1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 18, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
-------------------- ---------------------
Commission file number 1-303
THE KROGER CO.
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(Exact name of registrant as specified in its charter)
Ohio 31-0345740
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1014 Vine Street, Cincinnati, OH 45202
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(Address of principal executive offices)
(Zip Code)
(513) 762-4000
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(Registrant's telephone number, including area code)
Unchanged
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
------- -------
There were 803,293,536 shares of Common Stock ($1 par value) outstanding as of
September 26, 2001
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PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share amounts)
(unaudited)
2nd Quarter Ended Two Quarters Ended
--------------------------- ---------------------------
August 18, August 12, August 18, August 12,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Sales $11,485 $11,017 $26,587 $25,346
------- ------- ------- -------
Merchandise costs, including advertising, warehousing, and transportation .. 8,331 8,051 19,366 18,551
Operating, general and administrative ...................................... 2,177 2,059 5,012 4,808
Rent ....................................................................... 158 155 365 356
Depreciation and amortization .............................................. 246 234 566 541
Asset impairment charges -- -- -- 191
Merger-related costs ....................................................... 2 2 4 11
------- ------- ------- -------
Operating profit ........................................................ 571 516 1,274 888
Interest expense ........................................................... 152 155 357 361
------- ------- ------- -------
Earnings before income tax expense and extraordinary loss ............... 419 361 917 527
Income tax expense ......................................................... 163 151 358 217
------- ------- ------- -------
Earnings before extraordinary loss ...................................... $ 256 $ 210 $ 559 $ 310
Extraordinary loss, net of income tax benefit .............................. -- (2) -- (2)
------- ------- ------- -------
Net Earnings ............................................................ $ 256 $ 208 $ 559 $ 308
======= ======= ======= =======
Earnings per basic common share:
Earnings before extraordinary loss ...................................... $ 0.32 $ 0.25 $ 0.69 $ 0.37
Extraordinary loss ...................................................... 0.00 0.00 0.00 0.00
------- ------- ------- -------
Net earnings ......................................................... $ 0.32 $ 0.25 $ 0.69 $ 0.37
======= ======= ======= =======
Average number of common shares used in basic calculation .................. 805 824 809 828
Earnings per diluted common share:
Earnings before extraordinary loss ...................................... $ 0.31 $ 0.25 $ 0.67 $ 0.36
Extraordinary loss ...................................................... 0.00 0.00 0.00 0.00
------- ------- ------- -------
Net earnings ......................................................... $ 0.31 $ 0.25 $ 0.67 $ 0.36
======= ======= ======= =======
Average number of common shares used in diluted calculation ................ 827 847 830 849
--------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)
August 18, February 3,
2001 2001
-------------------- --------------------
ASSETS
Current assets
Cash.................................................................. $ 137 $ 161
Receivables........................................................... 649 687
Inventories........................................................... 4,039 4,063
Prepaid and other current assets...................................... 331 501
--------- ---------
Total Current Assets.............................................. 5,156 5,412
Property, plant and equipment, net....................................... 9,429 8,813
Goodwill, net............................................................ 3,625 3,639
Other assets............................................................. 317 315
--------- ---------
Total Assets...................................................... $ 18,527 $ 18,179
========= =========
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under
capital leases................................................... $ 350 $ 336
Accounts payable...................................................... 3,118 3,009
Salaries and wages.................................................... 536 603
Other current liabilities............................................. 1,621 1,434
--------- ---------
Total Current Liabilities......................................... 5,625 5,382
Long-term debt including obligations under capital leases................ 8,212 8,210
Other long-term liabilities.............................................. 1,472 1,498
--------- ---------
Total Liabilities................................................. 15,309 15,090
--------- ---------
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 shares authorized
and unissued.......................................................... -- --
Common stock, $1 par, 1,000 shares authorized: 898 shares issued
in 2001 and 891 shares issued in 2000................................. 898 891
Additional paid-in capital............................................... 2,140 2,092
Retained earnings........................................................ 1,663 1,104
Common stock in treasury, at cost, 96 shares in 2001 and
76 shares in 2000..................................................... (1,483) (998)
--------- ---------
Total Shareowners' Equity......................................... 3,218 3,089
--------- ---------
Total Liabilities and Shareowners' Equity......................... $ 18,527 $ 18,179
========= =========
--------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
Two Quarters Ended
------------------------------------------------
August 18, August 12,
2001 2000
----------------------- ----------------------
Cash Flows From Operating Activities:
Net earnings.................................................................. $ 559 $ 308
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Extraordinary loss......................................................... -- 2
Depreciation............................................................... 509 487
Goodwill amortization...................................................... 57 54
Non-cash items............................................................. 4 261
Deferred income taxes...................................................... 65 189
Other...................................................................... 30 34
Changes in operating assets and liabilities net of
effects from acquisitions of businesses:
Inventories............................................................ 22 140
Receivables............................................................ 52 54
Accounts payable....................................................... 292 170
Other.................................................................. 235 250
--------- ---------
Net cash provided by operating activities.......................... 1,825 1,949
--------- ---------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (1,148) (838)
Proceeds from sale of assets.................................................. 25 68
Payments for acquisitions, net of cash acquired............................... (85) (67)
Other......................................................................... 12 (75)
--------- ---------
Net cash used by investing activities.............................. (1,196) (912)
--------- ---------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt...................................... 1,290 525
Reductions in long-term debt.................................................. (1,292) (1,360)
Financing charges incurred.................................................... (14) (7)
Decrease in book overdrafts................................................... (198) (48)
Proceeds from issuance of capital stock....................................... 46 37
Treasury stock purchases...................................................... (485) (310)
--------- ---------
Net cash used by financing activities.............................. (653) (1,163)
--------- ---------
Net decrease in cash and temporary cash investments............................... (24) (126)
Cash and temporary investments:
Beginning of year.......................................................... 161 281
--------- ---------
End of quarter............................................................. $ 137 $ 155
========= =========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest..................................... $ 358 $ 356
Cash paid during the year for income $ 143 $ 77
taxes.................................
