Rite Aid 2016 Annual Report Download - page 58

from operations together with available borrowings under the revolving credit facility and other sources
of liquidity will be adequate to meet our requirements for working capital, debt service and capital
expenditures at least for the next twelve months. Based on our liquidity position, which we expect to
remain strong throughout the year, we do not expect to be subject to the fixed charge covenant in our
senior secured credit facility 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. Subject to the limitations set forth in the Merger Agreement, including the
requirement that we obtain WBA’s consent prior to engaging in certain transactions, from time to time,
we may seek deleveraging transactions, including entering into transactions to exchange debt for shares
of common stock, issuance of equity (including preferred stock and convertible securities), repurchase
or redemption of outstanding indebtedness, or seek to refinance our outstanding debt (including our
revolving credit facility) or may otherwise seek transactions to reduce interest expense and extend debt
maturities. Additionally, the Merger Agreement limits our borrowing capacity under our revolving
credit facility to $3.0 billion. Any of these transactions could impact our financial results. Upon closing
of the Merger, we expect that all amounts due under the Amended and Restated Credit Facility,
Tranche 1 Term Loan and Tranche 2 Term Loan will be paid in accordance with the terms of the
Merger Agreement. Additionally, upon closing of the Merger, the indentures governing the 9.25%
Notes, the 6.75% Notes and the 6.125% Notes require the Company or WBA to make a change of
control offer to repurchase such notes from the noteholders at 101% plus accrued and unpaid interest,
to the extent such notes remain outstanding at the closing.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our
consolidated financial statements, which have been prepared in accordance with accounting principles
generally accepted in the United States of America. The preparation of these financial statements
requires us to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues and expenses and related disclosure of contingent assets and liabilities. On an on-going basis,
we evaluate our estimates, including those related to inventory shrink, goodwill impairment, impairment
of long-lived assets, revenue recognition, vendor discounts and purchase discounts, self insurance
liabilities, lease exit liabilities, income taxes and litigation. Additionally, we have added the revenue
recognition and vendor allowances and purchase discounts critical accounting policies as a result of our
June 24, 2015 Acquisition of EnvisionRx (the ‘‘Acquisition’’) and the related addition of our new
Pharmacy Services Segment. We base our estimates on historical experience, current and anticipated
business conditions, the condition of the financial markets and various other assumptions that are
believed to be reasonable under existing conditions. Variability reflected in the sensitivity analyses
presented below is based on our recent historical experience. Actual results may differ materially from
these estimates and sensitivity analyses.
The following critical accounting policies require the use of significant judgments and estimates by
management:
Inventory shrink: The carrying value of our inventory is reduced by a reserve for estimated shrink
losses that occur between physical inventory dates. When estimating these losses, we consider historical
loss results at specific locations, as well as overall loss trends as determined during physical inventory
procedures. The estimated shrink rate is calculated by dividing historical shrink results for stores
inventoried in the most recent six months by the sales for the same period. Shrink expense is
recognized by applying the estimated shrink rate to sales since the last physical inventory. There have
been no significant changes in the assumptions used to calculate our shrink rate over the last three
years. Although possible, we do not expect a significant change to our shrink rate in future periods. A
10 basis point difference in our estimated shrink rate for the year ended February 27, 2016, would have
affected pre-tax income by approximately $9.7 million.
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