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 May 22, 2010

 

OR

 

o      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

 


 

(Exact name of registrant as specified in its charter)

 


 

Ohio

 

31-0345740

(State or other jurisdiction of

 

(I.R.S. Employer

incorporation or organization)

 

Identification No.)

 

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

 

(513) 762-4000

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 


 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer x

 

Accelerated filer o

 

 

 

Non-accelerated filer o

 

Smaller reporting company o

(do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x.

 

There were 642,071,330 shares of Common Stock ($1 par value) outstanding as of June 25, 2010.

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1.           Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

 

 

First Quarter Ended

 

 

 

May 22,

 

May 23,

 

 

 

2010

 

2009

 

Sales

 

$

24,764

 

$

22,789

 

Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below

 

19,168

 

17,266

 

Operating, general and administrative

 

4,195

 

4,026

 

Rent

 

200

 

200

 

Depreciation and amortization

 

478

 

453

 

 

 

 

 

 

 

Operating profit

 

723

 

844

 

Interest expense

 

132

 

163

 

 

 

 

 

 

 

Earnings before income tax expense

 

591

 

681

 

Income tax expense

 

216

 

250

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

 

375

 

431

 

Net earnings (loss) attributable to noncontrolling interests

 

1

 

(4

)

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

374

 

$

435

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per basic common share

 

$

0.58

 

$

0.67

 

 

 

 

 

 

 

Average number of common shares used in basic calculation

 

641

 

648

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share

 

$

0.58

 

$

0.66

 

 

 

 

 

 

 

Average number of common shares used in diluted calculation

 

645

 

651

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.095

 

$

.09

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

2



 

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)

 

 

 

May 22,

 

January 30,

 

 

 

2010

 

2010

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and temporary cash investments

 

$

602

 

$

424

 

Deposits in-transit

 

675

 

654

 

Receivables

 

828

 

909

 

FIFO inventory

 

5,557

 

5,705

 

LIFO reserve

 

(785

)

(770

)

Prefunded employee benefits

 

3

 

300

 

Prepaid and other current assets

 

302

 

261

 

Total current assets

 

7,182

 

7,483

 

 

 

 

 

 

 

Property, plant and equipment, net

 

13,976

 

13,929

 

Goodwill

 

1,158

 

1,158

 

Other assets

 

565

 

556

 

 

 

 

 

 

 

Total Assets

 

$

22,881

 

$

23,126

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

528

 

$

579

 

Trade accounts payable

 

3,963

 

3,890

 

Accrued salaries and wages

 

832

 

786

 

Deferred income taxes

 

354

 

354

 

Other current liabilities

 

2,124

 

2,118

 

Total current liabilities

 

7,801

 

7,727

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

Face-value of long-term debt including obligations under capital leases and financing obligations

 

6,936

 

7,420

 

Adjustment to reflect fair-value interest rate hedges

 

61

 

57

 

Long-term debt including obligations under capital leases and financing obligations

 

6,997

 

7,477

 

 

 

 

 

 

 

Deferred income taxes

 

560

 

568

 

Pension and postretirement benefit obligations

 

1,075

 

1,082

 

Other long-term liabilities

 

1,342

 

1,346

 

 

 

 

 

 

 

Total Liabilities

 

17,775

 

18,200

 

 

 

 

 

 

 

Commitments and contingencies (see Note 8)

 

 

 

 

 

 

 

 

 

 

 

SHAREOWNERS’ EQUITY

 

 

 

 

 

 

 

 

 

 

 

Preferred stock, $100 par per share, 5 shares authorized and unissued

 

¾

 

¾

 

Common stock, $1 par per share, 1,000 shares authorized; 959 shares issued in 2010 and 958 shares issued in 2009

 

959

 

958

 

Additional paid-in capital

 

3,364

 

3,361

 

Accumulated other comprehensive loss

 

(577

)

(593

)

Accumulated earnings

 

7,676

 

7,364

 

Common stock in treasury, at cost, 319 shares in 2010 and 316 shares in 2009

 

(6,314

)

(6,238

)

 

 

 

 

 

 

Total Shareowners’ Equity - The Kroger Co.