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired.......................................... $ 53 $ 91
Goodwill recorded...................................................... $ 45 $ 30
Value of stock issued.................................................. $ -- $ --
Liabilities assumed.................................................... $ 14 $ 54
--------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Certain prior year amounts have been reclassified to conform to
current-year presentation and all amounts presented are in millions
except per share amounts.
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries. The year-end balance sheet
includes Kroger's February 3, 2001 balance sheet, which was derived
from audited financial statements, and, due to its summary nature, does
not include all disclosures required by generally accepted accounting
principles. Significant intercompany transactions and balances have
been eliminated. References to the "Company" in these consolidated
financial statements mean the consolidated company.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments), which are necessary for a fair presentation of
results of operations for such periods, but should not be considered as
indicative of results for a full year. The financial statements have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to SEC regulations. Accordingly, the accompanying
consolidated financial statements should be read in conjunction with
the fiscal 2000 Annual Report on Form 10-K of The Kroger Co. filed with
the SEC on May 2, 2001.
The unaudited information included in the consolidated financial
statements for the second quarter and two quarters ended August 18,
2001 and August 12, 2000 includes the results of operations of the
Company for the 12-week and 28-week periods then ended.
2. MERGER-RELATED COSTS
The Company is continuing to implement its integration plan relating to
recent mergers. Total pre-tax merger-related costs incurred were $2
during the second quarter of 2001, and $2 during the second quarter of
2000. Year-to-date pre-tax merger-related costs were $4 in 2001 and $11
in 2000.
The following table presents the components of the pre-tax
merger-related costs:
2nd Quarter Ended Two Quarters Ended
---------------------------------------------------------------
August 18, August 12, August 18, August 12,
2001 2000 2001 2000
--------------- ------------------------------- ---------------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation................................ $ -- $ -- $ -- $ 1
Administration integration................................ -- -- -- 4
----- ----- ----- -----
5
OTHER CHARGES
Administration integration................................ 2 2 4 6
----- ----- ----- -----
Total merger-related costs................................... $ 2 $ 2 $ 4 $ 11
===== ===== ===== =====
TOTAL CHARGES
Distribution consolidation................................ $ -- $ -- $ -- $ 1
Administration integration................................ 2 2 4 10
----- ----- ----- -----
Total merger-related costs................................... $ 2 $ 2 $ 4 $ 11
===== ===== ===== =====
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Distribution Consolidation
Represents costs to consolidate distribution operations and eliminate
duplicate facilities. The year-to-date costs in 2000 represent
severance costs incurred and paid.
Administration Integration
Includes labor and severance costs related to employees identified for
termination in the integration. During each of the first and second
quarters of 2001, and the second quarter of 2000, the Company incurred
pre-tax costs totaling $2 resulting from issuing restricted stock
related to merger synergies. The year-to-date 2000 pre-tax costs
include approximately $6 resulting from issuing restricted stock
related to merger synergies, and charges of $4 for severance payments
recorded as cash was expended. The restrictions on the stock awards
lapse to the extent that synergy goals are achieved.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
----------------- -------------- ---------------------
Balance at January 29, 2000....................................... $ 130 $ 29 $ 29
Additions...................................................... -- -- 10
Payments....................................................... (17) (11) (4)
------ ------ ------
Balance at February 3, 2001....................................... 113 18 35
Additions...................................................... -- -- 4
Payments....................................................... (14) (8) (9)
------ ------ ------
Balance at August 18, 2001........................................ $ 99 $ 10 $ 30
====== ====== ======
3. ONE-TIME ITEMS
In addition to the merger-related costs described above, the Company
incurred pre-tax one-time expenses of $24 and $89 for year-to-date 2001
and 2000, respectively. The one-time items incurred during 2001
included approximately $5 related primarily to product costs for excess
capacity included as merchandise costs. The remaining $19 in 2001 was
included in operating, general and administrative costs and related to
employee severance and system conversion costs. All of the costs during
2001 represented cash expenditures. The one-time items incurred during
the second quarter of 2001 totaled approximately $9. The second
quarter, 2001, items included approximately $2 recorded as merchandise
costs, and approximately $7 recorded as operating, general, and
administrative costs. The one-time items incurred during 2000 included
approximately $19 for inventory write-downs included as merchandise
costs. The remaining $70 in 2000 was included in operating, general and
administrative costs and related to the closing of stores, severance
expenses related to headcount reductions, and other miscellaneous
costs. Of the $70, $15 represented cash expenditures and $55
represented charges that were accrued during the quarters. During the
first quarter of 2000, we recorded a pre-tax impairment charge of $191.
We identified impairment losses for assets to be disposed of, assets to
be held and used, and certain investments in former suppliers that have
experienced financial difficulty and with whom supply arrangements have
ceased.
4. INCOME TAXES
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of state taxes and non-deductible goodwill.
5. EARNINGS PER COMMON SHARE
Diluted earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding, after giving
effect to dilutive stock options.
The following table provides a reconciliation of earnings and shares
used in calculating basic earnings per share to those used in
calculating diluted earnings per share.
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For the Quarter Ended For the Quarter Ended
August 18, 2001 August 12, 2000
----------------------------------------- -----------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------
Basic earnings per common share....... $ 256 805 $ 0.32 $ 208 824 $ 0.25
Dilutive effect of stock options and
warrants.......................... -- 22 -- 23
-------- -------- -------- --------
Diluted earnings per common share.... $ 256 827 $ 0.31 $ 208 847 $ 0.25
======== ======== ======== ========
For the Two Quarters Ended For the Two Quarters Ended
August 18, 2001 August 12, 2000
----------------------------------------- -----------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
-----------------------------------------------------------------------------------
Basic earnings per common share....... $ 559 809 $ 0.69 $ 308 828 $ 0.37
Dilutive effect of stock options and
warrants.......................... -- 21 -- 21
-------- -------- -------- --------
Diluted earnings per common share.... $ 559 830 $ 0.67 $ 308 849 $ 0.36
======== ======== ======== ========
6. RECENTLY ISSUED ACCOUNTING STANDARDS
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for the
Company as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in the Company recording a liability of $9 million with a
corresponding charge recorded as additional paid-in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the immateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings.
