UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended January 28, 2017.30, 2021.
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐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.) |
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1014 Vine Street, Cincinnati, OH | | 45202 |
(Address of Principal Executive Offices) | | (Zip Code) |
Registrant’s telephone number, including area code (513) (513) 762-4000
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common, $1.00 Par Value | KR | |
| New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
NONE
(Title of class)
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
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Yes ☒ | | No ☐ |
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
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Yes ☐ | | No ☒ |
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 registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
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Yes ☒ | | No ☐ |
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
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Yes ☒ | | No ☐ |
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§299.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”filer,” “smaller reporting company,” and “smaller reporting“emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large accelerated filer☒ |
| Accelerated filer | ☐ | |
Non-accelerated filer |
| Smaller reporting company☐ | ||
| | Emerging growth company ☐ | ||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☒
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
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Yes ☐ | | No ☒ |
The aggregate market value of the Common Stock of The Kroger Co.voting and non-voting common equity held by non-affiliates computed by reference to the average bid and asked price of such common equity,as of August 13, 2016: $30.6the last business day of the registrant’s most recently completed second fiscal quarter (August 15, 2020). $27.6 billion. There were 914,240,326
The number of shares outstanding of the registrant's common stock, as of the latest practicable date. 751,993,701 shares of Common Stock ($1of $1 par value) outstandingvalue, as of March 22, 2017.24, 2021.
Documents Incorporated by Reference:
Portions of theKroger’s definitive proxy statement tofor its 2020 annual meeting of shareholders, which shall be filed pursuant to Regulation 14Awith the Securities and Exchange Commission within 120 days after the end of the Exchange Act on or before May 26, 2017,fiscal year to which this Report relates, are incorporated by reference into Part III of this Form 10-K.Report.
The Kroger Co.
Form 10-K
For the Fiscal Year Ended January 30, 2021
Table of Contents
PART I
FORWARD LOOKING STATEMENTS.
This Annual Report on Form 10-K contains forward-looking statements about our future performance. These statements are based on our assumptions and beliefs in light of the information currently available to us. These statements are subject to a number of known and unknown risks, uncertainties and other important factors, including the risks and other factors discussed in “Risk Factors” and “Outlook” below, that could cause actual results and outcomes to differ materially from any future results or outcomes expressed or implied by such forward looking statements. Such statements are indicated by words such as “comfortable,“achieve,” “affect,” “believe,” “committed,” “will,“continue,” “expect,“could,” “goal,“deliver,” “should,“effect,” “intend,“estimate,” “target,“expects,” “believe,“future,” “anticipate,“growth,” “intends,” “likely,” “may,” “model,” “plan,” “position,” “range,” “result,” “strategy,” “strong,” “trend,” “will” and “would,” and similar words or phrases. Moreover, statements in the sections entitled Risk Factors, Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) and Outlook,, and elsewhere in this report regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended.
ITEM 1.BUSINESS.Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
| ● | The extent to which our sources of liquidity are sufficient to meet our requirements may be affected by the state of the financial markets and the effect that such condition has on our ability to issue commercial paper at acceptable rates. Our ability to borrow under our committed lines of credit, including our bank credit facilities, could be impaired if one or more of our lenders under those lines is unwilling or unable to honor its contractual obligation to lend to us, or in the event that global pandemics, including the COVID-19 pandemic, natural disasters or weather conditions interfere with the ability of our lenders to lend to us. Our ability to refinance maturing debt may be affected by the state of the financial markets. |
| ● | Our ability to achieve sales, earnings, incremental FIFO operating profit, and adjusted free cash flow goals may be affected by: COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, the temporary inability of customers to shop due to illness, quarantine, or other travel restrictions or financial hardship, shifts in demand away from discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-filling activities, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates, temporary store closures due to reduced workforces or government mandates, or the availability and efficacy of a vaccine; labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs and the extent and effectiveness of any COVID-19 stimulus packages; manufacturing commodity costs; diesel fuel costs related to Kroger's logistics operations; trends in consumer spending; the extent to which our customers exercise caution in their purchasing in response to economic conditions; the uncertainty of economic growth or recession; changes in inflation or deflation in product and operating costs; stock repurchases; our ability to retain pharmacy sales from third-party payors; consolidation in the healthcare industry, including pharmacy benefit managers; our ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events, including the coronavirus; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of our future growth plans; the ability to execute our growth strategy and value creation model, including continued cost savings, growth of our alternative profit businesses, and widening and deepening our strategic moats of fresh, Our Brands, personalization, and seamless; and the successful integration of merged companies and new partnerships. |
| ● | Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow. |
| ● | Our effective tax rate may differ from the expected rate due to changes in laws, the status of pending items with various taxing authorities, and the deductibility of certain expenses. |
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We cannot fully foresee the effects of changes in economic conditions on our business.
Other factors and assumptions not identified above, including those discussed in Part 1, Item 1A of this Annual Report, 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, contemplated or implied by forward-looking statements made by us or our representatives. We undertake no obligation to update the forward-looking information contained in this filing.
ITEM 1. | BUSINESS. |
The Kroger Co. (the “Company” or “Kroger”) was founded in 1883 and incorporated in 1902. As of January 28, 2017,30, 2021, we are one of the largest retailers in the world based on annual sales. We also manufacture and process some of the food for sale in our supermarkets. We maintain a web site (www.thekrogerco.com) that includes the Kroger Fact Book and other additional information about the Company. Kroger’s website and any reports or other information made available by Kroger through its website are not part of or incorporated by reference into this Annual Report on Form 10-K. We make available through our web site, free of charge, our annual reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on Form 8-K and our interactive data files, including amendments. These forms are available as soon as reasonably practicable after we have filed them with, or furnished them electronically to, the SEC.
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominantly by selling products at price levels that produce revenues in excess of the costs to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs and overhead expenses. Our fiscal year ends on the Saturday closest to January 31. All references to 2016, 20152020, 2019 and 20142018 are to the fiscal years ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015,February 2, 2019, respectively, unless specifically indicated otherwise.
EMPLOYEESSTORES
As of January 28, 2017, Kroger employed approximately 443,000 full- and part-time employees. A majority of our employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 366 such agreements, usually with terms of three to five years.
STORES
As of January 28, 2017,30, 2021, Kroger operated, either directly or through its subsidiaries, 2,7962,742 supermarkets under a variety of local banner names, of which 2,255 had pharmacies and 1,4451,596 had fuel centers. We also offer ClickList™Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane—ExpressLane™— personalized, order online, pick up at the store services — at 6372,223 of our supermarkets.supermarkets and provide home delivery service to substantially all of Kroger households. Approximately 48%51% of theseour supermarkets were operated in Company-owned facilities, including some Company-owned buildings on leased land. Our current strategy emphasizes self-development and ownership of store real estate. Our stores operate under a variety of banners that have strong local ties and brand recognition. Fuel sales are an important part of our revenue, net earnings and loyalty offering. Our fuel strategy is to include a fuel center at each of our supermarket locations when it is feasible and it is expected to be profitable. Each fuel center typically includes 5 to 10 islands of fuel dispensers and storage tanks with capacity for 40,000 to 50,000 gallons of fuel. Supermarkets are generally operated under one of the following formats: combination food and drug stores (“combo stores”); multi-department stores; marketplace stores; or price impact warehouses.
The combo store is the primary food store format. They typically draw customers from a 2 — 2.52-2.5 mile radius. We believe this format is successful because the stores are large enough to offer the specialty departments that customers desire for one-stop shopping, including natural food and organic sections, pharmacies, general merchandise, pet centers and high-quality perishables such as fresh seafood and organic produce.
Multi-department stores are significantly larger in size than combo stores. In addition to the departments offered at a typical combo store, multi-department stores sell a wide selection of general merchandise items such as apparel, home fashion and furnishings, outdoor living, electronics, automotive products toys and fine jewelry.toys.
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Marketplace stores are smaller in size than multi-department stores. They offer full-service grocery, pharmacy and health and beauty care departments as well as an expanded perishable offering and general merchandise area that includes apparel, home goods and toys.
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Price impact warehouse stores offer a “no-frills, low cost” warehouse format and feature everyday low prices plus promotions for a wide selection of grocery and health and beauty care items. Quality meat, dairy, baked goods and fresh produce items provide a competitive advantage. The average size of a price impact warehouse store is similar to that of a combo store.
In addition to the supermarkets, as of January 28, 2017, we operated, through subsidiaries, 784 convenience stores, 319 fine jewelry stores and an online retailer. All 114 of our fine jewelry stores located in malls are operated in leased locations. In addition, 69 convenience stores were operated by franchisees through franchise agreements. Approximately 56% of the convenience stores operated by subsidiaries were operated in Company-owned facilities. The convenience stores offer a limited assortment of staple food items and general merchandise and, in most cases, sell fuel.SEGMENTS
SEGMENTS
We operate supermarkets multi-department stores, jewelry stores, and conveniencemulti-department stores throughout the United States. Our retail operations, which represent over 98%97% of our consolidated sales, and earnings before interest, taxes and depreciation and amortization (“EBITDA”), is our only reportable segment. We aggregate our operating divisions into one reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, our operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Our operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in their operating division. This geographical separation is the primary differentiation between these retail operating divisions. The geographical basis of organization reflects how the business is managed and how our Chief Executive Officer, who acts as our chief operating decision maker, assesses performance internally. All of our operations are domestic. Revenues, profits and losses and total assets are shown in our Consolidated Financial Statements set forth in Item 8 below.
MERCHANDISING AND MANUFACTURING
Corporate brand Our Brands products play an important role in our merchandising strategy. Our supermarkets, on average, stock over 14,00015,000 private label items. Our corporate brand Brands products are primarily produced and sold in three “tiers.” Private Selection® is theone of our premium quality brand designed to be a unique item in a category or to meet or beat the “gourmet” or “upscale” brands.brands, offering customers culinary foods and ingredients that deliver amazing eating experiences. The “banner brand” (Kroger®, Ralphs®, Fred Meyer®, King Soopers®, etc.),Kroger® brand, which represents the majority of our private label items, is designed to consistently satisfy and delight customers with quality products. Before we will carry a “banner brand” product we must be satisfiedproducts that exceed or meet the product quality meets our customers’ expectationsnational brand in taste and efficacy, as well as with unique and we guarantee it. P$$T…®differentiated products. Big K®, Check This Out…® and Heritage Farm™Farm® are the threesome of our value brands, designed to deliver good quality at a very affordable price. In addition we continue to grow our other brands, includingthree “tiers,” Our Brands offers customers a variety of natural and organic products with Simple Truth® and Simple Truth Organic®. Both Simple Truth and Simple Truth Organic are Free From 101+free from a defined list of artificial preservatives and ingredients that customers have told us they do not want in their food, and the Simple Truth Organic products are USDA certified organic.
Approximately 35%29% of Our Brands units and 40% of the corporate brandgrocery category Our Brands units sold in our supermarkets are produced in our food production plants; the remaining corporate brandOur Brands items are produced to our strict specifications by outside manufacturers. This percentage has declined recently due to an expanded portfolio of non-grocery corporate brand units produced by outside manufacturers. Our food production plants produced 45% of our grocery category corporate brand units sold in our supermarkets, which is consistent with our historical trend. We perform a “make or buy” analysis on corporate brandOur Brands products and decisions are based upon a comparison of market-based transfer prices versus open market purchases. As of January 28, 2017,30, 2021, we operated 3835 food production plants. These plants consisted of 1716 dairies, ten9 deli or bakery plants, five grocery product plants, two beverage plants, twoone meat plantsplant and two cheese plants.
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SEASONALITY
SEASONALITY
The majority of our revenues are generally not seasonal in nature. However, revenues tend to be higher during the major holidays throughout the year. Additionally, certain significant events including inclement weather systems, particularly winter storms, tend to affect our sales trends.
EXECUTIVE OFFICERS OF THE REGISTRANTHUMAN CAPITAL MANAGEMENT
The disclosure regarding executive officersOur People
We want Kroger to be a place our customers love to shop and associates love to work. This is set forthwhy we create working environments where associates feel encouraged and supported to be their best selves every day. As of January 30, 2021, Kroger employed approximately 465,000 full- and part-time employees. With these nearly half a million associates serving more than nine million customers every day, our people are essential to our success, and we focus intentionally on attracting, developing and engaging a diverse workforce that represents the communities we serve. We have long been guided by our core values – Honesty, Integrity, Respect, Safety, Diversity and Inclusion.
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Attracting & Developing Our Talent
We recognize that our people are our most important asset. To deliver on our customers’ experiences, we continually improve how we attract and retain talent. In addition to competitive wages, quality benefits, and a safe work environment, we offer a broad range of employment opportunities for workers of all ages and aspirations. During the past decade, Kroger has added 100,000 new jobs in Item 10communities across America. Many supermarket roles offer opportunities to learn new skills, grow and advance careers — inside or outside our family of Part III of this Form 10-K under the heading “Executive Officerscompanies.
Associates at all levels of the Company” have access to training and education programs to build their skills and prepare for the roles they want. In 2021, we expect to spend approximately $125 million on training our associates through onboarding, leadership development programs, and programs designed to upskill associates across the Company. We continue to invest in new platforms and applications to make learning more accessible to our associates.
Beyond our own programs, associates can take advantage of our tuition reimbursement benefit, which offers up to $3,500 annually — $21,000 over the course of employment — toward continuing education. These funds can be applied to education programs like certifications, associate or graduate degrees. Kroger has invested more than $15 million in this program since it launched in 2018.
Rewarding Our Associates
We care about our associates’ overall well-being — physical, financial and emotional — and provide wages and benefits that help associates take care of themselves and their families. Between 2018 and 2020, we invested an incremental $800 million in associate wages. Since 2018, Kroger’s average retail hourly wage increased to over $15 per hour. Including benefit equivalents, the average rate surpasses $20 per hour.
Promoting Diversity, Equity & Inclusion
Diversity and inclusion have been among Kroger’s values for decades. We strive to reflect the communities we serve and foster a culture that empowers everyone to be their true self, inspires collaboration, and feeds the human spirit. During the past year, we have taken a very thoughtful and purposeful approach to enact meaningful change and develop what we believe are the right actions to achieve true and lasting equality. Our new Framework for Action: Diversity, Equity & Inclusion plan reflects our desire to redefine, deepen, and advance our commitment, mobilizing our people, passion, scale and resources. The following summarizes our framework: Create a More Inclusive Culture; Develop Diverse Talent; Advance Diverse Partnerships; Advance Equitable Communities; Deeply Listen and Report Progress.
Creating a Safe Environment
Our associates’ safety is incorporated hereina top priority and it is one of our core values. Since March of 2020, we have made significant investments to reward and safeguard our associates and customers. At the onset of the COVID-19 pandemic, we activated our Pandemic Preparedness Plan and Business Resilience Plan to help protect frontline associates, stay open to serve our customers and communities, and anticipate and adapt to critical needs in a rapidly changing situation. Since then, we have enacted more than 30 policy changes to help keep our associates safe, including offering paid emergency leave to those most directly affected by reference.COVID-19, providing personal protective equipment, offering free testing through our COVID-19 at-home test kits, and promoting physical distancing in our locations. We are committed to supporting the health and well-being of our associates by providing a robust range of physical and mental health benefits and offering an incentive to associates who choose to get the COVID-19 vaccine.
Beyond the pandemic, we prioritize providing the right safety training and equipment, safe working conditions and resources to maintain and improve associates’ well-being. Through our strategy to set clear expectations, routine monitoring, and regular communication and engagement, we reduce the number of injuries and accidents that happen in our workplace.
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We track health and safety metrics centrally for an enterprise-wide view of issues, trends and opportunities and monitor associate injury performance including total injuries, Occupational Safety and Health Administration (“OSHA”) injury rates, and lost-time injuries, as well as customer injury metrics like slip-and-fall injuries. We also track the completion of required training for associates and we regularly share these metrics with leaders and relevant team members to inform management decisions.
Supporting Labor Relations
A majority of our employees are covered by collective bargaining agreements negotiated with local unions affiliated with one of several different international unions. There are approximately 350 such agreements, usually with terms of three to five years. Our objective in every negotiation is to find a fair and reasonable balance on compensation packages that provide solid wages as well as good quality, affordable health care and retirement benefits while also keeping our family of companies competitive in the market.
INFORMATION ABOUT OUR EXECUTIVE OFFICERS
The following is a list of the names and ages of the executive officers and the positions held by each such person. Except as otherwise noted, each person has held office for at least five years. Each officer will hold office at the discretion of the Board for the ensuing year until removed or replaced.
Name | Age | Recent Employment History | ||
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Mary E. Adcock | | 45 | | Ms. Adcock was elected Senior Vice President effective May 1, 2019 and is responsible for retail operations as well as the oversight of several Kroger retail divisions. From June 2016 to April 2019, she served as Group Vice President of Retail Operations. Prior to that, she served as Vice President of Operations for Kroger’s Columbus Division from November 2015 to May 2016 and as Vice President of Merchandising for the Columbus Division from March 2014 to November 2015. From February 2012 to March 2014, Ms. Adcock served as Vice President of Natural Foods Merchandising and from October 2009 to February 2012, she served as Vice President of Deli/Bakery Manufacturing. Prior to that, Ms. Adcock held several leadership positions in the manufacturing department, including human resources manager, general manager and division operations manager. Ms. Adcock joined Kroger in 1999 as human resources assistant manager at the Country Oven Bakery in Bowling Green, Kentucky. |
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Stuart W. Aitken | | 49 | | Mr. Aitken was named Senior Vice President and Chief Merchant and Marketing Officer in August 2020. He was elected Senior Vice President in February 2019 and served as Group Vice President from June 2015 to February 2019. He is responsible for sales, pricing, promotional and category planning for fresh foods, center store and general merchandise categories, as well as analytics & execution, e-commerce and Digital Merchandising, and Our Brands. Prior to joining Kroger, he served as the chief executive officer of dunnhumby USA, LLC from July 2010 to June 2015. Mr. Aitken has over 15 years of marketing, academic and technical experience across a variety of industries, and held various leadership roles with other companies, including Michaels Stores and Safeway, Inc. |
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Gabriel Arreaga | | 46 | | Mr. Arreaga was elected Senior Vice President of Supply Chain in December 2020. He is responsible for the company’s industry-leading Supply Chain organization, Logistics, Inventory & Replenishment, Manufacturing, and Fulfillment Centers. Prior to Kroger, Mr. Arreaga served as senior vice president of Supply Chains for Mondelez, where he was responsible for all operations and functions from field to consumer, internal and external factories, fulfillment centers, direct to store branches, Logistics and product development. He was also global vice president of Operations for Stanley Black and Decker and held numerous leadership roles at Unilever including vice president of Food and Beverage Operations. |
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Yael Cosset | | 47 | | Mr. Cosset was elected Senior Vice President and Chief Information Officer in May 2019 and is responsible for leading Kroger’s digital strategy, focused on building Kroger’s presence in the marketplace in digital channels, personalization and e-commerce. In August 2020, he also assumed responsibility for Kroger’s alternative profit businesses, including Kroger’s data analytics subsidiary, 84.51 ͦ LLC and Kroger Personal Finance. Prior to that, Mr. Cosset served as Group Vice President and Chief Digital Officer from January 2017 to April 2019. Before that, he served as Chief Commercial Officer and Chief Information Officer of 84.51° LLC from April 2015 to December 2016. Prior to joining Kroger, Mr. Cosset served in several leadership roles at dunnhumby USA, LLC from 2009 to 2015, including Executive Vice President of Consumer Markets and Global Chief Information Officer. |
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Michael J. Donnelly | | 62 | | Mr. Donnelly was elected Executive Vice President and Chief Operating Officer in December 2017. Prior to that, he was Executive Vice President of Merchandising from September 2015 to December 2017, and Senior Vice President of Merchandising from July 2011 to September 2015. Before that, Mr. Donnelly held a variety of key management positions with Kroger, including President of Ralphs Grocery Company, President of Fry’s Food Stores, and Senior Vice President, Drug/GM Merchandising and Procurement. Mr. Donnelly joined Kroger in 1978 as a clerk. Mr. Donnelly has announced his plan to retire in Spring of 2021. |
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Carin L. Fike | | 52 | | Ms. Fike was elected Vice President and Treasurer effective April 2017. Prior to that, she served as Assistant Treasurer from March 2011 to April 2017. Before that, Ms. Fike served as Director of Investor Relations from December 2003 to March 2011. Ms. Fike began her career with Kroger in 1999 as a manager in the Financial Reporting department after working with PricewaterhouseCoopers from 1995 to 1999, where most recently she was an audit manager. |
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Todd A. Foley | | 51 | | Mr. Foley was elected Vice President and Corporate Controller effective April 2017. Before that, he served as Vice President and Treasurer from June 2013 to April 2017. Prior to that, Mr. Foley served as Assistant Corporate Controller from March 2006 to June 2013, and Controller of Kroger’s Cincinnati/Dayton division from October 2003 to March 2006. Mr. Foley began his career with Kroger in 2001 as an audit manager in the Internal Audit Department after working for PricewaterhouseCoopers from 1991 to 2001, where most recently he was a senior audit manager. |
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Calvin J. Kaufman | | 58 | | Mr. Kaufman was elected Senior Vice President in June 2017, and is responsible for the oversight of several Kroger retail divisions. From July 2013 to June 2017, he served as President of the Louisville division. Prior to that, he served as President of Kroger Manufacturing and Our Brands from June 2008 to June 2013, and Group Vice President of Fred Meyer Logistics from September 2005 to May 2008. Mr. Kaufman held various positions in Logistics after joining Kroger in the Fred Meyer division in September 1994. |
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Timothy A. Massa | | 54 | | Mr. Massa was elected Senior Vice President of Human Resources and Labor Relations in June 2018. Prior to that, he served as Group Vice President of Human Resources and Labor Relations from June 2014 to June 2018. Mr. Massa joined Kroger in October 2010 as Vice President, Corporate Human Resources and Talent Development. Prior to joining Kroger, he served in various Human Resources leadership roles for 21 years at Procter & Gamble, most recently serving as Global Human Resources Director of Customer Business Development. |
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Stephen M. McKinney | | 64 | | Mr. McKinney was elected Senior Vice President in March 2018, and is responsible for the oversight of several Kroger retail divisions. From October 2013 to March 2018, he served as President of Kroger’s Fry’s Food Stores division. Prior to that, he served as Vice President of Operations for the Ralphs division from October 2007 to September 2013, and Vice President of Operations for the Southwest division from October 2006 to September 2007. From 1988 to 1998, Mr. McKinney served in various leadership positions in the Fry’s Food Stores division, including store manager, deli director, and executive director of operations. From 1981 to 1998, Mr. McKinney held several roles with Florida Choice Supermarkets, a former Kroger banner, including store manager, buyer, and field representative. He started his career with Kroger in 1981 as a clerk with Florida Choice. |
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W. Rodney McMullen | | 60 | | Mr. McMullen was elected Chairman of the Board effective January 1, 2015, and Chief Executive Officer effective January 1, 2014. Prior to that, he served as President and Chief Operating Officer from August 2009 to December 2013. Prior to that he was elected Vice Chairman in June 2003, Executive Vice President, Strategy, Planning and Finance in January 2000, Executive Vice President and Chief Financial Officer in May 1999, Senior Vice President in October 1997, and Group Vice President and Chief Financial Officer in June 1995. Before that he was appointed Vice President, Control and Financial Services in March 1993, and Vice President, Planning and Capital Management in December 1989. Mr. McMullen joined Kroger in 1978 as a part-time stock clerk. |
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Gary Millerchip | | 49 | | Mr. Millerchip was elected Senior Vice President and Chief Financial Officer effective April 2019. Prior to this, he served as Chief Executive Officer for Kroger Personal Finance since joining Kroger in 2008. Before coming to Kroger he was responsible for the Royal Bank of Scotland (RBS) Personal Credit Card business in the United Kingdom. He joined RBS in 1987 and held leadership positions in Sales & Marketing, Finance, Change Management, Retail Banking Distribution Strategy and Branch Operations during his time there. |
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Erin S. Sharp | | 63 | | Ms. Sharp has served as Group Vice President of Manufacturing since June 2013. She joined Kroger in 2011 as Vice President of Operations for Kroger’s Manufacturing division. Before joining Kroger, Ms. Sharp served as Vice President of Manufacturing for the Sara Lee Corporation. In that role, she led the manufacturing and logistics operations for the central region of their U.S. Fresh Bakery Division. Ms. Sharp has over 30 years of experience supporting food manufacturing operations. Ms. Sharp has announced her plan to retire in Spring of 2021. |
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Mark C. Tuffin | | 61 | | Mr. Tuffin has served as Senior Vice President since January 2014, and is responsible for the oversight of several of Kroger’s retail divisions. Prior to that, he served as President of Kroger’s Smith’s division from July 2011 to January 2014. From September 2009 to July 2011, Mr. Tuffin served as Vice President of Transition, where he was responsible for implementing an organizational restructuring initiative for Kroger’s retail divisions. He joined Kroger’s Smith’s division in 1996 and served in a series of leadership roles, including Vice President of Merchandising from September 1999 to September 2009. Mr. Tuffin held various positions with other supermarket retailers before joining Smith’s in 1996. |
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Christine S. Wheatley | | 50 | | Ms. Wheatley was elected Group Vice President, Secretary and General Counsel in May 2014. She joined Kroger in February 2008 as Corporate Counsel, and became Senior Attorney in 2010, Senior Counsel in 2011, and Vice President in 2012. Before joining Kroger, Ms. Wheatley was engaged in the private practice of law for 11 years, most recently as a partner at Porter Wright Morris & Arthur in Cincinnati. |
COMPETITIVE ENVIRONMENT
For the disclosure related to our competitive environment, see Item 1A under the heading “Competitive Environment.”
ITEM 1A. | RISK FACTORS. |
ITEM 1A.RISK FACTORS.
There are risks and uncertainties that can affect our business. The significant risk factors are discussed below. The following information should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the “Outlook” section in Item 7 of this Form 10-K,Operations,” which includeincludes forward-looking statements and factors that could cause us not to realize our goals or meet our expectations.
COMPETITIVE ENVIRONMENT
The operating environment for the food retailing industry continues to be characterized by intense price competition, aggressive expansion, increasing fragmentation of retail and online formats, entry of non-traditional competitors and market consolidation. Customer behavior shifted quickly and considerably during the pandemic, including a shift from food away from home to food at home. We have developed asee three major trends shaping the industry post-pandemic: e-commerce, cooking at home and prepared foods to go. If we do not appropriately or accurately anticipate customer preferences or fail to quickly adapt to these changing preferences, or if trends shift more quickly to food away from home, our sales and profitability could be adversely affected. If we fail to meet the evolving needs of our customers, our ability to compete and our financial condition, results of operations or cash flows could be adversely affected.
9
We are continuing to enhance the customer connection with investments in our four competitive moats – Seamless, Personalization, Fresh, and Our Brands. Each of these are strategic plan that wedifferentiators and each one is designed to generate customer loyalty and sustainable growth momentum. We believe providesour plans to deepen and strengthen our competitive moats provide a balanced approach that will enable us to meet the wide-ranging needs and expectations of our customers. If we are unable to continue to enhance the foregoing key elements of our connection with customers, or they fail to strengthen customer loyalty, our ability to compete and our financial condition, results of operations or cash flows could be adversely affected. Our ecosystem monetizes the traffic and data insights generated by our enhanced customer experience. We are using our assets in this challenging economic environment. However, thenew ways through these fast-growing, asset-light and margin rich businesses. We may be unsuccessful in implementing our alternative profit strategy, which could adversely affect our market share and business growth, and our financial condition, results of operations or cash flows. The nature and extent to which our competitors implement various pricingrespond to the evolving and promotional activities in response to increasing competition, including our execution of our strategic plan,competitive industry by developing and our response to theseimplementing their competitive actions, canstrategies could adversely affect our profitability. Our profitability
In addition, evolving customer preferences and growth have been,the advancement of online, delivery, ship to home, and couldmobile channels in our industry enhance the competitive environment. We must anticipate and meet these evolving customer preferences and continue to implement technology, software and processes to be able to conveniently and cost-effectively fulfill customer orders. Providing flexible fulfillment options and implementing new technology is complex and may not meet customer preferences. If we are not successful in reducing or offsetting the cost of fulfilling orders outside of our traditional in-store channel with efficiencies, cost-savings, expense reductions, or alternative revenues, our financial condition, results of operations or cash flows could be adversely affectedaffected.
In addition, if we do not successfully develop and maintain a relevant digital experience for our customers, our business, financial condition, results of operations or cash flows could be adversely impacted. Digital retailing is rapidly evolving, and we must keep pace with new developments by changesour competitors as well as the evolving needs and preferences of our customers. Our digital business accelerated significantly during the COVID-19 pandemic including Pickup, Delivery and Ship. We must compete by offering a convenient shopping experience for our customers regardless of how they choose to shop with us, and by investing in, providing and maintaining relevant customer-facing apps and interfaces that have the overall economic environmentfeatures customers want that affect consumer spending, including discretionary spending.are also reliable and easy to use. The future success of the digital business will also depend on the efficiency and cost effectiveness of fulfilling orders across our modalities, whether in store, in pickup-only locations, and through customer fulfillment centers powered by Ocado.
PRODUCT SAFETY
Customers count on Kroger to provide them with safe food and drugs and other merchandise. Concerns regarding the safety of the products that we sell could cause shoppers to avoid purchasing certain products from us, or to seek alternative sources of supply even if the basis for the concern is outside of our control. Any lost confidence on the part of our customers would be difficult and costly to reestablish. We could be adversely affected by personal injury or project liability claims, product recalls, or other health and safety issues. If we sell products that cause illness or injury to customers, resulting from product contamination or spoilage, the presence of certain substances, or damage caused in handling, storage or transportation, we could be exposed to claims or litigation. Any issue regarding the safety of items whether Our Brands items manufactured by the company or for the company or CPG products we sell, regardless of the cause, could have a substantial and adverse effect on our reputation, financial condition, results of operations or cash flows.
LABOR RELATIONSEMPLOYEE MATTERS
A majority of our employeesassociates are covered by collective bargaining agreements with unions, and our relationship with those unions, including a prolonged work stoppage affecting a substantial number of locations, could have a material adverse effect on our results.
financial condition, results of operations or cash flows. We are a party to approximately 366350 collective bargaining agreements. Upon the expiration of our collective bargaining agreements, work stoppages by the affected workers could occur if we are unable to negotiate new contracts with labor unions. A prolonged work stoppage affecting a substantial number of locationsIn addition, changes to national labor policy could have a material adverse effect onaffect labor relations with our results.associates and relationships with unions. Further, if we are unable to control health care, pension and wage costs, or if we have insufficient operational flexibility under our collective bargaining agreements, we may experience increased operating costs and an adverse effect on our financial condition, results of operations or cash flows.
410
We are committed to paying fair wages and providing the benefits that were collectively bargained with the United Food and Commercial Workers (“UFCW”) and other labor unions representing associates. Our ability to control labor and benefit costs is subject to numerous internal and external factors, including regulatory changes, wage rates, and healthcare and other insurance costs. Changes to wage regulations, including further increases in the minimum wage and extra pay ordinances enacted by local governments, could have an impact on our future financial condition, results of operations or cash flows. Our ability to meet our labor needs, while controlling wages and other costs, is subject to numerous external factors, including the available qualified workforce in each area where we are located, unemployment levels within those areas, wage rates, and changes in employment and labor laws.
Our continued success depends on the ongoing contributions of our associates, including members of our senior management and other key personnel. We must recruit, hire, develop and retain qualified associates with an increasingly large range of skills to meet the needs of our evolving and complex business. We compete with other retail and non-retail businesses for these associates and invest significant resources in training and motivating them. Competition among potential employers could result in increased associate costs, or in our failure to recruit and retain associates. There is no assurance that we will be able to attract or retain sufficient highly qualified associates in the future, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.
DATA AND TECHNOLOGY
Our business is increasingly dependent on information technology systems that are complex and vital to continuing operations.operations, resulting in an expansion of our technological presence and corresponding risk exposure. If we were to experience difficulties maintaining or operating existing systems or implementing new systems, we could incur significant losses due to disruptions in our operations.
Through our sales and marketing activities, we collect and store some personal information that our customers provide to us. We also gather and retain information about our associates in the normal course of business. Under certain circumstances, we may share information with vendors that assist us in conducting our business, as required by law, or otherwise in accordance with our privacy policy.
Our technology systems are vulnerable to disruption from circumstances beyond our control, and we regularly defend against and respond to data security incidents. Cyber-attackers have targeted and accessed, and may in the future again attempt to target and access, information stored in our or our vendors’ systems in order to misappropriate confidential customer or business information. Although we have implemented procedures to protect our information, and require our vendors to do the same, we cannot be certain that all of our security systems are entirely free from vulnerabilitywill successfully defend against, or be able to attack. Computer hackers may attempteffectively respond to, penetrate our or our vendors’ network securityrapidly evolving, increasingly sophisticated cyber-attacks as they become more difficult to detect and if successful, misappropriate confidential customer or business information. In addition,defend against. Further, a Kroger associate, a contractor or other third party with whom we do business may attempt toin the future circumvent our security measures in order to obtain information or may inadvertently cause a breach involving information. LossIn addition, hardware, software or applications we may use may have inherent defects, vulnerabilities, or could be inadvertently or intentionally applied or used in a way that could compromise our information security.
11
Our cybersecurity program, continued investment in our information technology systems, and our processes to evaluate and select vendors with reasonable information security controls may not effectively insulate us from potential attacks, data breaches or disruptions to our business operations, which could result in a loss of customercustomers or business information, could disrupt our operations,negative publicity, damage to our reputation, and expose usexposure to claims from customers, financial institutions, regulatory authorities, payment card associations, associates and other persons, any of whichpersons. Any such events could have an adverse effect on our business, financial condition, and results of operations.operations or cash flows and may not be covered by our insurance. In addition, compliance with tougher privacy and information security laws and standards may result in significant expense due to increased investment in technology and the development of new operational processes.processes and may require us to devote significant management resources to address these issues. The costs of attempting to protect against the foregoing risks and the costs of responding to cyber-attacks are significant. Following a cyber-attack, our and/or our vendors’ remediation efforts may not be successful, and a cyber-attack could result in interruptions, delays or cessation of service, and loss of existing or potential customers. In addition, breaches of our and/or our vendors’ security measures and the unauthorized dissemination of sensitive personal information or confidential information about us or our customers could expose our customers’ private information and our customers to the risk of financial or medical identity theft, or expose us or other third parties to a risk of loss or misuse of this information, and result in investigations, regulatory enforcement actions, material fines and penalties, loss of customers and business relationships, litigation or other actions which could have a material adverse effect on our brands, reputation, business, financial condition, results of operations or cash flows.
Additionally,Data governance failures can adversely affect our reputation and business. Our business depends on October 1, 2015,our customers’ willingness to entrust us with their personal information. Events that adversely affect that trust, including inadequate disclosure to our customers of our uses of their information, failing to keep our information technology systems and our customers’ sensitive information secure from significant attack, theft, damage, loss or unauthorized disclosure or access, whether as a result of our action or inaction (including human error) or that of our business associates, vendors or other third parties, could adversely affect our brand and reputation and operating results and also could expose and/or has exposed us to mandatory disclosure to the media, litigation (including class action litigation), governmental investigations and enforcement proceedings, material fines, penalties and/or remediation costs, and compensatory, special, punitive and statutory damages, consent orders, and/or injunctive relief, any of which could adversely affect our businesses, financial condition, results of operations or cash flows. Large scale data breaches at other entities, including supply chain security vulnerabilities, increase the challenge we and our vendors face in maintaining the security of our information technology systems and proprietary information and of our customers’ information. There can be no assurance that such failures will not occur, or if any do occur, that we will detect them or that they can be sufficiently remediated.
The use of data by our business and our business associates is highly regulated. Privacy and information-security laws and regulations change, and compliance with them may result in cost increases due to, among other things, systems changes and the development of new processes. If we or those with whom we share information fail to comply with laws and regulations, such as the California Consumer Privacy Act (CCPA) or the Health Insurance Portability and Accountability Act (HIPAA), our reputation could be damaged, possibly resulting in lost business, and we could be subjected to additional legal risk or financial losses as a result of non-compliance.
PAYMENT SYSTEMS
We accept payments using a variety of methods, including cash and checks, select credit and debit cards, and Kroger Pay, a mobile payment solution. As we offer new payment options to our customers, we may be subject to additional rules, regulations, compliance requirements, and higher fraud losses. For certain payment methods, we pay interchange and other related acceptance fees, along with additional transaction processing fees. We rely on third parties to provide payment transaction processing services for credit and debit cards. It could disrupt our business if these companies become unwilling or unable to provide these services to us, including due to short term disruption of service. We are also subject to evolving payment card industry shifted liabilityassociation and network operating rules, including data security rules, certification requirements and rules governing electronic funds transfers. For example, we are subject to Payment Card Industry Data Security Standards (“PCI DSS”), which contain compliance guidelines and standards with regard to our security surrounding the physical and electronic storage, processing and transmission of individual cardholder data. If our payment card terminals or internal systems are breached or compromised, we may be liable for certain transactionscard re-issuance costs and other costs, subject to retailers who are not ablefines and higher transaction fees, and lose our ability to accept Europay, MasterCard, Visa (EMV) transactions. We completed the implementationcard payments from our members, or if our third-party service providers’ systems are breached or compromised, our business, financial condition, results of the EMV technology for more than the majority of our supermarket transactions in 2016 with plans to complete them in 2017, and have a plan in place to complete implementation for our fuel centers prior to the liability shift for fuel centers.operations or cash flows could be adversely affected.
12
INDEBTEDNESS
INDEBTEDNESS
Our indebtedness could reduce our ability to obtain additional financing for working capital, mergers and acquisitions or other purposes and could make us vulnerable to future economic downturns as well as competitive pressures. If debt markets do not permit us to refinance certain maturing debt, we may be required to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness. Changes in our credit ratings, or in the interest rate environment, could have an adverse effect on our financing costs and structure.
LEGAL PROCEEDINGS AND INSURANCE
From time to time, we are a party to legal proceedings, including matters involving personnel and employment issues, personal injury, antitrustcontract disputes, regulatory claims and other proceedings. Other legal proceedings purport to be brought as class actions on behalf of similarly situated parties. Some of these proceedings could result in a substantial loss to Kroger. We estimate our exposure to these legal proceedings and establish accruals for the estimated liabilities, where it is reasonably possible to estimate and where an adverse outcome is probable. Assessing and predicting the outcome of these matters involves substantial uncertainties. Adverse outcomes in these legal proceedings, or changes in our evaluations or predictions about the proceedings, could have a material adverse effect on our financial results.condition, results of operations or cash flows. Please also refer to the “Legal Proceedings” section in Item 3 and the “Litigation” section in Note 13 to the Consolidated Financial Statements.
We use a combination of insurance and self-insurance to provide for potential liability for workers’ compensation, automobile and general liability, property, director and officers’ liability, cyber risk exposure and employeeassociate health care benefits. Any actuarial projection of losses is subject to a high degree of variability. With respect to insured matters, we are liable for retention amounts that vary by the nature of the claim, and some losses may not be covered by insurance. Changes in legal claims, trends and interpretations, variability in inflation rates, changes in the nature and method of claims settlement, benefit level changes due to changes in applicable laws, insolvency of insurance carriers, and changes in discount rates could all affect our financial condition, results of operations or cash flows.
5
MULTI-EMPLOYER PENSION OBLIGATIONS
As discussed in more detail below in “Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Policies-Multi-EmployerPolicies-Multi-Employer Pension Plans,,” Kroger contributes to several multi-employer pension plans based on obligations arising under collective bargaining agreements with unions representing employeesassociates covered by those agreements. We believe that the present value of actuarially accrued liabilities in most of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits, and we expect that Kroger’s contributions to those funds will increase over the next few years. A significant increase to those funding requirements could adversely affect our financial condition, results of operations or cash flows. Despite the fact that the pension obligations of these funds are not the liability or responsibility of the Company, except as noted below, there is a risk that the agencies that rate our outstanding debt instruments could view the underfunded nature of these plans unfavorably, or adjust their current views unfavorably, when determining their ratings on our debt securities. Any downgrading of our debt ratings likely would adversely affect our cost of borrowing and access to capital.
We also currently bear the investment risk of one of the largertwo multi-employer pension plans in which we participate. In addition, we have been designated as the named fiduciary of this fundthese funds with sole investment authority of the assets of the fund.these funds. If investment results fail to meet our expectations, we could be required to make additional contributions to fund a portion of or the entire shortfall, which could have an adverse effect on our business, financial condition, results of operations or cash flows.
13
INTEGRATION OF NEW BUSINESS AND STRATEGIC ALLIANCES
We enter into mergers, acquisitions and acquisitionsstrategic alliances with expected benefits including, among other things, operating efficiencies, procurement savings, innovation, sharing of best practices and increased market share that may allow for future growth. Achieving the anticipated or desired benefits may be subject to a number of significant challenges and uncertainties, including, without limitation, whether unique corporate cultures will work collaboratively in an efficient and effective manner, the coordination of geographically separate organizations, the possibility of imprecise assumptions underlying expectations regarding potential synergies, capital requirements, and the integration process, unforeseen expenses and delays, and competitive factors in the marketplace. We could also encounter unforeseen transaction and integration-related costs or other circumstances such as unforeseen liabilities or other issues. Many of these potential circumstances are outside of our control and any of them could result in increased costs, decreased revenue, decreased synergies and the diversion of management time and attention. If we are unable to achieve our objectives within the anticipated time frame, or at all, the expected benefits may not be realized fully or at all, or may take longer to realize than expected, which could have an adverse effect on our business, financial condition, and results of operations or cash flows.
FUEL
We sell a significant amount of fuel in our 1,596 fuel centers, which could face increased regulation, including due to climate change or other environmental concerns, and demand could be affected by concerns about the effect of emissions on the environment as well as retail price increases. We are unable to predict future regulations, environmental effects, political unrest, acts of terrorism, disruptions to the economy, including but not limited to the COVID-19 pandemic, and other matters that may affect the cost and availability of fuel, and how our customers will react to such factors, which could adversely affect our financial condition, results of operations or cash flows.
ECONOMIC CONDITIONS
Our operating results could be materially impacted by changes in overall economic conditions that impact consumer confidence and spending, including discretionary spending. Future economic conditions affecting disposable consumer income such as employment levels, business conditions, changes in housing market conditions, the availability of credit, interest rates, tax rates the impact of natural disasters or acts of terrorism, and other matters could reduce consumer spending. Increased fuel prices could also have an effect on consumer spending and on our costs of producing and procuring products that we sell. We are unable to predict how the global economy and financial markets will perform. If the global economy and financial markets do not perform as we expect, it could adversely affect our financial condition, results of operations or cash flows.
6
WEATHER, AND NATURAL DISASTERS AND OTHER EVENTS
A large number of our stores and distribution facilities are geographically located in areas that are susceptible to hurricanes, tornadoes, floods, droughts and earthquakes. Weather conditions and natural disasters could disrupt our operations at one or more of our facilities, interrupt the delivery of products to our stores, substantially increase the cost of products, including supplies and materials and substantially increase the cost of energy needed to operate our facilities or deliver products to our facilities. Moreover, the effects of climate change, including those associated with extreme weather events, may affect our ability to procure needed commodities at costs and in quantities that are optimal for us or at all. Adverse weather, and natural disasters, geo-political and catastrophic events, such as war, civil unrest, acts of terrorism or other acts of violence, including active shooter situations (which have occurred in the past at our locations), or pandemics, such as the spread of the novel coronavirus, COVID-19, or other future pandemics and other matters that could reduce consumer spending, could materially affect our financial condition, results of operations or cash flows.
14
COVID-19
The global COVID-19 pandemic continues to affect our business. A full year into the pandemic, many factors and uncertainties remain, including:
| ● | the continuing concerns about the health of, and the effect on our associates, and our ability to meet staffing needs in our stores, distribution facilities, corporate offices and other critical functions; |
| ● | the ultimate duration of the pandemic, including whether there will be additional spikes in the number of COVID-19 cases, future mutations or related strains of the virus; |
| ● | the duration, degree and effectiveness of governmental measures, such as access to unemployment compensation, stimulus payments, and other fiscal policy changes; |
| ● | the timing and availability of, and prevalence of access to and utilization of, effective medical treatments and timely rollout of vaccinations for COVID-19; |
| ● | evolving macroeconomic factors, including general economic uncertainty, unemployment rates, and recessionary pressures; |
| ● | the impact of the pandemic on economic activity and the pace and extent of recovery when the pandemic subsides, which may vary materially over time and among the different regions and markets we serve; |
| ● | the extent and duration of the effect on consumer confidence, economic well-being, spending, customer demand, buying patterns and shopping behaviors, including spend on discretionary categories, which often include higher margin products, and increased utilization of online sales channels, both during and after the pandemic; and |
| ● | the long-term impact of the pandemic on our business, including consumer behaviors. |
In addition, we cannot predict with certainty the extent of the impact that COVID-19 will have on our customers, suppliers, vendors, and other business partners, and each of their financial conditions; however, any material adverse effect on these parties could materially and adversely impact us. To the extent that COVID-19 continues to affect the U.S. and global economy and our business, it may also heighten other risks described in this section, including but not limited to those related to consumer behavior and expectations, competition, implementation of strategic initiatives, cybersecurity threats, payment-related risks, supply chain disruptions, labor availability and cost, litigation and operational risk as a result of regulatory requirements.
GOVERNMENT REGULATION
Our stores are subject to various laws, regulations, and administrative practices that affect our business. We must comply with numerous provisions regulating, among other things, health and sanitation standards, food labeling and safety, equal employment opportunity, minimum wages, and licensing for the sale of food, drugs, and alcoholic beverages.beverages, and new provisions relating to the COVID-19 pandemic. We cannot predict future laws, regulations, interpretations, administrative orders, or applications, or the effect they will have on our operations. They could, however, significantly increase the cost of doing business. They also could require the reformulation of some of the products that we sell (or manufacture for sale to third parties) to meet new standards. We also could be required to recall or discontinue the sale of products that cannot be reformulated. These changes could result in additional record keeping, expanded documentation of the properties of certain products, expanded or different labeling, or scientific substantiation. Any or all of these requirements could have an adverse effect on our financial condition, results of operations or cash flows.
15
SUPPLY CHAIN
ITEM 1B.UNRESOLVED STAFF COMMENTS.
Disruption in our global supply chain could negatively impact our business. The products we sell are sourced from a wide variety of domestic and international vendors, and any future disruption in our supply chain or inability to find qualified vendors and access products that meet requisite quality and safety standards in a timely and efficient manner could adversely impact our business. The loss or disruption of such supply arrangements for any reason, labor disputes, loss or impairment of key manufacturing sites, acts of war or terrorism, quality control issues, a supplier’s financial distress, natural disasters or health crises, regulatory actions or ethical sourcing issues, trade sanctions or other external factors over which we have no control, could interrupt product supply and, if not effectively managed and remedied, have a material adverse impact on our business, financial condition, results of operations or cash flows.
ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
None.
ITEM 2. | PROPERTIES. |
ITEM 2.PROPERTIES.
As of January 28, 2017,30, 2021, we operated approximately 4,0002,800 owned or leased supermarkets, convenience stores, fine jewelry stores, distribution warehouses and food production plants through divisions, subsidiaries or affiliates. These facilities are located throughout the United States. While our current strategy emphasizes ownership of store real estate, a majority of the properties used to conduct our business are leased.
We generally own store equipment, fixtures and leasehold improvements, as well as processing and food production equipment. The total cost of our owned assets and capitalizedfinance leases at January 28, 2017,30, 2021, was $40.6$46.0 billion while the accumulated depreciation was $19.6$23.6 billion.
Leased premisesWe lease certain store real estate, warehouses, distribution centers, office space and equipment. We operate in leased facilities in approximately half of our store locations. Lease terms generally have base terms rangingrange from ten-to-twenty10 to 20 years with renewal options to renew for additional periods. Somevarying terms at our sole discretion. Certain leases also include options provide the right to purchase the leased property. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property after the conclusion oftaxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis over the lease term. Store rentalsOur lease agreements do not contain any material residual value guarantees or material restrictive covenants. Certain properties or portions thereof are normally payable monthly at a stated amount or at a guaranteed minimum amount plus a percentage of sales over a stated dollar volume. Rentalssubleased to others for the distribution, food production and miscellaneous facilitiesperiods generally are payable monthly at stated amounts.ranging from one to 20 years. For additional information on lease obligations, see Note 10 to the Consolidated Financial Statements.
ITEM 3. | LEGAL PROCEEDINGS. |
7
ITEM 3.LEGAL PROCEEDINGS.
