UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q/A
Amendment No. 1
| x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended May 21, 2005
OR
| ¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-303
THE KROGER CO.
(Exact name of registrant as specified in its charter)
| Ohio | 31-0345740 | |
| (State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) |
1014 Vine Street, Cincinnati, OH 45202
(Address of principal executive offices)
(Zip Code)
(513) 762-4000
(Registrant’s telephone number, including area code)
Unchanged
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨.
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes x No ¨.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x.
There were 723,983,634 shares of Common Stock ($1 par value) outstanding as of June 24, 2005.
EXPLANATORY NOTE:
This filing is made to restate the May 21, 2005 and January 29, 2005 balance sheets contained herein to correct errors in accumulated earnings and deferred income taxes related to the matters described in the January 29, 2005 Form 10-K/A Amendment No. 2.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
| First Quarter Ended | ||||||
| May 21, 2005 |
May 22, 2004 | |||||
| Sales |
$ | 17,948 | $ | 16,905 | ||
| Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
13,442 | 12,523 | ||||
| Operating, general and administrative |
3,296 | 3,209 | ||||
| Rent |
203 | 212 | ||||
| Depreciation and amortization |
389 | 372 | ||||
| Operating Profit |
618 | 589 | ||||
| Interest expense |
159 | 172 | ||||
| Earnings before income tax expense |
459 | 417 | ||||
| Income tax expense |
165 | 154 | ||||
| Net earnings |
$ | 294 | $ | 263 | ||
| Net earnings per basic common share |
$ | 0.40 | $ | 0.35 | ||
| Average number of common shares used in basic calculation |
727 | 741 | ||||
| Net earnings per diluted common share |
$ | 0.40 | $ | 0.35 | ||
| Average number of common shares used in diluted calculation |
732 | 749 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
| May 21, 2005 (as restated) |
January 29, 2005 (as restated) |
|||||||
| ASSETS |
||||||||
| Current assets |
||||||||
| Cash and temporary cash investments |
$ | 135 | $ | 144 | ||||
| Deposits in-transit |
521 | 506 | ||||||
| Receivables |
616 | 661 | ||||||
| Receivables - Taxes |
— | 167 | ||||||
| FIFO Inventory |
4,676 | 4,729 | ||||||
| LIFO Credit |
(384 | ) | (373 | ) | ||||
| Prefunded employee benefits |
36 | 300 | ||||||
| Prepaid and other current assets |
272 | 272 | ||||||
| Total current assets |
5,872 | 6,406 | ||||||
| Property, plant and equipment, net |
11,466 | 11,497 | ||||||
| Goodwill |
2,192 | 2,191 | ||||||
| Other assets and investments |
394 | 397 | ||||||
| Total Assets |
$ | 19,924 | $ | 20,491 | ||||
| LIABILITIES |
||||||||
| Current liabilities |
||||||||
| Current portion of long-term debt, at face value, including obligations under capital leases and financing obligations |
$ | 71 | $ | 71 | ||||
| Accounts payable |
3,445 | 3,598 | ||||||
| Accrued salaries and wages |
570 | 659 | ||||||
| Deferred income taxes |
286 | 286 | ||||||
| Other current liabilities |
1,676 | 1,721 | ||||||
| Total current liabilities |
6,048 | 6,335 | ||||||
| Long-term debt including obligations under capital leases and financing obligations: |
||||||||
| Long-term debt, at face value, including obligations under capital leases and financing obligations |
7,376 | 7,830 | ||||||
| Adjustment to reflect fair value interest rate hedges (13) |
57 | 70 | ||||||
| Long-term debt including obligations under capital leases and financing obligations |
7,433 | 7,900 | ||||||
| Deferred income taxes |
821 | 841 | ||||||
| Other long-term liabilities |
1,837 | 1,796 | ||||||
| Total Liabilities |
16,139 | 16,872 | ||||||
| Commitments and Contingencies (Note 12) |
||||||||
| SHAREOWNERS’ EQUITY |
||||||||
| Preferred stock, $100 par, 5 shares authorized and unissued |
— | — | ||||||
| Common stock, $1 par, 1,000 shares authorized: 921 shares issued in 2005 and 918 shares issued in 2004 |
921 | 918 | ||||||
| Additional paid-in capital |
2,448 | 2,432 | ||||||
| Accumulated other comprehensive loss |
(201 | ) | (202 | ) | ||||
| Accumulated earnings |
3,914 | 3,620 | ||||||
| Common stock in treasury, at cost, 198 shares in 2005 and 190 shares in 2004 |
(3,297 | ) | (3,149 | ) | ||||
| Total Shareowners’ Equity |
3,785 | 3,619 | ||||||
| Total Liabilities and Shareowners’ Equity |
$ | 19,924 | $ | 20,491 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions and unaudited)
| Quarter Ended | ||||||||
| May 21, 2005 |
May 22, 2004 |
|||||||
| Cash Flows From Operating Activities: |
||||||||
| Net earnings |
$ | 294 | $ | 263 | ||||