The Company assesses, both at inception of the hedge and on an ongoing
basis, whether derivatives used as hedging instruments are highly
effective in offsetting the changes in the fair value or cash flow of
hedged items. If it is determined that a derivative is not highly
effective as a hedge or ceases to be highly effective, the Company
discontinues hedge accounting prospectively.
As of August 18, 2001, year-to-date derivative instrument liability
totaled $15 million. These instruments are designated as, and are
considered, effective cash flow hedges. Hedge ineffectiveness was not
material during the quarter ended August 18, 2001. A corresponding
charge was recorded as a part of additional paid-in capital, net of
income tax effects.
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Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning
in the first quarter of 2002. These issues address the appropriate
accounting for certain vendor contracts and loyalty programs. The
Company continues to assess the effect these new standards will have on
the financial statements. The Company expects the adoption of these
standards will not have a material effect on our financial statements.
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets," were issued by the Financial Accounting
Standards Board in late June of 2001. SFAS 141 is effective for all
business combinations initiated after June 30, 2001 and SFAS 142 will
become effective for the Company on February 3, 2002. The Company is
currently analyzing the effect the adoption of these standards will
have on its financial statements.
Statement on Financial Accounting Standards ("SFAS") No. 143, "Asset
Retirement Obligations," was issued by the Financial Accounting
Standards Board in August of 2001. SFAS 143 will become effective for
The Kroger Co. on February 2, 2003. The company is currently analyzing
the effect this standard will have on its financial statements.
7. GUARANTOR SUBSIDIARIES
Certain of the Company's Senior Notes and Senior Subordinated Notes
(the "Guaranteed Notes") are jointly and severally, fully and
unconditionally guaranteed by certain Kroger subsidiaries (the
"Guarantor Subsidiaries"). At August 18, 2001, a total of approximately
$6.0 billion of Guaranteed Notes were outstanding. The Guarantor
Subsidiaries and non-guarantor subsidiaries are wholly owned
subsidiaries of Kroger. Separate financial statements of Kroger and
each of the Guarantor Subsidiaries are not presented because the
guarantees are full and unconditional and the Guarantor Subsidiaries
are jointly and severally liable. The Company believes that separate
financial statements and other disclosures concerning the Guarantor
Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an
individual and aggregate basis of consolidated assets, pretax earnings,
cash flow, and equity. Therefore, the non-guarantor subsidiaries'
information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor
Subsidiaries to make payments under the guarantees referred to above,
but the obligations of each guarantor under its guarantee are limited
to the maximum amount as will result in obligations of such guarantor
under its guarantee not constituting a fraudulent conveyance or
fraudulent transfer for purposes of Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any
similar Federal or state law (e.g., adequate capital to pay dividends
under corporate laws).
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The following tables present summarized financial information as of
August 18, 2001 and February 3, 2001 and for the quarters ended August
18, 2001 and August 12, 2000.
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF AUGUST 18, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Current assets
Cash............................................... $ 21 $ 116 $ -- $ 137
Receivables........................................ 112 537 -- 649
Inventories........................................ 388 3,651 -- 4,039
Prepaid and other current assets................... (23) 354 -- 331
---------- ---------- ---------- ----------
Total current assets.......................... 498 4,658 -- 5,156
Property, plant and equipment, net..................... 1,040 8,389 -- 9,429
Goodwill, net.......................................... 2 3,623 -- 3,625
Other assets........................................... 653 (336) -- 317
Investment in and advances to subsidiaries............. 10,689 -- (10,689) --
---------- ---------- ---------- ----------
Total assets.................................. $ 12,882 $ 16,334 $ (10,689) $ 18,527
========== ========== ========== ==========
Current liabilities
Current portion of long-term debt including
obligations under capital leases................. $ 315 $ 35 $ -- $ 350
Accounts payable................................... 242 2,876 -- 3,118
Other current liabilities.......................... 632 1,525 -- 2,157
---------- ---------- ---------- ----------
Total current liabilities..................... 1,189 4,436 -- 5,625
Long-term debt including obligations
under capital leases............................... 7,826 386 -- 8,212
Other long-term liabilities............................ 649 823 -- 1,472
---------- ---------- ---------- ----------
Total liabilities............................. 9,664 5,645 -- 15,309
---------- ---------- ---------- ----------
Shareowners' Equity.................................... 3,218 10,689 (10,689) 3,218
---------- ---------- ---------- ----------
Total liabilities and shareowners' equity..... $ 12,882 $ 16,334 $ (10,689) $ 18,527
========== ========== ========== ==========
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CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF FEBRUARY 3, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
---------------- ----------------- ----------------------------------
Current assets
Cash............................................... $ 25 $ 136 $ -- $ 161
Receivables........................................ 134 553 -- 687
Inventories........................................ 340 3,723 -- 4,063
Prepaid and other current assets................... 148 353 -- 501
---------- ---------- ---------- ----------
Total current assets.......................... 647 4,765 -- 5,412
Property, plant and equipment, net..................... 866 7,947 -- 8,813
Goodwill, net.......................................... 1 3,638 -- 3,639
Other assets........................................... 653 (338) -- 315
Investment in and advances to subsidiaries............. 10,670 -- (10,670) --
---------- ---------- ---------- ----------
Total assets.................................. $ 12,837 $ 16,012 $ (10,670) $ 18,179
========== ========== ========== ==========
Current liabilities
Current portion of long-term debt including
obligations under capital leases................. $ 287 $ 49 $ -- $ 336
Accounts payable................................... 251 2,758 -- 3,009
Other current liabilities.......................... 449 1,588 -- 2,037
---------- ---------- ---------- ----------
Total current liabilities..................... 987 4,395 -- 5,382
Long-term debt including obligations
under capital leases............................... 7,808 402 -- 8,210
Other long-term liabilities............................ 953 545 -- 1,498
---------- ---------- ---------- ----------
Total liabilities............................. 9,748 5,342 -- 15,090
---------- ---------- ---------- ----------
Shareowners' Equity.................................... 3,089 10,670 (10,670) 3,089
---------- ---------- ---------- ----------
Total liabilities and shareowners' equity..... $ 12,837 $ 16,012 $ (10,670) $ 18,179
========== ========== ========== ==========
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CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE 12-WEEK QUARTER ENDED AUGUST 18, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Sales.................................................. $ 1,588 $ 10,092 $ (195) $ 11,485
Merchandising costs, advertising, warehousing, and
transportation..................................... 1,275 7,239 (183) 8,331
Operating, general and administrative.................. 309 1,868 -- 2,177
Rent................................................... 45 125 (12) 158
Depreciation and amortization.......................... 6 240 -- 246
Merger-related costs .................................. 2 -- -- 2
---------- ---------- ---------- ----------
Operating profit (loss)....................... (49) 620 -- 571
Interest expense....................................... (142) (10) -- (152)
Equity in earnings of subsidiaries..................... 372 -- (372) --
---------- ---------- ---------- ----------
Earnings before income tax expense and 181 610 (372) 419
extraordinary loss..........................
