MANAGEMENT'S DISCUSSION
AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
The New Albertson's
A new leadership team has been assembled to take Albertson's into the future.
This team has identified many actions and programs with which to drive the
Company's future competitiveness, profitability and return on invested capital.
One of the first actions taken was to identify and communicate internally and
externally five strategic imperatives that serve as a guide and a filter for all
future actions. These five imperatives, together with the major actions taken to
date, follow:
1) Aggressive Cost and Process Control. Each main category of expense,
including labor is rigorously monitored by a member of executive
management. A Board approved restructuring plan that included a Voluntary
Separation Plan and Involuntary Severance Plan resulted in a 20 percent
reduction in corporate and administrative staff above store level. Through
the continued focus on expenses, overhead and store processes the Company
expects to achieve $250 in annualized expense reductions by the second
quarter of Fiscal 2002 and an additional $250 by mid 2003 for a total of
$500 in targeted annualized cost reductions.
2) Maximize Return on Invested Capital. The Company has implemented a formal
process to review and measure all significant investments in corporate
assets. The goal of the Company is to hold a number 1 or 2 market share in
an area, or have a plan of action which provides a reasonable expectation
of achieving this goal in order to continue to maintain an investment in
that area. A thorough review was completed at both the individual asset or
store level and at the market area level. As a result of the review, the
Company identified 165 underperforming stores and on July 18, 2001,
announced its commitment to close and dispose the identified stores. The
Company closed 80 of these stores as of January 31, 2002, and expects to
sell or close the remaining 85 stores by mid 2002. In addition, the Company
formulated plans to accelerate the disposal of surplus property through an
auction process for owned properties and aggressive lease termination
negotiations for leased properties. As a result of the initial
restructuring, the number of division offices was reduced from 19 to 15.
During the fourth quarter of 2001, Albertson's sold 80 New England Osco
drugstores.
Additionally, the Company also made the decision to exit Miami, Florida and
the Springfield/Joplin, Missouri markets.
On March 13, 2002, the Company announced a second phase in the asset
rationalization process. As a result, the Company will completely exit four
underperforming markets: Memphis, Tennessee; Nashville, Tennessee; Houston,
Texas; and San Antonio, Texas. These market exits will occur through a
combination of store closures and store sales and involve a total of
95 stores. In connection with this action, the number of division offices
will be further reduced from 15 to 11 and the Tulsa, Oklahoma and Houston,
Texas distribution facilities will be sold or closed. The Company recently
announced the sale of its Tulsa, Oklahoma distribution facility to Fleming
Companies, Inc. This sales agreement also includes a long-term supply
arrangement under which Fleming will provide procurement and distribution
services for Albertson's Oklahoma and Nebraska stores.
Albertson's, Inc. 2001 Annual Report 1
The 2002 capital expenditure program will shift to more remodels and
replacement stores. Also, investments in the Company's technology
infrastructure both in the stores and in the back office will be a strong
focus of the 2002 capital spending program.
3) Customer-focused Approach to Growth. The Company intends to re-direct
non-value added dollars saved from the expense and process control programs
back into the marketplace in order to impact customers and drive growth.
Albertson's focus is on the following programs that are intended to drive
customer loyalty and profitable sales growth. A company-wide "Service
First, Second to None" program is reinvigorating the employees' focus on
customer service. A "Focus on Fresh" initiative is improving the delivery
of fresh foods throughout the Company's fresh departments. The Company's
Jewel-Osco stores in Chicago, Illinois have a decade of experience
operating a unique dual brand food and drugstore format. This unique format
was rolled out to the Tucson, Arizona and Reno, Nevada markets during
Fiscal 2001 and will continue to be introduced to additional markets during
Fiscal 2002. During the fourth quarter of 2001, the Company expanded its
loyalty card program to the Dallas/Fort Worth, Texas area. Albertson's
plans to roll out loyalty card programs to additional markets during Fiscal
2002. Albertson's private label product program will be enhanced during
2002, with a goal of developing a premier program and increasing its sales
penetration in this category.
4) Company-wide Focus on Technology. The Company has embraced a company-wide
focus on technology with the goal of becoming an industry leader. The
Company plans to commit a greater share of its capital expenditures to
information and process technology over the next three to five years to
serve customers and improve operating efficiencies. The Company has
recently rolled out its Albertsons.com on-line shopping service to
additional markets. With these expansions, Albertsons.com is now available
to more than 700 zip codes in California, Oregon and Washington.
5) Energized Associates. Albertson's will strive to become the employer of
choice in the food and drugstore industry. The Company plans to reduce
bureaucracy and layers of management, build stronger communication systems,
improve training programs and implement new performance-based reward
programs. To instill a sense of ownership at the store level, the Company
announced that as of November 1, 2001, all store directors and pharmacy
managers are now eligible for stock options.
Business Combination
On June 23, 1999, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") consummated a merger with the issuance of
177 million shares of Albertson's common stock (the "Merger"). The Merger
constituted a tax-free reorganization and has been accounted for as a pooling of
interests for accounting and financial reporting purposes.
Critical Accounting Policies
The Company's discussion and analysis of its financial condition and results of
operations are based upon the Company's consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
in the United States of America. The preparation of these financial statements
requires the Company to make estimates and judgements that affect the reported
amounts of assets, liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an ongoing basis, the Company evaluates
its estimates, including those related to bad debts, inventories, intangible
assets, income taxes, assets held for sale, impairment of long-lived assets,
self-insurance, restructuring, benefit costs, contingencies, litigation and
unearned income. The Company bases its estimates on historical experience and on
various other assumptions and factors that are believed to be reasonable under
the circumstances, the results of which form the basis for making judgements
about the carrying values of assets and liabilities that are not readily
apparent from other sources. The Company, based on its ongoing review, will make
adjustments where facts and circumstances dictate. Historically, actual results
have not significantly deviated from those determined using the estimates
described above.
Albertson's, Inc. 2001 Annual Report 2
The Company believes the following critical accounting policies are important to
the portrayal of the Company's financial condition and results and require
management's most difficult, subjective or complex judgments, often as a result
of the need to make estimates about the effect of matters that are inherently
uncertain.
SELF-INSURANCE The Company is primarily self-insured for workers' compensation,
automobile and general liability costs. The Company records its self-insurance
liability, determined actuarially, based on claims filed and an estimate of
claims incurred but not yet reported. Any actuarial projection of ultimate
losses is subject to a high degree of variability. Sources of this variability
are numerous and include, but are not limited to, future economic conditions,
court decisions and legislative actions. The Company's workers' compensation
future funding estimates anticipate no change in the benefit structure.
Statutory changes could have a significant impact on future claim costs.
The Company's workers' compensation liabilities are from claims occurring in
various states. Individual state workers' compensation regulations have received
a tremendous amount of attention from the state's politicians, insurers,
employers and providers, as well as the public in general. Recent years have
seen an escalation in the number of legislative reforms, judicial rulings and
social phenomena affecting this business. The changes in a state's political and
economic environment increase the variability in the unpaid claim liabilities.
ASSET IMPAIRMENTS The Company accounted for the impairment of long-lived assets
in accordance with Statement of Financial Accounting Standards (SFAS) No. 121
and, beginning in 2002, will account for it in accordance with SFAS No. 144. For
assets to be held and used, the Company tests for impairment using undiscounted
cash flows and calculates the amount of impairment using discounted cash flows.
For assets held for sale, impairment is recognized based on the excess of
remaining book value over expected recovery value. The recovery value is the
fair value as determined by independent quotes or expected sales prices
developed by internal specialists. Estimates of future cash flows and expected
sales prices are judgments based upon the Company's experience and knowledge of
local operations and cash flows that are projected for several years into the
future. These estimates can be significantly impacted by changes in real estate
market conditions, the economic environment, capital spending decisions and
inflation.
For properties to be closed that are under long-term lease agreements, the
present value of any remaining liability under the lease, discounted using
risk-free rates and net of expected sublease recovery, is recognized as a
liability and expensed. If the real estate and leasing markets change, the
assumptions regarding sublease recovery could significantly impact the Company's
recorded liability.
RESTRUCTURING The Company records restructuring charge liabilities in accordance
with Emerging Issues Task Force (EITF) Issue No. 94-3. The estimates of future
liabilities may change, requiring the recording of additional closure costs or
the reduction of liabilities already recorded. Changes in estimates occur when
exit costs are more or less costly than originally estimated.
PENSION COSTS Many of the Company's associates are covered by noncontributory
defined benefit pension plans. The Company accounts for these costs in
accordance with SFAS No. 87. That statement requires the Company to calculate
pension expense and liabilities using actuarial assumptions, including a
discount rate and long-term returns on assets. Actual returns on plan assets in
excess of return assumptions have, in past years, kept pension expense and cash
contributions to the plans at modest levels. Recent weaker market performance
may significantly increase pension expense and cash contributions in the future
unless asset returns again exceed the assumptions used. Changes in the interest
rates used to determine the discount rate may also cause volatility in pension
expense and cash contributions.
Albertson's, Inc. 2001 Annual Report 3
Results of Operations
Sales for 2001 were $37,931 compared to $36,762 in 2000 and $37,478 in 1999 (a
53-week year). The following table sets forth certain income statement
components expressed as a percent to sales, and the year-to-year percentage
changes in the amounts of such components:
PERCENT TO SALES PERCENTAGE CHANGE
- ------------------------------------------------------ -------------------------------- -------------------------------
2001 2000 1999 2001 VS. 2000 2000 VS. 1999
- ------------------------------------------------------ ---------- ---------- ---------- --------------- ---------------
Sales 100.00 100.00 100.00 3.2 (1.9)
Gross profit 28.41 28.38 27.52 3.3 1.2
Selling, general and administrative expenses 23.90 23.79 23.06 3.6 1.2
Restructuring charges and other 1.23 - - n.m. n.m.
Gain on sale of New England Osco drugstores (0.14) - - n.m. n.m.
Merger-related (credits) charges (0.04) 0.07 1.06 n.m. n.m.
Litigation settlement charge - - 0.10 n.m. n.m.
Operating profit 3.46 4.52 3.31 (21.0) 34.0
Interest expense, net 1.14 1.05 0.94 12.1 9.2
Earnings before income taxes and extraordinary item 2.30 3.46 2.40 (31.5) 41.6
Net earnings 1.32 2.08 1.08 (34.4) 89.2
n.m. - not meaningful
Increases in sales are primarily attributable to the continued development of
new stores and identical and comparable store sales increases. During 2001 the
Company opened or acquired 144 stores, remodeled 103 stores and closed or sold
235 stores (including the sale of 80 New England Osco drugstores and the closure
of 80 stores due to the Company's restructuring plan). Net retail square footage
was 98.1 million square feet as of the end of Fiscal 2001 and 2002. Adjusting
for the effect of the sale of 80 New England Osco drugstores and
80 restructuring closures, net retail square footage would have increased by
4.0% during 2001. During 2000, net retail square footage increased by 2.5%.
Identical store sales, stores that have been in operation for two full fiscal
years, increased 0.8% in 2001 and 0.3% in 2000. Comparable store sales, which
include replacement stores, increased 1.3% in 2001 and 0.6% in 2000. Identical
and comparable store sales continued to increase through higher average ticket
sales per customer. Management estimates that overall inflation in products
the Company sells was flat in 2001, there was overall deflation of 0.4% in 2000
and overall inflation of 0.2% in 1999.
In addition to store development, the Company has increased sales through its
continued implementation of best practices across the Company and its
customer-focused approach to growth. These programs include: the "Focus on
Fresh" initiative; a renewed focus on customer service through the "Service
First, Second to None" program; implementation of the preferred loyalty card
program; dual branded combination stores; and expansion of the on-line shopping
service. Other solutions include neighborhood marketing, targeted advertising
and exciting new and remodeled stores.
Gross profit, as a percent to sales, remained relatively flat between 2001 and
2000. The increase in 2000 over 1999 resulted primarily from an improved sales
mix of partially prepared, value-added products. Gross profit improvements in
2000 were also realized through the continued utilization of the Company's
distribution facilities and increased buying efficiencies. The Merger has
created buying synergies and margin improvements from the implementation of best
practices across the Company. The pre-tax LIFO adjustment, (as a percent to
sales), decreased gross profit by $10 (0.03%) in 2001, increased gross profit by
$23 (0.06%) in 2000 and decreased gross profit by $30 (0.08%) in 1999. The net
pre-tax LIFO charge for 2001 was $5, comprised of $10 of charges recorded in
cost of sales, $3 of credits recorded with gain on sale of New England Osco
drugstores and $2 of credits recorded with restructuring and other.
Albertson's, Inc. 2001 Annual Report 4
Cost of sales include vendor allowances and advertising expense related to the
Company's buying and merchandising activities. Vendor allowances consist
primarily of promotional allowances, advertising allowances and, to a lesser
extent, slotting allowances. The Company utilizes vendor allowances to fund
pricing promotions, advertising expense and slotting expense. Gross advertising
expense (excluding advertising allowances) totaled $537 in 2001, $550 in 2000
and $654 in 1999.
Selling, general and administrative (SG&A) expenses as a percent to sales
increased in 2001, primarily due to workers' compensation costs and benefit
expenses caused by sharply higher health care costs. The 2001 increase in SG&A
expenses was partially offset by reductions in direct labor costs. The increase
in 2000 over 1999 was primarily due to increased salary and related benefit
costs resulting from the Company's initiatives to increase sales, increased
depreciation expense associated with the Company's expansion program and larger
losses from asset impairment and dispositions.
Other income, for the year ended January 31, 2002, includes $16 of charges for a
decrease in company-owned life insurance, and $8 of credits for stock received
from the demutualization of two insurance companies.
The Company's effective income tax rate from continuing operations for 2001 was
42.6%, as compared to 40.0% for 2000 and 52.5% for 1999. The increase for 2001
over 2000, is due to lower earnings before income taxes, non-deductible
restructuring expenses and company-owned life insurance. The effective income
tax rate for 1999 was impacted by the non-deductible portion of merger-related
costs.
Restructuring and Other Non-Routine Items
Restructuring
On July 17, 2001, the Company's Board of Directors approved a restructuring plan
designed to improve future financial results and to drive future
competitiveness. The plan includes certain exit costs and employee termination
benefits, as described below, that will be incurred within approximately one
year of the Board approval date.
ACTION STATUS
------ ------
Reduction in administrative and corporate overhead Substantially complete
Closing of 165 underperforming retail stores 80 closed as of year end
Consolidation and elimination of four division offices Completed
Process streamlining Ongoing
As a result of the restructuring plan, the Company recorded pre-tax charges of
$509 ($314 after tax or $0.77 per diluted share) made up of $468 restructuring
and other, and $41 of period costs (including $35 of inventory write-down
recorded in cost of sales) for the 52 weeks ended January 31, 2002. The
following table presents the pre-tax charges, incurred by category of
expenditure, and related restructuring reserves included in the Company's
Consolidated Balance Sheets:
EMPLOYEE LEASE
SEVERAMCE ASSET TERMINATION
COSTS IMPAIRMENTS COSTS OTHER TOTAL
------------ -------------- -------------- ---------- ----------
Additions $ 44 $396 $ 57 $ 12 $509
Utilization 33 396 7 12 448
------------ -------------- -------------- ---------- ----------
Balance at January 31, 2002 $ 11 $ - $ 50 $ - $ 61
============ ============== ============== ========== ==========
Employee severance costs consist of severance pay, health care continuation
costs and outplacement service costs for employees who participated in the
Company's Voluntary Separation Plan and for employees who were terminated or
notified of termination under the Company's Involuntary Severance Plan. In
accordance with the restructuring plan, 1,341 managerial and administrative
positions above store level have been identified for termination. As of
January 31, 2002, 995 positions have been terminated. The remaining terminations
will occur as originally planned.