| Adjustments to reconcile net earnings to net cash provided by operating activities: |
||||||||
| Depreciation and amortization |
389 | 372 | ||||||
| LIFO charge |
11 | 11 | ||||||
| Deferred income taxes |
(20 | ) | 46 | |||||
| Other |
18 | 1 | ||||||
| Changes in operating assets and liabilities net of effects from acquisitions of businesses: |
||||||||
| Inventories |
53 | (71 | ) | |||||
| Receivables |
45 | 63 | ||||||
| Deposits in-transit |
(15 | ) | 86 | |||||
| Prepaid expenses |
265 | 204 | ||||||
| Accounts payable |
(135 | ) | 82 | |||||
| Accrued expenses |
(59 | ) | (222 | ) | ||||
| Accrued income taxes |
181 | 112 | ||||||
| Contribution to company-sponsored pension plans |
(89 | ) | — | |||||
| Other |
35 | (6 | ) | |||||
| Net cash provided by operating activities |
973 | 941 | ||||||
| Cash Flows From Investing Activities: |
||||||||
| Capital expenditures, excluding acquisitions |
(401 | ) | (453 | ) | ||||
| Proceeds from sale of assets |
28 | 14 | ||||||
| Payments for acquisitions, net of cash acquired |
— | (4 | ) | |||||
| Other |
(4 | ) | (4 | ) | ||||
| Net cash used by investing activities |
(377 | ) | (447 | ) | ||||
| Cash Flows From Financing Activities: |
||||||||
| Proceeds from issuance of long-term debt |
6 | — | ||||||
| Payments for long-term debt |
(460 | ) | (321 | ) | ||||
| Financing charges incurred |
— | (4 | ) | |||||
| Increase (decrease) in book overdrafts |
(20 | ) | (79 | ) | ||||
| Proceeds from issuance of capital stock |
22 | 15 | ||||||
| Treasury stock purchases |
(153 | ) | (121 | ) | ||||
| Net cash used by financing activities |
(605 | ) | (510 | ) | ||||
| Net decrease in cash and temporary cash investments |
(9 | ) | (16 | ) | ||||
| Cash and temporary cash investments: |
||||||||
| Beginning of year |
144 | 159 | ||||||
| End of quarter |
$ | 135 | $ | 143 | ||||
| Supplemental disclosure of cash flow information: |
||||||||
| Cash paid during the year for interest |
$ | 190 | $ | 215 | ||||
| Cash paid (refunded) during the year for income taxes |
$ | 5 | $ | (7 | ) | |||
| Non-cash changes related to purchase acquisitions: |
||||||||
| Fair value of assets acquired |
$ | — | $ | 3 | ||||
| Goodwill recorded |
$ | — | $ | 1 | ||||
The accompanying notes are an integral part of the Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts are in millions except per share amounts.
Certain prior-year amounts have been reclassified to conform to current-year presentation.
1. ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co. and its subsidiaries. The January 29, 2005 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). 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 normal, recurring adjustments that 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 GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying consolidated financial statements should be read in conjunction with the fiscal 2004 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on April 15, 2005, as amended.
The unaudited information included in the Consolidated Financial Statements for the first quarters ended May 21, 2005 and May 22, 2004 include the results of operations of the Company for the 16-week period then ended.
Store Closing and Other Expense Allowances
All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with Statement on Financial Accounting Standards (“SFAS”) No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and lease buyouts. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.
Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Company’s policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.
The following table summarizes accrual activity for future lease obligations of stores closed in the normal course of business.
| Future Lease Obligations | ||||||||
| 2005 | 2004 | |||||||
| Balance at beginning of year |
$ | 65 | $ | 35 | ||||
| Additions |
5 | 14 | ||||||
| Payments |
(2 | ) | (3 | ) | ||||
| Adjustments |
(4 | ) | (3 | ) | ||||
| Balances at First Quarter |
$ | 64 | $ | 43 | ||||
In addition, the Company maintains a $56 liability for facility closure costs for locations closed in California prior to the Fred Meyer merger, a $14 liability relating to a charitable contribution required as a result of the Fred Meyer merger and a $11 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 2001.
2. Restatement of Financial Statements
The Company has restated its May 31, 2005 and January 29, 2005 balance sheets contained herein to correct errors in accumulated earnings and deferred income taxes related to matters described in the January 29, 2005 Form 10-K/A Amendment No. 2. These adjustments caused deferred income tax liabilities to decrease and accumulated earnings to increase by $79 as of May 21, 2005 and January 29, 2005.
