1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
|X| Quarterly report pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 for the quarterly period ended October 3, 1998 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.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
1014 VINE STREET, CINCINNATI, OH 45202
- ------------------------------------------- ----------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 762-4000
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 256,220,362 shares of Common Stock ($1 par value) outstanding as of
October 31, 1998.
2
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended October 3, 1998 and October 4,
1997 includes the results of operations of The Kroger Co. for the 16 and 40 week
periods ended October 3, 1998 and October 4, 1997, and of Dillon Companies, Inc.
for the 13 and 39 week periods ended September 26, 1998 and September 27, 1997.
In the opinion of management, the information reflects all 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. See footnotes
five and six regarding one-time expenses and an accounting change.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
3rd Quarter Ended 3 Quarters Ended
-----------------------------------------------
October 3, October 4, October 3, October 4,
1998 1997 1998 1997
---------- ---------- ----------- --------
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $8,023,906 $7,686,640 $20,854,281 $20,057,847
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 6,091,003 5,863,919 15,958,653 15,292,020
Operating, general and administrative. . . . . . . . . 1,426,686 1,365,987 3,669,521 3,520,788
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 104,301 101,238 269,895 252,072
Depreciation and amortization. . . . . . . . . . . . . 124,436 112,009 315,903 285,584
Interest expense, net. . . . . . . . . . . . . . . . . 76,856 85,213 204,116 223,313
---------- ---------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 7,823,282 7,528,366 20,418,088 19,573,777
---------- ---------- ----------- -----------
Earnings before income tax expense and
extraordinary loss . . . . . . . . . . . . . . . . . . 200,624 158,274 436,193 484,070
Income tax expense. . . . . . . . . . . . . . . . . . . 76,239 61,744 165,757 187,143
---------- ---------- ---------- -----------
Earnings before extraordinary loss. . . . . . . . . . . 124,385 96,530 270,436 296,927
Extraordinary loss (net of income tax credit) . . . . . (6,490) (802) (10,783) (9,045)
---------- ---------- ---------- -----------
Net earnings . . . . . . . . . . . . . . . . . . . $ 117,895 $ 95,728 $ 259,653 $ 287,882
========== ========== ========== ===========
Basic earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $ 0.49 $ 0.38 $ 1.06 $ 1.17
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.03) 0.00 (0.04) (0.04)
------ ------ ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $ 0.46 $ 0.38 $ 1.02 $ 1.13
====== ====== ====== ======
Average number of common shares used in basic per share
calculation. . . . . . . . . . . . . . . . . . . . . . 256,039 254,423 255,701 254,184
Diluted earnings per common share:
Earnings from operations . . . . . . . . . . . . . . . $0.47 $0.37 $ 1.02 $ 1.13
Extraordinary loss . . . . . . . . . . . . . . . . . . (0.02) 0.00 (0.04) (0.03)
----- ----- ------ ------
Net earnings . . . . . . . . . . . . . . . . . . . $0.45 $0.37 $ 0.98 $ 1.10
===== ===== ====== ======
Average number of common shares used in diluted
per share calculation. . . . . . . . . . . . . . . . . 265,415 263,078 265,237 262,575
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
3
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
October 3, December 27,
1998 1997
---------- ----------
ASSETS
Current assets
Cash. . . . . . . . . . . . . . . . . . . . . . . . . . $ 74,845 $ 65,484
Receivables . . . . . . . . . . . . . . . . . . . . . . 381,756 400,529
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 2,186,980 2,273,896
Less LIFO reserve . . . . . . . . . . . . . . . . . . (480,931) (467,931)
---------- ----------
1,706,049 1,805,965
Property held for sale. . . . . . . . . . . . . . . . . 12,919 39,672
Prepaid and other current assets. . . . . . . . . . . . 173,748 328,901
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,349,317 2,640,551
Property, plant and equipment, net. . . . . . . . . . . . 3,644,044 3,296,599
Investments and other assets. . . . . . . . . . . . . . . 474,836 364,191
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $6,468,197 $6,301,341
========== ==========
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 154,062 $ 14,304
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 10,897 10,031
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,684,968 1,781,527
Other current liabilities . . . . . . . . . . . . . . . 1,287,972 1,137,654
---------- ----------
Total current liabilities . . . . . . . . . . . . . 3,137,899 2,943,516
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,121,234 3,306,451
Obligations under capital leases. . . . . . . . . . . . . 192,938 186,624
Deferred income taxes . . . . . . . . . . . . . . . . . . 146,642 166,013
Other long-term liabilities . . . . . . . . . . . . . . . 472,705 483,585