Albertson's, Inc. 2001 Annual Report 5
As part of the Company's restructuring plan, all stores were reviewed utilizing
a methodology based on return on invested capital. Based on this review, the
Company identified and committed to close and dispose 165 underperforming stores
in 25 states. All stores identified for closure were evaluated for asset
impairment by comparing the fair value, less selling cost, to the recorded book
value. Fair value used in the impairment calculation was based on third party
offers or market value for comparable properties. For stores under operating
lease agreements, the present values of any remaining liability under the lease,
net of sublease recoveries, or lease termination costs were expensed. As of
January 31, 2002, 80 stores have been closed.
Assets to be disposed of include land, buildings, equipment, leasehold
improvements, and inventory for stores and division offices that were included
in the restructuring discussed above. These assets are reported as assets held
for sale in the Company's Consolidated Balance Sheets.
Other costs include various expenses related to the Company's decision to exit
certain insignificant businesses and the consolidation of the division offices.
The restructuring plan also included actions to accelerate the disposal of
surplus property which included terminating leases through negotiated buyouts
and selling properties through auctions. During 2001, a $51 pre-tax adjustment
was recorded in selling, general and administrative expenses and included in the
closed store reserves for the additional charges expected to be incurred as a
result of these actions.
Merger-Related Charges (Credits)
Results of operations include $6 of merger-related credits ($4 after tax) for
fiscal year 2001, $151 of merger-related charges ($93 after tax) for fiscal year
2000, and $683 of merger-related charges ($529 after tax) for fiscal year 1999.
The following table presents the pre-tax charges (credits) incurred by category
of expenditure and merger-related accruals included in the Company's
Consolidated Balance Sheets:
ASSET INTEGRATION
IMPAIRMENTS SEVERANCE AND OTHER TOTAL
----------------- -------------- ---------------- --------------
Additions $ 264 $ 124 $ 343 $ 731
Adjustments (22) (7) (19) (48)
Utilization (242) (93) (315) (650)
----------------- -------------- ---------------- --------------
Balance at February 3, 2000 - 24 9 33
Additions 36 21 97 154
Adjustments (3) (3)
Utilization (36) (35) (100) (171)
----------------- -------------- ---------------- --------------
Balance at February 1, 2001 - 7 6 13
Additions 8 2 5 15
Adjustments (20) (1) (1) (22)
Utilization 12 (3) (10) (1)
----------------- -------------- ---------------- --------------
Balance at January 31, 2002 $ - $ 5 $ - $ 5
================= ============== ================ ==============
Albertson's, Inc. 2001 Annual Report 6
Asset impairments include the loss on disposal of duplicate and abandoned
facilities, including administrative offices, intangibles and information
technology equipment which were abandoned by the Company. Operations for the
year ended January 31, 2002, included $15 of pre-tax credits associated with the
reversal of previous impairment charges related to the sale of the American
Stores' Tower in Salt Lake City, Utah. The Company closed on the sale of this
property on May 15, 2001, thus completing the asset dispositions resulting from
the Merger.
Severance consists of retention costs for certain individuals and termination
benefit liabilities for 633 individuals who have already been terminated.
Integration and other costs consist primarily of incremental transition and
integration costs associated with integrating the operations of Albertson's and
ASC, and are being expensed as incurred. These include such costs as
advertising, labor associated with system conversions and training and
relocation costs. Also included are transaction and financing costs which
consist primarily of professional fees paid for investment banking, legal,
accounting, printing and regulatory filing fees. Financing costs also include
the extraordinary loss on extinguishment of debt.
In connection with the Merger, the Company recorded net pre-tax charges through
the first two quarters of 1999 of $47 related to Limited Stock Appreciation
Rights. This is included in the Integration and Other category above.
Other Non-Routine Items
The Company recorded a $54 pre-tax one-time gain during the fourth quarter of
2001 resulting from the sale of 80 New England Osco drugstores.
The Company recorded, in selling, general and administrative expenses, a
$36 pre-tax one-time gain during the fourth quarter of 2001 resulting from an
amendment to the Company's long-term disability plan. The amendment changed the
salary continuation feature from a cumulative benefit based on years of service,
to a set percentage of salary benefit.
The Company recorded a $20 pre-tax one-time charge during first quarter of 2000
and included it in selling, general and administrative expenses to reflect
liabilities related to certain previously assigned leases and subleases to
tenants who are in bankruptcy.
The Company recorded a $37 pre-tax one-time charge during the third quarter of
1999 resulting from an agreement reached to settle eight multi-state cases
combined in the United States District Court in Boise, Idaho, which raised
various issues including "off-the-clock" work allegations. Under the agreement,
current and former employees who meet eligibility criteria may present their
claims to a settlement administrator. While the Company cannot specify the exact
number of individuals who are likely to submit claims and the exact amount of
their claims, the one-time charge is the Company's current estimate of the total
monetary liability, including attorney fees, for all eight cases.
Albertson's, Inc. 2001 Annual Report 7
Summary of Restructuring and Other Non-Routine Items
Due to the significance of the restructuring charges, merger-related charges
(credits), and other non-routine items and their effect on operating results,
the following table is presented to assist in the comparison of income statement
components without these charges and credits:
52 WEEKS ENDED 52 WEEKS ENDED 53 WEEKS ENDED
JANUARY 31, 2002 FEBRUARY 1, 2001 FEBRUARY 3, 2000
- ----------------------------- ----------------------------------------------- --------------------- ----------------------
AS REPORTED ONE-TIME W/O ONE-TIME W/O ONE-TIME W/O ONE-TIME
- ----------------------------- ------------ ------------ --------------------- --------------------- -----------------------
Sales $37,931 $37,931 100.00% $36,762 100.00% $37,478 100.00%
Cost of sales 27,155 $ (35) 27,120 71.50 26,292 71.52 27,122 72.37
- ----------------------------- ------------ ------------ ------------ -------- ------------ -------- ------------ --------
Gross profit 10,776 35 10,811 28.50 10,470 28.48 10,356 27.63
Selling, general and
administrative expenses 9,064 (40) 9,024 23.79 8,637 23.49 8,427 22.49
Restructuring charges and
other 468 (468)
Gain on sale of New England
Osco drugstores (54) 54
Merger-related credits (15) 15
- ----------------------------- ------------ ------------ ------------ -------- ------------ -------- ------------ --------
Operating profit 1,313 474 1,787 4.71 1,833 4.99 1,929 5.15
Interest expense, net (432) (432) (1.14) (385) (1.05) (352) (0.94)
Other (expense) income, net (8) (8) (.02) (3) (0.01) 12 0.03
- ----------------------------- ------------ ------------ ------------ -------- ------------ -------- ------------ --------
Earnings before income taxes 873 474 1,347 3.55 1,445 3.93 1,589 4.24
Income taxes 372 180 552 1.46 575 1.56 634 1.69
- ----------------------------- ------------ ------------ ------------ -------- ------------ -------- ------------ --------
Net earnings $ 501 $ 294 $ 795 2.09% $ 870 2.37% $ 955 2.55%
============================= ============ ============ ============ ======== ============ ======== ============ ========
The costs of the Company's restructuring plan and integrating Albertson's and
ASC have resulted in significant nonrecurring charges and incremental expenses.
These costs had significant effects on the results of operations of the Company
for the past three years. During 2001, the Company recognized $560 ($345 after
tax) of charges ($442 noncash) associated with the restructuring plan announced
on July 18, 2001. In connection with the restructuring plan announced on
March 13, 2002, the Company expects to incur nonrecurring pre-tax charges of
approximately $580, of which, $510 will be noncash. Nonrecurring charges and
expenses of implementing integration actions, related to the Merger, were
originally estimated to total $700 after income tax benefits. On an after-tax
basis, and subsequent to the first quarter 1999, the Company has incurred $634
of merger-related costs and does not expect to exceed its original estimate.
Liquidity and Capital Resources
Cash provided by operating activities during 2001 was $2,092, compared to $1,791
in 2000 and $1,418 in 1999. Cash provided by operating activities in Fiscal 2001
was primarily impacted by noncash restructuring charges when compared to Fiscal
2000. Cash provided by operating activities in Fiscal 2000 was primarily
impacted by higher earnings when compared to Fiscal 1999. Also, driving the
change is the decrease in inventories offset by the decrease in other current
liabilities, mostly tax related.
The Company's financing activities for 2001 included new long-term borrowings of
$623, a net decrease of commercial paper and bank line borrowing of $1,153, and
dividend payments of $309 (which represents 38.8% of 2001 net earnings without
restructuring and other non-routine items). The Board of Directors, at its March
2002 meeting, maintained the regular quarterly cash dividend of $0.19 per share,
for an effective annual rate of $0.76 per share.
The Company utilizes its commercial paper and bank line programs primarily to
supplement cash requirements for seasonal fluctuations in working capital and to
fund its capital expenditure program. Accordingly, commercial paper and bank
line borrowings will fluctuate between reporting periods. The Company had no
commercial paper or bank line borrowings outstanding at January 31, 2002, as
compared to $1,153 outstanding as of February 1, 2001.
Albertson's, Inc. 2001 Annual Report 8
In support of the Company's commercial paper program, the Company had three
credit facilities totaling $1,750 during Fiscal 2001. The first agreement for
$100 expired in February 2002 and was renewed for an additional year to expire
in February 2003. The second agreement for $700 expired in March 2002 and was
replaced, based on the Company's revised liquidity requirements, by a $350,
364-day credit agreement. The third agreement for $950 expires in March 2005.
All of the credit agreements contain an option which would allow the Company,
upon due notice, to convert any outstanding amounts at the expiration dates to
term loans. The agreements in place at year end also contain certain covenants,
the most restrictive of which requires the Company to maintain consolidated
tangible net worth, as defined, of at least $2,100. As of January 31, 2002, the
Company's consolidated tangible net worth, as defined, was approximately $4,200.
Upon the execution of the $350, 364-day credit agreement, the consolidated
tangible net worth threshold increased to $3,000, and an additional covenant was
added requiring a fixed charge coverage of at least 2.7 times. As defined in the
new agreement, the fixed charge coverage ratio based on 2001 results was 4.2
times. No borrowings were outstanding under the credit facilities as of January
31, 2002, or February 1, 2001.
The Company filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective in February 2001 (the "2001
Registration Statement"), to authorize the issuance of up to $3,000 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes, including the potential purchase of outstanding shares of
Albertson's common stock.
During Fiscal 2001, the Company issued $600 of term notes under the 2001
Registration Statement. Proceeds were used primarily to repay borrowings under
the Company's commercial paper program. As of January 31, 2002, $2,400 of debt
securities remain available for issuance under the 2001 Registration Statement.
During Fiscal 2000 and Fiscal 1999, the Company issued $1,200 and $1,300,
respectively of term notes under a prior shelf registration statement filed with
the SEC in 1999. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program.
Following the Merger, the Company consolidated several of the commercial paper,
bank lines and other financing arrangements. The consolidation of debt included
the repayment of outstanding amounts under ASC's revolving credit facilities and
other debt containing change of control provisions and the tender for, or open
market purchases of, certain higher coupon debt. As a result, certain debt was
extinguished during 1999.
The Board of Directors adopted a program on December 3, 2001, authorizing, at
management's discretion, the Company to purchase and retire up to $500 of the
Company's common stock beginning December 6, 2001 through December 31, 2002. No
purchases were made during Fiscal 2001. During Fiscal 2000, the Company
purchased and retired 18.7 million shares of its common stock at a total cost of
$451, or an average price of $24.15 per share, under a Board authorization which
expired on December 6, 2001.
The Company's operating results continue to enhance its financial position and
ability to continue its planned expansion program. Cash flows from operations
and available borrowings are adequate to support currently planned business
operations, acquisitions and capital expenditures. Free cash flow (defined as
cash generated by the business after capital expenditures - net of proceeds from
disposals, and dividend payments but before acquisitions, divestitures and share
purchases) was $584 and $(106) in 2001 and 2000, respectively. The Company has
short-term financing capacity in the form of commercial paper up to $1,400 and
long-term capacity under the 2001 Registration Statement of $2,400.
Albertson's, Inc. 2001 Annual Report 9
As of January 31, 2002, the Company's credit ratings were as follows:
S & P MOODY'S FITCH
- -------------------- ----------------- ----------------- -----------------
Long-term debt BBB+ Baa1 --
Short-term debt A2 P2 F2
The Company believes that a downgrade in the Company's current credit ratings
will have no material effect on the fixed-term debt portfolio. There are no
payment acceleration provisions in the Company's fixed-term debt portfolio
related to a downgrade in the Company's credit ratings. The Company also
believes that a downgrade in the Company's credit ratings would not adversely
affect its ability to refinance any current maturities of fixed-term debt. Any
adverse changes to the Company's credit ratings could limit the Company's access
to the commercial paper market and increase the cost of debt, but would not
affect the Company's ability to borrow funds under the Company's credit
facilities.
Contractual Obligations and Commercial Commitments
Albertson's has assumed various financial obligations and commitments in the
normal course of its operations and financing activities. Financial obligations
are considered to represent known future cash payments that the Company is
required to make under existing contractual arrangements, such as debt and lease
agreements. The following table represents the scheduled maturities of the
Company's long-term contractual obligations as of January 31, 2002:
LESS THAN 1 YEAR YEARS 1-3 YEARS 4-5 AFTER 5 YEARS TOTAL
------------------- ------------- ------------- ----------------- ------------
Long-term debt $ 123 $ 610 $ 205 $ 4,245 $ 5,183
Capital lease obligations (1) 45 82 74 467 668
Operating leases (1) 333 650 559 2,264 3,806
Contracts for purchase of property and
construction of buildings 233 233
Other (2) 6 3 1 10
- ----------------------------------------- ------------------- ------------- ------------- ----------------- ------------
Total contractual cash obligations $ 740 $1,345 $ 839 $ 6,976 $ 9,900
========================================= =================== ============= ============= ================= ============
(1) Represents the minimum rents payable and includes leases associated with
closed stores accrued for under the Company's restructuring and closed
store reserves. Amounts are not offset by expected sublease income.
(2) Other includes transportation contracts with third parties. The Company has
entered into energy supply agreements which have terms through 2006. These
agreements include certain provisions that could potentially require the
Company to pay additional amounts if the actual usage is less than the
minimum usage per the contract documents or if the contracts were
terminated. This number is extremely difficult to estimate due to the
uncertainty of future energy usage and change in the market value of
energy, therefore no amounts have been included above.
The Company is contingently liable as a guarantor of certain leases that were
assigned to third parties in connection with various store closures and
dispositions. The Company believes the likelihood of a significant loss from
these agreements is remote because of the wide dispersion among third parties
and remedies available to the Company should the primary party fail to perform
under the agreements.
Albertson's commercial commitments as of January 31, 2002, representing possible
commitments triggered by potential future events, are as follows:
TOTAL YEAR 1 YEARS 2-3 YEARS 4-5 AFTER 5 YEARS
----------- ----------- ------------ ------------ --------------
Available lines of credit $1,750 $ 800 $ - $ 950 $ -
Letters of credit - standby 40 40
Letters of credit - commercial 13 13
- ----------------------------------------- ----------- ----------- ------------ ------------ --------------
Potential commercial commitments $1,803 $ 853 $ - $ 950 $ -
========================================= =========== =========== ============ ============ ==============
Albertson's, Inc. 2001 Annual Report 10
The following leverage ratios demonstrate the Company's levels of long-term
financing as of the indicated year end:
JANUARY 31, 2002 FEBRUARY 1, 2001
- ------------------------------------------------------------------- ------------------ ------------------
Long-term debt and capitalized lease obligations to capital (1) 47.5% 51.1%
Long-term debt and capitalized lease obligations to total assets 33.5 37.0
(1) Capital includes long-term debt, capitalized lease obligations and stockholders' equity
Letters of Credit
The Company had outstanding Letters of Credit of $53 as of January 31, 2002, all
of which were issued under separate bilateral agreements with multiple financial
institutions. Of the $53 outstanding at year end, $40 were standby letters of
credit covering primarily workers' compensation or performance obligations. The
remaining $13 were commercial letters of credit supporting the Company's
merchandise import program. The Company paid issuance fees that varied,
depending on type, up to 0.50% of the outstanding balance of the letter of
credit.