The following is a summary of the effects of the changes described above:
| Consolidated Balance Sheets | ||||||||||
| May 21, 2005 |
As Previously Reported |
Adjustments | As Restated | |||||||
| Deferred income taxes |
$ | 267 | $ | 19 | $ | 286 | ||||
| Total current liabilities |
$ | 6,029 | $ | 19 | $ | 6,048 | ||||
| Deferred income taxes |
$ | 919 | $ | (98 | ) | $ | 821 | |||
| Total liabilities |
$ | 16,218 | $ | (79 | ) | $ | 16,139 | |||
| Accumulated earnings |
$ | 3,835 | $ | 79 | $ | 3,914 | ||||
| Total shareowner’s equity |
$ | 3,706 | $ | 79 | $ | 3,785 | ||||
| Fiscal Year 2004 |
As Previously Reported |
Adjustments | As Restated | |||||||
| Deferred income taxes |
$ | 267 | $ | 19 | $ | 286 | ||||
| Total current liabilities |
$ | 6,316 | $ | 19 | $ | 6,335 | ||||
| Deferred income taxes |
$ | 939 | $ | (98 | ) | $ | 841 | |||
| Total liabilities |
$ | 16,951 | $ | (79 | ) | $ | 16,872 | |||
| Accumulated earnings |
$ | 3,541 | $ | 79 | $ | 3,620 | ||||
| Total shareowner’s equity |
$ | 3,540 | $ | 79 | $ | 3,619 | ||||
3. STOCK OPTION PLANS
The Company applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations to account for its stock option plans. The Company grants options for common stock at an option price equal to the fair market value of the stock at the date of the grant. Accordingly, the Company does not record stock-based compensation expense for these options. The Company also makes restricted stock awards. Compensation expense included in net earnings for restricted stock awards totaled approximately $2 and $3, after-tax, for the first quarter of 2005 and 2004, respectively. The Company’s stock option plans are more fully described in the Company’s fiscal 2004 Annual Report on Form 10-K.
The following table illustrates the effect on net earnings, net earnings per basic common share and net earnings per diluted common share as if compensation cost for all options had been determined based on the fair market value recognition provision of SFAS No. 123, “Accounting for Stock-Based Compensation.”
| First Quarter | ||||||||
| 2005 | 2004 | |||||||
| Net earnings, as reported |
$ | 294 | $ | 263 | ||||
| Add: Stock-based compensation expense included in net earnings, net of income tax benefits |
2 | 3 | ||||||
| Subtract: Total stock-based compensation expense determined under fair value method for all awards, net of income tax benefits |
(8 | ) | (13 | ) | ||||
| Pro forma net earnings |
$ | 288 | $ | 253 | ||||
| Net earnings per basic common share, as reported |
$ | 0.40 | $ | 0.35 | ||||
| Pro forma earnings per basic common share |
$ | 0.40 | $ | 0.34 | ||||
| Net earnings per diluted common share, as reported |
$ | 0.40 | $ | 0.35 | ||||
| Pro forma earnings per diluted common share |
$ | 0.39 | $ | 0.34 | ||||
To calculate pro forma stock-based compensation, the Company estimated the fair value of each option grant, on the date of the grant, using the Black-Scholes option pricing model with the following weighted average assumptions used for grants in 2005 and 2004.
| 2005 | 2004 | |||||
| Weighted average expected volatility (based on historical volatility) |
30.83 | % | 30.13 | % | ||
| Weighted average risk-free interest rate |
4.11 | % | 3.99 | % | ||
| Expected term (based on historical results) |
8.7 years | 8.7 years |
The weighted average fair value of options granted during 2005 and 2004 was $7.64 and $7.91 respectively. The Company uses a risk-free interest rate based upon the yield of a treasury note maturing at a date that approximates the option’s expected term.
4. DEBT OBLIGATIONS
Long-term debt consists of:
| May 21, 2005 |
January 29, 2005 |
|||||||
| Credit Facility and Commercial Paper borrowings |
$ | 266 | $ | 694 | ||||
| 4.95% to 8.92% Senior Notes and Debentures due through 2031 |
6,391 | 6,391 | ||||||
| 5.00% to 10.23% mortgages due in varying amounts through 2017 |
217 | 218 | ||||||
| Other |
191 | 202 | ||||||
| Total debt, excluding capital leases and financing obligations |
7,065 | 7,505 | ||||||
| Less current portion |
(46 | ) | (46 | ) | ||||
| Total long-term debt, excluding capital leases and financing obligations |
$ | 7,019 | $ | 7,459 | ||||
5. GOODWILL, NET
The following table summarizes the changes in the Company’s net goodwill balance:
| Balance at January 29, 2005 |
$ | 2,191 | |
| Goodwill recorded |
— | ||
| Purchase accounting adjustments in accordance with SFAS No. 141 |
1 | ||
| Balance at May 21, 2005 |
$ | 2,192 | |
6. COMPREHENSIVE INCOME
Comprehensive income is as follows:
| First Quarter Ended | ||||||
| May 21, 2005 |
May 22, 2004 | |||||
| Net earnings |
$ | 294 | $ | 263 | ||
| Unrealized gain (loss) on hedging activities, net of tax(1) |
1 | — | ||||
| Comprehensive income |
$ | 295 | $ | 263 | ||
| (1) | Amount is net of tax of $1 for the first quarter of 2005. |
During 2005, other comprehensive income consisted of reclassifications of previously deferred losses on cash flow hedges into net earnings as well as market value adjustments to reflect cash flow hedges at fair value as of the respective balance sheet dates.
