1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended November 4, 2000May 26, 2001
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 1-303
THE KROGER CO.
----------------------------------------------------- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 31-0345740
- ------------------------------------------------------------------------ ---------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1014 Vine Street, Cincinnati, OH 45202
------------------------------------------------------------------ --------------------------------------------------------------------------------
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
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(Registrant's telephone number, including area code)
Unchanged
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year, if changed since last
report)
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 (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
----- -----
There were 818,510,642803,962,423 shares of Common Stock ($1 par value) outstanding as of
December 12,July 6, 2000.
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share amounts)
(unaudited)
Third1st Quarter Ended
Three Quarters Ended
----------------------- -----------------------
November 4, November 6, November 4, November 6,------------------
May 26, May 20,
2001 2000
1999 2000 1999
---------- ---------- ---------- ----------------- -------
Sales........................................................................ $ 10,962 $ 10,329 $ 36,308 $ 34,111
-------- -------- -------- --------Sales ................................................................... $15,102 $14,329
------- -------
Merchandise costs, including advertising, warehousing, and transportation ... 8,050 7,606 26,605 25,15811,035 10,500
Operating, general and administrative ....................................... 2,029 1,898 6,786 6,259................................... 2,835 2,749
Rent ........................................................................ 152 156 531 498.................................................................... 207 201
Depreciation and amortization ............................................... 234 217 775 714........................................... 319 307
Asset impairment charges .................................................................................................... -- -- 191 --
Merger related costs ............................................................................................................ 2 69 13 304
-------- -------- -------- --------9
------- -------
Operating profit .......................................................... 495 383 1,407 1,178...................................................... 704 372
Interest expense ............................................................ 146 143 508 485
-------- -------- -------- --------........................................................ 206 206
------- -------
Earnings before income tax expense and extraordinary loss ................. 349 240 899 693.................................... 498 166
Income tax expense ...................................................... 194 67
------- -------
Net Earnings .......................................................... 146 111 373 301
-------- -------- -------- --------
Earnings before extraordinary loss ........................................ $ 203304 $ 129 $ 526 $ 392
Extraordinary loss, net of income tax benefit ............................... (2) -- (3) (10)
-------- -------- -------- --------
Net earnings .............................................................. $ 201 $ 129 $ 523 $ 382
======== ======== ======== ========99
======= =======
Earnings per basic common share:
Earnings before extraordinary loss ........................................ $ 0.25 $ 0.16 $ 0.64 $ 0.47
Extraordinary loss ........................................................ -- -- -- (0.01)
-------- -------- -------- --------
Net earnings .................................................................................................................. $ 0.250.37 $ 0.16 $ 0.64 $ 0.46
======== ======== ======== ========0.12
======= =======
Average number of common shares used in basic calculation ................... 821 832 825 829............... 812 831
Earnings per diluted common share:
Earnings before extraordinary loss ........................................ $ 0.24 $ 0.15 $ 0.62 $ 0.46
Extraordinary loss ........................................................ -- -- -- (0.01)
-------- -------- -------- --------
Net earnings .................................................................................................................. $ 0.240.36 $ 0.15 $ 0.62 $ 0.45
======== ======== ======== ========0.12
======= =======
Average number of common shares used in diluted calculation ................. 845 857 848 860............. 833 850
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)
November 4, January 29,
2000 2000May 26, February 3,
2001 2001
-------- --------
ASSETS
Current assets
Cash ..................................................................................................................... $ 131160 $ 281161
Receivables ...................................................... 618 622................................................. 672 687
Inventories ...................................................... 4,412 3,938................................................. 4,206 4,063
Prepaid and other current assets ................................. 197 690............................ 440 501
-------- --------
Total current assets ......................................... 5,358 5,531.................................... 5,478 5,412
Property, plant and equipment, net .................................. 8,698 8,275............................. 9,092 8,813
Goodwill, net ....................................................... 3,707 3,761.................................................. 3,645 3,639
Other assets ........................................................ 343 399................................................... 332 315
-------- --------
Total assets .................................................Assets ............................................ $ 18,10618,547 $ 17,96618,179
======== ========
LIABILITIES
Current liabilities
Current portion of long-term debt ................................including obligations under
capital leases ......................................... $ 309330 $ 536336
Accounts payable ................................................. 3,274 2,775
Accrued salaries............................................ 3,135 3,009
Salaries and wages ....................................... 651 695.......................................... 553 603
Other current liabilities ........................................ 1,751 1,689................................... 1,487 1,434
-------- --------
Total current liabilities .................................... 5,985 5,695............................... 5,505 5,382
Long-term debt ...................................................... 7,746 8,045including obligations under capital leases ...... 8,490 8,210
Other long-term liabilities ......................................... 1,529 1,543.................................... 1,429 1,498
-------- --------
Total liabilities ............................................ 15,260 15,283Liabilities ....................................... 15,424 15,090
-------- --------
Commitments and contingent liabilities ....................................................... -- --
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 million shares authorized
and unissued ..................................................................................................... -- --
Common stock, $1 par, 1 billion1,000 shares authorized: 889 million896 shares issued
in 2001 and 891 shares issued in 2000 and 885 million shares issued in 1999 ............. 889 885....................... 896 891
Additional paid-in capital .......................................... 2,073 2,023..................................... 2,124 2,092
Retained earnings ................................................... 755 232.............................................. 1,408 1,104
Common stock in treasury, at cost, 71 million89 shares in 2001 and
76 shares in 2000 and
50 million shares in 1999 ........................................ (871) (457)........................................... (1,305) (998)
-------- --------
Total shareowners' equity .................................... 2,846 2,683Shareowners' Equity ............................... 3,123 3,089
-------- --------
Total liabilitiesLiabilities and shareowners' equity ....................Shareowners' Equity ............... $ 18,10618,547 $ 17,96618,179
======== ========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
Three QuartersFirst Quarter Ended
-----------------------------------
November 4, November 6,------------------
May 26, May 20,
2001 2000
1999
----------- ------------------ -------
Cash Flows From Operating Activities:
Net earnings..................................................................earnings .............................................. $ 523304 $ 38299
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Extraordinary loss......................................................... 3 10
Depreciation............................................................... 696 638Depreciation .......................................... 288 276
Goodwill amortization...................................................... 79 76amortization ................................. 31 31
Non-cash items............................................................. 282 30items ........................................ 2 258
Deferred income taxes...................................................... 151 106
Other...................................................................... 33 (9)taxes ................................. (15) 181
Other ................................................. 21 18
Changes in operating assets and liabilities net of
effects from acquisitions of businesses:
Inventories............................................................ (474) (665)
Receivables............................................................ 7 (75)Inventories ........................................ (142) 29
Receivables ........................................ 29 15
Accounts payable....................................................... 492 377
Other.................................................................. 276 441
---------- ---------payable ................................... 66 140
Other .............................................. 32 (24)
------- -------
Net cash provided by operating activities.......................... 2,068 1,311
---------- ---------activities ...... 616 1,023
------- -------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (1,238) (1,470)expenditures ...................................... (618) (455)
Proceeds from sale of assets.................................................. 82 101assets .............................. 13 40
Payments for acquisitions, net of cash acquired...............................acquired ........... (67) --
Other......................................................................... (15) (33)
---------- ----------(36)
Other ..................................................... 18 (26)
------- -------
Net cash used by investing activities.............................. (1,238) (1,402)
---------- ----------activities .......... (654) (477)
------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt...................................... 825 1,718debt .................. 1,014 524
Reductions in long-term debt.................................................. (1,418) (1,600)
Debt prepayment costs......................................................... (2) (2)debt .............................. (738) (995)
Financing charges incurred.................................................... (10) (10)
Decreaseincurred ................................ (16) (7)
Increase in book overdrafts................................................... (5) (58)overdrafts ............................... 47 3
Proceeds from issuance of capital stock....................................... 44 63stock ................... 34 20
Treasury stock purchases...................................................... (414) --
---------- ---------purchases .................................. (304) (209)
------- -------
Net cash provided (used)/provided by financing activities.................. (980) 111
---------- ---------activities 37 (664)
------- -------
Net (decrease) increasedecrease in cash and temporary cash investments.................... (150) 20investments ........... (1) (118)
Cash and temporary investments:
Beginning of year..........................................................year ..................................... 161 281
263
---------- ---------------- -------
End of period..............................................................quarter ........................................ $ 131160 $ 283
========== =========163
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.....................................interest ................ $ 550210 $ 425201
Cash paid during the year for income taxes.................................taxes ............ $ 167126 $ 7566
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired..........................................acquired ...................... $ 9142 $ --60
Goodwill recorded......................................................recorded .................................. $ 3037 $ 33
Value of stock issued .............................. $ -- $ --
Liabilities assumed....................................................assumed ................................ $ 5412 $ --57
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
All amounts are in millions except per share amounts.
Certain prior year amounts have been reclassified to conform to current
year presentation.presentation and all amounts presented are in millions except per
share amounts.