Off Balance Sheet Arrangements
Albertson's, Inc. has no significant investments that are accounted for under
the equity method in accordance with accounting principles generally accepted in
the United States of America. Investments that are accounted for under the
equity method have no liabilities associated with them that would be considered
material to Albertson's.
Capital Expenditures
The Company continues to retain ownership of real estate when possible. As of
January 31, 2002, the Company held title to the land and buildings of 42% of the
Company's stores and held title to the buildings on leased land of an additional
9% of the Company's stores. The Company also holds title to the land and
buildings of most of its administrative offices and distribution facilities.
The Company is committed to keeping its stores up to date. In the last three
years, the Company has opened or remodeled 630 stores representing 28% of the
Company's retail square footage as of January 31, 2002. The following summary of
historical capital expenditures includes capital leases, stores acquired in
business and asset acquisitions, assets acquired with related debt and the
estimated fair value of property financed by operating leases:
2001 2000 1999
- -------------------------------------------------------------------- ----------------- ----------------- -----------------
New and acquired stores $ 874 $ 1,066 $ 1,126
Remodels 348 423 296
Retail replacement equipment, technology and other 247 170 248
Distribution facilities and equipment 64 174 198
- -------------------------------------------------------------------- ----------------- ----------------- -----------------
Total capital expenditures 1,533 1,833 1,868
Estimated fair value of property financed by operating leases 153 99 230
- -------------------------------------------------------------------- ----------------- ----------------- -----------------
$ 1,686 $ 1,932 $ 2,098
==================================================================== ================= ================= =================
The Company's strong financial position provides the flexibility for the Company
to grow through its store development program and future acquisitions.
Albertson's, Inc. 2001 Annual Report 11
Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to certain market risks that are inherent in the
Company's financial instruments, which arise from transactions entered into in
the normal course of business. From time to time, the Company enters into
certain derivative transactions allowed by the Company's risk management policy.
The Company does not enter into derivative financial instruments for trading
purposes. The Company uses derivatives primarily as cash flow hedges to set
interest rates for forecasted debt issuances, such as interest rate locks.
The Company is subject to interest rate risk on its fixed interest rate debt
obligations. Commercial paper borrowings do not give rise to significant
interest rate risk because these borrowings have maturities of less than three
months. Generally, the fair value of debt with a fixed interest rate will
increase as interest rates fall, and the fair value will decrease as interest
rates rise. The Company manages its exposure to interest rate risk by utilizing
a combination of fixed rate borrowings and commercial paper borrowings.
The Company has no foreign exchange exposure and as of January 31, 2002, has no
outstanding derivative transactions. There have been no material changes in the
primary risk exposures or management of the risks since the prior year. The
Company expects to continue to manage risks in accordance with the current
policy.
The table below provides information about the Company's debt obligations that
are sensitive to changes in interest rates. For debt obligations, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates:
2002 2003 2004 2005 2006 THERE-AFTER TOTAL FAIR VALUE
- ---------------------------- ----------- ----------- ----------- ----------- ---------- ------------- ----------- ------------
Fixed rate debt obligations $ 123 $ 106 $ 504 $ 202 $ 3 $ 4,245 $ 5,183 $ 5,516
Weighted average interest rate 9.8% 7.2% 6.6% 7.4% 7.8% 7.5% 7.5%
Related Party Transactions
Albertson's 2001, 2000, and 1999 transactions with related parties are not
considered material. See "Related Party Transactions" in the Notes to
Consolidated Financial Statements.
Recent Accounting Standards
Effective February 2, 2001, the Company adopted SFAS No. 133 as amended,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires all derivative financial instruments to be recognized as either assets
or liabilities in the Consolidated Balance Sheet and measured at fair value. The
cumulative effect of adoption of SFAS No. 133 as it relates to interest rate
locks was a $5 gain (net of taxes). Losses on contracts settled during 2001
amounted to $1 (net of taxes). These amounts are reported in other comprehensive
income in the accompanying Consolidated Stockholders' Equity. The amounts
reclassified from other comprehensive income to interest expense for 2001 and
the expected reclassifications for 2002 are insignificant.
Albertson's, Inc. 2001 Annual Report 12
In June 2001 the Financial Accounting Standards Board (FASB) issued two new
pronouncements SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141, which is effective for acquisitions
initiated after June 30, 2001, prohibits the use of the pooling-of-interest
method for business combinations and establishes the accounting and financial
reporting requirements for business combinations accounted for by the purchase
method. Adoption of this standard had no effect on the financial statements of
the Company. SFAS No. 142 requires that an intangible asset that is acquired
shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
SFAS No. 142 became effective for Albertson's on February 1, 2002. In accordance
with the provisions of SFAS No. 142, the Company will complete the analysis of
goodwill and other intangible assets for impairment no later than August 1,
2002, and will record any required impairment by the end of 2002. The Company is
currently evaluating the impact of the new accounting standard on existing
goodwill and other intangible assets. The ultimate impact of the new accounting
standard has yet to be determined. The net book value of goodwill was $1,468 and
$1,560 as of January 31, 2002 and February 1, 2001, respectively. Goodwill
amortization expense of $56, $57, and $58 was recorded in 2001, 2000, and 1999,
respectively, and will no longer be recorded in subsequent fiscal years.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 will become effective for Albertson's on January 31,
2003. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is currently analyzing the effect
that this standard will have on its financial statements, but believes it will
not have a significant effect on the financial statements of the Company.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 which replaces SFAS No. 121 and APB
No. 30, became effective for Albertson's on February 1, 2002. This Statement
retains the requirements to (i) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (ii) measure an impairment loss as the difference between the
carrying amount and fair value of the asset. This Statement removes goodwill
from its scope, eliminating the requirement to allocate goodwill to long-lived
assets to be tested for impairment. This Statement requires that a long-lived
asset to be abandoned, exchanged for a similar productive asset or distributed
to owners in a spin-off, be considered held and used until it is disposed of.
This Statement requires the accounting model for long-lived assets to be
disposed of by sale, be used for all long-lived assets, whether previously held
and used or newly acquired. Discontinued operations are no longer measured on a
net realizable value basis, and future operating losses are no longer recognized
before they occur. This Statement broadens the presentation of discontinued
operations in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. The Company is currently
analyzing the effect that this standard will have on its financial statements
and believes it will require additional disclosures but will not have a
significant effect on the operating results of the Company.
EITF Issue Nos. 00-14, "Accounting for Certain Sales Incentives;" 00-22,
"Accounting for Points and 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" address the appropriate accounting for certain vendor
contracts and loyalty programs. The Company's accounting procedures are in
compliance with the accounting requirements called for by these Issues.
Albertson's, Inc. 2001 Annual Report 13
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and groundwater contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). The Company conducts
an ongoing program for the inspection and evaluation of new sites proposed to be
acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition of the Company. Charges
against earnings for environmental remediation were not material in 2001, 2000
or 1999.
Cautionary Statement for Purposes of "Safe Harbor Provisions"
of the Private Securities Litigation Reform Act of 1995
From time to time, information provided by the Company, including written or
oral statements made by its 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 the Company expects or anticipates will
or may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of the
Company's business, future capital expenditures and the Company's business
strategy, contain forward-looking information. In reviewing such information it
should be kept in mind that actual results may differ materially from those
projected or suggested in such forward-looking information. This forward-looking
information is based on various factors and was derived using various
assumptions. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in interest rates,
changes in consumer spending, actions taken by competitors, particularly those
intended to improve their market share, and other factors affecting the
Company's business in or beyond the Company's control. These factors include
changes in the rate of inflation, changes in state or federal legislation or
regulation, adverse determinations with respect to litigation or other claims
(including environmental matters), labor negotiations, the cost and stability of
energy sources, the Company's ability to recruit, retain and develop employees,
its ability to develop new stores or complete remodels as rapidly as planned,
its ability to implement new technology successfully, the stability of product
costs, the Company's ability to integrate the operations of acquired or merged
companies, the Company's ability to execute its restructuring plans, and the
Company's ability to achieve its five strategic imperatives.
Other factors and assumptions not identified above could also cause the actual
results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions or changes in other factors affecting such forward-looking
information.
Albertson's, Inc. 2001 Annual Report 14
CONSOLIDATED
EARNINGS
52 WEEKS 52 WEEKS 53 WEEKS
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Sales $37,931 $ 36,762 $ 37,478
Cost of sales 27,155 26,329 27,164
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Gross profit 10,776 10,433 10,314
Selling, general and administrative expenses 9,064 8,747 8,641
Restructuring charges and other 468
Gain on sale of New England Osco drugstores (54)
Merger-related (credits) charges (15) 24 396
Litigation settlement charge 37
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Operating profit 1,313 1,662 1,240
Other (expenses) income:
Interest, net (432) (385) (353)
Other, net (8) (3) 12
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Earnings before income taxes and extraordinary item 873 1,274 899
Income taxes 372 509 472
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Earnings before extraordinary item 501 765 427
Extraordinary loss on extinguishment of debt, net of tax benefit of $7 (23)
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Net Earnings $501 $ 765 $ 404
======================================================================== =============== ================ ==================
Basic Earnings Per Share:
Earnings before extraordinary item $1.23 $ 1.83 $ 1.01
Extraordinary item (.05)
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Net Earnings $1.23 $ 1.83 $ 0.96
======================================================================== =============== ================ ==================
Diluted Earnings Per Share:
Earnings before extraordinary item $ 1.23 $ 1.83 $ 1.00
Extraordinary item (.05)
- ------------------------------------------------------------------------ --------------- ---------------- ------------------
Net Earnings $ 1.23 $ 1.83 $ 0.95
======================================================================== =============== ================ ==================
Weighted Average Common Shares Outstanding:
Basic 406 418 422
Diluted 408 418 423
See Notes to Consolidated Financial Statements
Albertson's, Inc. 2001 Annual Report 15
CONSOLIDATED
BALANCE SHEETS
JANUARY 31, FEBRUARY 1,
(IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001
- ------------------------------------------------------------------------------------ ------------------ -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 85 $ 57
Accounts and notes receivable, net 681 547
Inventories 3,196 3,364
Prepaid expenses 149 154
Assets held for sale 326 114
Deferred income taxes 172 70
Refundable income taxes 36
- ------------------------------------------------------------------------------------ ------------------ -----------------
Total Current Assets 4,609 4,342
Land, Buildings and Equipment, net 9,282 9,558
Goodwill and Intangibles, net 1,639 1,727
Other Assets 437 451
- ------------------------------------------------------------------------------------ ------------------ -----------------
Total Assets $ 15,967 $ 16,078
==================================================================================== ================== =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 2,093 $ 2,163
Salaries and related liabilities 584 561
Taxes other than income taxes 153 141
Income taxes 51
Self-insurance 198 218
Unearned income 88 112
Restructuring reserves 61
Merger-related reserves 5 13
Current portion of capitalized lease obligations 14 20
Current maturities of long-term debt 123 62
Other 212 105
- ------------------------------------------------------------------------------------ ------------------ -----------------
Total Current Liabilities 3,582 3,395
Long-Term Debt 5,060 5,715
Capitalized Lease Obligations 276 227
Self-Insurance 307 216
Deferred Income Taxes 71 116
Other Long-Term Liabilities and Deferred Credits 756 715
Commitments and Contingencies
Stockholders' Equity:
Preferred stock - $1.00 par value; authorized - 10 shares; designated -
3 shares of Series A Junior Participating; issued - none
Common stock - $1.00 par value; authorized - 1,200 shares; issued -
407 shares and 405 shares, respectively 407 405
Capital in excess of par 94 48
Accumulated other comprehensive loss (19)
Retained earnings 5,433 5,241
- ------------------------------------------------------------------------------------ ------------------ -----------------
Total Stockholders' Equity 5,915 5,694
- ------------------------------------------------------------------------------------ ------------------ -----------------
Total Liabilities and Stockholders' Equity $ 15,967 $ 16,078
==================================================================================== ================== =================
See Notes to Consolidated Financial Statements
Albertson's, Inc. 2001 Annual Report 16
CONSOLIDATED
CASH FLOWS
52 WEEKS 52 WEEKS 53 WEEKS
JANUARY 31, FEBRUARY 1, FEBRUARY 3,
(IN MILLIONS) 2002 2001 2000
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Cash Flows From Operating Activities:
Net earnings $ 501 $ 765 $ 404
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 970 944 853
Goodwill amortization 56 57 58
Noncash merger-related (credits) charges (13) 21 272
Restructuring and other noncash charges 442
Gain on sale of New England Osco drugstores (54)
Loss (gain) on asset sales 22 (4) (2)
Net deferred income taxes and other (106) 14 (53)
Decrease (increase) in cash surrender value of company-owned life
insurance 17 4 (12)
Changes in operating assets and liabilities:
Receivables and prepaid expenses (104) 3 46
Inventories 119 118 (233)
Accounts payable (70) (12) (9)
Other current liabilities 287 (175) 108
Self-insurance 71 24 (79)
Unearned income 3 19 76
Other long-term liabilities (49) 13 (11)
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Net cash provided by operating activities 2,092 1,791 1,418
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Cash Flows From Investing Activities:
Capital expenditures (1,487) (1,771) (1,837)
Proceeds from disposal of land, buildings and equipment 288 189 83
Decrease (increase) in other assets 40 33 (122)
Proceeds from divestitures and duplicate assets 393
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Net cash used in investing activities (1,159) (1,549) (1,483)
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Cash Flows From Financing Activities:
Proceeds from long-term borrowings 623 1,222 1,841
Payments on long-term borrowings (89) (417) (970)
Net commercial paper activity and bank borrowings (1,153) (475) (430)
Proceeds from stock options exercised 23 6 32
Cash dividends paid (309) (315) (265)
Stock purchases and retirements (451)
Tax payments for options exercised (14)
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Net cash (used in) provided by financing activities (905) (430) 194
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Net Increase (Decrease) in Cash and Cash Equivalents 28 (188) 129
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Cash and Cash Equivalents at Beginning of Year 57 245 116
- ------------------------------------------------------------------------ --------------- ---------------- ---------------
Cash and Cash Equivalents at End of Year $ 85 $ 57 $ 245
======================================================================== =============== ================ ===============
See Notes to Consolidated Financial Statements
Albertson's, Inc. 2001 Annual Report 17
CONSOLIDATED
STOCKHOLDERS' EQUITY
ACCUMULATED
CAPITAL IN OTHER TOTAL
COMMON STOCK EXCESS COMPREHENSIVE RETAINED TREASURY STOCKHOLDER'S COMPREHENSIVE
(DOLLARS IN MILLIONS) $1.00 PAR VALUE OF PAR VALUE (LOSS) INCOME EARNINGS STOCK EQUITY INCOME
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at January 28, 1999 $ 435 $ 579 $ - $ 5,027 $(519) $ 5,522 $801
====
Net earnings 404 404 $404
Issuance of 131,099 shares of
stock for stock options and
awards (1) 4 3
Merger-related stock option charge 47 47
Exercise of stock options,
including tax benefits 1 30 31
Treasury and fractional share
retirements (14) (496) 510 -
Shares issued for limited stock
appreciation rights 2 (16) (14)
Stock purchase incentive plan 2 5 7
Dividends (298) (298)
- ----------------------------------- --------------- ------------ ---------------- ---------- ---------- ------------- --------------
Balance at February 3, 2000 424 145 - 5,133 - 5,702 $404
====
Net earnings 765 765 $765
Deferred tax adjustment related to
stock options (12) (12)
Exercise of stock options,
including tax benefits 6 6
Stock purchases and retirements -
18,659,200 shares (19) (92) (340) (451)
Deferred stock unit plan 1 1
Dividends (317) (317)
- ----------------------------------- --------------- ------------ ---------------- ---------- ---------- ------------- --------------
Balance at February 1, 2001 405 48 - 5,241 - 5,694 $765
====
Net earnings 501 501 $501
Exercise of stock options,
including tax benefits 2 26 28
Deferred stock unit plan 19 19
Directors' stock plan 1 1
Dividends (309) (309)
Minimum pension liability,
adjustment (net of tax of $16) (23) (23) (23)
Interest rate locks:
Cumulative effect of adoption of
new accounting principle (net
of tax of $3) 5 5 5
Loss on settled contracts (net
of tax of $1) (1) (1) (1)
- ----------------------------------- --------------- ------------ ---------------- ---------- ---------- ------------- --------------
Balance at January 31, 2002 $ 407 $ 94 $(19) $ 5,433 $ - $ 5,915 $482
=================================== =============== ============ ================ ========== ========== ============= ==============
See Notes to Consolidated Financial Statements
Albertson's, Inc. 2001 Annual Report 18
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
(dollars in millions, except per share data)
Business Description and Basis of Presentation
Albertson's, Inc. (the "Company") is incorporated under the laws of the State of
Delaware and is the successor to a business founded by J.A. Albertson in 1939.
