1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended August 18,November 10, 2001
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
--------------------- -------------------- ---------------------
Commission file number 1-303
THE KROGER CO.
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(Exact name of registrant as specified in its charter)
Ohio 31-0345740
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1014 Vine Street, Cincinnati, OH 45202
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(Address of principal executive offices)
(Zip Code)
(513) 762-4000
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(Registrant's telephone number, including area code)
Unchanged
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(Former name, former address and former fiscal year, if changed since last
report)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No .
------- ------------ ---
There were 803,293,536800,418,690 shares of Common Stock ($1 par value) outstanding as of
September 26, 2001December 17, 2001.
2
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF EARNINGS
(in millions, except per share amounts)
(unaudited)
2ndThird Quarter Ended TwoThree Quarters Ended
--------------------------- ---------------------------
August 18, August 12, August 18, August 12,----------------------- ----------------------
November 10, November 4, November 10, November 4,
2001 2000 2001 2000
------------- ------------- ------------- --------------------- -------- -------- --------
Sales $11,485 $11,017 $26,587 $25,346
------- ------- ------- -------................................................................... $ 11,382 $ 10,962 $ 37,969 $ 36,308
-------- -------- -------- --------
Merchandise costs, including advertising, warehousing, and transportation .. 8,331 8,051 19,366 18,5518,265 7,999 27,629 26,574
Operating, general and administrative ...................................... 2,177 2,059 5,012 4,808................................... 2,253 2,079 7,279 6,879
Rent ....................................................................... 158 155 365 356.................................................................... 146 153 499 493
Depreciation and amortization .............................................. 246........................................... 254 234 566 541820 774
Asset impairment charges ................................................ 91 -- -- --91 191
Merger-related costs ........................................................................................................... 1 2 2 4 11
------- ------- ------- -------5 13
-------- -------- -------- --------
Operating profit ........................................................ 571 516 1,274 888..................................................... 372 495 1,646 1,384
Interest expense ........................................................... 152 155 357 361
------- ------- ------- -------........................................................ 149 146 506 508
-------- -------- -------- --------
Earnings before income tax expense and extraordinary loss ............... 419 361 917 527............ 223 349 1,140 876
Income tax expense ......................................................... 163 151 358 217
------- ------- ------- -------...................................................... 90 146 448 364
-------- -------- -------- --------
Earnings before extraordinary loss ......................................................................... $ 256133 $ 210203 $ 559692 $ 310512
Extraordinary loss, net of income tax benefit ......................................................... -- (2) -- (2)
------- ------- ------- -------(3)
-------- -------- -------- --------
Net Earnings ..................................................................................................................... $ 256133 $ 208201 $ 559692 $ 308
======= ======= ======= =======509
======== ======== ======== ========
Earnings per basic common share:
Earnings before extraordinary loss ......................................................................... $ 0.320.17 $ 0.25 $ 0.690.86 $ 0.370.62
Extraordinary loss ......................................................................................................... 0.00 0.00 0.00 0.00
------- ------- ------- --------------- -------- -------- --------
Net earnings ............................................................................................................... $ 0.320.17 $ 0.25 $ 0.690.86 $ 0.37
======= ======= ======= =======0.62
======== ======== ======== ========
Average number of common shares used in basic calculation .................. 805 824 809 828............... 801 821 807 826
Earnings per diluted common share:
Earnings before extraordinary loss ......................................................................... $ 0.310.16 $ 0.250.24 $ 0.670.84 $ 0.360.60
Extraordinary loss ......................................................................................................... 0.00 0.00 0.00 0.00
------- ------- ------- --------------- -------- -------- --------
Net earnings ............................................................................................................... $ 0.310.16 $ 0.250.24 $ 0.670.84 $ 0.36
======= ======= ======= =======0.60
======== ======== ======== ========
Average number of common shares used in diluted calculation ................ 827 847 830 849............. 821 845 828 848
- --------------------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
1
3
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(in millions, except per share amounts)
(unaudited)
August 18,November 10, February 3,
2001 2001
-------------------- ---------------------------- --------
ASSETS
Current assets
Cash..................................................................Cash ........................................................ $ 137143 $ 161
Receivables........................................................... 649Receivables ................................................. 685 687
Inventories........................................................... 4,039Inventories ................................................. 4,568 4,063
Prepaid and other current assets...................................... 331assets ............................ 275 501
--------- ----------------- --------
Total Current Assets.............................................. 5,156Assets .................................... 5,671 5,412
Property, plant and equipment, net....................................... 9,429net ............................. 9,522 8,813
Goodwill, net............................................................ 3,625net .................................................. 3,618 3,639
Other assets............................................................. 317assets ................................................... 326 315
--------- ----------------- --------
Total Assets......................................................Assets ............................................ $ 18,52719,137 $ 18,179
========= ================= ========
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under
capital leases...................................................leases ......................................... $ 350389 $ 336
Accounts payable...................................................... 3,118payable ............................................ 3,447 3,009
Salaries and wages.................................................... 536wages .......................................... 566 603
Other current liabilities............................................. 1,621liabilities ................................... 1,610 1,434
--------- ----------------- --------
Total Current Liabilities......................................... 5,625Liabilities ............................... 6,012 5,382
Long-term debt including obligations under capital leases................ 8,212leases ...... 8,273 8,210
Other long-term liabilities.............................................. 1,472liabilities .................................... 1,647 1,498
--------- ----------------- --------
Total Liabilities................................................. 15,309Liabilities ....................................... 15,932 15,090
--------- ----------------- --------
SHAREOWNERS' EQUITY
Preferred stock, $100 par, 5 shares authorized
and unissued..........................................................unissued ................................................ -- --
Common stock, $1 par, 1,000 shares authorized: 898900 shares issued
in 2001 and 891 shares issued in 2000................................. 8982000 ....................... 900 891
Additional paid-in capital............................................... 2,140capital ..................................... 2,120 2,092
Retained earnings........................................................ 1,663earnings .............................................. 1,796 1,104
Common stock in treasury, at cost, 96101 shares in 2001 and
76 shares in 2000..................................................... (1,483)2000 ........................................... (1,611) (998)
--------- ----------------- --------
Total Shareowners' Equity......................................... 3,218Equity ............................... 3,205 3,089
--------- ----------------- --------
Total Liabilities and Shareowners' Equity.........................Equity ............... $ 18,52719,137 $ 18,179
========= ================= ========
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The accompanying notes are an integral part
of the consolidated financial statements.
2
4
THE KROGER CO. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
(in millions)
(unaudited)
TwoThree Quarters Ended
------------------------------------------------
August 18, August 12,-------------------------
November 10, November 4,
2001 2000
----------------------- ----------------------------- -------
Cash Flows From Operating Activities:
Net earnings..................................................................earnings ............................................ $ 559692 $ 308509
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Extraordinary loss.........................................................loss .................................. -- 2
Depreciation............................................................... 509 4873
Depreciation ........................................ 736 696
Goodwill amortization...................................................... 57 54amortization ............................... 84 78
Non-cash items............................................................. 4 261items ...................................... 196 282
Deferred income taxes...................................................... 65 189
Other...................................................................... 30 34taxes ............................... 149 151
Other ............................................... 36 33
Changes in operating assets and liabilities net of
effects from acquisitions of businesses:
Inventories............................................................ 22 140
Receivables............................................................ 52 54Inventories ...................................... (514) (474)
Receivables ...................................... 20 10
Accounts payable....................................................... 292 170
Other.................................................................. 235 250
--------- ---------payable ................................. 723 489
Other ............................................ 232 303
------- -------
Net cash provided by operating activities.......................... 1,825 1,949
--------- ---------activities .... 2,354 2,080
------- -------
Cash Flows From Investing Activities:
Capital expenditures.......................................................... (1,148) (838)expenditures .................................... (1,673) (1,238)
Proceeds from sale of assets.................................................. 25 68assets ............................ 51 82
Payments for acquisitions, net of cash acquired............................... (85)acquired ......... (103) (67)
Other......................................................................... 12 (75)
--------- ---------Other ................................................... 112 (27)
------- -------
Net cash used by investing activities.............................. (1,196) (912)
--------- ---------activities ........ (1,613) (1,250)
------- -------
Cash Flows From Financing Activities:
Proceeds from issuance of long-term debt...................................... 1,290 525debt ................ 1,300 825
Reductions in long-term debt.................................................. (1,292) (1,360)debt ............................ (1,197) (1,418)
Debt prepayment costs ................................... -- (2)
Financing charges incurred.................................................... (14) (7)incurred .............................. (16) (10)
Decrease in book overdrafts................................................... (198) (48)overdrafts ............................. (301) (5)
Proceeds from issuance of capital stock....................................... 46 37stock ................. 66 44
Treasury stock purchases...................................................... (485) (310)
--------- ---------purchases ................................ (611) (414)
------- -------
Net cash used by financing activities.............................. (653) (1,163)
--------- ---------activities ........ (759) (980)
------- -------
Net decrease in cash and temporary cash investments............................... (24) (126)investments ......... (18) (150)
Cash and temporary investments:
Beginning of year..........................................................year ................................... 161 281
--------- ---------------- -------
End of quarter.............................................................quarter ...................................... $ 137143 $ 155
========= =========131
======= =======
Supplemental disclosure of cash flow information:
Cash paid during the year for interest.....................................interest .............. $ 358535 $ 356550
Cash paid during the year for income ................ $ 143238 $ 77
taxes.................................167
taxes
Non-cash changes related to purchase acquisitions:
Fair value of assets acquired..........................................acquired .................... $ 5368 $ 91
Goodwill recorded......................................................recorded ................................ $ 4570 $ 30
Value of stock issued..................................................issued ............................ $ -- $ --
Liabilities assumed....................................................assumed .............................. $ 1435 $ 54
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The accompanying notes are an integral part
of the consolidated financial statements.