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------------------
The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries ("Kroger"), including Fred
Meyer, Inc. and its subsidiaries ("Fred Meyer") which were merged with
Kroger on May 27, 1999 (see note 2).subsidiaries. The year-end balance sheet
includes Kroger's January 29, 2000February 3, 2001 balance sheet, which was derived
from audited financial statements, and, due to its summary nature, does
not include all disclosures required by generally accepted accounting
principles. Significant intercompany transactions and balances have
been eliminated. References to the "Company" in these consolidated
financial statements mean the consolidated company.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation of
results of operations for such periods but should not be considered as
indicative of results for a full year. The financial statements have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to SEC regulations. Accordingly, the accompanying
consolidated financial statements should be read in conjunction with
the fiscal 19992000 Annual Report on Form 10-K Annual Report of The Kroger Co. filed with
the SEC on April 27, 2000, as amended.May 2, 2001.
The unaudited information included in the consolidated financial
statements for the third quarter and threefirst quarters ended November 4,May 26, 2001 and May 20, 2000 and November 6, 1999
includes the results of operations of the Company for the 12 week and 4016 week
periods then ended.
2. BUSINESS COMBINATIONS
---------------------
On May 27, 1999, Kroger issued 312 million shares of Kroger common
stock in connection with a merger, for all of the outstanding common
stock of Fred Meyer, Inc., which operates stores primarily in the
Western region of the United States. The merger was accounted for as a
pooling of interests, and the accompanying financial statements
relating to periods in fiscal 1999 have been restated to give effect to
the consolidated results of Kroger and Fred Meyer.
3. MERGER RELATED COSTS
--------------------
The Company is continuing the process of implementing its integration
plan relating to recent mergers. The integration plan includes
distribution consolidation, systems integration, store conversions,
store closures, and administration integration. Total merger related costs incurred
were $2 during the thirdfirst quarter of 2000,2001, and $69$9 during the thirdfirst
quarter of 1999. Year-to-date merger related costs were $13
in 2000 and $304 in 1999.2000.
The following table presents the components of the merger related
costs:
Third Quarter Ended Three Quarters Ended
------------------------------- --------------------------------
NovemberFirst Quarter Ended
---------------------
May 26, May 20,
2000 1999
------- -------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation .. $- $1
Administration integration .. - 4 November 6, November 4, November 6,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation............................ $ -- $ 14 $ 1 $ 24
Systems integration................................... -- 22 -- 65
Store conversions..................................... -- 21 -- 43
Transaction costs..................................... -- 4 -- 91
Administration integration............................ -- 6 4 19
------ ------ ------ -----
-- 67 5 242
NON-CASH WRITEDOWN
System integration.................................... -- -- -- 3
Store closures........................................ -- -- -- 3
Administration integration............................ -- 1 -- 14
------ ------ ------ -----
-- 1 -- 20
OTHER CHARGES
Administration integration............................ 2 -- 8 --
------ ------ ------ -----
ACCRUED CHARGES
Distribution consolidation.............................. -- -- -- 5
Store closures.......................................... -- 1
-- --
- 5
5
6
Administration integration........................................ -- -- -- 32
------ ------ ------ -----
-- 1 -- 42
------ ------ ------ -----
Total merger related costs........................................ $ 2 $ 69 $ 13 $ 304
====== ====== ====== =====
TOTAL CHARGES
Distribution consolidation..................................... $ -- $ 14 $ 1 $ 29
Systems integration............................................ -- 22 -- 68
Store conversions.............................................. -- 21 -- 43
Transaction costs.............................................. -- 4 -- 91
Store closures ................................................ -- 1 -- 8
Administration integration..................................... 2 7 12 65
------ ------ ------ -----
Total merger related costs........................................ $ 2 $ 69 $ 13 $ 304
====== ====== ====== =====
OTHER CHARGES
Administration integration .. 2 4
-- --
Total merger related costs ...... $2 $9
== ==
TOTAL CHARGES
Distribution consolidation .. $- $1
Administration integration .. 2 8
-- --
Total merger related costs ...... $2 $9
== ==
Distribution Consolidation
Represents costs to consolidate distribution operations and eliminate
duplicate facilities. The costs in the first quarter of 2000 represent
severance costs incurred and paid.
The $14 in the third quarter of 1999 was for
Tolleson warehouse expenses recorded as cash was expended.
Systems Integration
Represents the costs of integrating systems and the related conversion
of corporate office and store systems. In the third quarter of 1999,
costs totaling $22 were expensed as incurred including incremental
operating costs during the conversion process, payments to third
parties, and training costs. The incremental operating costs were
principally labor costs.
Store Conversions
Includes the cost to convert store banners. All prior year costs
represented incremental cash expenditures for advertising and
promotions to establish the banner, changing store signage, labor
required to remerchandise the store inventory and other services that
were expensed as incurred.
Transaction Costs
Represents fees paid to outside parties, employee bonuses that were
contingent upon the completion of mergers, and an employee stay bonus
program. The Company incurred costs totaling $4 in the third quarter of
1999, related to fees and employee bonuses recorded as the cash was
expended.
Store Closures
Includes the costs to close stores identified as duplicate facilities
and to sell stores pursuant to settlement agreements. Year-to-date 1999
costs are related to the closure of seven stores identified as
duplicate facilities and to sell three stores pursuant to a settlement
with the Federal Trade Commission.4
6 7
Administration Integration
Includes labor and severance costs related to employees identified for
termination in the integration and charges to conform accounting
policies.integration. During the thirdfirst quarter of 2001, the
Company incurred costs totaling $2 resulting from issuing restricted
stock related to merger synergies. During the first quarter of 2000,
the Company incurred costs totaling $2$8 including approximately $4
resulting from the issuance ofissuing restricted stock related to merger synergies. Year-to-date 2000, the Company has recorded costs
totaling $12 which includes $8 resulting from restricted stock,synergies,
and charges of $4 for severance payments recorded as cash was expended.
RestrictionsThe restrictions on the stock grants lapse asto the extent that synergy
goals are achieved. Through three
quarters of 1999, the Company accrued severance costs totaling $12 and
an obligation to make a charitable contribution of $20 within seven
years from the date of the Fred Meyer merger.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
------------- --------- ----------------- -------------- ---------------------
Balance at January 2, 1999........................................29, 2000 $ 133130 $ 3029 $ 29
Additions ............. -- Additions...................................................... 8 24 29
Payments.......................................................-- 10
Payments .............. (17) (11) (25) --
-------- ------- ------(4)
----- ---- ----
Balance at January 29, 2000....................................... 130 29 29
Payments....................................................... (15) (10)February 3, 2001 113 18 35
Additions ............. -- -------- ------- -------- 2
Payments .............. (8) (2) (8)
----- ---- ----
Balance at November 4, 2000.......................................May 26, 2001 ... $ 115105 $ 1916 $ 29
======== ======= =========== ==== ====
4.3. ONE-TIME ITEMS
--------------
In addition to the "merger related costs"Merger Related Costs described above, the Company
incurred one-time expenses of $14 and $81 related to recent mergers
during the first quarters of $1212001 and $59
year-to-date 2000, and 1999, respectively. The one-time
items in 2000the first quarter of 2001 included approximately $16$3 related
primarily to product costs for inventory writedowns and $11 of other
one-time product related chargesexcess capacity included as merchandise
costs. The remaining $94$11 in 2001 is included in operating, general and
administrative costs and relates to employee severance and system
conversion costs. All of the costs in the first quarter of 2001
represented cash expenditures. The one-time items in the first quarter
of 2000 included approximately $15 for inventory writedowns included as
merchandise costs. The remaining $66 in 2000 is included in operating,
general and administrative costs and relates primarily to the closing of stores, that have closed
or will close and
severance expenses related to headcount reductions, and other
miscellaneous costs. Of the $94, $27$66, $11 represented cash expenditures and
$67$55 represented charges that were accrued pertaining
primarily toduring the present value of lease liabilities relating to closed
stores. The table below details the changes in the accruals of the
closed store reserves. The 1999 one-time items represent costs related
to mergers recorded as cash was expended. Of the $59, $23 was included
in operating, general and administrative costs, and $36 was included in
merchandise costs.
Accrued Lease Liability
Related to Store Closings
-----------------------------
Balance at January 29, 2000....................................... $ --
Additions...................................................... 67
Payments....................................................... (9)
--------
Balance at November 4, 2000....................................... $ 58
=======
5.quarter.
4. ASSET IMPAIRMENT CHARGES
------------------------
Due toAs a result of recent investments in stores that did not perform as
expected, updated profitability forecasts for 2000 and beyond, and new
divisional leadership, the Company performed an impairment review of
its long-lived assets during the first quarter of 2000. During this
review, the Company identified impairment losses for both assets to be
disposed of and assets to be held and used.