7. BENEFIT PLANS
The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first quarters of 2005 and 2004:
| Pension Benefits | Other Benefits | |||||||||||||||
| 2005 | 2004 | 2005 | 2004 | |||||||||||||
| Components of net periodic benefit cost: |
||||||||||||||||
| Service cost |
$ | 38 | $ | 34 | $ | 3 | $ | 3 | ||||||||
| Interest cost |
37 | 35 | 6 | 7 | ||||||||||||
| Expected return on plan assets |
(39 | ) | (38 | ) | — | — | ||||||||||
| Amortization of: |
||||||||||||||||
| Transition asset |
— | — | — | — | ||||||||||||
| Prior service cost |
2 | (2 | ) | (2 | ) | (2 | ) | |||||||||
| Actuarial (gain) loss |
8 | 3 | — | — | ||||||||||||
| Net periodic benefit cost |
$ | 46 | $ | 32 | $ | 7 | $ | 8 | ||||||||
In addition to the $89 contributed to the Company-sponsored pension plans in the first quarter of 2005, the Company is required to make cash contributions totaling $53 during the balance of fiscal 2005. The Company may elect to make additional contributions during 2005 in order to maintain its desired funding status.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded, or as and if withdrawal liability is incurred, in accordance with GAAP.
8. INCOME TAXES
The effective income tax rate was 35.9% for the first quarter of 2005 and 36.9% for the first quarter of 2004. In addition to the effect of state taxes, the effective income tax rate differed from the federal statutory rate due to a reduction of previously recorded tax contingency allowances resulting from a revision of the required allowances based on resolutions with tax authorities during the quarter.
9. EARNINGS PER COMMON SHARE
Earnings per basic common share equals net earnings divided by the weighted average number of common shares outstanding. Earnings per diluted common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options, restricted stock and warrants.
The following table provides a reconciliation of earnings before the cumulative effect of an accounting change and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share:
| First Quarter Ended May 21, 2005 |
First Quarter Ended May 22, 2004 | |||||||||||||||
| Earnings (Numerator) |
Shares (Denominator) |
Per Share Amount |
Earnings (Numerator) |
Shares (Denominator) |
Per Share Amount | |||||||||||
| Earnings per basic common share |
$ | 294 | 727 | $ | 0.40 | $ | 263 | 741 | $ | 0.35 | ||||||
| Dilutive effect of stock options and warrants |
5 | 8 | ||||||||||||||
| Earnings per diluted common share |
$ | 294 | 732 | $ | 0.40 | $ | 263 | 749 | $ | 0.35 | ||||||
The Company had options outstanding for approximately 39 shares and 27 shares during the first quarters of 2005 and 2004, respectively, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.
10. RECENTLY ISSUED ACCOUNTING STANDARDS
In December 2004, the FASB issued SFAS No. 123 (Revised 2004), “Share-Based Payment” (“SFAS No. 123R”), which replaces SFAS No. 123, supersedes APB No. 25 and related interpretations and amends SFAS No. 95 “Statement of Cash Flows.” The provisions of SFAS No. 123R are similar to those of SFAS No. 123; however, SFAS No. 123R requires all share-based payments to employees, including grants of employee stock options, to be recognized in the financial statements as compensation cost based on their fair value on the date of grant. Fair value of share-based awards will be determined using option pricing models (e.g. Black-Scholes or binomial models) and assumptions that appropriately reflect the specific circumstances of the awards.
Prior to the adoption of SFAS No. 123R, the Company is accounting for share-based compensation expense under the recognition and measurement provisions of APB No. 25, “Accounting for Stock Issued to Employees” and is following the accepted practice of recognizing share-based compensation expense over the explicit vesting period. SFAS No. 123R will require the immediate recognition at the grant date of the full share-based compensation expense for grants to retirement eligible employees, as the explicit vesting period is non-substantive. The estimated effect of applying the explicit vesting period approach versus the non-substantive approach is not material to any period presented. The Company expects to adopt SFAS No. 123R in the first quarter of fiscal 2006 and expects the adoption to reduce net earnings by $0.04-$0.06 per diluted share during fiscal 2006.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs, an amendment of ARB No. 43 Chapter 4” which clarifies that inventory costs that are “abnormal” are required to be charged to expense as incurred as opposed to being capitalized into inventory as a product cost. SFAS No. 151 provides examples of “abnormal” costs to included costs of idle facilities, excess freight and handling costs and spoilage. SFAS No. 151 will become effective for the Company’s fiscal year beginning January 29, 2006. The adoption of SFAS No. 151 is not expected to have a material effect on the Company’s Consolidated Financial Statements.