Tax expense (benefit).................................. (75) 238 -- 163
---------- ---------- ---------- ----------
Earnings before extraordinary loss............ 256 372 (372) 256
Extraordinary loss, net of income tax benefit.......... -- -- -- --
---------- ---------- ---------- ----------
Net earnings.................................. $ 256 $ 372 $ (372) $ 256
========== ========== ========== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE 12-WEEK QUARTER ENDED AUGUST 12, 2000
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Sales.................................................. $ 1,495 $ 9,686 $ (164) $ 11,017
Merchandising costs, advertising, warehousing, and
transportation..................................... 1,181 7,022 (152) 8,051
Operating, general and administrative.................. 230 1,829 -- 2,059
Rent................................................... 43 124 (12) 155
Depreciation and amortization.......................... 23 211 -- 234
Merger-related costs .................................. 2 -- -- 2
---------- ---------- ---------- ----------
Operating profit (loss)....................... 16 500 -- 516
Interest expense....................................... (145) (10) -- (155)
Equity in earnings of subsidiaries..................... 277 -- (277) --
---------- ---------- ---------- ----------
Earnings before income tax expense and
extraordinary loss.......................... 148 490 (277) 361
Tax expense (benefit).................................. (62) 213 -- 151
---------- ---------- ---------- ----------
Earnings before extraordinary loss............ 210 277 (277) 210
Extraordinary loss, net of income tax benefit.......... (2) -- -- (2)
---------- ---------- ---------- ----------
Net earnings.................................. $ 208 $ 277 $ (277) $ 208
========== ========== ========== ==========
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CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE TWO QUARTERS ENDED AUGUST 18, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Sales.................................................. $ 3,712 $ 23,319 $ (444) $ 26,587
Merchandising costs, advertising, warehousing, and
transportation..................................... 2,963 16,819 (416) 19,366
Operating, general and administrative.................. 594 4,418 -- 5,012
Rent................................................... 103 290 (28) 365
Depreciation and amortization.......................... 39 527 -- 566
Merger-related costs .................................. 4 -- -- 4
---------- ---------- ---------- ----------
Operating profit (loss)....................... 9 1,265 -- 1,274
Interest expense....................................... (336) (21) -- (357)
Equity in earnings of subsidiaries..................... 758 -- (758) --
---------- ---------- ---------- ----------
Earnings before income tax expense and 431 1,244 (758) 917
extraordinary loss..........................
Tax expense (benefit).................................. (128) 486 -- 358
---------- ---------- ---------- ----------
Earnings before extraordinary loss............ 559 758 (758) 559
Extraordinary loss, net of income tax benefit.......... -- -- -- --
---------- ---------- ---------- ----------
Net earnings.................................. $ 559 $ 758 $ (758) $ 559
========== ========== ========== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE TWO QUARTERS ENDED AUGUST 12, 2000
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ------------
Sales.................................................. $ 3,484 $ 22,233 $ (371) $ 25,346
Merchandising costs, advertising, warehousing, and
transportation..................................... 2,757 16,137 (343) 18,551
Operating, general and administrative.................. 628 4,180 -- 4,808
Rent................................................... 92 292 (28) 356
Depreciation and amortization.......................... 51 490 -- 541
Merger-related costs and asset impairment charges ..... 11 191 -- 202
---------- ---------- ---------- ----------
Operating profit (loss)....................... (55) 943 -- 888
Interest expense....................................... (335) (26) -- (361)
Equity in earnings of subsidiaries..................... 519 -- (519) --
---------- ---------- ---------- ----------
Earnings before income tax expense and 129 917 (519) 527
extraordinary loss..........................