7
8
Assets to be Disposed of
The impairment charge for assets to be disposed of related primarily to
the carrying value of land, buildings, and equipment for 25 stores that
have beenwere closed or that management has committed to close by the end
of theduring fiscal year.2000. The impairment charge was determined
using the fair value less the cost to sell. Fair value less the cost to
sell used in the impairment calculation was based on discounted cash
flows and third party offers to purchase the assets, or market value
for comparable properties, if applicable. Accordingly, an impairment
charge of $81 related to assets to be disposed of was recognized,
reducing the carrying value of fixed assets and goodwill by $41 and
$40, respectively.
Assets to be Held and Used
The impairment charge for assets to be held and used related primarily
to the carrying value of land, buildings, and equipment for 13 stores
that will continue to be operated by the Company. Updated projections, based
on revised operating plans, were used,
5
7
on a gross basis, to first to determine whether the assets were impaired,
then, on a discounted cash flow basis, to serve as the estimated fair
value of the assets for purposes of measuring the asset impairment
charge. As a result, an impairment charge of $87 related to assets to
be held and used was recognized, reducing the carrying value of fixed
assets and goodwill by $47 and $40, respectively.
Other Writedownswritedowns
In addition to the approximately $168 of impairment charges noted
above, the Company recorded a writedown of $23 to reduce the carrying
value of certain investments in unconsolidated entities, accounted for
on the cost basis of accounting, to reflect reductions in value
determined to be other than temporary. The writedowns related primarily
to investments in certain former suppliers that have experienced
financial difficulty and with whom supply arrangements have ceased.
6.5. INCOME TAXES
------------
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and the amortization
and impairment writedown of non-deductible goodwill.
7.6. EARNINGS PER COMMON SHARE
-------------------------
Basic earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding. Diluted earningsEarnings per common share equals net earnings divided by the weighted
average number of common shares outstanding, after giving effect to
dilutive stock options.
The amounts below are calculated based on earnings before extraordinary
items. The extraordinary items during 2000 and 1999 resulted from the
early retirement of debt.
The following table provides a reconciliation of earnings and shares
used in calculating basic earnings per share to those used in
calculating diluted earnings per share.
For the quarter ended For the quarter ended
November 4,May 26, 2001 May 20, 2000
November 6, 1999
----------------------------------------- ----------------------------------------------------------------------------------- ------------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
----------------------------------------- ---------------------------------------------------- ------------- ------ ----------- ------------- ------
Basic earnings per common share.......share ... $304 812 $ 203 8210.37 $99 831 $ 0.25 $ 129 832 $ 0.160.12
Dilutive effect of stock options and
warrants..........................Warrants ....................... -- 2421 -- 25
--------- --------- --------- --------19
------ ------ --- ---
Diluted earnings per common share....share .. $304 833 $ 203 8450.36 $99 850 $ 0.24 $ 129 857 $ 0.15
========= ========= ========= =========0.12
====== ====== ====== === === ======
8
9
For the three quarters ended For the three quarters ended
November 4, 2000 November 6, 1999
----------------------------------------- -----------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------- ------------- ------------- -------------- --------------------------
Basic earnings per common share....... $ 526 825 $ 0.64 $ 392 829 $ 0.47
Dilutive effect of stock options and
warrants.......................... -- 23 -- 31
--------- --------- --------- --------
Diluted earnings per common share.... $ 526 848 $ 0.62 $ 392 860 $ 0.46
========= ========= ========= =========
8.7. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
In June 1998, theStatement of Financial Accounting Standards Board issued
Statements of Financial Accounting Standards("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities.Activities," This standard, as
amended isby SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for fiscal years beginning after June 15, 2000.
Given current activities, the
Company as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in the Company recording a liability of $9 million with a
corresponding charge recorded as additional paid in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the immateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings.
6
8
The Company assesses, both at inception of the hedge and on an ongoing
basis, whether derivatives used as hedging instruments are highly
effective in offsetting the changes in the fair value or cash flow of
hedged items. If it is determined that a derivative is not highly
effective as a hedge or ceases to be highly effective, the Company
discontinues hedge accounting prospectively.
As of May 26, 2001, the Company recorded a liability of $9 related to
the fair value of its derivative instruments. These instruments are
designated as, and are considered, effective cash flow hedges. Hedge
ineffectiveness was not material during the quarter ended May 26, 2001.
A corresponding charge was recorded as a part of additional paid in
capital, net of income tax effects.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning
in the first quarter of 2002. These issues address the appropriate
accounting for certain vendor contracts and loyalty programs. The
Company continues to assess the effect these new standards will have on
the financial statements. The Company expects that the adoption of the
standardthese
standards will not have a material impacteffect on theour financial statements.
In March 2000,SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets" were issued by the Financial Accounting
Standards Board issued
Interpretation No. 44, "Accountingin late June of 2001. SFAS 141 is effective for Certain Transactions involving
Stock Compensation." This standard becameall
business combinations initiated after June 30, 2001 and SFAS 142 will
become effective July 1, 2000.for the Company on February 3, 2002. The Company is
currently analyzing the effect the adoption of the standard did notthese standards will
have a material impact on theits financial statements.
9.8. GUARANTOR SUBSIDIARIES
----------------------
Certain of Kroger'sthe Company's Senior Notes and Senior Subordinated Notes
(the "Guaranteed Notes") are jointly and severally, fully and
unconditionally guaranteed by Thecertain Kroger Co. and certain of its subsidiaries (the
"Guarantor Subsidiaries"). At November 4, 2000,May 26, 2001 a total of approximately
$5.2$6.2 billion of Guaranteed Notes were outstanding. The Guarantor
Subsidiaries and non-guarantor subsidiaries are wholly-owned
subsidiaries of The Kroger Co.Kroger. Separate financial statements of The Kroger Co. and
each of the Guarantor Subsidiaries are not presented because the
guarantees are full and unconditional and the Guarantor Subsidiaries
are jointly and severally liable. The Company believes that separate
financial statements and other disclosures concerning the Guarantor
Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an
individual and aggregate basis of consolidated assets, pretax earnings,
cash flow, and equity. Therefore, the non-guarantor subsidiaries'
information is not separately presented in the tables below, but rather
is included in the column labeled "Guarantor Subsidiaries."below.
There are no current restrictions on the ability of the Guarantor
Subsidiaries to make payments under the guarantees referred to above,
but the obligations of each guarantor under its guarantee are limited
to the maximum amount as will result in obligations of such guarantor
under its guarantee not constituting a fraudulent conveyance or
fraudulent transfer for purposes of Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any
similar Federal or state law (e.g. adequate capital to pay dividends
under corporate laws).
97
109
The following tables present summarized financial information as of November 4, 2000May
26, 2001 and January 29, 2000February 3, 2001 and for the three quarters ended November 4, 2000May 26, 2001
and November 6, 1999.
SUMMARIZED FINANCIAL INFORMATIONMay 20, 2000.