In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3. SFAS No. 154 requires retrospective application to prior periods financial statements for changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS No. 154 also requires that retrospective application of a change in accounting principle be limited to the direct effects of the change. Indirect effects of a change in accounting principle should be recognized in the period of the accounting change. SFAS No. 154 further requires a change in depreciation, amortization or depletion method for long-live, non-financial assets to be accounted for as a change in accounting estimate effected by a change in accounting principle. SFAS No. 154 will become effective for the Company’s fiscal year beginning January 29, 2006.
FASB Interpretation No. 47 (“FIN 47”) “Accounting for Conditional Asset Retirement Obligations” was issued by the FASB in March 2005. FIN 47 provides guidance relating to the identification of and financial reporting for legal obligations to perform an asset retirement activity. The Interpretation requires recognition of a liability for the fair value of a conditional asset retirement obligation when incurred if the liability’s fair value can be reasonably estimated. FIN 47 is effective no later than the end of fiscal years ending after December 15, 2005. The adoption of FIN 47 is not expected to have a material effect on the Company’s Consolidated Financial Statements.
11. GUARANTOR SUBSIDIARIES
The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and certain of its subsidiaries (the “Guarantor Subsidiaries”). At May 21, 2005, a total of approximately $6.3 billion of Guaranteed Notes were outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are direct or indirect wholly owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represented less than 3% on an individual and aggregate basis of consolidated assets, pre-tax 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. The obligations of each guarantor under its guarantee are limited to the maximum amount permitted under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g. laws requiring adequate capital to pay dividends) respecting fraudulent conveyance or fraudulent transfer.
The following tables present summarized financial information as of May 21, 2005, and January 29, 2005, and for the first quarters ended May 21, 2005 and May 22, 2004. As described in Note 2, certain amounts have been restated.
Condensed Consolidating
Balance Sheets
As of May 21, 2005
(as restated)
| The Kroger Co. |
Guarantor Subsidiaries |
Eliminations | Consolidated | ||||||||||
| Current assets |
|||||||||||||
| Cash, including temporary cash investments |
$ | 26 | $ | 109 | $ | — | $ | 135 | |||||
| Deposits in-transit |
58 | 463 | — | 521 | |||||||||
| Accounts receivable |
506 | 612 | (502 | ) | 616 | ||||||||
| Net inventories |
440 | 3,852 | — | 4,292 | |||||||||
| Prepaid and other current assets |
104 | 204 | — | 308 | |||||||||
| Total current assets |
1,134 | 5,240 | (502 | ) | 5,872 | ||||||||
| Property, plant and equipment, net |
1,464 | 10,002 | — | 11,466 | |||||||||
| Goodwill |
56 | 2,136 | — | 2,192 | |||||||||
| Other assets and investments |
— | 394 | — | 394 | |||||||||
| Investment in and advances to subsidiaries |
9,168 | — | (9,168 | ) | — | ||||||||
| Total assets |
$ | 11,822 | $ | 17,772 | $ | (9,670 | ) | $ | 19,924 | ||||
| Current liabilities |
|||||||||||||
| Current portion of long-term debt including obligations under capital leases and financing obligations |
$ | 71 | $ | — | $ | — | $ | 71 | |||||
| Accounts payable |
224 | 3,723 | (502 | ) | 3,445 | ||||||||
| Other current liabilities |
276 | 2,256 | — | 2,532 | |||||||||
| Total current liabilities |
571 | 5,979 | (502 | ) | 6,048 | ||||||||
| Long-term debt including obligations under capital leases and financing obligations |
|||||||||||||
| Face value long-term debt including obligations under capital leases and financing obligations |
7,344 | 32 | — | 7,376 | |||||||||
| Adjustment to reflect fair value interest rate hedges |
57 | — | — | 57 | |||||||||
| Long-term debt including obligations under capital leases and financing obligations |
7,401 | 32 | — | 7,433 | |||||||||
| Other long-term liabilities |
65 | 2,593 | — | 2,658 | |||||||||
| Total liabilities |
8,037 | 8,604 | (502 | ) | 16,139 | ||||||||
| Shareowners’ Equity |
3,785 | 9,168 | (9,168 | ) | 3,785 | ||||||||
| Total liabilities and shareowners’ equity |
$ | 11,822 | $ | 17,772 | $ | (9,670 | ) | $ | 19,924 | ||||
Condensed Consolidating
Balance Sheets
As of January 29, 2005
(as restated)