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 7,071,418 7,086,189
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SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 1,000,000,000 shares
Issued: 1998 - 280,560,937 shares
1997 - 277,153,260 shares. . . . . . . . . . . 772,322 728,644
Accumulated deficit . . . . . . . . . . . . . . . . . . . (924,741) (1,184,394)
Common stock in treasury, at cost
1998 - 24,826,941 shares
1997 - 22,182,650 shares . . . . . . . . . . . (450,802) (329,098)
---------- ----------
Total Shareowners' Deficit (603,221) (784,848)
---------- ----------
Total Liabilities and Shareowners' Deficit. . . . . . $6,468,197 $6,301,341
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
4
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(unaudited)
3 Quarters Ended
------------------------------
October 3, October 4,
1998 1997
----------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 259,653 $ 287,882
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 10,783 9,045
Depreciation and amortization. . . . . . . . . . . . . . . . 315,903 285,584
Amortization of deferred financing costs . . . . . . . . . . 9,250 11,142
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 13,000 11,000
Net increase in cash from changes in operating
assets and liabilities, detail below . . . . . . . . . . . 407,720 295,552
Other changes, net . . . . . . . . . . . . . . . . . . . . . (9,263) (2,557)
---------- ----------
Net cash provided by operating activities . . . . . . . . 1,007,046 897,648
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CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (665,980) (421,262)
Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 40,797 20,148
Decrease in property held for sale. . . . . . . . . . . . . . . 20,983 728
Increase in other investments . . . . . . . . . . . . . . . . . (94,479) (168,893)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (698,679) (569,279)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (14,803) (7,696)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (29,307) (24,988)
Principal payments under capital lease obligations. . . . . . . (7,780) (7,154)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 626,011 645,956
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (671,470) (736,246)
Outstanding checks. . . . . . . . . . . . . . . . . . . . . . . (122,839) (164,108)
Proceeds from issuance of capital stock . . . . . . . . . . . . 42,886 33,893
Capital stock reacquired. . . . . . . . . . . . . . . . . . . . (121,704) (69,286)
---------- ----------
Net cash used by financing activities . . . . . . . . . . (299,006) (329,629)
---------- ----------
Net increase(decrease) in cash and temporary cash investments . . 9,361 (1,260)
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 65,484 67,052
---------- ----------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 74,845 $ 65,792
========== ==========
INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 86,916 $ (2,814)
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 18,773 (21,188)
Prepaid and other current assets. . . . . . . . . . . . . . . 154,920 103,434
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . 26,280 32,128
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (31,622) 6,340
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 152,453 177,652
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$ 407,720 $ 295,552
========== ==========
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
5
Supplemental disclosures of cash flow information:
3 Quarters Ended
--------------------------
October 3, October 4,
1998 1997
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Cash paid during the period for:
Interest (net of amount capitalized) $214,432 $220,663
Income taxes 169,471 126,673
- --------------------------------------------------------------------------------
The accompanying notes are an integral part of the
consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION
The year-end condensed balance sheet data was derived from audited
financial statements and, due to its summary nature, does not contain
all information required by generally accepted accounting principles.
Certain prior year amounts have been reclassified to conform to current
year presentation.
2. INCOME TAXES
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes.
3. EXTRAORDINARY LOSS
The extraordinary loss for the three quarters ended October 3, 1998 and
October 4, 1997 of $10.8 million and $9.0 million, respectively, net of
income taxes of $6.5 million and $5.7 million, respectively, is related
to the early retirement of long-term debt. The extraordinary loss for
the quarters ended October 3, 1998 and October 4, 1997, of $6.5 million
and $.8 million, respectively, net of income taxes of $3.9 million and
$.5 million, respectively, is related to the early retirement of
long-term debt.
4. EARNINGS PER COMMON SHARE
Basic earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding. 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 before
extraordinary loss and shares used in calculating basic earnings per
share to those used in calculating diluted earnings per share.