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF NOVEMBER 4, 2000 AND FOR THE THREE
QUARTERS THEN ENDED:MAY 26, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------- ------------------------------- ------------ ------------ -------------
Current assets
Cash ......................................... $ 46321 $ 4,895139 $ -- $ 5,358
Non-current160
Receivables .................................. 144 528 -- 672
Net inventories .............................. 393 3,813 -- 4,206
Prepaid and other current assets ............. 227 213 -- 440
------- -------- -------- -------
Total current assets .................... 785 4,693 -- 5,478
Property, plant and equipment, net ............... 952 8,140 -- 9,092
Goodwill, net .................................... 1 3,644 -- 3,645
Other assets ..................................... 661 (329) -- 332
Investment in and advances to subsidiaries ....... 10,514 -- (10,514) --
------- -------- -------- -------
Total assets ............................ $12,913 $ 11,971 $ 11,458 $ (10,681) $ 12,74816,148 $(10,514) $18,547
======= ======== ======== =======
Current liabilities
Current portion of long-term debt including
obligations under capital leases ........... $ 1,356290 $ 4,62940 $ -- $ 5,985
Non-current330
Accounts payable ............................. 295 2,840 -- 3,135
Other current liabilities .................... 454 1,586 -- 2,040
------- -------- -------- -------
Total current liabilities ............... 1,039 4,466 -- 5,505
Long-term debt including obligations
under capital leases ......................... 8,096 394 -- 8,490
Other long-term liabilities ...................... 655 774 -- 1,429
------- -------- -------- -------
Total liabilities ....................... 9,790 5,634 -- 15,424
------- -------- -------- -------
Shareowners' Equity .............................. 3,123 10,514 (10,514) 3,123
------- -------- -------- -------
Total liabilities and shareowners' equity $12,913 $ 8,202 $ 1,073 $ -- $ 9,275
Sales $ 4,943 $ 31,875 $ (510) $ 36,308
Gross profit $ 1,031 $ 8,712 $ (40) $ 9,703
Operating (loss) profit $ (202) $ 1,609 $ -- $ 1,407
Net earnings $ 523 $ 925 $ (925) $ 52316,148 $(10,514) $18,547
======= ======== ======== =======
SUMMARIZED FINANCIAL INFORMATION8
10
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF JANUARY 29, 2000:FEBRUARY 3, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------- ------------------------------- ------------ ------------ -------------
Current assets
Cash ......................................... $ 57825 $ 4,953136 $ -- $ 5,531
Non-current161
Receivables .................................. 134 553 -- 687
Net inventories .............................. 340 3,723 -- 4,063
Prepaid and other current assets ............. 148 353 -- 501
------- -------- -------- -------
Total current assets .................... 647 4,765 -- 5,412
Property, plant and equipment, net ............... 866 7,947 -- 8,813
Goodwill, net .................................... 1 3,638 -- 3,639
Other assets ..................................... 653 (338) -- 315
Investment in and advances to subsidiaries ....... 10,670 -- (10,670) --
------- -------- -------- -------
Total assets ............................ $12,837 $ 11,652 $ 11,180 $ (10,397) $ 12,43516,012 $(10,670) $18,179
======= ======== ======== =======
Current liabilities
Current portion of long-term debt including
obligations under capital leases ........... $ 1,109287 $ 4,58649 $ -- $ 5,695
Non-current336
Accounts payable ............................. 251 2,758 -- 3,009
Other current liabilities .................... 449 1,588 -- 2,037
------- -------- -------- -------
Total current liabilities ............... 987 4,395 -- 5,382
Long-term debt including obligations
under capital leases ......................... 7,808 402 -- 8,210
Other long-term liabilities ...................... 953 545 -- 1,498
------- -------- -------- -------
Total liabilities ....................... 9,748 5,342 -- 15,090
------- -------- -------- -------
Shareowners' Equity .............................. 3,089 10,670 (10,670) 3,089
------- -------- -------- -------
Total liabilities and shareowners' equity $12,837 $ 8,437 $ 1,151 $ -- $ 9,58816,012 $(10,670) $18,179
======= ======== ======== =======
SUMMARIZED FINANCIAL INFORMATION9
11
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE THREE QUARTERS ENDED
NOVEMBER 6, 1999:16 WEEK QUARTER MAY 26, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
------------------------------------ -------------------- ------------------- ------------------- -------------------------------- ------------ ------------ ------------
Sales ...................................... $ 4,8772,124 $13,227 $ 29,783 $ (549) $ 34,111(249) $15,102
Merchandise costs, including warehousing and
transportation ......................... 1,688 9,580 (233) 11,035
------- ------- ------- -------
Gross profit $ 1,035 $ 7,954 $ (36) $ 8,953...................... 436 3,647 (16) 4,067
Operating, general and administrative ...... 285 2,550 -- 2,835
Rent ....................................... 58 165 (16) 207
Depreciation and amortization .............. 32 287 -- 319
Merger related costs and asset impairments . 2 -- -- 2
------- ------- ------- -------
Operating profit (loss) profit $ (13) $ 1,191 $........... 59 645 -- $ 1,178704
Interest expense ........................... 194 12 -- 206
Equity in earnings of subsidiaries ......... 386 -- (386) --
------- ------- ------- -------
Earnings before tax expense ................ 251 633 (386) 498
Tax expense (benefit) ...................... (53) 247 -- 194
------- ------- ------- -------
Net earnings ...................... $ 382304 $ 681386 $ (681)(386) $ 382304
======= ======= ======= =======
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE 16 WEEK QUARTER MAY 20, 2000
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Sales ...................................... $ 1,989 $12,547 $ (207) $14,329
Merchandise costs, including warehousing and
transportation ......................... 1,576 9,115 (191) 10,500
------- ------- ------- -------
Gross profit ...................... 413 3,432 (16) 3,829
Operating, general and administrative ...... 398 2,351 -- 2,749
Rent ....................................... 49 168 (16) 201
Depreciation and amortization .............. 28 279 -- 307
Merger related costs and asset impairments . 9 191 -- 200
------- ------- ------- -------
Operating profit (loss) ........... (71) 443 -- 372
Interest expense ........................... 190 16 -- 206
Equity in earnings of subsidiaries ......... 242 -- (242) --
------- ------- ------- -------
Earnings before tax expense ................ (19) 427 (242) 166
Tax expense (benefit) ...................... (118) 185 -- 67
------- ------- ------- -------
Net earnings ...................... $ 99 $ 242 $ (242) $ 99
======= ======= ======= =======
10
12
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE 16 WEEK QUARTER MAY 26, 2001
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ------------
Net cash (used) provided by operating activities . $ (113) $ 729 $ 616
------- ------- -------
Cash flows from investing activities:
Capital expenditures ...................... (29) (589) (618)
Other ..................................... (35) (1) (36)
------- ------- -------
Net cash used by investing activities ............ (64) (590) (654)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .. 1,014 -- 1,014
Reductions in long-term debt .............. (721) (17) (738)
Proceeds from issuance of capital stock ... 34 -- 34
Capital stock reacquired .................. (304) -- (304)
Other ..................................... (6) 37 31
Net change in advances to subsidiaries .... 156 (156) --
------- ------- -------
Net cash provided (used) by financing activities . 173 (136) 37
------- ------- -------
Net (decrease) increase in cash and temporary cash
investments .................................. (4) 3 (1)
Cash and temporary investments:
Beginning of year ......................... 25 136 161
------- ------- -------
End of year ............................... $ 21 $ 139 $ 160
======= ======= =======
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE 16 WEEK QUARTER MAY 20, 2000
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ------------
Net cash provided by operating activities ........ $ 568 $ 455 $ 1,023
------- ------- -------
Cash flows from investing activities:
Capital expenditures ...................... (14) (441) (455)
Other ..................................... (35) 13 (22)
------- ------- -------
Net cash used by investing activities ............ (49) (428) (477)
------- ------- -------
Cash flows from financing activities:
Proceeds from issuance of long-term debt .. 524 -- 524
Reductions in long-term debt .............. (963) (32) (995)
Proceeds from issuance of capital stock ... 20 -- 20
Capital stock reacquired .................. (209) -- (209)
Other ..................................... (5) 1 (4)
Net change in advances to subsidiaries .... 108 (108) --
------- ------- -------
Net used by financing activities ................. (525) (139) (664)
------- ------- -------
Net decrease in cash and temporary cash
investments .................................. (6) (112) (118)
Cash and temporary investments:
Beginning of year ......................... 30 251 281
------- ------- -------
End of year ............................... $ 24 $ 139 $ 163
======= ======= =======
11
13
9. COMMITMENTS AND CONTINGENCIES
-----------------------------
The Company is a 50% owner of Santee Dairies, L.L.C. ("Santee") and has
a 10-year product supply agreement with Santee that requires Ralphs to
purchase 9 million gallons of fluid milk and other products annually.
The product supply agreement expires on July 29, 2007. Upon acquisition
of Ralphs/Food 4 Less, Santee became excess capacity.
10. TREASURY STOCK
--------------
During the quarter,OTHER EVENTS
------------
On May 23, 2001, the Company invested $103 to repurchase 4.7 million
sharesentered into a new $1,625 revolving credit
facility, comprised of Kroger common stock. Duringa Five-Year Credit Agreement and a 364-Day
Credit Agreement (collectively the first three quarters of 2000,"New Credit Agreement"). The Five
Year Credit Agreement, a $812.5 facility, terminates on May 23, 2006,
unless extended or earlier terminated. The 364-Day Credit Agreement, a
$812.5 facility, terminates on May 22, 2002 unless extended, converted
into a one year term loan, or earlier terminated by the Company repurchased approximately 20.8 million shares of its common
stock for a total investment of $414.Company. The
Company has purchased 19.6
million sharesterminated its previous $1,500 Five-Year Credit Agreement and
364-Day Credit Agreement (collectively the "Old Credit Agreement") upon
entering the New Credit Agreement. Borrowings under the New Credit
Agreement bear interest as described in the Credit Agreement, which is
incorporated herein by reference to Exhibits 99.1 and 99.2 of Kroger's
Current Report on From 8-K dated May 31, 2001. At May 26, 2001, the
Applicable Margin for approximately $389 under its $750 stock repurchase
planthe 364-Day facility was .625% and has purchased an additional 1.2 million shares under its
program to repurchase common stock funded byfor the
proceedsFive-Year facility was .600%. The Facility Fee for the 364-Day facility
was .125% and tax
benefits from stock option exercises.
10for the Five-Year facility was .150%. The Credit
Agreement contains covenants which among other things, restrict
dividends and require the maintenance of certain financial ratios,
including fixed charge coverage ratios and leverage ratios.
12
1114
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis should be read in conjunction with the
consolidated financial statements.
BUSINESS COMBINATIONS
On May 27, 1999, Kroger issued 312 million shares of Kroger common
stock in connection with a merger, for all of the outstanding common
stock of Fred Meyer, Inc., which operates stores primarily in the
Western region of the United States. This merger was accounted for as a
pooling of interests. The accompanying statements of earnings and cash
flows for the three quarters ended November 6, 1999, have been restated
to give effect to the consolidated results of Kroger and Fred Meyer.