3
5
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
Certain prior year and prior quarter amounts have been reclassified to
conform to current-year presentation and all amounts presented are in
millions except per share amounts.
1. BASIS OF PRESENTATION AND PRINCIPLES OF CONSOLIDATION
-----------------------------------------------------
The accompanying financial statements include the consolidated accounts
of The Kroger Co. and its subsidiaries. The year-end balance sheet
includes Kroger's February 3, 2001 balance sheet, which was derived
from audited financial statements, and, due to its summary nature, does
not include all disclosures required by generally accepted accounting
principles. Significant intercompany transactions and balances have
been eliminated. References to the "Company" in these consolidated
financial statements mean the consolidated company.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments (consisting only of normal
recurring adjustments), which are necessary for a fair presentation of
results of operations for such periods, but should not be considered as
indicative of results for a full year. The financial statements have
been prepared by the Company pursuant to the rules and regulations of
the Securities and Exchange Commission ("SEC"). Certain information and
footnote disclosures normally included in financial statements prepared
in accordance with generally accepted accounting principles have been
omitted pursuant to SEC regulations. Accordingly, the accompanying
consolidated financial statements should be read in conjunction with
the fiscal 2000 Annual Report on Form 10-K of The Kroger Co. filed with
the SEC on May 2, 2001.
The unaudited information included in the consolidated financial
statements for the secondthird quarter and twothree quarters ended August 18,November 10,
2001 and August 12,November 4, 2000 includes the results of operations of the
Company for the 12-week and 28-week40-week periods then ended.
2. MERGER-RELATED COSTS
--------------------
The Company is continuing to implement its integration plan relating to
recent mergers. Total pre-tax merger-related costs incurred were $2$1
during the secondthird quarter of 2001, and $2 during the secondthird quarter of
2000. Year-to-date pre-tax merger-related costs were $4$5 in 2001 and $11$13
in 2000.
The following table presents the components of the pre-tax
merger-related costs:
2ndThird Quarter Ended TwoThree Quarters Ended
---------------------------------------------------------------
August 18, August 12, August 18, August 12,--------------------------- ---------------------------
November 10, November 4, November 10, November 4,
2001 2000 2001 2000
--------------- ------------------------------- --------------------------- ----------- ------------ -----------
CHARGES RECORDED AS CASH EXPENDED
Distribution consolidation................................consolidation .......... $ -- $ -- $ -- $ 1
Administration integration................................integration .......... -- -- -- 4
----- ----- ----- --------- ---- ---- ----
5
OTHER CHARGES
Administration integration................................integration .......... 1 2 2 4 6
----- ----- ----- -----5 8
---- ---- ---- ----
Total merger-related costs...................................costs ............. $ 1 $ 2 $ 25 $ 4 $ 11
===== ===== ===== =====13
=== === === ===
TOTAL CHARGES
Distribution consolidation................................consolidation .......... $ -- $ -- $ -- $ 1
Administration integration................................integration .......... 1 2 2 4 10
----- ----- ----- -----5 12
---- ---- ---- ----
Total merger-related costs...................................costs ............. $ 1 $ 2 $ 25 $ 4 $ 11
===== ===== ===== =====13
==== ==== ==== ====
4
6
Distribution Consolidation
Represents costs to consolidate distribution operations and eliminate
duplicate facilities. The year-to-date costs in 2000 representrepresented
severance costs incurred and paid.
Administration Integration
Includes labor and severance costs related to employees identified for
termination in the integration. During each of the first and second
quartersthird quarter of 2001, and
the secondthird quarter of 2000, the Company incurred pre-tax costs totaling
$1 and $2, respectively, resulting from issuing restricted stock
related to merger synergies. Year-to-date 2001 pre-tax costs resulting
from issuing restricted stock related to merger synergies totaled $5.
The year-to-date 2000 pre-tax costs includeincluded approximately $6$8 resulting
from issuing restricted stock related to merger synergies, and charges
of $4 for severance payments recorded as cash was expended. The
restrictions on the stock awards lapse to the extent that synergy goals
are achieved.achieved within the time periods specified. All synergy-based
awards have been earned provided that recipients are still employed by
the Company on the stated restriction lapsing date.
The following table is a summary of the changes in accruals related to
various business combinations:
Facility Employee Incentive Awards
Closure Costs Severance and Contributions
------------- --------- ----------------- -------------- ---------------------
Balance at January 29, 2000.......................................2000 . $ 130 $ 29 $ 29
Additions......................................................Additions ............... -- -- 10
Payments.......................................................Payments ................ (17) (11) (4)
------ ------ ----------- ----- -----
Balance at February 3, 2001.......................................2001 . 113 18 35
Additions......................................................Additions ............... -- -- 4
Payments....................................................... (14) (8)5
Payments ................ (17) (9) ------ ------ ------(9)
----- ----- -----
Balance at August 18, 2001........................................November 10, 2001 $ 9996 $ 109 $ 30
====== ====== ======31
===== ===== =====
3. ONE-TIME ITEMS
--------------
In addition to the merger-related costs described above, the Company
incurred pre-tax one-time expenses of $24$109 and $89 for year-to-date$33 during the third
quarters of 2001 and 2000, respectively. The one-timeOne-time items incurred during
the third quarter 2001 includedrelated to the merger totaled approximately $5$8.
Approximately $2 related primarily to product costs for excess capacity were
included as merchandise costs. The remaining $19 in 2001 wascosts, and approximately $6 related to employee
severance and system conversions costs were included inas operating,
general and administrative costs. Additionally, a one-time charge of
approximately $20 related to store closings, and a one-time charge of
$81 related to losses on utility contracts, were included as third
quarter 2001 operating, general and administrative costs. The $20
charge related to store closings represents the present value of future
lease liabilities and other costs required to close 12 stores. The $81
charge for losses on utility contracts represents the present value of
the ineffective portion of energy derivative contracts and was recorded
in accordance with Statement of Financial Accounting Standards No. 133.
Further details of this charge are included in footnote 7. One-time
items incurred during the third quarter, 2000 were related to the
merger and totaled approximately $33. These items included
approximately $8 recorded as merchandise costs, and approximately $25
recorded as operating, general, and administrative costs.
Year-to-date one-time items totaled $133 and $121 in 2001 and 2000,
respectively. Year-to-date, 2001 one-time items related to the merger
totaled approximately $32 of cash expenditures. Approximately $7
related to product costs for excess capacity were included as
merchandise costs, and approximately $25 related to employee severance
and system conversion costs. All of the costs during
2001 represented cash expenditures. The one-time items incurred during
the second quarter of 2001 totaled approximately $9. The second
quarter, 2001, itemswere included approximately $2 recorded as merchandise
costs, and approximately $7 recorded as operating, general and
administrative costs. TheRemaining one-time items incurred duringin 2001 consist of the
$20 charge for store closings and the $81 charge for losses on utility
contracts recorded in the third quarter, 2001. Year-to-date, 2000
one-time items related to the merger totaled $121. The items included
approximately $19$16 for inventory write-downswritedowns and $11 of other
product-related charges included as merchandise costs. The remaining
$70$94 in the first quarter, 2000 was included inas operating, general and
administrative costs and related to the closingconsisted of stores, severance
expenses related to headcount reductions, and other miscellaneous
costs. Of the $70, $15 represented$27 of cash expenditures for
severance related expenses and $55
represented$67 in non-cash charges for store
closings.
5
4. ASSET IMPAIRMENT CHARGES
------------------------
Due to recent investments in stores that were accrued duringdid not perform as expected
and updated profitability forecasts for 2002 and beyond, the quarters.Company
performed an impairment review of its long-lived assets. During this
review, the first quarterCompany identified impairment losses for both assets to be
disposed of 2000, weand assets to be held and used and recorded a pre-tax
impairment charge of $191.
We identified$91 in the third quarter, 2001. Details of these
charges are included below. In the first quarter, 2000 the Company
recorded a pre-tax impairment charge of $191 after identifying
impairment losses for assets to be disposed of, assets to be held and
used, and certain investments in former suppliers that havehad experienced
financial difficulty and with whom supply arrangements havehad ceased. 4.The
third quarter, 2001 impairment charge relates to locations that either
had not opened, or had only recently opened, as of the first quarter,
2000, and, as a result, estimates of future operating performance for
these locations were not determined at that time. As a result, these
stores were not considered in the first quarter, 2000 impairment
charge.
Assets to be Disposed of
The third quarter, 2001 impairment charge for assets to be disposed of
relates primarily to the carrying value of land, buildings and
equipment for stores that were closed in the third quarter or that
management has committed to close by the end of the fiscal year. The
impairment charge was determined using the fair value less cost to
sell. Fair value less cost to sell used in the impairment calculation
was based on third party offers to purchase the assets, or market value
for comparable properties, if available. Accordingly, a pre-tax
impairment charge related to assets to be disposed of was recognized,
reducing the carrying value of fixed assets by $37.
Assets to be Held and Used
The third quarter, 2001 impairment charge for assets to be held and
used relates primarily to the carrying value of land, buildings, and
equipment for stores that will continue to be operated by the Company.
Updated projections, based on revised operating plans, were used, on a
gross basis, to first determine whether the assets were impaired. Then,
discounted cash flows were used to determine the fair value of the
assets for purposes of measuring the impairment charge. As a result, an
impairment charge related to assets to be held and used was recognized,
reducing the carrying value of fixed assets by $54.
5. INCOME TAXES
------------
The effective income tax rate differs from the expected statutory rate
primarily due to the effect of state taxes and non-deductible goodwill.
5.6
6. EARNINGS PER COMMON SHARE
-------------------------
Diluted earnings per common share equals net earnings divided by the
weighted average number of common shares outstanding, after giving
effect to dilutive stock options.