 

5,108

 

4,852

 

Noncontrolling interests

 

(2

)

74

 

 

 

 

 

 

 

Total Equity

 

5,106

 

4,926

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

22,881

 

$

23,126

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

3



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions and unaudited)

 

 

 

Quarter Ended

 

 

 

May 22,
2010

 

May 23,
2009

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings including noncontrolling interests

 

$

375

 

$

431

 

Adjustments to reconcile net earnings to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

478

 

453

 

LIFO charge

 

15

 

23

 

Stock-based employee compensation

 

26

 

25

 

Expense for Company-sponsored pension plans

 

22

 

12

 

Deferred income taxes

 

(8

)

54

 

Other

 

10

 

6

 

Changes in operating assets and liabilities net of effects from acquisitions of businesses:

 

 

 

 

 

Store deposits in-transit

 

(20

)

(26

)

Receivables

 

12

 

18

 

Inventories

 

148

 

25

 

Prepaid expenses

 

255

 

171

 

Trade accounts payable

 

156

 

245

 

Accrued expenses

 

(55

)

(97

)

Income taxes receivable and payable

 

165

 

176

 

Contribution to Company-sponsored pension plans

 

(27

)

(200

)

Other

 

1

 

(28

)

 

 

 

 

 

 

Net cash provided by operating activities

 

1,553

 

1,288

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Payments for capital expenditures

 

(542

)

(635

)

Proceeds from sale of assets

 

8

 

6

 

Payments for acquisitions

 

(7

)

¾

 

Other

 

(3

)

(5

)

 

 

 

 

 

 

Net cash used by investing activities

 

(544

)

(634

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

3

 

3

 

Dividends paid

 

(61

)

(59

)

Payments on long-term debt

 

(544

)

(25

)

Payments on credit facility

 

¾

 

(129

)

Excess tax benefits on stock-based awards

 

1

 

¾

 

Proceeds from issuance of capital stock

 

12

 

2

 

Treasury stock purchases

 

(80

)

(20

)

Decrease in book overdrafts

 

(83

)

(53

)

Investment in the remaining interest of a variable interest entity

 

(86

)

¾

 

Other

 

7

 

2

 

 

 

 

 

 

 

Net cash used by financing activities

 

(831

)

(279

)

 

 

 

 

 

 

Net increase in cash and temporary cash investments

 

178

 

375

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

Beginning of year

 

424

 

263

 

End of quarter

 

$

602

 

$

638

 

 

 

 

 

 

 

Reconciliation of capital expenditures:

 

 

 

 

 

Payments for property and equipment

 

$

(542

)

$

(635

)

Changes in construction-in-progress payables

 

(1

)

(18

)

Total capital expenditures

 

$

(543

)

$

(653

)

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

Cash paid during the quarter for interest

 

$

149

 

$

163

 

Cash paid during the quarter for income taxes

 

$

54

 

$

37

 

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

4



 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(in millions, except per share amounts)

(unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Accumulated

 

 

 

 

 

 

 

 

 

 

 

 

 

Additional

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

Common Stock

 

Paid-In

 

Treasury Stock

 

Comprehensive

 

Accumulated

 

Noncontrolling

 

 

 

 

 

Shares

 

Amount

 

Capital

 

Shares

 

Amount

 

Gain (Loss)

 

Earnings

 

Interest

 

Total

 

Balances at January 31, 2009

 

955

 

$

955

 

$

3,266

 

306

 

$

(6,039

)

$

(495

)

$

7,538

 

$

95

 

$

5,320

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

 

 

2

 

 

 

 

 

 

2

 

Restricted stock issued

 

 

 

(5

)

 

3

 

 

 

 

(2

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

1

 

(17

)

 

 

 

(17

)

Stock options exchanged

 

 

 

 

 

(3

)

 

 

 

(3

)

Tax benefits from exercise of stock options

 

 

 

2

 

 

 

 

 