RESULTS OF OPERATIONS
Total sales for the thirdfirst quarter of 20002001 increased 6.1%5.4% to $11 billion
while year-to-date sales increased 6.4% to $36$15.1
billion. The increase in sales is attributable to an increase in
comparable and identical store sales and an increase in the number of
stores due to new storesacquisitions and acquisitions.expansions. Identical food store sales,
which includes stores that have been in operation and have not been
expanded or relocated for fivefour quarters, grew 1.4%1.9% from the thirdfirst
quarter of 1999.2000. Comparable food stores sales, which includes
relocations and expansions, increased 1.9%2.5% over the prior year.
As previously stated, a portion of the increase in sales was also due
to an increase in the number of stores. During the thirdfirst quarter of
2000,2001, we opened, acquired, relocated, or expanded or relocated 3546 food stores,
remodeled 26 food stores and closed 14 food stores. We had 24 operational
closings and completed 35 within-the-wall remodels. We operated 2,3432,380
food stores at November 4, 2000,May 26, 2001 compared to 2,2682,354 food stores at November 6, 1999.May 20,
2000. As of November 4, 2000,May 26, 2001, food store square footage totaled 124127
million. This represents an increase of 4.8%4.3% over November
6, 1999. Excluding acquisitions and operational closings, square
footage rose 4.3%. Excluding only acquisitions, square footage
increased 2.9% due to the 63 operational closingsMay 20, 2000.
The gross profit rate during the past four
quarters, compared to 41 operational closings in the preceding four
quarters.
Our gross profit rate,first quarter, excluding one-time
expenses and the effect of LIFO, was 26.6%27.0% in 2001 and 26.9% in 2000.
During the thirdfirst quarter of 2000 and 26.5% in the third
quarter of 1999. On this same basis, our year-to-date gross profit rate
was 26.8% in 2000 and 26.4% in 1999. During the third quarter of 2000,2001, we incurred $8$3 million of one-time
expenses included in merchandise costs bringing our year-to-date one-time costs for 2000compared to $27 million.
This compares to $18$15 million during
the third quarter and $36 million
year-to-date 1999.same period of 2000. Including these costs, ourthe first quarter gross
profit rates were 26.5% for the third quarter27.0% in 2001 and 26.8% year-to-date 2000 and 26.3% for
the third quarter and year-to-date 1999.in 2000. This increase is
primarily the result of synergy savings, reductions in product costs
through our corporate-wide merchandising programs, and increases in
private-labelprivate label sales and profitability. The economies of scale created
by the merger are providing reduced costs throughby enabling strategic
initiatives in coordinated purchasing. Technology and logistics
efficiencies have also have led to improvements in category management and
various other aspects of our operations, resulting in a decreased cost
of product.
During the quarter, we introduced 482
private-label products that produce a higher gross profit than the
comparable national brands.
We incurred $24$11 million of one-time operating, general and
administrative expenses in the thirdfirst quarter of 20002001 compared to $6$66
million during the thirdfirst quarter of 1999. Year-to-date these costs are
$94 million for 2000 and $23 million for 1999.2000. Excluding these one-time
items, operating, general and administrative expenses as a percent of
sales decreased 4 basis points fromwere 18.7% during the thirdfirst quarter of 1999 to 18.3%2001 and 18.7% during the
thirdfirst quarter of 2000. On this same basis,Including these expenses were
and 18.4% for year-to-date 2000 and 18.3% for year-to-date 1999.
Including the one-time items, operating,
general and administrative expenses as a percent of sales were 18.5%18.8% in
the thirdfirst quarter of 2000
and 18.7% year-to-date 2000,2001 compared to 18.4%19.2% in the thirdfirst quarter and
year-to-date 1999. The increase in operating,of
2000. Operating, general and administrative expenses as a percent of
sales is primarily due toremained unchanged from the increase in one-time expenses in 2000, higher health care costs,prior year, despite the negative
impact of higher utility costs, and increasing credit card fees.due primarily to increased
productivity.
The effective tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and the amortization and
impairment writeoff of non-deductible
goodwill. GoodwillTotal goodwill amortization was $25$31 million in the third quarter of 2000 and $23 million in the
third quarter of 1999. The goodwill impairment writedown taken in the first
quarter of 2000 was $80 million.
11
122001 and 2000.
Net earnings before extraordinary loss,were $304 million or $0.36 per diluted share for the first
quarter of 2001. These results represent an increase of approximately
200% over net earnings of $0.12 per diluted share for the first quarter
of 2000. Net earnings, excluding merger related costs and one-time
items, were $231$314 million or $0.28$0.38 per diluted share forin the thirdfirst
quarter of 2000. This represents a 17% increase over earnings
before extraordinary loss, excluding merger related costs and one-time
items, of $0.24 per diluted share for the third quarter of 1999. On
these same basis, year-to-date 2000 earnings before extraordinary loss
were $744 million or $0.88 per diluted share.2001. These results represent an increase of approximately
19% over year-to-date 1999net earnings before extraordinary
loss of $0.74$0.32 per diluted share.share excluding merger
related costs, the impairment charge, and one-time items for the first
quarter of 2000.
MERGER RELATED COSTS AND OTHER ONE-TIME EXPENSES
We are continuing the process of implementing our integration plan
relating to recent mergers. The integration plan includes distribution
consolidation, systems integration, store conversions, store closures,
and administration integration. Total merger related costs incurred were $2
million during the thirdfirst quarter of 2000,2001, and $69$9 million
during the third quarter of 1999. Year-to-date merger related costs
incurred were $13 million in 2000 and $304 million in 1999.
The following table presents the components of the merger related
costs:
Third Quarter Ended Three Quarters Ended
------------------------------- --------------------------------
November 4, November 6, November 4, November 6,
2000 1999 2000 1999
--------------- --------------- --------------- ---------------
(in millions) (in millions)
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation.............................. $ -- $ 14 $ 1 $ 24
Systems integration..................................... -- 22 -- 65
Store conversions....................................... -- 21 -- 43
Transaction costs....................................... -- 4 -- 91
Administration integration.............................. -- 6 4 19
------ ------ ------ -----
-- 67 5 242
NON-CASH WRITEDOWN
System integration...................................... -- -- -- 3
Store closures.......................................... -- -- -- 3
Administration integration.............................. -- 1 -- 14
------ ------ ------ -----
-- 1 -- 20
OTHER CHARGES
Administration integration.............................. 2 -- 8 --
------ ------ ------ -----
ACCRUED CHARGES
Distribution consolidation................................. -- -- -- 5
Store closures............................................. -- 1 -- 5
Administration integration................................. -- -- -- 32
------ ------ ------ -----
-- 1 -- 42
------ ------ ------ -----
Total merger related costs................................. $ 2 $ 69 $ 13 $ 304
====== ====== ====== =====
TOTAL CHARGES
Distribution consolidation.............................. $ -- $ 14 $ 1 $ 29
Systems integration..................................... -- 22 -- 68
Store conversions....................................... -- 21 -- 43
Transaction costs....................................... -- 4 -- 91
Store closures.......................................... -- 1 -- 8
Administration integration.............................. 2 7 12 65
------ ------ ------ -----
Total merger related costs................................. $ 2 $ 69 $ 13 $ 304
====== ====== ===== =====
12
13
Distribution Consolidation
Charges related to "Distribution Consolidation" represent costs to
consolidate distribution operations and eliminate duplicate facilities.
The $14 million in the third quarter of 1999 was for Tolleson warehouse
expenses recorded as cash was expended.
Systems Integration
Charges related to "Systems Integration" represent the costs of
integrating systems and the related conversion of corporate office and
store systems. In the third quarter of 1999, costs totaling $22 million
were expensed as incurred including incremental operating costs during
the conversion process, payments to third parties, and training costs.
The incremental operating costs consisted principally of labor costs.
Store Conversions
Charges related to "Store Conversions" include the cost to convert
store banners. All costs represented incremental cash expenditures for
advertising and promotions to establish the banner, changing store
signage, labor required to remerchandise the store inventory and other
services that were expensed as incurred.
Transaction Costs
Charges related to "Transaction Costs" represent fees paid to outside
parties, employee bonuses that were contingent upon the completion of
mergers, and an employee stay bonus program. We incurred costs totaling
$4 million in the third quarter of 1999, related to fees and employee
bonuses recorded as the cash was expended.
Store Closures
Charges related to "Store Closures" include the costs to close stores
identified as duplicate facilities and to sell stores pursuant to
settlement agreements. Year-to-date 1999 costs related to the closure
of seven stores identified as duplicate facilities and to sell three
stores pursuant to a settlement with the Federal Trade Commission.
Administration Integration
Charges related to "Administration Integration" include labor and
severance costs related to employees identified for termination in the
integration and charges to conform accounting policies. During the
third quarter of 2000, we incurred costs totaling $2 million resulting
from the issuance of restricted stock related to merger synergies.
Year-to-date 2000, we have recorded costs totaling $12 million which
includes approximately $8 million resulting from restricted stock, and
$4 million for severance payments recorded as cash was expended.
Restrictions on the stock grants lapse as synergy goals are achieved.