Various claimsIncorporated by reference herein is information regarding certain legal proceedings in which we are involved as set forth under “Litigation” contained in Note 13 – “Commitments and lawsuits arisingContingencies” in the normal coursenotes to the Consolidated Financial Statements in Item 8 of business, including suits charging violationsPart II of certain antitrust, wage and hour, or civil rights laws, as well as product liability cases, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, we believe that any resulting liability will not have a material adverse effect on our financial position, results of operations, or cash flows.Annual Report.
ITEM 4. | MINE SAFETY DISCLOSURES. |
We continually evaluate our exposure to loss contingencies arising from pending or threatened litigation and believe we have made provisions where it is reasonably possible to estimate and where an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. We currently believe that the aggregate range of loss for our exposures is not material. It remains possible that despite our current belief, material differences in actual outcomes or changes in our evaluation or predictions could arise that could have a material adverse effect on our financial condition, results of operations, or cash flows.
ITEM 4.MINE SAFETY DISCLOSURES.
Not applicable.
816
PART II
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
(a)
The following table sets forth the high and low sales prices for ourOur common sharesstock is listed on the New York Stock Exchange for each full quarterly periodunder the symbol “KR.” As of the two most recently completed fiscal years. All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on July 14, 2015.
COMMON SHARE PRICE RANGE
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| 2016 |
| 2015 |
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Quarter |
| High |
| Low |
| High |
| Low |
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1st |
| $ | 40.91 |
| $ | 33.62 |
| $ | 38.87 |
| $ | 34.05 |
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2nd |
| $ | 37.97 |
| $ | 32.02 |
| $ | 38.65 |
| $ | 37.09 |
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3rd |
| $ | 33.24 |
| $ | 28.71 |
| $ | 38.73 |
| $ | 27.32 |
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4th |
| $ | 36.44 |
| $ | 30.44 |
| $ | 42.75 |
| $ | 36.00 |
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Main trading market: New York Stock Exchange (Symbol KR)
Number ofMarch 24, 2021, there were 25,973 shareholders of record at fiscal year-end 2016:28,351record.
Number of shareholders of record at March 22, 2017:28,252
During 2016,2020, we paid two quarterly cash dividends of $0.105$0.16 per share and two quarterly cash dividends of $0.12$0.18 per share. During 2015,2019, we paid two quarterly cash dividends of $0.0925$0.14 per share and two quarterly cash dividends of $0.105$0.16 per share. On March 1, 2017,2021, we paid a quarterly cash dividend of $0.12$0.18 per share. On March 9, 2017,11, 2021, we announced that our Board of Directors declared a quarterly cash dividend of $0.12$0.18 per share, payable on June 1, 2017,2021, to shareholders of record at the close of business on May 15, 2017.14, 2021. We currently expect to continue to pay comparable cash dividends on a quarterly basis, that will increase over time, depending on our earnings and other factors, including approval by our Board.
For information on securities authorized for issuance under our existing equity compensation plans, see Item 12 under the heading “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
917
PERFORMANCE GRAPH
Set forth below is a line graph comparing the five-year cumulative total shareholder return on our common shares, based on the market price of the common shares and assuming reinvestment of dividends, with the cumulative total return of companies in the Standard & Poor’s 500 Stock Index and a peer group composed of food and drug companies.
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| Base |
| INDEXED RETURNS |
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| Period |
| Years Ending |
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Company Name/Index |
| 2011 |
| 2012 |
| 2013 |
| 2014 |
| 2015 |
| 2016 |
|
The Kroger Co. |
| 100 |
| 117.21 |
| 154.38 |
| 299.59 |
| 340.41 |
| 296.50 |
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S&P 500 Index |
| 100 |
| 117.60 |
| 141.48 |
| 161.61 |
| 160.53 |
| 194.03 |
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Peer Group |
| 100 |
| 120.77 |
| 137.32 |
| 171.73 |
| 160.23 |
| 157.59 |
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| | Base | | INDEXED RETURNS |
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| | Period | | Years Ending |
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Company Name/Index |
| 2015 |
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
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The Kroger Co. |
| 100 |
| 87.11 |
| 78.05 |
| 76.08 |
| 74.51 |
| 97.75 | |
S&P 500 Index |
| 100 |
| 120.87 |
| 148.47 |
| 148.38 |
| 180.37 |
| 211.48 | |
Peer Group |
| 100 |
| 98.35 |
| 127.05 |
| 123.40 |
| 148.90 |
| 183.16 | |
Kroger’s fiscal year ends on the Saturday closest to January 31.
Data supplied by Standard & Poor’s.
The foregoing Performance Graph will not be deemed incorporated by reference into any other filing, absent an express reference thereto.
* Total assumes $100 invested on January 29, 2012,30, 2016, in The Kroger Co., S&P 500 Index, and the Peer Group, with reinvestment of dividends.
** The Peer Group consists of Albertsons Companies, Inc. (included from June 26, 2020 when it began trading), Costco Wholesale Corp., CVS Caremark Corp,Health Corporation, Etablissements Delhaize Freres Et Cie Le Lion (“Groupe Delhaize”, which is included through July 22, 2016 when it merged with Koninklijke Ahold), Great Atlantic & Pacific Tea Company, Inc. (included through March 13, 2012 when it became private after emerging from bankruptcy), Koninklijke Ahold Delhaize NV (changed name from Koninklijke Ahold after merger with Groupe Delhaize), Safeway,Supervalu Inc. (included through January 29, 2015October 19, 2018 when it was acquired by AB Acquisition LLC), Supervalu Inc.United Natural Foods), Target Corp., Tesco Plc (included through November 27, 2013 when it sold its U.S. business), Wal-Mart Stores Inc., Walgreens Boots Alliance Inc. (formerly, Walgreen Co.), Walmart Inc., Whole Foods Market Inc. and Winn-Dixie Stores, Inc. (included through March 9, 2012August 28, 2017 when it became a wholly-owned subsidiary of Bi-Lo Holdings)was acquired by Amazon.com, Inc.).
1018
(c)
The following table presents information on our purchases of our common shares during the fourth quarter of 2016.2020.
ISSUER PURCHASES OF EQUITY SECURITIES
| | | | | | | | | | | |
| | | | | | | Total Number of | | Approximate Dollar |
| |
| | | | | | | Shares | | Value of Shares |
| |
| | | | | | | Purchased as | | that May Yet Be |
| |
| | | | | | | Part of Publicly | | Purchased Under |
| |
| | Total Number | | Average | | Announced | | the Plans or |
| ||
| | of Shares | | Price Paid Per | | Plans or | | Programs(4) |
| ||
Period(1) |
| Purchased(2) |
| Share(2) |
| Programs(3) |
| (in millions) |
| ||
First four weeks | | | | | | | | | | | |
November 8, 2020 to December 5, 2020 |
| 4,397,677 | | $ | 32.38 |
| 4,397,633 | | $ | 583 | |
Second four weeks | | | | | | | | | | | |
December 6, 2020 to January 2, 2021 |
| 3,788,929 | | $ | 31.10 |
| 3,756,853 | | $ | 470 | |
Third four weeks | | | | | | | | | | | |
January 3, 2021 to January 30, 2021 |
| 2,363,215 | | $ | 32.05 |
| 2,363,215 | | $ | 400 | |
Total |
| 10,549,821 | | $ | 31.85 |
| 10,517,701 | | $ | 400 | |
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
| Total Number of |
| Maximum Dollar |
| |
|
|
|
|
|
|
| Shares |
| Value of Shares |
| |
|
|
|
|
|
|
| Purchased as |
| that May Yet Be |
| |
|
|
|
|
|
|
| Part of Publicly |
| Purchased Under |
| |
|
| Total Number |
| Average |
| Announced |
| the Plans or |
| ||
|
| of Shares |
| Price Paid |
| Plans or |
| Programs (4) |
| ||
Period (1) |
| Purchased (2) |
| Per Share |
| Programs (3) |
| (in millions) |
| ||
First period - four weeks |
|
|
|
|
|
|
|
|
|
|
|
November 6, 2016 to December 3, 2016 |
| 2,927,535 |
| $ | 32.98 |
| 2,927,300 |
| $ | 587 |
|
Second period - four weeks |
|
|
|
|
|
|
|
|
|
|
|
December 4, 2016 to December 31, 2016 |
| 3,977,379 |
| $ | 34.48 |
| 3,906,084 |
| $ | 461 |
|
Third period — four weeks |
|
|
|
|
|
|
|
|
|
|
|
January 1, 2017 to January 28, 2017 |
| 3,931,162 |
| $ | 33.86 |
| 3,930,799 |
| $ | 339 |
|
Total |
| 10,836,076 |
| $ | 33.85 |
| 10,764,183 |
| $ | 339 |
|
| (1) |
| The reported periods conform to our fiscal calendar composed of thirteen 28-day periods. The fourth quarter of |
| (2) |
| Includes (i) shares repurchased under |
| (3) |
| Represents shares repurchased under the |
| (4) |
| On |
19
11
ITEM 6.SELECTED FINANCIAL DATA.
The following table presents our selected consolidated financial data for each of the last five fiscal years.
| | | | | | | | | | | | | | | | |
| | Fiscal Years Ended |
| |||||||||||||
|
| January 30, |
| February 1, |
| February 2, |
| February 3, |
| January 28, |
| |||||
| | 2021 | | 2020 | | 2019 | | 2018 | | 2017 |
| |||||
| | (52 weeks) | | (52 weeks) | | (52 weeks) | | (53 weeks) | | (52 weeks) |
| |||||
| | (In millions, except per share amounts) |
| |||||||||||||
Sales | | $ | 132,498 | | $ | 122,286 | | $ | 121,852 | | $ | 123,280 | | $ | 115,337 | |
Net earnings including noncontrolling interests | | $ | 2,588 | | $ | 1,512 | | $ | 3,078 | | $ | 1,889 | | $ | 1,957 | |
Net earnings attributable to The Kroger Co. | | $ | 2,585 | | $ | 1,659 | | $ | 3,110 | | $ | 1,907 | | $ | 1,975 | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 3.27 | | $ | 2.04 | | $ | 3.76 | | $ | 2.09 | | $ | 2.05 | |
Total assets | | $ | 48,637 | | $ | 45,256 | | $ | 38,118 | | $ | 37,197 | | $ | 36,505 | |
| | | | | | | | | | | | | | | | |
Long-term liabilities, including obligations under finance leases | | $ | 23,717 | | $ | 22,440 | | $ | 16,009 | | $ | 16,095 | | $ | 16,935 | |
Total shareholders’ equity — The Kroger Co. | | $ | 9,576 | | $ | 8,602 | | $ | 7,886 | | $ | 6,931 | | $ | 6,698 | |
Cash dividends per common share | | $ | 0.68 | | $ | 0.60 | | $ | 0.53 | | $ | 0.49 | | $ | 0.45 | |
Note: This information should be read in conjunction with MD&A and the Consolidated Financial Statements.
Fiscal year 2016, 2018, 2019 and 2020 each include 52 weeks. Fiscal year 2017 includes 53 weeks.
Total assets and long-term liabilities, including obligations under finance leases, were impacted in 2019 by the adoption of ASU 2016-02, “Leases,” as further described in Notes 10 and 18 to the Consolidated Financial Statements. Prior period amounts were not adjusted and continue to be reported in accordance with our historic accounting policies.
Products and services related primarily to Kroger Personal Finance and Media, which were historically accounted for as an offset to operating, general and administrative expenses (“OG&A”), are classified as a component of sales as of the beginning of fiscal year 2019, except for certain amounts in Media, which are netted against merchandise costs. The prior-year amounts have been reclassified to conform to current-year presentation with the exception of 2016, which was not material and not adjusted for the sales reclassification.
Fiscal year ended February 2, 2019 includes the gain on sale of our convenience store business unit. Additionally, refer to Note 17 to the Consolidated Financial Statements for disclosure of disposals of businesses.
Refer to Note 2 ofto the Consolidated Financial Statements for disclosure of business combinations and their effect on each of the last three fiscal years’ Consolidated Statements of Operations and the last two fiscal years’ Consolidated Balance Sheets. All share and per share amounts presented are reflective of the two-for-one stock split that began trading at the split adjusted price on July 14, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal Years Ended |
| |||||||||||||
|
| January 28, |
| January 30, |
| January 31, |
| February 1, |
| February 2, |
| |||||
|
| 2017 |
| 2016 |
| 2015 |
| 2014 |
| 2013 |
| |||||
|
| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
| (53 weeks) |
| |||||
|
| (In millions, except per share amounts) |
| |||||||||||||
Sales |
| $ | 115,337 |
| $ | 109,830 |
| $ | 108,465 |
| $ | 98,375 |
| $ | 96,619 |
|
Net earnings including noncontrolling interests |
|
| 1,957 |
|
| 2,049 |
|
| 1,747 |
|
| 1,531 |
|
| 1,508 |
|
Net earnings attributable to The Kroger Co. |
|
| 1,975 |
|
| 2,039 |
|
| 1,728 |
|
| 1,519 |
|
| 1,497 |
|
Net earnings attributable to The Kroger Co. per diluted common share |
|
| 2.05 |
|
| 2.06 |
|
| 1.72 |
|
| 1.45 |
|
| 1.39 |
|
Total assets |
|
| 36,505 |
|
| 33,897 |
|
| 30,497 |
|
| 29,281 |
|
| 24,634 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term liabilities, including obligations under capital leases and financing obligations |
|
| 16,935 |
|
| 14,128 |
|
| 13,663 |
|
| 13,181 |
|
| 9,359 |
|
Total shareholders’ equity — The Kroger Co. |
|
| 6,698 |
|
| 6,820 |
|
| 5,412 |
|
| 5,384 |
|
| 4,207 |
|
Cash dividends per common share |
|
| 0.450 |
|
| 0.395 |
|
| 0.340 |
|
| 0.308 |
|
| 0.248 |
|
1220
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion and analysis of financial condition and results of operations of The Kroger Co. should be read in conjunction with the “Forward-looking Statements” section set forth in Part I and the “Risk Factors” section set forth in Item 1A of Part II. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the “Outlook” section below.accompanying notes thereto contained in Item 8 of this report, as well as Part II, Item 7 “Management's Discussion and Analysis of Financial Condition and Results of Operations” of our Form 10-K for the year ended February 1, 2020, which provides additional information on comparisons of fiscal years 2019 and 2018.
EXECUTIVE SUMMARY – OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
We are proud of our results in 2020 and the balance achieved in delivering for all our key stakeholders – our Associates, Customers, Communities and Investors. We gained market share and exceeded guidance that we gave in the second half of 2020. We committed more than $2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including a $1 billion commitment to a UFCW pension fund. Identical sales, without fuel, were 14.1% for 2020, as customers continued to consolidate trips and spend more per transaction. We grew digital sales triple digits in 2020, enabled by our team’s ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers’ demand for safe, low-touch or touchless shopping modalities. Our strong performance in digital is also a testament to the proactive investments we made over the last several years in our network, which positioned us to respond with agility during this critical time. We were disciplined in balancing investments in our customers and associates with cost savings. For the third year in a row, our operations and sourcing teams delivered over $1 billion in incremental cost savings. These savings continue to be focused in areas that take complexity out of the business and allow our associates to provide a better customer experience. Strong execution by our team and accelerated investments in our competitive moats – Fresh, Our Brands, Data & Personalization and Seamless, during the pandemic allowed us to create significant value for shareholders and strengthen our balance sheet, including accelerated growth in our alternative profit business. The momentum we see in our business, which started pre-pandemic and accelerated during the pandemic, places us in an even better position to grow sales and profitability in the future and deliver on our total shareholder return commitments.
Our financial model is underpinned by our leading position in food. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats, to drive sales growth in our retail supermarket business, including fuel and pharmacy. This in turn generates the data and traffic that enables our fast-growing alternative profit streams. Our financial strategy is to continue to use our free cash flow to invest in the business to drive long-term sustainable net earnings growth, through the identification of high-return projects that support our strategy. Capital allocation is a core element of our value creation model, and we will allocate capital towards driving profitable sales growth, accelerating digital, expanding margin as well as maintaining the business. We will continue to be disciplined in deploying capital towards projects that exceed our hurdle rate of return and prioritize the highest return opportunities to drive 3% to 5% net earnings growth. At the same time, we are committed to maintaining our net debt to adjusted EBITDA range of 2.30 to 2.50 in order to keep our current investment grade debt rating. Our resilient cash flow will allow us to continue to grow our dividend over time and continue to return excess cash to investors via share repurchases, resulting in consistently strong and sustainable total shareholder return of between 8% and 11%.
21
The following table provides highlights of our financial performance:
Financial Performance Data
($ in millions, except per share amounts)
| | | | | | | | | |
| | Fiscal Year | | ||||||
| | |
| Percentage |
| | | ||
| | 2020 | | Change | | 2019 | | ||
Sales | | $ | 132,498 | | 8.4 | % | $ | 122,286 | |
Sales without fuel | | | 123,012 | | 13.7 | % | | 108,234 | |
Net earnings attributable to The Kroger Co. | | | 2,585 | | 55.8 | % | | 1,659 | |
Adjusted net earnings attributable to The Kroger Co. | |
| 2,740 | | 53.4 | % |
| 1,786 | |
Net earnings attributable to The Kroger Co. per diluted common share | |
| 3.27 | | 60.3 | % |
| 2.04 | |
Adjusted net earnings attributable to The Kroger Co. per diluted common share | | | 3.47 | | 58.4 | % |
| 2.19 | |
Operating profit | | | 2,780 | | 23.5 | % | | 2,251 | |
Adjusted FIFO operating profit | | | 4,056 | | 35.4 | % | | 2,995 | |
Dividends paid | | | 534 | | 9.9 | % | | 486 | |
Dividends paid per common share | | | 0.68 | | 13.3 | % | | 0.60 | |
Identical sales excluding fuel | | | 14.1 | % | N/A | | | 2.0 | % |
FIFO gross margin rate, excluding fuel, bps increase (decrease) | | | 0.14 | | N/A | | | (0.23) | |
OG&A rate, excluding fuel and Adjusted Items, bps decrease | | | 0.06 | | N/A | | | 0.29 | |
Reduction in total debt, including obligations under finance leases compared to prior fiscal year end | | | 663 | | N/A | | | 1,153 | |
Share repurchases | | | 1,324 | | N/A | | | 465 | |
OVERVIEW
Notable items for 2020 are:
Shareholder Return
| ● | Net earnings attributable to The Kroger Co. per diluted common share of $3.27. |
| ● | Adjusted net earnings attributable to The Kroger Co. per diluted common share of $3.47. |
| ● | Achieved operating profit of $2.8 billion. |
| ● | Achieved adjusted FIFO operating profit of $4.1 billion. |
| ● | Generated cash from operations of $6.8 billion. |
| ● | Increased cash and temporary cash investments by $1.3 billion, reflecting improved operating performance, significant improvements in working capital and the deferral of tax payments as a result of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) which was enacted in the first quarter of 2020. |
| ● | Returned $1.9 billion to shareholders through share repurchases and dividend payments. |
| ● | Decreased total debt, including obligations under finance leases, by $663 million. |
Other Financial Results
| ● | Identical sales, excluding fuel, increased 14.1% in 2020. |
| ● | Digital revenue grew 116% in 2020. Digital revenue primarily includes Pickup, Delivery, Ship and pharmacy e-commerce sales. |
| ● | Alternative profit streams contributed an incremental $150 million of operating profit in 2020 fueled by our retail media business – Kroger Precision Marketing. |
22
| ● | Cost savings for 2020 exceeded $1 billion. |
Significant Events
| ● | During the fourth quarter of 2020, certain of the Company’s associates ratified an agreement with certain UFCW local unions to withdraw from the UFCW International Union-Industry Pension Fund (“National Fund”). We incurred a withdrawal liability charge of $962 million, on a pre-tax basis, to fulfill obligations for past service for associates and retirees in the National Fund. We also made a $27 million commitment to a transition reserve in the new variable annuity pension plan. On an after-tax basis, the withdrawal liability and commitment to the transition reserve total $754 million (collectively, the “National Fund Commitment”). The withdrawal liability will be satisfied by payments to the National Fund over the next three years. |
| ● | During 2020, we invested over $1.5 billion to support and safeguard associates, customers and communities during the COVID-19 pandemic. These investments primarily relate to items within OG&A such as associate appreciation awards, expanded sick and emergency leave pay and investments in associate and customer safety during the pandemic (collectively, the “COVID-19 Investments”). Supported by our strong performance and cash position, we committed more than $2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including the National Fund Commitment. |
| ● | During the first quarter of 2020, in addition to the recurring multi-employer pension contributions we make in the normal course of business, we contributed an incremental $236 million, $180 million net of tax, to multi-employer pension plans, helping stabilize future associate benefits (the “First Quarter 2020 Multi-Employer Pension Contribution”). |
COVID-19
On March 11, 2020, the World Health Organization announced that infections of COVID-19 had become a pandemic, and on March 13, the U.S. President announced a National Emergency relating to the disease. The impact on our financial condition, results of operations, and cash flows was material in fiscal year 2020. We expect the ultimate significance will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and any governmental and public actions taken in response.
Since the beginning of the pandemic, our most urgent priority has been to safeguard our associates and customers. We’ve implemented dozens of new safety and cleanliness processes and procedures in our stores and other facilities, including safety partitions and physical distancing floor decals, implementation of customer capacity limits, and providing personal protective equipment like masks for our associates. All of which are described in our Blueprint for Businesses – an open source guide we created to help other companies navigate the complexities of safely operating during a pandemic.
As the pandemic has evolved, we have experienced unusually strong sales. We continue to see people eat and work more from home and prioritize health and cleanliness. The change in customer behavior caused by COVID-19 was a major factor in our 2020 results. The pandemic brought to the forefront the importance to the customer of fresh and digital. We continued to invest and grow our capabilities in these areas, leading to gains in both digital and total food at home market share. Identical sales, without fuel, were 14.1% for 2020, as customers continued to consolidate trips and spend more per transaction. Digital revenue grew 116% in 2020, enabled by our team’s ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers’ demand for safe, low-touch or touchless shopping modalities.
Our OG&A expenses include significant incremental costs related to investments in pay and benefits for our associates and measures to safeguard our associates and customers. Supported by our strong performance and cash position, in 2020 we committed more than $2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including committing nearly $1 billion to better secure pensions for over 30,000 associates. This was in addition to paid emergency leave, financial assistance through our Helping Hands program and more. As a percentage of sales, these incremental costs were partially offset by sales leverage resulting from strong sales growth due to the COVID-19 pandemic.
23
On March 18, 2020, we proactively borrowed $1 billion under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the COVID-19 pandemic. Strong execution by our team and accelerated investments in our competitive moats during the pandemic allowed us to strengthen our balance sheet. During 2020, we fully repaid the $1 billion borrowed under the revolving credit facility and $1.2 billion in outstanding commercial paper obligations, as of year-end 2019, using cash generated by operations.
For additional information about our debt activity in 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior note issuances, see Note 6 to the Consolidated Financial Statements. For additional information about our business results, including the impact of the COVID-19 pandemic, see our Results of Operations and Liquidity and Capital Resources sections within MD&A.
OUR BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. As of January 30, 2021, Kroger is one of the world’s largest retailers, as measured by revenue, operating 2,7962,742 supermarkets under a variety of local banner names in 35 states and the District of Columbia. Of these stores, 2,255 have pharmacies and 1,4451,596 have fuel centers. We also offer ClickList™Pickup (also referred to as ClickList®) and Harris Teeter ExpressLaneExpressLane™ — personalized, order online, pick up at the store services — at 6372,223 of our supermarkets and provide home delivery service to substantially all of Kroger households. We also operate 784 convenience stores, either directly or through franchisees, 319 fine jewelry stores and an online retailer.
We operate 3835 food production plants, primarily bakeries and dairies, which supply approximately 35%29% of Our Brands units and 40% of the corporate brandgrocery category Our Brands units sold in our supermarkets; the remaining corporate brandOur Brands items are produced to our strict specifications by outside manufacturers. This percentage has declined recently due to an expanded portfolio of non-grocery corporate brand units produced by outside manufacturers. Our food production plants produced 45% of our grocery category corporate brand units sold in our supermarkets, which is consistent with our historical trend.
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. We earn income predominately by selling products at price levels that produce revenues in excess of the costs we incur to make these products available to our customers. Such costs include procurement and distribution costs, facility occupancy and operational costs, and overhead expenses. Our retail operations, which represent over 98%97% of our consolidated sales, and EBITDA, is our only reportable segment.
On September 2, 2016,January 27, 2020, Lucky’s Market filed a voluntary petition in the Bankruptcy Court seeking relief under the Bankruptcy Code. Lucky’s Market is included in our Consolidated Statements of Operations in all periods in 2018 and through January 26, 2020. Refer to Note 17 to the Consolidated Financial Statements for additional information.
On April 26, 2019, we completed the sale of our Turkey Hill Dairy business for total proceeds of $225 million. Turkey Hill Dairy is included in our Consolidated Statements of Operations in all periods in 2018 and through April 25, 2019.
On March 13, 2019, we completed the sale of our You Technology business to Inmar for total consideration of $565 million, including $396 million of cash and $64 million of preferred equity received upon closing. We are also entitled to receive other cash payments of $105 million over five years. The transaction includes a long-term service agreement for Inmar to provide us digital coupon services. You Technology is included in our Consolidated Statements of Operations in all periods in 2018 and through March 12, 2019.
On June 22, 2018, we closed our merger with Modern HC Holdings, Inc. (“ModernHEALTH”)Home Chef by purchasing 100% of the outstanding sharesownership interest in Home Chef, for $197 million net of ModernHEALTH for $407 million. ModernHEALTHcash and cash equivalents of $30 million, in addition to future earnout payments of up to $500 million over five years that are contingent on achieving certain milestones. Home Chef is included in our ending Consolidated Balance Sheet for 20162019 and 2020 and in our Consolidated Statements of Operations from SeptemberJune 22, 2018 through February 2, 2016 through January 28, 2017.
On December 18, 2015, we closed our merger with Roundy’s, Inc. (“Roundy’s”) by purchasing 100% of Roundy’s® outstanding common stock for $3.60 per share and assuming Roundy’s outstanding debt, for a purchase price of $866 million. Roundy’s is included in our ending Consolidated Balance Sheets for 2015 and 2016 and in our Consolidated Statements of Operations for the last six weeks of 20152019 and all periods in 2016.
On August 18, 2014, we closed our merger with Vitacost.com® by purchasing 100% of the Vitacost.com outstanding common stock for $8.00 per share or $287 million. Vitacost.com is included in our ending Consolidated Balance Sheets for 20152019 and 2016 and in our Consolidated Statements of Operations for all periods succeeding the merger.
2020. See Note 2 to the Consolidated Financial Statements for more information related to our mergersmerger with ModernHEALTH, Roundy’s and Vitacost.com.Home Chef.
On April 20, 2018, we completed the sale of our convenience store business unit for $2.2 billion. The convenience store business is included in our Consolidated Statements of Operations through April 19, 2018.
1324
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, set forth in Part II, Item 8 of this Form 10-K are presented in accordance with generally accepted accounting principles (“GAAP”). We provide non-GAAP measures, including First-In, First-Out (“FIFO”) gross margin, FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. Our calculation and reasons these are useful metrics to investors and analysts are explained below.
We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out (“LIFO”) charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness. Managementas management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management to evaluate operational effectiveness. Managementas management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
We believe theThe adjusted net earnings and adjusted net earnings per diluted share metric presentsmetrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net earnings and net earnings per diluted share because adjusted items are not the result of our normal operations. Net earnings for 2020 include the following, which we define as the “2020 Adjusted Items:”
OVERVIEW
Notable items for 2016 are:
| ● | |||
|
|
|
|
| ● | Gains in other income (expense) of $1.1 billion, $821 million net of tax, for the gain on investments (the “2020 Other Income (Expense) Adjusted Item”). |
Net earnings for 2019 include the following, which we define as the “2019 Adjusted Items:”
| ● | Charges to |
| ● | Gains in other income (expense) of $106 million, $80 million net of tax, related to the |
Net earnings for 2018 include the following, which we define as the “2018 Adjusted Items:”
| ● | Charges to OG&A of $155 million, $121 million net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund; $33 million, $26 million net of tax, for the revaluation of Home Chef contingent consideration; and $42 million, $33 million net of tax, for an impairment of financial instrument (the “2018 OG&A Adjusted Items”). We had initially received the financial instrument in 2016 with no cash outlay as part of the consideration for entering into agreements with a third party. |
25
| ● | |||
| A reduction to depreciation and amortization expenses of $14 million, $11 million net of tax, related to held for sale assets (the “2018 Depreciation Adjusted |
| ● | |||
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|
14
The following table provides a reconciliation of net earnings attributable to The Kroger Co. to adjusted net earnings attributable to The Kroger Co. and a reconciliation of net earnings attributable to The Kroger Co. per diluted common share to adjusted net earnings attributable to The Kroger Co. per diluted common share, excluding the 20162020, 2019 and 20142018 Adjusted Items. In 2015, we did not have any adjustment items that affect net earnings or net earnings per diluted share.
26
Net Earnings per Diluted Share excluding the Adjusted Items
($ in millions, except per share amounts)
| | | | | | | | | | |
|
| 2020 |
| 2019 |
| 2018 |
| |||
Net earnings attributable to The Kroger Co. | | $ | 2,585 | | $ | 1,659 | | $ | 3,110 | |
(Income) expense adjustments | | | | | | | | | | |
Adjustments for pension plan withdrawal liabilities(1)(2) | |
| 754 | |
| 104 | |
| 121 | |
Adjustment for gain on sale of convenience store business(1)(3) | | | — | | | — | | | (1,360) | |
Adjustment for gain on sale of Turkey Hill Dairy(1)(4) | | | — | | | (80) | | | — | |
Adjustment for gain on sale of You Technology(1)(5) | | | — | | | (52) | | | — | |
Adjustment for gain on investments(1)(6) | | | (821) | | | (119) | | | (174) | |
Adjustment for depreciation related to held for sale assets(1)(7) | | | — | | | — | | | (11) | |
Adjustment for severance charge and related benefits(1)(8) | | | — | | | 61 | | | — | |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(1)(9) | | | — | | | 225 | | | — | |
Adjustment for Home Chef contingent consideration(1)(10) | | | 141 | | | (49) | | | 26 | |
Adjustment for impairment of financial instrument(1)(11) | | | — | | | — | | | 33 | |
Adjustment for transformation costs(1)(12) | | | 81 | | | 37 | | | — | |
Total Adjusted Items | | | 155 | | | 127 | | | (1,365) | |
| | | | | | | | | | |
Net earnings attributable to The Kroger Co. excluding the Adjusted Items | | $ | 2,740 | | $ | 1,786 | | $ | 1,745 | |
| | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | $ | 3.27 | | $ | 2.04 | | $ | 3.76 | |
(Income) expense adjustments | | | | | | | | | | |
Adjustments for pension plan withdrawal liabilities(13) | |
| 0.95 | |
| 0.13 | |
| 0.15 | |
Adjustment for gain on sale of convenience store business(13) | | | — | | | — | | | (1.65) | |
Adjustment for gain on sale of Turkey Hill Dairy(13) | | | — | | | (0.10) | | | — | |
Adjustment for gain on sale of You Technology(13) | | | — | | | (0.06) | | | — | |
Adjustment for gain on investments(13) | | | (1.05) | | | (0.15) | | | (0.21) | |
Adjustment for depreciation related to held for sale assets(13) | | | — | | | — | | | (0.01) | |
Adjustment for severance charge and related benefits(13) | | | — | | | 0.08 | | | — | |
Adjustment for deconsolidation and impairment of Lucky's Market attributable to The Kroger Co.(13) | | | — | | | 0.28 | | | — | |
Adjustment for Home Chef contingent consideration(13) | | | 0.18 | | | (0.07) | | | 0.03 | |
Adjustment for impairment of financial instrument(13) | | | — | | | — | | | 0.04 | |
Adjustment for transformation costs(13) | | | 0.12 | | | 0.04 | | | — | |
Total Adjusted Items | | | 0.20 | | | 0.15 | | | (1.65) | |
| |
| | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share excluding the Adjusted Items | | $ | 3.47 | | $ | 2.19 | | $ | 2.11 | |
| | | | | | | | | | |
Average numbers of common shares used in diluted calculation | |
| 781 | |
| 805 | |
| 818 | |
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
| |||
Net earnings attributable to The Kroger Co. |
| $ | 1,975 |
| $ | 2,039 |
| $ | 1,728 |
|
2016 Adjusted Items (1)(2) |
|
| 71 |
|
| — |
|
| — |
|
2014 Adjusted Items (1)(2) |
|
| — |
|
| — |
|
| 39 |
|
Net earnings attributable to The Kroger Co. excluding the adjusted items above |
| $ | 2,046 |
| $ | 2,039 |
| $ | 1,767 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 2.05 |
| $ | 2.06 |
| $ | 1.72 |
|
2016 Adjusted Items(3) |
|
| 0.07 |
|
| — |
|
| — |
|
2014 Adjusted Items(3) |
|
| — |
|
| — |
|
| 0.04 |
|
Net earnings attributable to The Kroger Co. per diluted common share excluding the adjusted items above |
| $ | 2.12 |
| $ | 2.06 |
| $ | 1.76 |
|
|
|
|
|
|
|
|
|
|
|
|
Average numbers of common shares used in diluted calculation |
|
| 958 |
|
| 980 |
|
| 993 |
|
| (1) |
| The amounts presented represent the after-tax effect of |
| (2) | The |
| (3) |
| The pre-tax |
| (4) | The pre-tax adjustment for gain on sale of Turkey Hill Dairy was ($106). |
| (5) | The pre-tax adjustment for gain on sale of You Technology was ($70). |
| (6) | The pre-tax adjustment for gain on investments was ($1,105) in 2020, ($157) in 2019 and |
| (7) | The pre-tax adjustment for depreciation related to held for sale assets was ($14) in 2018. |
| (8) | The pre-tax adjustment for severance charge and related benefits was $80. |
| (9) | The pre-tax adjustment for deconsolidation and impairment of Lucky’s Market was $412 including $305 attributable to The Kroger Co. |
| (10) | The pre-tax adjustment for Home Chef contingent consideration was $189 in 2020, ($69) in 2019 and $33 in 2018. |
| (11) | The pre-tax adjustment for impairment of financial instrument was $42. |
| (12) | The pre-tax adjustment for transformation costs was $111 |
| (13) |
| The |
27
RESULTS OF OPERATIONS
Sales
Total Sales
($ in millions)
| | | | | | | | | | | | | | |
| | | | |||||||||||
|
| |
| Percentage |
| |
| Percentage |
| | |
| ||
| | 2020 | | Change(1) | | 2019 | | Change(2) | | 2018 | | |||
Total sales to retail customers without fuel(3) | | $ | 122,134 | | 13.6 | % | $ | 107,487 | | 2.2 | % | $ | 105,123 | |
Supermarket fuel sales | | | 9,486 | | (32.5) | % |
| 14,052 | | (5.7) | % |
| 14,903 | |
Convenience stores(4) | |
| — | | — | % |
| — | | — | % |
| 944 | |
Other sales(5) | |
| 878 | | 17.5 | % |
| 747 | | (15.3) | % |
| 882 | |
Total sales | | $ | 132,498 | | 8.4 | % | $ | 122,286 | | 0.4 | % | $ | 121,852 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Percentage |
|
|
|
| Percentage |
|
|
|
|
|
| 2016 |
| Increase(2) |
| 2015 |
| Increase(3) |
| 2014 |
| |||
Total supermarket sales without fuel |
| $ | 96,900 |
| 6.1 | % | $ | 91,310 |
| 5.8 | % | $ | 86,281 |
|
Fuel sales |
|
| 13,979 |
| (5.6) | % |
| 14,804 |
| (21.5) | % |
| 18,850 |
|
Other sales(1) |
|
| 4,458 |
| 20.0 | % |
| 3,716 |
| 11.5 | % |
| 3,334 |
|
Total sales |
| $ | 115,337 |
| 5.0 | % | $ | 109,830 |
| 1.3 | % | $ | 108,465 |
|
| (1) |
|
| (2) | This column represents the percentage change in 2019 compared to 2018. |
| (3) |
|
| (4) | We completed the sale of our convenience store business unit during the first quarter of 2018. |
| (5) | Other sales primarily relate to external sales at |
|
|
|
|
15
Total sales increased in 2016,2020, compared to 2015,2019, by 5.0%8.4%. ThisThe increase was due to an increase in total sales to retail customers without fuel, partially offset by a reduction in supermarket fuel sales and decreased sales due to the disposal of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total sales to retail customers without fuel increased 13.6% in 2020, compared to 2019. The increase was primarily due to our increase in total supermarket sales, without fuel, and our merger with ModernHEALTH, partially offset by a decrease in fuel sales due to a 9.4% decrease in the average retail fuel price. The increase in total supermarket sales without fuel for 2016, compared to 2015, was primarily due to our merger with Roundy’s, an increase in supermarket square footage and our identical supermarket sales increase, excluding fuel, of 1.0%. Identical supermarket14.1%, partially offset by decreased sales due to the deconsolidation of Lucky’s Market in the fourth quarter of 2019. Total sales excluding fuel for 2016,and dispositions increased 14.2% in 2020 compared to 2015, increased2019. The significant increase in identical sales, excluding fuel, was caused by unprecedented demand due to the COVID-19 pandemic, digital sales growth and growth in market share. Market share growth contributed to our identical sales increase, excluding fuel, as our sales outpaced the general growth in the food retail industry during 2020. The increase in identical sales, excluding fuel, was broad based across all supermarket divisions and remained heightened throughout 2020. During the pandemic, customers reduced trips while significantly increasing basket value.
Total supermarket fuel sales decreased 32.5% in 2020, compared to 2019, primarily due to an increasea decrease in the numberfuel gallons sold of households shopping with us, partially offset by product cost deflation of 0.8%. Excluding mergers, acquisitions17.5% and operational closings, total supermarket square footage at the end of 2016 increased 3.4% over 2015. Total fuel sales decreased 5.6% in 2016, compared to 2015, primarily due to a decrease in the average retail fuel price of 9.4%,18.2%. The decrease in fuel gallons sold was reflective of the national trend, which decreased due to the COVID-19 pandemic. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
Total sales increased in 2019, compared to 2018, by 0.4%. The increase was due to an increase in total sales to retail customers without fuel, partially offset by andecreased supermarket fuel sales, a reduction in convenience store sales due to the sale of our convenience store business unit in the first quarter of 2018 and decreased sales due to the disposal of Turkey Hill Dairy and You Technology in the first quarter of 2019. Total sales, excluding fuel, dispositions and the merger with Home Chef increased 2.3% in 2019, compared to 2018. The increase in total sales to retail customers without fuel for 2019, compared to 2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 2.0%. Identical sales, excluding fuel, for 2019, compared to 2018, increased primarily due to growth of loyal households, a higher customer basket value including retail inflation and Kroger Specialty Pharmacy sales growth, partially offset by continued investments in lower prices for our customers.
Total supermarket fuel sales decreased 5.7% in 2019, compared to 2018, primarily due to a decrease in fuel gallons sold of 4.2%4.8% and a decrease in the average retail fuel price of 1.0%. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
Total sales increased in 2015, compared to 2014, by 1.3%. This increase in 2015 total sales, compared to 2014, was primarily due to an increase in28
We calculate identical supermarket sales, excluding fuel, of 5.0%. Totalas sales also increased due to the inclusion of Roundy’sretail customers, including sales due to our merger, for the period of December 18, 2015 to January 30, 2016. Identicalfrom all departments at identical supermarket sales, excluding fuel, for 2015, compared to 2014, increased primarily due to an increase in the number of households shopping with us, an increase in visits per household, changes in product mixlocations, Kroger Specialty Pharmacy businesses and product cost inflation. Total fuel sales decreased in 2015, compared to 2014, primarily due to a 26.7% decrease in the average retail fuel price, partially offset by an increase in fuel gallons sold of 7.1%.
ship-to-home solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Although identical supermarket sales is a relatively standard term, numerous methods exist for calculating identical supermarket sales growth. As a result, the method used by our management to calculate identical supermarket sales may differ from methods other companies use to calculate identical supermarket sales. We urge you to understand the methods used by other companies to calculate identical supermarket sales before comparing our identical supermarket sales to those of other such companies. Fuel discounts received at our fuel centers and earned based on in-store purchases are included in all of the identical supermarket sales results calculations as illustrated in the following table and reduce our identical supermarket sales results. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Identical supermarket sales include sales from all departments at identical multi-department stores and Roundy’s stores that are identical as if they were part of the Company in the prior year. Our identical supermarket sales, excluding fuel, results are summarized in the following table. We used the identical supermarketsales, excluding fuel, dollar figures presented below to calculate percentage changes for 20162020 and 2015.2019.
Identical Supermarket Sales
(dollars$ in millions)
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||
Including supermarket fuel centers |
| $ | 103,180 |
| $ | 103,106 |
|
Excluding supermarket fuel centers |
| $ | 92,451 |
| $ | 91,568 |
|
Including supermarket fuel centers |
|
| 0.1 | % |
| 1.1 | % |
Excluding supermarket fuel centers |
|
| 1.0 | % |
| 5.0 | % |
| | | | | | | |
|
| 2020 |
| 2019 |
| ||
Excluding fuel | | $ | 120,762 | | $ | 105,806 | |
Excluding fuel | |
| 14.1 | % |
| 2.0 | % |
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin.
Our gross margin rates, as a percentage of sales, were 22.40%23.32% in 2016, 22.16%2020 and 22.07% in 2015 and 21.16% in 2014.2019. The increase in 2016,2020, compared to 2015,2019, resulted primarily from lowerdecreased fuel sales, which have a lower LIFO charge and our merger with Roundy’s due to its historically higher gross margin rate, partially offset by continued investments in lower prices for our customers, unfavorable pricing and cost effects due to transitioning to a deflationary operating environment, our merger with ModernHEALTH due to its historically lower gross margin rate, an increase in our fuel gross margin, growth in our alternative profit stream portfolio, effective negotiations to achieve savings on the cost of products sold and increased warehousingdecreased shrink, transportation and shrinkadvertising costs, as a percentage of sales. Thesales, reflecting the significant increase in 2015, compared to 2014, resulted primarily from lower fuel sales reductions in transportation costs and a lower LIFO charge,volumes, partially offset by continued investments in lower prices for our customers and increased shrink costs,a change in our product sales mix, including lower relative sales in higher gross margin categories such as deli/bakery.
Our LIFO credit was $7 million in 2020 compared to a percentageLIFO charge of sales. Lower$105 million in 2019. Our LIFO credit was primarily driven by fourth quarter 2020 working capital improvements in pharmacy inventory and dairy deflation.
Our FIFO gross margin rate, which excludes the LIFO charge, was 23.32% in 2020, compared to 22.16% in 2019. Our fuel sales increaselower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, due to the very low gross margin rate, as a percentage of sales, on fuel sales compared to non-fuel sales.
16
Our LIFO charge was $19 million in 2016, $28 million in 2015 and $147 million in 2014. In 2016, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy, and was partially offset by annualized product cost deflation in other departments. In 2015, we experienced lower product cost inflation, compared to 2014, which resulted in a lower LIFO charge. In 2015, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy, and was partially offset by annualized product cost deflation related to meat and dairy. In 2014, our LIFO charge primarily resulted from annualized product cost inflation related to pharmacy, grocery, deli, meat and seafood.
Our FIFO gross margin rates, as a percentage of sales, were 22.42% in 2016, 22.18% in 2015 and 21.30% in 2014. Excluding the effect of fuel and our mergers with Roundy’s and ModernHEALTH (“recent mergers”), our FIFO gross margin rate decreased seven basis points in 2016, compared to 2015. This decrease resulted primarily from continued investments in lower prices for our customers, unfavorable pricing and cost effects due to transitioning to a deflationary operating environment and increased warehousing and shrink costs, as a percentage of sales. Excluding the effect of fuel, our FIFO gross margin rate decreased fourincreased 14 basis points in 2015,2020, compared to 2014.2019. This decreaseincrease resulted primarily from growth in our alternative profit stream portfolio, effective negotiations to achieve savings on the cost of products sold and decreased shrink, transportation and advertising costs, as a percentage of sales, reflecting the significant increase in sales volumes, partially offset by continued investments in lower prices for our customers and increased shrink costs, partially offset by a reductionchange in transportation costs,our product sales mix, including lower relative sales in higher gross margin categories such as a percentage of sales. deli/bakery.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, health care benefits andhealthcare benefit costs, retirement plan costs, utilityutilities, and credit card fees. Rent expense, depreciation and amortization expense, and interest expense are not included in OG&A.
OG&A expenses, as a percentage of sales, were 16.63%18.49% in 2016, 16.34%2020 and 17.34% in 20152019. The increase in 2020, compared to 2019, resulted primarily from the First Quarter 2020 Multi-Employer Pension Contribution, the 2020 OG&A Adjusted Items, the COVID-19 Investments, growth in our digital channel as a result of heightened demand during the pandemic, increased incentive plan costs and 15.82% in 2014.the effect of decreased fuel sales, which increases our OG&A expenses,rate, as a percentage of sales, increased 29 basis points to 16.63% in 2016 from 16.34% in 2015. This increase resulted primarily from a decrease in fuel sales, the loss of sales leverage due to transitioning to a deflationary operating environment, the 2016 Adjusted Items, our recent mergers due to their historically higher OG&A rate, compared to our other divisions, and increases in healthcare benefit and credit card costs, partially offset by the effect of increased supermarket sales productivity improvements, effective cost controls, $110 million United Food and Commercial Workers International Union (“UFCW”) contributions made during 2015 (“2015 UFCW Contributions”) anddue to the pandemic which decreases in incentive plans, company-sponsored pension plans and utility costs,our OG&A rate, as a percentage of sales. sales, the 2019 OG&A Adjusted Items and broad based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions.
29
Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 20162020 OG&A Adjusted Items recent mergers and the 2015 UFCW Contributions,2019 OG&A Adjusted Items, our OG&A rate decreased five6 basis points in 2016,2020, compared to 2015.2019. This decrease resulted primarily from the effect of increased supermarket sales productivity improvements, effective cost controls and decreases in incentive plans, company-sponsored pension plans and utility costs, partially offset by the loss of sales leverage due to transitioning to a deflationary operating environment and increases in healthcare benefit and credit card costs, as a percentage of sales.
the pandemic which decreases our OG&A expenses,rate, as a percentage of sales increased 52 basis points to 16.34% in 2015and broad based improvement from 15.82% in 2014. This increase resulted primarily from a decrease in fuel sales, increases in EMV chargebacks, company-sponsored pension, healthcarecost savings initiatives that drive administrative efficiencies, store productivity and incentive plan costs,sourcing cost reductions, partially offset by increased supermarket sales, the 2014First Quarter 2020 Multi-Employer Pension Plan Obligation, lower charges for total contributions to The Kroger FoundationContribution, the COVID-19 Investments, growth in our digital channel as a result of heightened demand during the pandemic and UFCW Consolidated Pension Plan (“2014 Contributions”), compared toincreased incentive plan costs. Excluding the 2015 UFCW Contributions, productivity improvements and effective cost controls at the store level. Excluding fuel, the 2015 UFCW Contributions, the 2014 Contributions and the 2014$236 million First Quarter 2020 Multi-Employer Pension Plan Obligation,Contribution from the above calculation, which we proactively made to cover future funding requirements for certain multi-employer pension plans, our OG&A rate decreased nineimproved 25 basis points,points.
Rent Expense
Rent expense was $874 million, or 0.66% of sales, for 2020, compared to 2014. The decrease resulted primarily from increased supermarket sales, productivity improvements and effective cost controls at the store level, partially offset by increases in EMV chargebacks , company-sponsored pension, healthcare and incentive plan costs, as a percentage of sales.
Rent Expense
Rent expense increased on a total dollars and percentage$884 million, or 0.72% of sales, basis in 2016, compared to 2015, due to:
|
|
|
|
17
Rent expense increased in 2015, compared to 2014, due to our merger with Roundy’s, partially offset by our continued emphasis to own rather than lease, whenever possible.for 2019. Rent expense, as a percentage of sales, decreased 6 basis points in 2015 was consistent with 2014,2020, compared to 2019, primarily due to the effect of increased sales due to the pandemic which decreases our merger with Roundy’s being offset by our continued emphasis to own rather than lease, whenever possible, and the benefitrent expense, as a percentage of increased sales.