| The Kroger Co. |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
| Current assets |
||||||||||||||
| Cash, including temporary cash investments |
$ | 32 | $ | 112 | — | $ | 144 | |||||||
| Deposits in-transit |
20 | 486 | — | 506 | ||||||||||
| Accounts receivable |
583 | 747 | (502 | ) | 828 | |||||||||
| Net inventories |
415 | 3,941 | — | 4,356 | ||||||||||
| Prepaid and other current assets |
275 | 297 | — | 572 | ||||||||||
| Total current assets |
1,325 | 5,583 | (502 | ) | 6,406 | |||||||||
| Property, plant and equipment, net |
1,277 | 10,220 | — | 11,497 | ||||||||||
| Goodwill |
20 | 2,171 | — | 2,191 | ||||||||||
| Other assets and investments |
642 | (245 | ) | — | 397 | |||||||||
| Investment in and advances to subsidiaries |
10,668 | — | (10,668 | ) | — | |||||||||
| Total assets |
$ | 13,932 | $ | 17,729 | $ | (11,170 | ) | $ | 20,491 | |||||
| Current liabilities |
||||||||||||||
| Current portion of long-term debt including obligations under capital leases and financing obligations |
$ | 71 | $ | — | $ | — | $ | 71 | ||||||
| Accounts payable |
188 | 3,912 | (502 | ) | 3,598 | |||||||||
| Other current liabilities |
319 | 2,347 | — | 2,666 | ||||||||||
| Total current liabilities |
578 | 6,259 | (502 | ) | 6,335 | |||||||||
| Long-term debt including obligations under capital leases and financing obligations |
||||||||||||||
| Face value long-term debt including obligations under capital leases and financing obligations |
7,797 | 33 | — | 7,830 | ||||||||||
| Adjustment to reflect fair value interest rate hedges |
70 | — | — | 70 | ||||||||||
| Long-term debt including obligations under capital leases and financing obligations |
7,867 | 33 | — | 7,900 | ||||||||||
| Other long-term liabilities |
1,868 | 769 | — | 2,637 | ||||||||||
| Total liabilities |
10,313 | 7,061 | (502 | ) | 16,872 | |||||||||
| Shareowners’ Equity |
3,619 | 10,668 | (10,668 | ) | 3,619 | |||||||||
| Total liabilities and shareowners’ equity |
$ | 13,932 | $ | 17,729 | $ | (11,170 | ) | $ | 20,491 | |||||
Condensed Consolidating
Statements of Operations
For the Quarter Ended May 21, 2005
| The Kroger Co. |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
| Sales |
$ | 2,530 | $ | 15,705 | $ | (287 | ) | $ | 17,948 | |||||
| Merchandise costs, including warehousing and transportation |
2,116 | 11,611 | (285 | ) | 13,442 | |||||||||
| Operating, general and administrative |
475 | 2,821 | — | 3,296 | ||||||||||
| Rent |
56 | 149 | (2 | ) | 203 | |||||||||
| Depreciation and amortization |
25 | 364 | — | 389 | ||||||||||
| Operating profit (loss) |
(142 | ) | 760 | — | 618 | |||||||||
| Interest expense |
150 | 9 | — | 159 | ||||||||||
| Equity in earnings of subsidiaries |
489 | — | (489 | ) | — | |||||||||
| Earnings (loss) before income tax expense |
197 | 751 | (489 | ) | 459 | |||||||||
| Income tax expense (benefit) |
(97 | ) | 262 | — | 165 | |||||||||
| Net earnings |
$ | 294 | $ | 489 | $ | (489 | ) | $ | 294 | |||||
Condensed Consolidating
Statements of Operations
For the Quarter Ended May 22, 2004
| The Kroger Co. |
Guarantor Subsidiaries |
Eliminations | Consolidated | |||||||||||
| Sales |
$ | 2,221 | $ | 14,958 | $ | (274 | ) | $ | 16,905 | |||||
| Merchandise costs, including warehousing and transportation |
1,730 | 11,051 | (258 | ) | 12,523 | |||||||||
| Operating, general and administrative |
474 | 2,735 | — | 3,209 | ||||||||||
| Rent |
64 | 164 | (16 | ) | 212 | |||||||||
| Depreciation and amortization |
40 | 332 | — | 372 | ||||||||||
| Operating profit (loss) |
(87 | ) | 676 | — | 589 | |||||||||
| Interest expense |
156 | 16 | — | 172 | ||||||||||
| Equity in earnings of subsidiaries |
412 | — | (412 | ) | — | |||||||||
| Earnings (loss) before income tax expense |
169 | 660 | (412 | ) | 417 | |||||||||
| Income tax expense (benefit) |
(94 | ) | 248 | — | 154 | |||||||||
| Net earnings |
$ | 263 | $ | 412 | $ | (412 | ) | $ | 263 | |||||
Condensed Consolidating
Statements of Cash Flows
For the Quarter Ended May 21, 2005
| The Kroger Co. |
Guarantor Subsidiaries |
Consolidated | ||||||||||
| Net cash provided (used) by operating activities |
$ | (820 | ) | $ | 1,793 | $ | 973 | |||||
| Cash flows from investing activities: |
||||||||||||
| Capital expenditures |
(33 | ) | (368 | ) | (401 | ) | ||||||
| Other |
9 | 15 | 24 | |||||||||
| Net cash used by investing activities |
(24 | ) | (353 | ) | (377 | ) | ||||||
| Cash flows from financing activities: |
||||||||||||
| Proceeds from issuance of long-term debt |
6 | — | 6 | |||||||||
| Reductions in long-term debt |
(459 | ) | (1 | ) | (460 | ) | ||||||
| Proceeds from issuance of capital stock |
22 | — | 22 | |||||||||