On June 23, 1999, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") consummated a merger. Based on sales, the
Company is one of the largest retail food and drug chains in the world. As of
January 31, 2002, the Company operated 2,421 stores in 33 Western, Midwestern,
Eastern and Southern states. Retail operations are supported by 19 major Company
distribution operations, strategically located in the Company's operating
markets.
The consolidated financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America and
include all entities in which the Company has control, including its
majority-owned subsidiaries. All material intercompany transactions and balances
have been eliminated.
Summary of Significant Accounting Policies
FISCAL YEAR END The Company's fiscal year is generally 52 weeks and periodically
consists of 53 weeks because the fiscal year ends on the Thursday nearest to
January 31. Unless the context otherwise indicates, reference to a fiscal year
of the Company refers to the calendar year in which such fiscal year commences.
USE OF ESTIMATES The preparation of the Company's consolidated financial
statements, in conformity with accounting principles generally accepted in the
United States of America, requires management to make estimates and assumptions.
Some of these estimates require difficult, subjective and/or complex judgments
about matters that are inherently uncertain, and as a result, actual results
could differ from these estimates. These estimates and assumptions affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements, and the reported
amounts of revenues and expenses during the reporting period.
SEGMENT INFORMATION The Company operates retail food and drug stores. These
operations are within a single operating segment and all are within the United
States.
DERIVATIVES From time to time, the Company enters into certain derivative
transactions allowed by the Company's risk management policy. The Company does
not enter into derivative financial instruments for trading purposes. The
Company uses derivatives primarily as cash flow hedges to set interest rates for
forecasted debt issuances, such as interest rate locks. These contracts are with
major financial institutions and are very short-term in nature. The gain or loss
on interest rate locks is deferred in other comprehensive income and recognized
over the life of the related debt instrument as an adjustment to interest
expense.
RECLASSIFICATIONS Certain reclassifications have been made in prior years'
financial statements to conform to classifications used in the current year.
CASH AND CASH EQUIVALENTS The Company considers all highly liquid investments
with a maturity of three months or less at the time of purchase to be cash
equivalents.
INVENTORIES The Company values inventories at the lower of cost or market.
Cost of substantially all inventories is determined on a last-in, first-out
(LIFO) basis.
Albertson's, Inc. 2001 Annual Report 19
CAPITALIZATION, DEPRECIATION AND AMORTIZATION Land, buildings and equipment are
recorded at cost. Depreciation is provided on the straight-line method over the
estimated useful life of the asset. Estimated useful lives are generally as
follows: buildings and improvements-10 to 35 years; fixtures and equipment-3 to
10 years; software-3 to 5 years; leasehold improvements-10 to 25 years;
intangibles-3 to 10 years; and capitalized leases-20 to 30 years.
The costs of major remodeling and improvements on leased stores are capitalized
as leasehold improvements. Leasehold improvements are amortized on the
straight-line method over the shorter of the life of the applicable lease or the
useful life of the asset. Assets under capital leases are recorded at the lower
of the fair market value of the asset or the present value of future minimum
lease payments. These leases are amortized on the straight-line method over
their primary term.
Beneficial lease rights and lease liabilities are recorded on purchased leases
based on differences between contractual rents under the respective lease
agreements and prevailing market rents at the date of the acquisition of the
lease. Beneficial lease rights and lease liabilities are amortized over the
lease term using the straight-line method.
GOODWILL Goodwill resulting from business acquisitions represents the excess of
cost over fair value of net assets acquired and is being amortized over 40 years
using the straight-line method. The practice of amortizing goodwill will be
discontinued in Fiscal 2002 with the adoption of Statement of Financial
Accounting Standards ("SFAS") No. 142 (see "Recent Accounting Standards").
Goodwill is principally from the acquisition of Lucky Stores, Inc. in 1988.
Accumulated amortization amounted to $708 and $660 in 2001 and 2000,
respectively.
COMPANY-OWNED LIFE INSURANCE The Company has purchased life insurance policies
to cover its obligations under certain deferred compensation plans for officers,
key employees and directors. Cash surrender values of these policies are
adjusted for fluctuations in the market value of underlying investments. The
cash surrender value is adjusted each reporting period and any gain or loss is
included with other income (expense) in the Company's Consolidated Earnings.
IMPAIRMENT OF LONG-LIVED ASSETS AND CLOSED STORE RESERVES The Company accounted
for the impairment of long-lived assets in accordance with SFAS No. 121 and,
beginning in 2002, will account for it in accordance with SFAS No. 144. For
assets to be held and used, the Company tests for impairment using undiscounted
cash flows and calculates the amount of impairment using discounted cash flows.
For assets held for sale, impairment is recognized based on the excess of
remaining book value over expected recovery value. The recovery value is the
fair value as determined by independent quotes or expected sales prices
developed by internal specialists.
For properties to be closed that are under long-term lease agreements, the
present value of any remaining liability under the lease, discounted using
risk-free rates and net of expected sublease recovery, is recognized as a
liability and expensed.
SELF-INSURANCE The Company is primarily self-insured for property loss, workers'
compensation and general liability costs. Self-insurance liabilities are
determined actuarially based on claims filed and estimates for claims incurred
but not reported. The majority of these liabilities are not discounted.
DEFERRED RENT The Company recognizes rent holidays and rent escalations on a
straight-line basis over the term of the lease. The deferred rent amount is
included in other long-term liabilities and deferred credits on the Company's
Consolidated Balance Sheets.
REVENUE RECOGNITION Revenue is recognized at the point of sale for retail sales.
Vendor allowances and credits that relate to the Company's buying and
merchandising activities are recorded in cost of sales and are recognized as
earned according to the underlying agreement. Two forms of agreement exist, one
based on volume and the other based on time. Vendor allowances consist primarily
of promotional allowances, advertising allowances and, to a lesser extent,
slotting allowances. The Company utilizes vendor allowances to fund pricing
promotions, advertising expense and slotting expense. The discount earned by
customers by using their preferred loyalty card is recorded by the Company as a
reduction to sales price. The only income recognized from any in-store rental
arrangement is the lease amount received based on space occupied.
STORE OPENING COSTS Noncapital expenditures incurred in opening new stores or
remodeling existing stores are expensed in the year in which they are incurred.
Albertson's, Inc. 2001 Annual Report 20
ADVERTISING Advertising costs incurred to produce media advertising for major
new campaigns are expensed in the year in which the advertising first takes
place. Other advertising costs are expensed when incurred. Cooperative
advertising credits from vendors are recorded in the period in which the related
expense is incurred. Gross advertising expenses of $537, $550 and $654,
excluding cooperative advertising money received from vendors, were included
with cost of sales in the Company's Consolidated Earnings for 2001, 2000 and
1999, respectively.
STOCK-BASED COMPENSATION SFAS No. 123, "Accounting for Stock-Based
Compensation," encourages, but does not require, companies to record
compensation cost for stock-based employee compensation plans at fair value. The
Company has chosen to continue to account for stock-based compensation using the
intrinsic value method prescribed in Accounting Principles Board Opinion ("APB")
No. 25, "Accounting for Stock Issued to Employees," and related Interpretations.
Accordingly, compensation cost of stock-based compensation is measured as the
excess, if any, of the quoted market price of the Company's stock at the date of
the grant over the option exercise price and is charged to operations over the
vesting period. Income tax benefits attributable to stock options exercised are
credited to capital in excess of par value.
INCOME TAXES The Company provides for deferred income taxes during the year in
accordance with SFAS No. 109. Deferred income taxes represent future net tax
effects resulting from temporary differences between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect for the
year in which the differences are expected to be settled or realized. The major
temporary differences and their net effect are shown in the "Income Taxes" note
to the Consolidated Financial Statements.
EARNINGS PER SHARE (EPS) Basic EPS is computed by dividing consolidated net
earnings by the weighted average number of common shares outstanding. Diluted
EPS is computed by dividing consolidated net earnings by the sum of the weighted
average number of common shares outstanding and the weighted average number of
potential common shares outstanding. Potential common shares consist primarily
of outstanding options under the Company's stock option plans.
COMPREHENSIVE INCOME The Company reports comprehensive income in accordance with
SFAS No. 130, "Reporting Comprehensive Income." Comprehensive income refers to
revenues, expenses, gains and losses that are not included in net earnings but
rather are recorded directly in stockholders' equity. Items of comprehensive
income other than net earnings were insignificant in 2000 and 1999.
Closed Store Reserves
When executive management approves and commits to closing or relocating a store,
the transaction is accounted for in accordance with the Company's policy (see
"Summary of Significant Accounting Policies"). The following table shows the
pre-tax expense, and related reserves, for closed stores and other surplus
property:
LEASE ASSET
LIABILITIES IMPAIRMENTS TOTAL
- --------------------------------------------- ------------------ ------------------ -----------------
Balance at January 29, 1999 $ 23 $ - $ 23
- --------------------------------------------- ------------------ ------------------ -----------------
Additions 5 6 11
Adjustments 1 (2) (1)
Utilization (4) (4) (8)
- --------------------------------------------- ------------------ ------------------ -----------------
Balance at February 3, 2000 25 - 25
- --------------------------------------------- ------------------ ------------------ -----------------
Additions 7 40 47
Adjustments (2) (2)
Utilization (8) (40) (48)
- --------------------------------------------- ------------------ ------------------ -----------------
Balance at February 1, 2001 22 - 22
- --------------------------------------------- ------------------ ------------------ -----------------
Additions 4 16 20
Adjustments (2) (2) (4)
Adjustments - Restructuring 23 28 51
Utilization (8) (42) (50)
- --------------------------------------------- ------------------ ------------------ -----------------
Balance at January 31, 2002 $ 39 $ - $ 39
============================================= ================== ================== =================
Albertson's, Inc. 2001 Annual Report 21
The restructuring plan (discussed in "Restructuring Plan") included actions to
accelerate the disposal of surplus property that included terminating leases
through negotiated buyouts and selling owned properties through auctions. The
$51 pre-tax restructuring adjustments are the additional charges expected to be
incurred as a result of these actions. These charges are included in selling,
general and administrative expenses in the Company's Consolidated Earnings. $30
of the reserve balance as of January 31, 2002 is included with accounts payable
and the remaining $9 is included with other liabilities and deferred credits in
the Company's Consolidated Balance Sheets. For the period ended February 1,
2001, $5 of the reserve balance was included with accounts payable with the
remaining $17 included with other liabilities and deferred credits. The related
assets are recorded at their estimated fair value, less selling costs, and
reported as assets held for sale in the Company's Consolidated Balance Sheets.
Restructuring Plan
On July 17, 2001, the Company's Board of Directors approved a restructuring plan
designed to improve future financial results and to drive future
competitiveness. The plan includes certain exit costs and employee termination
benefits, as described below, that will be incurred within approximately one
year of the Board approval date.
ACTION STATUS
------ ------
Reduction in administrative and corporate overhead Substantially complete
Closing of 165 underperforming retail stores 80 closed as of year end
Consolidation and elimination of four division offices Completed
Process streamlining Ongoing
As a result of the restructuring plan, the Company recorded pre-tax charges of
$509 ($314 after tax or $0.77 per diluted share) made up of $468 restructuring
and other and $41 of period costs (including $35 of inventory write-down
recorded in cost of sales) for the 52 weeks ended January 31, 2002. The
following table presents the pre-tax charges, incurred by category of
expenditure, and related restructuring reserve accruals included in the
Company's Consolidated Balance Sheets:
EMPLOYEE LEASE
SEVERANCE ASSET TERMINATION
COSTS IMPAIRMENTS COSTS OTHER TOTAL
------------ -------------- -------------- ---------- ----------
Additions $ 44 $ 396 $ 57 $ 12 $509
Utilization 33 396 7 12 448
------------ -------------- -------------- ---------- ----------
Balance at January 31, 2002 $ 11 $ - $ 50 $ - $ 61
============ ============== ============== ========== ==========
Employee severance costs consist of severance pay, health care continuation
costs, and outplacement service costs for employees who participated in the
Company's Voluntary Separation Plan and for employees who were terminated or
notified of termination under the Company's Involuntary Severance Plan. In
accordance with the restructuring plan, 1,341 managerial and administrative
positions above store level have been identified for termination. As of
January 31, 2002, 995 positions have been terminated.
As part of the Company's restructuring plan, all stores were reviewed utilizing
a methodology based on return on invested capital. Based on this review, the
Company identified and committed to close and dispose 165 underperforming stores
in 25 states. All stores identified for closure were evaluated for lease
liability or asset impairment, including goodwill, in accordance with the
Company's policy (see "Summary of Significant Accounting Policies"). As of
January 31, 2002, 80 stores have been closed.
Assets to be disposed of include land, buildings, equipment, leasehold
improvements and inventory for stores and division offices that were included in
the restructuring discussed above. These assets are recorded at their estimated
fair value, less selling costs, and reported as assets held for sale in the
Company's Consolidated Balance Sheets.
Other costs include various expenses related to the Company's decision to exit
certain insignificant businesses and the consolidation of the division offices.
Merger, Divestitures and Related Costs
On June 23, 1999, Albertson's, Inc. and American Stores Company consummated a
merger with the issuance of 177 million shares of Albertson's common stock (the
"Merger"). The Merger constituted a tax-free reorganization and has been
accounted for as a pooling of interests for accounting and financial reporting
purposes.
Albertson's, Inc. 2001 Annual Report 22
Results of operations include $6 of merger-related credits ($4 after tax) for
fiscal year 2001, $151 of merger-related charges ($93 after tax) for fiscal year
2000, and $683 of merger-related charges ($529 after tax) for fiscal year 1999.