Depreciation and Amortization Expense
Depreciation and amortization expense increased on a total dollars and percentagewas $2.7 billion, or 2.07% of sales, basis in 2016,for 2020, compared to 2015, due to:
|
|
|
|
|
|
$2.6 billion, or 2.17% of sales, for 2019. Depreciation and amortization expense, increased on a total dollars and percentage of sales basis in 2015, compared to 2014, due to:
|
|
|
|
Operating Profit and FIFO Operating Profit
Operating profit was $3.4 billion in 2016, $3.6 billion in 2015 and $3.1 billion in 2014. Operating profit, as a percentage of sales, decreased 2810 basis points in 2016,2020, compared to 2015,2019. This decrease resulted primarily from the effect of increased sales due to increased OG&A,the pandemic which decreases our depreciation and amortization and rent expenses, partially offset by higher gross margin and a lower LIFO charge,expense, as a percentage of sales.sales, partially offset by decreased fuel sales, which increases our depreciation expense, as a percentage of sales, additional depreciation on capital investments, excluding mergers and lease buyouts, of $3.2 billion during 2020 and a decrease in the average useful life on these capital investments. Our strategy includes initiatives to enhance the customer experience in stores, improve our process efficiency and integrate our digital shopping experience through technology developments. As such, the percentage of capital investments related to digital and technology has grown compared to the prior year, which has caused a decrease in the average depreciable life of our capital portfolio.
Operating Profit and FIFO Operating Profit
Operating profit was $2.8 billion, or 2.10% of sales, for 2020, compared to $2.3 billion, or 1.84% of sales, for 2019. Operating profit, as a percentage of sales, increased 3726 basis points in 2015,2020, compared to 2014,2019, due to improved sales to retail customers without fuel, a higher gross margin rate, decreased rent and depreciation and amortization expenses, as a lower LIFO charge,percentage of sales, and increased fuel earnings, partially offset by increased OG&A expense with fuel, as a percentage of sales.
FIFO operating profit was $2.8 billion, or 2.09% of sales, for 2020, compared to $2.4 billion, or 1.93% of sales, for 2019. FIFO operating profit, excluding the 2020 and 2019 Adjusted Items, increased 64 basis points in 2020, compared to 2019, due to improved sales to retail customers without fuel, a higher gross margin rate, decreased rent and depreciation and amortization and rent expenses, as a percentage of sales, and increased fuel earnings, partially offset by increased OG&A expense with fuel, as a percentage of sales.
Specific factors of thesecontributing to the trends driving operating trendsprofit and FIFO operating profit identified above are discussed earlier in this section.
30
The following table provides a reconciliation of operating profit to FIFO operating profit, was $3.5 billionexcluding the 2020 and 2019 Adjusted Items.
Operating Profit excluding the Adjusted Items
($ in 2016, $3.6 billion in 2015 and $3.3 billion in 2014. FIFO operating profit, as a percentage of sales, was 3.00% in 2016, 3.28% in 2015 and 3.03% in 2014. Fuel sales lower our operating profit rate due to the very low operating profit rate, as a percentage of sales, of fuel sales compared to non-fuel sales. FIFO operating profit, as a percentage of sales excluding fuel, the 2016 Adjusted Items, the effects of our recent mergers and the 2015 UFCW Contributions, decreased 14 basis points in 2016, compared to 2015. This decrease was due to lower gross margin, higher depreciation and amortization, partially offset by decreased OG&A and rent expenses, as a percentage of sales. FIFO operating profit, as a percentage of sales excluding fuel, the effects of our Roundy’s merger, the 2015 UFCW Contributions, the 2014 Contributions and the 2014 Multi-Employer Pension Plan Obligation, increased 8 basis points in 2015, compared to 2014. This increase was primarily due to decreased OG&A and rent, partially offset by lower gross margin and increased depreciation and amortization, as a percentage of sales. Specific factors of these operating trends are discussed earlier in this section. millions)
| | | | | | | |
|
| 2020 |
| 2019 | | ||
Operating profit | | $ | 2,780 | | $ | 2,251 | |
LIFO (credit) charge | | | (7) | | | 105 | |
| |
| | | | | |
FIFO Operating profit | |
| 2,773 | |
| 2,356 | |
| | | | | | | |
Adjustment for pension plan withdrawal liabilities | | | 989 | | | 135 | |
Adjustment for Home Chef contingent consideration | | | 189 | | | (69) | |
Adjustment for severance charge and related benefits | | | — | | | 80 | |
Adjustment for transformation costs(1) | | | 111 | | | 52 | |
Adjustment for deconsolidation and impairment of Lucky's Market(2) | | | — | | | 412 | |
Other | | | (6) | | | 29 | |
| | | | | | | |
2020 and 2019 Adjusted items | | | 1,283 | | | 639 | |
| | | | | | | |
Adjusted FIFO operating profit excluding the adjustment items above | | $ | 4,056 | | $ | 2,995 | |
| (1) | Transformation costs primarily include costs related to store and business closures and third-party professional consulting fees associated with business transformation and cost saving initiatives. |
| (2) | The adjustment for impairment of Lucky’s Market includes a $107 million net loss attributable to the minority interest of Lucky’s Market. |
Interest Expense
Interest expense totaled $522$544 million in 2016, $4822020 and $603 million in 2015 and $488 million in 2014. The increase in interest expense in 2016, compared to 2015, resulted primarily from additional borrowings used for share repurchases, mergers and a higher weighted average interest rate.2019. The decrease in interest expense in 2015,2020, compared to 2014,2019, resulted primarily from decreased borrowings. Over the timing oflast 12 months, we decreased total debt, principal payments and debt issuances, partially offsetincluding obligations under finance leases, by an increase in interest expense associated with our commercial paper program. $663 million.
18
Income Taxes
Our effective income tax rate was 32.8%23.2% in 2016, 33.8%2020 and 23.7% in 2015 and 34.1% in 2014.2019. The 20162020 tax rate differed from the federal statutory rate primarily as a resultdue to the effect of the recognition of excess tax benefits related to share-based payments after the adoption of ASU 2016-09,state income taxes, partially offset by the utilization of tax credits the Domestic Manufacturing Deduction and other changes, partially offset by the effect of state income taxes.deductions. The 2015 and 20142019 tax rate differed from the federal statutory rate primarily as a result of the utilization of tax credits, the Domestic Manufacturing Deduction and other changes, partially offset bydue to the effect of state income taxes.taxes and Lucky’s Market losses attributable to the noncontrolling interest which reduced pre-tax income but did not impact tax expense.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings of $2.05were $3.27 per diluted share in 2016 represented a decrease of 0.5% fromfor 2020 compared to net earnings of $2.06$2.04 per diluted share in 2015. Excluding the 2016for 2019. Adjusted Items, net earnings of $2.12$3.47 per diluted share in 2016for 2020 represented an increase of 2.9% from58.4% compared to adjusted net earnings of $2.06$2.19 per diluted share for 2019. The increase in 2015. Theadjusted net earnings of 2015 do not include any adjusted items. The 2.9% increaseper diluted share resulted primarily from a lowerincreased FIFO operating profit without fuel, the decrease in the LIFO charge, lower income tax expenseincreased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower non-fuel FIFO operating profit and lower fuel earnings.
Net earnings of $2.06 per diluted share in 2015 represented a increase of 19.8% from net earnings of $1.72 per diluted share in 2014. Excluding the 2014 Adjusted Items, net earnings of $2.06 per diluted share in 2015 represented an increase of 17.0% from net earnings of $1.76 per diluted share in 2014. The net earnings of 2015 do not include any adjusted items. The 17.0% increase resulted primarily from higher non-fuel FIFO operating profit, a lower LIFO charge and lower weighted average common shares outstanding due to common share repurchases, partially offset by lower fuel earnings and higher income tax expense.
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COMMON SHARE REPURCHASE PROGRAMS
We maintain share repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 and allow for the orderly repurchase of our common shares, from time to time. The share repurchase programs do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. We made open market purchases of our common shares totaling $1.7$1.2 billion in 2016, $5002020 and $400 million in 2015 and $1.1 billion in 2014 under these repurchase programs. 2019.
In addition to these repurchase programs, we also repurchase common shares to reduce dilution resulting from our employee stock option plans. This program is solely funded by proceeds from stock option exercises, and the tax benefit from these exercises. We repurchased approximately $105$128 million in 2016, $2032020 and $65 million in 2015 and $155 million in 20142019 of our common shares under the stock option program.
The followingOn November 5, 2019, our Board of Director authorizations createdDirectors approved a $1.0 billion share repurchase programsprogram to reacquire shares via open market purchases:purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “November 2019 Repurchase Program”). On September 11, 2020, our Board of Directors approved a $1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the “September 2020 Repurchase Program”). The September 2020 Repurchase Program authorization replaced the existing November 2019 Repurchase Program.
The shares repurchased in 2020 were reacquired under the following share repurchase programs:
| The November 2019 Repurchase Program. |
| ● | The September 2020 Repurchase Program. |
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As of January 30, 2021, there was $400 million remaining under the September 2020 Repurchase Program.
During the first quarter through March 28, 2017, the Company used24, 2021, we repurchased an additional $341$36 million of cash to repurchase 11 millionour common shares at an average price of $31.09 per share.under the stock option program and $191 million additional shares under the September 2020 Repurchase Program. As of March 28, 2017,24, 2021, we have exhausted the September 2016 program and have $498$209 million remaining under the March 2017 program.September 2020 Repurchase Program.
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CAPITAL INVESTMENTS
Capital investments, including changes in construction-in-progress payables and excluding mergers and the purchase of leased facilities, totaled $3.7$3.2 billion in 2016, $3.32020 and $3.0 billion in 2015 and $2.7 billion in 2014. Capital investments for mergers totaled $401 million in 2016, $168 million in 2015 and $252 million in 2014. We merged with ModernHEALTH in 2016, Roundy’s in 2015 and Vitacost.com in 2014. Refer to Note 2 to the Consolidated Financial Statements for more information on these mergers.2019. Capital investments for the purchase of leased facilities totaled $5$58 million in 2016, $352020 and $82 million in 2015 and $135 million in 2014.2019. The table below shows our supermarket storing activity and our total supermarket square footage:
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Supermarket Storing Activity
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| 2015 |
| 2014 |
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| 2020 |
| 2019 |
| 2018 |
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Beginning of year |
| 2,778 |
| 2,625 |
| 2,640 |
|
| 2,757 |
| 2,764 |
| 2,782 | |
Opened |
| 50 |
| 31 |
| 33 |
|
| 5 |
| 10 |
| 10 | |
Opened (relocation) |
| 21 |
| 12 |
| 13 |
|
| 6 |
| 9 |
| 4 | |
Acquired |
| — |
| 159 |
| — |
|
| — |
| 6 |
| 10 | |
Closed (operational) |
| (32) |
| (37) |
| (48) |
|
| (20) |
| (19) |
| (38) | |
Closed (relocation) |
| (21) |
| (12) |
| (13) |
|
| (6) |
| (13) |
| (4) | |
End of year |
| 2,796 |
| 2,778 |
| 2,625 |
|
| 2,742 |
| 2,757 |
| 2,764 | |
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Total supermarket square footage (in millions) |
| 178 |
| 173 |
| 162 |
|
| 179 |
| 180 |
| 179 | |
RETURN ON INVESTED CAPITAL
We calculate return on invested capital (“ROIC”) by dividing adjusted ROIC operating profit for the prior four quarters by the average invested capital. Adjusted operating profit for ROIC purposes is calculated by excluding certain items included in operating profit, and adding back our LIFO charge (credit), depreciation and amortization and rent to our U.S. GAAP operating profit of the prior four quarters. Average invested capital is calculated as the sum of (i) the average of our total assets, (ii) the average LIFO reserve, (iii) the average accumulated depreciation and amortization and (iv) a rent factor equalfor 2019, an adjustment due to total rent for the last four quarters multiplied by a factoradoption of eight;ASU 2016-02, “Leases,” at the beginning of 2019 as further described in Notes 10 and 18 to the Consolidated Financial Statements; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages, and (iv) the average other current liabilities, excluding accrued income taxes.taxes, (v) the average liabilities held for sale and (vi) certain other adjustments. Averages are calculated for ROIC by adding the beginning balance of the first quarter and the ending balance of the fourth quarter, of the last four quarters, and dividing by two. We use a factor of eight for our total rent as we believe this is a common factor used by our investors, analysts and rating agencies. ROIC is a non-GAAP financial measure of performance. ROIC should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. ROIC is an important measure used by management to evaluate our investment returns on capital. Management believes ROIC is a useful metric to investors and analysts because it measures how effectively we are deploying our assets.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company’s ROIC. As a result, the method used by our management to calculate ROIC may differ from methods other companies use to calculate their ROIC. We urge you to understand the methods used by other companies to calculate their ROIC before comparing our ROIC to that of such other companies.
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The following table provides a calculation of ROIC for 20162020 and 2015.2019 on a 52 week basis ($ in millions). The January 30, 20162019 calculation of ROIC excludes the financial position and results forof operations of You Technology and Turkey Hill Dairy, due to the Roundy's merger.sales in 2019, and Lucky’s Market, due to the deconsolidation in 2019.
| | | | | | | |
| | Fiscal Year Ended | | ||||
| | January 30, | | February 1, | | ||
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| 2021 | | 2020 |
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Return on Invested Capital | | | | | | | |
Numerator | | | | | | | |
Operating profit | | $ | 2,780 | | $ | 2,251 | |
LIFO charge (credit) | |
| (7) | |
| 105 | |
Depreciation and amortization | |
| 2,747 | |
| 2,649 | |
Rent | |
| 874 | |
| 884 | |
Adjustment for Home Chef contingent consideration | | | 189 | | | (69) | |
Adjustment for pension plan withdrawal liabilities | | | 989 | | | 135 | |
Adjustment for severance charge and related benefits | | | — | | | 80 | |
Adjustment for transformation costs | | | 111 | | | 52 | |
Adjustment for deconsolidation and impairment of Lucky's Market | | | — | | | 412 | |
Adjustment for operating losses of Lucky's Market | | | — | | | 75 | |
Adjustment for disposal of You Technology | |
| — | |
| (49) | |
Adjusted ROIC operating profit | | $ | 7,683 | | $ | 6,525 | |
| | | | | | | |
Denominator | | | | | | | |
Average total assets | | $ | 46,959 | | $ | 41,687 | |
Average taxes receivable(1) | |
| (74) | |
| (41) | |
Average LIFO reserve | |
| 1,377 | |
| 1,329 | |
Average accumulated depreciation and amortization | |
| 24,161 | |
| 23,404 | |
Average trade accounts payable | |
| (6,514) | |
| (6,204) | |
Average accrued salaries and wages | |
| (1,291) | |
| (1,198) | |
Average other current liabilities(2) | |
| (4,926) | |
| (3,942) | |
Average liabilities held for sale | |
| — | |
| (26) | |
Adjustment for disposal of Turkey Hill Dairy | | | — | | | (45) | |
Adjustment for disposal of You Technology | | | — | | | (13) | |
Adjustment for deconsolidation of Lucky's Market | | | — | | | (25) | |
Initial operating lease assets at adoption of ASU 2016-02, “Leases” (see Notes 10 and 18) | |
| — | |
| 3,406 | |
Average invested capital | | $ | 59,692 | | $ | 58,332 | |
Return on Invested Capital | |
| 12.87 | % |
| 11.19 | % |
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| Rolling Four Quarters Ended |
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| January 28, 2017 |
| January 30, 2016 |
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Return on Invested Capital |
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Numerator |
|
|
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|
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Operating profit |
| $ | 3,436 |
| $ | 3,576 |
|
LIFO (credit) charge |
|
| 19 |
|
| 28 |
|
Depreciation and amortization |
|
| 2,340 |
|
| 2,089 |
|
Rent |
|
| 881 |
|
| 723 |
|
Adjustments for pension plan agreements |
|
| 111 |
|
| — |
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Other |
|
| — |
|
| (13) |
|
Adjusted operating profit |
| $ | 6,787 |
| $ | 6,403 |
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Denominator |
|
|
|
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Average total assets |
| $ | 35,201 |
| $ | 32,197 |
|
Average taxes receivable (1) |
|
| (262) |
|
| (206) |
|
Average LIFO reserve |
|
| 1,283 |
|
| 1,259 |
|
Average accumulated depreciation and amortization |
|
| 18,940 |
|
| 17,441 |
|
Average trade accounts payable |
|
| (5,773) |
|
| (5,390) |
|
Average accrued salaries and wages |
|
| (1,330) |
|
| (1,359) |
|
Average other current liabilities (2) |
|
| (3,265) |
|
| (3,054) |
|
Adjustment for Roundy’s merger |
|
| — |
|
| (714) |
|
Rent x 8 |
|
| 7,048 |
|
| 5,784 |
|
Average invested capital |
| $ | 51,842 |
| $ | 45,958 |
|
Return on Invested Capital |
|
| 13.09 | % |
| 13.93 | % |
(1)Taxes receivable were $66 as of January 30, 2021 and $82 as of February 1, 2020. We did not have any taxes receivable as of February 2, 2019.
34 |
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CRITICAL ACCOUNTING POLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Our significant accounting policies are summarized in Note 1 to the Consolidated Financial Statements.
The preparation of financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues, and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could differ from those estimates.
We believe that the following accounting policies are the most critical in the preparation of our financial statements because they involve the most difficult, subjective or complex judgments about the effect of matters that are inherently uncertain.
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Self-Insurance Costs
We primarily are self-insured for costs related to workers’ compensation and general liability claims. The liabilities represent our best estimate, using generally accepted actuarial reserving methods, of the ultimate obligations for reported claims plus those incurred but not reported for all claims incurred through January 28, 2017. We establish case reserves for reported claims using case-basis evaluation of the underlying claim data and we update as information becomes known.
For both workers’ compensation and general liability claims, we have purchased stop-loss coverage to limit our exposure to any significant exposure on a per claim basis. We are insured for covered costs in excess of these per claim limits. We account for the liabilities for workers’ compensation claims on a present value basis utilizing a risk-adjusted discount rate. A 25 basis point decrease in our discount rate would increase our liability by approximately $2 million. General liability claims are not discounted.
The assumptions underlying the ultimate costs of existing claim losses are subject to a high degree of unpredictability, which can affect the liability recorded for such claims. For example, variability in inflation rates of health care costs inherent in these claims can affect the amounts realized. Similarly, changes in legal trends and interpretations, as well as a change in the nature and method of how claims are settled can affect ultimate costs. Our estimates of liabilities incurred do not anticipate significant changes in historical trends for these variables, and any changes could have a considerable effect on future claim costs and currently recorded liabilities.
Impairments of Long-Lived Assets
We monitor the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, we perform an impairment calculation, comparing projected undiscounted cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If we identify impairment for long-lived assets to be held and used, we compare the assets’ current carrying value to the assets’ fair value. Fair value is determined based on market values or discounted future cash flows. We record impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, we adjust the value of the property and equipment to reflect recoverable values based on our previous efforts to dispose of similar assets and current economic conditions. We recognize impairment for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal.
We recorded asset impairments in the normal course of business totaling $26$70 million in 2016, $462020. In 2019, we recognized an impairment charge related to Lucky’s Market totaling $238 million. The Lucky’s Market impairment charge consisted of property, plant and equipment of $200 million; goodwill of $19 million; operating lease assets of $11 million; and other charges of $8 million. Additionally, we recorded asset impairments totaling $120 million in 2015 and $372019, including $70 million of operating lease assets. This 2019 impairment charge included the 35 planned store closures across our footprint in 2014.2020 related to our transformation efforts. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as “Operating, general and administrative”OG&A expense.
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The factors that most significantly affect the impairment calculation are our estimates of future cash flows. Our cash flow projections look several years into the future and include assumptions on variables such as inflation, the economy and market competition. Application of alternative assumptions and definitions, such as reviewing long-lived assets for impairment at a different level, could produce significantly different results.
GoodwillBusiness Combinations
We account for business combinations using the acquisition method of accounting. All the assets acquired, liabilities assumed and amounts attributable to noncontrolling interests are recorded at their respective fair values at the date of acquisition once we obtain control of an entity. The determination of fair values of identifiable assets and liabilities involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in such instances, including the income approach. Significant estimates used in determining fair value include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill. See Note 3 for further information about goodwill.
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Goodwill
Our goodwill totaled $3.0$3.1 billion as of January 28, 2017.30, 2021. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our operating divisions and variable interestother consolidated entities (collectively, “reporting units”) that have goodwill balances. FairGenerally, fair value is determined using a multiple of earnings, or discounted projected future cash flows, and we compare fair value to the carrying value of a reporting unit for purposes of identifying potential impairment. We base projected future cash flows on management’s knowledge of the current operating environment and expectations for the future. If we identify potential for impairment, we measure the fair value of a reporting unit against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. We recognize goodwill impairment for any excess of thea reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit’s goodwill over the implied fair value.unit.
TheOur annual evaluation of goodwill is performed for our reporting units during the fourth quarterquarter. The 2020 fair value of 2016, 2015our Kroger Specialty Pharmacy reporting unit was estimated using multiple valuation techniques: a discounted cash flow model (income approach), a market multiple model and 2014a comparable mergers and acquisition model (market approaches), with each method weighted in the calculation. The income approach relies on management’s projected future cash flows, estimates of revenue growth rates, margin assumptions and an appropriate discount rate. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples. The annual evaluation of goodwill performed in 2020, 2019 and 2018 did not result in impairment.impairment for any of our reporting units. Based on current and future expected cash flows, we believe additional goodwill impairments are not reasonably likely. A 10% reduction in fair value of our reporting units would not indicate a potential for impairment of our goodwill balance.
For additional information relating to our results of the goodwill impairment reviews performed during 2016, 20152020, 2019 and 20142018, see Note 3 to the Consolidated Financial Statements.
The impairment review requires the extensive use of management judgment and financial estimates. Application of alternative estimates and assumptions such as reviewing goodwill for impairment at a different level, could produce significantly different results. The cash flow projections embedded in our goodwill impairment reviews can be affected by several factors such as inflation, business valuations in the market, the economy, market competition and our ability to successfully integrate recently acquired businesses.
Store Closing Costs
We provide for closed store liabilities on the basis of the present value of the estimated remaining non-cancellable lease payments after the closing date, net of estimated subtenant income. We estimate the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. We usually pay closed store lease liabilities 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 actual exit costs differing from original estimates. We make adjustments for changes in estimates in the period in which the change becomes known. We review store closing liabilities quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs is adjusted to earnings in the proper period.
We estimate subtenant income, future cash flows and asset recovery values based on our experience and knowledge of the market in which the closed store is located, our previous efforts to dispose of similar assets and current economic conditions. The ultimate cost of the disposition of the leases and the related assets is affected by current real estate markets, inflation rates and general economic conditions.
We reduce owned stores held for disposal to their estimated net realizable value. We account for costs to reduce the carrying values of property, equipment and leasehold improvements in accordance with our policy on impairment of long-lived assets. We classify inventory write-downs in connection with store closings, if any, in “Merchandise costs.” We expense costs to transfer inventory and equipment from closed stores as they are incurred.
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Post-Retirement Benefit Plans
We account for our defined benefit pension plans using the recognition and disclosure provisions of GAAP, which require the recognition of the funded status of retirement plans on the Consolidated Balance Sheet. We record, as a component of Accumulated Other Comprehensive Income (“AOCI”), actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized.
The determination of our obligation and expense for Company-sponsored pension plans and other post-retirement benefits is dependent upon our selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in Note 15 to the Consolidated Financial Statements and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality and the rate of increases in compensation and health care costs. Actual results that differ from our assumptions are accumulated and amortized over future periods and, therefore, generally affect our recognized expense and recorded obligation in future periods. While we believe that our assumptions are appropriate, significant differences in our actual experience or significant changes in our assumptions, including the discount rate used and the expected return on plan assets, may materially affect our pension and other post-retirement obligations and our future expense. Note 15 to the Consolidated Financial Statements also discusses the effect of a 1% change in the assumed health care cost trend rate on other post-retirement benefit costs and the related liability.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. Our methodology for selecting the discount rates was to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 4.25% and 4.18% discount rates as of year-end 2016 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. We utilized a discount rate of 4.62% and 4.44% as of year-end 2015 for pension and other benefits, respectively. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of January 28, 2017, by approximately $510 million.
To determine the expected rate of return on pension plan assets held by Kroger for 2016, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. In 2016, our assumed pension plan investment return rate was 7.40% compared to 7.44% in 2015 and 2014. During 2016, Kroger began managing the assets for the Harris Teeter and Roundy’s pension plans, and our expected rate of return reflects implementing a similar investment management strategy for the Harris Teeter and Roundy’s plans’ assets. Historically, the Kroger pension plans’ average rate of return was 5.81% for the 10 calendar years ended December 31, 2016, net of all investment management fees and expenses. The value of all investments in our Company-sponsored defined benefit pension plans during the calendar year ending December 31, 2016, net of investment management fees and expenses, increased 6.90%. For the past 20 years, the Kroger pension plans’ average annual rate of return has been 7.77%. Based on the above information and forward looking assumptions for investments made in a manner consistent with our target allocations, we believe a 7.40% rate of return assumption is reasonable for 2016. See Note 15 to the Consolidated Financial Statements for more information on the asset allocations of pension plan assets.
On January 31, 2015, we adopted new industry specific mortality tables based on mortality experience and assumptions for generational mortality improvement in determining our benefit obligations. On January 28, 2017, we adopted an updated assumption for generational mortality improvement, based on additional years of published mortality experience.
24
Sensitivity to changes in the major assumptions used in the calculation of Kroger’s pension plan liabilities is illustrated below (in millions).
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In 2016, we contributed $3 million to our Company-sponsored defined benefit plans and are not required to make any contributions to these plans in 2017. We contributed $5 million to our Company-sponsored defined benefit plans in 2015 and did not make contributions in 2014. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of contributions.
We contributed and expensed $215 million in 2016, $196 million in 2015 and $177 million in 2014 to employee 401(k) retirement savings accounts. The increase in 2016, compared to 2015, is primarily due to our recent mergers. The increase in 2015, compared to 2014, is due to a higher employee savings rate. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, plan compensation and length of service.
Multi-Employer Pension Plans
We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension 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.
We recognize expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. We made cash contributions to these plans of $289$619 million in 2016, $4262020, $461 million in 20152019 and $297$358 million in 2014.2018. The increase in 2020, compared to 2019 and 2018 is due to the First Quarter 2020 Multi-Employer Pension Contribution.
We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are beneficiaries of these plans. These under-fundings are not our liability. When an opportunity arises that is economically feasible and beneficial to us and our associates, we may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates’ future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change our debt profile as it relates to our credit rating since these off-balance sheet commitments are typically considered in our investment grade debt rating. We are currently designated as the named fiduciary of the UFCW Consolidated Pension Plan and the International Brotherhood of Teamsters (“IBT”) Consolidated Pension Fund and have sole investment authority over these assets. Significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
| In |
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| In |
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| ● | In 2018, we incurred a $155 million charge, $121 million net of tax, for obligations related to withdrawal liabilities for certain local unions of the |
25
As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds. Two locations have initiated a withdrawal process, in the first quarter of 2017, resulting in an estimated withdrawal liability of less than $100 million, after-tax.
Based on the most recent information available to us, we believe that the present value of actuarially accrued liabilities in most of the multi-employer plans to which we contribute substantially exceeds the value of the assets held in trust to pay benefits. We have attempted to estimate the amount by which these liabilities exceed the assets, (i.e., the amount of underfunding), as of December 31, 2016.2020. Because we are only one of a number of employers contributing to these plans, we also have attempted to estimate the ratio of our contributions to the total of all contributions to these plans in a year as a way of assessing our “share” of the underfunding. Nonetheless, the underfunding is not a direct obligation or liability of ours or of any employer.
As of December 31, 2016,2020, we estimate that our share of the underfunding of multi-employer pension plans to which we contribute or as it relates to certain funds, an estimated withdrawal liability, was approximately $3.0$1.7 billion, pre-tax, or $1.8$1.3 billion after-tax.net of tax. This represents an increasea decrease in the estimated amount of underfunding of approximately $100$600 million, pre-tax, or approximately $40$500 million after-tax,net of tax, as of December 31, 2016,2020, compared to December 31, 2015. 2019. The increasedecrease in the amount of underfunding is primarily attributable to lower thanhigher expected returns on the assets held in the multi-employer pension plansfunds during 20162020, restructuring of the National Fund and changes in mortality rate assumptions.the First Quarter 2020 Multi-Employer Pension Contribution. Our estimate is based on the most current information available to us including actuarial evaluations and other data (that include the estimates of others), and such information may be outdated or otherwise unreliable.
We have made and disclosed this estimate not because, except as noted above, this underfunding is a direct liability of ours. Rather, we believe the underfunding is likely to have important consequences. In 2017, we expect to contribute approximately $360 million to multi-employer pension plans, which excludes any additional multi-employer pension plan restructurings that could occur. Of this amount, $35 million has been accrued for as of January 28, 2017. We expect increases in expense as a result of increases in multi-employer pension plan contributions over the next few years. Finally, underfunding means that, in the event we were to exit certain markets or otherwise cease making contributions to these plans, we 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 estimated, in accordance with GAAP.
The amount of underfunding described above is an estimate and could change based on contract negotiations, returns on the assets held in the multi-employer pension plans, benefit payments or future restructuring agreements. The amount could decline, and our future expense would be favorably affected, if the values of the assets held in the trust significantly increase or if further changes occur through collective bargaining, trustee action or favorable legislation. On the other hand, our share of the underfunding could increase and our future expense could be adversely affected if the asset values decline, if employers currently contributing to these funds cease participation or if changes occur through collective bargaining, trustee action or adverse legislation. We continue to evaluate our potential exposure to under-funded multi-employer pension plans. Although these liabilities are not a direct obligation or liability of ours, any commitments to fund certain multi-employer pension plans will be expensed when our commitment is probable and an estimate can be made.
See Note 16 to the Consolidated Financial Statements for more information relating to our participation in these multi-employer pension plans.
Uncertain Tax PositionsNEW ACCOUNTING STANDARDS
We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our Consolidated Financial Statements. Refer to Note 518 and Note 19 to the Consolidated Financial Statements for the amount of unrecognized tax benefitsrecently adopted accounting standards and other disclosures related to uncertain tax positions.
Various taxing authorities periodically audit our income tax returns. These audits include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, we record allowances for probable exposures. A number of years may elapse before a particular matter, for which an allowance has been established, is audited and fully resolved. Asrecently issued accounting standards not yet adopted as of January 28, 2017, the Internal Revenue Service had concluded its examination of our 2012 and 2013 federal tax returns. 30, 2021.
The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.
2637
Share-Based Compensation Expense
We account for stock options under the fair value recognition provisions of GAAP. Under this method, we recognize compensation expense for all share-based payments granted. We recognize share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. In addition, we record expense for restricted stock awards in an amount equal to the fair market value of the underlying stock on the grant date of the award, over the period the award restrictions lapse. As described in Note 17 to the Consolidated Financial Statements, we adopted a new share-based compensation standard during 2016, which requires recognition of excess tax benefits related to share-based payments in our provision for income taxes. Excess tax benefits were historically recorded in additional paid-in capital.
Inventories
Inventories are stated at the lower of cost (principally on a LIFO basis) or market. In total, approximately 89% and 95% of inventories were valued using the LIFO method in 2016 and 2015, respectively. Cost for the balance of the inventories, including substantially all fuel inventories, was determined using the FIFO method. Replacement cost was higher than the carrying amount by $1.3 billion at January 28, 2017 and January 31, 2016. We follow the Link-Chain, Dollar-Value LIFO method for purposes of calculating our LIFO charge or credit.
We follow the item-cost method of accounting to determine inventory cost before the LIFO adjustment for substantially all store inventories at our supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of our inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).
We evaluate inventory shortages throughout the year based on actual physical counts in our facilities. We record allowances for inventory shortages based on the results of recent physical counts to provide for estimated shortages from the last physical count to the financial statement date.
Vendor Allowances
We recognize all vendor allowances as a reduction in merchandise costs when the related product is sold. In most cases, vendor allowances are applied to the related product cost by item, and therefore reduce the carrying value of inventory by item. When it is not practicable to allocate vendor allowances to the product by item, we recognize vendor allowances as a reduction in merchandise costs based on inventory turns and as the product is sold. We recognized approximately $7.8 billion in 2016, $7.3 billion in 2015 and $6.9 billion in 2014 of vendor allowances as a reduction in merchandise costs. We recognized approximately 92% of all vendor allowances in the item cost with the remainder being based on inventory turns.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In September 2015, the FASB issued Accounting Standards Update (“ASU”) 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments.” This amendment eliminates the requirement to retrospectively account for adjustments made to provisional amounts recognized in a business combination. This amendment became effective for us beginning January 31, 2016, and was adopted prospectively in accordance with the standard. The adoption of this amendment did not have an effect on our Consolidated Balance Sheets or Consolidated Statements of Operations.
During the second quarter of 2016, we adopted ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This amendment addresses several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. As a result of the adoption, we recognized $49 million of excess tax benefits related to share-based payments in our provision for income taxes in 2016. These items were historically recorded in additional paid-in capital. In addition, for 2016, cash flows related to excess tax benefits are classified as an operating activity. Cash paid on employees’ behalf related to shares withheld for tax
27
purposes is classified as a financing activity. Retrospective application of the cash flow presentation requirements resulted in increases to both “Net cash provided by operating activities” and “Net cash used by financing activities” of $59 million for 2016, $84 million for 2015 and $52 for 2014. Our stock compensation expense continues to reflect estimated forfeitures.
During 2016, we adopted ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Topic 205)”. This standard requires us to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise substantial doubt about our ability to continue as a going concern within one year after the date the Consolidated Financial Statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around our plan to alleviate these doubts are required. The adoption of this standard did not affect our Consolidated Financial Statements.
During 2016, we adopted ASU 2015-07, “Fair Value Measurement - Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (Topic 820)”. This standard requires us to disclose which assets we value using net asset value as a practical expedient, and ends the requirement to classify these assets within the GAAP fair value hierarchy. See Note 15 of our Consolidated Financial Statements for disclosures of assets we value using net asset value as a practical expedient.
RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers,” as amended by several subsequent ASUs, which provides guidance for revenue recognition. The standard’s core principle is that a company will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “Deferral of Effective Date,” this guidance will be effective for us in the first quarter of our fiscal year ending February 2, 2019. Early adoption is permitted as of the first quarter of our fiscal year ending February 3, 2018. We are currently in the process of evaluating the effect of adoption of this ASU on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will be effective for our fiscal year ending February 3, 2018. Early adoption is permitted. The implementation of this amendment will not have an effect on our Consolidated Statements of Operations and will not have a significant effect on our Consolidated Balance Sheets.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which provides guidance for the recognition of lease agreements. The standard’s core principle is that a company will now recognize most leases on its balance sheet as lease liabilities with corresponding right-of-use assets. This guidance will be effective for us in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted. The adoption of this ASU will result in a significant increase to our Consolidated Balance Sheets for lease liabilities and right-of-use assets, and we are currently evaluating the other effects of adoption of this ASU on our Consolidated Financial Statements. We believe our current off-balance sheet leasing commitments are reflected in our investment grade debt rating.
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $4.3$6.8 billion of cash from operations in 2016,2020 compared to $4.9$4.7 billion in 2015 and $4.2 billion in 2014. The cash provided by operating activities came from net earnings including non-controlling interests adjusted primarily for non-cash expenses of depreciation and amortization, stock compensation, expense for Company-sponsored pension plans and the LIFO charge. Changes in working capital created a net cash outflow in 2016, and net cash inflows for 2015 and 2014.
The decrease in net cash provided by operating activities in 2016, compared to 2015, resulted primarily due to a decrease in net2019. Net earnings including noncontrolling interests, and changes in working capital, partially offset by an increase in non-cash expenses, deferred taxes and lower payments on long-term liabilities.
28
The increase in net cash provided by operating activities in 2015, compared to 2014, resulted primarily due to an increase in net earnings including non-controlling interests, an increase inadjusted for non-cash items and changesother impacts, generated approximately $5.3 billion of operating cash flow in working capital. The increase in non-cash items in 2015, as2020 compared to 2014, was primarily due to increases$5.0 billion in depreciation and amortization expense and expense for Company-sponsored pension plans, partially offset by a lower LIFO charge.
2019. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, net of effects from mergers and disposals of businesses was $1.5 billion in 2020 compared to ($492)312) million in 2016, compared to $180 million in 2015 and $3 million in 2014. The decrease in cash provided by operating activities for changes in working capital in 2016, compared to 2015, was primarily due to the net effect of the following:
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2019. The increase in cash provided by operating activities for changes in operating assets and liabilities, including working capital, in 2015, compared to 2014,net of effects from mergers and disposals of businesses, was primarily due to the following:
| ● | A decrease in FIFO inventory at the end of 2020 due to accelerated timing of inventory sell-through resulting from elevated demand for our products during the pandemic; |
| ● | An increase in accrued expenses at the end of 2020 primarily due to the following: |
| o | An increase in the current portion of the deferral of the employer portion of social security tax payments as a result of the CARES Act; |
| o | An increase in accrued incentive plan costs at the end of 2020; and |
| o | An increase in the current portion of our commitments due to the National Fund; and |
| ● | An increase in long-term liabilities at the end of 2020, primarily due to the following: |
| o | An increase in the noncurrent portion of the deferral of the employer portion of social security tax payments as a result of the CARES Act; and |
| o | An increase in the noncurrent portion of our commitments due to the National Fund; |
| ● | Partially offset by an increase in prepaid and other current assets due to escrow deposits related to the restructuring of multi-employer pension plans; and |
| ● | Proceeds from a contract associated with the sale of a business that benefited 2019. |
Cash paid for taxes decreased in cash provided by trade accounts payables2020, compared to 2019, primarily due to the payment of taxes on the gain on sale of the You Technology and store depositsTurkey Hill Dairy businesses in transit, partially offset by a decrease2019.
Cash paid for interest increased in cash provided by income taxes receivable and payable. 2020, compared to 2019, primarily due to the timing of certain semi-annual senior note interest payments that were paid during the first quarter of 2020 which were accrued as of the end of fiscal year 2019.
Net cash used by investing activities
CashInvesting activities used by investing activities was $3.9cash of $2.8 billion in 2016,2020 compared to $3.6$2.6 billion in 2015 and $3.1 billion in 2014.2019. The amount of cash used by investing activities increased in 2016,2020, compared to 2015,2019, primarily due to increased cash payments for capital investments and our merger with ModernHEALTH. The amountthe following:
| ● | Decreased proceeds from the sale of assets in 2020 compared to 2019; and |
| ● | Proceeds from the sale of businesses that benefited 2019, partially offset by |
| ● | Payments for property and equipment continued at a slower pace in 2020 due to disruptions from the pandemic. However, increased purchase activity near the end of the year resulted in an increase in construction-in-progress payables as of year-end 2020 compared to 2019. |
38
Net cash used by investingfinancing activities increased
We used $2.7 billion of cash for financing activities in 2015,2020 compared to 2014, due to increased payments for capital investments, partially offset by lower payments for mergers.
Net cash provided (used) by financing activities
Financing activities used cash of $352 million in 2016, $1.3$2.1 billion in 2015 and $1.2 billion in 2014.during 2019. The decrease in the amount of cash used for financing activities in 2016,for 2020, compared to 2015, was2019, increased primarily due to higher treasury stock purchases, partially offset by higher long-term and commercial paper borrowings. The increase in the amount of cash used for financing activities in 2015, compared to 2014, was primarily related to increased payments on long-term debtcommercial paper and commercial paper,share repurchases, partially offset by higherincreased proceeds from issuancesthe issuance of long-term debt and decreased treasury stock purchases. payments on long-term debt.
Debt Management
Total debt, including both the current and long-term portions of capital lease and lease-financing obligations increased $2.0 billionunder finance leases, decreased $663 million to $14.1$13.4 billion as of year-end 2016,2020 compared to 2015.2019. The increasedecrease in 2016,2020, compared to 2015,2019, resulted primarily from the issuancenet payments on commercial paper borrowings of (i) $1.0$1.2 billion and payment of senior notes bearing an interest rate of 4.45%, (ii) 750$700 million of senior notes bearing an interest rate of 2.65%3.30%, (iii)partially offset by the issuance of $500 million of senior notes bearing an interest rate of 3.875%2.20%, (iv)the issuance of $500 million of senior notes bearing an interest rate of 1.5%, (v) increases in commercial paper borrowings1.70% and (vi) increases in capital lease obligations due to additional leased locations, partially offset by payments of $1.4 billion on maturing long-term debt obligations.
Total debt, including both the current and long-term portions of capital lease and lease-financing obligations, increased $481 million to $12.1 billion as of year-end 2015, compared to 2014. Thea net increase in 2015, compared to 2014, resulted primarily from the issuanceobligations under finance leases of (i) $300 million of senior notes bearing an interest rate of 2.00%, (ii) $300 million of senior notes bearing an interest rate of 2.60%, (iii) $500 million of senior notes bearing an interest rate of 3.50% and (iv) an increase$183 million.
Dividends
The following table provides dividend information ($ in capital lease obligations due to our merger with Roundy’s and various leased locations, partially offset by payments of $678 million on long-term debt obligations assumed as part of our merger with Roundy’s and $500 million of payments at maturity of senior notes bearing an interest rate of 3.90%. The increase in financing obligations was due to partially funding our merger with Roundy���s.millions, except per share amounts):
| | | | | |
| 2020 | | 2019 | ||
Cash dividends paid | $ | 534 | | $ | 486 |
Cash dividends paid per common share | $ | 0.68 | | $ | 0.60 |
29
Liquidity Needs
We estimate our liquidity needs over the next twelve-month period to range from $5.9 to $6.4 billion, which includes anticipated requirements for working capital, capital investments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of 2016. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our commercial paper program and bank credit facility, will be adequate to meet our liquidity needs for the next twelve months and for the foreseeable future beyond the next twelve months. Our liquidity needs include anticipated requirements for working capital, capital investments, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of 2020. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. We have approximately $1.4 billion of commercial paper and $600$800 million of senior notes maturing in the next twelve months, which$311 million of the employer portion of social security tax payments we have deferred under the CARES act that is includedrequired to be paid by December 31, 2021 and expect to pay approximately $307 million in the rangefirst half of $5.92021 to $6.4 billion in estimated liquidity needs.satisfy a portion of the National Fund commitment. We expect to refinance this debt, in 2017, by issuingsatisfy these obligations using cash generated from operations, temporary cash investments on hand, or through the issuance of additional senior notes or commercial paper on favorable terms based on our past experience. We also currently plan to continue repurchases of common shares under the Company’s share repurchase programs and a growing dividend.paper. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions.
We held cash and temporary cash investments of $1.7 billion as of the end of 2020 which reflects our elevated operating performance and significant improvements in working capital. We remain committed to our dividend and share repurchase program and we will evaluate the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy.
The CARES Act, which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, we are deferring the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. During 2020, we deferred the employer portion of social security tax of $622 million. Of the total, $311 million is included in “Other current liabilities” and $311 million is included in “Other long-term liabilities” in our Consolidated Balance Sheets.
For additional information about our debt activity in 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior notes issuances, see Note 6 to the Consolidated Financial Statements.
39
Factors Affecting Liquidity
We can currently borrow on a daily basis approximately $2.75 billion under our commercial paper program. At January 28, 2017,30, 2021, we had $1.4 billion ofno outstanding commercial paper borrowings outstanding.paper. Commercial paper borrowings are backed by our credit facility and reduce the amount we can borrow under the credit facility. If our short-term credit ratings fall, the ability to borrow under our current commercial paper program could be adversely affected for a period of time and increase our interest cost on daily borrowings under our commercial paper program. This could require us to borrow additional funds under the credit facility, under which we believe we have sufficient capacity. However, in the event of a ratings decline, we do not anticipate that our borrowing capacity under our commercial paper program would be any lower than $500 million on a daily basis. Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost and applicable margin on borrowings under the credit facility could be affected by an increasea downgrade in our Leverage Ratio.Public Debt Rating. “Public Debt Rating” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. As of March 22, 2017,24, 2021, we had $956 million ofno commercial paper borrowings outstanding.
Our credit facility requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our “financial covenants”). A failure to maintain our financial covenants would impair our ability to borrow under the credit facility. These financial covenants are described below:
| Our Leverage Ratio (the ratio of Net Debt to |
| Our Fixed Charge Coverage Ratio (the ratio of |
Our credit facility is more fully described in Note 6 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2016.2020.
3040
The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as of January 28, 201730, 2021 (in millions of dollars):
| | | | | | | | | | | | | | | | | | | | | | |
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| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total |
| |||||||
Contractual Obligations(1)(2) | | | | | | | | | | | | | | | | | | | | | | |
Long-term debt(3) | | $ | 844 | | $ | 894 | | $ | 617 | | $ | 494 | | $ | 575 | | $ | 8,986 | | $ | 12,410 | |
Interest on long-term debt(4) | | | 491 | | | 474 | | | 439 | | | 427 | | | 407 | | | 5,001 | | | 7,239 | |
Finance lease obligations | | | 109 | | | 97 | | | 95 | | | 93 | | | 92 | | | 935 | | | 1,421 | |
Operating lease obligations | | | 947 | | | 865 | | | 790 | | | 717 | | | 653 | | | 6,260 | | | 10,232 | |
Self-insurance liability(5) | | | 220 | | | 156 | | | 107 | | | 70 | | | 45 | | | 133 | | | 731 | |
Construction commitments(6) | | | 1,030 | | | — | | | — | | | — | | | — | | | — | | | 1,030 | |
Purchase obligations(7) | | | 742 | | | 378 | | | 365 | | | 257 | | | 240 | | | 1,950 | | | 3,932 | |
Total | | $ | 4,383 | | $ | 2,864 | | $ | 2,413 | | $ | 2,058 | | $ | 2,012 | | $ | 23,265 | | $ | 36,995 | |
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Other Commercial Commitments | | | | | | | | | | | | | | | | | | | | | | |
Standby letters of credit | | $ | 368 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 368 | |
Surety bonds | | | 408 | | | — | | | — | | | — | | | — | | | — | | | 408 | |
Total | | $ | 776 | | $ | — | | $ | — | | $ | — | | $ | — | | $ | — | | $ | 776 | |
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|
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
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Contractual Obligations (1) (2) |
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|
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|
|
|
|
|
|
|
|
Long-term debt(3) |
| $ | 2,197 |
| $ | 1,315 |
| $ | 1,246 |
| $ | 724 |
| $ | 797 |
| $ | 7,036 |
| $ | 13,315 |
|
Interest on long-term debt (4) |
|
| 444 |
|
| 479 |
|
| 422 |
|
| 343 |
|
| 330 |
|
| 3,995 |
|
| 6,013 |
|
Capital lease obligations |
|
| 92 |
|
| 76 |
|
| 71 |
|
| 66 |
|
| 64 |
|
| 647 |
|
| 1,016 |
|
Operating lease obligations |
|
| 986 |
|
| 932 |
|
| 856 |
|
| 759 |
|
| 656 |
|
| 3,992 |
|
| 8,181 |
|
Financed lease obligations |
|
| 7 |
|
| 8 |
|
| 8 |
|
| 9 |
|
| 9 |
|
| 53 |
|
| 94 |
|
Self-insurance liability (5) |
|
| 229 |
|
| 146 |
|
| 100 |
|
| 68 |
|
| 41 |
|
| 98 |
|
| 682 |
|
Construction commitments(6) |
|
| 428 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 428 |
|
Purchase obligations(7) |
|
| 478 |
|
| 178 |
|
| 78 |
|
| 68 |
|
| 36 |
|
| 65 |
|
| 903 |
|
Total |
| $ | 4,861 |
| $ | 3,134 |
| $ | 2,781 |
| $ | 2,037 |
| $ | 1,933 |
| $ | 15,886 |
| $ | 30,632 |
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|
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|
|
|
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|
|
|
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Other Commercial Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
| $ | 242 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 242 |
|
Surety bonds |
|
| 396 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 396 |
|
Total |
| $ | 638 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 638 |
|
| (1) |
| The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled approximately $33 million in |
| (2) |
| The liability related to unrecognized tax benefits has been excluded from the contractual obligations table because a reasonable estimate of the timing of future tax settlements cannot be determined. |
| (3) |
| As of January |
| (4) |
| Amounts include contractual interest payments using the interest rate as of January |
| (5) |
| The amounts included in the contractual obligations table for self-insurance liability related to workers’ compensation claims have been stated on a present value basis. |
| (6) |
| Amounts include funds owed to third parties for projects currently under construction. These amounts are reflected in |
| (7) |
| Amounts include commitments, many of which are short-term in nature, to be utilized in the normal course of business, such as several contracts to purchase raw materials utilized in our food production plants and several contracts to purchase energy to be used in our stores and food production plants. Our obligations also include management fees for facilities operated by third parties and outside service contracts. Any upfront vendor allowances or incentives associated with outstanding purchase commitments are recorded as either current or long-term liabilities in our Consolidated Balance Sheets. We included our future commitments for customer fulfillment centers for which we have placed an order. We did not include our commitments associated with additional customer fulfillment centers that have not yet been ordered. We have provided a letter of credit which supports our commitment to build a certain number of fulfillment centers. The balance of the letter of credit reduces primarily upon the construction of each fulfillment center. If we do not reach our total purchase commitment, we will be responsible for the balance remaining on the letter of credit. This letter of credit balance is included in the “Standby letters of credit” line above. |
As of January 28, 2017,30, 2021, we maintained a $2.75 billion (with the ability to increase by $750 million)$1 billion), unsecured revolving credit facility that, unless extended, terminates on June 30, 2019.August 29, 2022. Outstanding borrowings under the credit facility, and commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As of January 28, 2017,30, 2021, we had $1.4 billion of borrowings ofno outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled $13$2 million as of January 28, 2017.30, 2021.