The following table provides a reconciliation of earnings and shares
used in calculating basic earnings per share to those used in
calculating diluted earnings per share.
5
7
For the Quarter Ended For the Quarter Ended
August 18,November 10, 2001 August 12,November 4, 2000
----------------------------------------- -----------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------ ------------- ------------- -------------- --------------------------
Basic earnings per common share....... $ 256 805133 801 $ 0.320.17 $ 208 824201 821 $ 0.25
Dilutive effect of stock options and
warrants.......................... -- 2220 -- 23
-------- -------- --------24
--------- --------- --------- --------
Diluted earnings per common share.... $ 256 827133 821 $ 0.310.16 $ 208 847201 845 $ 0.25
======== ======== ======== ========0.24
========= ========= ========= =========
For the TwoThree Quarters Ended For the TwoThree Quarters Ended
August 18,November 10, 2001 August 12,November 4, 2000
----------------------------------------- -----------------------------------------
Earnings Shares Per Share Earnings Shares Per Share
(Numerator) (Denominator) Amount (Numerator) (Denominator) Amount
------------------------------------------------------------------------------------------------ ------------- ------------- -------------- --------------------------
Basic earnings per common share....... $ 559 809692 807 $ 0.690.86 $ 308 828509 826 $ 0.370.62
Dilutive effect of stock options and
warrants.......................... -- 21 -- 21
-------- -------- --------22
--------- --------- --------- --------
Diluted earnings per common share.... $ 559 830692 828 $ 0.670.84 $ 308 849509 848 $ 0.36
======== ======== ======== ========0.60
========= ========= ========= =========
6.There were options outstanding for approximately 9.2 and 15.4 shares in
the third quarter 2001 and the third quarter 2000, respectively, that
were excluded from the computations of diluted EPS because their
inclusion would have had an anti-dilutive effect on EPS.
7
7. RECENTLY ISSUED ACCOUNTING STANDARDS
------------------------------------
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for the
Company as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in the Company recording a liability of $9, millionprimarily related
to interest rate swaps designated as cash flow hedges, with a
corresponding charge recorded as additional paid-in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the immateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings. Changes in the
fair value of derivative instruments designated as fair value hedges,
along with the corresponding changes in the fair values of the hedged
assets or liabilities, are recorded in current-period earnings.
The Company assesses, both at inception of the hedge and on an ongoing
basis, whether derivatives used as hedging instruments are highly
effective in offsetting the changes in the fair value or cash flow of
hedged items. If it is determined that a derivative is not highly
effective as a hedge or ceases to be highly effective, the Company
discontinues hedge accounting prospectively.
As of August 18,November 10, 2001, year-to-date derivative instrument liability
totaled $15 million. These instruments arethe Company maintains five interest rate swaps
and one interest rate collar designated as and are
considered, effective cash flow hedges.hedges of variable
rate debt. A liability totaling $21 has been recorded for these
instruments. The Company has also recorded a liability of $44 related
to a cash flow hedge of electricity purchases, as more fully described
below. Hedge ineffectiveness was not material for these instruments
during the quarter, and year-to-date, for the period ended August 18,November 10,
2001. A corresponding charge was recorded as a part of additional
paid-in capital, net of income tax effects. 6
8In addition, the Company
maintains five interest rate swaps designated as fair value hedges of
its fixed rate debt. As of November 10, 2001, an asset totaling $7 has
been recorded to reflect the fair value of these swaps, offset by a
liability for the same amount to reflect the impact of the change in
interest rates on the fair value of the debt.
During March through May 2001, the Company entered into four separate
commitments to purchase electricity from one of its utility suppliers
in southern California. At the inception of these contracts, forecasted
electricity usage, which was estimated primarily based on historical
energy usage, indicated that it was probable that all of the
electricity would be utilized in the operations of the company. The
Company, therefore, accounted for the contracts in accordance with the
normal purchases and normal sales exception under SFAS No. 133, as
amended, and no amounts were recorded in the financial statements
related to these purchase commitments.
During the third quarter, 2001 the Company reassessed its projected
electricity requirements in southern California. Due primarily to
energy conservation programs initiated by the Company in the latter
half of 2001, the Company determined that it no longer needed all of
the electricity that it had committed to purchase. As a result, one of
the contracts, and a portion of a second contract, were deemed to
exceed expected electricity usage, thereby eliminating the normal
purchases and normal sales exception under SFAS 133 for those
contracts, and requiring the fair value of the contracts to be recorded
currently in earnings. These contracts will continue to be
marked-to-market through current earnings each quarter. Accordingly,
the Company recorded a third quarter charge of $81 reflecting the
estimated fair value of these contracts through December 2006. The
remaining portion of the second contract has been re-designated as a
cash flow hedge of future purchases. The other two purchase commitments
continue to qualify for the normal purchases and normal sales exception
under SFAS No. 133.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning
in the first quarter of 2002. These issues address the appropriate
accounting for certain vendor contracts and loyalty programs. The
Company continues to assess the effect these new standards will have on
the financial statements. The Company expects the adoption of these
standards will not have a material effect on ourits financial statements.
8
SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and
Other Intangible Assets," were issued by the Financial Accounting
Standards Board ("FASB") in late June of 2001. SFAS 141 is effective
for all business combinations initiated after June 30, 2001 and SFAS
142 will become effective for the Company on February 3, 2002. The
Company is
currently analyzing the effect theestimates that adoption of these standardsSFAS 142 will have on its financial statements.
Statement on Financial Accounting Standards ("SFAS")improve fiscal 2002
earnings by approximately $90 to $100.
SFAS No. 143, "Asset Retirement Obligations," was issued by the Financial Accounting
Standards BoardFASB in
August of 2001. SFAS 143 will become effective for The Kroger Co. on
February 2, 2003. The companyCompany is currently analyzing the effect this
standard will have on its financial statements.
7.SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived
Assets," was issued by the FASB in August of 2001. SFAS 144 will become
effective for The Kroger Co. on February 3, 2002. The Company is
currently analyzing the effect this standard will have on its financial
statements.
8. SUBSEQUENT EVENTS
-----------------
On December 11, 2001, the Company outlined a strategic growth plan that
will support additional investment in its core business to grow sales,
increase market share, and reduce merchandising and operating, general,
and administrative costs by more than $500 over the next two years. As
part of the plan to reduce annual operating, general, and
administrative costs, the Company will eliminate approximately 1,500
managerial and clerical positions over the next 12 months. The Company
will also merge one existing division into two adjacent marketing
areas. The Company also has identified new opportunities to further
leverage its economies of scale by centralizing additional
merchandising and procurement functions. The Company expects to incur a
pre-tax charge of approximately $85-$100 to reflect severance and other
costs associated with implementing this strategic growth plan. The
majority of the charge will be taken in the fourth quarter, 2001.
9. GUARANTOR SUBSIDIARIES
----------------------
Certain of the Company's Senior Notes and Senior Subordinated Notes (the "Guaranteed Notes") are jointly and
severally, fully and unconditionally guaranteed by certain Kroger
subsidiaries (the "Guarantor Subsidiaries"). At August 18,November 10, 2001 a
total of approximately $6.0 billion of Guaranteed Notes were
outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries
are wholly owned subsidiaries of Kroger. Separate financial statements
of Kroger and each of the Guarantor Subsidiaries are not presented
because the guarantees are full and unconditional and the Guarantor
Subsidiaries are jointly and severally liable. The Company believes
that separate financial statements and other disclosures concerning the
Guarantor Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an
individual and aggregate basis of consolidated assets, pretax earnings,
cash flow, and equity. Therefore, the non-guarantor subsidiaries'
information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor
Subsidiaries to make payments under the guarantees referred to above,
but the obligations of each guarantor under its guarantee are limited
to the maximum amount as will result in obligations of such guarantor
under its guarantee not constituting a fraudulent conveyance or
fraudulent transfer for purposes of Bankruptcy Law, the Uniform
Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any
similar Federal or state law (e.g., adequate capital to pay dividends
under corporate laws).
79
9
The following tables present summarized financial information as of
August 18,November 10, 2001 and February 3, 2001 and for the quarters ended
August
18,November 10, 2001 and August 12,November 4, 2000.