 

2

 

Share-based employee compensation

 

 

 

25

 

 

 

 

 

 

25

 

Other comprehensive gain net of income tax of $-

 

 

 

 

 

 

1

 

 

 

1

 

Other

 

 

 

1

 

 

 

 

 

(7

)

(6

)

Cash dividends declared ($0.09 per common share)

 

 

 

 

 

 

 

(59

)

 

(59

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

435

 

(4

)

431

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at May 23, 2009

 

955

 

$

955

 

$

3,291

 

307

 

$

(6,056

)

$

(494

)

$

7,914

 

$

84

 

$

5,694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at January 30, 2010

 

958

 

$

958

 

$

3,361

 

316

 

$

(6,238

)

$

(593

)

$

7,364

 

$

74

 

$

4,926

 

Issuance of common stock:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock options exercised

 

1

 

1

 

10

 

 

2

 

 

 

 

13

 

Restricted stock issued

 

 

 

(3

)

 

2

 

 

 

 

(1

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

2

 

(59

)

 

 

 

(59

)

Stock options exchanged

 

 

 

 

1

 

(21

)

 

 

 

(21

)

Tax detriments from exercise of stock options

 

 

 

(8

)

 

 

 

 

 

(8

)

Share-based employee compensation

 

 

 

26

 

 

 

 

 

 

26

 

Other comprehensive gain net of income tax of $6

 

 

 

 

 

 

16

 

 

 

16

 

Other

 

 

 

 

 

 

 

(1

)

(10

)

(11

)

Investment in the remaining interest of a variable interest entity

 

 

 

(22

)

 

 

 

 

(67

)

(89

)

Cash dividends declared ($0.095 per common share)

 

 

 

 

 

 

 

(61

)

 

(61

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

374

 

1

 

375

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at May 22, 2010

 

959

 

$

959

 

$

3,364

 

319

 

$

(6,314

)

$

(577

)

$

7,676

 

$

(2

)

$

5,106

 

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5



 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All amounts in the notes to Consolidated Financial Statements are in millions except per share amounts.

 

Certain prior-year amounts have been reclassified to conform to current-year presentation.

 

1.              ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary.  The January 30, 2010 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the 2009 Annual Report on Form 10-K of The Kroger Co. for the fiscal year ended January 30, 2010.

 

The unaudited information in the Consolidated Financial Statements for the first quarter ended May 22, 2010, and May 23, 2009, includes the results of operations of the Company for the 16-week periods then ended.

 

The Company reflects certain promotional allowances in its LIFO charge. During the first quarter of the 2010 LIFO analysis, the Company revised the LIFO reserve to reflect certain prior year promotional allowances in prior year LIFO indices. By not including these promotional allowances in all LIFO indices, the Company overstated its LIFO reserve for years 2007 and prior. The Company believes this correction is not material to any individual year or any quarterly period within the years presented. As a result, the Company has increased beginning accumulated earnings and reduced its LIFO reserve on the Consolidated Financial Statements by $33 ($20 after-tax).

 

2.              DEBT OBLIGATIONS

 

Long-term debt consists of:

 

 

 

May 22,

 

January 30,

 

 

 

2010

 

2010

 

3.90% to 8.00% Senior Notes and Debentures due through 2038

 

$

6,808

 

$

7,308

 

5.00% to 9.50% Mortgages due in varying amounts through 2034

 

81

 

105

 

Other

 

156

 

163

 

 

 

 

 

 

 

Total debt, excluding capital leases and financing obligations

 

7,045

 

7,576

 

 

 

 

 

 

 

Less current portion

 

(497

)

(549

)

 

 

 

 

 

 

Total long-term debt, excluding capital leases and financing obligations

 

$

6,548

 

$

7,027

 

 

With the proceeds received from the Company’s third quarter of 2009 issuance of $500 of senior notes bearing an interest rate of 3.90% due in 2015, the Company repaid $500 of senior notes bearing an interest rate of 8.05% that matured in the first quarter of 2010.