| Treasury stock purchases |
(153 | ) | — | (153 | ) | |||||||
| Other |
(2 | ) | (18 | ) | (20 | ) | ||||||
| Net change in advances to subsidiaries |
1,424 | (1,424 | ) | — | ||||||||
| Net cash provided (used) by financing activities |
838 | (1,443 | ) | (605 | ) | |||||||
| Net decrease in cash and temporary cash investments |
(6 | ) | (3 | ) | (9 | ) | ||||||
| Cash and temporary cash investments: |
||||||||||||
| Beginning of year |
32 | 112 | 144 | |||||||||
| End of quarter |
$ | 26 | $ | 109 | $ | 135 | ||||||
Condensed Consolidating
Statements of Cash Flows
For the Quarter Ended May 22, 2004
| The Kroger Co. |
Guarantor Subsidiaries |
Consolidated | ||||||||||
| Net cash provided (used) by operating activities |
$ | (59 | ) | $ | 1,000 | $ | 941 | |||||
| Cash flows from investing activities: |
||||||||||||
| Capital expenditures |
(27 | ) | (426 | ) | (453 | ) | ||||||
| Other |
— | 6 | 6 | |||||||||
| Net cash used by investing activities |
(27 | ) | (420 | ) | (447 | ) | ||||||
| Cash flows from financing activities: |
||||||||||||
| Reductions in long-term debt |
(319 | ) | (2 | ) | (321 | ) | ||||||
| Proceeds from issuance of capital stock |
15 | — | 15 | |||||||||
| Treasury stock purchases |
(121 | ) | — | (121 | ) | |||||||
| Other |
(5 | ) | (78 | ) | (83 | ) | ||||||
| Net change in advances to subsidiaries |
518 | (518 | ) | — | ||||||||
| Net provided (used) by financing activities |
88 | (598 | ) | (510 | ) | |||||||
| Net increase (decrease) in cash and temporary cash investments |
2 | (18 | ) | (16 | ) | |||||||
| Cash and temporary cash investments: |
||||||||||||
| Beginning of year |
26 | 133 | 159 | |||||||||
| End of quarter |
$ | 28 | $ | 115 | $ | 143 | ||||||
12. COMMITMENTS AND CONTINGENCIES
The Company continually evaluates contingencies based upon the best available information.
Management believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. Allowances for loss are included in other current liabilities and other long-term liabilities. To the extent that resolution of contingencies results in amounts that vary from management’s estimates, future earnings will be charged or credited.
The principal contingencies are described below.
Insurance — The Company’s workers’ compensation risks are self-insured in certain states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers’ compensation risks is accounted for on a present value basis. The liability for general liability risks is not present-valued. Actual claim settlements and expenses incident thereto may differ from the provisions for loss.
Litigation — On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. Under the Agreement, the Company paid approximately $147 million to the other Retailers. The lawsuit raises claims that could question the validity of those payments, as well as claims that the retailers unlawfully restrained competition. On May 25, 2005, the Court denied a motion for summary judgment filed by the defendants. Ralphs and the other defendants have filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material effect, favorable or adverse, on the Company’s financial condition, results of operations or cash flows.
Ralphs Grocery Company is the defendant in a group of civil actions initially filed in 2003 and for which a coordination order was issued on January 20, 2004, in The Great Escape Promotion Cases pending in the Superior Court of California, County of Los Angeles, Case No. JCCP No. 4343. The plaintiffs allege that Ralphs violated various laws protecting consumers in connection with a promotion pursuant to which Ralphs offered travel awards to customers. The plaintiffs are seeking to certify a class of several hundred thousand customers who, they allege, were harmed by Ralphs’ inability to fulfill the promotion. In a separate action styled People v. Ralphs Grocery Co., San Diego County Superior Court, Case No. GIC 832986, the California Attorney General brought an action based on similar allegations. Ralphs agreed to and did resolve that matter to the satisfaction of the Attorney General in a Stipulation of Final Judgment providing relief for all customers who, to Ralphs knowledge, had qualified for and sought travel awards under the promotion. Despite having resolved the litigation with the Attorney General, the Company cannot predict the outcome of The Great Escape Promotion Cases nor the dollar amount of damages for which Ralphs may be found additionally liable. Based on the information presently available to the Company, however, management does not believe the ultimate outcome will have a material effect on the Company’s financial condition.