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF AUGUST 18,NOVEMBER 10, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ---------------------------- ----------------- ----------------------------------
Current assets
Cash............................................... $ 2120 $ 116123 $ -- $ 137143
Receivables........................................ 112 537138 547 -- 649685
Inventories........................................ 388 3,651432 4,136 -- 4,0394,568
Prepaid and other current assets................... (23) 354(28) 303 -- 331
---------- ---------- ----------275
--------------- ----------- ----------- ----------
Total current assets.......................... 498 4,658562 5,109 -- 5,1565,671
Property, plant and equipment, net..................... 1,040 8,3891,035 8,487 -- 9,4299,522
Goodwill, net.......................................... 2 3,62323 3,595 -- 3,6253,618
Other assets........................................... 653 (336)649 (323) -- 317326
Investment in and advances to subsidiaries............. 10,68910,395 -- (10,689)(10,395) --
---------- ---------- --------------------- ----------- --------------- ----------
Total assets.................................. $ 12,88212,664 $ 16,33416,868 $ (10,689)(10,395) $ 18,527
========== ========== ==========19,137
=========== =========== =============== ==========
Current liabilities
Current portion of long-term debt including
obligations under capital leases................. $ 315360 $ 3529 $ -- $ 350389
Accounts payable................................... 242 2,876238 3,209 -- 3,1183,447
Other current liabilities.......................... 632 1,525556 1,620 -- 2,157
---------- ---------- ----------2,176
----------- ----------- ----------- ----------
Total current liabilities..................... 1,189 4,4361,154 4,858 -- 5,6256,012
Long-term debt including obligations
under capital leases............................... 7,826 3867,605 668 -- 8,2128,273
Other long-term liabilities............................ 649 823700 947 -- 1,472
---------- ---------- ----------1,647
----------- ----------- ----------- ----------
Total liabilities............................. 9,664 5,6459,459 6,473 -- 15,309
---------- ---------- ----------15,932
----------- ----------- ----------- ----------
Shareowners' Equity.................................... 3,218 10,689 (10,689) 3,218
---------- ---------- ----------3,205 10,395 (10,395) 3,205
----------- ----------- --------------- ----------
Total liabilities and shareowners' equity..... $ 12,88212,664 $ 16,33416,868 $ (10,689)(10,395) $ 18,527
========== ========== ==========19,137
=========== =========== =============== ==========
810
10
CONDENSED CONSOLIDATING
BALANCE SHEETS
AS OF FEBRUARY 3, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
---------------- ----------------- ----------------------------------
Current assets
Cash............................................... $ 25 $ 136 $ -- $ 161
Receivables........................................ 134 553 -- 687
Inventories........................................ 340 3,723 -- 4,063
Prepaid and other current assets................... 148 353 -- 501
---------- ---------- --------------------- ----------- ----------- ----------
Total current assets.......................... 647 4,765 -- 5,412
Property, plant and equipment, net..................... 866 7,947 -- 8,813
Goodwill, net.......................................... 1 3,638 -- 3,639
Other assets........................................... 653 (338) -- 315
Investment in and advances to subsidiaries............. 10,670 -- (10,670) --
---------- ---------- --------------------- ----------- --------------- ----------
Total assets.................................. $ 12,837 $ 16,012 $ (10,670) $ 18,179
========== ========== ===================== =========== =============== ==========
Current liabilities
Current portion of long-term debt including
obligations under capital leases................. $ 287 $ 49 $ -- $ 336
Accounts payable................................... 251 2,758 -- 3,009
Other current liabilities.......................... 449 1,588 -- 2,037
---------- ---------- --------------------- ----------- ----------- ----------
Total current liabilities..................... 987 4,395 -- 5,382
Long-term debt including obligations
under capital leases............................... 7,808 402 -- 8,210
Other long-term liabilities............................ 953 545 -- 1,498
---------- ---------- --------------------- ----------- ----------- ----------
Total liabilities............................. 9,748 5,342 -- 15,090
---------- ---------- --------------------- ----------- ----------- ----------
Shareowners' Equity.................................... 3,089 10,670 (10,670) 3,089
---------- ---------- --------------------- ----------- --------------- ----------
Total liabilities and shareowners' equity..... $ 12,837 $ 16,012 $ (10,670) $ 18,179
========== ========== ===================== =========== =============== ==========
911
11
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE 12-WEEK QUARTER ENDED AUGUST 18,NOVEMBER 10, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ---------------------------- ----------------- ----------------------------------
Sales.................................................. $ 1,5881,603 $ 10,0929,993 $ (195)(214) $ 11,48511,382
Merchandising costs, advertising, warehousing, and
transportation..................................... 1,275 7,239 (183) 8,3311,257 7,210 (202) 8,265
Operating, general and administrative.................. 309 1,868454 1,799 -- 2,1772,253
Rent................................................... 45 12527 131 (12) 158146
Depreciation and amortization.......................... 6 24018 236 -- 246254
Merger-related costs .................................. 2and asset impairment charges...... 1 91 -- -- 2
---------- ---------- ----------92
----------- ----------- ----------- ----------
Operating profit (loss)....................... (49) 620(154) 526 -- 571372
Interest expense....................................... (142)(139) (10) -- (152)(149)
Equity in earnings of subsidiaries..................... 372315 -- (372)(315) --
---------- ---------- --------------------- ----------- --------------- ----------
Earnings before income tax expense and 181 610 (372) 41922 516 (315) 223
extraordinary loss..........................
Tax expense (benefit).................................. (75) 238(111) 201 -- 163
---------- ---------- ----------90
--------------- ----------- ----------- ----------
Earnings before extraordinary loss............ 256 372 (372) 256133 315 (315) 133
Extraordinary loss, net of income tax benefit.......... -- -- -- --
---------- ---------- --------------------- ----------- ----------- ----------
Net earnings.................................. $ 256133 $ 372315 $ (372)(315) $ 256
========== ========== ==========133
=========== =========== =============== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE 12-WEEK QUARTER ENDED AUGUST 12,NOVEMBER 4, 2000
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ---------------------------- ----------------- ----------------------------------
Sales.................................................. $ 1,4951,463 $ 9,6869,637 $ (164)(138) $ 11,01710,962
Merchandising costs, advertising, warehousing, and
transportation..................................... 1,181 7,022 (152) 8,0511,083 7,043 (127) 7,999
Operating, general and administrative.................. 230 1,829525 1,554 -- 2,0592,079
Rent................................................... 43 124 (12) 15532 132 (11) 153
Depreciation and amortization.......................... 23 21119 215 -- 234
Merger-related costs .................................. 2 -- -- 2
---------- ---------- --------------------- ----------- ----------- ----------
Operating profit (loss)....................... 16 500(198) 693 -- 516495
Interest expense....................................... (145)(136) (10) -- (155)(146)
Equity in earnings of subsidiaries..................... 277385 -- (277)(385) --
---------- ---------- --------------------- ----------- --------------- ----------
Earnings before income tax expense and
extraordinary loss.......................... 148 490 (277) 36151 683 (385) 349
Tax expense (benefit).................................. (62) 213(152) 298 -- 151
---------- ---------- ----------146
--------------- ----------- ----------- ----------
Earnings before extraordinary loss............ 210 277 (277) 210203 385 (385) 203
Extraordinary loss, net of income tax benefit.......... (2) -- -- (2)
---------- ---------- ---------- ------------------------- ----------- ----------- -----------
Net earnings.................................. $ 208201 $ 277385 $ (277)(385) $ 208
========== ========== ==========201
=========== =========== =============== ==========
1012
12
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE TWOTHREE QUARTERS ENDED AUGUST 18,NOVEMBER 10, 2001
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ---------------------------- ----------------- ----------------------------------
Sales.................................................. $ 3,7125,315 $ 23,31933,312 $ (444)(658) $ 26,58737,969
Merchandising costs, advertising, warehousing, and
transportation..................................... 2,963 16,819 (416) 19,3664,220 24,027 (618) 27,629
Operating, general and administrative.................. 594 4,4181,048 6,231 -- 5,0127,279
Rent................................................... 103 290 (28) 365130 409 (40) 499
Depreciation and amortization.......................... 39 52757 763 -- 566820
Merger-related costs .................................. 4and asset impairment charges...... 5 91 -- -- 4
---------- ---------- ----------96
----------- ----------- ----------- ----------
Operating profit (loss)....................... 9 1,265(145) 1,791 -- 1,2741,646
Interest expense....................................... (336) (21)(475) (31) -- (357)(506)
Equity in earnings of subsidiaries..................... 7581,073 -- (758)(1,073) --
---------- ---------- --------------------- ----------- --------------- ----------
Earnings before income tax expense and 431 1,244 (758) 917453 1,760 (1,073) 1,140
extraordinary loss..........................
Tax expense (benefit).................................. (128) 486(239) 687 -- 358
---------- ---------- ----------448
--------------- ----------- ----------- ----------
Earnings before extraordinary loss............ 559 758 (758) 559692 1,073 (1,073) 692
Extraordinary loss, net of income tax benefit.......... -- -- -- --
---------- ---------- --------------------- ----------- ----------- ----------
Net earnings.................................. $ 559692 $ 7581,073 $ (758)(1,073) $ 559
========== ========== ==========692
=========== =========== =============== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF INCOME
FOR THE TWOTHREE QUARTERS ENDED AUGUST 12,NOVEMBER 4, 2000
Guarantor
The Kroger Co. Subsidiaries Eliminations Consolidated
-------------- ------------ ------------ ---------------------------- ----------------- ----------------------------------
Sales.................................................. $ 3,4844,947 $ 22,23331,870 $ (371)(509) $ 25,34636,308
Merchandising costs, advertising, warehousing, and
transportation..................................... 2,757 16,137 (343) 18,5513,840 23,204 (470) 26,574
Operating, general and administrative.................. 628 4,1801,153 5,726 -- 4,8086,879
Rent................................................... 92 292 (28) 356124 408 (39) 493
Depreciation and amortization.......................... 51 49070 704 -- 541774
Merger-related costs and asset impairment charges ..... 11charges...... 13 191 -- 202
---------- ---------- ----------204
----------- ----------- ----------- ----------
Operating profit (loss)....................... (55) 943(253) 1,637 -- 8881,384
Interest expense....................................... (335) (26)(471) (37) -- (361)(508)
Equity in earnings of subsidiaries..................... 519904 -- (519)(904) --
---------- ---------- --------------------- ----------- --------------- ----------
Earnings before income tax expense and 129 917 (519) 527180 1,600 (904) 876
extraordinary loss..........................