 

6



 

3.              COMPREHENSIVE INCOME

 

Comprehensive income is as follows:

 

 

 

First Quarter Ended

 

 

 

May 22,
2010

 

May 23,
2009

 

Net earnings including noncontrolling interests

 

$

375

 

$

431

 

Unrealized gain on available for sale securities, net of income tax

 

7

 

 

Amortization of amounts included in net periodic pension expense, net of income tax(1)

 

8

 

 

Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax

 

1

 

1

 

 

 

 

 

 

 

Comprehensive income

 

391

 

432

 

Comprehensive income (loss) attributable to noncontrolling interests

 

1

 

(4

)

 

 

 

 

 

 

Comprehensive income attributable to The Kroger Co.

 

$

390

 

$

436

 

 


(1)

 

Amount is net of tax of $6 for the first quarter of 2010.

 

4.              BENEFIT PLANS

 

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first quarter of 2010 and 2009.

 

 

 

First Quarter

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost 

 

$

14

 

$

10

 

$

4

 

$

3

 

Interest cost 

 

52

 

54

 

6

 

5

 

Expected return on plan assets 

 

(60

)

(54

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost 

 

 

1

 

(2

)

(2

)

Actuarial loss (gain) 

 

16

 

1

 

(1

)

(1

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost 

 

$

22

 

$

12

 

$

7

 

$

5

 

 

The Company contributed $27 and $200 to Company-sponsored pension plans in the first quarter of 2010 and 2009, respectively.

 

The Company contributed $37 and $35 to employee 401(k) retirement savings accounts in the first quarter of 2010 and 2009, respectively.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.

 

7



 

5.              EARNINGS PER COMMON SHARE

 

Net earnings attributable to The Kroger Co. per basic common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding.  Net earnings attributable to The Kroger Co. per diluted common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options.  The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:

 

 

 

First Quarter Ended

 

First Quarter Ended

 

 

 

May 22, 2010

 

May 23, 2009

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Net earnings attributable to The Kroger Co. per basic common share 

 

$

371

 

641

 

$

0.58

 

$

432

 

648

 

$

0.67

 

Dilutive effect of stock options

 

 

 

4

 

 

 

 

 

3

 

 

 

Net earnings attributable to The Kroger Co. per diluted common share 

 

$

371

 

645

 

$

0.58

 

$

432 

 

651

 

$

0.66

 

 

The Company had undistributed and distributed earnings to participating securities totaling $3 in both the first quarters of 2010 and 2009.

 

The Company had options outstanding for approximately 19 and 21 shares during the first quarter of 2010 and 2009, respectively, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.

 

6.              RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity that will not become effective until interim and annual periods beginning after December 15, 2010.  The new standard requires the Company to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements.  The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements.  See Note 9 to the Consolidated Financial Statements for the Company’s fair value measurements and disclosures.

 

In June 2009, the FASB amended its existing standards related to the consolidation of VIE’s, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard requires an entity to analyze whether its variable interests give it a controlling financial interest of a VIE and outlines what defines a primary beneficiary.  The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE, among other amendments.  The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE.  The adoption of these new standards did not have a material effect on the Company’s Consolidated Financial Statements.

 

8



 

7.    GUARANTOR SUBSIDIARIES

 

The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of its subsidiaries (the “Guarantor Subsidiaries”).  At May 22, 2010, a total of approximately $6,808 of Guaranteed Notes was outstanding.  The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co.  Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable.  The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

 

The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity.  Therefore, the non-guarantor subsidiaries’ information is not separately presented in the tables below.

 

There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, 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).

 

9



 

The following tables present summarized financial information as of May 22, 2010 and January 30, 2010 and for the first quarter ended May 22, 2010 and May 23, 2009:

 

Condensed Consolidating

Balance Sheets

As of May 22, 2010

 

 

 

The Kroger
Co. 