Other matters are described under the heading “Legal Proceedings” in the Company’s Annual Report on Form 10-K for the fiscal year ended January 29, 2005.
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust and civil rights laws, are pending against the Company. Some of these purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in an antitrust case will be automatically trebled. Although it is not possible at this time to evaluate the merits of all these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefore. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition or results of operation.
Guarantees – The Company periodically enters into real estate joint ventures in connection with the development of certain properties. The Company usually sells its interest in such partnerships upon completion of the projects. As of May 21, 2005, the Company was a partner with 50% ownership in two real estate joint ventures for which it has guaranteed approximately $8 of debt incurred by the ventures. Based on the covenants underlying this indebtedness as of May 21, 2005, it is unlikely that the Company will be responsible for repayment of these obligations.
Assignments – The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy obligations under leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to satisfy a material amount of these obligations is remote.
Benefit Plans – The Company administers certain non-contributory defined benefit retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. Funding for the pension plans is based on a review of the specific requirements and an evaluation of the assets and liabilities of each plan.
In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Funding for the retiree health care benefits occurs as claims or premiums are paid.
The determination of the obligation and expense for the Company’s pension and other post-retirement benefits is dependent on the Company’s selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in the Company’s fiscal 2004 Annual Report on Form 10-K and include, among others, the discount rate, the expected long-term rate of return on plan assets, and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.
In addition to the $89 contributed to Company-sponsored pension plans in the first quarter of 2005, the Company is required to make cash contributions totaling $53 during the balance of fiscal 2005. The Company may elect to make additional contributions during 2005 in order to maintain its desired funding levels. Among other things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations and future changes in legislation will determine the amounts of any additional contributions.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Although underfunding can result in the imposition of excise taxes on contributing employers, increased contributions can reduce underfunding so that excise taxes are not triggered. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined, in accordance with GAAP.
13. FAIR VALUE INTEREST RATE HEDGES
In 2003, the Company reconfigured a portion of its interest derivative portfolio by terminating six interest rate swap agreements that were accounted for as fair value hedges. Approximately $114 of proceeds received as a result of these terminations were recorded as adjustments to the carrying values of the underlying debt and are being amortized over the remaining lives of the debt. As of May 21, 2005, the unamortized balances totaled approximately $75.
At the end of the first quarter of 2005, the Company maintained 10 interest rate swap agreements that are being accounted for as fair value hedges. As of May 21, 2005, liabilities totaling $18 have been recorded to reflect the fair value of these new agreements, offset by reductions in the fair value of the underlying debt.
14. SUBSEQUENT EVENTS
On June 23, 2005, the Company’s shareholders approved The Kroger Co. 2005 Long-Term Incentive Plan (the “Plan”). A summary of the Plan is set forth in the Company’s Current Report on Form 8-K filed on June 23, 2005.
On June 28, 2005, Fitch Ratings changed its rating outlook on the Company to negative from stable and affirmed the Company’s long-term credit rating of BBB.
On June 29, 2005, Standard & Poor’s Ratings Services downgraded the Company’s long-term credit rating to BBB- with a stable outlook.
PART II – OTHER INFORMATION
Item 6. Exhibits.
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 31.1 – Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer
*EXHIBIT 31.2 – Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer
EXHIBIT 31.3 – Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer
EXHIBIT 31.4 – Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer
*EXHIBIT 32.1 – Section 1350 Certifications
EXHIBIT 32.2 – Section 1350 Certifications
*EXHIBIT 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.
EXHIBIT 99.2 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.
| * | Previously filed. |
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 6, 2006 | By: | /s/ David B. Dillon | ||
| David B. Dillon | ||||
| Chairman of the Board and Chief Executive Officer | ||||
| Dated: March 6, 2006 | By: | /s/ J. Michael Schlotman | ||
| J. Michael Schlotman | ||||
| Senior Vice President and Chief Financial Officer | ||||
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 31.1 - | Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer | |
| *Exhibit 31.2 - | Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer | |
| Exhibit 31.3 - | Rule 13a–14(a) / 15d–14(a) Certifications – Chief Executive Officer | |
| Exhibit 31.4 - | Rule 13a–14(a) / 15d–14(a) Certifications – Chief Financial Officer | |
| *Exhibit 32.1 - | Section 1350 Certifications | |
| Exhibit 32.2 - | Section 1350 Certifications | |
| *Exhibit 99.1 - | Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. | |
| Exhibit 99.2 - | Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. | |
| * | Previously filed. |