Tax expense (benefit).................................. (181) 398(332) 696 -- 217
---------- ---------- ----------364
--------------- ----------- ----------- ----------
Earnings before extraordinary loss............ 310 519 (519) 310512 904 (904) 512
Extraordinary loss, net of income tax benefit.......... (2)(3) -- -- (2)
---------- ---------- ---------- ----------(3)
--------------- ----------- ----------- -----------
Net earnings.................................. $ 308509 $ 519904 $ (519)(904) $ 308
========== ========== ==========509
=========== =========== =============== ==========
1113
13
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR TWOTHREE QUARTERS ENDED AUGUST 18,NOVEMBER 10, 2001
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ----------------------------- ---------------- -----------------
Net cash provided by operating activities.............. $ 805734 $ 1,0201,620 $ 1,825
---------- ----------2,354
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures............................ (85) (1,063) (1,148)(112) (1,561) (1,673)
Other........................................... (80) 32 (48)
---------- ----------5 55 60
----------- ----------- ----------
Net cash used by investing activities.................. (165) (1,031) (1,196)
---------- ---------- ----------(107) (1,506) (1,613)
--------------- --------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........ 1,2901,300 -- 1,2901,300
Reductions in long-term debt.................... (1,262) (30) (1,292)(1,443) 246 (1,197)
Proceeds from issuance of capital stock......... 4666 -- 4666
Treasury stock purchases........................ (485)(611) -- (485)(611)
Other........................................... (214) 2 (212)(219) (98) (317)
Net change in advances to subsidiaries.......... (19) 19275 (275) --
---------- --------------------- --------------- ----------
Net cash used by financing activities.................. (644) (9) (653)
---------- ---------- ----------(632) (127) (759)
--------------- --------------- -----------
Net (decrease) increase in cash and temporary cash
investments........................................ (4) (20) (24)(5) (13) (18)
Cash and temporary investments:
Beginning of year............................... 25 136 161
---------- --------------------- ----------- ----------
End of year..................................... $ 2120 $ 116123 $ 137
========== ==========143
=========== =========== ==========
CONDENSED CONSOLIDATING
STATEMENTS OF CASH FLOWS
FOR THE TWOTHREE QUARTERS ENDED AUGUST 12,NOVEMBER 4, 2000
Guarantor
The Kroger Co. Subsidiaries Consolidated
-------------- ------------ ----------------------------- ---------------- -----------------
Net cash provided by operating activities.............. $ 7971,200 $ 1,152880 $ 1,949
---------- ----------2,080
----------- ----------- ----------
Cash flows from investing activities:
Capital expenditures............................ (20) (818) (838)(39) (1,199) (1,238)
Other........................................... (68) (6) (74)
---------- ---------- ----------(30) 18 (12)
--------------- ----------- -----------
Net cash used by investing activities.................. (88) (824) (912)
---------- ---------- ----------(69) (1,181) (1,250)
--------------- --------------- -----------
Cash flows from financing activities:
Proceeds from issuance of long-term debt........ 525825 -- 525825
Reductions in long-term debt.................... (1,301) (59) (1,360)(1,331) (87) (1,418)
Proceeds from issuance of capital stock......... 3744 -- 3744
Treasury stock purchases........................ (310)(414) -- (310)(414)
Other........................................... (9) (46) (55)49 (66) (17)
Net change in advances to subsidiaries.......... 341 (341)(310) 310 --
---------- ------------------------- ----------- ----------
Net cash used by financing activities.................. (717) (446) (1,163)
---------- ---------- ----------(1,137) 157 (980)
--------------- ----------- -----------
Net decrease in cash and temporary cash
investments........................................ (8) (118) (126)(6) (144) (150)
Cash and temporary investments:
Beginning of year............................... 30 251 281
---------- --------------------- ----------- ----------
End of year..................................... $ 2224 $ 133107 $ 155
========== ==========131
=========== =========== ==========
1214
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
The following analysis should be read in conjunction with the
consolidated financial statements.
RESULTS OF OPERATIONS
Total sales for the secondthird quarter of 2001 increased 4.2%3.8% to $11.5$11.4 billion
while year-to-date sales increased 4.9%4.6% to $26.6$38 billion. The increase in
sales is attributable to an increase in comparable and identical store
sales and an increase in the number of stores due to new store openings
and acquisitions. Identical food store sales, which include stores that
have been in operation and have not been expanded or relocated for four
quarters, grew 0.8% from the secondthird quarter of 2000. Comparable food
stores sales, which include relocations and expansions, increased 1.6%1.4%
over the prior year.third quarter of 2000.
During the secondthird quarter of 2001, we opened, acquired, relocated, or
expanded 3833 food stores, remodeled 2226 food stores and closed 1915 food
stores. We operated 2,3922,401 food stores at August 18,November 10, 2001 compared to
2,3382,343 food stores at August 12,November 4, 2000. As of August 18,November 10, 2001, food
store square footage totaled 128129 million. This represents an increase
of 4.0% over August 12,November 4, 2000.
The gross profit rate during the secondthird quarter, excluding one-time
expenses and the effect of LIFO, was 27.6%27.5% in 2001 and 27.0% in 2000.
On this same basis, our year-to-date gross profit rate was 27.3% in
2001 and 26.9% in 2000. During the secondthird quarter of 2001, we incurred
$2 million of one-time expenses included in merchandise costs, bringing
our year-to-date one-time costs included in merchandise costs for 2001
to $5$7 million. This compares to $4$8 million during the secondthird quarter of
2000 and $19$27 million for year-to-date, 2000. Including these one-time
expenses, and excluding the effect of LIFO, gross profit rates were
27.5% for the secondthird quarter of 2001 and 27.2%27.3% year-to date 2001, compared
to 27.0% for the secondthird quarter of 2000 and 26.9% for26.8% year-to-date, 2000. This
increase is primarily the result of synergy savings, reductions in product costs through
our corporate-wide merchandising programs and increases in corporate
brand sales and profitability. The economies of scale created by theour
merger with Fred Meyer have enabled Kroger to reduce costs through
coordinated purchasing. Technology and logistics efficiencies also have also
led to improvements in category management and various other aspects of
our operations, resulting in a decreased cost of product.
We incurred $7$107 million of pre-tax one-time operating, general and
administrative expenses in the secondthird quarter of 2001 compared to $4$25
million during the secondthird quarter of 2000. Year-to-date these costs were
$19$126 million for 2001 and $70$94 million for 2000. Excluding these
one-time items, operating, general and administrative expenses as a
percent of sales were 18.9% during the secondthird quarter of 2001 and 18.8%
year-to-date, 2001. These rates compare to 18.7%18.8% during the secondthird
quarter and 18.7% year-to-date, 2000. Including these one-time items,
operating, general and administrative expenses as a percent of sales
were 19.0%19.8% in the secondthird quarter of 2001 and 18.9%19.2% year-to-date, 2001,
compared to 18.7% in19.0% for the secondthird quarter of 2000 and 19.0% year-to-date, 2000.
Operating, general and administrative expenses as a percent of sales
increased from the prior year primarily because of higher utility and
health care benefit costs, offset by increased productivity.
The effective tax rate differs from the expected statutory rate
primarily due to the effect of certain state taxes and non-deductible
goodwill. Total goodwill amortization was $26$27 million in the secondthird
quarter of 2001 and $57$84 million year-to-date, 2001, compared to $23$24.5
million in the secondthird quarter of 2000 and $54$78 million year-to-date,
2000.
Net earnings were $256$133 million, or $0.31$0.16 per diluted share, for the
secondthird quarter of 2001. These results represent an increasea decrease of
approximately 24% over33% compared to net earnings of $0.25$0.24 per diluted share
for the secondthird quarter of 2000. Year-to-date net earnings were $559$692
million, or $0.67$0.84 per diluted share, which represent an increase of
approximately 86%40% over net earnings of $0.36$0.60 per diluted share for
year-to-date 2000. Net earnings, excluding merger-related costs,
and one-time items and impairment charges were $263$259 million or $0.32 per
diluted share in the secondthird quarter of 2001. These results represent an
increase of approximately 19%14% over net earnings of $224$231 million, or
$0.27$0.28 per diluted share, excluding merger-related costs the impairment charge, and one-time
items, for the secondthird quarter of 2000. On this same basis, year-to-date
earnings before extraordinary loss were $576$835 million or $0.69$1.01 per
diluted share, which represent an increase of approximately 19%17% over
earnings of $495$729 million or $0.58$0.86 per diluted share.
1315
15
MERGER-RELATED COSTS AND OTHER ONE-TIME EXPENSES
Total pre-tax merger-related costs incurred were $2$1 million during the
secondthird quarter of 2001, and $2 million during the secondthird quarter of 2000.
The year-to-dateYear-to-date pre-tax mergermerger-related costs incurred were $4totaled $5 million duringin 2001
and $11$13 million duringin 2000.
Due to recent investments in stores that did not perform as expected
and updated profitability forecasts for 2002 and beyond, we performed
an impairment review of our long-lived assets. During the first quarterthis review, we
identified impairment losses for both assets to be disposed of 2000, weand
assets to be held and used and recorded a pre-tax impairment charge of
approximately$91 million in the third quarter, 2001. In the first quarter, 2000
Kroger recorded a pre-tax impairment charge of $191 million. We identifiedmillion after
identifying impairment losses for assets to be disposed of, assets to
be held and used, and certain investments in former suppliers that have
experienced financial difficulty and with whom supply arrangements havehad
ceased. The third quarter, 2001 impairment charge relates to locations
that either had not opened, or had only recently opened, as of the
first quarter, 2000, and, as a result, estimates of future operating
performance for these locations were not determined at that time. As a
result, these stores were not considered in the first quarter, 2000
impairment charge.
In addition to pre-tax merger-related costs that are shown separately
on the Consolidated Statements of Earnings, we also incurred other pre-tax
one-time expenses that areof $109 million and $33 million during the third
quarters of 2001 and 2000, respectively. One-time items related to the
merger incurred during the third quarter 2001 totaled approximately $8
million. Additionally, a one-time charge of approximately $20 million
related to store closings, and a one-time charge of $81 million related
to losses on utility contracts, were included in merchandise costs andas third quarter 2001
operating, general and administrative expenses.costs. The $20 million charge for
store closings relates to locations that either had not opened, or had
only recently opened, as of the first quarter, 2000, and, as a result,
estimates of future operating performance for these locations were not
determined at that time. As a result, these stores were not considered
in the $67 million one-time expensescharge for store closings recorded in the
first quarter, 2000. The $20 million charge in 2001 represents the
present value of $9future lease liabilities and other costs required to
close 12 stores. The $81 million charge for losses on utility contracts
represents the present value of the ineffective portion of electricity
derivative contracts and was recorded in accordance with Statement of
Financial Accounting Standards No. 133. One-time items incurred during
the secondthird quarter, 2000 were related to the merger and $24totaled
approximately $33 million.