Year-to-date 1999, we accrued severance costs totaling $12 million and
an obligation to make a charitable contribution of $20 million within
seven years from the date of the Fred Meyer merger.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
----------------- -------------- ---------------------
(in millions)
Balance at January 2, 1999........................................ $ 133 $ 30 $ --
Additions...................................................... 8 24 29
Payments....................................................... (11) (25) --
-------- -------------- ------
Balance at January 29, 2000....................................... 130 29 29
Payments....................................................... (15) (10) --
-------- -------------- ------
Balance at November 4, 2000....................................... $ 115 $ 19 $ 29
======== ======= ======
13
14
ONE-TIME ITEMS
In addition to the "merger related costs" described above, we incurred
one-time expenses related to recent mergers of $121 million and $59
million year-to-date 2000 and 1999, respectively. The one-time items in
2000 included approximately $16 million for inventory writedowns and
$11 million of one-time product related costs included as merchandise
costs. The remaining $94 million in 2000 is included in operating,
general and administrative costs and relates primarily to stores that
have closed or will close and severance expenses related to headcount
reductions and other miscellaneous costs. Of the $94 million, $27
million represented cash expenditures and $67 million represented
charges that were accrued pertaining primarily to the present value of
lease liabilities relating to closed stores. The table below details
the changes in the accruals related to the closed store reserves. The
1999 one-time items represent costs related to mergers recorded as cash
was expended. Of the $59 million, $23 million was included in
operating, general and administrative costs, and $36 million was
included in merchandise costs.
Accrued Lease Liability
Related to Store Closings
-----------------------------
(in millions)
Balance at January 29, 2000....................................... $ --
Additions...................................................... 67
Payments....................................................... (9)
-------
Balance at November 4, 2000....................................... $ 58
=======
ASSET IMPAIRMENT CHARGES
Due to updated profitability forecasts for 2000 and beyond and new
divisional leadership, we performed an impairment review of our
long-lived assets during the
first quarter of 2000.
In addition to merger related costs that are shown separately on the
Consolidated Statements of Earnings, we also incurred other one-time
expenses that are included in merchandise costs and operating, general
and administrative expenses. The one-time expenses of $14 million
during the first quarter 2001 and $81 million during the first quarter
2000 were costs related to recent mergers.
During this review,the first quarter of 2000, we recorded an impairment charge of
approximately $191 million. We identified impairment losses for both assets to be disposed of and
assets to be held and used.
Assets to be Disposed of
The impairment charge for assets
to be disposed of, related primarily to
the carrying value of land, buildings, and equipment for 25 stores that
have been closed or that management has committed to close by the end
of the fiscal year. The impairment charge was determined using the fair
value less the cost to sell. Fair value less the cost to sell used in
the impairment calculation was based on discounted cash flows and
third-party offers to purchase the assets, or market value for
comparable properties, if applicable. Accordingly, an impairment charge
of $81 million related to assets to be disposed of was recognized,
reducing the carrying value of fixed assets and goodwill by $41 million
and $40 million, respectively.
Assets to be Held and Used
The impairment charge for assets to be held and used, related primarily
to the carrying value of land, buildings, and equipment for 13 stores
that we will continue to operate. Updated projections, based on revised
operating plans, were used, on a gross basis, first to determine
whether the assets were impaired, then, on a discounted cash flow basis
to serve as the estimated fair value of the assets for purposes of
measuring the asset impairment charge. As a result, an impairment
charge of $87 million related to assets to be held and used was
recognized, reducing the carrying value of fixed assets and goodwill by
$47 million and $40 million, respectively.
Other Writedowns
In addition to the approximately $168 million of impairment charges
noted above, we recorded a writedown of $23 million to reduce the
carrying value of certain investments
in unconsolidated entities,
accounted for on the cost basis of accounting, to reflect reductions in
value determined to be other than temporary. The writedowns related
primarily to investments in certain former suppliers that have experienced financial difficulty and with
whom supply arrangements have ceased. 14The table below details our
merger related costs and one-time items:
13
15
First Quarter Ended
-------------------------------
May 26, May 20,
2001 2000
-------------------------------
(in millions)
Merger related costs...................................... $ 2 $ 9
--------- --------
One-time items related to mergers included in:
Merchandise costs...................................... 3 15
Operating, general and administrative.................. 11 66
--------- --------
Total one-time items..................................... 14 81
--------- --------
Impairment charge......................................... -- 191
--------- --------
Total merger related costs and other one-time items....... $ 16 $ 281
========= ========
Please refer to footnotes two, three and four of the financial
statements for more information on these costs.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
---------------
During the third quarter, we invested $103$304 million to repurchase 4.712.9 million
shares of Kroger stock at an average price of $21.84$23.59 per share. During the first three quarters of 2000, we repurchased approximately
20.8We
purchased 7.9 million shares of our common stock at an average price of $19.93
per share for a total investment of $414 million. We have purchased
19.6 million shares for approximately $389 million under our $750 million stock repurchase
plan and we purchased an additional 1.25 million shares under our program
to repurchase common stock funded by the proceeds and tax benefits from
stock option exercises.
We had several lines of credit totaling $4.0$3.5 billion, with $1.8 billion
in unused balances at November 4, 2000.May 26, 2001. In addition, we had a $470$466 million
synthetic lease credit facility with no unused balance and $175a $150
million of money market linesline with an unused balancesbalance of $165$80 million at November 4, 2000.May
26, 2001.
On May 23, 2001, we entered into a new $1,625 revolving credit
facility, comprised of a Five-Year Credit Agreement and a 364-Day
Credit Agreement (collectively the "New Credit Agreement"). The Five
Year Credit Agreement, a $812.5 facility, terminates on May 23, 2006
unless extended or earlier terminated. The 364-Day Credit Agreement, a
$812.5 facility, terminates on May 22, 2002 unless extended, converted
into a one year term loan, or earlier terminated by us. We terminated
our previous $1,500 Five-Year Credit Agreement and 364-Day Credit
Agreement (collectively the "Old Credit Agreement") upon entering the
New Credit Agreement. Borrowings under the New Credit Agreement bear
interest as described in the Credit Agreement, which is incorporated
herein by reference to Exhibits 99.1 and 99.2 of Kroger's Current
Report on From 8-K dated May 31, 2001. At May 26, 2001, the Applicable
Margin for the 364-Day facility was .625% and for the Five-Year
facility was .600%. The Facility Fee for the 364-Day facility was .125%
and for the Five-Year facility was .150%. The Credit Agreement contains
covenants which among other things, restrict dividends and require the
maintenance of certain financial ratios, including fixed charge
coverage ratios and leverage ratios.
Net debt decreased $364increased $267 million to $8.4$8.7 billion at the end of the thirdfirst
quarter of 20002001 compared to the thirdfirst quarter of the prior year. We
define netNet
debt is defined as long-term debt, including capital leases and current
portion thereof, less investments in Kroger debt securities and prefunded
employee benefits. We do not intend to present net debt as an
alternative to any generally accepted accounting principle measure of
performance. Rather, we believe that presentation of this calculation
is important to the understanding of our financial condition. Net debt decreased $363increased $388 million from year-end 1999, despite2000.
These increases are primarily the $414 million
repurchaseresult of Krogerthe increased investment in
working capital and stock and acquisitions completed during the first
three quarters of 2000. The decrease since year-end resulted from
strong free cash flow from operations, including a reduction in net
working capital.repurchases.
Our bank credit facilities and the indentures underlying our publicly
issued debt contain various restrictive covenants. Some of these
covenants are based on EBITDA, which we define as earnings before
interest, taxes, depreciation, amortization, LIFO, extraordinary
losses, and one-time items. The ability to generate EBITDA at levels
sufficient to satisfy the requirements of these agreements is a key
measure of our financial strength. We do not intend to present EBITDA
as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe the presentation of EBITDA
is important for understanding our performance compared to our debt
covenants. The calculation of EBITDA is based on the definition
contained in our bank credit facilities. This may be a different
definition than other companies use. We were in compliance with all
EBITDA-based bank credit facilityfacilities and indenture covenants on November
4, 2000.May 26,
2001.
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16
The following is a summary of the calculation of EBITDA for the thirdfirst
quarter of 2001 and three quarters ended November 4, 2000 and November 6, 1999.2000.
Third1st Quarter Ended
Three Quarters Ended
----------------------------------
--------------------------------
November 4, November 6, November 4, November 6,May 26, May 20,
2001 2000 1999 2000 1999
---------------- ----------------
----------------- --------------
(in millions) (in millions)
Earnings before tax expense............................. $ 349498 $ 240 $ 899 $ 693166
Interest................................................ 146 143 508 485206 206
Depreciation............................................ 209 193 696 638288 276
Goodwill amortization................................... 25 23 79 7631 31
LIFO.................................................... (6) (6) 10 612 12
One-time items included in merchandise costs............ 8 18 27 363 15
One-time items included in operating, general and
administrativeAdministrative expenses.............................. 24 6 94 2311 66
Merger related costs.................................... 2 69 13 3049
Impairment charges...................................... -- -- 191 --
---------- ----------
---------- ---------
EBITDA.................................................. $ 7571,051 $ 686 $ 2,517 $ 2,261
========== ==========972
========== =========
Cash Flow
---------
We generated $2,068$616 million of cash from operating activities year-to-date 2000during the
first quarter of 2001 compared to $1,311 million year-to-date 1999.$1.02 billion in the first quarter of
2000. Cash flow from operating activities increaseddecreased in the thirdfirst
quarter of 20002001 largely due to a reduction in working capital and an increase in net
earnings excluding non-cash charges.working capital.