In addition to the available credit mentioned above, as of January 28, 2017,30, 2021, we had authorized for issuance $4$3.3 billion of securities remaining under a shelf registration statement filed with the SEC and effective on December 14, 2016.May 24, 2019.
3141
We also maintain surety bonds related primarily to our self-insured workers’ compensation claims. These bonds are required by most states in which we are self-insured for workers’ compensation and are placed with predominately third-party insurance providers to insure payment of our obligations in the event we are unable to meet our claim payment obligations up to our self-insured retention levels. These bonds do not represent liabilities of ours, as we already have reserves on our books for the claims costs. Market changes may make the surety bonds more costly and, in some instances, availability of these bonds may become more limited, which could affect our costs of, or access to, such bonds. Although we do not believe increased costs or decreased availability would significantly affect our ability to access these surety bonds, if this does become an issue, we would issue letters of credit, in states where allowed, against our credit facility to meet the state bonding requirements. This could increase our cost and decrease the funds available under our credit facility.
We also are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our assignments among third parties, and various other remedies available to us, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. We have agreed to indemnify certain third-party logistics operators for certain expenses, including multi-employer pension plan obligations and withdrawal liabilities.
In addition to the above, we enter into various indemnification agreements and take on indemnification obligations in the ordinary course of business. Such arrangements include indemnities against third partythird-party claims arising out of agreements to provide services to us; indemnities related to the sale of our securities; indemnities of directors, officers and employees in connection with the performance of their work; and indemnities of individuals serving as fiduciaries on benefit plans. While our aggregate indemnification obligation could result in a material liability, we are not aware of any current matter that could result in a material liability.
3242
OUTLOOK
This discussion and analysis contains certain forward-looking statements about our future performance. These statements are based on management’s assumptions and beliefs in light of the information currently available to it. Such statements are indicated by words such as “comfortable,” “committed,” “will,” “expect,” “goal,” “should,” “intend,” “target,” “believe,” “anticipate,” “plan,” and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.
Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.
ITEM 7A. |
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33
Various uncertainties and other factors could cause actual results to differ materially from those contained in the forward-looking statements. These include:
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We cannot fully foresee the effects of changes in economic conditions on our business. We have assumed economic and competitive situations will not change significantly in 2017.
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, contemplated or implied by forward-looking statements made by us or our representatives. We undertake no obligation to update the forward-looking information contained in this filing.
34
ITEM 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Financial Risk Management
We use derivative financial instruments primarily to manage our exposure to fluctuations in interest rates. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the value of the underlying exposure. The interest rate derivatives we use are straightforward instruments with liquid markets.
We manage our exposure to interest rates and changes in the fair value of our debt instruments primarily through the strategic use of our commercial paper program, variable and fixed rate debt, and interest rate swaps. Our current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, we use the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount of debt subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of $2.5 billionthe carrying value of our debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
As of January 28, 2017,When we maintained two interest rate swap agreements, with an aggregate notional amount totaling $100 million,use derivative financial instruments, it is primarily to manage our exposure to fluctuations in interest rates. We do not enter into derivative financial instruments for trading purposes. As a matter of policy, all of our derivative positions are intended to reduce risk by hedging an underlying economic exposure. Because of the high correlation between the hedging instrument and the underlying exposure, fluctuations in the value of the instruments generally are offset by reciprocal changes in the fair value of our fixed rate debt resulting fromthe underlying exposure. The interest rate movements by effectively converting a portion of our debt from fixed to variable rates. These agreements mature in December 2018, and coincidederivatives we use are straightforward instruments with our scheduled debt maturities. The differential between fixed and variable rates to be paid or received is accrued as interest rates change in accordance with the agreements as an adjustment to interest expense. These interest rate swap agreements are being accounted for as fair value hedges.
liquid markets. As of January 28, 2017,30, 2021, we maintained 25had no forward-starting interest rate swap agreements with maturity dates of August 15, 2027, January 15, 2029, January 15, 2049 and January 15, 2050 with an aggregate notional amount totaling $1.6 billion. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. We entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on our forecasted issuances of debt in fiscal years 2017, 2018 and 2019. The fixed interest rates for these forward-starting interest rate swaps range from 2.07% to 3.00%. The variable rate component on the forward-starting interest rate swaps is 3 month LIBOR. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of January 28, 2017, the fair value of the interest rate swaps was recorded in other assets for $67 million, other long-term liabilities for $7 million and accumulated other comprehensive income for $38 million, net of tax.outstanding.
Annually, we review with the Financial Policy Committee of our Board of Directors compliance with the guidelines described above. The guidelines may change as our business needs dictate.
35
The tables below provide information about our interest rate derivatives classified as fair value hedges and underlying debt portfolio as of January 28, 201730, 2021 and January 30, 2016.February 1, 2020. The amounts shown for each year represent the contractual maturities of long-term debt, excluding capitalfinance leases, and the average outstanding notional amounts of interest rate derivatives classified as fair value hedges as of January 28, 201730, 2021 and January 30, 2016.February 1, 2020. Interest rates reflect the weighted average rate for the outstanding instruments. The variable component of each interest rate derivative and the variable rate debt is based on U.S. dollar LIBOR using the forward yield curve as of January 28, 201730, 2021 and January 30, 2016.February 1, 2020. The Fair Value column includes the fair value of our debt instruments as of January 30, 2021 and February 1, 2020. We have no outstanding interest rate derivatives
classified as fair value hedges as of January 28, 2017 and January 30, 2016.2021 or February 1, 2020. See Notes 6, 7 and 8 to the Consolidated Financial Statements.
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
| | January 30, 2021 |
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| | Expected Year of Maturity |
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| 2021 |
| 2022 |
| 2023 |
| 2024 |
| 2025 |
| Thereafter |
| Total |
| Fair Value |
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| January 28, 2017 |
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| Expected Year of Maturity |
| |||||||||||||||||||||||||||||||||||||||||||||||
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| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| Fair Value |
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| (in millions) |
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| | (in millions) |
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Debt |
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| | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate |
| $ | (716) |
| $ | (1,298) |
| $ | (1,246) |
| $ | (699) |
| $ | (797) |
| $ | (6,955) |
| $ | (11,711) |
| $ | (12,301) |
| | $ | (802) | | $ | (894) | | $ | (594) | | $ | (494) | | $ | (494) | | $ | (8,986) | | $ | (12,264) | | $ | (14,534) | |
Average interest rate |
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| 4.94 | % |
| 4.54 | % |
| 4.68 | % |
| 4.62 | % |
| 4.63 | % |
| 4.57 | % |
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| |
| 4.20 | % |
| 4.29 | % |
| 4.41 | % |
| 4.55 | % |
| 4.58 | % |
| 4.40 | % | | | | | | |
Variable rate |
| $ | (1,481) |
| $ | (17) |
| $ | — |
| $ | (25) |
| $ | — |
| $ | (81) |
| $ | (1,604) |
| $ | (1,604) |
| | $ | (42) | | $ | — | | $ | (23) | | $ | — | | $ | (81) | | $ | — | | $ | (146) | | $ | (146) | |
Average interest rate |
|
| 0.93 | % |
| 3.53 | % |
| — | % |
| 5.00 | % |
| — | % |
| 3.73 | % |
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| |
| 1.87 | % |
| — | |
| 2.62 | % |
| — | |
| 0.08 | % |
| — | % | | | | | | |
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| January 28, 2017 |
| January 28, |
| January 28, |
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| Average Notional Amounts Outstanding |
| 2017 |
| 2017 |
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| 2017 |
| 2018 |
| 2019 |
| 2020 |
| 2021 |
| Thereafter |
| Total |
| Fair Value |
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Interest Rate Derivatives Classified as Fair Value Hedges |
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Fixed to variable |
| $ | 100 |
| $ | 88 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
| $ | 100 |
| $ | (1) |
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Average pay rate |
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| 6.71 | % |
| 7.20 | % |
| — |
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| — |
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| — |
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| — |
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Average receive rate |
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| 6.80 | % |
| 6.80 | % |
| — |
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| — |
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| — |
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| — |
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| | February 1, 2020 |
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| | Expected Year of Maturity |
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| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total |
| Fair Value |
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| | (in millions) |
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Debt | | | | | | | | | | | | | | | | | | | | | | | | | |
Fixed rate | | $ | (705) | | $ | (804) | | $ | (894) | | $ | (594) | | $ | (495) | | $ | (8,462) | | $ | (11,954) | | $ | (13,347) | |
Average interest rate | |
| 4.39 | % |
| 4.56 | % |
| 4.47 | % |
| 4.69 | % |
| 4.86 | % |
| 4.65 | % | | | | | | |
Variable rate | | $ | (1,221) | | $ | — | | $ | — | | $ | — | | $ | — | | $ | (81) | | $ | (1,302) | | $ | (1,302) | |
Average interest rate | |
| 1.88 | % |
| — | |
| — | |
| — | |
| — | |
| 1.65 | % | | | | | | |
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| January 30, 2016 |
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| Expected Year of Maturity |
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| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| Thereafter |
| Total |
| Fair Value |
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| (in millions) |
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Debt |
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|
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Fixed rate |
| $ | (768) |
| $ | (713) |
| $ | (1,300) |
| $ | (747) |
| $ | (699) |
| $ | (5,456) |
| $ | (9,683) |
| $ | (10,597) |
|
Average interest rate |
|
| 4.74 | % |
| 4.78 | % |
| 4.95 | % |
| 4.80 | % |
| 4.80 | % |
| 4.68 | % |
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Variable rate |
| $ | (1,550) |
| $ | (22) |
| $ | (7) |
| $ | (27) |
| $ | (25) |
| $ | (82) |
| $ | (1,713) |
| $ | (1,747) |
|
Average interest rate |
|
| 3.71 | % |
| 1.21 | % |
| 1.26 | % |
| 1.06 | % |
| 0.46 | % |
| 0.03 | % |
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| January 30, 2016 |
| January 30, |
| January 30, |
| ||||||||||||||||||
|
| Average Notional Amounts Outstanding |
| 2016 |
| 2016 |
| ||||||||||||||||||
|
| 2016 |
| 2017 |
| 2018 |
| 2019 |
| 2020 |
| Thereafter |
| Total |
| Fair Value |
| ||||||||
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| (in millions) |
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Interest Rate Derivatives Classified as Fair Value Hedges |
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Fixed to variable |
| $ | 100 |
| $ | 100 |
| $ | 88 |
| $ | — |
| $ | — |
| $ | — |
| $ | 100 |
| $ | 1 |
|
Average pay rate |
|
| 6.30 | % |
| 6.64 | % |
| 6.95 | % |
| — |
|
| — |
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| — |
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Average receive rate |
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| 6.80 | % |
| 6.80 | % |
| 6.80 | % |
| — |
|
| — |
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| — |
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|
Based on our year-end 20162020 variable rate debt levels, a 10 percent change in interest rates would be immaterial. See Note 7 to the Consolidated Financial Statements for further discussion of derivatives and hedging policies.
3643
ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA |
ITEM 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.Consolidated Financial Statements of The Kroger Co.
For the Fiscal Year Ended January 30, 2021
Table of Contents
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45 | |
48 | |
49 | |
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51 | |
52 | |
53 |
44
Report of Independent Registered Public Accounting Firm
To the Shareholders and Board of Directors and Shareholders of
The Kroger Co.
Opinions on the Financial Statements and Internal Control over Financial Reporting
In our opinion,
We have audited the accompanying consolidated balance sheets of The Kroger Co. and its subsidiaries (the “Company”) as of January 30, 2021 and February 1, 2020, and the related consolidated statements of operations, of comprehensive income, of changes in shareholders’shareholders' equity and cash flows present fairly, in all material respects, the financial position of The Kroger Co. and its subsidiaries at January 28, 2017 and January 30, 2016, and the results of their operations and their cash flows for each of the three years in the period ended January 28, 201730, 2021, including the related notes (collectively referred to as the “consolidated financial statements”). We also have audited the Company's internal control over financial reporting as of January 30, 2021 based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of the Company as of January 30, 2021 and February 1, 2020, and the results of its operations and its cash flows for each of the three years in the period ended January 30, 2021 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of January 28, 2017,30, 2021, based on criteria established in Internal Control - Integrated Framework(2013) issued by the Committee of Sponsoring Organizations ofCOSO.
Changes in Accounting Principles
As discussed in Note 18 to the Treadway Commission (COSO). consolidated financial statements, the Company changed the manner in which it accounts for leases in 2019 and the manner in which it accounts for revenues from contracts with customers in 2018.
Basis for Opinions
The Company’sCompany's management is responsible for these consolidated financial statements, for maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on thesethe Company’s consolidated financial statements and on the Company’sCompany's internal control over financial reporting based on our integrated audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States).PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud, and whether effective internal control over financial reporting was maintained in all material respects.
Our audits of the consolidated financial statements included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the consolidated financial statements, assessingstatements. Our audits also included evaluating the accounting principles used and significant estimates made by management, andas well as evaluating the overall presentation of the consolidated financial statement presentation.statements. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
45
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Critical Audit Matters
The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to theconsolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the consolidatedfinancial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill Impairment Assessment – Kroger Specialty Pharmacy (“KSP”) Reporting Unit
As described in Management’s Report on Internal Control Over Financial Reporting, management has excluded Modern HC Holdings, Inc. from its assessment of internal control overNotes 1 and 3 to the consolidated financial reportingstatements, the Company’s consolidated goodwill balance was $3.1 billion as of January 28, 2017 because it30, 2021, a portion of which is allocated to the KSP reporting unit. Management reviews goodwill annually for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. The fair value of a reporting unit is compared to its carrying value for purposes of identifying potential impairment. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. As disclosed by management, the fair value of the Company's KSP reporting unit was acquired byestimated using multiple valuation techniques, a discounted cash flow model (income approach), a market multiple model and comparable mergers and acquisition model (market approaches), with each method weighted in the Company in a purchase business combinationcalculation. The income approach relies on September 2, 2016. We have also excluded Modern HC Holdings, Inc. frommanagement’s estimates of revenue growth rates, margin assumptions, and discount rate to estimate future cash flows. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples.
The principal considerations for our auditdetermination that performing procedures relating to the goodwill impairment assessment of internal control over financial reporting. Modern HC Holdings, Inc.the KSP reporting unit is a wholly-owned subsidiary whose total assets and total revenues represent 1% and less than 1%, respectively,critical audit matter are (i) the significant judgment by management when developing the fair value measurement of the reporting unit; (ii) the high degree of auditor judgment, subjectivity, and effort in performing procedures to evaluate management’s cash flow projections and significant assumptions related to revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection; and (iii) the audit effort involved the use of professionals with specialized skill and knowledge.
46
Addressing the matter involved performing procedures and evaluating audit evidence in connection with forming our overall opinion on the consolidated financial statement amounts asstatements. These procedures included testing the effectiveness of controls relating to management’s goodwill impairment assessment, including controls over the valuation of the Company’s KSP reporting unit. These procedures also included, among others, testing management’s process for developing the fair value estimate, evaluating the appropriateness of the income and formarket approach models, testing the year ended January 28, 2017.completeness and accuracy of the underlying data used in the models and evaluating the reasonableness of significant assumptions used by management related to the revenue growth rates, margin assumptions, discount rate, peer group determination, and market multiple selection. Evaluating management’s assumptions relating to revenue growth rates and margin assumptions involved evaluating whether the assumptions used by management were reasonable considering (i) the current and past performance of the reporting unit, (ii) the consistency with external market and industry data, and (iii) whether these assumptions were consistent with evidence obtained in other areas of the audit. Evaluating the Company’s peer group determinations included evaluating the appropriateness of the identified peer companies. Professionals with specialized skill and knowledge were used to assist in evaluating the appropriateness of the discounted cash flow and market models and evaluating the reasonableness of certain significant assumptions related to the discount rate, peer group determination, and market multiples.
/s/ PricewaterhouseCoopers LLP
Cincinnati, Ohio
March 28, 201730, 2021
We have served as the Company’s auditor since 1929.
3747
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
|
|
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|
|
| January 28, |
| January 30, |
| ||
(In millions, except par values) |
| 2017 |
| 2016 |
| ||
ASSETS |
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|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
Cash and temporary cash investments |
| $ | 322 |
| $ | 277 |
|
Store deposits in-transit |
|
| 910 |
|
| 923 |
|
Receivables |
|
| 1,649 |
|
| 1,734 |
|
FIFO inventory |
|
| 7,852 |
|
| 7,440 |
|
LIFO reserve |
|
| (1,291) |
|
| (1,272) |
|
Prepaid and other current assets |
|
| 898 |
|
| 790 |
|
Total current assets |
|
| 10,340 |
|
| 9,892 |
|
|
|
|
|
|
|
|
|
Property, plant and equipment, net |
|
| 21,016 |
|
| 19,619 |
|
Intangibles, net |
|
| 1,153 |
|
| 1,053 |
|
Goodwill |
|
| 3,031 |
|
| 2,724 |
|
Other assets |
|
| 965 |
|
| 609 |
|
|
|
|
|
|
|
|
|
Total Assets |
| $ | 36,505 |
| $ | 33,897 |
|
|
|
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|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
Current portion of long-term debt including obligations under capital leases and financing obligations |
| $ | 2,252 |
| $ | 2,370 |
|
Trade accounts payable |
|
| 5,818 |
|
| 5,728 |
|
Accrued salaries and wages |
|
| 1,234 |
|
| 1,426 |
|
Deferred income taxes |
|
| 251 |
|
| 221 |
|
Other current liabilities |
|
| 3,305 |
|
| 3,226 |
|
Total current liabilities |
|
| 12,860 |
|
| 12,971 |
|
|
|
|
|
|
|
|
|
Long-term debt including obligations under capital leases and financing obligations |
|
| 11,825 |
|
| 9,709 |
|
Deferred income taxes |
|
| 1,927 |
|
| 1,752 |
|
Pension and postretirement benefit obligations |
|
| 1,524 |
|
| 1,380 |
|
Other long-term liabilities |
|
| 1,659 |
|
| 1,287 |
|
|
|
|
|
|
|
|
|
Total Liabilities |
|
| 29,795 |
|
| 27,099 |
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note 13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred shares, $100 per share, 5 shares authorized and unissued |
|
| — |
|
| — |
|
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2016 and 2015 |
|
| 1,918 |
|
| 1,918 |
|
Additional paid-in capital |
|
| 3,070 |
|
| 2,980 |
|
Accumulated other comprehensive loss |
|
| (715) |
|
| (680) |
|
Accumulated earnings |
|
| 15,543 |
|
| 14,011 |
|
Common shares in treasury, at cost, 994 shares in 2016 and 951 shares in 2015 |
|
| (13,118) |
|
| (11,409) |
|
|
|
|
|
|
|
|
|
Total Shareholders’ Equity - The Kroger Co. |
|
| 6,698 |
|
| 6,820 |
|
Noncontrolling interests |
|
| 12 |
|
| (22) |
|
|
|
|
|
|
|
|
|
Total Equity |
|
| 6,710 |
|
| 6,798 |
|
|
|
|
|
|
|
|
|
Total Liabilities and Equity |
| $ | 36,505 |
| $ | 33,897 |
|
| | | | | | | |
|
| January 30, |
| February 1, |
| ||
(In millions, except par amounts) | | 2021 | | 2020 |
| ||
ASSETS | | | | | | | |
Current assets | | | | | | | |
Cash and temporary cash investments | | $ | 1,687 | | $ | 399 | |
Store deposits in-transit | |
| 1,096 | |
| 1,179 | |
Receivables | |
| 1,781 | |
| 1,706 | |
FIFO inventory | |
| 8,436 | |
| 8,464 | |
LIFO reserve | |
| (1,373) | |
| (1,380) | |
Prepaid and other current assets | | | 876 | | | 522 | |
Total current assets | |
| 12,503 | |
| 10,890 | |
| | | | | | | |
Property, plant and equipment, net | |
| 22,386 | |
| 21,871 | |
Operating lease assets | | | 6,796 | | | 6,814 | |
Intangibles, net | |
| 997 | |
| 1,066 | |
Goodwill | |
| 3,076 | |
| 3,076 | |
Other assets | |
| 2,904 | |
| 1,539 | |
| | | | | | | |
Total Assets | | $ | 48,662 | | $ | 45,256 | |
| | | | | | | |
LIABILITIES | | | | | | | |
Current liabilities | | | | | | | |
Current portion of long-term debt including obligations under finance leases | | $ | 911 | | $ | 1,965 | |
Current portion of operating lease liabilities | | | 667 | | | 597 | |
Trade accounts payable | |
| 6,679 | |
| 6,349 | |
Accrued salaries and wages | |
| 1,413 | |
| 1,168 | |
Other current liabilities | |
| 5,696 | |
| 4,164 | |
Total current liabilities | |
| 15,366 | |
| 14,243 | |
| | | | | | | |
Long-term debt including obligations under finance leases | | | 12,502 | | | 12,111 | |
Noncurrent operating lease liabilities | | | 6,507 | | | 6,505 | |
Deferred income taxes | |
| 1,542 | |
| 1,466 | |
Pension and postretirement benefit obligations | |
| 535 | |
| 608 | |
Other long-term liabilities | |
| 2,660 | |
| 1,750 | |
| | | | | | | |
Total Liabilities | |
| 39,112 | |
| 36,683 | |
| | | | | | | |
Commitments and contingencies see Note 13 | | | | | | | |
| | | | | | | |
SHAREHOLDERS’ EQUITY | | | | | | | |
| | | | | | | |
Preferred shares, $100 par per share, 5 shares authorized and unissued | | | — | | | — | |
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2020 and 2019 | |
| 1,918 | |
| 1,918 | |
Additional paid-in capital | |
| 3,461 | |
| 3,337 | |
Accumulated other comprehensive loss | |
| (630) | |
| (640) | |
Accumulated earnings | |
| 23,018 | |
| 20,978 | |
Common shares in treasury, at cost, 1,160 shares in 2020 and 1,130 shares in 2019 | |
| (18,191) | |
| (16,991) | |
| | | | | | | |
Total Shareholders’ Equity - The Kroger Co. | |
| 9,576 | |
| 8,602 | |
Noncontrolling interests | |
| (26) | |
| (29) | |
| | | | | | | |
Total Equity | |
| 9,550 | |
| 8,573 | |
| | | | | | | |
Total Liabilities and Equity | | $ | 48,662 | | $ | 45,256 | |
The accompanying notes are an integral part of the consolidated financial statements.
3848
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015February 2, 2019
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2016 |
| 2015 |
| 2014 |
| |||
(In millions, except per share amounts) |
| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
| |||
Sales |
| $ | 115,337 |
| $ | 109,830 |
| $ | 108,465 |
|
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
| 89,502 |
|
| 85,496 |
|
| 85,512 |
|
Operating, general and administrative |
|
| 19,178 |
|
| 17,946 |
|
| 17,161 |
|
Rent |
|
| 881 |
|
| 723 |
|
| 707 |
|
Depreciation and amortization |
|
| 2,340 |
|
| 2,089 |
|
| 1,948 |
|
|
|
|
|
|
|
|
|
|
|
|
Operating profit |
|
| 3,436 |
|
| 3,576 |
|
| 3,137 |
|
Interest expense |
|
| 522 |
|
| 482 |
|
| 488 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income tax expense |
|
| 2,914 |
|
| 3,094 |
|
| 2,649 |
|
Income tax expense |
|
| 957 |
|
| 1,045 |
|
| 902 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
|
| 1,957 |
|
| 2,049 |
|
| 1,747 |
|
Net earnings (loss) attributable to noncontrolling interests |
|
| (18) |
|
| 10 |
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. |
| $ | 1,975 |
| $ | 2,039 |
| $ | 1,728 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 2.08 |
| $ | 2.09 |
| $ | 1.74 |
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in basic calculation |
|
| 942 |
|
| 966 |
|
| 981 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 2.05 |
| $ | 2.06 |
| $ | 1.72 |
|
|
|
|
|
|
|
|
|
|
|
|
Average number of common shares used in diluted calculation |
|
| 958 |
|
| 980 |
|
| 993 |
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
| $ | 0.465 |
| $ | 0.408 |
| $ | 0.350 |
|
| | | | | | | | | | | |
| | | | | | | |
| |||
| | | 2020 |
| 2019 |
| 2018 | | |||
(In millions, except per share amounts) |
|
| (52 weeks) | | (52 weeks) | | (52 weeks) |
| |||
Sales | | | $ | 132,498 | | $ | 122,286 | | $ | 121,852 | |
| | | | | | | | | | | |
Operating expenses | | | | | | | | | | | |
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below | | |
| 101,597 | |
| 95,294 | |
| 95,103 | |
Operating, general and administrative | | |
| 24,500 | |
| 21,208 | |
| 20,786 | |
Rent | | |
| 874 | |
| 884 | |
| 884 | |
Depreciation and amortization | | |
| 2,747 | |
| 2,649 | |
| 2,465 | |
| | | | | | | | | | | |
Operating profit | | |
| 2,780 | |
| 2,251 | |
| 2,614 | |
| | | | | | | | | | | |
Other income (expense) | | | | | | | | | | | |
Interest expense | | |
| (544) | |
| (603) | |
| (620) | |
Non-service component of company-sponsored pension plan costs | | | | 29 | | | — | | | (26) | |
Gain on investments | | | | 1,105 | | | 157 | | | 228 | |
Gain on sale of businesses | | | | — | | | 176 | | | 1,782 | |
| | | | | | | | | | | |
Net earnings before income tax expense | | |
| 3,370 | |
| 1,981 | |
| 3,978 | |
| | | | | | | | | | | |
Income tax expense | | |
| 782 | |
| 469 | |
| 900 | |
| | | | | | | | | | | |
Net earnings including noncontrolling interests | | |
| 2,588 | |
| 1,512 | |
| 3,078 | |
Net income (loss) attributable to noncontrolling interests | | |
| 3 | |
| (147) | |
| (32) | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. | | | $ | 2,585 | | $ | 1,659 | | $ | 3,110 | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per basic common share | | | $ | 3.31 | | $ | 2.05 | | $ | 3.80 | |
| | | | | | | | | | | |
Average number of common shares used in basic calculation | | |
| 773 | |
| 799 | |
| 810 | |
| | | | | | | | | | | |
Net earnings attributable to The Kroger Co. per diluted common share | | | $ | 3.27 | | $ | 2.04 | | $ | 3.76 | |
| | | | | | | | | | | |
Average number of common shares used in diluted calculation | | |
| 781 | |
| 805 | |
| 818 | |
The accompanying notes are an integral part of the consolidated financial statements.
3949
THE KROGER CO.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Years Ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015February 2, 2019
| | | | | | | | | |
| | | | | | | |||
| | 2020 | | 2019 |
| 2018 | |||
(In millions) |
| (52 weeks) | | (52 weeks) | | (52 weeks) | |||
Net earnings including noncontrolling interests | | $ | 2,588 | | $ | 1,512 | | $ | 3,078 |
| | | | | | | | | |
Other comprehensive income (loss) | | | | | | | | | |
Realized gains on available for sale securities, net of income tax(1) | |
| — | | | — | | | (4) |
Change in pension and other postretirement defined benefit plans, net of income tax(2) | | | 22 | | | (105) | | | 147 |
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) | |
| (14) | |
| (47) | |
| (23) |
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4) | | | 2 | | | 4 | | | 5 |
Cumulative effect of accounting change(5) | | | — | | | (146) | | | — |
| | | | | | | | | |
Total other comprehensive income (loss) | |
| 10 | |
| (294) | |
| 125 |
| | | | | | | | | |
Comprehensive income | |
| 2,598 | |
| 1,218 | |
| 3,203 |
Comprehensive income (loss) attributable to noncontrolling interests | |
| 3 | |
| (147) | |
| (32) |
Comprehensive income attributable to The Kroger Co. | | $ | 2,595 | | $ | 1,365 | | $ | 3,235 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2016 |
| 2015 |
| 2014 |
| |||
(In millions) |
| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
| |||
Net earnings including noncontrolling interests |
| $ | 1,957 |
| $ | 2,049 |
| $ | 1,747 |
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
Realized and unrealized gains and losses on available for sale securities, net of income tax(1) |
|
| (20) |
|
| 3 |
|
| 5 |
|
Change in pension and other postretirement defined benefit plans, net of income tax(2) |
|
| (64) |
|
| 131 |
|
| (329) |
|
Unrealized gains and losses on cash flow hedging activities, net of income tax(3) |
|
| 47 |
|
| (3) |
|
| (25) |
|
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax |
|
| 2 |
|
| 1 |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income (loss) |
|
| (35) |
|
| 132 |
|
| (348) |
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
| 1,922 |
|
| 2,181 |
|
| 1,399 |
|
Comprehensive income (loss) attributable to noncontrolling interests |
|
| (18) |
|
| 10 |
|
| 19 |
|
Comprehensive income attributable to The Kroger Co. |
| $ | 1,940 |
| $ | 2,171 |
| $ | 1,380 |
|
| (1) |
| Amount is net of tax benefit of |
| (2) |
| Amount is net of tax expense (benefit) of |
| (3) |
| Amount is net of tax benefit of |
| (4) | Amount is net of tax expense of $2 in 2020, $3 in 2019 and $3 in 2018. |
| (5) | Related to the adoption of Accounting Standards Update (“ASU”) 2018-02, “Income Statement – Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income,” (See Note 18 for additional details). |
The accompanying notes are an integral part of the consolidated financial statements.
4050
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended January 28, 2017,30, 2021, February 1, 2020 and February 2, 2019
| | | | | | | | | | |
| | | | | | |
| |||
| | 2020 |
| 2019 |
| 2018 | | |||
(In millions) |
| (52 weeks) | | (52 weeks) | | (52 weeks) |
| |||
Cash Flows from Operating Activities: | | | | | | | | | | |
Net earnings including noncontrolling interests | | $ | 2,588 | | $ | 1,512 | | $ | 3,078 | |
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: | | | | | | | | | | |
Depreciation and amortization | |
| 2,747 | |
| 2,649 | |
| 2,465 | |
Asset impairment charges | | | 70 | | | 120 | | | 56 | |
Operating lease asset amortization | | | 626 | | | 640 | | | — | |
LIFO (credit) charge | |
| (7) | |
| 105 | |
| 29 | |
Stock-based employee compensation | |
| 185 | |
| 155 | |
| 154 | |
Expense (credit) for company-sponsored pension plans | |
| (9) | |
| 39 | |
| 76 | |
Deferred income taxes | |
| 73 | |
| (56) | |
| (45) | |
Gain on sale of businesses | | | — | | | (176) | | | (1,782) | |
(Gain) loss on the sale of assets | | | (59) | | | (158) | | | 2 | |
Gain on investments | | | (1,105) | | | (157) | | | (228) | |
Loss on deconsolidation and impairment of Lucky's Market | | | — | | | 412 | | | — | |
Other | |
| 165 | |
| (109) | |
| 58 | |
Changes in operating assets and liabilities net of effects from mergers and disposals of businesses: | | | | | | | | | | |
Store deposits in-transit | |
| 83 | |
| 3 | |
| (20) | |
Receivables | |
| (90) | |
| (36) | |
| (208) | |
Inventories | |
| 7 | |
| (351) | |
| (354) | |
Prepaid and other current assets | |
| (342) | |
| (33) | |
| 244 | |
Trade accounts payable | |
| 330 | |
| 342 | |
| 213 | |
Accrued expenses | |
| 1,382 | |
| 302 | |
| 416 | |
Income taxes receivable and payable | |
| 24 | | | (142) | |
| 289 | |
Contribution to company-sponsored pension plan | | | — | | | — | | | (185) | |
Operating lease liabilities | | | (552) | | | (639) | | | — | |
Proceeds from contract associated with sale of business | | | — | |
| 295 | | | — | |
Other | |
| 699 | |
| (53) | |
| (94) | |
| | | | | | | | | | |
Net cash provided by operating activities | |
| 6,815 | |
| 4,664 | |
| 4,164 | |
| | | | | | | | | | |
Cash Flows from Investing Activities: | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | |
| (2,865) | |
| (3,128) | |
| (2,967) | |
Proceeds from sale of assets | |
| 165 | | | 273 | |
| 85 | |
Proceeds on settlement of financial instrument | | | — | | | — | | | 235 | |
Payments for acquisitions, net of cash acquired | | | — | | | — | | | (197) | |
Purchases of stores | | | — | | | — | | | (44) | |
Net proceeds from sale of businesses | | | — | | | 327 | | | 2,169 | |
Purchases of Ocado securities | | | — | | | — | | | (392) | |
Other | |
| (114) | |
| (83) | |
| (75) | |
| | | | | | | | | | |
Net cash used by investing activities | |
| (2,814) | |
| (2,611) | |
| (1,186) | |
| | | | | | | | | | |
Cash Flows from Financing Activities: | | | | | | | | | | |
Proceeds from issuance of long-term debt | |
| 1,049 | |
| 813 | |
| 2,236 | |
Payments on long-term debt including obligations under finance leases | |
| (747) | | | (2,304) | |
| (1,372) | |
Net proceeds (payments) on commercial paper | |
| (1,150) | | | 350 | |
| (1,321) | |
Dividends paid | | | (534) | | | (486) | | | (437) | |
Proceeds from issuance of capital stock | | | 127 | |
| 55 | | | 65 | |
Treasury stock purchases | |
| (1,324) | |
| (465) | |
| (2,010) | |
Other | | | (134) | |
| (46) | |
| (57) | |
| | | | | | | | | | |
Net cash used by financing activities | |
| (2,713) | |
| (2,083) | |
| (2,896) | |
| | | | | | | | | | |
Net increase (decrease) in cash and temporary cash investments | |
| 1,288 | |
| (30) | |
| 82 | |
| | | | | | | | | | |
Cash and temporary cash investments: | | | | | | | | | | |
Beginning of year | |
| 399 | |
| 429 | |
| 347 | |
End of year | | $ | 1,687 | | $ | 399 | | $ | 429 | |
| | | | | | | | | | |
Reconciliation of capital investments: | | | | | | | | | | |
Payments for property and equipment, including payments for lease buyouts | | $ | (2,865) | | $ | (3,128) | | $ | (2,967) | |
Payments for lease buyouts | | | 58 | |
| 82 | | | 5 | |
Changes in construction-in-progress payables | |
| (359) | |
| 2 | |
| (56) | |
Total capital investments, excluding lease buyouts | | $ | (3,166) | | $ | (3,044) | | $ | (3,018) | |
| | | | | | | | | | |
Disclosure of cash flow information: | | | | | | | | | | |
Cash paid during the year for interest | | $ | 564 | | $ | 523 | | $ | 614 | |
Cash paid during the year for income taxes | | $ | 659 | | $ | 706 | | $ | 600 | |
The accompanying notes are an integral part of the consolidated financial statements
51
THE KROGER CO.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended January 30, 20162021, February 1, 2020 and January 31, 2015February 2, 2019
| | | | | | | | | | | | | | | | | | | | | | | | | |
|
|
|
|
| |
|
| |
|
|
|
| |
| Accumulated |
|
| |
|
| |
|
| | |
| | | | | | | Additional | | | | | | | Other | | | | | | | | | | ||
| | Common Stock | | Paid-In | | Treasury Stock | | Comprehensive | | Accumulated | | Noncontrolling | | | | ||||||||||
(In millions, except per share amounts) | | Shares | | Amount | | Capital | | Shares | | Amount | | Income (Loss) | | Earnings | | Interest | | Total | |||||||
Balances at February 3, 2018 |
| 1,918 | | $ | 1,918 | | $ | 3,161 |
| 1,048 | | $ | (14,684) | | $ | (471) | | $ | 17,007 | | $ | (26) | | $ | 6,905 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (4) | |
| 65 | |
| — | |
| — | |
| — | |
| 65 |
Restricted stock issued |
| — | |
| — | |
| (119) |
| (3) | |
| 74 | |
| — | |
| — | |
| — | |
| (45) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 76 | |
| (1,927) | |
| — | |
| — | |
| — | |
| (1,927) |
Stock options exchanged |
| — | |
| — | |
| — |
| 3 | |
| (83) | |
| — | |
| — | |
| — | |
| (83) |
Share-based employee compensation |
| — | |
| — | |
| 154 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 154 |
Other comprehensive income net of tax of $39 |
| — | |
| — | |
| — |
| — | |
| — | |
| 125 | |
| — | |
| — | |
| 125 |
Other |
| — | |
| — | |
| 49 |
| — | |
| (57) | |
| — | |
| — | |
| 7 | |
| (1) |
Cash dividends declared ($0.545 per common share) |
| — | | | — | | | — |
| — | |
| — | |
| — | |
| (436) | |
| — | | | (436) |
Net earnings (loss) including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 3,110 | |
| (32) | |
| 3,078 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 2, 2019 |
| 1,918 | | $ | 1,918 | | $ | 3,245 |
| 1,120 | | $ | (16,612) | | $ | (346) | | $ | 19,681 | | $ | (51) | | $ | 7,835 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (3) | |
| 55 | |
| — | |
| — | |
| — | |
| 55 |
Restricted stock issued |
| — | |
| — | |
| (128) |
| (3) | |
| 92 | |
| — | |
| — | |
| — | |
| (36) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 14 | |
| (400) | |
| — | |
| — | |
| — | |
| (400) |
Stock options exchanged |
| — | |
| — | |
| — |
| 2 | |
| (65) | |
| — | |
| — | |
| — | |
| (65) |
Share-based employee compensation |
| — | |
| — | |
| 155 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 155 |
Other comprehensive loss net of tax of ($47) |
| — | |
| — | |
| — |
| — | |
| — | |
| (294) | |
| — | |
| — | |
| (294) |
Cumulative effect of accounting change (see note 18) | | — | |
| — | | | — |
| — | |
| — | | | — | | | 146 | | | — | | | 146 |
Deconsolidation of Lucky's Market | | — | |
| — | | | — |
| — | |
| — | | | — | | | — | | | 168 | | | 168 |
Other |
| — | |
| — | |
| 65 |
| — | |
| (61) | |
| — | |
| (5) | |
| 1 | |
| — |
Cash dividends declared ($0.62 per common share) | | — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (503) | |
| — | |
| (503) |
Net earnings (loss) including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 1,659 | |
| (147) | |
| 1,512 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at February 1, 2020 |
| 1,918 | | $ | 1,918 | | $ | 3,337 |
| 1,130 | | $ | (16,991) | | $ | (640) | | $ | 20,978 | | $ | (29) | | $ | 8,573 |
Issuance of common stock: | | | | | | | | | | | | | | | | | | | | | | | | | |
Stock options exercised |
| — | |
| — | |
| — |
| (7) | |
| 127 | |
| — | |
| — | |
| — | |
| 127 |
Restricted stock issued |
| — | |
| — | |
| (134) |
| (3) | |
| 71 | |
| — | |
| — | |
| — | |
| (63) |
Treasury stock activity: | | | | | | | | | | | | | | | | | | | | | | | | | |
Treasury stock purchases, at cost |
| — | |
| — | |
| — |
| 36 | |
| (1,196) | |
| — | |
| — | |
| — | |
| (1,196) |
Stock options exchanged |
| — | |
| — | |
| — |
| 4 | |
| (128) | |
| — | |
| — | |
| — | |
| (128) |
Share-based employee compensation |
| — | |
| — | |
| 185 |
| — | |
| — | |
| — | |
| — | |
| — | |
| 185 |
Other comprehensive income net of tax of $1 |
| — | |
| — | |
| — |
| — | |
| — | |
| 10 | |
| — | |
| — | |
| 10 |
Other |
| — | |
| — | |
| 73 |
| — | |
| (74) | |
| — | |
| — | |
| — | |
| (1) |
Cash dividends declared ($0.70 per common share) |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| (545) | |
| — | |
| (545) |
Net earnings including non-controlling interests |
| — | |
| — | |
| — |
| — | |
| — | |
| — | |
| 2,585 | |
| 3 | |
| 2,588 |
| | | | | | | | | | | | | | | | | | | | | | | | | |
Balances at January 30, 2021 |
| 1,918 | | $ | 1,918 | | $ | 3,461 |
| 1,160 | | $ | (18,191) | | $ | (630) | | $ | 23,018 | | $ | (26) | | $ | 9,550 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |||
|
| 2016 |
| 2015 |
| 2014 |
| |||
(In millions) |
| (52 weeks) |
| (52 weeks) |
| (52 weeks) |
| |||
Cash Flows from Operating Activities: |
|
|
|
|
|
|
|
|
|
|
Net earnings including noncontrolling interests |
| $ | 1,957 |
| $ | 2,049 |
| $ | 1,747 |
|
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
| 2,340 |
|
| 2,089 |
|
| 1,948 |
|
Asset impairment charge |
|
| 26 |
|
| 46 |
|
| 37 |
|
LIFO charge |
|
| 19 |
|
| 28 |
|
| 147 |
|
Stock-based employee compensation |
|
| 141 |
|
| 165 |
|
| 155 |
|
Expense for Company-sponsored pension plans |
|
| 94 |
|
| 103 |
|
| 55 |
|
Deferred income taxes |
|
| 201 |
|
| 317 |
|
| 73 |
|
Other |
|
| (28) |
|
| 54 |
|
| 72 |
|
Changes in operating assets and liabilities net of effects from mergers of businesses: |
|
|
|
|
|
|
|
|
|
|
Store deposits in-transit |
|
| 13 |
|
| 95 |
|
| (27) |
|
Receivables |
|
| (110) |
|
| (59) |
|
| (141) |
|
Inventories |
|
| (382) |
|
| (184) |
|
| (147) |
|
Prepaid and other current assets |
|
| (172) |
|
| (28) |
|
| 2 |
|
Trade accounts payable |
|
| 16 |
|
| 440 |
|
| 135 |
|
Accrued expenses |
|
| (118) |
|
| 275 |
|
| 249 |
|
Income taxes receivable and payable |
|
| 261 |
|
| (359) |
|
| (68) |
|
Contribution to Company-sponsored pension plans |
|
| — |
|
| (5) |
|
| — |
|
Other |
|
| 14 |
|
| (109) |
|
| (22) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
| 4,272 |
|
| 4,917 |
|
| 4,215 |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Investing Activities: |
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
|
| (3,699) |
|
| (3,349) |
|
| (2,831) |
|
Proceeds from sale of assets |
|
| 132 |
|
| 45 |
|
| 37 |
|
Payments for mergers |
|
| (401) |
|
| (168) |
|
| (252) |
|
Other |
|
| 93 |
|
| (98) |
|
| (14) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by investing activities |
|
| (3,875) |
|
| (3,570) |
|
| (3,060) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flows from Financing Activities: |
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
| 2,781 |
|
| 1,181 |
|
| 576 |
|
Payments on long-term debt |
|
| (1,355) |
|
| (1,245) |
|
| (375) |
|
Net borrowings (payments) on commercial paper |
|
| 435 |
|
| (285) |
|
| 25 |
|
Dividends paid |
|
| (429) |
|
| (385) |
|
| (338) |
|
Excess tax benefits on stock-based awards |
|
| — |
|
| 97 |
|
| 52 |
|
Proceeds from issuance of capital stock |
|
| 68 |
|
| 120 |
|
| 110 |
|
Treasury stock purchases |
|
| (1,766) |
|
| (703) |
|
| (1,283) |
|
Investment in the remaining equity of a noncontrolling interest |
|
| — |
|
| (26) |
|
| — |
|
Other |
|
| (86) |
|
| (92) |
|
| (55) |
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used by financing activities |
|
| (352) |
|
| (1,338) |
|
| (1,288) |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and temporary cash investments |
|
| 45 |
|
| 9 |
|
| (133) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and temporary cash investments: |
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
| 277 |
|
| 268 |
|
| 401 |
|
End of year |
| $ | 322 |
| $ | 277 |
| $ | 268 |
|
|
|
|
|
|
|
|
|
|
|
|
Reconciliation of capital investments: |
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease buyouts |
| $ | (3,699) |
| $ | (3,349) |
| $ | (2,831) |
|
Payments for lease buyouts |
|
| 5 |
|
| 35 |
|
| 135 |
|
Changes in construction-in-progress payables |
|
| 72 |
|
| (35) |
|
| (56) |
|
Total capital investments, excluding lease buyouts |
| $ | (3,622) |
| $ | (3,349) |
| $ | (2,752) |
|
|
|
|
|
|
|
|
|
|
|
|
Disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
| $ | 505 |
| $ | 474 |
| $ | 477 |
|
Cash paid during the year for income taxes |
| $ | 557 |
| $ | 1,001 |
| $ | 941 |
|
The accompanying notes are an integral part of the consolidated financial statements.
41
52
THE KROGER CO.
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS’ EQUITY
Years Ended January 28, 2017, January 30, 2016 and January 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Accumulated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
| Additional |
|
|
|
|
|
| Other |
|
|
|
|
|
|
|
|
| ||
|
| Common Stock |
| Paid-In |
| Treasury Stock |
| Comprehensive |
| Accumulated |
| Noncontrolling |
|
|
| ||||||||||
(In millions, except per share amounts) |
| Shares |
| Amount |
| Capital |
| Shares |
| Amount |
| Gain (Loss) |
| Earnings |
| Interest |
| Total | |||||||
Balances at February 1, 2014 |
| 1,918 |
| $ | 1,918 |
| $ | 2,590 |
| 902 |
| $ | (9,641) |
| $ | (464) |
| $ | 10,981 |
| $ | 11 |
| $ | 5,395 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (10) |
|
| 110 |
|
| — |
|
| — |
|
| — |
|
| 110 |
Restricted stock issued |
| — |
|
| — |
|
| (91) |
| (5) |
|
| 40 |
|
| — |
|
| — |
|
| — |
|
| (51) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 51 |
|
| (1,129) |
|
| — |
|
| — |
|
| — |
|
| (1,129) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 6 |
|
| (154) |
|
| — |
|
| — |
|
| — |
|
| (154) |
Share-based employee compensation |
| — |
|
| — |
|
| 155 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 155 |
Other comprehensive loss net of income tax of ($204) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (348) |
|
| — |
|
| — |
|
| (348) |
Other |
| — |
|
| — |
|
| 94 |
| — |
|
| (35) |
|
| — |
|
| — |
|
| — |
|
| 59 |
Cash dividends declared ($0.350 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (342) |
|
| — |
|
| (342) |
Net earnings including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,728 |
|
| 19 |
|
| 1,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 31, 2015 |
| 1,918 |
| $ | 1,918 |
| $ | 2,748 |
| 944 |
| $ | (10,809) |
| $ | (812) |
| $ | 12,367 |
| $ | 30 |
| $ | 5,442 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| — |
| (9) |
|
| 120 |
|
| — |
|
| — |
|
| — |
|
| 120 |
Restricted stock issued |
| — |
|
| — |
|
| (122) |
| (5) |
|
| 37 |
|
| — |
|
| — |
|
| — |
| �� | (85) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 14 |
|
| (500) |
|
| — |
|
| — |
|
| — |
|
| (500) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 7 |
|
| (203) |
|
| — |
|
| — |
|
| — |
|
| (203) |
Share-based employee compensation |
| — |
|
| — |
|
| 165 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 165 |
Other comprehensive gain net of income tax of $77 |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| 132 |
|
| — |
|
| — |
|
| 132 |
Investment in the remaining equity of a non-controlling interest |
| — |
|
| — |
|
| 26 |
| — |
|
| — |
|
| — |
|
| — |
|
| (57) |
|
| (31) |
Other |
| — |
|
| — |
|
| 163 |
| — |
|
| (54) |
|
| — |
|
| — |
|
| (5) |
|
| 104 |
Cash dividends declared ($0.408 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (395) |
|
| — |
|
| (395) |
Net earnings including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 2,039 |
|
| 10 |
|
| 2,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 30, 2016 |
| 1,918 |
| $ | 1,918 |
| $ | 2,980 |
| 951 |
| $ | (11,409) |
| $ | (680) |
| $ | 14,011 |
| $ | (22) |
| $ | 6,798 |
Issuance of common stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options exercised |
| — |
|
| — |
|
| (1) |
| (5) |
|
| 68 |
|
| — |
|
| — |
|
| — |
|
| 67 |
Restricted stock issued |
| — |
|
| — |
|
| (116) |
| (3) |
|
| 57 |
|
| — |
|
| — |
|
| — |
|
| (59) |
Treasury stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at cost |
| — |
|
| — |
|
| — |
| 47 |
|
| (1,661) |
|
| — |
|
| — |
|
| — |
|
| (1,661) |
Stock options exchanged |
| — |
|
| — |
|
| — |
| 4 |
|
| (105) |
|
| — |
|
| — |
|
| — |
|
| (105) |
Share-based employee compensation |
| — |
|
| — |
|
| 141 |
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 141 |
Other comprehensive loss net of income tax of $(28) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| (35) |
|
| — |
|
| — |
|
| (35) |
Other |
| — |
|
| — |
|
| 66 |
| — |
|
| (68) |
|
| — |
|
| — |
|
| 52 |
|
| 50 |
Cash dividends declared ($0.465 per common share) |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| (443) |
|
| — |
|
| (443) |
Net earnings (loss) including non-controlling interests |
| — |
|
| — |
|
| — |
| — |
|
| — |
|
| — |
|
| 1,975 |
|
| (18) |
|
| 1,957 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances at January 28, 2017 |
| 1,918 |
| $ | 1,918 |
| $ | 3,070 |
| 994 |
| $ | (13,118) |
| $ | (715) |
| $ | 15,543 |
| $ | 12 |
| $ | 6,710 |
The accompanying notes are an integral part of the consolidated financial statements.