Year-to-date one-time items totaled $133 million year to dateand $121 million in
2001 and $8 million during the second quarter and $89 million
year-to-date 2000, were costsrespectively. Year-to-date, 2001 one-time items related
to recent mergers.the merger totaled approximately $32 million. Remaining one-time
items in 2001 consist of the $20 million charge for store closings and
the $81 million charge for losses on utility contracts recorded in the
third quarter, 2001. Year-to-date, 2000 one-time items related to the
merger totaled $121 million.
The table below details our pre-tax merger-related costs, impairment
charges and one-time items:
2ndThird Quarter Ended Two QuartersThree quarters Ended
------------------------------- -------------------------------
August 18, August 12, August 18, August 12,November 10, November 4, November 10, November 4,
2001 2000 2001 2000
------------------------------- -------------------------------
(in millions) (in millions)
Merger-related costs...................................... $ 21 $ 2 $ 45 $ 1113
--------- --------- --------- --------
One-time items related to mergers included in:
Merchandise costs......................................costs - related to the merger.............. 2 4 5 198 7 27
Operating, general and administrative.................. 7 4 19 70administrative - related to
the merger........................................... 6 25 25 94
Operating, general and administrative - store closings. 20 -- 20 --
Operating, general and administrative - utility
contracts............................................ 81 -- 81 --
--------- --------- --------- --------
Total one-time items...................................... 9 8 24 89items..................................... 109 33 133 121
--------- --------- --------- --------
Impairment charge......................................... 91 -- -- --91 191
--------- --------- --------- --------
Total merger-related costs and other one-time items........................................................... $ 11201 $ 1035 $ 28229 $ 291325
========= ========= ========= ========
Please refer to footnotes two, three, four and threeseven of the financial
statements for more information on these costs.
16
LIQUIDITY AND CAPITAL RESOURCES
Debt Management
---------------DEBT MANAGEMENT
During the secondthird quarter of 2001, we invested approximately $180$128
million to repurchase approximately 75 million shares of Kroger stock at
an average price of $25.30$25.23 per share. During the first twothree quarters
of 2001, we repurchased approximately 19.925 million shares of our common
stock at an average price of $24.19. During$24.40. Of the second quarter of 2001,
we purchased approximately 15 million shares
to complete our $750repurchased in the third quarter, 2001, approximately 4 million stock repurchase plan. We alsoshares
were purchased approximately 5
million shares under the $1 billion authorization and approximately 1
million shares were purchased under our program to repurchase common
stock funded by the proceeds and tax benefits from stock option
exercises.
We had several lines of credit totaling $3.5 billion, with borrowings
of $1.4 billion at August 18,November 10, 2001. In addition, we had a fully
borrowed $457 million synthetic lease credit facility and a $150
million money market line with no borrowings of $65 million at August 18,November
10, 2001.
Net total debt was $8.5$8.6 billion at the end of the secondthird quarter of
2001, an increase of $391$212 million as compared to the secondthird quarter of
the prior year. Net total debt is defined as long-term debt, including
capital leases and current portion thereof, less investments in debt
securities and prefunded employee benefits. Net total debt increased
$207$325 million from year-end 2000. These increases are primarily the
result of the increased investment in working capital and stock
repurchases.
14
16
Our bank credit facilities and the indentures underlying our publicly
issued debt contain various restrictive covenants. Some of these
covenants are based on EBITDA, which we define as earnings before
interest, taxes, depreciation, amortization, LIFO, extraordinary
losses, and one-time items. The ability to generate EBITDA at levels
sufficient to satisfy the requirements of these agreements is a key
measure of our financial strength. We do not intend to present EBITDA
as an alternative to any generally accepted accounting principle
measure of performance. Rather, we believe the presentation of EBITDA
is important for understanding our performance compared to our debt
covenants. The calculation of EBITDA is based on the definition
contained in our bank credit facilities. This may be a different
definition than other companies use. We were in compliance with all
EBITDA-based bank credit facilities and indenture covenants on August
18,November
10, 2001.
The following is a summary of the calculation of EBITDA for the first
quarterthird
quarters of 2001 and 2000.2000, and the respective three quarters then
ended.
2ndThird Quarter Ended Two QuartersThree quarters Ended
---------------------------------- --------------------------------
August 18, August 12, August 18, August 12,----------------------------------
November 10, November 4, November 10, November 4,
2001 2000 2001 2000
---------------------------------- ------------------------------------------------------------------
(in millions) (in millions)
Earnings before tax expense and extraordinary loss...... $ 419223 $ 361349 $ 9171,140 $ 527876
Interest................................................ 152 155 357 361149 146 506 508
Depreciation............................................ 220 211 509 487227 209 736 696
Goodwill amortization................................... 26 23 57 5427 25 84 78
LIFO.................................................... 8 4 20 167 (6) 27 10
One-time items included in merchandise costs............ 2 4 5 198 7 27
One-time items included in operating, general and
administrative expenses.............................. 7 4 19 70107 24 126 94
Merger-related costs.................................... 1 2 2 4 115 13
Impairment charges...................................... 91 -- 91 191
Rounding................................................ -- -- -- 191
Rounding................................................ 1 (1)
-- (1)---------- --------- --------- --------- ------------------- ----------
EBITDA.................................................. $ 837834 $ 763757 $ 1,8882,722 $ 1,7352,492
========== ========= ========= =================== =========
Cash Flow
---------17
CASH FLOW
We generated $1.83$2.35 billion of cash from operating activities during the
first twothree quarters of 2001 compared to $1.95$2.08 billion during the first
twothree quarters of 2000. Cash flow from operating activities decreasedincreased
in the first twothree quarters of 2001 largely due to an increase in
working
capitalearnings and an increase in cash tax payments.trade accounts payable.
Investing activities used $1.20$1.61 billion of cash during the first twothree
quarters of 2001 compared to $912 million$1.25 billion in 2000. This increase in
use of cash was primarily because ofdue to payments for acquisitions and
increased capital spending.
Financing activities used $653$759 million of cash during the first twothree
quarters of 2001 compared to $1.16 billion$980 million during the first twothree
quarters of 2000. This reduction in the use of cash was primarily
because of proceeds received from the issuance of debt during 2001
offset by an increase in treasury stock purchases.purchases and a decrease in
book overdrafts.
CAPITAL EXPENDITURES
Capital expenditures including acquisitions totaled $540$530 million in the
secondthird quarter of 2001 compared to $384$400 million in the secondthird quarter of
2000. During the secondthird quarter of 2001 we opened, acquired, expanded,
or relocated 3833 food stores. We had 1915 operational closings and
completed 2226 within the wall remodels. Square footage increased 4.0%.
15
17
OTHER ISSUES
Kroger has completed the $750 million stock repurchase program
announced in April 2000 and continues to repurchase Kroger stock under
the $1 billion repurchase program authorized in March 2001. This
program had remaining authorized purchases of approximately $766
million as of third quarter, 2001.
Emerging Issues Task Force (EITF) Issue Nos. 00-14, "Accounting for
Certain Sales Incentives;" 00-22, "Accounting for "Points" and Certain
Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers
for Free Products or Services to be Delivered in the Future;" and
00-25, "Vendor Income Statement Characterization of Consideration from
a Vendor to a Retailer" become effective for The Kroger Co. beginning in the
first quarter of 2002. These issues address the appropriate accounting
for certain vendor contracts and loyalty programs. The
Company continuesWe continue to
assess the effect these new standards will have on the financial
statements. The Company expectsWe expect the adoption of these standards will not have a
material effect on our financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 141, "Business
Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets"
were issued by the Financial Accounting Standards Board in late June of
2001. SFAS 141 is effective for all business combinations initiated
after June 30, 2001 and SFAS 142 will become effective for The Kroger
Co. on
February 3, 2002. We are currently analyzing the effect theestimate that adoption of these standardsSFAS 142 will have on its financial statements.improve
fiscal 2002 earnings by approximately $90 million to $100 million.
Statement onof Financial Accounting Standards ("SFAS") No. 143, "Asset
Retirement Obligations," was issued by the Financial Accounting
Standards Board in August of 2001. SFAS 143 will become effective for
The Kroger Co. on February 2, 2003. The company isWe are currently analyzing the effect this
standard will have on its financial statements.
Statement of Financial Accounting Standards ("SFAS") No. 133,
"Accounting for Derivative Instruments and Hedging Activities," as
amended by SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement
No. 133," and SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities," became effective for
Kroger as of February 4, 2001. SFAS No. 133, as amended, defines
derivatives, requires that derivatives be carried at fair value on the
balance sheet, and provides for hedge accounting when certain
conditions are met. Initial adoption of this new accounting standard
resulted in Kroger recording a liability of $9 million, primarily
related to interest rate swaps designated as cash flow hedges, with a
corresponding charge recorded as additional paid inpaid-in capital, net of
income tax effects. An accumulated other comprehensive loss caption was
not utilized due to the immateriality of the balance.