Investing activities used $1,238$654 million of cash year-to-date 2000during the first quarter
of 2001 compared to $1,402$477 million year-to-date 1999.in 2000. This decreaseincrease in use of cash
was primarily due to a decrease inthe payment for acquisitions and increased capital
spending during 2000.spending.
Financing activities used $980provided $37 million of cash year-to-date 2000in the first quarter
of 2001 compared to providing $111a use of $664 million throughin the thirdfirst quarter of 1999.2000.
This increase in the use of cash wasis due to our repurchaseproceeds received from the issuance of
Company
common stock and net reductions in debt.
15
16debt during the first quarter of 2001.
CAPITAL EXPENDITURES
Capital expenditures excluding acquisitions totaled $400$618 million in the
thirdfirst quarter of 20002001 compared to $625$455 million in the thirdfirst quarter of
1999.2000. During the thirdfirst quarter of 20002001 we opened, acquired, expanded,
or relocated 3546 food stores. We had 2414 operational closings and
completed 35 within-the-wall26 within the wall remodels. Square footage increased 4.8%
over4.3%.
OTHER ISSUES
Kroger has completed the prior year. Excluding acquisitions$750 million stock repurchase program
announced in April 2000 and operational closings,
square footage rose 4.3%. Excluding only acquisitions, square footage
increased 2.9%continues to repurchase Kroger stock under
the $1 billion repurchase program authorized in March 2001.
We are a 50% owner of Santee Dairies, L.L.C. ("Santee") and have a
10-year product supply agreement with Santee that requires us to
purchase 9 million gallons of fluid milk and other products annually.
The product supply agreement expires on July 29, 2007. Upon the
acquisition of Ralphs/Food 4 Less, Santee became excess capacity.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning
in the first quarter of 2002. These issues address the appropriate
accounting for certain vendor contracts and loyalty programs. The
Company continues to assess the effect these new standards will have on
the financial statements. The Company expects the adoption of these
standards will not have a material effect on our financial statements.
Statement of Financial Accounting Stanadards ("SFAS") No. 141,
"Business Combinations," and SFAS No. 142, "Goodwill and Other
Intangible Assets" were issued by the Financial Accounting Standards
Board in late June of 2001. SFAS 141 is
15
17
effective for all business combinations initiated after June 30, 2001
and SFAS 142 will become effective for the Kroger on February 3, 2002.
We are currently analyzing the effect the adoption of these standards
will have on its financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for
Kroger as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in Kroger recording a liability of $9 million with a
corresponding charge recorded as additional paid in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the 63 operational closingsimmateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings.
We assess, both at inception of the hedge and on an ongoing basis,
whether derivatives used as hedging instruments are highly effective in
offsetting the changes in the fair value or cash flow of hedged items.
If we determine that a derivative is not highly effective as a hedge
or ceases to be highly effective, we discontinue hedge accounting
prospectively.
As of May 26, 2001, we recorded a liability of $9 million related to
the fair value of its derivative instruments. These instruments are
designated as, and are considered, effective cash flow hedges. Hedge
ineffectiveness was not material during the past four
quarters, compared to 41 operational closingquarter ended May 26, 2001.
We recorded a corresponding charge as a part of additional paid in
the preceding four
quarters.
Year-to-date 2000 capital, expenditures totaled $1,238 million compared
to $1,470 million year-to-date 1999. During the first three quartersnet of 2000 we opened, acquired, expanded, or relocated 130 food stores. We
had 54 operational closings and completed 93 within the wall remodels.income tax effects.
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OUTLOOK
Information provided by us, including written or oral statements made
by our representatives, may contain forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, which address
activities, events or developments that we expect or anticipate will or
may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of our
business, future capital expenditures and our business strategy,
contain forward-looking information. Statements elsewhere in this
report and below regarding our expectations, hopes, beliefs,
intentions, or strategies are also forward-lookingforward looking statements. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. While we believe that the statements
are accurate, uncertainties and other factors could cause actual
results to differ materially from those statements. In particular:
- We expect to reduce net operating working capital as compared
to the third quarter of 1999 by a total of $500 million by the
end of the third quarter 2004. Our ability to achieve this
reduction will depend on results of our programs to improve
net working capital management. We calculate net operating
working capital as detailed in the table below. As of the end
of the first quarter net operating working capital increased
$264 million since the first quarter of 2000. A calculation of
net operating working capital, after reclassification of
certain balance sheet amounts, based on our definition for all
quarters from the third quarter of 1999 through the first
quarter of 2001 is provided below:
THIRD FOURTH FIRST SECOND THIRD FOURTH FIRST
QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER
1999 1999 2000 2000 2000 2000 2001
--------------------------------------------------------------------------------
(in millions)
Cash ............................. $ 283 $ 281 $ 163 $ 155 $ 131 $ 161 $ 160
Receivables ...................... 633 635 623 583 628 687 672
FIFO inventory ................... 4,632 4,260 4,240 4,133 4,743 4,382 4,537
Operating prepaid and other assets 200 495 358 252 186 410 351
Accounts payable ................. (3,222) (2,804) (3,004) (2,940) (3,300) (3,009) (3,135)
Operating accrued liabilities .... (1,937) (1,844) (1,849) (1,932) (1,907) (1,918) (1,813)
Prepaid VEBA ..................... -- (200) (118) (56) (3) (208) (95)
------- ------- ------- ------- ------- ------- -------
Working capital .................. $ 589 $ 823 $ 413 $ 195 $ 478 $ 505 $ 677
======= ======= ======= ======= ======= ======= =======
- We obtain sales growth from new square footage, as well as
from increased productivity from existing locations. We expect
20002001 full year square footage to grow approximately 4.0%.
During the next two years, Kroger plans to grow square footage
by 4.0% to 5.0% year over year. We expect to continue to
realize savings from economies of scale in technology and
logistics, some of which may be reinvested in retail price
reductions to increase sales volume and enhance market share.
-4.5%. We expect
combination stores to increase our sales per customer by
including numerous specialty departments, such as pharmacies,
natural food products, gasoline pumps, seafood shops, floral
shops, and bakeries. We believe the combination store format
will allow us to withstand continued competition from other
food retailers, supercenters, mass merchandisers, club or
warehouse stores, drug stores and restaurants.
- We believe we have adequate coverageOur targeted annual earnings per share growth is 16%-18%
through the fiscal year ending February 1, 2003 and 15%
thereafter.
- Capital expenditures reflect our strategy of growth through
expansion and acquisition as well as our debt covenants to
continue to respond effectively to competitive conditions.
- We expect to continueemphasis on
self-development and ownership of real estate, and on
logistics and technology improvements. The continued capital
spending in technology focusing on improved store operations,
logistics, manufacturing procurement, category management,
merchandising and buying practices, which should continue to reduce
merchandising costs as a percent of sales. - We expect to reduce working capital as compared to the third
quarter of 1999 by a total of $500 million by the end of the
third quarter of fiscal 2004. We define working capital as
current operating assets less current operating liabilities.
We do not intend to present working capital as an alternative
to any generally accepted accounting principle measure of
performance. Rather, we believe this presentation is relevant
to an assessment of our financial condition. As of the end of
the third quarter of 2000 we have reduced working capital $85
million since the third quarter of 1999. A calculation of
working capital based on our definition as of the end of the
third quarter of 2000 and the third quarter of 1999 is
provided in the following table:
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17
Third Quarter Third Quarter
2000 1999
------------- --------------
(in millions)
Cash..................................... $ 131 $ 283
Receivables.............................. 618 620
FIFO inventory........................... 4,923 4,812
Operating prepaid and other assets....... 186 199
Accounts payable......................... (3,274) (3,199)
Operating accrued liabilities............ (2,279) (2,328)
Prepaid VEBA............................. (3) --
--------- ---------
Working capital ......................... $ 302 $ 387
========= =========
- Our earnings per share target is a 16%-18% average annual
increase through the fiscal year ending February 1, 2003.
- We expect our
capital expenditures for the yearfiscal 2001 to total approximately $1.8$2.0 billion,
net ofexcluding acquisitions. Capital
expenditures reflect our strategy of growth through expansion
and acquisition as well as our emphasis, whenever possible, on
self-development and ownership of store real estate, and on
logistics and technology improvements. We intend to use the combination of
free cash flows from operations, including reductions in
working capital, and borrowings under credit facilities to
finance capital expenditure requirements. If determined
preferable, we may fund capital expenditure requirements by
mortgaging facilities, entering into sale/leaseback
transactions, or by issuing additional debt or equity.