42
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All amounts in the Notes to Consolidated Financial Statements are in millions except per share amounts.
1. | ACCOUNTING POLICIES |
1.ACCOUNTING POLICIES
The following is a summary of the significant accounting policies followed in preparing these financial statements.
Description of Business, Basis of Presentation and Principles of Consolidation
The Kroger Co. (the “Company”) was founded in 1883 and incorporated in 1902. As of January 28, 2017,30, 2021, the Company was one of the largest retailers in the world based on annual sales. The Company also manufactures and processes food for sale by its supermarkets. The accompanying financial statements include the consolidated accounts of the Company, its wholly-owned subsidiaries and the variable interest entities in which the Company is the primary beneficiary.other consolidated entities. Intercompany transactions and balances have been eliminated.
On June 25, 2015, the Company’s Board of Directors approved a two-for-one stock split of the Company’s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in the Company’s Consolidated Financial Statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.
Refer to Note 1718 for a description of changes to the Consolidated Statement of Operations and Consolidated Statement of Cash FlowsFinancial Statements for a recently adopted accounting standardstandards regarding the presentationrecognition of employee share-based compensation payments.lease agreements, reclassification of stranded tax effects and implementation costs of cloud computing arrangements.
Fiscal Year
The Company’s fiscal year ends on the Saturday nearest January 31. The last three fiscal years consist of the 52-week periods ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015.February 2, 2019.
Pervasiveness of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities. Disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of consolidated revenues and expenses during the reporting period is also required. Actual results could differ from those estimates.
Cash, Temporary Cash Investments and Book Overdrafts
Cash and temporary cash investments represent store cash and short-term investments with original maturities of less than three months. Book overdrafts are included in “Trade accounts payable” and “Accrued salaries and wages” in the Consolidated Balance Sheets.
Deposits In-Transit
Deposits in-transit generally represent funds deposited to the Company’s bank accounts at the end of the year related to sales, a majority of which were paid for with debit cards, credit cards and checks, to which the Company does not have immediate access but settle within a few days of the sales transaction.
Inventories
43
Inventories
Inventories are stated at the lower of cost (principally on a last-in, first-out “LIFO” basis) or market. In total, approximately 89%92% of inventories in 20162020 and 95%91% of inventories in 20152019 were valued using the LIFO method. Cost for the balance of theThe remaining inventories, including substantially all fuel inventories, was determined usingare stated at the first-in, first-out (“FIFO”) method.lower of cost (on a FIFO basis) or net realizable value. Replacement cost was higher than the carrying amount by $1,291 at January 28, 2017 and $1,272$1,373 at January 30, 2016.2021 and $1,380 at February 1, 2020. The Company follows the Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge or credit. During 2020, the Company had a LIFO liquidation primarily related to pharmacy inventory. The liquidated inventory was carried at lower costs prevailing in prior years as compared with current costs. The effect of this reduction in inventory decreased “Merchandise costs” by approximately $76, $58 net of tax.
53
The item-cost method of accounting to determine inventory cost before the LIFO adjustment is followed for substantially all store inventories at the Company’s supermarket divisions. This method involves counting each item in inventory, assigning costs to each of these items based on the actual purchase costs (net of vendor allowances and cash discounts) of each item and recording the cost of items sold. The item-cost method of accounting allows for more accurate reporting of periodic inventory balances and enables management to more precisely manage inventory. In addition, substantially all of the Company’s inventory consists of finished goods and is recorded at actual purchase costs (net of vendor allowances and cash discounts).
The Company evaluates inventory shortages throughout the year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the financial statement date.
Property, Plant and Equipment
Property, plant and equipment are recorded at cost or, in the case of assets acquired in a business combination, at fair value. Depreciation and amortization expense, which includes the depreciation of assets recorded under capitalfinance leases, is computed principally using the straight-line method over the estimated useful lives of individual assets. Buildings and land improvements are depreciated based on lives varying from 10 to 40 years. All new purchases of store equipment are assigned lives varying from three to nine years. Leasehold improvements are amortized over the shorter of the lease term to which they relate, which generally varies from four to 25 years, or the useful life of the asset. Food production plant and distribution center equipment is depreciated over lives varying from three to 15 years. Information technology assets are generally depreciated over three to five years. Depreciation and amortization expense was $2,340$2,747 in 2016, $2,0892020, $2,649 in 20152019 and $1,948$2,465 in 2014.2018.
Interest costs on significant projects constructed for the Company’s own use are capitalized as part of the costs of the newly constructed facilities. Upon retirement or disposal of assets, the cost and related accumulated depreciation and amortization are removed from the balance sheet and any gain or loss is reflected in net earnings. Refer to Note 4 for further information regarding the Company’s property, plant and equipment.
Deferred RentLeases
The Company recognizes rent holidays, includingleases certain store real estate, warehouses, distribution centers, office space and equipment. The Company determines if an arrangement is a lease at inception. Finance and operating lease assets and liabilities are recognized at the time period during whichlease commencement date. Finance and operating lease liabilities represent the present value of minimum lease payments not yet paid. Operating lease assets represent the right to use an underlying asset and are based upon the operating lease liabilities adjusted for prepayments, lease incentives and impairment, if any. To determine the present value of lease payments, the Company has accessestimates an incremental borrowing rate which represents the rate used for a secured borrowing of a similar term as the lease.
Lease terms generally range from 10 to 20 years with options to renew for varyingterms at the Company’s sole discretion. The lease term includes the initial contractual term as well as any options to extend the lease when it is reasonably certain that the Company will exercise that option. Leases with an initial term of 12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses or payment of executory costs such as property for construction of buildingstaxes, utilities or improvementsinsurance and escalating rent provisionsmaintenance. Operating lease payments are charged on a straight-line basis to rent expense over the lease term ofand finance lease payments are charged to interest expense and depreciation and amortization expense over the lease. The deferred amount is includedlease term. Assets under finance leases are amortized in “Other current liabilities” and “Other long-term liabilities” onaccordance with the Company’s normal depreciation policy for owned assets or over the lease term, if shorter. The Company’s lease agreements do not contain any residual value guarantees or material restrictive covenants. For additional information on leases, see Note 10 to the Consolidated Balance Sheets.Financial Statements.
54
Goodwill
Goodwill
The Company reviews goodwill for impairment during the fourth quarter of each year, and also upon the occurrence of a triggering event. The Company performs reviews of each of its operating divisions and variable interestother consolidated entities (collectively, “reporting units”) that have goodwill balances. Generally, fair value is determined using a market multiple of earnings,model, or discounted projected future cash flows, and is compared to the carrying value of a reporting unit for purposes of identifying potential impairment. Projected future cash flows are based on management’s knowledge of the current operating environment and expectations for the future. If potential for impairment is identified, the fair value of a reporting unit is measured against the fair value of its underlying assets and liabilities, excluding goodwill, to estimate an implied fair value of the reporting unit’s goodwill. Goodwill impairment is recognized for any excess of the reporting unit’s carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit’s goodwill over the implied fair value.unit. Results of the goodwill impairment reviews performed during 2016, 20152020, 2019 and 20142018 are summarized in Note 3.
44
Impairment of Long-Lived Assets
The Company monitors the carrying value of long-lived assets for potential impairment each quarter based on whether certain triggering events have occurred. These events include current period losses combined with a history of losses or a projection of continuing losses or a significant decrease in the market value of an asset. When a triggering event occurs, an impairment calculation is performed, comparing projected undiscounted future cash flows, utilizing current cash flow information and expected growth rates related to specific stores, to the carrying value for those stores. If the Company identifies impairment for long-lived assets to be held and used, the Company compares the assets’ current carrying value to the assets’ fair value. Fair value is based on current market values or discounted future cash flows. The Company records impairment when the carrying value exceeds fair market value. With respect to owned property and equipment held for disposal, the value of the property and equipment is adjusted to reflect recoverable values based on previous efforts to dispose of similar assets and current economic conditions. Impairment is recognized for the excess of the carrying value over the estimated fair market value, reduced by estimated direct costs of disposal. The Company recorded asset impairments totaling $70, $120 and $56 in 2020, 2019 and 2018, respectively. The increase in the normal course of business totaling $26, $462019 impairment charge, compared to 2020 and $372018, related to the 35 planned store closures in 2016, 2015 and 2014, respectively.2020. Costs to reduce the carrying value of long-lived assets for each of the years presented have been included in the Consolidated Statements of Operations as “Operating,Operating, general and administrative”administrative (“OG&A”) expense.
Store Closing CostsAccounts Payable Financing Arrangement
The Company provides for closed store liabilities relatinghas an agreement with a third party to provide an accounts payable tracking system which facilitates participating suppliers’ ability to finance payment obligations from the present valueCompany with designated third-party financial institutions. Participating suppliers may, at their sole discretion, make offers to finance one or more payment obligations of the estimated remaining non-cancellable lease payments afterCompany prior to their scheduled due dates at a discounted price to participating financial institutions. The Company’s obligations to its suppliers, including amounts due and scheduled payment dates, are not affected by suppliers’ decisions to finance amounts under this arrangement. These obligations are included in “Other current liabilities” in the closing date, netConsolidated Balance Sheets.
Contingent Consideration
The Company’s Home Chef business combination involves potential payment of estimated subtenant income.future consideration that is contingent upon the achievement of certain performance milestones. The Company estimatesrecorded contingent consideration at fair value at the net lease liabilitiesdate of acquisition based on the consideration expected to be transferred, estimated as the probability-weighted future cash flows, discounted back to present value using a discount rate determined in accordance with accepted valuation methods. The liability for contingent consideration is remeasured to calculatefair value at each reporting period using Level 3 inputs, and the presentchange in fair value, including accretion for the passage of time, is recognized in earnings until the remaining net rent payments on closed stores. contingency is resolved. In 2020 and 2018, adjustments to increase the contingent consideration liability as of year-end were recorded for $189 and $33, respectively, in OG&A expense. In 2019, an adjustment to decrease the contingent consideration liability as of year-end 2019 was recorded for ($69) in OG&A expense.
55
Store Closing Costs
The closed store leaseCompany regularly evaluates the performance of its stores and periodically closes those stores that are underperforming. Related liabilities usually are paid over the lease termsarise, such as severance, contractual obligations and other accruals associated with store closings. The Company records a liability for costs associated with an exit or disposal activity when the closed stores, which generally have remaining terms ranging from one to 20 years.liability is incurred, usually in the period the store closes. Adjustments to closed store liabilities primarily relate to changes in subtenant income and actual exit costs differing from original estimates. 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 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, plant, equipment and leasehold improvementsoperating lease assets 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 the Consolidated Statements of Operations as “Merchandise costs.” Costs to transfer inventory and equipment from closed stores are expensed as incurred.
The current portion of the future lease obligations of stores is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
Interest Rate Risk Management
The Company uses derivative instruments primarily to manage its exposure to changes in interest rates. The Company’s current program relative to interest rate protection and the methods by which the Company accounts for its derivative instruments are described in Note 7.
Benefit Plans and Multi-Employer Pension Plans
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of Accumulated Other Comprehensive Income (“AOCI”). All plans are measuredThe Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the Company’smonth-end that is closest to its fiscal year end.year-ends, which were January 30, 2021 for fiscal 2020 and February 1, 2020 for fiscal 2019.
45
The determination of the obligation and expense for Company-sponsoredcompany-sponsored pension plans and other post-retirement benefits is dependent on the selection of assumptions used by actuaries and the Company in calculating those amounts. Those assumptions are described in Note 15 and include, among others, the discount rate, the expected long-term rate of return on plan assets, mortality 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 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.
The Company also participates in various multi-employer plans for substantially all union employees. Pension expense for these plans is recognized as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. Refer to Note 16 for additional information regarding the Company’s participation in these various multi-employer pension plans.
The Company administers and makes contributions to the employee 401(k) retirement savings accounts. Contributions to the employee 401(k) retirement savings accounts are expensed when contributed.contributed or over the service period in the case of automatic contributions. Refer to Note 15 for additional information regarding the Company’s benefit plans.
56
Share Based Compensation
The Company accounts for stock options under fair value recognition provisions. Under this method, the Company recognizes compensation expense for all share-based payments granted.granted under fair value recognition provisions. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award.award based on the fair value at the date of the grant. The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock option at the date of grant. Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant. In addition to stock options, the Company records expenseawards restricted stock to employees and nonemployee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company determines the fair value for restricted stock awards in an amount equal to the fair market value of the underlying stockshares on the grant date of the award, over the period the awards lapse. Excess tax benefits related to share-based payments are recognized in the provision for income taxes. Refer to Note 12 for additional information regarding the Company’s stock based compensation.award.
Deferred Income Taxes
Deferred income taxes are recorded to reflect the tax consequences of differences between the tax basis of assets and liabilities and their financial reporting basis. Refer to Note 5 for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income taxes are classified as a net current or noncurrent asset or liability based on the classification of the related asset or liability for financial reporting purposes. A deferred tax asset or liability that is not related to an asset or liability for financial reporting is classified according to the expected reversal date.
Uncertain Tax Positions
The Company reviews the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in its consolidated financial statements. Refer to Note 5 for the amount of unrecognized tax benefits and other related disclosures related to uncertain tax positions.
Various taxing authorities periodically audit the Company’s income tax returns. These audits include questions regarding the Company’s tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating the exposures connected with these various tax filing positions, including state and local taxes, the Company records allowances for probable exposures. A number of years may lapseelapse before a particular matter, for which an allowance has been established, is audited and fully resolved. As of January 28, 2017,30, 2021, the Internal Revenue Service had concluded its examination of the Company’s 2012 and 2013all federal tax returns.returns up to and including the return for the year ended January 30, 2016.
The assessment of the Company’s tax position relies on the judgment of management to estimate the exposures associated with the Company’s various filing positions.
46
Self-Insurance Costs
The Company is primarily self-insured for costs related to workers’ compensation and general liability claims. Liabilities are actuarially determined and are recognized based on claims filed and an estimate of claims incurred but not reported. The liabilities for workers’ compensation claims are accounted for on a present value basis. The Company has purchased stop-loss coverage to limit its exposure to any significant exposure on a per claim basis. The Company is insured for covered costs in excess of these per claim limits.
The following table summarizes the changes in the Company’s self-insurance liability through January 28, 2017.30, 2021.
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||||||||||||
Beginning balance |
| $ | 639 |
| $ | 599 |
| $ | 569 |
| | $ | 689 | | $ | 696 | | $ | 695 | |
Expense |
|
| 263 |
|
| 234 |
|
| 246 |
| |
| 262 | |
| 209 | |
| 229 | |
Claim payments |
|
| (220) |
|
| (225) |
|
| (216) |
| |
| (220) | |
| (216) | |
| (228) | |
Assumed from mergers |
|
| — |
| | 31 |
| | — |
| ||||||||||
Ending balance |
|
| 682 |
|
| 639 |
|
| 599 |
| |
| 731 | |
| 689 | |
| 696 | |
Less: Current portion |
|
| (229) |
|
| (223) |
|
| (213) |
| |
| (220) | |
| (216) | |
| (228) | |
Long-term portion |
| $ | 453 |
| $ | 416 |
| $ | 386 |
| | $ | 511 | | $ | 473 | | $ | 468 | |
The current portion of the self-insured liability is included in “Other current liabilities,” and the long-term portion is included in “Other long-term liabilities” in the Consolidated Balance Sheets.
57
The Company maintains surety bonds related to self-insured workers’ compensation claims. These bonds are required by most states in which the Company is self-insured for workers’ compensation and are placed with third-party insurance providers to insure payment of the Company’s obligations in the event the Company is unable to meet its claim payment obligations up to its self-insured retention levels. These bonds do not represent liabilities of the Company, as the Company has recorded reserves for the claim costs.
The Company is similarly self-insuredalso maintains insurance coverages for some risks, including cyber exposure and property-related losses. The Company maintains stop lossCompany’s insurance coverage begins for these exposures ranging from $25 to limit its property loss exposures including coverage for earthquake, wind, flood and other catastrophic events.$50.
Revenue Recognition
RevenuesSales
The Company recognizes revenues from the retail sale of products, net of products are recognizedsales taxes, at the point ofsale. Pharmacy sales are recorded when the product isprovided tothe customer. Digital channel originated sales are recognized either upon pickup in store or upon delivery to the customer. Amounts billed to a customer related to shipping and delivery represent revenues earned for the goods provided and are classified as sales. When shipping is discounted, it is recorded as an adjustment to sales. Discounts providedto customers by the Company at the time of sale, including thoseprovidedin connection with loyalty cards, are recognized as a reduction in sales as the products are sold.Discounts provided by vendors, usually inthe formof paper coupons, are not recognized as a reduction insales providedthe couponsare redeemable at any retailer that accepts coupons.The Company records a receivablefromthe vendorfor the difference in sales price and cash received.For merchandise sold in one of the Company’s stores or online, tender is accepted at the point of sale. The Company acts as principal in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company records revenue and related costs on a gross basis for these arrangements. For pharmacy sales, collection of third-party receivables is typically expected within three months or less from the vendor for the difference in sales price and cash received. Pharmacytime of purchase. The third-party receivables from pharmacy sales are recorded when product is provided toin Receivables in the customer. Sales taxes are recordedCompany’s Consolidated Balance Sheets and were $672 as other accrued liabilitiesof January 30, 2021 and not$646 as a component of sales. February 1, 2020.
Gift Cards and Gift Certificates
The Company doesnotrecognize a sale whenit sells its own gift cardsandgift certificates. certificates (collectively “gift cards”).Rather, it records a deferred revenue liability equal to the amount received.A sale is thenrecognized when the gift card or gift certificate is cards areredeemedto purchase the Company’sproducts. In 2016, theThe Company’s gift cards do not expire. While gift cards are generally redeemed within 12 months, some are never fully redeemed. The Company began recognizingrecognizes gift card and gift certificate breakage under the proportionalmethod,where recognition of breakage income is basedupon the historical run-offrateof unredeemed gift cards and gift certificates. Prior to 2016,cards. The Company’s gift card deferred revenue liability was $160 as of January 30, 2021 and gift certificate breakage was recognized under$114 as of February 1, 2020.
58
Disaggregated Revenues
Thefollowing table presents sales revenueby type of product for the remote method, where breakage income is recognized when redemption is unlikely to occuryear-ended January 30, 2021, February 1, 2020, and there is no legal obligation to remit the value of the unredeemed gift cards or gift certificates. The amount of breakage was not material for 2016, 2015 and 2014.February 2, 2019:
| | | | | | | | | | | | | | | | |
| | 2020 | | 2019 | | 2018 |
| |||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
| Amount |
| % of total |
| |||
Non Perishable(1) | | $ | 71,434 |
| 53.9 | % | $ | 61,464 |
| 50.3 | % | $ | 60,649 |
| 49.8 | % |
Fresh(2) | |
| 33,449 |
| 25.2 | % |
| 29,452 |
| 24.1 | % |
| 29,089 |
| 23.9 | % |
Supermarket Fuel | |
| 9,486 |
| 7.2 | % |
| 14,052 |
| 11.5 | % |
| 14,903 |
| 12.2 | % |
Pharmacy | |
| 11,388 |
| 8.6 | % |
| 11,015 |
| 9.0 | % |
| 10,617 |
| 8.7 | % |
Convenience Stores (3) | | | — | | - | % | | — | | - | % | | 944 | | 0.8 | % |
Other(4) | |
| 6,741 |
| 5.1 | % |
| 6,303 |
| 5.1 | % |
| 5,650 |
| 4.6 | % |
| | | | | | | | | | | | | | | | |
Total Sales | | $ | 132,498 |
| 100 | % | $ | 122,286 |
| 100 | % | $ | 121,852 |
| 100 | % |
| (1) | Consists primarily of grocery, generalmerchandise, health and beauty careand naturalfoods. |
| (2) | Consists primarily of produce,floral,meat,seafood, deli, bakery andfresh prepared. |
| (3) | The Company completed the sale of its convenience store business unit during the first quarter of 2018. |
| (4) | Consistsprimarily of salesrelatedto foodproduction plants to outsideparties,dataanalytic services, third-party media revenue, other consolidated entities, specialty pharmacy,in-storehealthclinics, digitalcouponservicesand other online sales not included in the categories above. |
Merchandise Costs
The “Merchandise costs” line item of the Consolidated Statements of Operations includes product costs, net of discounts and allowances; advertising costs (see separate discussion below); inbound freight charges; warehousing costs, including receiving and inspection costs; transportation costs; and food production and operational costs. Warehousing, transportation and manufacturing management salaries are also included in the “Merchandise costs” line item; however, purchasing management salaries and administration costs are included in the “Operating, general and administrative”OG&A line item along with most of the Company’s other managerial and administrative costs. Shipping and delivery costs associated with the Company’s digital offerings originating from non-retail store locations are included in the “Merchandise costs” line item. Rent expense and depreciation and amortization expense are shown separately in the Consolidated Statements of Operations.
47
Warehousing and transportation costs include distribution center direct wages, transportation direct wages, repairs and maintenance, utilities, inbound freight and, where applicable, third partythird-party warehouse management fees. These costs are recognized in the periods the related expenses are incurred.
The Company believes the classification of costs included in merchandise costs could vary widely throughout the industry. The Company’s approach is to include in the “Merchandise costs” line item the direct, net costs of acquiring products and making them available to customers in its stores. The Company believes this approach most accurately presents the actual costs of products sold.
The Company recognizes all vendor allowances as a reduction in merchandise costs when the related product is sold. When possible, vendor allowances are applied to the related product cost by item and, therefore, reduce the carrying value of inventory by item. When the items are sold, the vendor allowance is recognized. When it is not possible, due to systems constraints, to allocate vendor allowances to the product by item, vendor allowances are recognized as a reduction in merchandise costs based on inventory turns and, therefore, recognized as the product is sold.
59
Advertising Costs
The Company’s advertising costs are recognized in the periods the related expenses are incurred and are included in the “Merchandise costs” line item of the Consolidated Statements of Operations. The Company’s pre-tax advertising costs totaled $717$888 in 2016, $6792020, $854 in 20152019 and $648$752 in 2014.2018. The Company does not record vendor allowances for co-operative advertising as a reduction of advertising expense.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, retirement plan costs, utilities, and credit card fees. Shipping and delivery costs associated with the Company's digital offerings originating from retail store locations, including third-party delivery fees, are included in the “OG&A” line item of the Consolidated Statements of Operations. Rent expense, depreciation and amortization expense and interest expense are shown separately in the Consolidated Statement of Operations.
Consolidated Statements of Cash Flows
For purposes of the Consolidated Statements of Cash Flows, the Company considers all highly liquid debt instruments purchased with an original maturity of three months or less to be temporary cash investments.
Segments
The Company operates supermarkets multi-department stores, jewelry stores, and conveniencemulti-department stores throughout the United States. The Company’s retail operations, which represent over 98%97% of the Company’s consolidated sales, and EBITDA, are its only reportable segment. The Company’sCompany aggregated its operating divisions have been aggregated into one1 reportable segment due to the operating divisions having similar economic characteristics with similar long-term financial performance. In addition, the Company’s operating divisions offer customers similar products, have similar distribution methods, operate in similar regulatory environments, purchase the majority of the merchandise for retail sale from similar (and in many cases identical) vendors on a coordinated basis from a centralized location, serve similar types of customers, and are allocated capital from a centralized location. Operating divisions are organized primarily on a geographical basis so that the operating division management team can be responsive to local needs of the operating division and can execute company strategic plans and initiatives throughout the locations in thetheir operating division. TheThis geographical separation is the primary differentiation between these retail operating divisions. The Company’s geographicgeographical basis of organization reflects the manner in whichhow the business is managed and how the Company’s Chief Executive Officer, who acts as the Company’s chief operating decision maker, assesses performance internally. All of the Company’s operations are domestic.
48
The following table presents sales revenue by type of product for 2016, 2015 and 2014.
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
| |||||||||
|
| Amount |
| % of total |
| Amount |
| % of total |
| Amount |
| % of total |
| |||
Non Perishable (1) |
| $ | 60,220 |
| 52.2 | % | $ | 57,187 |
| 52.1 | % | $ | 54,392 |
| 50.1 | % |
Perishable (2) |
|
| 27,666 |
| 24.0 | % |
| 25,726 |
| 23.4 | % |
| 24,178 |
| 22.3 | % |
Fuel |
|
| 13,979 |
| 12.1 | % |
| 14,802 |
| 13.5 | % |
| 18,850 |
| 17.4 | % |
Pharmacy |
|
| 10,432 |
| 9.0 | % |
| 9,778 |
| 8.9 | % |
| 9,032 |
| 8.3 | % |
Other (3) |
|
| 3,040 |
| 2.7 | % |
| 2,337 |
| 2.1 | % |
| 2,013 |
| 1.9 | % |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Sales and other revenue |
| $ | 115,337 |
| 100 | % | $ | 109,830 |
| 100 | % | $ | 108,465 |
| 100 | % |
2. |
|
|
|
|
|
|
49
2.MERGERS
On September 2, 2016,May 17, 2018, the Company closed its mergerentered into a Partnership Framework Agreement with Modern HCOcado International Holdings Inc.Limited and Ocado Group plc (“ModernHEALTH”Ocado”) by purchasing 100% of the outstanding shares of ModernHEALTH for $407. This merger allows. The Partnership Framework Agreement was amended in 2020. Under this agreement, Ocado will partner exclusively with the Company to expand its specialty pharmacy services by significantly increasing geographic reach and patient therapies. The merger was accounted for underin the purchase method of accounting and was financed through the issuance of commercial paper. In a business combination, the purchase price is allocated to assets acquired and liabilities assumed based on their fair values, with any excess of purchase price over fair value recognized as goodwill. In addition to recognizing the assets and liabilities on the acquired company’s balance sheet, the Company reviews supply contracts, leases, financial instruments, employment agreements and other significant agreements to identify potential assets or liabilities that require recognition in connection with the application of acquisition accounting under Accounting Standards Codification (“ASC”) 805. Intangible assets are recognized apart from goodwill when the asset arises from contractual or other legal rights, or are separable from the acquired entity such that they may be sold, transferred, licensed, rented or exchanged either on a standalone basis or in combination with a related contract, asset or liability.
Pending finalization ofU.S., enhancing the Company’s valuationdigital and other items, the following table summarizes the preliminary fair values of the assets acquired and liabilities assumed asrobotics capabilities in its distribution networks. As part of the merger with ModernHEALTH:
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Of the $136 allocated to intangible assets,agreement, the Company recorded $131 and $5 relatedprovided a letter of credit which supports its commitment to pharmacy prescription files and distribution agreements, respectively.contract with Ocado to build a number of fulfilment centers. The Company will amortize the pharmacy prescription files and distribution agreements, using the straight line method, over 10 years. The goodwill recorded as partbalance of the mergerletter of credit was attributable to$207 as of January 30, 2021 and will reduce primarily upon the assembled workforceconstruction of ModernHEALTH and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The merger was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of tax basis and goodwill is not expected to be deductible for tax purposes.each fulfillment center.
On December 18, 2015,In addition, on May 17, 2018, the Company closed its mergerentered into a Share Subscription Agreement with Roundy’s by purchasing 100%Ocado, pursuant to which the Company agreed to purchase 33.1 million ordinary shares of Roundy’s outstanding common stockOcado for $3.60 per share and assuming Roundy’s outstanding debt, for aan aggregate purchase price of $866.$243. The merger brings a complementary store baseCompany completed the purchase of these 33.1 million shares on May 29, 2018. This is in communities throughout Wisconsin and a stronger presenceaddition to 8.1 million Ocado shares purchased earlier in the greater Chicagoland area. The merger was accounted for under the purchase method of accounting and was financed through a combination of commercial paper and long-term debt.
50
The Company’s purchase price allocation was finalized in the fourthfirst quarter of 2016. The changes in the fair values assumed from the preliminary amounts determined as of December 18, 2015 were a decrease in goodwill of $13, a decrease in current liabilities of $82018, and a decrease in deferred tax liabilities of $5. The table below summarizes the final fair value of the assets acquired and liabilities assumed:
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Of the $324 allocated to intangible assets, $211 relates to the Mariano’s®, Pick ‘n Save®, Metro Market and Copps™ trade names, to which was assigned an indefinite life and, therefore, will not be amortized. The Company also recorded $69, $38, and $6 related to favorable leasehold interests, pharmacy prescription files and customer lists, respectively. The Company will amortize the favorable leasehold interests over a weighted average of twelve years. The Company will amortize the pharmacy prescription files and customer lists over seven and two years, respectively, on a straight-line basis. The goodwill recorded as part of the merger was attributable to the assembled workforce of Roundy’s and operational synergies expected from the merger, as well as any intangible assets that do not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes.
On August 18, 2014, the Company closed its merger with Vitacost.com, Inc. (“Vitacost.com”) by purchasing 100% of the Vitacost.com outstanding common stock for $8.00 per share or $287. This merger affords the Company access to Vitacost.com’s extensive e-commerce platform, which can be combined with the Company’s customer insights and loyal customer base, to create new levels of personalization and convenience for customers. The merger was accounted for under the purchase method of accounting and was financed through the issuance of commercial paper.
51
The Company’s purchase price allocation was finalized6.5 million additional shares purchased in the second quarter of 2015. The changes2018. Fair value adjustments in equity of Ocado flow through “Gain on investments” in the Company’s Consolidated Statements of Operations. The fair values assumed fromvalue of all shares owned, which is measured using Level 1 inputs, was $1,808 as of January 30, 2021 and $776 as of February 1, 2020 and is included in “Other assets” in the preliminary amounts were not material.Company’s Consolidated Balance Sheets. The table below summarizesCompany recorded an unrealized gain of $1,032 in 2020, $157 in 2019 and $228 in 2018, NaN of which was realized during the final fair values of the assets acquired and liabilities assumed:
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Of the $81 allocated to intangible assets,period as the Company recorded $49, $26 and $6 related to customer relationships, technology and the trade name, respectively. The Company will amortize the technology and the trade name, using the straight line method, over 10 and three years, respectively, while the customer relationships will be amortized over five years using the declining balance method. The goodwill recorded as part of the merger was attributable to the assembled workforce of Vitacost.com and operational synergies expected from the merger, as well as any intangible assets that did not qualify for separate recognition. The transaction was treated as a stock purchase for income tax purposes. The assets acquired and liabilities assumed as part of the merger did not result in a step up of the tax basis and goodwill is not expected to be deductible for tax purposes.sell any Ocado securities.
Pro forma results of operations, assuming the Vitacost.com merger had taken place at the beginning of 2013, the Roundy’s transaction had taken place at the beginning of 2014 and the ModernHEALTH merger had taken place at the beginning of 2015, are included in the following table. The pro forma information includes historical results of operations of Vitacost.com, Roundy’s and ModernHEALTH, as well as adjustments for interest expense that would have been incurred due to financing the mergers, depreciation and amortization of the assets acquired and excludes the pre-merger transaction related expenses incurred by Vitacost.com, Roundy’s, ModernHEALTH and the Company. The pro forma information does not include efficiencies, cost reductions, synergies or investments in lower prices for our customers expected to result from the mergers. The unaudited pro forma financial information is not necessarily indicative of the results that actually would have occurred had the Vitacost.com merger completed at the beginning of 2013, the Roundy’s merger completed at the beginning of 2014 or the ModernHEALTH merger completed at beginning of 2015.
|
|
|
|
|
|
|
|
|
|
|
|
| Fiscal year ended |
| Fiscal year ended |
| Fiscal year ended |
| |||
|
| January 28, 2017 |
| January 30, 2016 |
| January 31, 2015 |
| |||
Sales |
| $ | 115,994 |
| $ | 114,341 |
| $ | 112,458 |
|
Net earnings including noncontrolling interests |
|
| 1,958 |
|
| 2,059 |
|
| 1,751 |
|
Net earnings (loss) attributable to noncontrolling interests |
|
| (18) |
|
| 10 |
|
| 19 |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings attributable to The Kroger Co. |
| $ | 1,976 |
| $ | 2,049 |
| $ | 1,732 |
|
52
60
3. | GOODWILL AND INTANGIBLE ASSETS |
3.GOODWILL AND INTANGIBLE ASSETS
The following table summarizes the changes in the Company’s net goodwill balance through January 28, 2017.30, 2021.
|
|
|
|
|
|
|
| |||||||
|
| 2016 |
| 2015 |
| |||||||||
| | | | | | | | |||||||
|
| 2020 |
| 2019 |
| |||||||||
Balance beginning of year |
|
|
|
|
|
|
| | | | | | | |
Goodwill |
| $ | 5,256 |
| $ | 4,836 |
| | $ | 5,737 | | $ | 5,729 | |
Accumulated impairment losses |
|
| (2,532) |
|
| (2,532) |
| |
| (2,661) | |
| (2,642) | |
|
|
| 2,724 |
|
| 2,304 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Subtotal | |
| 3,076 | |
| 3,087 | | |||||||
| | | | | | | | |||||||
Activity during the year |
|
|
|
|
|
|
| | | | | | | |
Mergers |
|
| 307 |
|
| 420 |
| |
| — | |
| 8 | |
|
|
|
|
|
|
|
| |||||||
Impairment losses | | | — | | | (19) | | |||||||
| | | | | | | | |||||||
| | | | | | | | |||||||
Balance end of year |
|
|
|
|
|
|
| | | | | | | |
Goodwill |
|
| 5,563 |
|
| 5,256 |
| |
| 5,737 | |
| 5,737 | |
Accumulated impairment losses |
|
| (2,532) |
|
| (2,532) |
| |
| (2,661) | |
| (2,661) | |
|
| $ | 3,031 |
| $ | 2,724 |
| |||||||
Total Goodwill | | $ | 3,076 | | $ | 3,076 | | |||||||
In 2016, the Company acquired all of the outstanding shares of ModernHEALTH (see Note 2) resulting in additional goodwill totaling $285.
In 2015, the Company acquired all the outstanding shares of Roundy’s (see Note 2), resulting in additional goodwill totaling $401. In 2016,2019, the Company finalized its Roundy'sthe purchase allocationaccounting for the Home Chef acquisition resulting in an increase of goodwill and deferred taxes of $8. The Company also recorded an impairment charge of $19 as a decrease in goowillresult of $13 (see Note 2).the Lucky’s Market impairment.
Testing for impairment must be performed annually, or on an interim basis upon the occurrence of a triggering event or a change in circumstances that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The annual evaluationsevaluation of goodwill and indefinite-lived intangible assets werewas performed during the fourth quarter of 2016, 20152020, 2019 and 20142018 and did not result in impairment.
Based on current and future expected cash flows, the Company believes goodwill impairments are not reasonably likely. A 10% reduction in fair value of the Company’s reporting units would not indicate a potential for impairment of the Company’s remaining goodwill balance.
In 2016, the Company acquired definite and indefinite lived intangible assets totaling approximately $136 as a result of the merger with ModernHEALTH.
In 2015, the Company acquired definite and indefinite lived intangible assets totaling approximately $324 as a result of the merger with Roundy's.
53
The following table summarizes the Company’s intangible assets balance through January 28, 2017.30, 2021.
| | | | | | | | | | | | | |
| | 2020 | | 2019 |
| ||||||||
|
| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
| | amount | | amortization(1) | | amount | | amortization(1) |
| ||||
Definite-lived pharmacy prescription files | |
| 315 | |
| (167) | |
| 320 | |
| (133) | |
Definite-lived customer relationships | | | 186 | | | (143) | | | 186 | | | (120) | |
Definite-lived other | |
| 110 | |
| (78) | |
| 106 | |
| (68) | |
Indefinite-lived trade name | |
| 685 | |
| — | |
| 685 | |
| — | |
Indefinite-lived liquor licenses | |
| 89 | |
| — | |
| 90 | |
| — | |
| | | | | | | | | | | | | |
Total | | $ | 1,385 | | $ | (388) | | $ | 1,387 | | $ | (321) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||||||||
|
| Gross carrying |
| Accumulated |
| Gross carrying |
| Accumulated |
| ||||
|
| amount |
| amortization(1) |
| amount |
| amortization(1) |
| ||||
Definite-lived favorable leasehold interests |
| $ | 167 |
| $ | (41) |
| $ | 169 |
| $ | (31) |
|
Definite-lived pharmacy prescription files |
|
| 254 |
|
| (56) |
|
| 127 |
|
| (40) |
|
Definite-lived customer relationships |
|
| 93 |
|
| (55) |
|
| 93 |
|
| (39) |
|
Definite-lived other |
|
| 97 |
|
| (33) |
|
| 78 |
|
| (23) |
|
Indefinite-lived trade name |
|
| 641 |
|
| — |
|
| 641 |
|
| — |
|
Indefinite-lived liquor licenses |
|
| 86 |
|
| — |
|
| 78 |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,338 |
| $ | (185) |
| $ | 1,186 |
| $ | (133) |
|
| (1) |
|
|
61
Amortization expense associated with intangible assets totaled approximately $63, $51$67, $85 and $41,$80, during fiscal years 2016, 20152020, 2019 and 2014,2018, respectively. Future amortization expense associated with the net carrying amount of definite-lived intangible assets for the years subsequent to 20162020 is estimated to be approximately:
|
|
|
|
2017 |
| $ | 73 |
2018 |
|
| 57 |
2019 |
|
| 39 |
2020 |
|
| 30 |
2021 |
|
| 28 |
Thereafter |
|
| 199 |
|
|
|
|
Total future estimated amortization associated with definite-lived intangible assets |
| $ | 426 |
| | | |
2021 |
| $ | 58 |
2022 | |
| 51 |
2023 | |
| 38 |
2024 | |
| 34 |
2025 | |
| 30 |
Thereafter | |
| 12 |
| | | |
Total future estimated amortization associated with definite-lived intangible assets | | $ | 223 |
4. | PROPERTY, PLANT AND EQUIPMENT, NET |
4.PROPERTY, PLANT AND EQUIPMENT, NET
Property, plant and equipment, net consists of:
|
|
|
|
|
|
|
| |||||||
|
| 2016 |
| 2015 |
| |||||||||
| | | | | | | | |||||||
|
| 2020 |
| 2019 |
| |||||||||
Land |
| $ | 3,197 |
| $ | 2,997 |
| | $ | 3,373 | | $ | 3,299 | |
Buildings and land improvements |
|
| 11,643 |
|
| 10,524 |
| |
| 13,149 | |
| 12,553 | |
Equipment |
|
| 13,495 |
|
| 12,520 |
| |
| 14,928 | |
| 15,031 | |
Leasehold improvements |
|
| 9,342 |
|
| 8,710 |
| |
| 10,516 | |
| 10,832 | |
Construction-in-progress |
|
| 1,979 |
|
| 2,115 |
| |
| 2,892 | |
| 3,166 | |
Leased property under capital leases and financing obligations |
|
| 932 |
|
| 801 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Leased property under finance leases | |
| 1,165 | |
| 966 | | |||||||
| | | | | | | | |||||||
Total property, plant and equipment |
|
| 40,588 |
|
| 37,667 |
| |
| 46,023 | |
| 45,847 | |
Accumulated depreciation and amortization |
|
| (19,572) |
|
| (18,048) |
| |
| (23,637) | |
| (23,976) | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Property, plant and equipment, net |
| $ | 21,016 |
| $ | 19,619 |
| | $ | 22,386 | | $ | 21,871 | |
Accumulated depreciation and amortization for leased property under capitalfinance leases was $330 at January 28, 2017 and $293$321 at January 30, 2016.2021 and $276 at February 1, 2020.
Approximately $219$152 and $264,$162, net book value, of property, plant and equipment collateralized certain mortgages at January 28, 201730, 2021 and January 30, 2016,February 1, 2020, respectively.
54
62
5. | TAXES BASED ON INCOME |
5.TAXES BASED ON INCOME
The provision for taxes based on income consists of:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||||||||||||
Federal |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Current |
| $ | 721 |
| $ | 723 |
| $ | 847 |
| | $ | 577 | | $ | 454 | | $ | 775 | |
Deferred |
|
| 158 |
|
| 266 |
|
| (15) |
| |
| 75 | |
| (50) | |
| (3) | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Subtotal federal |
|
| 879 |
|
| 989 |
|
| 832 |
| |
| 652 | |
| 404 | |
| 772 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
State and local |
|
|
|
|
|
|
|
|
|
| | | | | | | | | | |
Current |
|
| 51 |
|
| 37 |
|
| 59 |
| |
| 133 | |
| 70 | |
| 108 | |
Deferred |
|
| 27 |
|
| 19 |
|
| 11 |
| |
| (3) | |
| (5) | |
| 20 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Subtotal state and local |
|
| 78 |
|
| 56 |
|
| 70 |
| |
| 130 | |
| 65 | |
| 128 | |
|
|
|
|
|
|
|
|
|
|
| ||||||||||
| | | | | | | | | | | ||||||||||
Total |
| $ | 957 |
| $ | 1,045 |
| $ | 902 |
| | $ | 782 | | $ | 469 | | $ | 900 | |
A reconciliation of the statutory federal rate and the effective rate follows:
|
|
|
|
|
|
|
| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||
| | | | | | | | |||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||||||
Statutory rate |
| 35.0 | % | 35.0 | % | 35.0 | % |
| 21.0 | % | 21.0 | % | 21.0 | % |
State income taxes, net of federal tax benefit |
| 1.6 | % | 1.2 | % | 1.7 | % |
| 3.0 | | 2.6 | | 2.6 | |
Credits |
| (1.1) | % | (1.2) | % | (1.2) | % |
| (0.7) | | (1.5) | | (1.3) | |
Favorable resolution of audit issues |
| (0.5) | % | (0.2) | % | (0.4) | % | |||||||
Domestic manufacturing deduction |
| (0.7) | % | (0.7) | % | (0.7) | % | |||||||
Resolution of issues |
| — | | (0.1) | | 0.5 | | |||||||
Excess tax benefits from share-based payments |
| (1.6) | % | — | % | — | % | | (0.8) | | (0.2) | | (0.3) | |
Impairment losses attributable to noncontrolling interest | | — | | 1.2 | | — | | |||||||
Other changes, net |
| 0.1 | % | (0.3) | % | (0.3) | % |
| 0.7 | | 0.7 | | 0.1 | |
|
|
|
|
|
|
|
| |||||||
|
| 32.8 | % | 33.8 | % | 34.1 | % | |||||||
| | | | | | | | |||||||
|
| 23.2 | % | 23.7 | % | 22.6 | % | |||||||
The 20162020 tax rate differed from the federal statutory rate primarily as a resultdue to the effect of the recognition of excess tax benefits related to share-based payments after the adoption of ASU 2016-09 (see Note 17),state income taxes, partially offset by the utilization of tax credits and deductions.
The 2019 tax rate differed from the Domestic Manufacturing Deduction and other changes, partially offset byfederal statutory rate primarily due to the effect of state income taxes.
The 2015 rate for statetaxes and Lucky’s Market losses attributable to the noncontrolling interest which reduced pre-tax income taxes is less than 2016 and 2014 due to filing amended returns to claim additional benefits in years still under review, the favorable resolution of state issues and an increase in state credits.
55
but did not impact tax expense.
63
The tax effects of significant temporary differences that comprise tax balances were as follows:
|
|
|
|
|
|
|
| |||||||
|
| 2016 |
| 2015 |
| |||||||||
Current deferred tax assets: |
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
|
| 2020 |
| 2019 |
| |||||||||
Deferred tax assets: | | | | | | | | |||||||
Compensation related costs | | $ | 766 | | $ | 406 | | |||||||
Lease liabilities | |
| 1,932 | |
| 1,872 | | |||||||
Closed store reserves | |
| 38 | |
| 55 | | |||||||
Net operating loss and credit carryforwards |
| $ | 23 |
| $ | 10 |
| |
| 86 | |
| 100 | |
Compensation related costs |
|
| 67 |
|
| 83 |
| |||||||
Deferred income | | | 149 | | | 172 | | |||||||
Allowance for uncollectible receivables | | | 23 | | | 93 | | |||||||
Other |
|
| 50 |
| | 61 |
| | | 46 | |
| — | |
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Subtotal |
|
| 140 |
|
| 154 |
| |
| 3,040 | |
| 2,698 | |
Valuation allowance |
|
| (11) |
|
| (9) |
| |
| (53) | |
| (55) | |
|
|
|
|
|
|
|
| |||||||
Total current deferred tax assets |
|
| 129 |
|
| 145 |
| |||||||
|
|
|
|
|
|
|
| |||||||
Current deferred tax liabilities: |
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Total deferred tax assets | |
| 2,987 | |
| 2,643 | | |||||||
| | | | | | | | |||||||
Deferred tax liabilities: | | | | | | | | |||||||
Depreciation and amortization | |
| (2,115) | |
| (1,942) | | |||||||
Operating lease assets | |
| (1,794) | | | (1,782) | | |||||||
Insurance related costs |
|
| (52) |
|
| (56) |
| | | — | | | (28) | |
Inventory related costs |
|
| (328) |
|
| (310) |
| | | (264) | | | (252) | |
|
|
|
|
|
|
|
| |||||||
Total current deferred tax liabilities |
|
| (380) |
|
| (366) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Current deferred taxes |
| $ | (251) |
| $ | (221) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Long-term deferred tax assets: |
|
|
|
|
|
|
| |||||||
Compensation related costs |
| $ | 783 |
| $ | 709 |
| |||||||
Lease accounting |
|
| 121 |
|
| 106 |
| |||||||
Closed store reserves |
|
| 46 |
|
| 57 |
| |||||||
Insurance related costs |
|
| 7 |
|
| 29 |
| |||||||
Net operating loss and credit carryforwards |
|
| 101 |
|
| 128 |
| |||||||
Equity investments in excess of tax basis | | | (356) | | | (94) | | |||||||
Other |
| | 1 |
|
| 17 |
| | | — | | | (11) | |
|
|
|
|
|
|
|
| |||||||
Subtotal |
|
| 1,059 |
|
| 1,046 |
| |||||||
Valuation allowance |
|
| (39) |
|
| (43) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Total long-term deferred tax assets |
|
| 1,020 |
|
| 1,003 |
| |||||||
Long-term deferred tax liabilities: |
|
|
|
|
|
|
| |||||||
Depreciation and amortization |
|
| (2,947) |
|
| (2,755) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Total long-term deferred tax liabilities |
|
| (2,947) |
|
| (2,755) |
| |||||||
|
|
|
|
|
|
|
| |||||||
Long-term deferred taxes |
| $ | (1,927) |
| $ | (1,752) |
| |||||||
| | | | | | | | |||||||
Total deferred tax liabilities | |
| (4,529) | |
| (4,109) | | |||||||
| | | | | | | | |||||||
Deferred taxes | | $ | (1,542) | | $ | (1,466) | | |||||||
At January 28, 2017,30, 2021, the Company had net operating loss carryforwards for state income tax purposes of $1,206.$1,081. These net operating loss carryforwards expire from 20172021 through 2036.2040. The utilization of certain of the Company’s state net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state net operating losses.