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

$

25

 

$

 577

 

$

 

$

602

 

Deposits in-transit

 

71

 

604

 

 

675

 

Receivables

 

2,172

 

655

 

(1,999

)

828

 

Net inventories

 

505

 

4,267

 

 

4,772

 

Prepaid and other current assets

 

98

 

207

 

 

305

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

2,871

 

6,310

 

(1,999

)

7,182

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,835

 

12,141

 

 

13,976

 

Goodwill

 

5

 

1,153

 

 

1,158

 

Other assets

 

870

 

1,801

 

(2,106

)

565

 

Investment in and advances to subsidiaries

 

9,864

 

 

(9,864

)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

15,445

 

$

21,405

 

$

(13,969

)

$

22,881

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

528

 

$

 

$

 

$

528

 

Trade accounts payable

 

364

 

3,599

 

 

3,963

 

Other current liabilities

 

875

 

6,540

 

(4,105

)

3,310

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,767

 

10,139

 

(4,105

)

7,801

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

 

 

 

 

Face value of long-term debt including obligations under capital leases and financing obligations

 

6,936

 

 

 

6,936

 

Adjustment to reflect fair value interest rate hedges

 

61

 

 

 

61

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

6,997

 

 

 

6,997

 

Other long-term liabilities

 

1,575

 

1,402

 

 

2,977

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

10,339

 

11,541

 

(4,105

)

17,775

 

 

 

 

 

 

 

 

 

 

 

Shareowners’ Equity

 

5,106

 

9,864

 

(9,864

)

5,106

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

15,445

 

$

21,405

 

$

(13,969

)

$

22,881

 

 

10



 

Condensed Consolidating

Balance Sheets

As of January 30, 2010

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

$

29

 

$

395

 

$

 

$

424

 

Deposits in-transit

 

76

 

578

 

 

654

 

Receivables

 

2,173

 

734

 

(1,998

)

909

 

Net inventories

 

460

 

4,475

 

 

4,935

 

Prepaid and other current assets

 

405

 

156

 

 

561

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

3,143

 

6,338

 

(1,998

)

7,483

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,823

 

12,106

 

 

13,929

 

Goodwill

 

5

 

1,153

 

 

1,158

 

Other assets

 

814

 

1,771

 

(2,029

)

556

 

Investment in and advances to subsidiaries

 

10,019

 

 

(10,019

)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

15,804

 

$

21,368

 

$

(14,046

)

$

23,126

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

Current portion of long-term debt including obligations under capital leases and financing obligations

 

$

579

 

$

 

$

 

$

579

 

Trade accounts payable

 

372

 

3,518

 

 

3,890

 

Other current liabilities

 

1,135

 

6,150

 

(4,027

)

3,258

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

2,086

 

9,668

 

(4,027

)

7,727

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

 

 

 

 

 

 

 

 

Face value of long-term debt including obligations under capital leases and financing obligations

 

7,420

 

 

 

7,420

 

Adjustment to reflect fair value interest rate hedges

 

57

 

 

 

57

 

 

 

 

 

 

 

 

 

 

 

Long-term debt including obligations under capital leases and financing obligations

 

7,477

 

 

 

7,477

 

Other long-term liabilities

 

1,315

 

1,681

 

 

2,996

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

10,878

 

11,349

 

(4,027

)

18,200

 

 

 

 

 

 

 

 

 

 

 

Shareowners’ Equity

 

4,926

 

10,019

 

(10,019

)

4,926

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

15,804

 

$

21,368

 

$

(14,046

)

$

23,126

 

 

11



 

Condensed Consolidating

Statements of Operations

For the Quarter Ended May 22, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

3,189

 

$

22,008

 

$

(433

)

$

24,764

 

Merchandise costs, including advertising, warehousing and transportation

 

2,604

 

16,997

 

(433

)

19,168

 

Operating, general and administrative

 

546

 

3,649

 

 

4,195

 

Rent

 

36

 

164

 

 

200

 

Depreciation and amortization

 

60

 

418

 

 

478

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(57

)

780

 

 

723

 

Interest expense

 

130

 

2

 

 

132

 

Equity in earnings of subsidiaries

 

533

 

 

(533

)

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income tax expense

 

346

 

778

 

(533

)

591

 

Income tax expense (benefit)

 

(28

)

244

 

 

216

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

374

 

534

 

(533

)

375

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

 

1

 

 

1

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co.

