Segment Reporting

6 Months Ended

Sep. 02, 2017

Segment Reporting

Segment Reporting

13. Segment Reporting

Prior to June 24, 2015, the Company’s operations were within one reportable segment. As a result of the completion of the Acquisition, the Company has realigned its internal management reporting to reflect two reportable segments, its retail drug stores (“Retail Pharmacy”), and its pharmacy services (“Pharmacy Services”) segments, collectively the “Parent Company”.

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, on both a transparent pass-through model and traditional model, formulary management and claims processing. Additionally, the Pharmacy Services segment offers specialty and mail order services, infertility treatment, and drug benefits to eligible beneficiaries under the federal government’s Medicare Part D program.

The Parent Company’s chief operating decision makers are its Parent Company Chief Executive Officer, Chief Financial Officer, and Executive Vice Presidents-Retail Pharmacy, and the Chief Executive Officer—Pharmacy Services, and Executive Vice Presidents-Pharmacy Services (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 table is a reconciliation of the Company’s business segments to the condensed consolidated financial statements for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016:

	Retail Pharmacy		Pharmacy Services		Intersegment Eliminations (1)			Consolidated
Thirteen Week Period Ended
September 2, 2017:
Revenues	$	6,267,929	$	1,492,831	$	(81,857	)	$	7,678,903
Gross Profit	1,683,741		103,262		—			1,787,003
Adjusted EBITDA(2)	163,995		49,275		—			213,270
August 27, 2016:
Revenues	$	6,485,482	$	1,634,876	$	(90,552	)	$	8,029,806
Gross Profit	1,819,349		97,394		—			1,916,743
Adjusted EBITDA(2)	262,643		50,010		—			312,653
Twenty-Six Week Period Ended
September 2, 2017:
Revenues	$	12,618,137	$	3,006,072	$	(163,853	)	$	15,460,356
Gross Profit	3,337,803		208,234		—			3,546,037
Adjusted EBITDA(2)	307,960		97,874		—			405,834
August 27, 2016:
Revenues	$	13,161,030	$	3,237,235	$	(184,278	)	$	16,213,987
Gross Profit	3,624,716		186,327		—			3,811,043
Adjusted EBITDA(2)	507,470		91,185		—			598,655

(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 to Adjusted EBITDA for the thirteen and twenty-six week periods ended September 2, 2017 and August 27, 2016:

	Thirteen Week Period Ended					Twenty-Six Week Period Ended
	September 2, 2017			August 27, 2016		September 2, 2017			August 27, 2016
	(dollars in thousands)
Net income	$	170,716		$	14,773	$	95,367		$	10,185
Interest expense	111,261			105,388		221,198			210,501
Income tax expense	107,087			10,928		71,878			4,619
Depreciation and amortization expense	132,012			142,051		274,104			280,839
LIFO charge	5,632			13,760		22,506			27,511
Lease termination and impairment charges	3,128			7,233		7,214			13,014
Walgreens Boots Alliance merger termination fee	(325,000		)	—		(325,000		)	—
Other	8,434			18,520		38,567			51,986
Adjusted EBITDA	$	213,270		$	312,653	$	405,834		$	598,655

The following is balance sheet information for the Company’s reportable segments:

	Retail Pharmacy		Pharmacy Services		Eliminations (2)			Consolidated
September 2, 2017:
Total Assets	$	8,503,384	$	3,163,941	$	(169,017	)	$	11,498,308
Goodwill	76,124		1,639,355		—			1,715,479
Additions to property and equipment and intangible assets	126,816		6,718		—			133,534
March 4, 2017:
Total Assets	$	8,664,216	$	3,087,143	$	(157,607	)	$	11,593,752
Goodwill	76,124		1,639,355		—			1,715,479
Additions to property and equipment and intangible assets(1)	468,386		12,725		—			481,111

(1) Includes additions to property and equipment and intangible assets for the fifty-three week period ended March 4, 2017.

(2) As of September 2, 2017 and March 4, 2017, intersegment eliminations include netting of the Pharmacy Services segment long-term deferred tax liability of $150,690 and $140,865, respectively, against the Retail Pharmacy segment long-term deferred tax asset for consolidation purposes in accordance with ASC 740, and intersegment accounts receivable of $18,327 and $16,742, 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.