The following table presents the pre-tax charges (credits) incurred by category
of expenditure and merger-related accruals included in the Company's
Consolidated Balance Sheets:
ASSET INTEGRATION
IMPAIRMENTS SEVERANCE AND OTHER TOTAL
----------------- -------------- ---------------- --------------
Additions $ 264 $ 124 $ 343 $ 731
Adjustments (22) (7) (19) (48)
Utilization (242) (93) (315) (650)
----------------- -------------- ---------------- --------------
Balance at February 3, 2000 - 24 9 33
Additions 36 21 97 154
Adjustments (3) (3)
Utilization (36) (35) (100) (171)
----------------- -------------- ---------------- --------------
Balance at February 1, 2001 - 7 6 13
Additions 8 2 5 15
Adjustments (20) (1) (1) (22)
Utilization 12 (3) (10) (1)
----------------- -------------- ---------------- --------------
Balance at January 31, 2002 $ - $ 5 $ - $ 5
================= ============== ================ ==============
Asset impairments include the loss on disposal of duplicate and abandoned
facilities, including administrative offices, intangibles and information
technology equipment which were abandoned by the Company. Operations for the
year ended January 31, 2002, included $15 of pre-tax credits associated with the
reversal of previous impairment charges related to the sale of the American
Stores' Tower in Salt Lake City, Utah. The Company closed on the sale of this
property on May 15, 2001, thus completing the asset dispositions resulting from
the Merger.
Severance consists of retention costs for certain individuals and termination
benefit liabilities for 633 individuals who have already been terminated.
Integration and other costs consist primarily of incremental transition and
integration costs associated with integrating the operations of Albertson's and
ASC and are being expensed as incurred. These include such costs as advertising,
labor associated with system conversions and training and relocation costs. Also
included are transaction and financing costs which consist primarily of
professional fees paid for investment banking, legal, accounting, printing and
regulatory filing fees. Financing costs also include the extraordinary loss on
extinguishment of debt.
As discussed in the "Stock Options and Stock Awards" note, the Company recorded
net pre-tax charges through the first two quarters of 1999 of $47 related to
Limited Stock Appreciation Rights ("LSARs"). These charges are included in the
integration and other category above. The actual change of control price used to
measure the value of these exercised LSARs became determinable at the date the
Merger was consummated.
The costs of integrating the two companies have resulted in significant
nonrecurring charges and incremental expenses. These costs had a significant
effect on both 2000 and 1999 results of operations of the Company. Nonrecurring
charges and expenses of implementing integration actions were originally
estimated to total $700, after income tax benefits. On an after-tax basis, and
subsequent to first quarter 1999, the Company has incurred $634 of
merger-related costs and does not expect to exceed its original estimate.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
2001 2000 1999
- -------------------------------------------------------------------- ------------- -------------- ------------
Cash payments for income taxes $ 403 $ 549 $ 520
Cash payments for interest, net of amounts capitalized 296 373 413
Noncash investing and financing activities:
Capitalized lease obligations incurred 79 62 24
Capitalized lease obligations terminated 19 6 14
Deferred stock units 19 1
Tax benefits related to stock options 4 1 11
Deferred tax adjustment - related to stock options 3 12
Liabilities assumed in connection with asset acquisitions 7
Albertson's, Inc. 2001 Annual Report 23
Store Dispositions
During January 2002 the Company sold 80 New England Osco drugstores for $235
million in a transaction that resulted in a $54 pre-tax one-time gain.
Accounts and Notes Receivable
Accounts and notes receivable, net, consisted of the following:
JANUARY 31, FEBRUARY 1,
2002 2001
- ----------------------------------------------------------------- -------------- ---------------
Trade and other accounts receivable $ 685 $ 578
Current portion of notes receivable 40 7
Allowance for doubtful accounts (44) (38)
- ----------------------------------------------------------------- -------------- ---------------
$ 681 $ 547
================================================================= ============== ===============
Inventories
Approximately 97% of the Company's inventories are valued using the last-in,
first-out (LIFO) method. If the first-in, first-out (FIFO) method had been used,
inventories would have been $597 and $591 higher at the end of 2001 and 2000,
respectively. Net earnings (basic and diluted earnings per share) would have
been higher by $3 ($0.01) in 2001, lower by $14 ($0.03) in 2000, and higher by
$18 ($0.04) in 1999. The replacement cost of inventories valued at LIFO
approximates FIFO cost.
During 2001 and 2000, inventory quantities were reduced. These reductions
resulted in a liquidation of LIFO inventory quantities carried at lower costs
prevailing in prior years as compared with the cost of 2001 and 2000 purchases.
As a result, cost of sales was decreased by $10 in 2001 and $26 in 2000. This
increased net earnings (basic and diluted earnings per share) by $6 ($0.01) in
2001 and $15 ($0.04) in 2000.
Land, Buildings and Equipment
Land, buildings and equipment, net, consisted of the following:
JANUARY 31, FEBRUARY 1,
2002 2001
- ----------------------------------------------------------------- -------------- ---------------
Land $ 2,105 $ 2,169
Buildings 5,598 5,418
Fixtures and equipment 5,471 5,491
Leasehold improvements 1,535 1,548
Capitalized leases 326 314
- ----------------------------------------------------------------- -------------- ---------------
15,035 14,940
Accumulated depreciation and amortization (5,753) (5,382)
- ----------------------------------------------------------------- -------------- ---------------
$ 9,282 $ 9,558
================================================================= ============== ===============
Goodwill and Intangibles
Goodwill and intangibles, net, consisted of the following:
JANUARY 31, FEBRUARY 1,
2002 2001
- ----------------------------------------------------------------- -------------- ---------------
Goodwill $ 2,176 $ 2,220
Intangible assets 346 320
- ----------------------------------------------------------------- -------------- ---------------
2,522 2,540
Accumulated amortization (883) (813)
- ----------------------------------------------------------------- -------------- ---------------
$ 1,639 $ 1,727
================================================================= ============== ===============
Albertson's, Inc. 2001 Annual Report 24
Indebtedness
Long-term debt consisted of the following (borrowings are unsecured unless
indicated):
JANUARY 31, FEBRUARY 1,
2002 2001
- -------------------------------------------------------------------------------------- -------------- ---------------
2001 Shelf Registration:
8.0% Debentures due May 1, 2031 $ 400
7.25% Notes due May 1, 2013 200
1999 Shelf Registration:
7.5% Notes due February 15, 2011 700 $ 700
8.35% Notes due May 1, 2010 275 275
8.7% Debentures due May 1, 2030 225 225
7.45% Debentures due August 1, 2029 650 650
6.95% Notes due August 1, 2009 350 350
6.55% Notes due August 1, 2004 300 300
Prior Authorizations:
Medium-term notes, due 2013 through 2028, average interest rate of 6.5% 317 317
Medium-term notes, due 2007 through 2027, average interest rate of 6.8% 200 200
7.75% Debentures due June 15, 2026 200 200
7.5% Debentures due May 1, 2037 200 200
8.0% Debentures due June 1, 2026 272 272
7.9% Debentures due May 1, 2017 95 95
7.4% Notes due May 15, 2005 200 200
Medium-term notes, due 2003 through 2028, average interest rate of 7.0% 245 245
9.125% Notes due April 1, 2002 80 80
Other Long-Term Debt:
Notes due July 3, 2004, average interest rates of 6.7% and 6.5%, respectively 200 200
Industrial revenue bonds, average interest rate of 6.1% 11 11
Secured mortgage notes and other notes payable, average interest rates of 11.0%
and 9.4%, respectively 63 104
Commercial paper and bank lines of credit 1,153
- -------------------------------------------------------------------------------------- -------------- ---------------
5,183 5,777
Current maturities (123) (62)
- -------------------------------------------------------------------------------------- -------------- ---------------
$5,060 $5,715
====================================================================================== ============== ===============
As of January 31, 2002, there were no outstanding commercial paper borrowings.
The Company has established the necessary credit facilities, through its
revolving credit agreements, to refinance outstanding commercial paper and bank
line borrowings on a long-term basis. Outstanding borrowings are classified as
noncurrent because it is the Company's intent to refinance these obligations on
a long-term basis. The effective interest rate for these borrowings during the
fiscal year ended January 31, 2002 was 5.04%.
In support of the Company's commercial paper program, the Company had three
credit facilities totaling $1,750 during Fiscal 2001. The first agreement for
$100 expired in February 2002 and was renewed for an additional year to expire
in February 2003. The second agreement for $700 expired in March 2002 and was
replaced, based on the Company's revised liquidity requirements, by a $350,
364-day credit agreement. The third agreement for $950 expires in March 2005.
All of the credit agreements contain an option which would allow the Company,
upon due notice, to convert any outstanding amounts at the expiration dates to
term loans. The agreements in place at year end also contain certain covenants,
the most restrictive of which requires the Company to maintain consolidated
tangible net worth, as defined, of at least $2,100. As of January 31, 2002, the
Company's consolidated tangible net worth, as defined, was approximately $4,200.
Upon the execution of the $350, 364-day credit agreement, the consolidated
tangible net worth threshold increased to $3,000, and an additional covenant was
added requiring a fixed charge coverage of at least 2.7 times. As defined in the
new agreement, the fixed charge coverage ratio based on 2001 results was
4.2 times. No borrowings were outstanding under the credit facilities as of
January 31, 2002, or February 1, 2001.
Albertson's filed a shelf registration statement with the Securities and
Exchange Commission (SEC), which became effective on February 13, 2001 ("2001
Registration Statement") to authorize the issuance of up to $3,000 in debt
securities. In May 2001 the Company issued $600 of term notes under the 2001
Registration Statement. The notes are composed of $200 of principal bearing
interest at 7.25% due May 1, 2013 and $400 of principal bearing interest at 8.0%
due May 1, 2031. Proceeds were used primarily to repay borrowings under the
Company's commercial paper program.
Albertson's, Inc. 2001 Annual Report 25
Albertson's filed a shelf registration statement with the SEC, which became
effective in February 1999 (the "1999 Registration Statement"), to authorize the
issuance of up to $2,500 in debt securities. In January 2001 the Company issued
the remaining $700 of term notes available under the 1999 Registration
Statement. The $700 principal bears interest at 7.5% and matures February 15,
2011. In May 2000 the Company issued $500 of term notes under the 1999
Registration Statement. The notes are composed of $275 of principal bearing
interest at 8.35% due May 1, 2010, and $225 of principal bearing interest at
8.7% due May 1, 2030. In July 1999 the Company issued $1,300 of term notes under
the 1999 Registration Statement. The notes are composed of $300 of principal
bearing interest at 6.55% due August 1, 2004; $350 of principal bearing interest
at 6.95% due August 1, 2009; and $650 of principal bearing interest at 7.45% due
August 1, 2029. For all issues, proceeds were used primarily to repay borrowings
under the Company's commercial paper program.
In July 1999 the Company negotiated an amendment to a $200 term loan agreement
between ASC and a group of commercial banks. The amended loans carry interest
based upon a pricing schedule (which averages 6.70%) dependent upon the
Company's long-term debt rating, and mature July 3, 2004.
The Company has pledged real estate with a cost of $151 as collateral for
mortgage notes which are payable on various schedules, including interest at
rates ranging from 6.8% to 16.5%. The notes mature from 2002 to 2019.
Medium-term notes of $30 due July 2027 contain a put option which would require
the Company to repay the notes in July 2007 if the holder of the note so elects
by giving the Company a 60-day notice. Medium-term notes of $50 due April 2028
contain a put option which would require the Company to repay the notes in April
2008 if the holder of the note so elects by giving the Company a 60-day notice.
The $200 of 7.5% debentures due 2037 contain a put option which will require the
Company to repay the note in 2009 if the holder of the notes so elects by giving
the Company a 60-day notice.
Following the merger with ASC the Company consolidated several of the commercial
paper, bank lines and other financing arrangements. The consolidation of debt
included the repayment of outstanding amounts under ASC's revolving credit
facilities and other debt containing change of control provisions and the tender
for, or open market purchases of, certain higher coupon debt. As a result,
certain debt was extinguished during 1999.
Net interest expense was as follows:
2001 2000 1999
- ----------------------------------------------------- ------------ ------------ -------------
Debt $ 408 $ 366 $ 350
Capitalized leases 30 27 27
Capitalized interest (23) (21) (26)
- ----------------------------------------------------- ------------ ------------ -------------
Interest expense 415 372 351
Bank service charges, net of interest income 17 13 2
- ----------------------------------------------------- ------------ ------------ -------------
$ 432 $ 385 $ 353
===================================================== ============ ============ =============
The scheduled aggregate maturities of debt outstanding at January 31, 2002, are
summarized as follows: $123 in 2002, $106 in 2003, $504 in 2004, $202 in 2005,
$3 in 2006 and $4,245 thereafter.
Capital Stock
On December 2, 1996, the Board of Directors adopted a stockholder rights plan,
which was amended on August 2, 1998, and March 16, 1999, under which all
stockholders receive one right for each share of common stock held. Each right
will entitle the holder to purchase, under certain circumstances, one
one-thousandth of a share of Series A Junior Participating Preferred Stock, par
value $1.00 per share, of the Company (the "preferred stock") at a price of 160
dollars. Subject to certain exceptions, the rights will become exercisable for
shares of preferred stock 10 business days (or such later date as may be
determined by the Board of Directors) following the commencement of a tender
offer or exchange offer that would result in a person or group beneficially
owning 15% or more of the outstanding shares of common stock.
Albertson's, Inc. 2001 Annual Report 26
Under the plan, subject to certain exceptions, if any person or group as defined
by the plan becomes the beneficial owner of 15% or more of the outstanding
common stock or takes certain other actions, each right will then entitle its
holder as defined by the plan, other than such person or group, upon payment of
the 160 dollars exercise price, to purchase common stock (or, in certain
circumstances, cash, property or other securities of the Company) with a value
equal to twice the exercise price. The rights may be redeemed by the Board of
Directors at a price of $0.001 per right under certain circumstances. The
rights, which do not vote and are not entitled to dividends, will expire at the
close of business on March 21, 2007, unless earlier redeemed or extended by the
Board of Directors of the Company. In connection with the Merger, no person or
group became the beneficial owner of 15% or more of the common stock.
The Board of Directors adopted a program on April 25, 2000, authorizing, but not
requiring, the Company to purchase and retire up to $500 of the Company's common
stock. This program was increased by an additional $1,000 by the Board of
Directors on December 6, 2000, for a total of $1,500. The revised program
enabled the Company to purchase stock from April 25, 2000 through December 6,
2001. During Fiscal 2000 the Company purchased and retired 18.7 million shares
at a total cost of $451 or an average price of $24.15 per share. On December 3,
2001, the Board of Directors adopted a program authorizing, but not requiring,
the Company to purchase and retire up to $500 of the Company's common stock from
December 6, 2001 through December 31, 2002. No shares were purchased during
Fiscal 2001.
Income Taxes
Deferred tax assets and liabilities consist of the following:
JANUARY 31, FEBRUARY 1,
2002 2001
- -------------------------------------------------------------------- -------------- ---------------
Deferred tax assets (no valuation allowance considered necessary):
Basis in fixed assets $ 264 $157
Self-insurance 188 162
Compensation and benefits 264 238
Unearned income 18 22
Other, net 91 128
- -------------------------------------------------------------------- -------------- ---------------
Total deferred tax assets 825 707
- -------------------------------------------------------------------- -------------- ---------------
Deferred tax liabilities:
Basis in fixed assets and capitalized leases (515) (584)
Inventories (126) (104)
Compensation and benefits (59) (36)
Other, net (24) (29)
- -------------------------------------------------------------------- -------------- ---------------
Total deferred tax liabilities (724) (753)
- -------------------------------------------------------------------- -------------- ---------------
Net deferred tax assets (liabilities) $101 $(46)
==================================================================== ============== ===============
The change in net deferred tax assets includes total adjustments of $10 for the
year ended January 31, 2002, related to stock options of $(3) and other
comprehensive income of $13.