At January 28, 2017,30, 2021, the Company had state credit carryforwards of $62,$38, most of which expire from 20172021 through 2027. The utilization of certain of the Company’s state credits may be limited in a given year. Further, based on the analysis described below, the Company has recorded a valuation allowance against some of the deferred tax assets resulting from its state credits.credits.
At January 28, 2017, the Company had federal net operating loss carryforwards of $55. These net operating loss carryforwards expire from 2030 through 2035. The utilization of certain of the Company’s federal net operating loss carryforwards may be limited in a given year. Further, based on the analysis described below, the Company has not recorded a valuation allowance against the deferred tax assets resulting from its federal net operating losses.
56
The Company regularly reviews all deferred tax assets on a tax filer and jurisdictional basis to estimate whether these assets are more likely than not to be realized based on all available evidence. This evidence includes historical taxable income, projected future taxable income, the expected timing of the reversal of existing temporary differences and the implementation of tax planning strategies. Projected future taxable income is based on expected results and assumptions as to the jurisdiction in which the income will be earned. The expected timing of the reversals of existing temporary differences is based on current tax law and the Company’s tax methods of accounting. Unless deferred tax assets are more likely than not to be realized, a valuation allowance is established to reduce the carrying value of the deferred tax asset until such time that realization becomes more likely than not. Increases and decreases in these valuation allowances are included in "Income tax expense" in the Consolidated Statements of Operations. As of January 30, 2021, February 1, 2020 and February 2, 2019 the total valuation allowance was $53, $55 and $54, respectively.
64
A reconciliation of the beginning and ending amount of unrecognized tax benefits, including positions impacting only the timing of tax benefits, is as follows:
|
|
|
|
|
|
|
|
|
|
| ||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||
| | | | | | | | | | | ||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||||||||||||
Beginning balance |
| $ | 204 |
| $ | 246 |
| $ | 325 |
| | $ | 174 | | $ | 174 | | $ | 180 | |
Additions based on tax positions related to the current year |
|
| 10 |
|
| 11 |
|
| 17 |
| |
| 7 | |
| 13 | |
| 7 | |
Reductions based on tax positions related to the current year |
|
| (1) |
|
| (11) |
|
| (6) |
| |
| — | |
| — | |
| (1) | |
Additions for tax positions of prior years |
|
| 3 |
|
| 4 |
|
| 9 |
| |
| 16 | |
| 8 | |
| 23 | |
Reductions for tax positions of prior years |
|
| (30) |
|
| (27) |
|
| (36) |
| |
| — | |
| (1) | |
| (22) | |
Settlements |
|
| (2) |
|
| (17) |
|
| (63) |
| | | — | |
| (19) | |
| (10) | |
Lapse of statute |
|
| (7) |
|
| (2) |
|
| — |
| | | (4) | | | (1) | | | (3) | |
Ending balance |
| $ | 177 |
| $ | 204 |
| $ | 246 |
| | $ | 193 | | $ | 174 | | $ | 174 | |
The Company does not anticipate that changes in the amount of unrecognized tax benefits over the next twelve months will have a significant impact on its results of operations or financial position.
As of January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015,February 2, 2019 the amount of unrecognized tax benefits that, if recognized, would impact the effective tax rate was $73, $83$85, $74 and $90,$72 respectively.
To the extent interest and penalties (recoveries) would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense. During the years ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015,February 2, 2019, the Company recognized approximately $(1), $(5)$7, $7 and $3,$2, respectively, in interest and penalties (recoveries). The Company had accrued approximately $20, $25$38, $30 and $30 for the payment of interest and penalties as of January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015, respectively.February 2, 2019.
As of January 28, 2017,30, 2021, the Internal Revenue Service had concluded its examination of all federal tax returns up to and including the return for the year ended January 30, 2016. The Company anticipates resolution in the next twelve to eighteen months of Internal Revenue Service audits for tax years ending January 28, 2017 and February 3, 2018.
The Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, the Company is deferring the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid by December 31, 2021 and the other half by December 31, 2022. During 2020, the Company deferred the employer portion of social security tax of $622. Of the total, $311 is included in “Other current liabilities” and $311 is included in “Other long-term liabilities” in the Company’s 2012 and 2013 federal tax returns.Consolidated Balance Sheets.
6. | DEBT OBLIGATIONS |
6.DEBT OBLIGATIONS
Long-term debt consists of:
|
|
|
|
|
|
|
|
|
| January 28, |
| January 30, |
| ||
|
| 2017 |
| 2016 |
| ||
1.14% to 8.00% Senior Notes due through 2047 |
| $ | 11,311 |
| $ | 9,826 |
|
5.00% to 12.75% Mortgages due in varying amounts through 2027 |
|
| 38 |
|
| 58 |
|
0.66% to 0.91% Commercial paper borrowings due through February 2017 |
|
| 1,425 |
|
| 990 |
|
Other |
|
| 541 |
|
| 522 |
|
|
|
|
|
|
|
|
|
Total debt, excluding capital leases and financing obligations |
|
| 13,315 |
|
| 11,396 |
|
Less current portion |
|
| (2,197) |
|
| (2,318) |
|
|
|
|
|
|
|
|
|
Total long-term debt, excluding capital leases and financing obligations |
| $ | 11,118 |
| $ | 9,078 |
|
| | | | | | |
| | January 30, | | February 1, | ||
|
| 2021 |
| 2020 | ||
1.70% to 8.00% Senior Notes due through 2049 | | $ | 11,899 | | $ | 11,598 |
1.77% Commercial paper borrowings | |
| — | |
| 1,150 |
Other | |
| 511 | |
| 508 |
| | | | | | |
Total debt, excluding obligations under finance leases | |
| 12,410 | |
| 13,256 |
Less current portion | |
| (844) | |
| (1,926) |
| | | | | | |
Total long-term debt, excluding obligations under finance leases | | $ | 11,566 | | $ | 11,330 |
57
65
In 2016, the Company issued $1,000 of senior notes due in fiscal year 2047 bearing an interest rate of 4.45%, $500 of senior notes due in fiscal year 2046 bearing an interest rate of 3.88%, $750 of senior notes due in fiscal year 2026 bearing an interest rate of 2.65% and $500 of senior notes due in fiscal year 2019 bearing an interest rate of 1.50%. The Company also repaid $450 of senior notes bearing an interest rate of 2.20%, $500 of senior notes bearing an interest rate of 3-month London Inter-Bank Offering Rate plus 53 basis points and $300 of senior notes bearing an interest rate of 1.20%.
In 2015,2020, the Company issued $500 of senior notes due in fiscal year 20262030 bearing an interest rate of 3.50%, $3002.20% and $500 of senior notes due in fiscal year 20212030 bearing interest rate of 1.70%. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $450 due in fiscal year 2030. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2020. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $41, $31 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company repaid $700 of senior notes bearing an interest rate of 2.60%3.30% with proceeds from the senior notes issuances.
On March 18, 2020, the Company proactively borrowed $1,000 under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and $300maintain liquidity in response to the COVID-19 pandemic. During 2020, the Company fully repaid the $1,000 borrowed under the revolving credit facility and the entire $1,150 in outstanding commercial paper obligations using cash generated by operations.
In 2019, the Company issued $750 of senior notes due in fiscal year 20192049 bearing an interest rate of 2.00%3.95%. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $300. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the fourth quarter of 2019. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $12, $10 net of tax, has been deferred in Accumulated Other Comprehensive Loss and will continue to amortize to earnings as the interest payments are made. The Company repaid $750 of senior notes bearing an interest rate of 6.15%, with proceeds from the senior notes issuances. During 2019, the Company also repaid, upon maturity, $1,000 term loan bearing an interest rate of 3.37% and repaid $500 of senior notes bearing an interest rate of 3.90% upon maturity. Due to the merger with Roundy’s,1.50%, using cash generated by operations and proceeds from issuing commercial paper.
On August 29, 2017, the Company assumed $678 of term loans, which were entirely paid off following the merger.
On June 30, 2014, the Companyentered into an amended, extended and restated its $2,000 unsecured revolving credit facility. The Company entered into the amended credit facility to amend, extend and restate the Company’s existing credit facility that would have terminated on January 25, 2017. The amended credit facility provides for a $2,750 unsecured revolving credit facility (the “Credit Agreement”), with a termination date of June 30, 2019,August 29, 2022, unless extended as permitted under the Credit Agreement. The Company has the ability to increase the size of the Credit Agreement by up to an additional $750,$1,000, subject to certain conditions.
Borrowings under the Credit Agreement bear interest, at the Company’s option, at either (i) LIBOR plus a market rate spread, based on the Company’s Leverage RatioPublic Debt Rating or (ii) the base rate, defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread based on the Company’s Leverage Ratio.Public Debt Rating. The Company will also pay a Commitment Fee based on the Leverage Ratioits Public Debt Rating and Letter of Credit fees equal to a market rate spread based on the Company’s Leverage Ratio. Public Debt Rating. “Public Debt Rating” means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company.
The Credit Agreement contains covenants, which, among other things, require the maintenance of a Leverage Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not less than 1.70:1.70:1.00. The Company may repay the Credit Agreement in whole or in part at any time without premium or penalty. The Credit Agreement is not guaranteed by the Company’s subsidiaries.
As of January 28, 2017,30, 2021, the Company had $1,4250 commercial paper borrowings and 0 borrowings under the Credit Agreement.As of borrowingsFebruary 1, 2020, the Company had $1,150 of commercial paper borrowings, with a weighted average interest rate of 0.91%,1.77% and no borrowings under the Credit Agreement. As of January 30, 2016, the Company had $990 of borrowings of commercial paper, with a weighted average interest rate of 0.66%, and no0 borrowings under the Credit Agreement.
As of January 28, 2017,30, 2021, the Company had outstanding letters of credit in the amount of $242,$381, of which $13$2 reduces funds available under the Credit Agreement. As of February 1, 2020, the Company had outstanding letters of credit in the amount of $362, of which $2 reduces funds available under the Credit Agreement. The letters of credit are maintained primarily to support performance, payment, deposit or surety obligations of the Company.
66
Most of the Company’s outstanding public debt is subject to early redemption at varying times and premiums, at the option of the Company. In addition, subject to certain conditions, some of the Company’s publicly issued debt will be subject to redemption, in whole or in part, at the option of the holder upon the occurrence of a redemption event, upon not less than five days’ notice prior to the date of redemption, at a redemption price equal to the default amount, plus a specified premium. “Redemption Event” is defined in the indentures as the occurrence of (i) any person or group, together with any affiliate thereof, beneficially owning 50% or more of the voting power of the Company, (ii) any one person or group, or affiliate thereof, succeeding in having a majority of its nominees elected to the Company’s Board of Directors, in each case, without the consent of a majority of the continuing directors of the Company or (iii) both a change of control and a below investment grade rating.
58
The aggregate annual maturities and scheduled payments of long-term debt, as of year-end 2016,2020, and for the years subsequent to 20162020 are:
|
|
|
|
|
2017 |
| $ | 2,197 |
|
2018 |
|
| 1,315 |
|
2019 |
|
| 1,246 |
|
2020 |
|
| 724 |
|
2021 |
|
| 797 |
|
Thereafter |
|
| 7,036 |
|
|
|
|
|
|
Total debt |
| $ | 13,315 |
|
| | | | |
2021 |
| $ | 844 |
|
2022 | |
| 894 | |
2023 | |
| 617 | |
2024 | |
| 494 | |
2025 | |
| 575 | |
Thereafter | |
| 8,986 | |
| | | | |
Total debt | | $ | 12,410 | |
7. | DERIVATIVE FINANCIAL INSTRUMENTS |
7.DERIVATIVE FINANCIAL INSTRUMENTS
GAAP requires that derivatives be carried at fair value on the balance sheet and provides for hedge accounting when certain conditions are met. The Company’s 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 tax effects. Ineffective portions of cash flow hedges, if any, are recognized in current period earnings. Other comprehensive income or loss is reclassified into current period earnings when the hedged transaction affects earnings. Changes in the fair value of derivative instruments designated as “fair value” hedges, along with corresponding changes in the fair values of the hedged assets or liabilities, are recorded in current period earnings. Ineffective portions of fair value hedges, if any, are recognized in current period earnings.
The Company assesses, both at the 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 the 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.
Interest Rate Risk Management
The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of a commercial paper program, interest rate swaps (fair value hedges) and forward-starting interest rate swaps (cash flow hedges). The Company’s current program relative to interest rate protection contemplates hedging the exposure to changes in the fair value of fixed-rate debt attributable to changes in interest rates. To do this, the Company uses the following guidelines: (i) use average daily outstanding borrowings to determine annual debt amounts subject to interest rate exposure, (ii) limit the average annual amount subject to interest rate reset and the amount of floating rate debt to a combined total amount that represents 25% of $2,500the carrying value of the Company’s debt portfolio or less, (iii) include no leveraged products, and (iv) hedge without regard to profit motive or sensitivity to current mark-to-market status.
The Company reviews compliance with these guidelines annually with the Financial Policy Committee of the Board of Directors. These guidelines may change as the Company’s needs dictate.
59
67
Fair Value Interest Rate Swaps
The table below summarizes theCompany did not have any outstanding interest rate swaps designatedderivatives classified as fair value hedges as of January 28, 201730, 2021 and January 30, 2016.February 1, 2020.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| ||||||||
|
| Pay |
| Pay |
| Pay |
| Pay |
| ||||
|
| Floating |
| Fixed |
| Floating |
| Fixed |
| ||||
Notional amount |
| $ | 100 |
| $ | — |
| $ | 100 |
| $ | — |
|
Number of contracts |
|
| 2 |
|
| — |
|
| 2 |
|
| — |
|
Duration in years |
|
| 1.92 |
|
| — |
|
| 2.92 |
|
| — |
|
Average variable rate |
|
| 6.37 | % |
| — |
|
| 6.00 | % |
| — |
|
Average fixed rate |
|
| 6.80 | % |
| — |
|
| 6.80 | % |
| — |
|
Maturity |
|
| December 2018 |
|
|
|
|
| December 2018 |
|
|
|
|
The gain or loss on these derivative instruments as well as the offsetting gain or loss on the hedged items attributable to the hedged risk is recognized in current earnings as “Interest expense.” These gains and losses for 2016 and 2015 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year-To-Date |
| ||||||||||
|
| January 28, 2017 |
| January 30, 2016 |
| ||||||||
|
| Gain/(Loss) on |
| Gain/(Loss) on |
| Gain/(Loss) on |
| Gain/(Loss) on |
| ||||
Consolidated Statements of Operations Classification |
| Swaps |
| Borrowings |
| Swaps |
| Borrowings |
| ||||
Interest Expense |
| $ | (2) |
| $ | 2 |
| $ | 1 |
| $ | (1) |
|
The following table summarizes the location and fair value of derivative instruments designated as fair value hedges on the Company’s Consolidated Balance Sheets:
|
|
|
|
|
|
|
|
|
|
|
| Asset Derivatives |
| ||||||
|
| Fair Value |
|
|
| ||||
|
| January 28, |
| January 30, |
|
|
| ||
Derivatives Designated as Fair Value Hedging Instruments |
| 2017 |
| 2016 |
| Balance Sheet Location |
| ||
Interest Rate Hedges |
| $ | (1) |
| $ | 1 |
| (Other long-term liabilities)/Other assets |
|
Cash Flow Forward-Starting Interest Rate Swaps
The Company did not have any outstanding forward-starting interest rate swap agreements as of January 30, 2021.
As of January 28, 2017,February 1, 2020, the Company had eleven7 forward-starting interest rate swap agreements with a maturity datesdate of August 2017January 2021 with an aggregate notional amount totaling $600, nine forward-starting interest rate swap agreements with maturity dates of January 2019 with an aggregate notional amount totaling $750 and five forward-starting interest rate swap agreements with maturity dates of January 2020 with an aggregate notional amount totaling $250.$350. A forward-starting interest rate swap is an agreement that effectively hedges the variability in future benchmark interest payments attributable to changes in interest rates on the forecasted issuance of fixed-rate debt. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuance of debt in August 2017, January 2019 and January 2020.2021. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of January 28, 2017, the fair value of the interest rate swaps was recorded in other assets and other long-term liabilities for $67 and $7, respectively, and accumulated other comprehensive income for $38 net of tax.
As of January 30, 2016, the Company had seven forward-starting interest rate swap agreements with maturity dates of August 2017 with an aggregate notional amount totaling $400. The Company entered into these forward-starting interest rate swaps in order to lock in fixed interest rates on its forecasted issuances of debt in August 2017. Accordingly, the forward-starting interest rate swaps were designated as cash-flow hedges as defined by GAAP. As of January 30, 2016,February 1, 2020, the fair value of the interest rate swaps was recorded in other long-term liabilities for $27$19 and accumulated other comprehensive loss for $17 net of tax.
60
During 2016,2020, the Company terminated 9 forward-starting interest rate swaps with maturity dates of October 2016,January 2021 with an aggregate notional amount totaling $300.$450. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the thirdfourth quarter of 2016.2020. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $13, $8$41, $31 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.
During 2015, In addition, the Company terminated eightand discontinued hedge accounting for 1 forward-starting interest rate swap agreements with a maturity datesdate of October 2015 and January 20162021 with an aggregate notional amount totaling $600. Four$50. The gain of these$7 from the termination of this forward starting interest rate swap was record in interest income in the fourth quarter of 2020.
During 2019, the Company terminated 6 forward-starting interest rate swap agreements,swaps with maturity dates of January 2020 with an aggregate notional amount totaling $300 were entered into and terminated in 2015.. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued in 2015. As discussed in Note 6,during the Company issued $1,100fourth quarter of senior notes in 2015.2019. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $17, $11$12, $10 net of tax, has been deferred in AOCI and will be amortized to earnings as the interest payments are made.
The following table summarizes the effect of the Company’s derivative instruments designated as cash flow hedges for 20162020, 2019 and 2015:2018:
| | | | | | | | | | | | | | | | | | | | | |
| | Year-To-Date | | |
| ||||||||||||||||
| | Amount of Gain/(Loss) in | | Amount of Gain/(Loss) | | |
| ||||||||||||||
| | AOCI on Derivative | | Reclassified from AOCI into | | Location of Gain/(Loss) |
| ||||||||||||||
Derivatives in Cash Flow Hedging | | (Effective Portion) | | Income (Effective Portion) | | Reclassified into Income |
| ||||||||||||||
Relationships |
| 2020 | | 2019 |
| 2018 |
| 2020 | | 2019 |
| 2018 |
| (Effective Portion) |
| ||||||
Forward-Starting Interest Rate Swaps, net of tax* | | $ | (54) | | $ | (42) | | $ | 6 | | $ | (2) | | $ | (4) | | $ | (5) |
| Interest expense | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year-To-Date |
|
|
| ||||||||||
|
| Amount of Gain/(Loss) in |
| Amount of Gain/(Loss) |
|
|
| ||||||||
|
| AOCI on Derivative |
| Reclassified from AOCI into |
| Location of Gain/(Loss) |
| ||||||||
Derivatives in Cash Flow Hedging |
| (Effective Portion) |
| Income (Effective Portion) |
| Reclassified into Income |
| ||||||||
Relationships |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| (Effective Portion) |
| ||||
Forward-Starting Interest Rate Swaps, net of tax* |
| $ | (2) |
| $ | (51) |
| $ | (2) |
| $ | (1) |
| Interest expense |
|
* | The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2020, 2019 and 2018, respectively. |
*The amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds and payments from forward-starting interest rate swaps once classified as cash flow hedges that were terminated prior to end of 2016 and 2015, respectively.
For the above fair value and cash flow interest rate swaps, the Company has entered into International Swaps and Derivatives Association master netting agreements that permit the net settlement of amounts owed under their respective derivative contracts. Under these master netting agreements, net settlement generally permits the Company or the counterparty to determine the net amount payable for contracts due on the same date and in the same currency for similar types of derivative transactions. These master netting agreements generally also provide for net settlement of all outstanding contracts with a counterparty in the case of an event of default or a termination event.
68
Collateral is generally not required of the counterparties or of the Company under these master netting agreements. As of January 28, 2017 and January 30, 2016, noFebruary 1, 2020, 0 cash collateral was received or pledged under the master netting agreements.
61
The effect of the net settlement provisions of these master netting agreements on the Company’s derivative balances upon an event of default or termination event is as follows as of January 28, 2017 and January 30, 2016:February 1, 2020:
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|
|
| Gross Amounts Not Offset in the |
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|
| ||||
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|
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|
|
| Net Amount |
| Balance Sheet |
|
|
|
| |||||
|
| Gross Amount |
| Gross Amounts Offset |
| Presented in the |
| Financial |
|
|
|
|
|
|
| ||||
January 28, 2017 |
| Recognized |
| in the Balance Sheet |
| Balance Sheet |
| Instruments |
| Cash Collateral |
| Net Amount |
| ||||||
Assets |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash Flow Forward-Starting Interest Rate Swaps |
| $ | 67 |
| $ | — |
| $ | 67 |
| $ | — |
| $ | — |
| $ | 67 |
|
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Liabilities |
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Fair Value Interest Rate Swaps |
|
| 1 |
|
| — |
|
| 1 |
|
| — |
|
| — |
|
| 1 |
|
Cash Flow Forward-Starting Interest Rate Swaps |
|
| 7 |
|
| — |
|
| 7 |
|
| — |
|
| — |
|
| 7 |
|
Total |
| $ | 8 |
| $ | — |
| $ | 8 |
| $ | — |
| $ | — |
| $ | 8 |
|
| | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | Gross Amounts Not Offset in the | | | |
| ||||
| | | | | | | | Net Amount | | Balance Sheet | | | |
| |||||
|
| Gross Amount |
| Gross Amounts Offset |
| Presented in the |
| Financial |
| | |
| | |
| ||||
February 1, 2020 | | Recognized | | in the Balance Sheet | | Balance Sheet | | Instruments | | Cash Collateral | | Net Amount |
| ||||||
Liabilities | | | | | | | | | | | | | | | | | | | |
Cash Flow Forward-Starting Interest Rate Swaps | | $ | 19 | | $ | — | | $ | 19 | | $ | — | | $ | — | | $ | 19 | |
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| Gross Amounts Not Offset in the |
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| ||||
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| Net Amount |
| Balance Sheet |
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| |||||
|
| Gross Amount |
| Gross Amounts Offset |
| Presented in the |
| Financial |
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| ||||
January 30, 2016 |
| Recognized |
| in the Balance Sheet |
| Balance Sheet |
| Instruments |
| Cash Collateral |
| Net Amount |
| ||||||
Assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Interest Rate Swaps |
| $ | 1 |
| $ | — |
| $ | 1 |
| $ | — |
| $ | — |
| $ | 1 |
|
|
|
|
|
|
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Liabilities |
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|
|
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|
|
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|
Cash Flow Forward-Starting Interest Rate Swaps |
| $ | 27 |
| $ | — |
| $ | 27 |
| $ | — |
| $ | — |
| $ | 27 |
|
8. | FAIR VALUE MEASUREMENTS |
8.FAIR VALUE MEASUREMENTS
GAAP establishes a fair value hierarchy that prioritizes the inputs used to measure fair value. The three levels of the fair value hierarchy defined in the standards are as follows:
Level 1 - Quoted prices are available in active markets for identical assets or liabilities;
Level 2 - Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;
Level 3 - Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.
62
For items carried at (or adjusted to) fair value in the consolidated financial statements, the following tables summarize the fair value of these instruments at January 28, 201730, 2021 and February 1, 2020:
January 30, 2016:
January 28, 20172021 Fair Value Measurements Using
|
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| ||||||||||
|
| Quoted Prices in |
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|
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| |||||||||||
|
| Active Markets |
|
|
|
| Significant |
|
|
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| ||||||||||||
|
| for Identical |
| Significant Other |
| Unobservable |
|
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| |||||||||||||
|
| Assets |
| Observable Inputs |
| Inputs |
|
|
|
| |||||||||||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| ||||||||||||||
| | | | | | | | | | | |||||||||||||
|
| Quoted Prices in |
| | |
| | |
| ||||||||||||||
| | Active Markets | | Significant | | | |
| |||||||||||||||
| | for Identical | | Unobservable | | | |
| |||||||||||||||
| | Assets | | Inputs | | | |
| |||||||||||||||
| | (Level 1) | | (Level 3) | | Total |
| ||||||||||||||||
Trading Securities |
| $ | 50 |
| $ | — |
| $ | — |
| $ | 50 |
| | $ | 1,882 | | $ | — | | $ | 1,882 | |
Long-Lived Assets |
|
| — |
|
| — |
|
| 3 |
|
| 3 |
| ||||||||||
Interest Rate Hedges |
|
| — |
|
| 59 |
|
| — |
|
| 59 |
| ||||||||||
Other Investment | | | — | |
| 160 | |
| 160 | | |||||||||||||
Total |
| $ | 50 |
| $ | 59 |
| $ | 3 |
| $ | 112 |
| | $ | 1,882 | | $ | 160 | | $ | 2,042 | |
January 30, 2016February 1, 2020 Fair Value Measurements Using
|
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| |||||||||||||
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| Quoted Prices in |
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| ||||||||||||||
|
| Active Markets |
|
|
|
| Significant |
|
|
|
| |||||||||||||||
|
| for Identical |
| Significant Other |
| Unobservable |
|
|
|
| ||||||||||||||||
|
| Assets |
| Observable Inputs |
| Inputs |
|
|
|
| ||||||||||||||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| Total |
| |||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
|
| Quoted Prices in |
| | |
| | |
| | |
| ||||||||||||||
| | Active Markets | | | | | Significant | | | |
| |||||||||||||||
| | for Identical | | Significant Other | | Unobservable | | | |
| ||||||||||||||||
| | Assets | | Observable Inputs | | Inputs | | | |
| ||||||||||||||||
| | (Level 1) | | (Level 2) | | (Level 3) | | Total |
| |||||||||||||||||
Trading Securities |
| $ | 48 |
| $ | — |
| $ | — |
| $ | 48 |
| | $ | 840 | | $ | — | | $ | — | | $ | 840 | |
Available-For-Sale Securities |
|
| 41 |
|
| — |
|
| — |
|
| 41 |
| |||||||||||||
Long-Lived Assets |
|
| — |
|
| — |
|
| 7 |
|
| 7 |
| |||||||||||||
Other Investment | | | — | | | — | | | 41 | | | 41 | | |||||||||||||
Interest Rate Hedges |
|
| — |
|
| (26) |
|
| — |
|
| (26) |
| |
| — | |
| (19) | |
| — | |
| (19) | |
Total |
| $ | 89 |
| $ | (26) |
| $ | 7 |
| $ | 70 |
| | $ | 840 | | $ | (19) | | $ | 41 | | $ | 862 | |
In the first two quarters of 2016, the Company sold all available-for-sale securities for a gain of $27, which was recorded to “Operating, general and administrative” within the Consolidated Statements of Operations. In 2015, unrealized2018, realized gains on the Level 1, available-for-sale securities totaled $5.
The Company values interest rate hedges using observable forward yield curves. These forward yield curves are classified as Level 2 inputs.
69
The equity investment in Ocado is measured at fair value through net earnings. The fair value of all shares owned, which is measured using Level 1 inputs, was $1,808 and $776 as of January 30, 2021 and February 1, 2020, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. The unrealized gain for this level 1 investment was approximately $1,032 and $157 for 2020 and 2019, respectively, and is included in “Gain on investments” in the Company’s Consolidated Statements of Operations. The Company held other equity investments without a readily determinable fair value. These investments are measured initially at cost and remeasured for observable price changes to fair value through net earnings. The value of these investments, which were measured using Level 3 inputs, was $160 and $41 at January 30, 2021 and February 1, 2020, respectively, and is included in “Other assets” in the Company’s Consolidated Balance Sheets. The unrealized gain for these level 3 investments was approximately $73 for 2020 and is included in “Gain on investments” in the Company’s Consolidated Statements of Operations.
Fair value measurements of non-financial assets and non-financial liabilities are primarily used in the impairment analysis of goodwill, other intangible assets, long-lived assets and in the valuation of store lease exit costs. The Company reviews goodwill and indefinite-lived intangible assets for impairment annually, during the fourth quarter of each fiscal year, and as circumstances indicate the possibility of impairment. See Note 3 for further discussion related to the Company’s carrying value of goodwill. Long-lived assets and store lease exit costs were measured at fair value on a nonrecurring basis using Level 3 inputs as defined in the fair value hierarchy. See Note 1 for further discussion of the Company’s policies and recorded amounts for impairments of long-lived assets and valuation of store lease exit costs. In 2016,2020, long-lived assets with a carrying amount of $29$72 were written down to their fair value of $3,$2, resulting in an impairment charge of $26.$70. In 2015,2019, long-lived assets with a carrying amount of $53$152 were written down to their fair value of $7,$32, resulting in an impairment charge of $46. $120, which included the 35 planned store closures.
Mergers are accounted for using the acquisition method of accounting, which requires that the purchase price paid for an acquisitiona merger be allocated to the assets and liabilities acquired based on their estimated fair values as of the effective date of the acquisition,merger, with the excess of the purchase price over the net assets being recorded as goodwill. See Note 2 for further discussion related to accounting for mergers.
63
Fair Value of Other Financial Instruments
Current and Long-term Debt
The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at respective year-ends. At January 28, 2017,30, 2021, the fair value of total debt excluding obligation under finance leases was $13,905$14,680 compared to a carrying value of $13,315.$12,410. At January 30, 2016,February 1, 2020, the fair value of total debt excluding obligation under finance leases was $12,344$14,649 compared to a carrying value of $11,396.$13,256.
Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current LiabilitiesContingent Consideration
The carrying amountsAs a result of these items approximated fair value.
Other Assets
During the second quarter of 2016,Home Chef merger, the Company entered into agreements withrecognized a third party. As partcontingent liability of $91 on the acquisition date. The contingent consideration for entering these agreements,was measured using unobservable (Level 3) inputs and was included in “Other long-term liabilities” within the Company received a financial instrument that derives its value from the third party’s business operations.Consolidated Balance Sheet. The Company used the Monte-Carlo simulation method to determineestimated the fair value of this financial instrument. the earnout liability by applying a Monte-Carlo simulation method using the Company’s projection of future operating results for both the online and offline businesses related to the Home Chef merger and the estimated probability of achievement of the earnout target metrics. The Monte-Carlo simulation is a generally accepted statistical technique used to generate a defined number of valuation paths in order to develop a reasonable estimate of the fair value of this financial instrument. the earnout liability.The assumptions used inliability is remeasured to fair value using the Monte-Carlo simulation are classified as Level 3 inputs. The financial instrument was valuedmethod at $335each reporting period, and recordedthe change in “Other assets” withinfair value, including accretion for the Consolidated Balance Sheets. Aspassage of time, is recognized in net earnings until the financial instrument was obtained in exchange for certain obligations,contingency is resolved. In 2020, the Company also recognized offsetting deferred revenue liabilities in “Otheramended the contingent consideration agreement including the performance milestones to align with the Company’s current liabilities” and “Other long-term liabilities” withinbusiness strategies. In 2020, an adjustment to increase the Consolidated Balance Sheets. The deferred revenue will be amortized to “Sales” within the Consolidated Statementscontingent consideration liability as of Operations over the term of the agreements. Post inception, the Company received a distribution of $59, whichyear-end 2020 was recorded for $189 in OG&A. In 2019, an adjustment to decrease the contingent consideration liability as a reduction of the cost method investment.year-end 2019 was recorded for ($69) in OG&A.
70
Cash and Temporary Cash Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current Liabilities
The carrying amounts of these items approximated fair value.
Other Assets
The fair values of certain investments recorded in “other“Other assets” within the Consolidated Balance Sheets were estimated based on quoted market prices for those or similar investments, or estimated cash flows, if appropriate. At January 28, 2017Other assets include other long-term investments of $280 and $261 as of January 30, 2016, the carrying2021 and fair valueFebruary 1, 2020, respectively. Other assets include notes receivable of long-term investments for which fair value is determinable was $151$240 and $128 respectively. At January 28, 2017 and$210 as of January 30, 2016, the2021 and February 1, 2020, respectively. Other assets also include prepaid deposits under certain contractual arrangements of $186 and $111 as of January 30, 2021 and February 1, 2020. The carrying value of notes receivable for whichthese assets approximates fair value is determinable was $182 and $145, respectively.value.
9. | ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) |
64
9.ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
The following table represents the changes in AOCI by component for the years ended January 30, 20162021 and January 28, 2017:February 1, 2020:
| | | | | | | | | |
| | | | | Pension and | | | | |
| | Cash Flow | | Postretirement | | | | ||
| | Hedging | | Defined Benefit | | | | ||
|
| Activities(1) |
| Plans(1) |
| Total(1) | |||
Balance at February 2, 2019 | | $ | 6 | | $ | (352) | | $ | (346) |
Cumulative effect of accounting change(2) | | | (5) | | | (141) | | | (146) |
OCI before reclassifications(3) | | | (47) | | | (134) | |
| (181) |
Amounts reclassified out of AOCI(4) | | | 4 | |
| 29 | |
| 33 |
Net current-period OCI | | | (48) | |
| (246) | |
| (294) |
Balance at February 1, 2020 | | $ | (42) | | $ | (598) | | $ | (640) |
| | | | | | | | | |
Balance at February 1, 2020 | | $ | (42) | | $ | (598) | | $ | (640) |
OCI before reclassifications(3) | |
| (14) | |
| 8 | |
| (6) |
Amounts reclassified out of AOCI(4) | |
| 2 | |
| 14 | |
| 16 |
Net current-period OCI | |
| (12) | |
| 22 | |
| 10 |
Balance at January 30, 2021 | | $ | (54) | | $ | (576) | | $ | (630) |
|
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|
| Pension and |
|
|
|
| |
|
| Cash Flow |
|
|
|
| Postretirement |
|
|
|
| ||
|
| Hedging |
| Available for sale |
| Defined Benefit |
|
|
|
| |||
|
| Activities(1) |
| Securities(1) |
| Plans(1) |
| Total(1) |
| ||||
Balance at January 31, 2015 |
| $ | (49) |
| $ | 17 |
| $ | (780) |
| $ | (812) |
|
OCI before reclassifications(2) |
|
| (3) |
|
| 3 |
|
| 78 |
|
| 78 |
|
Amounts reclassified out of AOCI(3) |
|
| 1 |
|
| — |
|
| 53 |
|
| 54 |
|
Net current-period OCI |
|
| (2) |
|
| 3 |
|
| 131 |
|
| 132 |
|
Balance at January 30, 2016 |
| $ | (51) |
| $ | 20 |
| $ | (649) |
| $ | (680) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at January 30, 2016 |
| $ | (51) |
| $ | 20 |
| $ | (649) |
| $ | (680) |
|
OCI before reclassifications(2) |
|
| 47 |
|
| (6) |
|
| (97) |
|
| (56) |
|
Amounts reclassified out of AOCI(3) |
|
| 2 |
|
| (14) |
|
| 33 |
|
| 21 |
|
Net current-period OCI |
|
| 49 |
|
| (20) |
|
| (64) |
|
| (35) |
|
Balance at January 28, 2017 |
| $ | (2) |
| $ | — |
| $ | (713) |
| $ | (715) |
|
| (1) |
| All amounts are net of tax. |
| (2) |
|
| (3) | Net of tax of |
| (4) |
| Net of tax of |
6571
The following table represents the items reclassified out of AOCI and the related tax effects for the years ended January 28, 2017, January 30, 20162021, February 1, 2020 and January 31, 2015:February 2, 2019:
| | | | | | | | | | | |
| |
| For the year ended | | For the year ended | | For the year ended | | |||
|
|
| January 30, 2021 |
| February 1, 2020 |
| February 2, 2019 |
| |||
| | | | | | | | | | | |
Cash flow hedging activity items | | | | | | | | | | | |
Amortization of gains and losses on cash flow hedging activities(1) | | | $ | 4 | | $ | 7 | | $ | 8 | |
Tax expense | | |
| (2) | |
| (3) | |
| (3) | |
Net of tax | | |
| 2 | |
| 4 | |
| 5 | |
| | | | | | | | | | | |
Pension and postretirement defined benefit plan items | | | | | | | | | | | |
Amortization of amounts included in net periodic pension cost(2) |
| |
| 19 | |
| 38 | |
| 56 | |
Tax expense |
| |
| (5) | |
| (9) | |
| (13) | |
Net of tax |
| |
| 14 | |
| 29 | |
| 43 | |
Total reclassifications, net of tax |
| | $ | 16 | | $ | 33 | | $ | 48 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| For the year ended |
| For the year ended |
| For the year ended |
| |||
|
|
| January 28, 2017 |
| January 30, 2016 |
| January 31, 2015 |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
Cash flow hedging activity items |
|
|
|
|
|
|
|
|
|
|
|
Amortization of gains and losses on cash flow hedging activities(1) |
|
| $ | 2 |
| $ | 1 |
| $ | 1 |
|
Tax expense |
|
|
| — |
|
| — |
|
| — |
|
Net of tax |
|
|
| 2 |
|
| 1 |
|
| 1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Available for sale security items |
|
|
|
|
|
|
|
|
|
|
|
Realized gains on available for sale securities(2) |
|
|
| (27) |
|
| — |
|
| — |
|
Tax expense |
|
|
| 13 |
|
| — |
|
| — |
|
Net of tax |
|
|
| (14) |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension and postretirement defined benefit plan items |
|
|
|
|
|
|
|
|
|
|
|
Amortization of amounts included in net periodic pension expense(3) |
|
|
| 53 |
|
| 85 |
|
| 35 |
|
Tax expense |
|
|
| (20) |
|
| (32) |
|
| (13) |
|
Net of tax |
|
|
| 33 |
|
| 53 |
|
| 22 |
|
Total reclassifications, net of tax |
|
| $ | 21 |
| $ | 54 |
| $ | 23 |
|
| (1) |
| Reclassified from AOCI into interest expense. |
| (2) |
| Reclassified from AOCI into |
|
|
10. | LEASES AND LEASE-FINANCED TRANSACTIONS |
10.LEASES AND LEASE-FINANCED TRANSACTIONS
While the Company’s current strategy emphasizes ownership ofThe Company leases certain store real estate, thewarehouses, distribution centers, office space and equipment. The Company operates primarily in leased facilities. facilities in approximately half of its store locations. Leaseterms generally range from 10 to 20 years with options to renew for varying terms at the Company’s sole discretion. Certain leases also include options to renew for varying terms. Termspurchase the leased property. Leases with an initial term of certain12 months or less are not recorded on the balance sheet. Certain leases include escalation clauses percentage rent based on sales or payment of executory costs such as property taxes, utilities or insurance and maintenance. Rent expense for leases with escalation clauses or other lease concessions are accounted for on a straight-line basis beginning with the earlier ofover the lease commencement dateterm. The Company’s lease agreements do not contain any material residual value guarantees or the date the Company takes possession. Portions of certainmaterial restrictive covenants. Certain properties or portions thereof are subleased to others for periods generally ranging from one to 20 years.
Rent expense (under operating leases) consists of:
|
|
|
|
|
|
|
|
|
|
|
|
| 2016 |
| 2015 |
| 2014 |
| |||
Minimum rentals |
| $ | 973 |
| $ | 807 |
| $ | 795 |
|
Contingent payments |
|
| 16 |
|
| 18 |
|
| 16 |
|
Tenant income |
|
| (108) |
|
| (102) |
|
| (104) |
|
|
|
|
|
|
|
|
|
|
|
|
Total rent expense |
| $ | 881 |
| $ | 723 |
| $ | 707 |
|
66
72
The following table provides supplemental balance sheet classification information related to leases:
Minimum annual rentals
| | | | | | | | |
|
| |
| January 30, |
| February 1, | ||
| | Classification | | 2021 | | 2020 | ||
Assets | | | | | | | | |
Operating | | Operating lease assets | | $ | 6,796 | | $ | 6,814 |
Finance | | Property, plant and equipment, net(1) | | | 844 | | | 690 |
| | | | | | | | |
Total leased assets | | | | $ | 7,640 | | $ | 7,504 |
| | | | | | | | |
Liabilities | | | | | | | | |
Current | | | | | | | | |
Operating | | Current portion of operating lease liabilities | | $ | 667 | | $ | 597 |
Finance | | Current portion of long-term debt including obligations under finance leases | | | 67 | | | 39 |
| | | | | | | | |
Noncurrent | | | | | | | | |
Operating | | Noncurrent operating lease liabilities | | | 6,507 | | | 6,505 |
Finance | | Long-term debt including obligations under finance leases | | | 936 | | | 781 |
| | | | | | | | |
Total lease liabilities | | | | $ | 8,177 | | $ | 7,922 |
| (1) | Finance lease assets are recorded net of accumulated amortization of $321 and $276 as of January 30, 2021 and February 1, 2020. |
The following table provides the components of lease cost:
| | | | | | | | |
| | | | Year-To-Date | | Year-To-Date | ||
Lease Cost | | Classification |
| | January 30, 2021 |
| February 1, 2020 | |
Operating lease cost(1) | | Rent Expense | | $ | 981 | | $ | 1,000 |
Sublease and other rental income | | Rent Expense | |
| (107) | |
| (116) |
Finance lease cost | | | |
| | |
| |
Amortization of leased assets | | Depreciation and Amortization | | | 55 | | | 53 |
Interest on lease liabilities | | Interest Expense | | | 45 | | | 48 |
| | | | | | | | |
Net lease cost | | | | $ | 974 | | $ | 985 |
| (1) | Includes short-term leases and variable lease costs, which are immaterial. |
73
Maturities of operating and payments under capital leases and lease-financed transactions for the five years subsequent to 2016 andfinance lease liabilities are listed below. Amounts in the aggregate are:table include options to extend lease terms that are reasonably certain of being exercised.
| | | | | | | | | |
| | Operating | | Finance | | | |||
| | Leases | | Leases | | Total | |||
2021 | | $ | 947 | | $ | 109 | | $ | 1,056 |
2022 | |
| 865 | |
| 97 | |
| 962 |
2023 | |
| 790 | |
| 95 | |
| 885 |
2024 | |
| 717 | |
| 93 | |
| 810 |
2025 | |
| 653 | |
| 92 | |
| 745 |
Thereafter | |
| 6,260 | |
| 935 | |
| 7,195 |
| | | | | | | | | |
Total lease payments | | | 10,232 | | | 1,421 | | $ | 11,653 |
| | | | | | | | | |
Less amount representing interest | |
| 3,058 | | | 418 | | | |
| | | | | | | | | |
Present value of lease liabilities(1) | | $ | 7,174 | | $ | 1,003 | | | |
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Lease- |
| |
|
| Capital |
| Operating |
| Financed |
| |||
|
| Leases |
| Leases |
| Transactions |
| |||
2017 |
| $ | 92 |
| $ | 986 |
| $ | 7 |
|
2018 |
|
| 76 |
|
| 932 |
|
| 8 |
|
2019 |
|
| 71 |
|
| 856 |
|
| 8 |
|
2020 |
|
| 66 |
|
| 759 |
|
| 9 |
|
2021 |
|
| 64 |
|
| 656 |
|
| 9 |
|
Thereafter |
|
| 647 |
|
| 3,992 |
|
| 53 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 1,016 |
| $ | 8,181 |
| $ | 94 |
|
|
|
|
|
|
|
|
|
|
|
|
Less estimated executory costs included in capital leases |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net minimum lease payments under capital leases |
|
| 1,016 |
|
|
|
|
|
|
|
Less amount representing interest |
|
| 348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments under capital leases |
| $ | 668 |
|
|
|
|
|
|
|
| (1) | Includes the current portion of $667 for operating leases and $67 for finance leases. |
Total future minimum rentals under noncancellablenon-cancellable subleases at January 28, 201730, 2021 were $268.$261.
11.EARNINGS PER COMMON SHAREThe following table provides the weighted-average lease term and discount rate for operating and finance leases:
| | | | | | |
| | | | | ||
| | January 30, 2021 | | February 1, 2020 | ||
Weighted-average remaining lease term (years) | | | | | | |
Operating leases | | 15.3 | | | 16.0 | |
Finance leases | | 16.2 | | | 15.3 | |
Weighted-average discount rate | | | | | | |
Operating leases | | 4.2 | % | | 4.3 | % |
Finance leases | | 4.4 | % | | 5.4 | % |
| | | | | | |
The following table provides supplemental cash flow information related to leases:
| | | | | |
| Year-To-Date | | Year-To-Date | ||
| January 30, 2021 | | February 1, 2020 | ||
Cash paid for amounts included in the measurement of lease liabilities | | | | | |
Operating cash flows from operating leases | $ | 849 | | $ | 942 |
Operating cash flows from finance leases | | 45 | | | 48 |
Financing cash flows from finance leases | | 37 | | | 45 |
Leased assets obtained in exchange for new operating lease liabilities | | 679 | | | 849 |
Leased assets obtained in exchange for new finance lease liabilities | | 190 | | | 233 |
Net gain recognized from sale and leaseback transactions(1) | | 39 | | | 58 |
Impairment of operating lease assets(2) | | 4 | | | 81 |
Impairment of finance lease assets | | 2 | | | 40 |
| (1) | In 2020, the Company entered into sale leaseback transactions related to 7 properties, which resulted in total proceeds of $78. In 2019, the Company entered into sale leaseback transactions related to 9 properties, which resulted in total proceeds of $113. |
| (2) | In 2019, impairment of operating lease assets includes $11 related to Lucky’s Market. |
74
11. | EARNINGS PER COMMON SHARE |
Net earnings attributable to The Kroger Co. per basic common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding. Net earnings attributable to The Kroger Co. per diluted common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options. The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:
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| For the year ended |
| For the year ended |
| For the year ended |
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| January 28, 2017 |
| January 30, 2016 |
| January 31, 2015 |
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| Per |
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| Per |
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| Per |
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| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
| Earnings |
| Shares |
| Share |
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| | For the year ended | | For the year ended | | For the year ended |
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| | January 30, 2021 | | February 1, 2020 | | February 2, 2019 |
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| | Earnings | | Shares | | Share | | Earnings | | Shares | | Share | | Earnings | | Shares | | Share |
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(in millions, except per share amounts) |
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| (Numerator) |
| (Denominator) |
| Amount |
| | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount | | (Numerator) | | (Denominator) | | Amount |
| ||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 1,959 |
| 942 |
| $ | 2.08 |
| $ | 2,021 |
| 966 |
| $ | 2.09 |
| $ | 1,711 |
| 981 |
| $ | 1.74 |
| | $ | 2,556 |
| 773 | | $ | 3.31 | | $ | 1,640 |
| 799 | | $ | 2.05 | | $ | 3,076 |
| 810 | | $ | 3.80 | |
Dilutive effect of stock options |
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|
| 16 |
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| 14 |
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| 12 |
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| | | |
| 8 | | | | | | |
| 6 | | | | | | |
| 8 | | | | |
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Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 1,959 |
| 958 |
| $ | 2.05 |
| $ | 2,021 |
| 980 |
| $ | 2.06 |
| $ | 1,711 |
| 993 |
| $ | 1.72 |
| | $ | 2,556 |
| 781 | | $ | 3.27 | | $ | 1,640 |
| 805 | | $ | 2.04 | | $ | 3,076 |
| 818 | | $ | 3.76 | |
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The Company had combined undistributed and distributed earnings to participating securities totaling $16, $18$29, $19 and $17$34 in 2016, 20152020, 2019 and 2014,2018, respectively.
The Company had stock options outstanding for approximately 7.19.1 million, 1.918.4 million and 4.610.1 million shares, respectively, for the years ended January 28, 2017, January 30, 20162021, February 1, 2020, and January 31, 2015,February 2, 2019, which were excluded from the computations of net earnings per diluted common share because their inclusion would have had an anti-dilutive effect on net earnings per diluted share.
The Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award based on the fair value at the date of the grant.
12.STOCK OPTION PLANS
The Company grants options for common shares (“stock options”) to employees under various plans at an option price equal to the fair market value of the stock option at the date of grant. The Company accounts for stock options under the fair value recognition provisions. Under this method, the Company recognizes compensation expense for all share-based payments granted. The Company recognizes share-based compensation expense, net of an estimated forfeiture rate, over the requisite service period of the award. Excess tax benefits related to share-based payments are recognized in the provision for income taxes. Equity awards may be made at one of four meetings of its Board of Directors occurring shortly after the Company’s release of quarterly earnings. The 2016 primary grant was made in conjunction with the June meeting of the Company’s Board of Directors. Certain changes to the stock option compensation strategy were put into effect in 2015, which resulted in a reduction to the number of stock options granted in 2016 and 2015, compared to 2014.
provisions. Stock options typically expire 10 years from the date of grant. Stock options vest between one and five years from the date of grant. At January 28, 2017, approximately 33 million common shares were available for future option grants under the 2008, 2011 and 2014 Long-Term Incentive Plans (the “Plans”).