- We expectBased on current operating results, we believe that operating
cash flow and other sources of liquidity, including borrowings
under our commercial paper program and bank credit facilities,
will be adequate to meet or exceed $380 million in annual synergy
savings as a result of our mergers by the end of fiscal 2001.
We have exceeded our previously stated annual synergy savings
goal of $260 millionanticipated requirements for fiscal 2000 by achieving an annual
run rate of $294 million as of the end of the third quarter of
2000. Some of these savings will be reinvested in the business
to drive sales growth.
- We expectworking
capital, capital expenditures, interest expensepayments and scheduled
principal payments for the year to total $660 - $670
million.foreseeable future. We continue to utilize interest rate swaps and caps
to limit our exposure to rising interest rates. The
derivatives are used primarily to fix the rates on variable
debt and limit the floating rate debt to a total of $2.3
billion or less. For the balance of the year, we expect less
than 10% of our outstanding debt will be exposed to upward
movements in interest rates and expect this floating rate debt
to average $800 - $850 million for the remainder of the year.
Our ability to achieve our expectations may be impacted by several
factors that could cause actual results to differ materially from our
expectations. We operate in an increasingly competitive environment
that could adversely affect our expected increases in sales and
earnings. Competitors' pricing strategies, store openings, and remodels
may effect our sales and earnings growth. A downturn in the general
business or economic conditions in our operating regions may also
adversely affect our sales and earnings. Such an economic downturn may
include fluctuations in the rate of inflation, decreases in population,
or employment and job growth. Our projected increases in store square
footage could be adversely affected by increased operational store
closings or delays in construction projects. Although we believe
we have adequate coverage of our debt covenants our indebtedness could
adversely affect us by reducing our flexibilityto continue to
respond effectively to changingcompetitive conditions.
17
19
- A decline in the generation of sufficient cash flows to
support capital expansion plans, share repurchase programs and
general operating activities could cause our growth to slow
significantly and may cause us to miss our earnings targets,
because we obtain some of our sales growth from new square
footage.
- The grocery retailing industry continues to experience fierce
competition from other grocery retailers, supercenters, club
or warehouse stores, and drug stores. Our ability to maintain
our current success is dependent upon our ability to compete
in this industry and continue to reduce operating expenses.
The competitive environment may cause us to reduce our prices
in order to gain or maintain share of sales, thus reducing
margins. While we believe our opportunities for sustained,
profitable growth are considerable, unanticipated actions of
competitors could impact our share of sales and net income.
- Changes in laws and regulations, including changes in
accounting standards, taxation requirements, and environmental
laws may have a material impact on our financial statements.
- Changes in the general business and economic conditions in our
operating regions, including the rate of inflation, population
growth, and increasingemployment and job growth in the markets in which
we operate may affect our borrowing costs.
Increases in labor costsability to hire and relations with union bargaining units
representingtrain qualified
employees to operate our employees or delays in opening new stores couldstores. This would negatively affect
earnings and sales growth. General economic changes may also
cause us to fall shorteffect the shopping habits of our customers, which could
affect sales and earnings targets. Sales growthearnings.
- Changes in our product mix may also be negatively affected if the impact of new square footage on
existing storesaffect certain
financial indicators. For example, we have added and will
continue to add supermarket fuel centers. Since gasoline is greater than anticipated. Whilea
low profit margin item with high sales dollars, we expect to
reduce
working capital,see our gross profit margins decrease as we sell more
gasoline. Although this negatively affects our gross profit
margin, gasoline provides a positive affect on EBITDA and net
earnings.
- Our ability to do sointegrate any companies we acquire or have
acquired and achieve operating improvements at those companies
will affect our operations.
- We retain a portion of the exposure for our workers'
compensation and general liability claims. It is possible that
these claims may be impaired by changes in
vendor payment terms, seasonal variations in inventory levels, or
systems problemscause significant expenditures that result in increases in inventory levels.would
affect our operating cash flows.
- Our capital expenditures could fall outside of the expected
range if we are unsuccessful in acquiring suitable sites for
new stores, if development costs exceed those budgeted, or if
our logistics and technology projects are not completed in the
time frame expected or on budget.
While- Adverse weather conditions could increase the cost our
suppliers charge for our products, or may decrease the
customer demand for certain products. Additionally, increases
in the cost of inputs, such as utility costs or raw material
costs, could negatively impact financial ratios and net
earnings.
- Although we expectpresently operate only in the United States, civil
unrest in foreign countries in which our suppliers do business
may affect the prices we are charged for imported goods. If we
are unable to achieve benefits through logistics and technology,
duepass these increases on to our recent mergerscustomers our
gross margin and acquisitions, thereEBITDA will suffer.
- Interest rate fluctuation and other capital market conditions
may cause variability in earnings. Although we use derivative
financial instruments to reduce our net exposure to financial
risks, we are inherent
uncertainties that may hinderstill exposed to interest rate fluctuations and
other capital market conditions.
Other factors and assumptions not identified above could also cause actual
results to differ materially from those set forth in the development of new systems and
integration of systems. Unforeseen difficulties in integrating Fred
Meyer or any other acquired entity with Kroger could cause us to fail
to achieve the anticipated synergy savings, and could otherwise
adversely affect our ability to meet our other expectations. Changes in
laws and regulations, including changes in accounting standards and
taxation requirements may adversely affect our operations.forward-looking
information. Accordingly, actual events and results may vary significantly from
those included in or contemplated or implied by forward lookingforward-looking statements made
by us.
17
18
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to risk from the changes in interest rates as a result
of borrowing activities. We continue to utilize interest rate swaps and
caps to limitus or our exposure to rising interest rates. We use derivatives
primarily to fix the rates on variable debt and limit the floating rate
debt to a total of $2.3 billion or less.
There have been no significant changes in our exposure to market risk
from the information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk on our Form 10-K filed with the SEC on
April 27, 2000.representatives.
18
1920
PART II - OTHER INFORMATION
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries are not
filed as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets of the
Company. The Company undertakes to file these instruments with
the Commission upon request.
EXHIBIT 27.1 - Financial Data Schedule.
EXHIBIT 99.1 - Additional Exhibits - Statement of Computation
of Ratio of Earnings to Fixed Charges.
(b) The Company disclosed and filed an underwriting agreement,
pricing agreement,announcement of preliminary
fourth quarter and the eighth Supplemental Indenture
related to the issuancefiscal year 2000 results and a restatement
of $300,000,000, 7.80% senior notesprior earnings by minor amounts in its Current Report on
Form 8-K dated August 21, 2000; andMarch 5, 2001; its earnings release for the
secondfourth quarter and fiscal year of fiscal 2000 in its Current Report
on Form 8-K dated September 12, 2000.March 15, 2000; an announcement regarding
the reaudit of Fred Meyer, Inc.'s 1998 financials, including
preliminary restated financials, in its Current Report on Form
8-K dated March 21, 2001; and an underwriting agreement,
pricing agreement, the Tenth Supplemental Indenture related to
the issuance of $500,000,000, 6.80% Senior Notes, and the
Eleventh Supplemental Indenture related to the issuance of
$500,000,000, 7.50% Senior Notes in its Current Report on Form
8-K dated May 11, 2001.
19
2021
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.
THE KROGER CO.
Dated: December 15, 2000July 10, 2001 By: /s/ Joseph A. Pichler
----------------------------------------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: December 15, 2000July 10, 2001 By: /s/ M. Elizabeth Van Oflen
---------------------------------------------------------------
M. Elizabeth Van Oflen
Vice President and
Corporate Controller
2122
Exhibit Index
-------------
Exhibit 3.1 - Amended Articles of Incorporation of the Company are hereby
incorporated by reference to Exhibit 3.1 of the Company's
Quarterly Report on Form 10-Q for the quarter ended October 3,
1998. The Company's Regulations are incorporated by reference
to Exhibit 4.2 of the Company's Registration Statement on Form
S-3 as filed with the Securities and Exchange Commission on
January 28, 1993, and bearing Registration No. 33-57552.
Exhibit 4.1 - Instruments defining the rights of holders of long-term debt
of the Company and its subsidiaries are not filed as Exhibits
because the amount of debt under each instrument is less than
10% of the consolidated assets of the Company. The Company
undertakes to file these instruments with the Commission upon
request.
Exhibit 27.110.1 - Financial Data Schedule.364 - Day Credit Agreement and Five- Year Credit Agreement,
both dated as of May 23, 2001, among The Kroger Co., as
Borrower; the Initial Lenders named therein; Citibank, N.A.
and The Chase Manhattan Bank, as Administrative Agents; and
Bank of America, N.A., Bank One, N.A., and The Bank of New
York, as Co-Syndication Agents. Incorporated by reference to
Exhibit 99.1 and 99.2 of the Company's Current Report on Form
8-K dated May 31, 2001.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of
Earnings to Fixed Charges.