The Company has federal and state net operating loss carryforwards of $7 and
$32, respectively, that will expire in years 2005 through 2021. Based on
management's assessment, it is more likely than not that all of the deferred tax
assets associated with the net operating loss carryforwards will be realized;
therefore, no valuation allowance is considered necessary.
Income tax expense on continuing operations consists of the following:
2001 2000 1999
- ---------------------------------- ------------ ------------ ------------
Current:
Federal $ 462 $ 458 $ 476
State 47 40 48
- ---------------------------------- ------------ ------------ ------------
509 498 524
Deferred:
Federal (124) 10 (47)
State (13) 1 (5)
- ---------------------------------- ------------ ------------ ------------
(137) 11 (52)
- ---------------------------------- ------------ ------------ ------------
$ 372 $ 509 $ 472
================================== ============ ============ ============
Albertson's, Inc. 2001 Annual Report 27
The reconciliations between the federal statutory tax rate and the Company's
effective tax rates are as follows:
2001 PERCENT 2000 PERCENT 1999 PERCENT
- ---------------------------------------------- ------------ ------------ ------------ ------------ ------------ -----------
Taxes computed at statutory rate $306 35.0 $446 35.0 $315 35.0
State income taxes net of federal
income tax benefit 37 4.2 54 4.3 38 4.2
Goodwill amortization 27 3.1 21 1.6 22 2.5
Merger-related charges 2 0.2 115 12.8
Other 2 0.3 (14) (1.1) (18) (2.0)
- ---------------------------------------------- ------------ ------------ ------------ ------------ ------------ -----------
$372 42.6 $509 40.0 $472 52.5
============================================== ============ ============ ============ ============ ============ ===========
Stock Options and Stock Awards
The Company's stock option and stock award plans (Albertson's, Inc. 1995 Amended
and Restated Stock-Based Incentive Plan) (the "1995 Plan") provide for the grant
of options to purchase shares of common stock and stock awards. At January 31,
2002, Albertson's had one stock-based incentive plan in effect under which
grants could be made with respect to 50 million shares of the Company's common
stock. Under this plan, approved by the stockholders most recently in 2001,
options and stock awards may be granted to officers and key employees to
purchase the Company's common stock. During 1999, the Company's stock-based
incentive plan was amended to, among other things, include the grant of options
and other awards to non-employee members of the Board of Directors. During 2001,
the Company's stock-based incentive plan was amended to, among other things,
increase the number of shares allowed by the plan from 30 million to 50 million.
Generally, options are granted with an exercise price at not less than 100% of
the closing market price on the date of the grant. The Company's options
generally become exercisable in installments of 20% per year on each of the
first through fifth anniversaries of the grant date or vest 100% on the third
anniversary of the grant date and have a maximum term of 7 to 10 years.
DEFERRED STOCK UNITS The Board of Directors adopted a program effective
December 6, 2000, which authorized the award of deferred stock units with
dividend equivalents paid in cash quarterly under the 1995 Plan to key officers
of the Company. Under this program, 900,800 of the units will be distributed in
stock on December 5, 2003, if the applicable officers are still employed as an
officer of the Company on that date, unless otherwise deferred by those
officers. The Company is recognizing this expense over the three-year service
period. Additional grants were made during Fiscal 2001 to key officers of the
Company of which 788,670 of the units will be distributed in a manner elected by
the participant on a date after said participant ceases to be an officer of the
Company. 8,000 of the units will be distributed in stock on September 17, 2002
and on each September 17th for the next four years, unless otherwise deferred.
8,000 of the units will be distributed in stock on November 19, 2002 and on each
November 19th for the next four years, unless otherwise deferred. 21,243 of the
units will be distributed in stock on December 3, 2002 and on each December 3rd
for the next three years and 21,245 of the units will be distributed in stock on
December 3, 2006, unless otherwise deferred.
VARIABLE ACCOUNTING TREATMENT FOR OPTION PLANS In the first quarter of 1999, a
market price adjustment of $29 was recorded as a reduction of pre-tax
merger-related costs to reflect a decline in the relevant stock price at the end
of the first fiscal quarter relative to LSARs. The actual change of control
price used to measure the value of these exercised LSARs became determinable at
the date the Merger was consummated and resulted in no further adjustments. Upon
Merger consummation, the change of control price was $53.77 per share, resulting
in the issuance of approximately 1.7 million Albertson's shares.
LSARs relating to approximately 4.0 million equivalent stock options became
exercisable upon regulatory approval of the merger with ASC, which resulted in
recognition of an additional pre-tax charge of $76 in the second quarter of
Fiscal 1999. This charge was based upon a change of control price of $56.96 per
share, which included an adjustment factor for the early termination of the LSAR
feature. A total of 0.8 million Albertson's shares were issued in satisfaction
of those options for which the LSAR feature was elected and the remaining
options were converted into options to acquire approximately 1.2 million
Albertson's shares.
Albertson's, Inc. 2001 Annual Report 28
STOCK OPTIONS - A summary of shares reserved for outstanding options as of the
fiscal year end, changes during the year and related weighted average exercise
price is presented below (shares in thousands):
JANUARY 31, 2002 FEBRUARY 1, 2001 FEBRUARY 3, 2000
---------------------------- ------------------------- -------------------------
SHARES PRICE SHARES PRICE SHARES PRICE
- ----------------------------------------- --------------- ------------ ------------ ------------ ------------ ------------
Outstanding at beginning of year 25,290 $ 32.79 18,015 $ 38.34 9,989 $ 35.01
Granted 6,406 32.64 8,683 21.78 12,536 39.76
Exercised (1,303) 22.71 (287) 21.54 (3,907) 33.00
Forfeited (2,348) 34.70 (1,121) 39.58 (603) 39.43
- ----------------------------------------- --------------- ------------ ------------ ------------ ------------ ------------
Outstanding at end of year 28,045 $ 33.06 25,290 $ 32.79 18,015 $ 38.34
========================================= =============== ============ ============ ============ ============ ============
Options exercisable at end of year 11,414 $ 35.67 7,251 $ 37.14 5,640 $ 35.44
========================================= =============== ============ ============ ============ ============ ============
As of January 31, 2002, there were 20 million shares of Company common stock
reserved for the granting of additional options and stock awards.
The following table summarizes options outstanding and options exercisable as of
January 31, 2002, and the related weighted average remaining contractual life
(years) and weighted average exercise price (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------ ---------------------------
SHARES REMAINING SHARES
OPTION PRICE PER SHARE OUTSTANDING LIFE PRICE EXERCISABLE PRICE
- ------------------------------ ---------------- ------------- ----------- --------------- -----------
$ 16.87 - $ 22.63 7,139 8.8 $ 21.66 1,821 $ 21.59
24.31 - 34.87 13,629 8.3 31.42 4,541 30.24
35.00 - 45.94 2,601 4.7 40.43 2,601 40.43
47.00 - 51.19 4,676 7.4 51.15 2,451 51.11
- ------------------------------ ---------------- ------------- ----------- --------------- -----------
$ 16.87 - $ 51.19 28,045 7.9 $ 33.06 11,414 $ 35.67
============================== ================ ============= =========== =============== ===========
The weighted average fair value at date of grant for Albertson's options granted
during 2001, 2000, and 1999 was $6.61, $7.35, and $10.42 per option,
respectively. The fair value of options at date of grant was estimated using the
Black-Scholes model with the following weighted average assumptions:
2001 2000 1999
- ----------------------------------- ----------------- ------------ ------------
Expected life (years) 3.0 3.0 3.0
Risk-free interest rate 3.62% 5.46% 5.96%
Volatility 30.09 54.83 37.03
Dividend yield 2.33 3.49 1.81
The Company has adopted the disclosure-only provisions of SFAS No. 123,
"Accounting for Stock-Based Compensation." Had compensation cost been determined
based on the fair value at the grant date consistent with the provisions of this
statement, the Company's pro forma net earnings and earnings per share would
have been as follows:
2001 2000 1999
- ------------------------------------ ------------ ------------ ------------
Net earnings:
As reported $ 501 $ 765 $ 404
Pro forma 472 738 375
Basic earnings per share:
As reported 1.23 1.83 0.96
Pro forma 1.16 1.77 0.89
Diluted earnings per share:
As reported 1.23 1.83 0.95
Pro forma 1.16 1.76 0.89
The 2001 and 2000 pro forma net earnings resulted from reported net earnings
less pro forma after-tax compensation expense. The 1999 pro forma earnings of
$375 resulted from reported net earnings of $404, less the 1999 pro forma
after-tax compensation expense of $67 ($49 of which related to an adjustment for
the acceleration of unamortized compensation expense for the stock options
granted prior to 1999 which vested in connection with the merger with ASC) and
the elimination of net merger-related after-tax stock option charges of $38
included with as-reported net earnings. The pro forma effect on net earnings is
not representative of the pro forma effect on net earnings in future years.
Albertson's, Inc. 2001 Annual Report 29
Employee Benefit Plans
Substantially all employees working over 20 hours per week are covered by
retirement plans. Union employees participate in multi-employer retirement plans
under collective bargaining agreements. The Company sponsors both defined
benefit and defined contribution plans.
The Albertson's Salaried Employees Pension Plan and Albertson's Employees
Corporate Pension Plan are funded, qualified, defined benefit, noncontributory
plans for eligible Albertson's employees who are 21 years of age with one or
more years of service and (with certain exceptions) are not covered by
collective bargaining agreements. Benefits paid to retirees are based upon age
at retirement, years of credited service and average compensation. The Company's
funding policy for these plans is to contribute the amount necessary to meet the
funding requirements as defined by the Internal Revenue Code.
The Company also sponsors the Albertson's Savings and Retirement Estates
("ASRE") Plan (formerly the American Stores Retirement Estates Plan) which is a
defined contribution retirement plan. ASRE was originally authorized by the ASC
Board of Directors for the purpose of providing retirement benefits for
employees of ASC and its subsidiaries. During 1999, ASRE was authorized by
Albertson's Board of Directors to provide retirement benefits for all qualified
employees of the Company and its subsidiaries. In conjunction with the
authorization of ASRE, the company-sponsored defined benefit plans were amended
to close the plans to future new entrants. Future accruals for participants in
the defined benefit plans are offset by the value of Company profit sharing
contributions to the new defined contribution plan.
The Company sponsors a tax-deferred savings plan which is a salary deferral plan
pursuant to Section 401(k) of the Internal Revenue Code. The plan covers
employees meeting age and service eligibility requirements, except those
represented by a labor union, unless the collective bargaining agreement
provides for participation. In addition, the Company provides a matching
contribution based on the amount of eligible compensation contributed by the
employee.
All Company contributions to ASRE and the company-sponsored 401(k) plan are made
at the discretion of the Board of Directors. The total amount contributed by the
Company is included with the ASRE defined contribution plan expense.
The Company also sponsors an unfunded Executive Pension Makeup Plan and an
Executive ASRE Makeup Plan. These plans are nonqualified and provide certain key
employees retirement benefits which supplement those provided by the Company's
other retirement plans.
Net periodic benefit (income) expense for defined benefit plans is determined
using assumptions as of the beginning of each year. The projected benefit
obligation and related funded status are determined using assumptions as of the
end of each year. Assumptions used at the end of each year for the
company-sponsored defined benefit pension plans were as follows:
2001 2000 1999
- ---------------------------------------------------- ------------ ------------ ------------
Weighted-average discount rate 6.75% 7.15% 7.50%
Annual salary increases 3.70-4.50 3.70-4.50 4.35-4.50
Expected long-term rate of return on assets 9.00 9.50 9.50
Net periodic benefit (income) expense for company-sponsored defined benefit
pension plans was as follows:
2001 2000 1999
- ---------------------------------------------------- ------------ ------------ ------------
Service cost - benefits earned during the period $ 11 $ 14 $ 45
Interest cost on projected benefit obligations 35 32 34
Expected return on assets (48) (55) (49)
Amortization of prior service cost (7) 5
Recognized net actuarial (gain) loss (4) 1
- ---------------------------------------------------- ------------ ------------ ------------
$ (9) $ (8) $ 31
==================================================== ============ ============ ============
Albertson's, Inc. 2001 Annual Report 30
The following table sets forth the funded status of the company-sponsored
defined benefit pension plans:
JANUARY 31, FEBRUARY 1,
2002 2001
- ------------------------------------------------------------------ --------------- ----------------
Change in projected benefit obligation:
Beginning of year benefit obligation $ 495 $ 423
Service cost 11 14
Interest cost 35 32
Actuarial loss 41 29
Amendments 11
Benefits paid (15) (14)
- ------------------------------------------------------------------ --------------- ----------------
End of year benefit obligation 567 495
- ------------------------------------------------------------------ --------------- ----------------
Change in plan assets:
Plan assets at fair value at beginning of year 537 582
Actual return on plan assets (57) (32)
Employer contributions 1 1
Benefit payments (15) (14)
- ------------------------------------------------------------------ --------------- ----------------
Plan assets at fair value at end of year 466 537
- ------------------------------------------------------------------ --------------- ----------------
Funded status (101) 42
Unrecognized net loss 165 19
Unrecognized prior service cost (71) (79)
Additional minimum liability (67) (1)
- ------------------------------------------------------------------ --------------- ----------------
Net accrued pension cost $ (74) $ (19)
- ------------------------------------------------------------------ --------------- ----------------
Prepaid pension cost included with other assets $ 25 $ 16
Accrued pension cost included with other long-term liabilities (99) (35)
- ------------------------------------------------------------------ --------------- ----------------
Net accrued pension cost $ (74) $ (19)
================================================================== =============== ================
At January 31, 2002, the accumulated benefit obligation exceeded the fair value
of the plans' assets in the Albertson's Employees Corporate Pension Plan and the
Executive Pension Makeup Plan. The provisions of SFAS No. 87, "Employers'
Accounting for Pensions," require recognition in the balance sheet of an
additional minimum liability and related intangible asset for pension plans with
accumulated benefits in excess of plan assets; any portion of such additional
liability which is in excess of the plan's prior service cost is a component of
other comprehensive income and is reflected in stockholders' equity, net of
related tax benefit. Accordingly, at January 31, 2002, a liability of $67 was
included in other long-term liabilities, an intangible asset equal to the prior
service cost of $28 was included in other assets, and a charge of $23 net of
deferred taxes of $16 was reflected as a minimum pension liability adjustment in
other comprehensive income under stockholders' equity in the Company's
Consolidated Balance Sheets.
The following table summarizes the projected benefit obligation, accumulated
benefit obligation, and plan assets of the individual plans that have a
projected benefit obligation in excess of plan assets:
JANUARY 31, FEBRUARY 1,
2002 2001
- ---------------------------------------------------- --------------- ----------------
Projected benefit obligation:
Albertson's Employees Corporate Pension Plan $331 $289
Executive Pension Makeup Plan 20 18
Accumulated benefit obligation:
Albertson's Employees Corporate Pension Plan 330 288
Executive Pension Makeup Plan 20 16
Plan assets (fair market value):
Albertson's Employees Corporate Pension Plan 250 285
Assets of the two funded Company defined benefit pension plans are invested in
directed trusts. Assets in the directed trusts are invested in common stocks
(including $52 of the Company's common stock at January 31, 2002 and February 1,
2001), U.S. government obligations, corporate bonds, international equity funds,
real estate and money market funds.
Albertson's, Inc. 2001 Annual Report 31
The Company also contributes to various plans under industrywide collective
bargaining agreements, primarily for defined benefit pension plans. Total
contributions to these plans were $49 for 2001, $58 for 2000, and $98 for 1999.