For the quarter ended For the quarter ended
OCTOBER 3, 1998 OCTOBER 4, 1997
---------------------------- ---------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator nator amount ator nator amount
-------- ------- ----- -------- ------- -----
BASIC EPS
Earnings before extraordinary
loss . . . . . . . . . . . $124,385 256,039 $0.49 $ 96,530 254,423 $0.38
EFFECT OF DILUTIVE SECURITIES
Stock option awards. . . . 9,376 8,655
-------- ------- ----- -------- ------- -----
DILUTED EPS
Income available to share-
holders plus assumed
conversions. . . . . . . $124,385 265,415 $0.47 $ 96,530 263,078 $0.37
======== ======= ===== ======== ======= =====
For 3 quarters ended For 3 quarters ended
OCTOBER 3, 1998 OCTOBER 4, 1997
--------------------------- ---------------------
Income Shares Per Income Shares Per
(Numer- (Denomi- Share (Numer- (Denomi- Share
ator nator amount ator nator amount
-------- ------- ----- -------- ------- -----
BASIC EPS
Earnings before extraordinary
loss . . . . . . . . . . . $270,436 255,701 $1.06 $296,927 254,184 $1.17
EFFECT OF DILUTIVE SECURITIES
Stock option awards. . . . 9,536 8,391
-------- ------- ----- -------- ------- -----
DILUTED EPS
Income available to share-
holders plus assumed
conversions. . . . . . . $270,436 265,237 $1.02 $296,927 262,575 $1.13
======== ======= ===== ======== ======= =====
7
5. ONE-TIME EXPENSES
In the second quarter of 1998, the Company incurred approximately $40.8
million pre-tax, $25.3 million after-tax or $.09 per diluted share, in
one-time expenses associated with its logistics initiatives. These
expenses include the costs associated with exiting a joint venture that
formerly operated as a wholesale distributor for the Company's Michigan
stores. This warehouse is now operated by a third party, with the
Company procuring and owning the inventory. These expenses also include
the transition costs related to one new Company operated warehouse
facility and one new warehouse facility operated by an unaffiliated
entity, including the carrying costs of the facilities idled as a
result of these new warehouses and the associated employee severance
costs. The expenses described above include non-cash asset writedowns
of $15.5 million and were included in merchandise costs, including
warehouse and transportation. The remaining $25.3 million includes
$11.0 million related to severance, $9.5 million related to the
carrying cost for idle facilities, and $4.8 million related to the exit
of the joint venture. Cash costs paid to date are $12.1 million and the
remaining accrual of $13.2 million at October 3, 1998 relates to
severance costs, $6.4 million, that will be paid through the second
quarter of 1999, and carrying costs for idle warehouse facilities, $6.8
million, through 2001.
Additionally, in the second quarter of 1998, the Company incurred
one-time expenses of $11.6 million pre-tax, $7.2 million after-tax or
$.03 per diluted share, associated with accounting, data and operations
consolidations in Texas, including the costs associated with closing
eight stores and relocating the remaining Dallas office employees to a
smaller facility. These expenses, which include non-cash asset
writedowns of $2.2 million, were included in Operating, General and
Administrative expenses. Cash costs paid to date are $0.6 million and
the remaining accrual of $8.8 million at October 3, 1999 represents
estimated rent or lease termination costs that will be paid on closed
stores through 2013.
6. ACCOUNTING CHANGE
In the second quarter of 1998, the Company changed its application of
the LIFO method of accounting for store inventories from the retail
method to the item cost method. The change was made to more accurately
reflect inventory value by eliminating the averaging and estimation
inherent in the retail method. The cumulative effect of this change on
periods prior to December 28, 1997 cannot be determined. The effect of
the change on the December 28, 1997 inventory valuation, which includes
other immaterial modifications in inventory valuation methods, was
included in restated results for the quarter ended March 21, 1998, and
increased merchandise costs by $89.7 million and reduced earnings
before extraordinary loss and net earnings by $55.6 million, or $0.21
per diluted share. Pro forma effects of the change for prior periods
have not been presented as cost information is not determinable. The
item cost method did not have a material impact on earnings subsequent
to its initial adoption.
7. SUBSEQUENT EVENTS
On October 19, 1998 the Company announced its intended merger with Fred
Meyer, Inc. Under the terms of the merger, Fred Meyer, Inc.
shareholders will receive one newly issued share of Kroger common stock
for each Fred Meyer, Inc. common share. The transaction will be
accounted for as a pooling of interests. It is expected to close in
early 1999 subject to approval of Kroger and Fred Meyer shareholders,
antitrust clearance and customary closing conditions. Additional
information regarding the merger can be found in the Company's current
report on Form 8-K dated October 20, 1998.
8. RECENTLY ISSUED ACCOUNTING STANDARDS
The Financial Accounting Standards Board issued Statement of Financial
Standards No. 131 "Disclosure about Segments of an Enterprise and
Related Information", No. 132 "Employers' Disclosures about Pensions
and Other Postretirement Benefits", No. 133 "Accounting for Derivative
Instruments and Hedging Activities", and No. 134 "Accounting for
Mortgage Backed Securities Retained after the Securitization of
Mortgage Loans Held for Sale by a Mortgage Banking Enterprise". The
Company has not yet determined what effect, if any, these statements
will have.
9. COMPREHENSIVE INCOME
The Company has no items of other comprehensive income in any period
presented. Therefore net earnings as presented in the Consolidated
Statement of Operations equals comprehensive income.
8
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: March 3, 1999 By: (W. Rodney McMullen)
W. Rodney McMullen
Senior Vice President
Dated: March 3, 1999 By: (J. Michael Schlotman)
J. Michael Schlotman
Vice President and
Corporate Controller -
Principal Accounting Officer