In accordance with SFAS No. 133, derivative financial instruments are
recognized on the balance sheet at fair value. Changes in the fair
value of derivative instruments designated as "cash flow" hedges, to
the extent the hedges are highly effective, are recorded in other
comprehensive income, net of related tax effects. The ineffective
portion of the cash flow hedge, if any, is recognized in current-period
earnings. Other comprehensive income is reclassified to current-period
earnings when the hedged transaction affects earnings. Changes in the
fair value of derivative instruments designated as fair value hedges,
along with the corresponding changes in the fair values of the hedged
assets or liabilities, are recorded in current-period earnings.
18
We assess, both at inception of the hedge and on an ongoing basis,
whether derivatives used as hedging instruments are highly effective in
offsetting the changes in the fair value or cash flow of hedged items.
If we determine that a derivative is not highly effective as a hedge or
ceases to be highly effective, we discontinue hedge accounting
prospectively.
As of August 18,November 10, 2001, we maintain five interest rate swaps and one
interest rate collar designated as cash flow hedges of variable rate
debt. We recorded a year-to-dateliability totaling $21 million for these
instruments. We also recorded a liability of $15$44 million related to the fair value of its derivative instruments. These
instruments are designated as, and are considered, effectivea
cash flow hedges.hedge of electricity purchases, as more fully described
below. Hedge ineffectiveness was not material for these instruments
during the quarter, and year-to-date, for the period ended August 18,November 10,
2001. We recorded a corresponding charge as a part of additional
paid inpaid-in capital, net of income tax effects. 16In addition, we maintain
five interest rate swaps designated as fair value hedges of its fixed
rate debt. As of November 10, 2001, we recorded an asset totaling $7
million to reflect the fair value of these swaps, offset by a liability
for the same amount to reflect the impact of the change in interest
rates on the fair value of the debt.
During March through May of 2001, we entered into four separate
commitments to purchase electricity from one of our utility suppliers
in southern California. At the inception of these contracts, forecasted
electricity usage, which was estimated primarily based on historical
energy usage, indicated that it was probable that all of the
electricity would be utilized in the operations of the company. We,
therefore, accounted for the contracts in accordance with the normal
purchases and normal sales exception under SFAS No. 133, as amended,
and no amounts were recorded in the financial statements related to
these purchase commitments.
During the third quarter, 2001 we reassessed our projected energy
requirements in southern California. Due primarily to energy
conservation programs initiated by Kroger in the latter half of 2001 we
determined we no longer needed all of the energy which we had committed
to purchase. As a result, one of the contracts, and a portion of a
second contract, were deemed to exceed expected energy usage, thereby
eliminating the normal purchases and normal sales exception under SFAS
133 for those contracts, and requiring the fair value of the contracts
to be recorded currently in earnings. These contracts will continue to
be marked-to-market through current earnings each quarter. Accordingly,
we recorded a third quarter charge of $81 million reflecting the
estimated fair value of these contracts through December 2006. The
remaining portion of the second contract has been re-designated as a
cash flow hedge of future purchases. The other two purchase commitments
continue to qualify for the normal purchases and normal sales exception
under SFAS No. 133.
Statement of Financial Accounting Standards ("SFAS") No. 144,
"Accounting for the Impairment or Disposal of Long-Lived Assets," was
issued by the Financial Accounting Standards Board in August of 2001.
SFAS 143 will become effective for Kroger on February 3, 2002. We are
currently analyzing the effect this standard will have on the financial
statements.
19
18
OUTLOOK
Information provided by us, including written or oral statements made
by our representatives, may contain forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. All
statements, other than statements of historical facts, which address
activities, events or developments that we expect or anticipate will or
may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of our
business, future capital expenditures and our business strategy,
contain forward-looking information. Statements elsewhere in this
report and below regarding our expectations, hopes, beliefs,
intentions, or strategies are also forward looking statements. This
forward-looking information is based on various factors and was derived
utilizing numerous assumptions. While we believe that the statements
are accurate, uncertainties and other factors could cause actual
results to differ materially from those statements. In particular:
- We expect to reduce net operating working capital as compared
to the third quarter of 1999 by a total of $500 million by the
end of the third quarter 2004. Our ability to achieve this
reduction could be adversely affected by: increases in product
costs; our ability to obtain sales growth from new square
footage; competitive activity in the markets in which we
operate; changes in our product mix; changes in laws and
regulations; and other factors. We calculate net operating
working capital as detailed in the table below. As of the end
of the secondthird quarter of 2001, net operating working capital
increased $235$67 million since the secondthird quarter of 2000.2000, but
decreased $44 million since the third quarter of 1999. A
calculation of net operating working capital, after
reclassification of certain balance sheet amounts based on our definitionto conform
to current year presentation, for the third quarter of 1999,
the secondthird quarter of 2000, and the secondthird quarter of 2001 is
provided below:
Third Second SecondThird Third
Quarter Quarter 2000 Quarter
1999 2000 2001
-------------------------------------
(in millions)
Cash................................. Cash...................................$ 283 $ 155130 $ 137
Receivables..........................143
Receivables............................ 633 583 649628 685
FIFO inventory.......................inventory......................... 4,632 4,133 4,3754,744 4,910
Operating prepaid and other assets...assets..... 200 252 256186 207
Accounts payable.....................payable....................... (3,222) (2,940) (3,118)(3,300) (3,447)
Operating accrued liabilities........liabilities.......... (1,937) (1,932) (1,851)(1,907) (1,953)
Prepaid VEBA.........................VEBA........................... -- (56) (18)(3) --
------- -------- -----------------------------
Working capital ..................... .......................$ 589 $ 195478 $ 430
========545
========= ======== ========
- We obtain sales growth from new square footage, as well as
from increased productivity from existing locations. We expect
2001 full year square footage to grow 4.0% to 4.5%, excluding
major acquisitions. We expect combination stores to increase
our sales per customer by including numerous specialty
departments, such as pharmacies, natural food products, fuel
centers, seafood shops, floral shops, and bakeries. We believe
the combination store format will allow us to completecompete
effectively with other food retailers, supercenters, mass
merchandisers, club or warehouse stores, drug stores and
restaurants. Our square footage growth may not meet our
expectations if real estate projects are not completed as
scheduled or if a general economic downturn causes us to delay
projects. Our projected increases in sales per customer may
not be achieved if customers reduce spending for
"non-essential" items in our specialty departments.
20
- Our targeted annual earnings per shareOn December 11, 2001, Kroger outlined a strategic growth is
16%-18% through the fiscal year ending February 1,
2003plan
that will support additional investment in core business to
grow sales and 15% thereafter. Our abilityincrease market share. We intend to achieve
identical supermarket store sales growth of 2% to 3% above
product cost inflation and reduce merchandising and operating,
general, and administrative costs by more than $500 million
over the next two years. As part of the plan to reduce annual
operating, general, and administrative costs, Kroger will
eliminate approximately 1,500 managerial and clerical
positions over the next 12 months. We also will merge one
existing division into two adjacent marketing areas. We have
also identified new opportunities to further leverage our
economies of scale by centralizing additional merchandising
and procurement functions.
As part of the plan, we have established a long-term,
sustainable annual earnings-per-share ("EPS") growth target of
13%-15% beginning in fiscal 2004. For fiscal 2002 and 2003, we
expect annual EPS growth of 10%-12%. We also estimate that
adoption of SFAS 142 will improve fiscal 2002 earnings by
approximately $90 million to $100 million beyond the expected
growth rate of 10%-12%.
Kroger estimates free cash flow to be approximately $550-$650
in fiscal 2002. The estimate reflects capital spending of $2.1
billion, which is consistent with prior plans, and a net
working capital reduction of $100 million.
We expect to incur a pre-tax charge of approximately $85-$100
million to reflect severance and other costs associated with
implementing this strategic growth couldplan. The majority of the
charge will be adversely affected by: general
economic conditions; competitive activitytaken in the markets in which we operate; increases in product
costs; prolonged union work stoppages; interest rate
fluctuations; our ability to obtain sales growth from
new square footage; and other factors not
specifically identified.
17
19fourth quarter, 2001.
- Capital expenditures reflect our strategy of growth through
expansion and acquisition as well as our emphasis on
self-development and ownership of real estate, and on
logistics and technology improvements. The continued capital
spending in technology focusing on improved store operations,
logistics, manufacturing procurement, category management,
merchandising and buying practices, should reduce
merchandising costs as a percent of sales. We expect our
capital expenditures for fiscal 2001 to total $2.0 billion,
excluding acquisitions. We intend to use the combination of
free cash flow from operations and borrowings under credit
facilities to finance capital expenditure requirements. If
determined preferable, we may fund capital expenditure
requirements by mortgaging facilities, entering into
sale/leaseback transactions, or by issuing additional debt or
equity.
- This analysis contains certain forward-looking statements
about Kroger's future performance. These statements are based
on management's assumptions and beliefs in light of the
information currently available. Such statements relate to,
among other things: projected growth in earnings per share
("EPS"); working capital reduction; a decline in our net total
debt-to-EBITDA ratio; our ability to generate free cash flow;
and our strategic growth plan, and are indicated by words or
phrases such as "comfortable," "committed," "expects," "goal,"
and similar words or phrases. These forward-looking statements
are subject to uncertainties and other factors that could
cause actual results to differ materially. Our ability to
achieve annual EPS growth goals will be affected primarily by
pricing and promotional activities of existing and new
competitors, including non-traditional food retailers, and our
response to these actions intended to increase market share.
In addition, Kroger's EPS growth goals could be affected by:
increases in product costs; newly opened or consolidated
distribution centers; our ability to obtain sales growth from
new square footage; competitive activity in the markets in
which we operate; changes in our product mix; and changes in
laws and regulations. Our ability to reduce our net total
debt-to-EBITDA ratio could be adversely affected by: our
ability to generate sales growth and free cash flow; interest
rate fluctuations and other changes in capital market
conditions; Kroger's stock repurchase activity; unexpected
increases in the cost of capital expenditures; acquisitions;
and other factors. The results of our strategic growth plan
and our ability to generate free cash flow to the extent
expected could be adversely affected if any of the factors
identified above negatively impact our operations. In
addition, the timing of the execution of the plan could
adversely impact our EPS and sales results.
