Question: Rite Aid Corporation operates retail drugstores in
Rite Aid Corporation operates retail drugstores in the United States. It is one of the country’s largest retail drugstore chains with 3,333 stores in operation as of March 3, Year 3. The company’s
drugstores’ primary business is pharmacy services. The company also sells a full selection of health and beauty aids and personal care products, seasonal merchandise, and a large private brand product line.
The following condensed information was extracted from Rite Aid’s Form 10-K for the fiscal year that ended March 3, Year 3 (all dollars in thousands).
Accounts Receivable
The Company maintains an allowance for doubtful accounts receivable based upon the expected collectibility of accounts receivable. The allowance for uncollectible accounts at March 3, Year 3, and March 4, Year 2, was $30,246 and $32,336, respectively. The Company’s accounts receivable is due primarily from third-party payors (e.g., pharmacy benefit management companies, insurance companies, or governmental agencies) and are recorded net of any allowances provided for under the respective plans. Since payments due from third-party payors are sensitive to payment criteria changes and legislative actions, the allowance is reviewed continually, and adjusted for accounts deemed uncollectible by management.
The Company maintains securitization agreements with several multiseller asset-backed
commercial paper vehicles (“CPVsâ€). Under the terms of the securitization agreements, the Company sells substantially all of its eligible third-party pharmaceutical receivables to a bankruptcy remote Special Purpose Entity (SPE) and retains servicing responsibility. The assets of the SPE are not available to satisfy the creditors of any other person, including any of the Company’s affiliates. These agreements provide for the Company to sell, and for the SPE to purchase these receivables. The SPE then transfers an interest in these receivables to various CPVs. Transferred outstanding receivables cannot exceed $400,000. The amount of transferred receivables outstanding at any one time is dependent upon a formula that takes into account such factors as default history, obligor concentrations, and potential dilution (“Securitization Formulaâ€). Adjustments to this amount can occur on a weekly basis. At March 3, Year 3, and March 4, Year 2, the total of outstanding receivables that have been transferred to the CPVs were $350,000 and $330,000, respectively. The Company has determined that the transactions meet the criteria for sales treatment in accordance with (pre-Codification) SFAS No. 140 “Accounting for Transfers and Servicing of Financial assets and Extinguishment of Liabilities.â€
1. Calculate cash collected from customers during fiscal Year 3.
2. Had Rite Aid not securitized receivables during Year 3, Year 2, and Year 1, what would its operating cash flows have been in each of these years? Do you believe that Rite Aid’s operating cash flows were materially affected by its receivables securitization practices?
3. Calculate pre-tax operating income for Year 3, Year 2, and Year 1, and compare it to operating cash flows as originally reported and to operating cash flows assuming that Rite Aid did not securitize receivables. Compare both results and comment on the impact of Rite Aid’s practice of securitizing receivables
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Consolidated Statements of Cash Flows-Operating Activities Section Year Ended 3/3/Year 3 3/4/Year 2 2/26/Year 1 $ 26,826 $1,273,006 $ 302,478 Net Income Total noncash charges (credits) Changes in operating assets and liabilities: Net proceeds from accounts receivable 379,715 (810,731) 129,729 securitization 20,000 180,000 150,000 Accounts receivable (39,543) (51,494) 36,549 Net changes in other operating assets and liabilities (77,853) $309,145 (173,616) $ 417,165 (100,310) $ 518,446 Net cash provided by operating activities Consolidated Statements of Operatlons Year Ended 3/3/Year 3 3/4/Year 2 2/26/Year 1 $17,507,719 $17,270,968 $16,816,439 Revenues Costs and expenses Cost of goods sold Selling, general, and administrative expenses Store closing and impairment charges Interest expense Loss on debt modifications and retirements, net (Gain) loss on sale of assets, net 12,791,597 4,370,481 49,317 12,571,860 4,307,421 68,692 12,202,894 4,127,536 35,655 294,871 19,229 2,247 16,682,432 134,007 (168,471) 302,478 275,219 18,662 277,017 9,186 (11,139) 17,494,137 13,582 (6,462) 17,227,714 43,254 Income before income taxes Income tax benefit (13,244) $ 26,826 (1,229,752) $ 1,273,006 Net income Selected Data Pertaining to accounts receivable Year Ended 3/3/Year 3 3/4/Year 2 2/26/Year 1 Year-end Accounts receivable, net Allowance for uncollectible accounts at year-end Additions to uncollectible accounts charged to costs and ex penses $374,493 30,246 $354,949 32,336 $483,455 31,216 26,603 34,702 47,291
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