware |
JCG (PJC) USA, LLC (a Delaware limited liability company) | Delaware |
JCG Holdings (USA), Inc. (a Delaware corporation) | Delaware |
Juniper Rx, LLC | Delaware |
K & B, Incorporated (a Delaware corporation) | Delaware |
Maxi Drug North, Inc. (a Delaware corporation) | Delaware |
Maxi Drug South, L.P. (a Delaware limited partnership) | Delaware |
Maxi Drug, Inc. (a Delaware corporation) | Delaware |
Munson & Andrews, LLC (a Delaware limited liability company) | Delaware |
Name Rite, LLC (a Delaware limited liability company) | Delaware |
P.J.C. Distribution, Inc. (a Delaware corporation) | Delaware |
P.J.C. Realty Co., Inc. (a Delaware corporation) | Delaware |
PJC Lease Holdings, Inc. (a Delaware corporation) | Delaware |
PJC Manchester Realty LLC (a Delaware limited liability company) | Delaware |
PJC Peterborough Realty LLC | Delaware |
PJC Revere Realty LLC (a Delaware limited liability company) | Delaware |
PJC Special Realty Holdings, Inc. (a Delaware corporation) | Delaware |
RediClinic Associates, Inc. (a Delaware corporation) | Delaware |
RediClinic LLC (a Delaware limited liability company) | Delaware |
RediClinic of PA, LLC (a Delaware limited liability company) | Delaware |
Entity | Jurisdiction of Incorporation or Organization |
|---|---|
| |
Rite Aid Corporation (PARENT) | Delaware |
Rite Aid Drug Palace, Inc. (a Delaware corporation) | Delaware |
Rite Aid Hdqtrs. Corp. (a Delaware corporation) | Delaware |
Rite Aid Hdqtrs. Funding, Inc. (a Delaware corporation) | Delaware |
Rite Aid of Delaware, Inc. (a Delaware corporation) | Delaware |
Rite Aid Online Store Inc. (a Delaware corporation) | Delaware |
Rite Aid Payroll Management Inc. (a Delaware corporation) | Delaware |
Rite Aid Realty Corp. (a Delaware corporation) | Delaware |
Rite Aid Specialty Pharmacy LLC (a Delaware limited liability company) | Delaware |
Rite Aid Transport, Inc. (a Delaware corporation) | Delaware |
Rite Investments Corp. (a Delaware corporation) | Delaware |
Rite Investments Corp., LLC (a Delaware limited liability company) | Delaware |
Rx Choice, Inc. (a Delaware corporation) | Delaware |
The Jean Coutu Group (PJC) USA, Inc. (a Delaware corporation) | Delaware |
Thrift Drug Inc. (a Delaware corporation) | Delaware |
Advance Benefits, LLC | Florida |
Elixir Savings, LLC | |
First Florida Insurers of Tampa, LLC | Florida |
Rite Aid of Georgia, Inc. | Georgia |
Rite Aid of Indiana, Inc. | Indiana |
Rite Aid of Kentucky, Inc. | Kentucky |
K & B Louisiana Corporation | Louisiana |
K & B Services, Incorporated | Louisiana |
Rite Aid of Maine, Inc. | Maine |
GDF, Inc. | Maryland |
READ'S, Inc. | Maryland |
Rite Aid of Maryland, Inc. | Maryland |
PJC of Massachusetts, Inc. (a Massachusetts corporation) | Massachusetts |
PJC Realty MA, Inc. (a Massachusetts corporation) | Massachusetts |
1740 Associates, LLC | Michigan |
Apex Drug Stores, Inc. | Michigan |
PDS-1 Michigan, Inc. | Michigan |
Perry Distributors, Inc. | Michigan |
Perry Drug Stores, Inc. | Michigan |
RDS Detroit, Inc. | Michigan |
Rite Aid of Michigan, Inc. | Michigan |
Laker Software, LLC | Minnesota |
K & B Mississippi Corporation | Mississippi |
Elixir Rx Solutions, LLC | Missouri |
Elixir Rx Solutions of Nevada | Nevada |
Rite Aid of New Hampshire, Inc. | New Hampshire |
Lakehurst and Broadway Corporation | New Jersey |
Rite Aid of New Jersey, Inc. | New Jersey |
Entity | Jurisdiction of Incorporation or Organization |
|---|---|
| |
Rite Aid of New York, Inc. (a New York corporation) | New York |
Rite Aid Rome Distribution Center, Inc. (a New York corporation) | New York |
EDC Drug Stores, Inc. | North Carolina |
Rite Aid of North Carolina, Inc. | North Carolina |
4042 Warrensville Center Road - Warrensville Ohio, Inc. | Ohio |
5600 Superior Properties, Inc. | Ohio |
Broadview and Wallings-Broadview Heights Ohio, Inc. | Ohio |
Elixir Rx Solutions, LLC | Ohio |
Gettysburg and Hoover - Dayton, Ohio, LLC | Ohio |
Elixir Pharmacy, LLC | Ohio |
Rite Aid of Ohio, Inc. | Ohio |
Elixir Rx Options, LLC | Ohio |
The Lane Drug Company | Ohio |
Tonic Procurement, LLC | Ohio |
Rite Aid of Pennsylvania, LLC (Formerly Rite Aid of Pennsylvania, Inc.) | Pennsylvania |
PJC of Rhode Island, Inc. | Rhode Island |
Rite Aid of South Carolina, Inc. | South Carolina |
K & B Tennessee Corporation | Tennessee |
Rite Aid of Tennessee, Inc. | Tennessee |
K & B Texas Corporation (a Texas corporation) | Texas |
RCMH, LLC (a Texas limited liability company) | Texas |
Rx Initiatives, L.L.C. | Utah |
Maxi Green, Inc. | Vermont |
PJC of Vermont, Inc. | Vermont |
Rite Aid of Vermont, Inc. | Vermont |
Rite Aid of Virginia, Inc. | Virginia |
Rite Aid of Washington, D.C., Inc. | Wash. D.C. |
5277 Associates, Inc. | Washington |
The Bartell Drug Company | Washington |
Rite Aid of West Virginia, Inc. | West Virginia |
Design Rx, LLC | Wyoming |
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.
Date: July 6, 2022 | | |
| | |
| By: | /s/ HEYWARD DONIGAN |
| | Heyward Donigan |
| | 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.
Date: July 6, 2022 | | |
| | |
| By: | /s/ MATTHEW C. SCHROEDER |
| | Matthew C. Schroeder |
| | Executive Vice President and Chief Financial Officer |
| | |
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 28, 2022 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.
/s/ HEYWARD DONIGAN | | |
Name: | Heyward Donigan | |
Title: | President and Chief Executive Officer | |
Date: | July 6, 2022 | |
| | |
| | |
/s/ MATTHEW C. SCHROEDER | | |
Name: | Matthew C. Schroeder | |
Title: | Executive Vice President and Chief Financial Officer | |
Date: | July 6, 2022 | |