- Based on current operating results, we believe that operating
cash flow and other sources of liquidity, including borrowings
under our commercial paper program and bank credit facilities,
will be adequate to meet anticipated requirements for working
capital, capital expenditures, interest payments and scheduled
principal payments for the foreseeable future. We also believe
we have adequate coverage of our debt covenants to continue
responding effectively to competitive conditions.
- A decline in sufficient cash flows to support capital
expansion plans, share repurchase programs and general
operating activities could cause our growth to slow
significantly and may cause us to miss our earnings targets,
because we obtain some of our sales growth from new square
footage.
21
- The grocery retailing industry continues to experience fierce
competition from other grocery retailers, supercenters, club
or warehouse stores, and drug stores. Our ability to maintain
our current success is dependent upon our ability to compete
in this industry and continue to reduce operating expenses.
The competitive environment may cause us to reduce our prices
in order to gain or maintain share of sales, thus reducing
margins. While we believe our opportunities for sustained,
profitable growth are considerable, unanticipated actions of
competitors could impact our share of sales and net income.
- Changes in laws and regulations, including changes in
accounting standards, taxation requirements, and environmental
law may have a material impact on our financial statements.
- Changes in the general business and economic conditions in our
operating regions, including the rate of inflation, population
growth, and employment and job growth in the markets in which
we operate may affect our ability to hire and train qualified
employees to operate our stores. This would negatively affect
earnings and sales growth. General economic changes may also
effect the shopping habits of our customers, which could
affect sales and earnings.
- Changes in our product mix may negatively affect certain
financial indicators. For example, we have added and will
continue to add supermarket fuel centers. Since gasoline is a
low profit margin item with high sales dollars, we expect to
see our gross profit margins decrease as we sell more
gasoline. Although this negatively affects our gross profit
margin, gasoline provides a positive affect on EBITDA and net
earnings.
- Our ability to integrate any companies we acquire or have
acquired and achieve operating improvements at those companies
will affect our operations.
- We retain a portion of the exposure for our workers'
compensation and general liability claims. It is possible that
these claims may cause significant expenditures that would
affect our operating cash flows.
- Our capital expenditures could fall outside of the expected
range if we are unsuccessful in acquiring suitable sites for
new stores, if development costs exceed those budgeted, or if
our logistics and technology projects are not completed in the
time frame expected or on budget.
- Adverse weather conditions could increase the cost our
suppliers charge for our products, or may decrease the
customer demand for certain products. Additionally, increases
in the cost of inputs, such as utility costs or raw material
costs, could negatively impact financial ratios and net
earnings.
- Although we currently operate only in the United States, the
prices we are charged for imported goods could be affected by
civil unrest in foreign countries where our suppliers do
business. If we are unable to pass these increases on to our
customers our gross margin and EBITDA will suffer.
18
20
- Interest rate fluctuation and other capital market conditions
may cause variability in earnings. Although we use derivative
financial instruments to reduce our net exposure to financial
risks, we are still exposed to interest rate fluctuations and
other capital market conditions.
- We cannot fully foresee the effects of the tragic events of
September 11, 2001, or the general economic
downtown upon Kroger's business. We have assumed the Company's business.economic
situation and competitive situations will not improve
significantly for the next two years.
Other factors and assumptions not identified above could also cause
actual results to differ materially from those set forth in the
forward-looking information. Accordingly, actual events and results may
vary significantly from those included in or contemplated or implied by
forward-looking statements made by our representatives or us.
1922
21
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to market risk from the changes in interest rates as a
result of borrowing activities. WeTo manage the volatility of this risk
in a cost effective manner, we continue to utilize interest rate swaps
and caps to limit our exposure to rising interest rates.caps. We use derivatives primarily to fixmanage the rates on variable debtCompany's interest cost and
limit the floating rate debt to a total of $2.3 billion or less.
There have been no significant changes in our exposure to market risk
from the information provided in Item 7A. Quantitative and Qualitative
Disclosures About Market Risk on our Form 10-K filed with the SEC on
May 2, 2001.
2023
22
PART II - OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) June 21, 2001 - Annual Meeting
(b)1. LEGAL PROCEEDINGS
On September 13, 1996, a class action lawsuit titled McCampbell, et
al., v. Ralphs Grocery Company, et al., was filed in the Superior
Court of the State of California, County of San Diego, against Ralphs
Grocery Company ("Ralphs/Food 4 Less") and two other grocery chains
operating in the Southern California area. The shareholders elected four directorscomplaint alleged,
among other things, that Ralphs/Food 4 Less and others conspired to
serve untilfix the annual meetingretail price of shareholderseggs in 2004 or until their
successors have been elected and qualified and ratified the
selection of PricewaterhouseCoopers LLP, as Company auditors
for 2001.Southern California. The shareholders also adopted a shareholder proposal
requestingplaintiffs
claimed that the Boarddefendants' actions violated the provisions of Directors take stepsthe
California Cartwright Act and constituted unfair competition. The
plaintiffs sought damages they purported to implementhave sustained as a
result of the annual electiondefendants' alleged actions, which damages were subject
to trebling under the applicable statute, and an injunction from
future actions in restraint of trade and unfair competition. A class
was certified consisting of all Board members as opposedretail purchasers of white chicken
eggs sold by the dozen in Los Angeles, Riverside, San Diego,
Imperial, and Orange counties from September 13, 1992.
The case proceeded to electiontrial before a jury in classesJuly and defeatedAugust 1999. On
September 2, 1999, the jury returned a shareholder proposal
recommendingverdict in favor of
Ralphs/Food 4 Less and against the Company labelplaintiffs. Judgment was entered
in favor of Ralphs/Food 4 Less on November 1, 1999. Plaintiffs
appealed the judgment and identify all products sold
under its brand names or private labels that may contain
genetically engineered crops, organisms or products.
Votes were cast as follows:
For Withheld
----------- -----------
To Serve Until 2004
-------------------
John L. Clendenin 602,206,422 134,802,546
David B. Dillon 605,593,361 131,415,607
Bruce Karatz 606,339,537 130,669,431
Thomas H. O'Leary 602,339,635 134,669,333
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
PricewaterhouseCoopers LLP 724,044,937 8,788,911 4,175,120 --
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
Shareholder proposal
(declassify Board) 399,384,890 251,811,552 11,002,368 74,810,158
For Against Withheld Broker Non-Votes
---------- ----------- ---------- ----------------
Shareholder proposal
(genetically engineered items) 91,492,862 506,219,156 64,486,792 74,810,158
21
23the Court of Appeals affirmed the judgment
in favor Ralphs/Food 4 Less. Plaintiffs have filed a petition for
review with the California Supreme Court.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.
(a) EXHIBIT 3.1 - Amended Articles of Incorporation of the Company
are hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter ended
October 3, 1998. The Company's Regulations are incorporated by
reference to Exhibit 4.2 of the Company's Registration
Statement on Form S-3 as filed with the Securities and
Exchange Commission on January 28, 1993, and bearing
Registration No. 33-57552.
EXHIBIT 4.1 - Instruments defining the rights of holders of
long-term debt of the Company and its subsidiaries are not
filed as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets of the
Company. The Company undertakes to file these instruments with
the Commission upon request.
EXHIBIT 99.1 - Additional Exhibits - Statement of Computation
of Ratio of Earnings to Fixed Charges.
(b) The Company disclosed and filed a new 364 - Day Credit
Agreement and Five-Year Credit Agreement, both dated as of May
23, 2001, in its Current Report on Form 8-K dated May 31,
2001; an announcement of firstsecond quarter, 2001
earnings results in its Current Report on Form 8-K dated
June 26, 2001; and an
underwriting agreement, pricing agreement, and the Twelfth
Supplemental Indenture related to the issuance of $250,000,000
of Debt Securities in the form of Puttable Reset Securities
due 2012 in its Current Report on Form 8-K dated August 16,September 19, 2001.
2224
24
SIGNATURES
----------
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE KROGER CO.
Dated: October 1,December 21, 2001 By: /s/ Joseph A. Pichler
----------------------------------
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: October 1,December 21, 2001 By: /s/ M. Elizabeth Van Oflen
----------------------------------
M. Elizabeth Van Oflen
Vice President and
Corporate Controller
25
Exhibit Index
-------------
Exhibit 3.1 - Amended Articles of Incorporation of the Company are
hereby incorporated by reference to Exhibit 3.1 of the
Company's Quarterly Report on Form 10-Q for the quarter
ended October 3, 1998. The Company's Regulations are
incorporated by reference to Exhibit 4.2 of the
Company's Registration Statement on Form S-3 as filed
with the Securities and Exchange Commission on January
28, 1993, and bearing Registration No. 33-57552.
Exhibit 4.1 - Instruments defining the rights of holders of long-term
debt of the Company and its subsidiaries are not filed
as Exhibits because the amount of debt under each
instrument is less than 10% of the consolidated assets
of the Company. The Company undertakes to file these
instruments with the Commission upon request.
Exhibit 10.1 - 364 - Day Credit Agreement and Five- Year Credit
Agreement, both dated as of May 23, 2001, among The
Kroger Co., as Borrower; the Initial Lenders named
therein; Citibank, N.A. and The Chase Manhattan
Bank, as Administrative Agents; and Bank of
America, N.A., Bank One, N.A., and The Bank of New
York, as Co-Syndication Agents. Incorporated by
reference to Exhibit 99.1 and 99.2 of the Company's
Current Report on Form 8-K dated May 31, 2001.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio
of Earnings to Fixed Charges.