In addition to the stock options described above, the Company awards restricted stock to employees and non-employeenonemployee directors under various plans. The restrictions on these awards generally lapse between one and five years from the date of the awards. The Company records expensedetermines the fair value for restricted stock awards in an amount equal to the fair market value of the underlying shares on the grant date of the award, over the period the awards lapse. As ofaward.
At January 28, 2017,30, 2021, approximately 1734 million common shares were available for future options or restricted stock grants under the 2011, 2014, and 2019 Long-Term Incentive Plans (the “Plans”). Options granted reduce the shares available under the Plans for future restrictedat a ratio of 1 to one. Restricted stock awards orgrants reduce the shares issued to the extent performance criteria are achieved. The Company has the ability to convert shares available for stock options under the Plans at a ratio of 2.83 to one.
Equity awards granted are based on the aggregate value of the award on the grant date. This can affect the number of shares availablegranted in a given year as equity awards. Excess tax benefits related to equity awards are recognized in the provision for restricted stock awards. Underincome taxes. Equity awards may be approved at one of four meetings of its Board of Directors occurring shortly after the Plans, four shares available for option awards can be converted into one share available for restricted stock awards.Company’s release of quarterly earnings. The 2020 primary grants were made in conjunction with the March and June meetings of the Company’s Board of Directors.
All awards become immediately exercisable upon certain changes of control of the Company.
75
Stock Options
Changes in options outstanding under the stock option plans are summarized below:
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| ||||||
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| Shares |
| Weighted- |
| |||||||
|
| subject |
| average |
| |||||||
|
| to option |
| exercise |
| |||||||
|
| (in millions) |
| price |
| |||||||
Outstanding, year-end 2013 |
| 43.3 |
| $ | 12.83 |
| ||||||
| | | | | | | ||||||
|
| Shares |
| Weighted- |
| |||||||
| | subject | | average |
| |||||||
| | to option | | exercise |
| |||||||
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| (in millions) |
| price |
| |||||||
Outstanding, year-end 2017 |
| 36.7 | | $ | 22.23 | | ||||||
Granted |
| 8.4 |
| $ | 24.71 |
|
| 2.7 | | $ | 27.88 | |
Exercised |
| (10.3) |
| $ | 11.56 |
|
| (4.4) | | $ | 15.34 | |
Canceled or Expired |
| (0.6) |
| $ | 15.56 |
|
| (0.9) | | $ | 28.05 | |
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| ||||||
Outstanding, year-end 2014 |
| 40.8 |
| $ | 15.56 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2018 |
| 34.1 | | $ | 23.42 | | ||||||
Granted |
| 3.4 |
| $ | 38.40 |
|
| 3.1 | | $ | 24.63 | |
Exercised |
| (8.9) |
| $ | 13.54 |
|
| (4.0) | | $ | 14.17 | |
Canceled or Expired |
| (0.4) |
| $ | 19.98 |
|
| (1.0) | | $ | 28.87 | |
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| ||||||
Outstanding, year-end 2015 |
| 34.9 |
| $ | 18.26 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2019 |
| 32.2 | | $ | 24.52 | | ||||||
Granted |
| 4.8 |
| $ | 37.10 |
|
| 2.9 | | $ | 29.31 | |
Exercised |
| (4.9) |
| $ | 14.20 |
|
| (7.3) | | $ | 17.72 | |
Canceled or Expired |
| (0.5) |
| $ | 28.35 |
|
| (1.0) | | $ | 30.53 | |
|
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|
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| ||||||
Outstanding, year-end 2016 |
| 34.3 |
| $ | 21.32 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2020 |
| 26.8 | | $ | 26.65 | | ||||||
68
A summary of options outstanding, exercisable and expected to vest at January 28, 201730, 2021 follows:
| | | | | | | | | | |
| | | | Weighted-average | | | | | Aggregate |
|
| | | | remaining | | Weighted-average | | intrinsic |
| |
|
| Number of shares |
| contractual life |
| exercise price |
| value |
| |
|
| (in millions) |
| (in years) | | | |
| (in millions) | |
Options Outstanding |
| 26.8 |
| 5.43 | | $ | 26.65 |
| 231 | |
Options Exercisable |
| 18.5 |
| 4.34 | | $ | 26.42 |
| 168 | |
Options Expected to Vest |
| 8.2 |
| 7.82 | | $ | 27.16 |
| 62 | |
|
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|
|
| Weighted-average |
|
|
|
| Aggregate |
|
|
|
|
| remaining |
| Weighted-average |
| intrinsic |
| |
|
| Number of shares |
| contractual life |
| exercise price |
| value |
| |
|
| (in millions) |
| (in years) |
|
|
|
| (in millions) |
|
Options Outstanding |
| 34.3 |
| 6.04 |
| $ | 21.32 |
| 447 |
|
Options Exercisable |
| 21.7 |
| 4.84 |
| $ | 16.00 |
| 381 |
|
Options Expected to Vest |
| 12.3 |
| 8.09 |
| $ | 30.45 |
| 65 |
|
76
Restricted stock
Changes in restricted stock outstanding under the restricted stock plans are summarized below:
|
|
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|
| ||||||
|
| Restricted |
|
|
|
| ||||||
|
| shares |
| Weighted-average |
| |||||||
|
| outstanding |
| grant-date |
| |||||||
|
| (in millions) |
| fair value |
| |||||||
Outstanding, year-end 2013 |
| 9.6 |
| $ | 16.16 |
| ||||||
| | | | | | | ||||||
|
| Restricted |
| | |
| ||||||
| | shares | | Weighted-average |
| |||||||
| | outstanding | | grant-date |
| |||||||
| | (in millions) | | fair value |
| |||||||
Outstanding, year-end 2017 |
| 9.2 | | $ | 26.78 | | ||||||
Granted |
| 6.1 |
| $ | 24.76 |
|
| 4.6 | | $ | 27.99 | |
Lapsed |
| (5.2) |
| $ | 16.52 |
|
| (4.4) | | $ | 25.93 | |
Canceled or Expired |
| (0.3) |
| $ | 18.67 |
|
| (0.6) | | $ | 26.57 | |
|
|
|
|
|
|
| ||||||
Outstanding, year-end 2014 |
| 10.2 |
| $ | 21.04 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2018 |
| 8.8 | | $ | 27.86 | | ||||||
Granted |
| 3.2 |
| $ | 38.34 |
|
| 5.4 | | $ | 22.72 | |
Lapsed |
| (5.4) |
| $ | 21.49 |
|
| (4.1) | | $ | 28.07 | |
Canceled or Expired |
| (0.4) |
| $ | 22.80 |
|
| (0.8) | | $ | 25.68 | |
|
|
|
|
|
|
| ||||||
Outstanding, year-end 2015 |
| 7.6 |
| $ | 28.01 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2019 |
| 9.3 | | $ | 24.85 | | ||||||
Granted |
| 3.6 |
| $ | 37.03 |
|
| 4.0 | | $ | 31.99 | |
Lapsed |
| (3.5) |
| $ | 28.52 |
|
| (4.9) | | $ | 24.69 | |
Canceled or Expired |
| (0.3) |
| $ | 30.70 |
|
| (0.6) | | $ | 26.71 | |
|
|
|
|
|
|
| ||||||
Outstanding, year-end 2016 |
| 7.4 |
| $ | 32.09 |
| ||||||
| | | | | | | ||||||
Outstanding, year-end 2020 |
| 7.8 | | $ | 28.46 | | ||||||
The weighted-average grant date fair value of stock options granted during 2016, 20152020, 2019 and 20142018 was $7.48, $9.78$6.43, $6.00 and $5.98,$6.78, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes accounting judgment and financial estimates, including the term option holders are expected to retain their stock options before exercising them, the volatility of the Company’s share price over that expected term, the dividend yield over the term and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations. The increase in the fair value of the stock options granted during 2020, compared to 2019, resulted primarily from increases in the Company’s share price and the weighted average expected volatility, partially offset by a decrease in the interest rate. The decrease in the fair value of the stock options granted during 2016,2019, compared to 2015,2018, resulted primarily from a decrease in the Company’s share price, which increased the expected dividend yield, and decreases in the weighted average expected volatitity and the weighted average risk free discount rate. The increase in the fair value of the stock options granted during 2015, compared to 2014, resulted primarily from an increase in the Company’s share price, which decreased the expected dividend yield, andpartially offset by an increase in the weighted average risk-free interest rate.expected volatility.
The following table reflects the weighted-average assumptions used for grants awarded to option holders:
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| |||||||
|
| 2016 |
| 2015 |
| 2014 |
| |||||||
| | | | | | | | |||||||
|
| 2020 |
| 2019 |
| 2018 |
| |||||||
Weighted average expected volatility |
| 21.40 | % | 24.07 | % | 25.29 | % |
| 26.96 | % | 25.37 | % | 24.50 | % |
Weighted average risk-free interest rate |
| 1.29 | % | 2.12 | % | 2.06 | % |
| 0.82 | % | 2.54 | % | 2.82 | % |
Expected dividend yield |
| 1.40 | % | 1.20 | % | 1.51 | % |
| 2.00 | % | 2.00 | % | 2.00 | % |
Expected term (based on historical results) |
| 7.2 | years | 7.2 | years | 6.6 | years |
| 7.2 | years | 7.2 | years | 7.2 | years |
69
The weighted-average risk-free interest rate was based on the yield of a treasury note as of the grant date, continuously compounded, which matures at a date that approximates the expected term of the options. The dividend yield was based on our history and expectation of dividend payouts. Expected volatility was determined based upon historical stock volatilities; however, implied volatility was also considered. Expected term was determined based upon historical exercise and cancellation experience.
Total stock compensation recognized in 2016, 20152020, 2019 and 20142018 was $141, $165$185, $155 and $155,$154, respectively. Stock option compensation recognized in 2016, 20152020, 2019 and 20142018 was $28, $31$22, $24 and $32,$25, respectively. Restricted shares compensation recognized in 2016, 20152020, 2019 and 20142018 was $113, $134$163, $131 and $123,$129, respectively.
77
The total intrinsic value of stock options exercised was $105, $217$115, $51 and $142$58 in 2016, 20152020, 2019 and 2014,2018, respectively. The total amount of cash received in 20162020 by the Company from the exercise of stock options granted under share-based payment arrangements was $68.$127. As of January 28, 2017,30, 2021, there was $218$201 of total unrecognized compensation expense remaining related to non-vested share-based compensation arrangements granted under Plans. This cost is expected to be recognized over a weighted-average period of approximately two years. The total fair value of options that vested was $28, $33$23, $26 and $26$30 in 2016, 20152020, 2019 and 2014,2018, respectively.
Shares issued as a result of stock option exercises may be newly issued shares or reissued treasury shares. Proceeds received from the exercise of options, and the related tax benefit, may be utilized to repurchase the Company’s common shares under a stock repurchase program adopted by the Company’s Board of Directors. During 2016,2020, the Company repurchased approximately three4 million common shares in such a manner.
13. | COMMITMENTS AND CONTINGENCIES |
13.COMMITMENTS AND CONTINGENCIES
The Company continuously evaluates contingencies based upon the best available evidence.
The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable. To the extent that resolution of contingencies results in amounts that vary from the Company’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 most 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. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are all reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation — Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust,personal injury, contract disputes, employment discrimination, wage and hour or civil rights laws, as well as product liability cases,and other regulatory claims are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material effect on the Company’s financial position, results of operations, or cash flows.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and when an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of loss for the Company’s exposure is not material to the Company. 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, results of operations, or cash flows.
70
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 the obligations under the leases if any of the assignees is unable to fulfill its 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 assume a material amount of these obligations is remote.
78
14. | STOCK |
14.STOCK
Preferred Shares
The Company has authorized five5 million shares of voting cumulative preferred shares; two2 million shares were available for issuance at January 28, 2017.30, 2021. The shares have a par value of $100 per share and are issuable in series.
Common Shares
The Company has authorized two2 billion common shares, $1 par value per share.
On June 25, 2015, the Company’s Board of Directors approved a two-for-one stock split of The Kroger Co.’s common shares in the form of a 100% stock dividend, which was effective July 13, 2015. All share and per share amounts in the Company’s Consolidated Financial Statements and related notes have been retroactively adjusted to reflect the stock split for all periods presented.
Common Stock Repurchase Program
The Company maintains stock repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act of 1934 to allow for the orderly repurchase of The Kroger Co. common shares, from time to time. The Company made open market purchases totaling $1,661, $500$1,196, $400 and $1,129$727 under these repurchase programs in 2016, 20152020, 2019 and 2014,2018, respectively.
On April 20, 2018 the Company entered and funded a $1,200 accelerated stock repurchase (“ASR”) program to reacquire shares in privately negotiated transactions. The final delivery under the ASR program occurred during the second quarter of 2018, which included the settlement of the remaining 2.3 million Kroger Common shares. In total, the Company invested $1,200 to repurchase 46.3 million Kroger common shares at an average price of $25.91 per share.
In addition to these repurchase programs, in December 1999, the Company began a program to repurchase common shares to reduce dilution resulting from its employee stock option plans. This program is solely funded by proceeds from stock option exercises and the related tax benefit. The Company repurchased approximately $105, $203$128, $65 and $154$83 under the stock option program during 2016, 20152020, 2019 and 2014,2018, respectively.
15. | COMPANY- SPONSORED BENEFIT PLANS |
15.COMPANY- SPONSORED BENEFIT PLANS
The Company administers non-contributory defined benefit retirement plans for some non-union employees and union-represented employees as determined by the terms and conditions of collective bargaining agreements. These include several qualified pension plans (the “Qualified Plans”) and non-qualified pension plans (the “Non-Qualified Plans”). The Non-Qualified Plans pay benefits to any employee that earns in excess of the maximum allowed for the Qualified Plans by Section 415 of the Internal Revenue Code. The Company only funds obligations under the Qualified Plans. Funding for the Company-sponsoredcompany-sponsored pension plans is based on a review of the specific requirements and on 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. The majorityBased on employee’s age, years of service and position with the Company’s employeesCompany, the employee may becomebe eligible for these benefits if they reach normal retirement age while employed by the Company.retiree health care benefits. Funding of retiree health care benefits occurs as claims or premiums are paid.
The Company recognizes the funded status of its retirement plans on the Consolidated Balance Sheets. Actuarial gains or losses, prior service costs or credits and transition obligations that have not yet been recognized as part of net periodic benefit cost are required to be recorded as a component of AOCI. All plans are measuredThe Company has elected to measure defined benefit plan assets and obligations as of January 31, which is the Company’smonth-end that is closest to its fiscal year end.year-ends, which were January 30, 2021 for fiscal 2020 and February 1, 2020 for fiscal 2019.
71
79
Amounts recognized in AOCI as of January 28, 201730, 2021 and January 30, 2016February 1, 2020 consists of the following (pre-tax):
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| |||||||||||||||||||
|
| Pension Benefits |
| Other Benefits |
| Total |
| |||||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
| | Pension Benefits | | Other Benefits | | Total |
| |||||||||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| |||||||||||||||||||||||||
Net actuarial loss (gain) |
| $ | 1,308 |
| $ | 1,213 |
| $ | (120) |
| $ | (121) |
| $ | 1,188 |
| $ | 1,092 |
| | $ | 951 | | $ | 955 | | $ | (147) | | $ | (109) | | $ | 804 | | $ | 846 | |
Prior service cost (credit) |
|
| — |
|
| 1 |
|
| (58) |
|
| (66) |
|
| (58) |
|
| (65) |
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| |||||||||||||||||||
Prior service credit | |
| — | |
| — | |
| (55) | |
| (68) | |
| (55) | |
| (68) | | |||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | |||||||||||||||||||
Total |
| $ | 1,308 |
| $ | 1,214 |
| $ | (178) |
| $ | (187) |
| $ | 1,130 |
| $ | 1,027 |
| | $ | 951 | | $ | 955 | | $ | (202) | | $ | (177) | | $ | 749 | | $ | 778 | |
Amounts in AOCI expected to be recognized as components of net periodic pension or postretirement benefit costs in the next fiscal year are as follows (pre-tax):
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|
|
|
| Pension Benefits |
| Other Benefits |
| Total |
| |||
|
| 2017 |
| 2017 |
| 2017 |
| |||
Net actuarial loss (gain) |
| $ | 85 |
| $ | (9) |
| $ | 76 |
|
Prior service credit |
|
| — |
|
| (8) |
|
| (8) |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
| $ | 85 |
| $ | (17) |
| $ | 68 |
|
Other changes recognized in other comprehensive income (loss) in 2016, 20152020, 2019 and 20142018 were as follows (pre-tax):
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|
| ||||||||||||||||||||||||||||
|
| Pension Benefits |
| Other Benefits |
| Total |
| |||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | Pension Benefits | | Other Benefits | | Total |
| |||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 |
| |||||||||||||||||||||||||||||||||||||
Incurred net actuarial loss (gain) |
| $ | 165 |
| $ | (83) |
| $ | 590 |
| $ | (9) |
| $ | (39) |
| $ | 14 |
| $ | 156 |
| $ | (122) |
| $ | 604 |
| | $ | 36 | | $ | 179 | | $ | (126) | | $ | (46) | | $ | 9 | | $ | (10) | | $ | (10) | | $ | 188 | | $ | (136) | |
Amortization of prior service credit |
|
| — |
|
| — |
|
| — |
|
| 8 |
|
| 11 |
|
| 7 |
|
| 8 |
|
| 11 |
|
| 7 |
| |
| — | |
| — | |
| — | |
| 13 | |
| 11 | |
| 11 | |
| 13 | |
| 11 | |
| 11 | |
Amortization of net actuarial gain (loss) |
|
| (71) |
|
| (102) |
|
| (50) |
|
| 10 |
|
| 7 |
|
| 8 |
|
| (61) |
|
| (95) |
|
| (42) |
| |
| (40) | |
| (61) | |
| (77) | |
| 8 | |
| 12 | |
| 10 | |
| (32) | |
| (49) | |
| (67) | |
Other |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (2) |
|
| (47) |
|
| — |
|
| (2) |
|
| (47) |
| |
| — | |
| (1) | |
| — | |
| — | |
| (12) | |
| — | |
| — | |
| (13) | |
| — | |
Total recognized in other comprehensive income (loss) |
|
| 94 |
|
| (185) |
|
| 540 |
|
| 9 |
|
| (23) |
|
| (18) |
|
| 103 |
|
| (208) |
|
| 522 |
| | $ | (4) | | $ | 117 | | $ | (203) | | $ | (25) | | $ | 20 | | $ | 11 | | $ | (29) | | $ | 137 | | $ | (192) | |
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|
|
|
|
| ||||||||||||||||||||||||||||
Total recognized in net periodic benefit cost and other comprehensive income |
| $ | 188 |
| $ | (82) |
| $ | 595 |
| $ | 10 |
| $ | (22) |
| $ | (9) |
| $ | 198 |
| $ | (104) |
| $ | 586 |
| ||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
Total recognized in net periodic benefit cost and other comprehensive income (loss) | | $ | (4) | | $ | 165 | | $ | (127) | | $ | (34) | | $ | 11 | | $ | 5 | | $ | (38) | | $ | 176 | | $ | (122) | | ||||||||||||||||||||||||||||
72
Information with respect to change in benefit obligation, change in plan assets, the funded status of the plans recorded in the Consolidated Balance Sheets, net amounts recognized at the end of fiscal years, weighted average assumptions and components of net periodic benefit cost follow:
| | | | | | | | | | | | | | | | | | | |
| | Pension Benefits | | | | | | |
| ||||||||||
| | Qualified Plans | | Non-Qualified Plans | | Other Benefits |
| ||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||||
Change in benefit obligation: | | | | | | | | | | | | | | | | | | | |
Benefit obligation at beginning of fiscal year | | $ | 3,518 | | $ | 2,994 | | $ | 328 | | $ | 298 | | $ | 198 | | $ | 200 | |
Service cost | |
| 13 | |
| 32 | |
| — | |
| 1 | |
| 7 | |
| 6 | |
Interest cost | |
| 104 | |
| 124 | |
| 10 | |
| 12 | |
| 6 | |
| 8 | |
Plan participants’ contributions | |
| — | |
| — | |
| — | |
| — | |
| 12 | |
| 13 | |
Actuarial (gain) loss | |
| 175 | |
| 545 | |
| 35 | |
| 41 | |
| (47) | |
| 9 | |
Plan settlements | | | (16) | | | — | | | — | | | — | | | — | | | — | |
Benefits paid | |
| (171) | |
| (180) | |
| (21) | |
| (21) | |
| (24) | |
| (26) | |
Other | |
| (8) | |
| 3 | |
| (1) | |
| (3) | |
| — | |
| (12) | |
| | | | | | | | | | | | | | | | | | | |
Benefit obligation at end of fiscal year | | $ | 3,615 | | $ | 3,518 | | $ | 351 | | $ | 328 | | $ | 152 | | $ | 198 | |
| | | | | | | | | | | | | | | | | | | |
Change in plan assets: | | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at beginning of fiscal year | | $ | 3,422 | | $ | 3,010 | | $ | — | | $ | — | | $ | — | | $ | — | |
Actual return on plan assets | |
| 342 | |
| 590 | |
| — | |
| — | |
| — | |
| — | |
Employer contributions | |
| — | |
| — | |
| 21 | |
| 21 | |
| 12 | |
| 13 | |
Plan participants’ contributions | |
| — | |
| — | |
| — | |
| — | |
| 12 | |
| 13 | |
Plan settlements | | | (16) | | | — | | | — | | | — | | | — | | | — | |
Benefits paid | |
| (171) | |
| (180) | |
| (21) | |
| (21) | |
| (24) | |
| (26) | |
Other | |
| (8) | |
| 2 | |
| — | |
| — | |
| — | |
| — | |
| | | | | | | | | | | | | | | | | | | |
Fair value of plan assets at end of fiscal year | | $ | 3,569 | | $ | 3,422 | | $ | — | | $ | — | | $ | — | | $ | — | |
Funded status and net asset and liability recognized at end of fiscal year | | $ | (46) | | $ | (96) | | $ | (351) | | $ | (328) | | $ | (152) | | $ | (198) | |
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|
| Pension Benefits |
|
|
|
|
|
|
| ||||||||||
|
| Qualified Plans |
| Non-Qualified Plans |
| Other Benefits |
| ||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of fiscal year |
| $ | 3,922 |
| $ | 4,102 |
| $ | 290 |
| $ | 304 |
| $ | 244 |
| $ | 275 |
|
Service cost |
|
| 68 |
|
| 62 |
|
| 2 |
|
| 3 |
|
| 9 |
|
| 10 |
|
Interest cost |
|
| 177 |
|
| 154 |
|
| 14 |
|
| 12 |
|
| 10 |
|
| 9 |
|
Plan participants’ contributions |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 12 |
|
| 10 |
|
Actuarial (gain) loss |
|
| 186 |
|
| (411) |
|
| 29 |
|
| (17) |
|
| (9) |
|
| (39) |
|
Benefits paid |
|
| (211) |
|
| (162) |
|
| (19) |
|
| (17) |
|
| (23) |
|
| (19) |
|
Other |
|
| (2) |
|
| (17) |
|
| — |
|
| 3 |
|
| — |
|
| (2) |
|
Assumption of Roundy's benefit obligation |
|
| — |
|
| 194 |
|
| — |
|
| 2 |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at end of fiscal year |
| $ | 4,140 |
| $ | 3,922 |
| $ | 316 |
| $ | 290 |
| $ | 243 |
| $ | 244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of fiscal year |
| $ | 3,045 |
| $ | 3,189 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Actual return (loss) on plan assets |
|
| 302 |
|
| (124) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Employer contributions |
|
| 3 |
|
| 5 |
|
| 19 |
|
| 17 |
|
| 11 |
|
| 9 |
|
Plan participants’ contributions |
|
| — |
|
| — |
|
| — |
|
| — |
|
| 12 |
|
| 10 |
|
Benefits paid |
|
| (211) |
|
| (162) |
|
| (19) |
|
| (17) |
|
| (23) |
|
| (19) |
|
Other |
|
| (1) |
|
| (18) |
|
| — |
|
| — |
|
| — |
|
| — |
|
Assumption of Roundy’s plan assets |
|
| — |
|
| 155 |
|
| — |
|
| — |
|
| — |
|
| — |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair value of plan assets at end of fiscal year |
| $ | 3,138 |
| $ | 3,045 |
| $ | — |
| $ | — |
| $ | — |
| $ | — |
|
Funded status and net liability recognized at end of fiscal year |
| $ | (1,002) |
| $ | (877) |
| $ | (316) |
| $ | (290) |
| $ | (243) |
| $ | (244) |
|
80
As of January 28, 201730, 2021, other assets and January 30, 2016, other current liabilities include $37$21 and $31,$35, respectively, of the net asset and liability recognized for the above benefit plans. As of February 1, 2020, other assets and other current liabilities include $19 and $33, respectively, of the net asset and liability recognized for the above benefit plans.
The Company announced changes to certain non-union company-sponsored pension plans. The Company froze the compensation and service periods used to calculate pension benefits for active employees who participate in the affected pension plans as of December 31, 2019. Beginning January 1, 2020, the affected active employees no longer accrue additional benefits for future service and eligible compensation received under these plans.
As of January 28, 201730, 2021 and January 30, 2016,February 1, 2020, pension plan assets do not include common shares of The Kroger Co.
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| |||||||||||||
|
| Pension Benefits |
| Other Benefits |
| |||||||||||||||||||||
| | | | | | | | | | | | | | |||||||||||||
| | Pension Benefits | | Other Benefits |
| |||||||||||||||||||||
Weighted average assumptions |
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
|
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 |
|
Discount rate — Benefit obligation |
| 4.25 | % | 4.62 | % | 3.87 | % | 4.18 | % | 4.44 | % | 3.74 | % |
| 2.72 | % | 3.01 | % | 4.23 | % | 2.43 | % | 2.97 | % | 4.19 | % |
Discount rate — Net periodic benefit cost |
| 4.62 | % | 3.87 | % | 4.99 | % | 4.44 | % | 3.74 | % | 4.68 | % |
| 3.01 | % | 4.23 | % | 4.00 | % | 2.97 | % | 4.19 | % | 3.93 | % |
Expected long-term rate of return on plan assets |
| 7.40 | % | 7.44 | % | 7.44 | % |
|
|
|
|
|
|
| 5.50 | % | 6.00 | % | 5.90 | % | | | | | | |
Rate of compensation increase — Net periodic benefit cost |
| 2.71 | % | 2.85 | % | 2.86 | % |
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|
|
|
|
|
| 3.03 | % | 3.04 | % | 3.03 | % | | | | | | |
Rate of compensation increase — Benefit obligation |
| 2.72 | % | 2.71 | % | 2.85 | % |
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|
|
|
|
|
| 3.03 | % | 3.03 | % | 3.04 | % | | | | | | |
Cash Balance plan interest crediting rate | | 3.30 | % | 3.60 | % | 4.00 | % | | | | | | | |||||||||||||
The Company’s discount rate assumptions were intended to reflect the rates at which the pension benefits could be effectively settled. They take into account the timing and amount of benefits that would be available under the plans. The Company’s policy is to match the plan’s cash flows to that of a hypothetical bond portfolio whose cash flow from coupons and maturities match the plan’s projected benefit cash flows. The discount rates are the single rates that produce the same present value of cash flows. The selection of the 4.25%2.72% and 4.18%2.43% discount rates as of year-end 20162020 for pension and other benefits, respectively, represents the hypothetical bond portfolio using bonds with an AA or better rating constructed with the assistance of an outside consultant. A 100 basis point increase in the discount rate would decrease the projected pension benefit obligation as of January 31, 2017,30, 2021, by approximately $510.$410.
73
The Company’s 2020 assumed pension plan investment return rate was 5.50% compared to 6.00% in 2019 and 5.90% in 2018. The value of all investments in the company-sponsored defined benefit pension plans during the calendar year ended December 31, 2020, net of investment management fees and expenses, increased 16.9% and for fiscal year 2020 investments increased 10.2%. Historically, the Company’s pension plans’ average rate of return was 7.7% for the 10 calendar years ended December 31, 2020, net of all investment management fees and expenses. For the past 20 years, the Company’s pension plans’ average annual rate of return has been 7.2%. To determine the expected rate of return on pension plan assets held by the Company, for 2016, the Company consideredconsiders current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. In 2016, the Company assumed a pension plan investment return rate to 7.40% compared to 7.44% in 2015 and 2014. The Company pension plan’s average rate of return was 5.81% for the 10 calendar years ended December 31, 2016, net of all investment management fees and expenses. The value of all investments in the Qualified Plans during the calendar year ending December 31, 2016 increased 6.90%, net of investment management fees and expenses. For the past 20 years, the Company’s average annual rate of return has been 7.77%. Based on the above information and forward looking assumptions for investments made in a manner consistent with the Company’s target allocations, the Company believes a 7.40% rate of return assumption is reasonable.
The Company calculates its expected return on plan assets by using the market-related value of plan assets. The market-related value of plan assets is determined by adjusting the actual fair value of plan assets for gains or losses on plan assets. Gains or losses represent the difference between actual and expected returns on plan investments for each plan year. Gains or losses on plan assets are recognized evenly over a five yearfive-year period. Using a different method to calculate the market-related value of plan assets would provide a different expected return on plan assets.
On January 31, 2015, the Company adopted new industry specific mortality tables based on mortality experience and assumptions for generational mortality improvement in determining the Company’s benefit obligations. On January 28, 2017, the Company adopted an updated assumption for generational mortality improvement, based on additional years of published mortality experience.
The fundedpension benefit unfunded status decreased in 2016,2020, compared to 2015,2019, due primarily to higher than anticipated asset returns, partially offset by a decreasedecline in the discount rate partially offset by an increasefrom 2019 to 2020 and changes in plan assets.demographic assumptions in 2020.
81
The following table provides the components of the Company’s net periodic benefit costs for 2016, 20152020, 2019 and 2014:2018:
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| ||||||||||||||||||||||||||||
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| Pension Benefits |
|
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| ||||||||||||||||||||||||||||||||||||||||||||
|
| Qualified Plans |
| Non-Qualified Plans |
| Other Benefits |
| |||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
| 2016 |
| 2015 |
| 2014 |
| |||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||||||||||||||||||||||||||
| | Pension Benefits | | | | | | | | | |
| ||||||||||||||||||||||||||||||||||||||||||||
| | Qualified Plans | | Non-Qualified Plans | | Other Benefits |
| |||||||||||||||||||||||||||||||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2018 |
| |||||||||||||||||||||||||||||||||||||
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Service cost |
| $ | 68 |
| $ | 62 |
| $ | 48 |
| $ | 2 |
| $ | 3 |
| $ | 3 |
| $ | 9 |
| $ | 10 |
| $ | 11 |
| | $ | 13 | | $ | 32 | | $ | 35 | | $ | — | | $ | 1 | | $ | 2 | | $ | 7 | | $ | 6 | | $ | 7 | |
Interest cost |
|
| 177 |
|
| 154 |
|
| 169 |
|
| 14 |
|
| 12 |
|
| 13 |
|
| 10 |
|
| 9 |
|
| 13 |
| |
| 104 | |
| 124 | |
| 124 | |
| 10 | |
| 12 | |
| 12 | |
| 6 | |
| 8 | |
| 8 | |
Expected return on plan assets |
|
| (238) |
|
| (230) |
|
| (228) |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| |
| (168) | |
| (182) | |
| (174) | |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
Amortization of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Prior service credit |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| (8) |
|
| (11) |
|
| (7) |
| |
| — | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (13) | |
| (11) | |
| (11) | |
Actuarial (gain) loss |
|
| 60 |
|
| 93 |
|
| 46 |
|
| 8 |
|
| 9 |
|
| 4 |
|
| (10) |
|
| (7) |
|
| (8) |
| |
| 35 | |
| 55 | |
| 69 | |
| 5 | |
| 6 | |
| 8 | |
| (8) | |
| (12) | |
| (10) | |
Other |
|
| 3 |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
|
| — |
| | | 1 | |
| — | |
| — | |
| — | |
| — | |
| — | |
| (1) | |
| — | |
| — | |
Net periodic benefit cost |
| $ | 70 |
| $ | 79 |
| $ | 35 |
| $ | 24 |
| $ | 24 |
| $ | 20 |
| $ | 1 |
| $ | 1 |
| $ | 9 |
| | $ | (15) | | $ | 29 | | $ | 54 | | $ | 15 | | $ | 19 | | $ | 22 | | $ | (9) | | $ | (9) | | $ | (6) | |
The following table provides the projected benefit obligation (“PBO”), and the fair value of plan assets for those company-sponsored pension plans with projected benefit obligations in excess of plan assets.
| | | | | | | | | | | | | |
| | Qualified Plans | | Non-Qualified Plans |
| ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 |
| ||||
PBO at end of fiscal year | | $ | 3,415 | | $ | 3,272 | | $ | 351 | | $ | 328 | |
Fair value of plan assets at end of year | | $ | 3,349 | | $ | 3,157 | | $ | — | | $ | — | |
The following table provides the accumulated benefit obligation (“ABO”) and the fair value of plan assets for all Company-sponsoredthose company-sponsored pension plans.plans with accumulated benefit obligations in excess of plan assets.
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||
|
| Qualified Plans |
| Non-Qualified Plans |
| ||||||||||||||||||||
|
| 2016 |
| 2015 |
| 2016 |
| 2015 |
| ||||||||||||||||
PBO at end of fiscal year |
| $ | 4,140 |
| $ | 3,922 |
| $ | 316 |
| $ | 290 |
| ||||||||||||
| | | | | | | | | | | | | |||||||||||||
| | Qualified Plans | | Non-Qualified Plans | |||||||||||||||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | |||||||||||||||||
ABO at end of fiscal year |
| $ | 3,997 |
| $ | 3,786 |
| $ | 297 |
| $ | 280 |
| | $ | 3,415 | | $ | 3,271 | | $ | 351 | | $ | 328 |
Fair value of plan assets at end of year |
| $ | 3,138 |
| $ | 3,045 |
| $ | — |
| $ | — |
| | $ | 3,349 | | $ | 3,157 | | $ | — | | $ | — |
74
The following table provides information about the Company’s estimated future benefit payments.
| | | | | | | |
|
| Pension |
| Other |
| ||
| | Benefits | | Benefits |
| ||
2021 | | $ | 224 | | $ | 11 | |
2022 | | $ | 231 | | $ | 12 | |
2023 | | $ | 219 | | $ | 12 | |
2024 | | $ | 223 | | $ | 12 | |
2025 | | $ | 226 | | $ | 12 | |
2026 —2030 | | $ | 1,124 | | $ | 57 | |
|
|
|
|
|
|
|
|
|
| Pension |
| Other |
| ||
|
| Benefits |
| Benefits |
| ||
2017 |
| $ | 246 |
| $ | 14 |
|
2018 |
| $ | 242 |
| $ | 14 |
|
2019 |
| $ | 253 |
| $ | 15 |
|
2020 |
| $ | 265 |
| $ | 17 |
|
2021 |
| $ | 276 |
| $ | 18 |
|
2022 —2026 |
| $ | 1,522 |
| $ | 104 |
|
82
The following table provides information about the weighted average target and actual pension plan asset allocations.allocations as of January 30, 2021.
|
|
|
|
|
|
|
| |||||||
|
|
|
| Actual |
| |||||||||
|
| Target allocations |
| Allocations |
| |||||||||
|
| 2016 |
| 2016 |
| 2015 |
| |||||||
| | | | | | | | |||||||
| | | | Actual |
| |||||||||
| | Target allocations | | Allocations |
| |||||||||
|
| 2020 |
| 2020 |
| 2019 |
| |||||||
Pension plan asset allocation |
|
|
|
|
|
|
| | | | | | | |
Global equity securities |
| 13.2 | % | 14.3 | % | 14.9 | % |
| 2.0 | % | 6.0 | % | 4.3 | % |
Emerging market equity securities |
| 5.8 |
| 6.5 |
| 5.2 |
|
| 1.0 | | 1.6 | | 2.3 | |
Investment grade debt securities |
| 8.0 |
| 12.0 |
| 11.3 |
|
| 80.0 | | 77.9 | | 77.8 | |
High yield debt securities |
| 14.0 |
| 14.2 |
| 11.9 |
|
| 4.0 | | 2.7 | | 2.9 | |
Private equity |
| 6.0 |
| 7.5 |
| 7.4 |
|
| 10.0 | | 8.1 | | 8.1 | |
Hedge funds |
| 39.0 |
| 35.2 |
| 36.0 |
|
| — | | 2.2 | | 2.8 | |
Real estate |
| 3.0 |
| 2.8 |
| 3.9 |
|
| 3.0 | | 1.5 | | 1.8 | |
Other |
| 11.0 |
| 7.5 |
| 9.4 |
| |||||||
|
|
|
|
|
|
|
| |||||||
| | | | | | | | |||||||
Total |
| 100.0 | % | 100.0 | % | 100.0 | % |
| 100.0 | % | 100.0 | % | 100.0 | % |
Investment objectives, policies and strategies are set by the Pension InvestmentRetirement Benefit Plan Management Committee (the “Committee”). The primary objectives include holding and investing the assets and distributing benefits to participants and beneficiaries of the pension plans. Investment objectives have been established based on a comprehensive review of the capital markets and each underlying plan’s current and projected financial requirements. The time horizon of the investment objectives is long-term in nature and plan assets are managed on a going-concern basis.
Investment objectives and guidelines specifically applicable to each manager of assets are established and reviewed annually. Derivative instruments may be used for specified purposes, including rebalancing exposures to certain asset classes. Any use of derivative instruments for a purpose or in a manner not specifically authorized is prohibited, unless approved in advance by the Committee.
The current target allocations shown represent the 2016 targets thatfor 2020 were established in 2015. The Company2020 in conjunction with the continuation of the Company’s transition to a LDI strategy, which began in 2017. A LDI strategy focuses on maintaining a close to fully-funded status over the long-term with minimal funded status risk. This is achieved by investing more of the plan assets in fixed income instruments to more closely match the duration of the plan liability. This LDI strategy will rebalance by liquidating assets whose allocation materially exceeds target, if possible, and investingbe phased in assets whose allocation is materially below target. If markets are illiquid,over time as the Company may not beis able to rebalance totransition out of illiquid investments. During this transition, the Company’s target quickly. To maintain actual asset allocations consistent with target allocations, assets are reallocated or rebalanced periodically. In addition, cashallocation will change by increasing the Company’s fixed income instruments. Cash flow from employer contributions and redemption of plan assets to fund participant benefit payments can be used to fund underweight asset classes and divest overweight asset classes, as appropriate. The Company expects that cash flow will be sufficient to meet most rebalancing needs.
The Company did not make any contributions to its company-sponsored pension plans in 2020 and the Company is not required to make any contributions to the Qualified Plansthese plans in 2017.2021. If the Company does make any contributions in 2017,2021, the Company expects these contributions will decrease its required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate the pension obligations, and future changes in legislation, will determine the amounts of any contributions. The Company expects 2017 expense2021 net periodic benefit costs for Company-sponsoredcompany-sponsored pension plans to be approximately $110. ($45).
83
Assumed health care cost trend rates have a significant effect on the amounts reported for the health care plans. The Company used a 6.10%5.50% initial health care cost trend rate, which is assumed to decrease on a linear basis to a 4.50%
75
ultimate health care cost trend rate in 2037, to determine its expense. A one-percentage-point change in the assumed health care cost trend rates would have the following effects:
|
|
|
|
|
|
|
|
|
| 1% Point |
| 1% Point |
| ||
|
| Increase |
| Decrease |
| ||
Effect on total of service and interest cost components |
| $ | 2 |
| $ | (2) |
|
Effect on postretirement benefit obligation |
| $ | 24 |
| $ | (21) |
|
The following tables, which both reflect the adoption of Accounting Standards Update (“ASU”) 2015-07 (see Note 17), set forth by level within the fair value hierarchy, present the Qualified Plans’ assets at fair value as of January 28, 201730, 2021 and January 30, 2016:February 1, 2020:
Assets at Fair Value as of January 28, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Quoted Prices in |
|
|
|
| Significant |
|
|
|
|
|
| |||
|
| Active Markets for |
| Significant Other |
| Unobservable |
| Assets |
|
|
|
| ||||
|
| Identical Assets |
| Observable Inputs |
| Inputs |
| Measured |
|
|
|
| ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||
Cash and cash equivalents |
| $ | 183 |
| $ | — |
| $ | — |
| $ | — |
| $ | 183 |
|
Corporate Stocks |
|
| 240 |
|
| — |
|
| — |
|
| — |
|
| 240 |
|
Corporate Bonds |
|
| — |
|
| 57 |
|
| — |
|
| — |
|
| 57 |
|
U.S. Government Securities |
|
| — |
|
| 37 |
|
| — |
|
| — |
|
| 37 |
|
Mutual Funds/Collective Trusts |
|
| 122 |
|
| 4 |
|
| — |
|
| 827 |
|
| 953 |
|
Partnerships/Joint Ventures |
|
| — |
|
| 156 |
|
| — |
|
| — |
|
| 156 |
|
Hedge Funds |
|
| — |
|
| — |
|
| 67 |
|
| 1,034 |
|
| 1,101 |
|
Private Equity |
|
| — |
|
| — |
|
| — |
|
| 245 |
|
| 245 |
|
Real Estate |
|
| — |
|
| — |
|
| 65 |
|
| 22 |
|
| 87 |
|
Other |
|
| — |
|
| 35 |
|
| — |
|
| 44 |
|
| 79 |
|
Total |
| $ | 545 |
| $ | 289 |
| $ | 132 |
| $ | 2,172 |
| $ | 3,138 |
|
Assets at Fair Value as of January 30, 20162021
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Quoted Prices in |
|
|
|
| Significant |
|
|
|
|
|
| |||||||||||||||||||
|
| Active Markets for |
| Significant Other |
| Unobservable |
| Assets |
|
|
|
| ||||||||||||||||||||
|
| Identical Assets |
| Observable Inputs |
| Inputs |
| Measured |
|
|
|
| ||||||||||||||||||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | Quoted Prices in | | | | | Significant | | | | | |
| |||||||||||||||||||
| | Active Markets for | | Significant Other | | Unobservable | | Assets | | | |
| ||||||||||||||||||||
| | Identical Assets | | Observable Inputs | | Inputs | | Measured | | | |
| ||||||||||||||||||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||||||||||||||||||
Cash and cash equivalents |
| $ | 27 |
| $ | — |
| $ | — |
| $ | — |
| $ | 27 |
| | $ | 120 | | $ | — | | $ | — | | $ | — | | $ | 120 | |
Corporate Stocks |
|
| 231 |
|
| — |
|
| — |
|
| — |
|
| 231 |
| |
| 89 | |
| — | |
| — | |
| — | |
| 89 | |
Corporate Bonds |
|
| — |
|
| 76 |
|
| — |
|
| — |
|
| 76 |
| |
| — | |
| 1,240 | |
| — | |
| — | |
| 1,240 | |
U.S. Government Securities |
|
| — |
|
| 75 |
|
| — |
|
| — |
|
| 75 |
| |
| — | |
| 225 | |
| — | |
| — | |
| 225 | |
Mutual Funds/Collective Trusts |
|
| 89 |
|
| 5 |
|
| — |
|
| 896 |
|
| 990 |
| ||||||||||||||||
Partnerships/Joint Ventures |
|
| — |
|
| 118 |
|
| — |
|
| — |
|
| 118 |
| ||||||||||||||||
Mutual Funds | |
| 329 | |
| — | |
| — | |
| — | |
| 329 | | ||||||||||||||||
Collective Trusts | |
| — | |
| — | |
| — | |
| 1,014 | |
| 1,014 | | ||||||||||||||||
Hedge Funds |
|
| — |
|
| — |
|
| 61 |
|
| 1,043 |
|
| 1,104 |
| |
| — | |
| — | |
| 35 | |
| 46 | |
| 81 | |
Private Equity |
|
| — |
|
| — |
|
| — |
|
| 225 |
|
| 225 |
| |
| — | |
| — | |
| — | |
| 289 | |
| 289 | |
Real Estate |
|
| — |
|
| — |
|
| 79 |
|
| 24 |
|
| 103 |
| |
| — | |
| — | |
| 39 | |
| 16 | |
| 55 | |
Other |
|
| — |
|
| 47 |
|
| — |
|
| 49 |
|
| 96 |
| |
| — | |
| 127 | |
| — | |
| — | |
| 127 | |
Total |
| $ | 347 |
| $ | 321 |
| $ | 140 |
| $ | 2,237 |
| $ | 3,045 |
| | $ | 538 | | $ | 1,592 | | $ | 74 | | $ | 1,365 | | $ | 3,569 | |
Assets at Fair Value as of February 1, 2020
| | | | | | | | | | | | | | | | |
| | Quoted Prices in | | | | | Significant | | | | | |
| |||
| | Active Markets for | | Significant Other | | Unobservable | | Assets | | | |
| ||||
| | Identical Assets | | Observable Inputs | | Inputs | | Measured | | | |
| ||||
|
| (Level 1) |
| (Level 2) |
| (Level 3) |
| at NAV |
| Total |
| |||||
Cash and cash equivalents | | $ | 186 | | $ | — | | $ | — | | $ | — | | $ | 186 | |
Corporate Stocks | |
| 78 | |
| — | |
| — | |
| — | |
| 78 | |
Corporate Bonds | |
| — | |
| 1,157 | |
| — | |
| — | |
| 1,157 | |
U.S. Government Securities | |
| — | |
| 194 | |
| — | |
| — | |
| 194 | |
Mutual Funds | |
| 305 | |
| — | |
| — | |
| — | |
| 305 | |
Collective Trusts | |
| — | |
| — | |
| — | |
| 945 | |
| 945 | |
Hedge Funds | |
| — | |
| — | |
| 43 | |
| 51 | |
| 94 | |
Private Equity | |
| — | |
| — | |
| — | |
| 275 | |
| 275 | |
Real Estate | |
| — | |
| — | |
| 43 | |
| 17 | |
| 60 | |
Other | |
| — | |
| 128 | |
| — | |
| — | |
| 128 | |
Total | | $ | 569 | | $ | 1,479 | | $ | 86 | | $ | 1,288 | | $ | 3,422 | |
76
Certain investments that are measured at fair value using the NAV per share (or its equivalent) have not been classified in the fair value hierarchy. The fair value amounts presented for these investments in the preceding tables are intended to permit reconciliation of the fair value hierarchies to the total fair value of plan assets.
84
For measurements using significant unobservable inputs (Level 3) during 20162020 and 2015,2019, a reconciliation of the beginning and ending balances is as follows:
| | | | | | |
|
| Hedge Funds |
| Real Estate | ||
Ending balance, February 2, 2019 | | $ | 49 | | $ | 67 |
Contributions into Fund | |
| 2 | |
| 3 |
Realized gains | |
| (2) | |
| 23 |
Unrealized losses | |
| — | |
| (17) |
Distributions | |
| (11) | |
| (33) |
Other | | | 5 | |
| — |
| | | | | | |
Ending balance, February 1, 2020 | |
| 43 | |
| 43 |
Contributions into Fund | |
| 2 | |
| 1 |
Realized gains | |
| — | |
| 4 |
Unrealized gains | |
| — | |
| (6) |
Distributions | |
| (10) | |
| (3) |
| | | | | | |
Ending balance, January 30, 2021 | | $ | 35 | | $ | 39 |
|
|
|
|
|
|
|
|
| Hedge Funds |
| Real Estate | ||
Ending balance, January 31, 2015 |
| $ | 56 |
| $ | 84 |
Contributions into Fund |
|
| 13 |
|
| 9 |
Realized gains |
|
| — |
|
| 5 |
Unrealized (losses) gains |
|
| (1) |
|
| 2 |
Distributions |
|
| (7) |
|
| (21) |
|
|
|
|
|
|
|
Ending balance, January 30, 2016 |
|
| 61 |
|
| 79 |
Contributions into Fund |
|
| 10 |
|
| 9 |
Realized gains |
|
| 1 |
|
| 12 |
Unrealized losses |
|
| (1) |
|
| (2) |
Distributions |
|
| (4) |
|
| (32) |
Other |
|
| — |
|
| (1) |
|
|
|
|
|
|
|
Ending balance, January 28, 2017 |
| $ | 67 |
| $ | 65 |
See Note 8 for a discussion of the levels of the fair value hierarchy. The assets’ fair value measurement level above is based on the lowest level of any input that is significant to the fair value measurement.