Retirement plans expense was as follows:
2001 2000 1999
- ------------------------------------------ ------------ ------------ ------------
Defined benefit pension plans $ ( 9) $ (8) $ 31
ASRE defined contribution plan 154 155 110
Multi-employer plans 49 58 98
- ------------------------------------------ ------------ ------------ ------------
$ 194 $ 205 $ 239
========================================== ============ ============ ============
Most retired employees of the Company are eligible to remain in its health and
life insurance plans. Retirees who elect to remain in the Albertson's-sponsored
plans are charged a premium which is equal to the difference between the
estimated costs of the benefits for the retiree group and a fixed contribution
amount made by the Company. The Company also provides certain health care
benefits to eligible ASC retirees of certain defined employee groups under two
unfunded plans, a defined dollar and a full coverage plan. The net periodic
postretirement benefit cost was as follows:
2001 2000 1999
- ------------------------------------------ ------------ ------------ ------------
Service cost $ 3 $ 3 $ 3
Interest cost 4 4 4
Amortization of unrecognized gain (1) (1) (1)
- ------------------------------------------ ------------ ------------ ------------
$ 6 $ 6 $ 6
========================================== ============ ============ ============
The following table sets forth the funded status of the company-sponsored
postretirement health and life insurance benefit plans:
JANUARY 31, FEBRUARY 1,
2002 2001
- ------------------------------------------------------------------------------------------- -------------- --------------
Change in accumulated benefit obligation:
Beginning of year benefit obligation $ 66 $ 62
Service cost 3 3
Interest cost 4 4
Plan participants' contributions 12 10
Actuarial loss 2 2
Benefits paid (16) (15)
- -------------------------------------------------------------------------------------------- -------------- --------------
End of year benefit obligation 71 66
- -------------------------------------------------------------------------------------------- -------------- --------------
Plan assets activity:
Employer contributions 5 5
Plan participants' contributions 12 10
Benefit payments (17) (15)
- -------------------------------------------------------------------------------------------- -------------- --------------
Funded status (71) (66)
Unrecognized net gain (10) (16)
- -------------------------------------------------------------------------------------------- -------------- --------------
Accrued postretirement benefit obligations included with other long-term liabilities $ (81) $ (82)
============================================================================================ ============== ==============
Discount rates as of end of year 6.75% 7.15%
- -------------------------------------------------------------------------------------------- -------------- --------------
For measurement purposes, a 6% annual rate of increase in the per capita cost of
covered health care benefits was assumed for plans covering ASC retirees for
2001 and is expected to remain at that level thereafter. For the ASC defined
dollar plan, no future increases in the subsidy level were assumed. Annual rates
of increases in health care costs are not applicable in the calculation of the
Albertson's benefit obligation because Albertson's contribution is a fixed
amount per participant.
With the exception of the plans covering ASC grandfathered retirees, all
postretirement plans are contributory, with participants' contributions adjusted
annually. The accounting for the health care plans anticipates that the Company
will not increase its contribution for health care benefits for
non-grandfathered retirees in future years.
Albertson's, Inc. 2001 Annual Report 32
Since the subsidy levels for the Albertson's and the ASC defined dollar plans
are fixed and the proportion of grandfathered ASC retirees is small, a health
care cost trend increase or decrease has no material impact on the accumulated
postretirement benefit obligation or the postretirement benefit expense.
SFAS No. 112, "Employers' Accounting for Postemployment Benefits" requires
employers to recognize an obligation for benefits provided to former or inactive
employees after employment but before retirement. The Company is self-insured
for certain of its employees' short-term and long-term disability plans which
are the primary benefits paid to inactive employees prior to retirement.
During 2001, a plan amendment made to the Company's long-term disability plan
changed the salary continuation feature from a cumulative benefit based on years
of service to a set percentage of salary benefit. This amendment resulted in a
reduction of the obligation by $36, which was recognized immediately in
accordance with the Company's policy for plan amendments. Following is a summary
of the obligation for postemployment benefits included in the Company's
Consolidated Balance Sheets:
JANUARY 31, FEBRUARY 1,
2002 2001
- ------------------------------------------------- -------------- --------------
Included with salaries and related liabilities $ 12 $ 12
Included with other long-term liabilities 54 74
- ------------------------------------------------- -------------- --------------
$ 66 $ 86
================================================= ============== ==============
The Company also contributes to various plans under industrywide collective
bargaining agreements which provide for health care benefits to both active
employees and retirees. Total contributions to these plans were $362 for 2001,
$286 for 2000, and $316 for 1999.
Employment Contracts
The Company has entered into employment contracts with certain executives for
periods up to three years (and ten years for the Chairman of the Board and Chief
Executive Officer). The agreements include specified amounts for signing bonus,
base salary, annual bonus payments, stock option awards and deferred stock unit
awards. In the event of termination of employment without cause, the executive
would be entitled to certain guaranteed payments and the vesting of stock
awards.
In addition, as part of the merger with ASC, the Company has entered into
retention agreements with certain executives under which they are paid an annual
retention bonus if they continue to be employed by the Company through June
2002.
Leases
The Company leases a portion of its real estate. The typical lease period is 20
to 30 years and most leases contain renewal options. Exercise of such options is
dependent on the level of business conducted at the location. In addition, the
Company leases certain equipment. Some leases contain contingent rental
provisions based on sales volume at retail stores or miles traveled for trucks.
Capitalized leases are calculated using interest rates appropriate at the
inception of each lease. Following is an analysis of the Company's assets under
capitalized leases, $12 of real estate and equipment is included in assets held
for sale at January 31, 2002:
JANUARY 31, FEBRUARY 1,
2002 2001
- ----------------------------------------------- -------------- --------------
Real estate and equipment $338 $314
Accumulated amortization (112) (132)
- ----------------------------------------------- -------------- --------------
$226 $182
=============================================== ============== ==============
Albertson's, Inc. 2001 Annual Report 33
Future minimum lease payments for noncancelable operating leases (which exclude
the amortization of acquisition-related fair value adjustments), related
subleases and capital leases at January 31, 2002, are as follows:
OPERATING CAPITAL
LEASES SUBLEASES LEASES
- ----------------------------------------------- ------------ ------------ ------------
2002 $ 333 $ (43) $ 45
2003 332 (36) 42
2004 318 (29) 40
2005 292 (19) 37
2006 267 (15) 37
Remainder 2,264 (61) 467
- ----------------------------------------------- ------------ ------------ ------------
Total minimum obligations (receivables) $3,806 $(203) 668
=============================================== ============ ============
Interest (378)
- ----------------------------------------------- ------------ ------------ ------------
Present value of net minimum obligations 290
Current portion (14)
- ----------------------------------------------- ------------ ------------ ------------
Long-term obligations at January 31, 2002 $ 276
=============================================== ============ ============ ============
The Company is contingently liable as a guarantor of certain leases that were
assigned to third parties in connection with various store closures and
dispositions. The Company believes the likelihood of a significant loss from
these agreements is remote because of the wide dispersion among third parties
and remedies available to the Company should the primary party fail to perform
under the agreements.
Rent expense under operating leases, excluding the amortization of
acquisition-related fair value adjustments of $13 in 2001, and $14 in 2000 and
1999, was as follows:
2001 2000 1999
- -------------------------------------- ------------ ------------ ------------
Minimum rent $ 375 $ 369 $ 330
Contingent rent 28 30 29
- -------------------------------------- ------------ ------------ ------------
403 399 359
Sublease rent (94) (97) (58)
- -------------------------------------- ------------ ------------ ------------
$ 309 $ 302 $ 301
====================================== ============ ============ ============
Related Party Transactions
In the normal course of business, Albertson's has entered into leases for
9 stores and 2 office locations ($3 of rent paid during Fiscal 2001), purchased
a piece of land ($2 during Fiscal 2001), purchased inventory for resale ($82
during Fiscal 2001), and engaged consulting services (insignificant) from
entities that have a relationship with certain members of the Company's Board of
Directors. All of the foregoing transactions were conducted at competitive
rates.
The Company has made loans to certain executive officers in connection with
their relocation. As of January 31, 2002, the amounts outstanding were
insignificant.
Financial Instruments
Financial instruments which potentially subject the Company to concentration of
credit risk consist principally of cash equivalents and receivables. The Company
limits the amount of credit exposure to each individual financial institution
and places its temporary cash into investments of high credit quality.
Concentrations of credit risk with respect to receivables are limited due to
their dispersion across various companies and geographies.
The estimated fair values of cash and cash equivalents, accounts receivable,
accounts payable, short-term debt, commercial paper and bank line borrowings
approximate their carrying amounts. Substantially all of the fair values were
estimated using quoted market prices. The estimated fair values and carrying
amounts of outstanding debt (excluding commercial paper and bank line
borrowings) were as follows:
JANUARY 31, FEBRUARY 1,
2002 2001
- ------------------------------------------------- -------------- --------------
Fair value $ 5,516 $ 4,470
Carrying amount 5,183 4,624
Albertson's, Inc. 2001 Annual Report 34
Environmental
The Company has identified environmental contamination sites related primarily
to underground petroleum storage tanks and groundwater contamination at various
store, warehouse, office and manufacturing facilities (related to current
operations as well as previously disposed of businesses). The Company conducts
an ongoing program for the inspection and evaluation of new sites proposed to be
acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each environmental contamination site unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of environmental remediation
is uncertain, the Company believes that required remediation and continuing
compliance with environmental laws, in excess of current reserves, will not have
a material adverse effect on the financial condition of the Company. Charges
against earnings for environmental remediation were not material in 2001, 2000
or 1999.
Legal Proceedings
In April 2000 a class action complaint was filed against Albertson's as well as
American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Mario Gardner, et al.
v. American Stores Company, Albertson's, Inc., American Drug Stores, Inc.,
Sav-on Drug Stores, Inc. and Lucky Stores, Inc.) seeking recovery of overtime
due to plaintiffs' allegation that they were improperly classified as exempt
under California law. A class action with respect to Sav-on Drug assistant
managers was certified by the court. A case with very similar claims, also
involving the assistant drug managers and operating managers, was filed against
the Company's subsidiary Sav-on Drug Stores, Inc. in Los Angeles Superior Court
(Rocher, Dahlin et al. v. Sav-on Drug Stores, Inc.) and was also certified as a
class action. Subsequent to year end, the Court of Appeal of the State of
California, Second Appellate District reversed the Rocher class certification,
leaving only two plaintiffs. The Company will now seek decertification of the
Gardner class. The Company has strong defenses against these lawsuits, and is
vigorously defending them. Although these lawsuits are subject to the
uncertainties inherent in the litigation process, based on the information
presently available to the Company, management does not expect the ultimate
resolution of these actions to have a material adverse effect on the Company's
financial condition.
In August 2000 a class action complaint was filed against Jewel Food Stores,
Inc., an indirect wholly owned subsidiary of the Company, in the Circuit Court
of Cook County, Illinois (Maureen Baker, et al. v. Jewel Food Stores, Inc. and
Dominick's Supermarkets, Inc., Case No. 00L 009664) alleging milk price fixing.
On December 21, 2001, the Company's motion for summary judgment was denied, and
the Company has appealed this denial. The Company has strong defenses against
this lawsuit, and is vigorously defending it. Although this lawsuit is subject
to the uncertainties inherent in the litigation process, based on the
information presently available to the Company, management does not expect the
ultimate resolution of this action to have a material adverse effect on the
Company's financial condition.
An agreement has been reached, and court approval granted, to settle eight
purported class and/or collective actions which were consolidated in the United
States District Court in Boise, Idaho, which raised various issues including
"off the clock" work allegations and allegations regarding certain salaried
grocery managers' exempt status. Under the settlement agreement, current and
former employees who meet eligibility criteria may present their claims to a
settlement administrator. Additionally, current and former grocery managers
employed in the state of California may present their exempt status claims to a
settlement administrator. While the Company cannot specify the exact number of
individuals who are likely to submit claims and the exact amount of their
claims, the $37 pre-tax ($22 after-tax) charge recorded by the Company in 1999
is the Company's current estimate of the total monetary liability, including
attorney fees, for all eight cases. During the first quarter of 2001 this
liability was reduced by an $18 cash payment for legal expenses.
The Company is also involved in routine litigation incidental to operations. The
Company utilizes various methods of alternative dispute resolution, including
settlement discussions, to manage the costs and uncertainties inherent in the
litigation process. In the opinion of management, the ultimate resolution of
these legal proceedings will not have a material adverse effect on the Company's
financial condition.
Albertson's, Inc. 2001 Annual Report 35
Recent Accounting Standards
Effective February 2, 2001, the Company adopted SFAS No. 133 as amended,
"Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133
requires all derivative financial instruments to be recognized as either assets
or liabilities in the Consolidated Balance Sheet and measured at fair value. The
cumulative effect of adoption of SFAS No. 133 as it relates to interest rate
locks was a $5 gain (net of taxes). Losses on contracts settled during 2001
amounted to $1 (net of taxes). These amounts are reported in other comprehensive
income in the accompanying Consolidated Stockholders' Equity. The amounts
reclassified from other comprehensive income to interest expense for 2001 and
the expected reclassifications for 2002 are insignificant.
In June 2001 the Financial Accounting Standards Board (FASB) issued two new
pronouncements SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill
and Other Intangible Assets." SFAS No. 141, which is effective for acquisitions
initiated after June 30, 2001, prohibits the use of the pooling-of-interest
method for business combinations and establishes the accounting and financial
reporting requirements for business combinations accounted for by the purchase
method. Adoption of this standard had no effect on the financial statements of
the Company. SFAS No. 142 requires that an intangible asset that is acquired
shall be initially recognized and measured based on its fair value. The
statement also provides that goodwill should not be amortized, but shall be
tested for impairment annually, or more frequently if circumstances indicate
potential impairment, through a comparison of fair value to its carrying amount.
SFAS No. 142 became effective for Albertson's on February 1, 2002. In accordance
with the provisions of SFAS No. 142, the Company will complete the analysis of
goodwill and other intangible assets for impairment no later than August 1,
2002, and will record any required impairment by the end of 2002. The Company is
currently evaluating the impact of the new accounting standard on existing
goodwill and other intangible assets. The ultimate impact of the new accounting
standard has yet to be determined. The net book value of goodwill was $1,468 and
$1,560 as of January 31, 2002 and February 1, 2001, respectively. Goodwill
amortization expense of $56, $57, and $58 was recorded in 2001, 2000, and 1999,
respectively, and will no longer be recorded in subsequent fiscal years.
In July 2001 the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 will become effective for Albertson's on January 31,
2003. This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated asset retirement costs. The Company is currently analyzing the effect
that this standard will have on its financial statements, but believes it will
not have a significant effect on the financial statements of the Company.
In August 2001 the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets." SFAS No. 144 which replaces SFAS No. 121 and APB
No. 30, became effective for Albertson's on February 1, 2002. This Statement
retains the requirements to (i) recognize an impairment loss only if the
carrying amount of a long-lived asset is not recoverable from its undiscounted
cash flows and (ii) measure an impairment loss as the difference between the
carrying amount and fair value of the asset. This Statement removes goodwill
from its scope, eliminating the requirement to allocate goodwill to long-lived
assets to be tested for impairment. This Statement requires that a long-lived
asset to be abandoned, exchanged for a similar productive asset or distributed
to owners in a spin-off, be considered held and used until it is disposed of.