Tax expense (benefit).................................. (181) 398 -- 217
---------- ---------- ---------- ----------
Earnings before extraordinary loss............ 310 519 (519) 310
Extraordinary loss, net of income tax benefit.......... (2) -- -- (2)
---------- ---------- ---------- ----------
Net earnings.................................. $ 308 $ 519 $ (519) $ 308
========== ========== ========== ==========
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CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR TWO QUARTERS ENDED AUGUST 18, 2001
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ------------
Net cash provided by operating activities.............. $ 805 $ 1,020 $ 1,825
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures............................ (85) (1,063) (1,148)
Other........................................... (80) 32 (48)
---------- ---------- ----------
Net cash used by investing activities.................. (165) (1,031) (1,196)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........ 1,290 -- 1,290
Reductions in long-term debt.................... (1,262) (30) (1,292)
Proceeds from issuance of capital stock......... 46 -- 46
Treasury stock purchases........................ (485) -- (485)
Other........................................... (214) 2 (212)
Net change in advances to subsidiaries.......... (19) 19 --
---------- ---------- ----------
Net cash used by financing activities.................. (644) (9) (653)
---------- ---------- ----------
Net (decrease) increase in cash and temporary cash
investments........................................ (4) (20) (24)
Cash and temporary investments:
Beginning of year............................... 25 136 161
---------- ---------- ----------
End of year..................................... $ 21 $ 116 $ 137
========== ========== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE TWO QUARTERS ENDED AUGUST 12, 2000
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ------------
Net cash provided by operating activities.............. $ 797 $ 1,152 $ 1,949
---------- ---------- ----------
Cash flows from investing activities:
Capital expenditures............................ (20) (818) (838)
Other........................................... (68) (6) (74)
---------- ---------- ----------
Net cash used by investing activities.................. (88) (824) (912)
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........ 525 -- 525
Reductions in long-term debt.................... (1,301) (59) (1,360)
Proceeds from issuance of capital stock......... 37 -- 37
Treasury stock purchases........................ (310) -- (310)
Other........................................... (9) (46) (55)
Net change in advances to subsidiaries.......... 341 (341) --
---------- ---------- ----------
Net cash used by financing activities.................. (717) (446) (1,163)
---------- ---------- ----------
Net decrease in cash and temporary cash
investments........................................ (8) (118) (126)
Cash and temporary investments:
Beginning of year............................... 30 251 281
---------- ---------- ----------
End of year..................................... $ 22 $ 133 $ 155
========== ========== ==========
12
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis should be read in conjunction with the
consolidated financial statements.
RESULTS OF OPERATIONS
Total sales for the second quarter of 2001 increased 4.2% to $11.5
billion while year-to-date sales increased 4.9% to $26.6 billion. The
increase in sales is attributable to an increase in comparable and
identical store sales and an increase in the number of stores due to
new store openings and acquisitions. Identical food store sales, which
include stores that have been in operation and have not been expanded
or relocated for four quarters, grew 0.8% from the second quarter of
2000. Comparable food stores sales, which include relocations and
expansions, increased 1.6% over the prior year.
During the second quarter of 2001, we opened, acquired, relocated, or
expanded 38 food stores, remodeled 22 food stores and closed 19 food
stores. We operated 2,392 food stores at August 18, 2001 compared to
2,338 food stores at August 12, 2000. As of August 18, 2001, food store
square footage totaled 128 million. This represents an increase of 4.0%
over August 12, 2000.
The gross profit rate during the second quarter, excluding one-time
expenses and the effect of LIFO, was 27.6% in 2001 and 27.0% in 2000.
On this same basis, our year-to-date gross profit rate was 27.3% in
2001 and 26.9% in 2000. During the second quarter of 2001, we incurred
$2 million of one-time expenses included in merchandise costs, bringing
our year-to-date one-time costs included in merchandise costs for 2001
to $5 million. This compares to $4 million during the second quarter of
2000 and $19 million for year-to-date 2000. Including these one-time
expenses, gross profit rates were 27.5% for the second quarter of 2001
and 27.2% year-to date 2001 compared to 27.0% for the second quarter of
2000 and 26.9% for year-to-date 2000. This increase is primarily the
result of synergy savings, reductions in product costs through our
corporate-wide merchandising programs, and increases in corporate brand
sales and profitability. The economies of scale created by the merger
have enabled Kroger to reduce costs through coordinated purchasing.
Technology and logistics efficiencies have also led to improvements in
category management and various other aspects of our operations,
resulting in a decreased cost of product.
We incurred $7 million of pre-tax one-time operating, general and
administrative expenses in the second quarter of 2001 compared to $4
million during the second quarter of 2000. Year-to-date these costs
were $19 million for 2001 and $70 million for 2000. Excluding these
one-time items, operating, general and administrative expenses as a
percent of sales were 18.9% during the second quarter of 2001 and 18.8%
year-to-date 2001. These rates compare to 18.7% during the second
quarter and year-to-date 2000. Including these one-time items,
operating, general and administrative expenses as a percent of sales
were 19.0% in the second quarter of 2001 and 18.9% year-to-date 2001
compared to 18.7% in the second quarter of 2000 and 19.0% year-to-date
2000. Operating, general and administrative expenses as a percent of
sales increased from the prior year primarily because of higher utility
and health care benefit costs, offset by increased productivity.
The effective tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and non-deductible
goodwill. Total goodwill amortization was $26 million in the second
quarter of 2001 and $57 million year-to-date 2001 compared to $23
million in the second quarter of 2000 and $54 million year-to-date
2000.
Net earnings were $256 million or $0.31 per diluted share for the
second quarter of 2001. These results represent an increase of
approximately 24% over net earnings of $0.25 per diluted share for the
second quarter of 2000. Year-to-date net earnings were $559 million or
$0.67 per diluted share, which represent an increase of approximately
86% over net earnings of $0.36 per diluted share for year-to-date 2000.
Net earnings, excluding merger-related costs and one-time items, were
$263 million or $0.32 per diluted share in the second quarter of 2001.
These results represent an increase of approximately 19% over net
earnings of $224 million, or $0.27 per diluted share excluding
merger-related costs, the impairment charge, and one-time items, for
the second quarter of 2000. On this same basis, year-to-date earnings
before extraordinary loss were $576 million or $0.69 per diluted share,
which represent an increase of approximately 19% over earnings of $495
million or $0.58 per diluted share.
13
15
MERGER-RELATED COSTS AND OTHER ONE-TIME EXPENSES
Total pre-tax merger-related costs incurred were $2 million during the
second quarter of 2001, and $2 million during the second quarter of
2000. The year-to-date pre-tax merger costs incurred were $4 million
during 2001 and $11 million during 2000.
