Rite Aid 2011 Annual Report Download - page 41

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basis. A 25 basis point difference in the discount rate for the year ended February 26, 2011, would have
affected pretax income by approximately $1.8 million.
Lease exit liabilities: We record reserves for closed stores based on future lease commitments,
anticipated ancillary occupancy costs and anticipated future subleases of properties. The reserves are
calculated at the individual location level and the assumptions are assessed at that level. The reserve
for lease exit liabilities is discounted using a credit adjusted risk free interest rate. Reserve estimates
and related assumptions are updated on a quarterly basis.
A substantial amount of our closed stores were closed prior to our adoption of ASC 420, ‘‘Exit or
Disposal Cost Obligations.’’ Therefore, if interest rates change, reserves may be increased or decreased.
In addition, changes in the real estate leasing markets can have an impact on the reserve. As of
February 26, 2011, a 50 basis point variance in the credit adjusted risk free interest rate would have
affected pretax income by approximately $2.8 million for fiscal 2011.
Income taxes: We currently have net operating loss (‘‘NOL’’) carryforwards that can be utilized to
offset future income for federal and state tax purposes. These NOLs generate significant deferred tax
assets which are currently offset by a valuation allowance. We regularly review the deferred tax assets
for recoverability considering the relative impact of negative and positive evidence including our
historical profitability, projected taxable income, the expected timing of the reversals of existing
temporary differences and tax planning strategies. The weight given to the potential effect of the
negative and positive evidence is commensurate with the extent to which it can be objectively verified.
We establish a valuation allowance against deferred tax assets when we determine that it is more likely
than not that some portion of our deferred tax assets will not be realized. There have been no
significant changes in the assumptions used to calculate our valuation allowance over the last three
years. However, changes in market conditions and the impact of the acquisition of Brooks Eckerd on
operations have caused changes in the valuation allowance from period to period which were included
in the tax provision in the period of change.
We recognize tax liabilities in accordance with ASC 740, ‘‘Income Taxes’’ and we adjust these
liabilities when our judgment changes 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 our current estimate of the tax liabilities.
Litigation reserves: We are involved in litigation on an on-going basis. We accrue our best estimate
of the probable loss related to legal claims. Such estimates are based upon a combination of litigation
and settlement strategies. These estimates are updated as the facts and circumstances of the cases
develop and/or change. To the extent additional information arises or our strategies change, it is
possible that our best estimate of the probable liability may also change. Changes to these reserves
during the last three fiscal years were not material.
Non GAAP Measures
In addition to net income 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 to be used in evaluating the performance of our
business. We define Adjusted EBITDA as net loss excluding the impact of income taxes, interest
expense and securitization costs, depreciation and amortization, LIFO adjustments, charges or credits
for facility closing and impairment, inventory write-downs related to store closings, stock-based
compensation expense, debt modifications and retirements, sale of assets and investments, revenue
deferrals related to customer loyalty programs and other items. 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 operating performance of prior periods and external
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