This Statement requires the accounting model for long-lived assets to be
disposed of by sale, be used for all long-lived assets, whether previously held
and used or newly acquired. Discontinued operations are no longer measured on a
net realizable value basis, and future operating losses are no longer recognized
before they occur. This Statement broadens the presentation of discontinued
operations in the income statement to include a component of an entity (rather
than a segment of a business). A component of an entity comprises operations and
cash flows that can be clearly distinguished, operationally and for financial
reporting purposes, from the rest of the entity. The Company is currently
analyzing the effect that this standard will have on its financial statements
and believes it will require additional disclosures but will not have a
significant effect on the operating results of the Company.
Emerging Issues Task Force ("EITF") Issue Nos. 00-14, "Accounting for Certain
Sales Incentives;" 00-22, "Accounting for Points and 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" address the
appropriate accounting for certain vendor contracts and loyalty programs. The
Company's accounting procedures are in compliance with the accounting
requirements called for by these Issues.
Albertson's, Inc. 2001 Annual Report 36
Computation of Earnings Per Share
2001 2000 1999
- --------------------------------------------------- ----------------------- ---------------------- -----------------------
DILUTED BASIC DILUTED BASIC DILUTED BASIC
----------- ----------- ---------- ----------- ----------- -----------
Net earnings $501 $501 $765 $765 $404 $404
==== ==== ==== ==== ==== ====
Weighted average common shares outstanding 406 406 418 418 422 422
=== === ===
Common share equivalents 2 - 1
---- ---- ----
Weighted average shares outstanding 408 418 423
==== ==== ====
Earnings per common share and common share
equivalent: $1.23 $1.23 $1.83 $1.83 $0.95 $0.96
===== ===== ===== ===== ===== =====
Calculation Of Common Share Equivalents:
Options to purchase common shares 17 2 6
Common shares assumed purchased with
potential proceeds (15) (2) (5)
--- --- ---
Common share equivalents 2 - 1
=== === ===
Calculation Of Common Shares Assumed
Purchased With Potential Proceeds:
Potential proceeds from exercise of options
to purchase common shares $455 $ 52 $242
Common stock price used under the treasury
stock method $31.12 $27.99 $46.18
Common shares assumed purchased with
potential proceeds 15 2 5
Outstanding options excluded in 2001, 2000 and 1999 (option price exceeded the
average market price during the period) amounted to 9.4 million shares,
16.6 million shares, and 3.5 million shares, respectively.
Subsequent Event
On March 13, 2002, the Company announced a second phase in its restructuring
process. The Company intends to completely exit four underperforming markets:
Memphis, Tennessee; Nashville, Tennessee; Houston, Texas; and San Antonio,
Texas. These market exits will occur through a combination of store closures and
store sales and involve a total of 95 stores. In connection with this action,
the number of division offices will be reduced from 15 to 11 and the Tulsa,
Oklahoma and Houston, Texas distribution facilities will be sold or closed.
Albertson's expects to record nonrecurring pre-tax charges of approximately
$580, primarily related to asset impairments in this restructuring plan. This
$580 total includes approximately $510 in noncash charges. The disposition of
all the assets related to this restructuring plan should generate net positive
pre-tax cash flow of about $180.
Albertson's recently announced the sale of the Tulsa, Oklahoma distribution
facility, as mentioned above, to Fleming Companies, Inc. This sales agreement
also includes a long-term supply arrangement under which Fleming will provide
procurement and distribution services for Albertson's Oklahoma and Nebraska
stores.
Albertson's, Inc. 2001 Annual Report 37
INDEPENDENT
AUDITORS' REPORT
Deloitte
& Touche
The Board of Directors and Stockholders of Albertson's, Inc.:
We have audited the accompanying consolidated balance sheets of Albertson's,
Inc., and subsidiaries as of January 31, 2002 and February 1, 2001, and the
related consolidated statements of earnings, stockholders' equity, and cash
flows for each of the three years in the period ended January 31, 2002. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Albertson's, Inc., and subsidiaries
at January 31, 2002 and February 1, 2001, and the results of their operations
and their cash flows for each of the three years in the period ended January 31,
2002, in conformity with accounting principles generally accepted in the United
States of America.
Deloitte & Touche LLP
Boise, Idaho
March 15, 2002
Albertson's, Inc. 2001 Annual Report 38
RESPONSIBILITY FOR
FINANCIAL REPORTING
The management of Albertson's, Inc., is responsible for the preparation and
integrity of the consolidated financial statements of the Company. The
accompanying consolidated financial statements have been prepared by the
management of the Company, in accordance with accounting principles generally
accepted in the United States of America, using management's best estimates and
judgment where necessary. Financial information appearing throughout this Annual
Report is consistent with that in the consolidated financial statements.
To help fulfill its responsibility, management maintains a system of internal
controls, including an internal audit department, designed to provide reasonable
assurance that assets are safeguarded against loss or unauthorized use and that
transactions are executed in accordance with management's authorizations and are
reflected accurately in the Company's records. This system is continually
reviewed, improved, and modified in response to changing conditions and
operations, and to recommendations made by the independent auditors and internal
auditors. The concept of reasonable assurance is based on the recognition that
the cost of maintaining a system of internal accounting controls should not
exceed benefits expected to be derived from the system. The Company believes
that its long-standing emphasis on the highest standards of conduct and ethics,
set forth in comprehensive written policies, serves to reinforce its system of
internal controls.
Deloitte & Touche LLP, independent auditors, audited the consolidated financial
statements in accordance with auditing standards generally accepted in the
United States of America to independently assess the fair presentation of the
Company's financial position, results of operations and cash flows.
The Audit/Finance Committee of the Board of Directors, composed entirely of
outside directors, oversees the fulfillment by management of its
responsibilities over financial controls and the preparation of financial
statements. The Audit/Finance Committee meets with internal and external
auditors at least four times per year to review audit plans and audit results.
This provides internal and external auditors direct access to the Board of
Directors.
Management recognizes its responsibility to conduct the business of Albertson's,
Inc., in accordance with high ethical standards. This responsibility is
reflected in key policy statements that, among other things, address potentially
conflicting outside business interests of Company employees and specify proper
conduct of business activities. Ongoing communications and review programs are
designed to help ensure compliance with these policies.
Larry Johnston Felicia Thornton
Chairman of the Board & Executive Vice President &
Chief Executive Officer Chief Financial Officer
Albertson's, Inc. 2001 Annual Report 39
FIVE-YEAR SUMMARY
OF SELECTED FINANCIAL DATA
52 WEEKS 52 WEEKS 53 WEEKS 52 WEEKS 52 WEEKS
JANUARY 31, FEBRUARY 1, FEBRUARY 3, JANUARY 28, JANUARY 29,
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA) 2002 2001 2000 1999 1998
- ------------------------------------------------- --------------- ---------------- ---------------- ---------------- ---------------
Operating Results:
Sales $ 37,931 $ 36,762 $ 37,478 $ 35,872 $ 33,828
Earnings before extraordinary item 501 765 427 801 797
Extraordinary item (23)
Net earnings 501 765 404 801 797
Net earnings as a percent to sales 1.32% 2.08% 1.08% 2.23% 2.36%
Common Stock Data:
Earnings per share before extraordinary item:
Basic $ 1.23 $ 1.83 $ 1.01 $ 1.91 $ 1.89
Diluted 1.23 1.83 1.00 1.90 1.88
Extraordinary item:
Basic (0.05)
Diluted (0.05)
Earnings per share:
Basic 1.23 1.83 0.96 1.91 1.89
Diluted 1.23 1.83 0.95 1.90 1.88
Cash dividends per share:
Albertson's, Inc. 0.76 0.76 0.72 0.68 0.64
American Stores Company equivalent 0.14 0.57 0.56
Financial Position:
Total assets $ 15,967 $ 16,078 $ 15,719 $ 15,131 $ 13,767
Long-term debt and capitalized lease obligations 5,336 5,942 4,990 5,108 4,333
Other Year End Statistics:
Number of stores 2,421 2,512 2,492 2,564 2,435
All fiscal years consist of 52 weeks, except for 1999 which is a 53-week year.
2001 operating results included pre-tax restructuring charges of $560 ($345
after tax or $0.85 per share), pre-tax gain of $54 ($32 after tax or $0.08 per
share) on sale of New England Osco drugstores, pre-tax credit for amendment to
benefit plans of $36 ($21 after tax or $0.05 per share), pre-tax charge for
management changes of $9 ($6 after tax or $0.01 per share), and pre-tax
merger-related credits of $6 ($4 after tax or $0.01 per share). Restructuring
charges included severance, the write-down of assets to net realizable value and
lease termination costs. Merger-related credits included a credit for a reversal
of a prior impairment charge as well as charges for severance, the write-down of
other assets to net realizable value and integration costs.
2000 operating results included pre-tax merger-related charges of $151 ($93
after tax or $0.22 per share), and a pre-tax charge of $20 ($12 after tax or
$0.03 per share) for an impairment - lease contingency. Merger-related charges
included severance, the write-down of assets to net realizable value and
integration costs.
1999 operating results included pre-tax merger-related charges of $683 ($529
after tax or $1.25 per share), and a pre-tax charge of $37 ($22 after tax or
$0.05 per share) for a litigation settlement. Merger-related charges included
severance, the write-down of assets to net realizable value, transaction and
financing costs, integration costs and stock option charges.
During 1999 American Stores Company paid only one quarterly dividend due to the
consummation of the Merger.
1998 operating results included a pre-tax merger-related stock option charge of
$195 ($132 after tax or $0.31 per share) related to the exercisability of
6 million equivalent limited stock appreciation rights due to the approval by
ASC's stockholders of the Merger Agreement and a $24 pre-tax charge ($16 after
tax or $0.04 per share) related to management's decision to close
16 underperforming stores.
1997 operating results included pre-tax charges of $34 related to the sale of
stock by a major stockholder and pre-tax charges of $13 related to the sale of a
division of ASC's communications subsidiary (total of $41 after tax or $0.10 per
share).
Albertson's, Inc. 2001 Annual Report 40
QUARTERLY FINANCIAL DATA
(DOLLARS IN MILLIONS, EXCEPT PER SHARE DATA - UNAUDITED) FIRST SECOND THIRD FOURTH YEAR
- ---------------------------------------------------------- ------------ ------------ ------------ ------------ -------------
2001
Sales $ 9,331 $ 9,577 $ 9,363 $ 9,660 $ 37,931
Gross profit 2,658 2,680 2,655 2,783 10,776
Operating profit (loss) 435 (135) 417 596 1,313
Net earnings (loss) 186 (151) 176 290 501
Earnings (loss) per share:
Basic 0.46 (0.37) 0.43 0.71 1.23
Diluted 0.46 (0.37) 0.43 0.71 1.23
- ---------------------------------------------------------- ------------ ------------ ------------ ------------ -------------
2000
Sales $ 9,013 $ 9,214 $ 8,991 $ 9,544 $ 36,762
Gross profit 2,516 2,642 2,553 2,722 10,433
Operating profit 376 421 384 481 1,662
Net earnings 179 194 172 220 765
Earnings per share:
Basic 0.42 0.46 0.41 0.54 1.83
Diluted 0.42 0.46 0.41 0.54 1.83
- ---------------------------------------------------------- ------------ ------------ ------------ ------------ -------------
During 2001, operating results of quarters two, three, and four were affected by
pre-tax restructuring charges totaling $560 ($345 after tax). Restructuring
charges included severance, the write-down of assets to net realizable value and
lease termination costs. First quarter 2001 included a pre-tax one-time charge
of $9 ($6 after tax) for management changes. Fourth quarter 2001 included a
pre-tax gain of $54 ($32 after tax) for the sale of New England Osco drugstores
and a pre-tax credit of $36 ($21 after tax) for an amendment in the Company's
disability benefit plans. During 2001 and 2000 all quarters' operating results
were affected by merger-related charges and credits. Net pre-tax merger-related
credits totaling $6 ($4 after tax) were recorded during 2001 and net pre-tax
charges of $151 ($93 after tax) were recorded in 2000. Merger-related charges
included severance, the write-down of assets to net realizable value and
integration costs. First quarter 2000 included a pre-tax charge of $20 ($12
after tax) for an impairment - lease contingency. The following table reflects
the net earnings (loss) and earnings per share (EPS) effect of these items.
FIRST SECOND THIRD FOURTH ANNUAL
------------------- -------------------- -------------------- ------------------- --------------------
NET EPS NET EPS NET EPS NET EPS NET EPS
EARNINGS (LOSS) E(L) EFFECT E(L) EFFECT E(L) EFFECT E(L) EFFECT E(L) EFFECT
- --------------------- -------- ---------- --------- ---------- --------- ---------- -------- ---------- --------- ----------
2001
Restructuring $(334) $(0.82) $ (3) $ (0.01) $ (8) $(0.02) $(345) $(0.85)
Management change $ (6) $(0.01) (6) (0.01)
New England Osco
drugstores sale 32 0.08 32 0.08
Benefit Plan
amendment 21 0.05 21 0.05
Merger-related 6 0.01 (1) (0.00) (1) (0.00) 4 0.01
- --------------------- -------- ---------- --------- ---------- --------- ---------- -------- ---------- --------- ----------
2000
Merger-related $(35) $(0.08) $ (17) $(0.04) $(16) $ (0.04) $(25) $(0.06) $ (93) $(0.22)
Impairment - Lease
contingency (12) (0.03) (12) (0.03)
- --------------------- -------- ---------- --------- ---------- --------- ---------- -------- ---------- --------- ----------
The Company estimates the quarterly LIFO reserves, which cannot be accurately
determined until year end. The LIFO method of valuing inventories (decreased)
increased net earnings and EPS as follows:
FIRST SECOND THIRD FOURTH YEAR
- --------------------------------- ------------ ------------ ------------ ------------ ------------
2001
Net earnings $ (4) $ (4) $ (5) $ 10 $ (3)
Basic and diluted EPS (0.01) (0.01) (0.01) 0.02 (0.01)
- --------------------------------- ------------ ------------ ------------ ------------ ------------
2000
Net earnings $ (3) $ (3) $ (5) $ 25 $ 14
Basic and diluted EPS (0.01) (0.01) (0.01) 0.06 0.03
- --------------------------------- ------------ ------------ ------------ ------------ ------------
Due to rounding and different periods used to compute weighted average
outstanding shares, the sum of the quarterly EPS may not equal the annual EPS.
Albertson's, Inc. 2001 Annual Report 41
OTHER
INFORMATION
The Company's stock is traded on the New York and Pacific stock exchanges under
the symbol ABS. The high and low stock prices by quarter were as follows:
FIRST SECOND THIRD FOURTH YEAR
HIGH LOW HIGH LOW HIGH LOW HIGH LOW HIGH LOW
- ------------------- ---------- --------- ---------- ---------- --------- ---------- ---------- --------- ---------- ---------
2001 $ 34.05 $ 27.00 $ 33.72 $ 27.30 $ 36.99 $ 29.25 $ 35.59 $ 28.26 $ 36.99 $ 27.00
2000 34.94 23.06 39.25 30.00 31.50 20.06 28.88 21.00 39.25 20.06
1999 61.94 49.06 56.94 48.56 52.25 37.00 38.31 29.00 61.94 29.00
Cash dividends declared per share were:
FIRST SECOND THIRD FOURTH YEAR
- ----------------------- ---------------- -------------------- -------------------- --------------------- --------------------
2001 $0.19 $0.19 $0.19 $0.19 $0.76
2000 0.19 0.19 0.19 0.19 0.76
1999 0.18 0.18 0.18 0.18 0.72
In March 2002 the Board of Directors maintained the regular quarterly cash
dividend of $0.19 per share, for an effective annual rate of $0.76 per share.
The quarterly rate will be paid on May 10, 2002, to stockholders of record on
April 15, 2002.
Albertson's, Inc. 2001 Annual Report 42