During the first quarter of 2000, we recorded a pre-tax impairment
charge of approximately $191 million. We identified impairment losses
for assets to be disposed of, assets to be held and used, and certain
investments in former suppliers that have experienced financial
difficulty and with whom supply arrangements have ceased.
In addition to pre-tax merger-related costs that are shown separately
on the Consolidated Statements of Earnings, we also incurred other
pre-tax one-time expenses that are included in merchandise costs and
operating, general and administrative expenses. The one-time expenses
of $9 million during the second quarter and $24 million year to date
2001, and $8 million during the second quarter and $89 million
year-to-date 2000, were costs related to recent mergers.
The table below details our pre-tax merger-related costs and one-time
items:
2nd Quarter Ended Two Quarters Ended
------------------------------- -------------------------------
August 18, August 12, August 18, August 12,
2001 2000 2001 2000
------------------------------- -------------------------------
(in millions) (in millions)
Merger-related costs...................................... $ 2 $ 2 $ 4 $ 11
--------- --------- --------- --------
One-time items related to mergers included in:
Merchandise costs...................................... 2 4 5 19
Operating, general and administrative.................. 7 4 19 70
--------- --------- --------- --------
Total one-time items...................................... 9 8 24 89
--------- --------- --------- --------
Impairment charge......................................... -- -- -- 191
--------- --------- --------- --------
Total merger-related costs and other one-time items....... $ 11 $ 10 $ 28 $ 291
========= ========= ========= ========
Please refer to footnotes two and three of the financial statements for
more information on these costs.
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
---------------
During the second quarter of 2001, we invested approximately $180
million to repurchase approximately 7 million shares of Kroger stock at
an average price of $25.30 per share. During the first two quarters of
2001, we repurchased approximately 19.9 million shares of our common
stock at an average price of $24.19. During the second quarter of 2001,
we purchased approximately 1 million shares to complete our $750
million stock repurchase plan. We also purchased approximately 5
million shares under the $1 billion authorization and approximately 1
million shares under our program to repurchase common stock funded by
the proceeds and tax benefits from stock option exercises.
We had several lines of credit totaling $3.5 billion, with borrowings
of $1.4 billion at August 18, 2001. In addition, we had a fully
borrowed $457 million synthetic lease credit facility and a $150
million money market line with no borrowings at August 18, 2001.
Net debt was $8.5 billion at the end of the second quarter of 2001, an
increase of $391 million as compared to the second quarter of the prior
year. Net debt is defined as long-term debt, including capital leases
and current portion thereof, less investments in debt securities and
prefunded employee benefits. Net debt increased $207 million from
year-end 2000. These increases are primarily the result of the
increased investment in working capital and stock repurchases.
14
16
Our bank credit facilities and the indentures underlying our publicly
issued debt contain various restrictive covenants. Some of these
covenants are based on EBITDA, which we define as earnings before
interest, taxes, depreciation, amortization, LIFO, extraordinary
losses, and one-time items. The ability to generate EBITDA at levels
sufficient to satisfy the requirements of these agreements is a key
measure of our financial strength. We do not intend to present EBITDA
as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe the presentation of EBITDA
is important for understanding our performance compared to our debt
covenants. The calculation of EBITDA is based on the definition
contained in our bank credit facilities. This may be a different
definition than other companies use. We were in compliance with all
EBITDA-based bank credit facilities and indenture covenants on August
18, 2001.
The following is a summary of the calculation of EBITDA for the first
quarter of 2001 and 2000.
2nd Quarter Ended Two Quarters Ended
---------------------------------- --------------------------------
August 18, August 12, August 18, August 12,
2001 2000 2001 2000
---------------------------------- --------------------------------
(in millions) (in millions)
Earnings before tax expense and extraordinary loss...... $ 419 $ 361 $ 917 $ 527
Interest................................................ 152 155 357 361
Depreciation............................................ 220 211 509 487
Goodwill amortization................................... 26 23 57 54
LIFO.................................................... 8 4 20 16
One-time items included in merchandise costs............ 2 4 5 19
One-time items included in operating, general and
administrative expenses.............................. 7 4 19 70
Merger-related costs.................................... 2 2 4 11
Impairment charges...................................... -- -- -- 191
Rounding................................................ 1 (1) -- (1)
--------- --------- --------- ---------
EBITDA.................................................. $ 837 $ 763 $ 1,888 $ 1,735
========= ========= ========= =========
Cash Flow
---------
We generated $1.83 billion of cash from operating activities during the
first two quarters of 2001 compared to $1.95 billion during the first
two quarters of 2000. Cash flow from operating activities decreased in
the first two quarters of 2001 largely due to an increase in working
capital and an increase in cash tax payments.
Investing activities used $1.20 billion of cash during the first two
quarters of 2001 compared to $912 million in 2000. This increase in use
of cash was primarily because of payments for acquisitions and
increased capital spending.
Financing activities used $653 million of cash during the first two
quarters of 2001 compared to $1.16 billion during the first two
quarters of 2000. This reduction in the use of cash was primarily
because of proceeds received from the issuance of debt during 2001
offset by an increase in treasury stock purchases.
CAPITAL EXPENDITURES
Capital expenditures including acquisitions totaled $540 million in the
second quarter of 2001 compared to $384 million in the second quarter
of 2000. During the second quarter of 2001 we opened, acquired,
expanded, or relocated 38 food stores. We had 19 operational closings
and completed 22 within the wall remodels. Square footage increased
4.0%.
15
17
OTHER ISSUES
Kroger has completed the $750 million stock repurchase program
announced in April 2000 and continues to repurchase Kroger stock under
the $1 billion repurchase program authorized in March 2001.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning
in the first quarter of 2002. These issues address the appropriate
accounting for certain vendor contracts and loyalty programs. The
Company continues to assess the effect these new standards will have on
the financial statements. The Company expects the adoption of these
standards will not have a material effect on our financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets"
were issued by the Financial Accounting Standards Board in late June of
2001. SFAS 141 is effective for all business combinations initiated
after June 30, 2001 and SFAS 142 will become effective for The Kroger
Co. on February 3, 2002. We are currently analyzing the effect the
adoption of these standards will have on its financial statements.