The following is a description of the valuation methods used for the Qualified Plans’ assets measured at fair value in the above tables:
| Cash and cash equivalents: The carrying value approximates fair value. |
| Corporate Stocks: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded. |
| Corporate Bonds: The fair values of these securities are primarily based on observable market quotations for similar bonds, valued at the closing price reported on the active market on which the individual securities are traded. When such quoted prices are not available, the bonds are valued using a discounted cash flow approach using current yields on similar instruments of issuers with similar credit ratings, including adjustments for certain risks that may not be observable, such as credit and liquidity risks. |
| U.S. Government Securities: Certain U.S. Government securities are valued at the closing price reported in the active market in which the security is traded. Other U.S. government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for similar securities, the security is valued under a discounted cash flow approach that maximizes observable inputs, such as current yields of similar instruments, but includes adjustments for certain risks that may not be observable, such as credit and liquidity risks. |
| Mutual Funds: The fair values of these securities are based on observable market quotations for identical assets and are valued at the closing price reported on the active market on which the individual securities are traded. |
| Collective Trusts: The |
85
| ● | Hedge Funds: The |
|
|
77
|
|
| Private Equity: Private Equity investments are valued based on the fair value of the underlying securities within the fund, which include investments both traded on an active market and not traded on an active market. For those investments that are traded on an active market, the values are based on the closing price reported on the active market on which those individual securities are traded. For investments not traded on an active market, or for which a quoted price is not publicly available, a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches, are employed by the fund manager to value investments. Fair values of all investments are adjusted annually, if necessary, based on audits of the private equity fund financial statements; such adjustments are reflected in the fair value of the plan’s assets. |
| Real Estate: Real estate investments include investments in real estate funds managed by a fund manager. These investments are valued using a variety of unobservable valuation methodologies, including discounted cash flow, market multiple and cost valuation approaches. The valuations for these investments are not based on readily observable inputs and are classified as Level 3 investments. Certain other real estate investments are valued using a NAV provided by the manager of each fund. These assets have been valued using NAV as a practical expedient. |
The methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while the Company believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
The Company contributed and expensed $215, $196$294, $264 and $177$263 to employee 401(k) retirement savings accounts in 2016, 20152020, 2019 and 2014,2018, respectively. The 401(k) retirement savings account plans provide to eligible employees both matching contributions and automatic contributions from the Company based on participant contributions, compensation as defined by the plan and length of service.
16.MULTI-EMPLOYER PENSION PLANSIn 2019, the Company approved and implemented a plan to reorganize certain portions of its division management structure. This reorganization increased operational effectiveness and reduced overhead costs while maintaining a high quality customer experience. The Company recorded a charge for severance and related benefits of $80, $61 net of tax, in 2019, which is included in the OG&A caption within the Consolidated Statements of Operations. Of the total charge, $42 was unpaid as of February 1, 2020 and was included in Other Current Liabilities within the Consolidated Balance Sheet and the remaining balance was paid in 2020.
16. | MULTI-EMPLOYER PENSION PLANS |
The Company contributes to various multi-employer pension plans based on obligations arising from collective bargaining agreements. These multi-employer pension 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.
The Company recognizes expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. The Company made cash contributions to these plans of $289 million$619 in 2016, $426 million2020, $461 in 20152019 and $297 million$358 in 2014.2018. The increase in 2020, compared to 2019 and 2018, is primarily due to incremental contributions of $236, $180 net of tax, to multi-employer pension plans, helping stabilize future associate benefits.
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The Company continues to evaluate and address potential exposure to under-funded multi-employer pension plans as it relates to the Company’s associates who are beneficiaries of these plans. These under-fundings are not a liability of the Company. When an opportunity arises that is economically feasible and beneficial to the Company and its associates, the Company may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates’ future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change the Company’s debt profile of the Company as it relates to its credit rating since these off balance sheet commitments are typically considered in the Company’s creditinvestment grade debt rating.
The Company is currently designated as the named fiduciary of the UFCWUnited Food and Commercial Workers (“UFCW”) Consolidated Pension Plan and
78
the International Brotherhood of Teamsters (“IBT”) Consolidated Pension Fund and has sole investment authority over these assets. SignificantDue to opportunities arising, the Company has restructured certain multi-employer pension plans. The significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
| ● | In 2020, certain of the Company’s associates ratified an agreement with certain UFCW local unions to withdraw from the UFCW International Union-Industry Pension Fund (“National Fund”). Due to the ratification of the agreement, the Company incurred a withdrawal liability charge of $962, on a pre-tax basis, to fulfill obligations for past service for associates and retirees in the National Fund. The Company also incurred an additional $27 commitment to a transition reserve in the new variable annuity pension plan. On an after-tax basis, the withdrawal liability and commitment to the transition reserve totaled $754. The current portion of the commitment of $523 is included in “Other current liabilities” and the long-term portion of the commitment of $466 is included in “Other long-term liabilities” in the Company’s Consolidated Balance Sheets. These commitments will be satisfied by payments to the National Fund over the next three years. The long-term portion is included in “Other” within “Changes in operating assets and liabilities net of effects from mergers and disposals of businesses” in the Company’s Consolidated Statements of Cash Flows. |
•In 2016, the Company incurred a charge of $111, $71 (after-tax), due to commitments and withdrawal liabilities arising from the restructuring of certain multi-employer pension plan obligations, of which $28 was contributed to the UFCW Consolidated Pension Plan in 2016.
| ● | In 2019, the Company incurred a $135 charge, $104 net of tax, for obligations related to withdrawal liabilities for certain multi-employer pension plan funds. |
| ● | In 2018, the Company incurred a $155 charge, $121 net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension plan fund. |
•In 2015, the Company contributed $190 to the UFCW Consolidated Pension Plan. The Company had previously accrued $60 of the total contributions at January 31, 2015 and recorded expense for the remaining $130 at the time of payment in 2015.
•In 2014, the Company incurred a charge of $56 (after-tax) related to commitments and withdrawal liabilities associated with the restructuring of pension plan agreements, of which $15 was contributed to the UFCW Consolidated Pension Plan in 2014.
The risks of participating in multi-employer pension plans are different from the risks of participating in single-employer pension plans in the following respects:
a. | Assets contributed to the multi-employer plan by one employer may be used to provide benefits to employees of other participating employers. |
b. | If a participating employer stops contributing to the plan, the unfunded obligations of the plan allocable to such withdrawing employer may be borne by the remaining participating employers. |
c. | If the Company stops participating in some of its multi-employer pension plans, the Company may be required to pay those plans an amount based on its allocable share of the unfunded vested benefits of the plan, referred to as a withdrawal liability. |
The Company’s participation in multi-employer plans is outlined in the following tables. The EIN / Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit pension plan number. The most recent Pension Protection Act Zone Status available in 20162020 and 20152019 is for the plan’s year-end at December 31, 20152019 and December 31, 2014,2018, respectively. Among other factors, generally, plans in the red zone are less than 65 percent funded, plans in the yellow zone are less than 80 percent funded and plans in the green zone are at least 80 percent funded. The FIP/RP Status Pending / Implemented Column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented. Unless otherwise noted, the information for these tables was obtained from the Forms 5500 filed for each plan’s year-end at December 31, 20152019 and December 31, 2014.2018. The multi-employer contributions listed in the table below are the Company’s multi-employer contributions made in fiscal years 2016, 20152020, 2019 and 2014.2018.
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The following table contains information about the Company’s multi-employer pension plans:
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| | | | Pension Protection | | Status | | | | | | | | | | | |
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| | EIN / Pension | | Act Zone Status | | Pending/ | | Multi-Employer Contributions | | Surcharge |
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Pension Fund | | Plan Number | | 2020 | | 2019 | | Implemented | | 2020 | | 2019 | | 2018 | | Imposed (5) |
| |||
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund(1)(2) |
| 95-1939092 - 001 |
| Yellow |
| Yellow |
| Implemented | | $ | 86 | | $ | 75 | | $ | 71 |
| No | |
Desert States Employers & UFCW Unions Pension Plan(1) |
| 84-6277982 - 001 |
| Green |
| Green |
| No | |
| 19 | |
| 19 | |
| 19 |
| No | |
Sound Retirement Trust (formerly Retail Clerks Pension Plan)(1)(3) |
| 91-6069306 – 001 |
| Yellow |
| Yellow |
| Implemented | |
| 29 | |
| 25 | |
| 23 |
| No | |
Rocky Mountain UFCW Unions and Employers Pension Plan(1) |
| 84-6045986 - 001 |
| Green |
| Green |
| No | |
| 28 | |
| 23 | |
| 20 |
| No | |
Oregon Retail Employees Pension Plan(1) |
| 93-6074377 - 001 |
| Green |
| Green |
| No | |
| 9 | |
| 9 | |
| 9 |
| No | |
Bakery and Confectionary Union & Industry International Pension Fund(1) |
| 52-6118572 - 001 |
| Red |
| Red |
| Implemented | |
| 8 | |
| 10 | |
| 11 |
| No | |
Retail Food Employers & UFCW Local 711 Pension(1) |
| 51-6031512 - 001 |
| Yellow |
| Yellow |
| Implemented | |
| 11 | |
| 10 | |
| 10 |
| No | |
United Food & Commercial Workers Intl Union — Industry Pension Fund(1)(4) |
| 51-6055922 - 001 |
| Green |
| Green |
| No | |
| 29 | |
| 32 | |
| 32 |
| No | |
Western Conference of Teamsters Pension Plan |
| 91-6145047 - 001 |
| Green |
| Green |
| No | |
| 35 | |
| 34 | |
| 34 |
| No | |
Central States, Southeast & Southwest Areas Pension Plan |
| 36-6044243 - 001 |
| Red |
| Red |
| Implemented | |
| 12 | |
| — | |
| 18 |
| No | |
UFCW Consolidated Pension Plan(1) |
| 58-6101602 – 001 |
| Green |
| Green |
| No | |
| 321 | |
| 174 | |
| 55 |
| No | |
IBT Consolidated Pension Plan(1)(6) | | 82-2153627 - 001 | | N/A | | N/A | | No | | | 18 | | | 33 | | | 37 | | No | |
Other | | | | | | | | | |
| 14 | |
| 17 | |
| 19 | | | |
Total Contributions | | | | | | | | | | $ | 619 | | $ | 461 | | $ | 358 | | | |
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| FIP/RP |
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| Pension Protection |
| Status |
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| ||
|
| EIN / Pension |
| Act Zone Status |
| Pending/ |
| Multi-Employer Contributions |
| Surcharge |
| |||||||||
Pension Fund |
| Plan Number |
| 2016 |
| 2015 |
| Implemented |
| 2016 |
| 2015 |
| 2014 |
| Imposed(6) |
| |||
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund(1) (2) |
| 95-1939092 - 001 |
| Red |
| Red |
| Implemented |
| $ | 60 |
| $ | 55 |
| $ | 48 |
| No |
|
Desert States Employers & UFCW Unions Pension Plan(1) |
| 84-6277982 - 001 |
| Green |
| Green |
| No |
|
| 18 |
|
| 18 |
|
| 21 |
| No |
|
Sound Retirement Trust (formerly Retail Clerks Pension Plan)(1) (3) |
| 91-6069306 – 001 |
| Red |
| Red |
| Implemented |
|
| 18 |
|
| 17 |
|
| 15 |
| No |
|
Rocky Mountain UFCW Unions and Employers Pension Plan(1) |
| 84-6045986 - 001 |
| Green |
| Green |
| No |
|
| 16 |
|
| 17 |
|
| 17 |
| No |
|
Oregon Retail Employees Pension Plan(1) |
| 93-6074377 - 001 |
| Green |
| Green |
| No |
|
| 8 |
|
| 9 |
|
| 7 |
| No |
|
Bakery and Confectionary Union & Industry International Pension Fund(1) |
| 52-6118572 - 001 |
| Red |
| Red |
| Implemented |
|
| 10 |
|
| 11 |
|
| 11 |
| No |
|
Washington Meat Industry Pension Trust(1) (4) (5) |
| 91-6134141 - 001 |
| Red |
| Red |
| Implemented |
|
| — |
|
| — |
|
| 1 |
| No |
|
Retail Food Employers & UFCW Local 711 Pension(1) |
| 51-6031512 - 001 |
| Red |
| Red |
| Implemented |
|
| 9 |
|
| 9 |
|
| 9 |
| No |
|
Denver Area Meat Cutters and Employers Pension Plan(1) |
| 84-6097461 - 001 |
| Green |
| Green |
| No |
|
| 3 |
|
| 7 |
|
| 8 |
| No |
|
United Food & Commercial Workers Intl Union — Industry Pension Fund(1) (4) |
| 51-6055922 - 001 |
| Green |
| Green |
| No |
|
| 37 |
|
| 35 |
|
| 33 |
| No |
|
Western Conference of Teamsters Pension Plan |
| 91-6145047 - 001 |
| Green |
| Green |
| No |
|
| 33 |
|
| 31 |
|
| 30 |
| No |
|
Central States, Southeast & Southwest Areas Pension Plan |
| 36-6044243 - 001 |
| Red |
| Red |
| Implemented |
|
| 23 |
|
| 16 |
|
| 15 |
| No |
|
UFCW Consolidated Pension Plan(1) |
| 58-6101602 – 001 |
| Green |
| Green |
| No |
|
| 34 |
|
| 190 |
|
| 70 |
| No |
|
Other |
|
|
|
|
|
|
|
|
|
| 20 |
|
| 11 |
|
| 12 |
|
|
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Total Contributions |
|
|
|
|
|
|
|
|
| $ | 289 |
| $ | 426 |
| $ | 297 |
|
|
|
| (1) |
| The |
| (2) |
| The information for this fund was obtained from the Form 5500 filed for the |
| (3) |
| The information for this fund was obtained from the Form 5500 filed for the |
| (4) |
| The information for this fund was obtained from the Form 5500 filed for the |
| (5) |
|
|
| Under the Pension Protection Act, a surcharge may be imposed when employers make contributions under a collective bargaining agreement that is not in compliance with a rehabilitation plan. As of January |
| (6) | The plan was formed after 2006, and therefore is not subject to zone status certifications. |
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The following table describes (a) the expiration date of the Company’s collective bargaining agreements and (b) the expiration date of the Company’s most significant collective bargaining agreements for each of the material multi-employer funds in which the Company participates.
| | | | | | | |
| | Expiration Date | | | | | |
| |
| | | | Most Significant Collective | |
| |
| |
| | Bargaining Agreements(1) | |
Pension Fund |
|
| |||||
| Expiration |
|
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| |||
SO CA UFCW Unions & Food Employers Joint Pension Trust Fund |
|
|
| 2 |
|
| |
UFCW Consolidated Pension Plan |
|
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|
|
| April | |
Desert States Employers & UFCW Unions Pension Plan |
| February 2022 to October |
| 1 |
|
| |
Sound Retirement Trust (formerly Retail Clerks Pension Plan) |
|
|
|
|
| May | |
Rocky Mountain UFCW Unions and Employers Pension Plan |
| January |
| 1 |
| January | |
Oregon Retail Employees Pension Plan (2) |
| August |
| 3 |
| August | |
Bakery and Confectionary Union & Industry International Pension Fund |
|
|
|
|
|
| |
Retail Food Employers & UFCW Local 711 Pension |
|
|
| 1 |
| March | |
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|
| | |||
United Food & Commercial Workers Intl Union — Industry Pension Fund |
|
|
| 2 |
|
| |
Western Conference of Teamsters Pension Plan |
| April |
|
|
| July | |
| | September | | 3 | | September | |
| (1) |
| This column represents the number of significant collective bargaining agreements and their expiration date for each of the Company’s pension funds listed above. For the purposes of this table, the “significant collective bargaining agreements” are the largest based on covered employees that, when aggregated, cover the majority of the employees for which we make multi-employer contributions for the referenced pension fund. |
| (2) |
| Certain collective bargaining agreements for each of these pension funds are operating under an extension. |
The Company held escrow deposits as of January 30, 2021, amounting to $271 due to certain restructuring agreements. These payments are included in “Prepaid and other current assets” in the Company’s Consolidated Balance Sheets.
Based on the most recent information available to it, the Company believes the present value of actuarial accrued liabilities in most of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. 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 it can be reasonably estimated.
The Company also contributes to various other multi-employer benefit plans that provide health and welfare benefits to active and retired participants. Total contributions made by the Company to these other multi-employer health and welfare plans were approximately $1,143$1,262 in 2016, $1,1922020, $1,252 in 20152019 and $1,200$1,282 in 2014.2018.
17. | DISPOSAL OF BUSINESS |
17.RECENTLY ADOPTED ACCOUNTING STANDARDS
In September 2015,On March 13, 2019, the FASB issued ASU 2015-16, “Business Combinations (Topic 805): SimplifyingCompany completed the Accountingsale of its You Technology business to Inmar for Measurement-Period Adjustments.” This amendment eliminatestotal consideration of $565, including $396 of cash and $64 of preferred equity received upon closing. The Company is also entitled to receive other cash payments of $105 over five years. The transaction includes a long-term service agreement for Inmar to provide the requirement to retrospectively account for adjustments made to provisional amounts recognizedCompany digital coupon services. The sale resulted in a business combination. This amendment became effective forgain of $70, $52 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statement of Operations. The Company beginning January 31, 2016,recorded the fair value of the long-term service agreement of $358 in “Other current liabilities” and was adopted prospectively“Other long-term liabilities” in accordance with the standard. The adoption of this amendment did not have an effect on the Company’s Consolidated Balance Sheets orand such amount is being recorded as sales over the 10-year agreement.
On April 26, 2019, the Company completed the sale of its Turkey Hill Dairy business to an affiliate of Peak Rock Capital for total proceeds of $225. The sale resulted in a gain of $106, $80 net of tax, which is included in “Gain on sale of businesses” in the Consolidated Statements of Operations.
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In the secondthird quarter of 2016, the Company adopted ASU 2016-09, “Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting.” This amendment addresses several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards2019, as either equity or liabilities and classification on the statement of cash flows. As a result of the adoption,a portfolio review, the Company decided to divest its interest in Lucky’s Market. The Company recognized $49an impairment charge of excess tax benefits related to share-based payments$238 in its provision for income taxesthe third quarter of 2019, which is included in 2016. These items were historically recordedOG&A in additional paid-in capital. In addition, for 2016, cash flows related to excess tax benefits are classified as anthe Consolidated Statements of Operations. The impairment charge consists of property, plant and equipment of $200, which includes $40 of finance lease assets; goodwill of $19; operating activity. Cash paid on employees’ behalf related to shares withheld for tax purposes is classified as a financing activity. Retrospective applicationlease assets of $11; and other charges of $8. The amount of the cash flow presentation requirements resultedimpairment charge attributable to The Kroger Co. is $131, $100 net of tax, with the remaining amount attributable to the minority interest. Subsequently, the decision was made by Lucky’s Market to file for bankruptcy in increases to both “Net cash provided by operating activities” and “Net cash used by financing activities” of $59 for 2016, $84 for 2015 and $52 for 2014. The Company’s stock compensation expense continues to reflect estimated forfeitures.
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During 2016, the Company adopted ASU 2014-15, “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern (Topic 205)”. This standard requires management to evaluate, for each annual and interim reporting period, whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the Consolidated Financial Statements are issued or are available to be issued. If substantial doubt is raised, additional disclosures around the Company’s plan to alleviate these doubts are required. The adoption of this standard did not have any affect on the Company’s Consolidated Financial Statements.
During 2016, the Company adopted ASU 2015-07, “Fair Value Measurement - Disclosures for Investments in Certain Entities that Calculate Net Asset Value per Share (or Its Equivalent) (Topic 820)”. This standard requiresJanuary 2020, which led the Company to disclosefully write off the value of its investment and deconsolidate Lucky’s Market from the consolidated financial statements. This resulted in an additional non-cash charge of $174, $125 net of tax, in the fourth quarter of 2019, which assets are valued using net asset value as a practical expedient, and endsis included in OG&A in the requirement to classify these assets within the GAAP fair value hierarchy. See Note 15Consolidated Statements of Operations. The amount of the Consolidated Financial Statements for disclosurestotal 2019 charge attributable to The Kroger Co. is $305, $225 net of assets valued using net asset value as a practical expedient.tax. The Company maintains liabilities associated with certain property related guarantees that will result in the Company making payments to settle these over time.
18. | RECENTLY ADOPTED ACCOUNTING STANDARDS |
18.RECENTLY ISSUED ACCOUNTING STANDARDS
In May 2014,On February 4, 2018, the FASB issuedCompany adopted ASU 2014-09, “Revenue from Contracts with Customers (Topic 606)” as amended by several subsequent ASUs, which provides guidance forsuperseded previous revenue recognition. The standard’s core principlerecognition guidance. Topic 606 is a comprehensive new revenue recognition model that requires a company willto recognize revenue when it transfers promised goods orand services are transferred to customersthe customer in an amount that is proportionate to what has been delivered at that point and that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Per ASU 2015-14, “DeferralThe Company adopted the standard using a modified retrospective approach with the adoption primarily involving the evaluation of Effective Date,” this guidancewhether the Company acts as principal or agent in certain vendor arrangements where the purchase and sale of inventory are virtually simultaneous. The Company will be effectivecontinue to record revenue and related costs on a gross basis for the Company in the first quarter of its fiscal year ending February 2, 2019. Earlyarrangements. The adoption is permitted as of the first quarter of the Company’s fiscal year ending February 3, 2018. The Company is currently in the process of evaluating the effect of adoption of this ASU on its Consolidated Financial Statements.
In November 2015, the FASB issued ASU 2015-17, “Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes.” This amendment requires deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position. This guidance will be effective for the Company’s fiscal year ending February 3, 2018. Early adoption is permitted. The implementation of this amendment willstandard did not have ana material effect on the Company’s Consolidated Statements of Operations, and will not have a significant effect on the Company’s Consolidated Balance Sheets.Sheets or Consolidated Statements of Cash Flows.
InOn February 2016,3, 2019, the FASB issuedCompany adopted ASU 2016-02, “Leases”,“Leases,” which provides guidance for the recognition of lease agreements. The standard’s core principleCompany adopted the standard using the modified retrospective approach, which provides a method for recording existing leases at adoption that approximates the results of a full retrospective approach. In addition, the Company elected the transition package of practical expedients permitted within the standard, which allowed it to carry forward the historical lease classification, and applied the transition option which does not require application of the guidance to comparative periods in the year of adoption.
The adoption of the standard resulted in the recognition of operating lease assets and operating lease liabilities of approximately $6,800 and $7,000, respectively, as of February 3, 2019. Included in the measurement of the new lease assets is thatthe reclassification of certain balances including those historically recorded as prepaid or deferred rent and favorable and unfavorable leasehold interests. Several other asset and liability line items in the Consolidated Balance Sheets were also impacted by immaterial amounts. The adoption of this standard also resulted in a companychange in naming convention for leases classified historically as capital leases. These leases are now referred to as finance leases. The adoption of this standard did not materially affect the Company’s consolidated net earnings or cash flows.
In February 2018, the Financial Accounting Standards Board (“FASB”) issued ASU 2018-02, "Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This amendment allows companies to reclassify stranded tax effects resulting from the Tax Act from accumulated other comprehensive income (AOCI) to retained earnings. The Company adopted ASU 2018-02 on February 3, 2019, which resulted in a decrease to AOCI and an increase to accumulated earnings of $146, primarily related to deferred taxes previously recorded for pension and other postretirement benefits and cash flow hedges. The adoption of this standard did not have an effect on the Company’s consolidated results of operations or cash flows.
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In August 2018, the FASB issued ASU 2018-15, “Intangibles – Goodwill and Other – Internal-Use Software: Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That Is a Service Contract.” Under the new standard, implementation costs related to a cloud computing arrangement will now recognize most leases on itsbe deferred or expensed as incurred, in accordance with the existing internal-use software guidance for similar costs. The new standard also prescribes the balance sheet, as lease liabilities with corresponding right-of-use assets. Thisincome statement, and cash flow classification of the capitalized implementation costs and related amortization expense. The Company adopted this guidance will be effective for the Companyon a prospective basis in the first quarter of fiscal year ending February 1, 2020. Early adoption is permitted. The adoptionCapitalized implementation costs of this ASU will result$81, net of accumulated amortization of $2, are included in a significant increase to“Other assets” in the Company’s Consolidated Balance Sheets as of January 30, 2021. The corresponding cash flows related to these arrangements are included in “Net cash provided by operating activities” in the Company’s Consolidated Statements of Cash Flows.
19. | RECENTLY ISSUED ACCOUNTING STANDARDS |
In March 2020, the FASB issued ASU 2020-04, “Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This standard provides optional expedients and exceptions for lease liabilitiesapplying GAAP to certain contract modifications and right-of-use assets,hedging relationships that reference LIBOR or other reference rates expected to be discontinued. This guidance is effective upon issuance and can be applied through December 31, 2022. The Company may elect to apply the amendments for contract modifications by Topic or Industry Subtopic as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020. The Company is currently evaluating the other effects of adoptioneffect of this ASUstandard on the its Consolidated Financial Statements.
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19.20. QUARTERLY DATA (UNAUDITED)
The two tables that follow reflect the unaudited results of operations for 20162020 and 2015.2019.
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| (12 Weeks) |
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| (12 Weeks) |
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| (12 Weeks) |
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| (52 Weeks) |
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| | | | | | | | | | | | | | | | | ||||||||||||||||
| | Quarter | | | |
| ||||||||||||||||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
| Total Year |
| |||||||||||||||||||||
2020 | | (16 Weeks) | | | (12 Weeks) | | | (12 Weeks) | | | (12 Weeks) | | | (52 Weeks) |
| |||||||||||||||||
Sales |
| $ | 34,604 |
| $ | 26,565 |
| $ | 26,557 |
| $ | 27,611 |
| $ | 115,337 |
| | $ | 41,549 | | $ | 30,489 | | $ | 29,723 | | $ | 30,737 | | $ | 132,498 | |
| | | | | | | | | | | | | | | | | ||||||||||||||||
Operating Expenses | | | | | | | | | | | | | | | | | ||||||||||||||||
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
| 26,669 |
|
| 20,697 |
|
| 20,653 |
|
| 21,483 |
|
| 89,502 |
| |
| 31,454 | |
| 23,551 | |
| 22,901 | |
| 23,691 | |
| 101,597 | |
Operating, general and administrative |
|
| 5,779 |
|
| 4,473 |
|
| 4,443 |
|
| 4,483 |
|
| 19,178 |
| |
| 7,671 | |
| 5,297 | |
| 5,194 | |
| 6,338 | |
| 24,500 | |
Rent |
|
| 262 |
|
| 205 |
|
| 199 |
|
| 215 |
|
| 881 |
| |
| 273 | |
| 204 | |
| 205 | |
| 192 | |
| 874 | |
Depreciation and amortization |
|
| 694 |
|
| 525 |
|
| 549 |
|
| 572 |
|
| 2,340 |
| |
| 825 | |
| 617 | |
| 631 | |
| 674 | |
| 2,747 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Operating profit |
|
| 1,200 |
|
| 665 |
|
| 713 |
|
| 858 |
|
| 3,436 |
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Operating profit (loss) | |
| 1,326 | |
| 820 | |
| 792 | |
| (158) | |
| 2,780 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Other income (expense) | | | | | | | | | | | | | | | | | ||||||||||||||||
Interest expense |
|
| 155 |
|
| 116 |
|
| 124 |
|
| 126 |
|
| 522 |
| |
| (174) | |
| (135) | |
| (129) | |
| (106) | |
| (544) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Earnings before income tax expense |
|
| 1,045 |
|
| 549 |
|
| 589 |
|
| 732 |
|
| 2,914 |
| ||||||||||||||||
Income tax expense |
|
| 350 |
|
| 171 |
|
| 206 |
|
| 230 |
|
| 957 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings including noncontrolling interests |
|
| 695 |
|
| 378 |
|
| 383 |
|
| 502 |
|
| 1,957 |
| ||||||||||||||||
Net loss attributable to noncontrolling interests |
|
| (1) |
|
| (5) |
|
| (8) |
|
| (4) |
|
| (18) |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings attributable to The Kroger Co. |
| $ | 696 |
| $ | 383 |
| $ | 391 |
| $ | 506 |
| $ | 1,975 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 0.72 |
| $ | 0.40 |
| $ | 0.41 |
| $ | 0.54 |
| $ | 2.08 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Non-service component of company sponsored pension plan costs | | | 11 | | | 8 | | | 9 | | | 1 | | | 29 | | ||||||||||||||||
Gain on investments | | | 422 | | | 368 | | | 162 | | | 153 | | | 1,105 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings (loss) before income tax expense | |
| 1,585 | |
| 1,061 | |
| 834 | |
| (110) | |
| 3,370 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Income tax expense (benefit) | |
| 373 | |
| 241 | |
| 202 | |
| (34) | |
| 782 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings (loss) including noncontrolling interests | |
| 1,212 | |
| 820 | |
| 632 | |
| (76) | |
| 2,588 | | ||||||||||||||||
Net income attributable to noncontrolling interests | |
| — | |
| 1 | |
| 1 | |
| 1 | |
| 3 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings (loss) attributable to The Kroger Co. | | $ | 1,212 | | $ | 819 | | $ | 631 | | $ | (77) | | $ | 2,585 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings (loss) attributable to The Kroger Co. per basic common share | | $ | 1.53 | | $ | 1.04 | | $ | 0.81 | | $ | (0.10) | | $ | 3.31 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Average number of shares used in basic calculation |
|
| 954 |
|
| 943 |
|
| 940 |
|
| 929 |
|
| 942 |
| |
| 780 | |
| 777 | |
| 772 | |
| 761 | |
| 773 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.71 |
| $ | 0.40 |
| $ | 0.41 |
| $ | 0.53 |
| $ | 2.05 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings (loss) attributable to The Kroger Co. per diluted common share | | $ | 1.52 | | $ | 1.03 | | $ | 0.80 | | $ | (0.10) | | $ | 3.27 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Average number of shares used in diluted calculation |
|
| 966 |
|
| 959 |
|
| 953 |
|
| 943 |
|
| 958 |
| |
| 788 | |
| 786 | |
| 780 | |
| 761 | |
| 781 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Dividends declared per common share |
| $ | 0.105 |
| $ | 0.120 |
| $ | 0.120 |
| $ | 0.120 |
| $ | 0.465 |
| | $ | 0.16 | | $ | 0.18 | | $ | 0.18 | | $ | 0.18 | | $ | 0.70 | |
Annual amounts may not sum due to rounding.
83
Net earnings for the first quarter of 2020 include charges to OG&A of $60, $44 net of tax, for the revaluation of Home Chef contingent consideration and $38, $28 net of tax, for transformation costs and gains in other income (expense) of $422, $312 net of tax, for the gain on investments.
In
Net earnings for the second quarter of 2016, the Company incurred a $111 charge2020 include charges to OG&A expensesof $25, $19 net of tax, for the revaluation of Home Chef contingent consideration and $29, $21 net of tax, for transformation costs and a gain in other income (expense) of $368, $278 net of tax, for the gain on investments.
92
Net earnings for the third quarter of 2020 include charges to OG&A of $24, $17 net of tax, for the revaluation of Home Chef contingent consideration and $33, $24 net of tax, for transformation costs and a gain in other income (expense) of $162, $115 net of tax, for the gain on investments.
Net earnings for the fourth quarter of 2020 include charges to OG&A of $989, $754 net of tax, for commitments and withdrawal liabilities associated with the restructuring ofto certain multi-employer pension plan agreements.funds, $80, $61 net of tax, for the revaluation of Home Chef contingent consideration and $11, $8 net of tax, for transformation costs and a gain in other income (expense) of $153, $116 net of tax, for the gain on investments.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
|
| Quarter |
|
|
|
| ||||||||||||||||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
| Total Year |
| |||||||||||||||||||||
2015 |
| (16 Weeks) |
| (12 Weeks) |
| (12 Weeks) |
| (12 Weeks) |
| (52 Weeks) |
| |||||||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
| | Quarter | | | |
| ||||||||||||||||||||||||||
|
| First |
| Second |
| Third |
| Fourth |
| Total Year |
| |||||||||||||||||||||
2019 | | (16 Weeks) | | (12 Weeks) | | (12 Weeks) | | (12 Weeks) | | (52 Weeks) |
| |||||||||||||||||||||
Sales |
| $ | 33,051 |
| $ | 25,539 |
| $ | 25,075 |
| $ | 26,165 |
| $ | 109,830 |
| | $ | 37,251 | | $ | 28,168 | | $ | 27,974 | | $ | 28,893 | | $ | 122,286 | |
| | | | | | | | | | | | | | | | | ||||||||||||||||
Operating Expenses | | | | | | | | | | | | | | | | | ||||||||||||||||
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below |
|
| 25,760 |
|
| 20,065 |
|
| 19,478 |
|
| 20,193 |
|
| 85,496 |
| |
| 28,983 | |
| 22,007 | |
| 21,798 | |
| 22,507 | |
| 95,294 | |
Operating, general and administrative |
|
| 5,354 |
|
| 4,068 |
|
| 4,169 |
|
| 4,355 |
|
| 17,946 |
| |
| 6,314 | |
| 4,811 | |
| 5,097 | |
| 4,985 | |
| 21,208 | |
Rent |
|
| 215 |
|
| 155 |
|
| 172 |
|
| 181 |
|
| 723 |
| |
| 274 | |
| 200 | |
| 201 | |
| 209 | |
| 884 | |
Depreciation and amortization |
|
| 620 |
|
| 477 |
|
| 484 |
|
| 508 |
|
| 2,089 |
| |
| 779 | |
| 591 | |
| 624 | |
| 655 | |
| 2,649 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Operating profit |
|
| 1,102 |
|
| 774 |
|
| 772 |
|
| 928 |
|
| 3,576 |
| |
| 901 | |
| 559 | |
| 254 | |
| 537 | |
| 2,251 | |
| | | | | | | | | | | | | | | | | ||||||||||||||||
Other income (expense) | | | | | | | | | | | | | | | | | ||||||||||||||||
Interest expense |
|
| 148 |
|
| 114 |
|
| 107 |
|
| 113 |
|
| 482 |
| |
| (197) | |
| (130) | |
| (137) | |
| (140) | |
| (603) | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Earnings before income tax expense |
|
| 954 |
|
| 660 |
|
| 665 |
|
| 815 |
|
| 3,094 |
| ||||||||||||||||
Non-service component of company sponsored pension plan costs | | | 3 | | | (4) | | | (1) | | | 2 | | | — | | ||||||||||||||||
Gain (loss) on investments | | | 106 | | | (45) | | | 106 | | | (9) | | | 157 | | ||||||||||||||||
Gain on sale of business | | | 176 | | | — | | | — | | | — | | | 176 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings before income tax expense | |
| 989 | |
| 380 | |
| 222 | |
| 390 | |
| 1,981 | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Income tax expense |
|
| 330 |
|
| 227 |
|
| 238 |
|
| 250 |
|
| 1,045 |
| |
| 226 | |
| 93 | |
| 79 | |
| 71 | |
| 469 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings including noncontrolling interests |
|
| 624 |
|
| 433 |
|
| 427 |
|
| 565 |
|
| 2,049 |
| |
| 763 | |
| 287 | |
| 143 | |
| 319 | |
| 1,512 | |
Net earnings (loss) attributable to noncontrolling interests |
|
| 5 |
|
| — |
|
| (1) |
|
| 6 |
|
| 10 |
| ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
Net loss attributable to noncontrolling interests | |
| (9) | |
| (10) | |
| (120) | |
| (8) | |
| (147) | | ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings attributable to The Kroger Co. |
| $ | 619 |
| $ | 433 |
| $ | 428 |
| $ | 559 |
| $ | 2,039 |
| | $ | 772 | | $ | 297 | | $ | 263 | | $ | 327 | | $ | 1,659 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings attributable to The Kroger Co. per basic common share |
| $ | 0.63 |
| $ | 0.44 |
| $ | 0.44 |
| $ | 0.57 |
| $ | 2.09 |
| | $ | 0.96 | | $ | 0.37 | | $ | 0.32 | | $ | 0.40 | | $ | 2.05 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Average number of shares used in basic calculation |
|
| 969 |
|
| 963 |
|
| 965 |
|
| 966 |
|
| 966 |
| |
| 798 | |
| 800 | |
| 802 | |
| 797 | |
| 799 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Net earnings attributable to The Kroger Co. per diluted common share |
| $ | 0.62 |
| $ | 0.44 |
| $ | 0.43 |
| $ | 0.57 |
| $ | 2.06 |
| | $ | 0.95 | | $ | 0.37 | | $ | 0.32 | | $ | 0.40 | | $ | 2.04 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Average number of shares used in diluted calculation |
|
| 983 |
|
| 977 |
|
| 979 |
|
| 980 |
|
| 980 |
| |
| 805 | |
| 805 | |
| 807 | |
| 804 | |
| 805 | |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||
| | | | | | | | | | | | | | | | | ||||||||||||||||
Dividends declared per common share |
| $ | 0.093 |
| $ | 0.105 |
| $ | 0.105 |
| $ | 0.105 |
| $ | 0.408 |
| | $ | 0.14 | | $ | 0.16 | | $ | 0.16 | | $ | 0.16 | | $ | 0.62 | |
Annual amounts may not sum due to rounding.
93
Net earnings for the first quarter of 2019 include charges to OG&A expenses of $59, $44 net of tax, for obligations related to withdrawal liabilities for certain local unions of the Central States multi-employer pension fund and a reduction to OG&A of $24, $18 net of tax, for the revaluation of Home Chef contingent consideration and gains in other income of $106, $80 net of tax, related to the sale of Turkey Hill Dairy, $70, $52 net of tax, related to the sale of You Technology and $106, $80 net of tax, for the mark to market gain on Ocado.
In
Net earnings for the second quarter of 2019 include charges to OG&A of $27, $22 net of tax, for obligations related to withdrawal liabilities for a certain multi-employer pension fund and $2, $2 net of tax, for the revaluation of Home Chef contingent consideration, and a charge in other income (expense) of $45, $36 net of tax, for the mark to market loss on Ocado securities.
Net earnings for the third quarter of 2015, the Company incurred2019 include a $80 charge to OG&A expensesof $45, $35 net of tax, for contributionsobligations related to withdrawal liabilities for a certain multi-employer pension fund, $80, $61 net of tax, for a severance charge and related benefits, $238 including $131 attributable to the UFCW Consolidated Pension Plan.Kroger Co., $100 net of tax, for impairment of Lucky’s Market and $4, $3 net of tax, for the revaluation of Home Chef contingent consideration and gain in other income of $106, $81 net of tax, for the mark to market gain on Ocado securities.
InNet earnings for the fourth quarter of 2015, the Company incurred a $30 charge2019 include charges to OG&A expensesof $4, $3 net of tax, for contributionsobligations related to the UFCW Consolidated Pension Plan.
20.SUBSEQUENT EVENT
In 2016, the Company announced a Voluntary Retirement Offering (“VRO”) for certain non-store associates. Approximately 1,300 associates irrevocably accepted the VRO in early March 2017. The Company anticipates recognizing a VRO charge of approximately $180, pre-tax, in the first quarter of 2017.
As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds. Two locations have initiatedmulti-employer pension funds, $174, $125 net of tax, for deconsolidation and impairment of Lucky’s Market, $52, $37 net of tax, for transformation costs, primarily including 35 planned store closures and a withdrawal process,reduction to OG&A of $51, $36 net of tax, for the revaluation of Home Chef contingent consideration and a loss in other income (expense) of $9, $6 net of tax, for the first quarter of 2017, resulting in an estimated withdrawal liability of less than $100, after-tax.mark to market loss on Ocado securities.
84
94
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
ITEM 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE.
None.
ITEM 9A. | EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES. |
ITEM 9A.CONTROLS AND PROCEDURES.
As of January 28, 2017,30, 2021, our Chief Executive Officer and Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated the Company’s disclosure controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that the Company’s disclosure controls and procedures were effective as of January 28, 2017.30, 2021.
CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING
There was no change in our internal control over financial reporting during the fiscal quarter ended January 28, 201730, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting for the Company. With the participation of the Chief Executive Officer and the Chief Financial Officer, our management conducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework and criteria established in Internal Control — Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission. Our management excluded Modern HC Holdings, Inc. (“ModernHEALTH”) from its assessment of internal control over financial reporting, as of January 28, 2017, because it was acquired in a purchase business combination on September 2, 2016. ModernHEALTH is a wholly-owned subsidiary whose total assets and total revenues represent 1% and less than 1%, respectively, of the related Consolidated Financial Statements amounts as of and for the year ended January 28, 2017. Based on the evaluation, management has concluded that the Company’s internal control over financial reporting was effective as of January 28, 2017.30, 2021.
The effectiveness of the Company’s internal control over financial reporting as of January 28, 2017,30, 2021, has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report, which can be found in Item 8 of this Form 10-K.
ITEM 9B. | OTHER INFORMATION. |
ITEM 9B.OTHER INFORMATION.
None.
85
95
PART III
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
ITEM 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.Our board of directors has adopted The Kroger Co. Policy on Business Ethics, applicable to all officers, employees and directors, including Kroger’s principal executive, financial and accounting officers. The Policy on Business Ethics is available on our website at ir.kroger.com under Investors – Governance – Policy on Business Ethics. A copy of the Code of Ethics is available in print free of charge to any shareholder who requests a copy. Shareholders may make a written request to Kroger’s Secretary at our executive offices at 1014 Vine Street, Cincinnati, Ohio 45202. We intend to satisfy the disclosure requirement regarding any amendment to, or a waiver from, a provision of the Policy on Business Ethics for our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, by posting such information on our website.
The information required by this Item 10 with respect to executive officers is included within Item 1 in Part I of this Annual Report on Form 10-K under the caption “Information about our Executive Officers.” The information required by this Item not otherwise set forth belowin Part I above or in this Item 10 of Part III is set forth under the headings Election of Directors, Information Concerning the Board of Directors —Directors- Committees of the Board, Information Concerning the Board of Directors —Directors- Audit Committee Information Concerning the Board of Directors — Code of Ethics and SectionDelinquent 16(a) Beneficial Ownership Reporting ComplianceReports in the definitive proxy statement to be filed by the Company with the Securities and Exchange Commission before May 26, 2017within 120 days after the end of the fiscal year 2020 (the “2017“2021 proxy statement”) and is hereby incorporated by reference into this Form 10-K.
EXECUTIVE OFFICERS OF THE COMPANY
The following is a list of the names and ages of the executive officers and the positions held by each such person. Except as otherwise noted, each person has held office for at least five years. Each officer will hold office at the discretion of the Board for the ensuing year until removed or replaced.
ITEM 11. | ||||
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EXECUTIVE COMPENSATION. |
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ITEM 11.EXECUTIVE COMPENSATION.
The information required by this Item is set forth in the sections entitled Compensation Discussion and Analysis, Compensation Committee Report, and Compensation Tables in the 20172021 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The following table provides information regarding shares outstanding and available for issuance under our existing equity compensation plans.
Equity Compensation Plan Information
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| (a) |
| (b) |
| (c) |
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| | | | | | | Number of securities |
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| | | | | | | remaining available for future |
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| | Number of securities to | | Weighted-average | | issuance under equity |
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| | be issued upon exercise | | exercise price of | | compensation plans |
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| | of outstanding options, | | outstanding options, | | (excluding securities |
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Plan Category | | warrants and rights(1) | | warrants and rights(1) | | reflected in column (a)) |
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Equity compensation plans approved by security holders |
| 30,516,238 | | $ | 26.65 |
| 33,857,862 | |
Equity compensation plans not approved by security holders |
| — | | $ | — |
| — | |
Total |
| 30,516,238 | | $ | 26.65 |
| 33,857,862 | |
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| Number of securities |
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| remaining for future |
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| Number of securities to |
| Weighted-average |
| issuance under equity |
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| be issued upon exercise |
| exercise price of |
| compensation plans |
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| of outstanding options, |
| outstanding options, |
| (excluding securities |
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Plan Category |
| warrants and rights (1) |
| warrants and rights (1) |
| reflected in column (a)) |
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Equity compensation plans approved by security holders |
| 35,572,478 |
| $ | 21.32 |
| 50,044,668 |
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Equity compensation plans not approved by security holders |
| — |
| $ | — |
| — |
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Total |
| 35,572,478 |
| $ | 21.32 |
| 50,044,668 |
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(1)The total number of securities reported includes the maximum number of common shares, 3,693,198, that may be issued under performance units granted under our long-term incentive plans. The nature of the awards is more particularly described in the Compensation Discussion and Analysis section of the definitive 2021 proxy statement and is hereby incorporated by reference into this Form 10-K. The weighted-average exercise price in column (b) does not take these performance unit awards into account. Based on historical data, or in the case of the awards made in 2018 through 2020 and earned in 2020 the actual payout percentage, our best estimate of the number of common shares that will be issued under the performance unit grants is approximately 5,052,484.
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The remainder of the information required by this Item is set forth in the section entitled Beneficial Ownership of Common Stock in the 20172021 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. |
ITEM 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.
This information required by this Item is set forth in the sections entitled Related Person Transactions and Information Concerning the Board of Directors-Independence in the 20172021 proxy statement and is hereby incorporated by reference into this Form 10-K.
ITEM 14. | PRINCIPAL ACCOUNTING FEES AND SERVICES. |
ITEM 14.PRINCIPAL ACCOUNTING FEES AND SERVICES.
The information required by this Item is set forth in the section entitled Ratification of the ApppointmentAppointment of Kroger’s Independent Auditor in the 20172021 proxy statement and is hereby incorporated by reference into this Form 10-K.
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ITEM 15. | EXHIBITS, FINANCIAL STATEMENT SCHEDULES. |
(a)1. |
| Financial Statements: |
| | Report of Independent Registered Public Accounting Firm |
| | Consolidated Balance Sheets as of January |
| | Consolidated Statements of Operations for the years ended January |
| | Consolidated Statements of Comprehensive Income for the years ended January Consolidated Statements of Cash Flows for the years ended January |
| | Consolidated Statement of Changes in Shareholders’ Equity for the years ended January |
| | Notes to Consolidated Financial Statements |
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(a)2. | | Financial Statement Schedules: |
| | There are no Financial Statement Schedules included with this filing for the reason that they are not applicable or are not required or the information is included in the financial statements or notes thereto. |
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(a)3.(b) | | Exhibits |
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3.1 | | |
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3.2 | | |
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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 SEC upon request. |
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4.2 | | |
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10.1* | | |
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10.2* | | |
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10.3* | | |
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10.4* | | |
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10.5* | | |
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10.6 | | |
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10.7* | | |
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10.8* | |
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10.9* | | |
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10.10* | | |
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10.11* | | |
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10.12* | | |
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10.14* | | |
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10.16*† | |
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21.1 | | |
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23.1 | | |
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24.1 | | |
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31.1 | | |
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31.2 | | |
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32.1 | | |
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101.INS | | XBRL Instance |
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101.SCH | | XBRL Taxonomy Extension Schema Document. |
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101.CAL | | XBRL Taxonomy Extension Calculation Linkbase Document. |
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101.DEF | | XBRL Taxonomy Extension Definition Linkbase Document. |
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101.LAB | | XBRL Taxonomy Extension Label Linkbase Document. |
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101.PRE | | XBRL Taxonomy Extension Presentation Linkbase Document. |
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*Management contract or compensatory plan or arrangement.
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104 | | Cover Page Interactive Data File - The cover page interactive data file does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document. |
* | Management contract or compensatory plan or arrangement. |
† | Filed herewith. |
ITEM 16. | FORM 10-K SUMMARY |
SIGNATURESNot Applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
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| THE KROGER CO. |
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Dated: March | /s/ W. Rodney McMullen |
| W. Rodney McMullen |
| Chairman of the Board and Chief Executive Officer |
| (principal executive officer) |
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Company and in the capacities indicated on the 2830th of March 2017.2021.
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/s/ | |
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| | (principal financial officer) | |||
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/s/ | | Vice President & Corporate Controller | |||
| | (principal accounting officer) | |||
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* |
| Director | |||
Nora A. Aufreiter | | | |||
* | | Director | |||
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* | | Director | |||
Anne Gates | | | |||
* | | Director | |||
Karen M. Hoguet | | | |||
* | | Director | |||
Susan J. Kropf | | | |||
* | | Chairman of the Board and Chief Executive Officer | |||
W. Rodney McMullen | | | |||
* |
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| | Director | |||
Clyde R. Moore | | | |||
* |
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| | Director | |||
Ronald L. Sargent | | | |||
* | | Director | |||
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* | | Director | |||
Mark S. Sutton | | ||||
* | | Director | |||
Ashok Vemuri | | | |||
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* By: | /s/ | | | ||
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| Attorney-in-fact | | | ||
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EXHIBIT INDEX
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*Management contract or compensatory plan or arrangement.
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