Statement on Financial Accounting Standards ("SFAS") No. 143, "Asset
Retirement Obligations," was issued by the Financial Accounting
Standards Board in August of 2001. SFAS 143 will become effective for
The Kroger Co. on February 2, 2003. The company is currently analyzing
the effect this standard will have on its financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for
Kroger as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in Kroger recording a liability of $9 million with a
corresponding charge recorded as additional paid in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the immateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings.
We assess, both at inception of the hedge and on an ongoing basis,
whether derivatives used as hedging instruments are highly effective in
offsetting the changes in the fair value or cash flow of hedged items.
If we determine that a derivative is not highly effective as a hedge or
ceases to be highly effective, we discontinue hedge accounting
prospectively.
As of August 18, 2001, we recorded a year-to-date liability of $15
million related to the fair value of its derivative instruments. These
instruments are designated as, and are considered, effective cash flow
hedges. Hedge ineffectiveness was not material during the quarter ended
August 18, 2001. We recorded a corresponding charge as a part of
additional paid in capital, net of income tax effects.
16
18
OUTLOOK
Information provided by us, including written or oral statements made
by our representatives, may contain forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, which address
activities, events or developments that we expect or anticipate will or
may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of our
business, future capital expenditures and our business strategy,
contain forward-looking information. Statements elsewhere in this
report and below regarding our expectations, hopes, beliefs,
intentions, or strategies are also forward looking statements. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. While we believe that the statements
are accurate, uncertainties and other factors could cause actual
results to differ materially from those statements. In particular:
- We expect to reduce net operating working capital as
compared to the third quarter of 1999 by a total of
$500 million by the end of the third quarter 2004.
Our ability to achieve this reduction could be
adversely affected by: increases in product costs;
our ability to obtain sales growth from new square
footage; competitive activity in the markets in which
we operate; changes in our product mix; changes in
laws and regulations; and other factors. We calculate
net operating working capital as detailed in the
table below. As of the end of the second quarter of
2001, net operating working capital increased $235
million since the second quarter of 2000. A
calculation of net operating working capital, after
reclassification of certain balance sheet amounts,
based on our definition for the third quarter of
1999, the second quarter of 2000, and the second
quarter of 2001 is provided below:
Third Second Second
Quarter Quarter Quarter
1999 2000 2001
-------------------------------------
(in millions)
Cash................................. $ 283 $ 155 $ 137
Receivables.......................... 633 583 649
FIFO inventory....................... 4,632 4,133 4,375
Operating prepaid and other assets... 200 252 256
Accounts payable..................... (3,222) (2,940) (3,118)
Operating accrued liabilities........ (1,937) (1,932) (1,851)
Prepaid VEBA......................... -- (56) (18)
------- -------- --------
Working capital ..................... $ 589 $ 195 $ 430
======== ======== ========
- We obtain sales growth from new square footage, as
well as from increased productivity from existing
locations. We expect 2001 full year square footage to
grow 4.0% to 4.5%, excluding major acquisitions. We
expect combination stores to increase our sales per
customer by including numerous specialty departments,
such as pharmacies, natural food products, fuel
centers, seafood shops, floral shops, and bakeries.
We believe the combination store format will allow us
to complete effectively with other food retailers,
supercenters, mass merchandisers, club or warehouse
stores, drug stores and restaurants. Our square
footage growth may not meet our expectations if real
estate projects are not completed as scheduled or if
a general economic downturn causes us to delay
projects. Our projected increases in sales per
customer may not be achieved if customers reduce
spending for "non-essential" items in our specialty
departments.
- Our targeted annual earnings per share growth is
16%-18% through the fiscal year ending February 1,
2003 and 15% thereafter. Our ability to achieve this
growth could be adversely affected by: general
economic conditions; competitive activity in the
markets in which we operate; increases in product
costs; prolonged union work stoppages; interest rate
fluctuations; our ability to obtain sales growth from
new square footage; and other factors not
specifically identified.
17
19
- Capital expenditures reflect our strategy of growth
through expansion and acquisition as well as our
emphasis on self-development and ownership of real
estate, and on logistics and technology improvements.
The continued capital spending in technology focusing
on improved store operations, logistics,
manufacturing procurement, category management,
merchandising and buying practices, should reduce
merchandising costs as a percent of sales. We expect
our capital expenditures for fiscal 2001 to total
$2.0 billion, excluding acquisitions. We intend to
use the combination of free cash flow from operations
and borrowings under credit facilities to finance
capital expenditure requirements. If determined
preferable, we may fund capital expenditure
requirements by mortgaging facilities, entering into
sale/leaseback transactions, or by issuing additional
debt or equity.
- Based on current operating results, we believe that
operating cash flow and other sources of liquidity,
including borrowings under our commercial paper
program and bank credit facilities, will be adequate
to meet anticipated requirements for working capital,
capital expenditures, interest payments and scheduled
principal payments for the foreseeable future. We
also believe we have adequate coverage of our debt
covenants to continue responding effectively to
competitive conditions.
- A decline in sufficient cash flows to support capital
expansion plans, share repurchase programs and
general operating activities could cause our growth
to slow significantly and may cause us to miss our
earnings targets, because we obtain some of our sales
growth from new square footage.
- The grocery retailing industry continues to
experience fierce competition from other grocery
retailers, supercenters, club or warehouse stores,
and drug stores. Our ability to maintain our current
success is dependent upon our ability to compete in
this industry and continue to reduce operating
expenses. The competitive environment may cause us to
reduce our prices in order to gain or maintain share
of sales, thus reducing margins. While we believe our
opportunities for sustained, profitable growth are
considerable, unanticipated actions of competitors
could impact our share of sales and net income.
- Changes in laws and regulations, including changes in
accounting standards, taxation requirements, and
environmental law may have a material impact on our
financial statements.
- Changes in the general business and economic
conditions in our operating regions, including the
rate of inflation, population growth, and employment
and job growth in the markets in which we operate may
affect our ability to hire and train qualified
employees to operate our stores. This would
negatively affect earnings and sales growth. General
economic changes may also effect the shopping habits
of our customers, which could affect sales and
earnings.
- Changes in our product mix may negatively affect
certain financial indicators. For example, we have
added and will continue to add supermarket fuel
centers. Since gasoline is a low profit margin item
with high sales dollars, we expect to see our gross
profit margins decrease as we sell more gasoline.
Although this negatively affects our gross profit
margin, gasoline provides a positive affect on EBITDA
and net earnings.
- Our ability to integrate any companies we acquire or
have acquired and achieve operating improvements at
those companies will affect our operations.
- We retain a portion of the exposure for our workers'
compensation and general liability claims. It is
possible that these claims may cause significant
expenditures that would affect our operating cash
flows.
- Our capital expenditures could fall outside of the
expected range if we are unsuccessful in acquiring
suitable sites for new stores, if development costs
exceed those budgeted, or if our logistics and
technology projects are not completed in the time
frame expected or on budget.
- Adverse weather conditions could increase the cost
our suppliers charge for our products, or may
decrease the customer demand for certain products.
Additionally, increases in the cost of inputs, such
as utility costs or raw material costs, could
negatively impact financial ratios and net earnings.
- Although we currently operate only in the United
States, the prices we are charged for imported goods
could be affected by civil unrest in foreign
countries where our suppliers do business. If we are
unable to pass these increases on to our customers
our gross margin and EBITDA will suffer.
18
20
- Interest rate fluctuation and other capital market
conditions may cause variability in earnings.
Although we use derivative financial instruments to
reduce our net exposure to financial risks, we are
still exposed to interest rate fluctuations and other
capital market conditions.
- We cannot foresee the effects of the tragic events of
September 11, 2001, or the general economic downtown,
upon the Company's business.
Other factors and assumptions not identified above could also cause
actual results to differ materially from those set forth in the
forward-looking information. Accordingly, actual events and results may
vary significantly from those included in or contemplated or implied by
forward-looking statements made by our representatives or us.
19
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from the changes in interest rates as a
result of borrowing activities. We continue to utilize interest rate
swaps and caps to limit our exposure to rising interest rates. We use
derivatives primarily to fix the rates on variable debt and limit the
floating rate debt to a total of $2.3 billion or less.
There have been no significant changes in our exposure to market risk
from the information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk on our Form 10-K filed with the SEC on
May 2, 2001.
20
22
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) June 21, 2001 - Annual Meeting
(b) The shareholders elected four directors to serve until the
annual meeting of shareholders in 2004 or until their
successors have been elected and qualified and ratified the
selection of PricewaterhouseCoopers LLP, as Company auditors
for 2001. The shareholders also adopted a shareholder proposal
requesting that the Board of Directors take steps to implement
the annual election of all Board members as opposed to
election in classes and defeated a shareholder proposal
recommending the Company label and identify all products sold
under its brand names or private labels that may contain
genetically engineered crops, organisms or products.
Votes were cast as follows:
For Withheld
----------- -----------
To Serve Until 2004
-------------------
John L. Clendenin 602,206,422 134,802,546
David B. Dillon 605,593,361 131,415,607
Bruce Karatz 606,339,537 130,669,431
Thomas H. O'Leary 602,339,635 134,669,333
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
PricewaterhouseCoopers LLP 724,044,937 8,788,911 4,175,120 --
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
Shareholder proposal
(declassify Board) 399,384,890 251,811,552 11,002,368 74,810,158
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
Shareholder proposal
(genetically engineered items) 91,492,862 506,219,156 64,486,792 74,810,158
21
23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries are not
filed as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets of the
Company. The Company undertakes to file these instruments with
the Commission upon request.
EXHIBIT 99.1 - Additional Exhibits - Statement of Computation
of Ratio of Earnings to Fixed Charges.
(b) The Company disclosed and filed a new 364 - Day Credit
Agreement and Five-Year Credit Agreement, both dated as of May
23, 2001, in its Current Report on Form 8-K dated May 31,
2001; an announcement of first quarter 2001 earnings results
in its Current Report on Form 8-K dated June 26, 2001; and an
underwriting agreement, pricing agreement, and the Twelfth
Supplemental Indenture related to the issuance of $250,000,000
of Debt Securities in the form of Puttable Reset Securities
due 2012 in its Current Report on Form 8-K dated August 16,
2001.
22
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE KROGER CO.
Dated: October 1, 2001 By: /s/ Joseph A. Pichler
----------------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: October 1, 2001 By: /s/ M. Elizabeth Van Oflen
----------------------------------
M. Elizabeth Van Oflen
Vice President and
Corporate Controller
25
Exhibit Index
-------------
Exhibit 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1
of the Company's Quarterly Report on Form 10-Q for
the quarter ended October 3, 1998. The Company's
Regulations are incorporated by reference to
Exhibit 4.2 of the Company's Registration Statement
on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and
bearing Registration No. 33-57552.
Exhibit 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries
are not filed as Exhibits because the amount of
debt under each instrument is less than 10% of the
consolidated assets of the Company. The Company
undertakes to file these instruments with the
Commission upon request.
Exhibit 10.1 - 364 - Day Credit Agreement and Five- Year Credit
Agreement, both dated as of May 23, 2001, among The
Kroger Co., as Borrower; the Initial Lenders named
therein; Citibank, N.A. and The Chase Manhattan
Bank, as Administrative Agents; and Bank of
America, N.A., Bank One, N.A., and The Bank of New
York, as Co-Syndication Agents. Incorporated by
reference to Exhibit 99.1 and 99.2 of the Company's
Current Report on Form 8-K dated May 31, 2001.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of
Ratio of Earnings to Fixed Charges.