 

$

374

 

$

533

 

$

(533

)

$

374

 

 

Condensed Consolidating

Statements of Operations

For the Quarter Ended May 23, 2009

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

2,883

 

$

20,219

 

$

(313

)

$

22,789

 

Merchandise costs, including advertising, warehousing and transportation

 

2,325

 

15,254

 

(313

)

17,266

 

Operating, general and administrative

 

513

 

3,513

 

 

4,026

 

Rent

 

39

 

161

 

 

200

 

Depreciation and amortization

 

55

 

398

 

 

453

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(49

)

893

 

 

844

 

Interest expense

 

162

 

1

 

 

163

 

Equity in earnings of subsidiaries

 

623

 

 

(623

)

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income tax expense

 

412

 

892

 

(623

)

681

 

Income tax expense (benefit)

 

(23

)

273

 

 

250

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

435

 

619

 

(623

)

431

 

 

 

 

 

 

 

 

 

 

 

Net (loss) attributable to noncontrolling interests

 

 

(4

)

 

(4

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co.

 

$

435

 

$

623

 

$

(623

)

$

435

 

 

12



 

 

Condensed Consolidating

Statements of Cash Flows

For the Quarter Ended May 22, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

107

 

$

1,446

 

$

1,553

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for capital expenditures, excluding acquisitions

 

(48

)

(494

)

(542

)

Other

 

2

 

(4

)

(2

)

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

(46

)

(498

)

(544

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(61

)

 

(61

)

Proceeds from issuance of long-term debt

 

3

 

 

3

 

Payments on long-term debt

 

(544

)

 

(544

)

Proceeds from issuance of capital stock

 

13

 

 

13

 

Treasury stock purchases

 

(80

)

 

(80

)

Other

 

(84

)

(78

)

(162

)

Net change in advances to subsidiaries

 

688

 

(688

)

 

 

 

 

 

 

 

 

 

Net cash provided (used) by financing activities

 

(65

)

(766

)

(831

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(4

)

182

 

178

 

 

 

 

 

 

 

 

 

Cash:

 

 

 

 

 

 

 

Beginning of year

 

29

 

395

 

424

 

 

 

 

 

 

 

 

 

End of quarter

 

$

25

 

$

577

 

$

602

 

 

13



 

Condensed Consolidating

Statements of Cash Flows

For the Quarter Ended May 23, 2009

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Consolidated

 

Net cash provided by operating activities

 

$

168

 

$

1,120

 

$

1,288

 

 

 

 

 

 

 

 

 

Cash flows from investing activities:

 

 

 

 

 

 

 

Payments for capital expenditures, excluding acquisitions

 

(31

)

(604

)

(635

)

Other

 

 

1

 

1

 

 

 

 

 

 

 

 

 

Net cash used by investing activities

 

(31

)

(603

)

(634

)

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

Dividends paid

 

(59

)

 

(59

)

Proceeds from issuance of long-term debt

 

3

 

 

3

 

Payments on long-term debt

 

(25

)

 

(25

)

Proceeds from issuance of capital stock

 

2

 

 

2

 

Treasury stock purchases

 

(20

)

 

(20

)

Other

 

(137

)

(43

)

(180

)

Net change in advances to subsidiaries

 

96

 

(96

)

 

 

 

 

 

 

 

 

 

Net cash used by financing activities

 

(140

)

(139

)

(279

)

 

 

 

 

 

 

 

 

Net increase (decrease) in cash

 

(3

)

378

 

375

 

 

 

 

 

 

 

 

 

Cash:

 

 

 

 

 

 

 

Beginning of year

 

27

 

236

 

263

 

 

 

 

 

 

 

 

 

End of quarter

 

$

24

 

$

614

 

$

638

 

 

14



 

8.              COMMITMENTS AND CONTINGENCIES

 

The Company continuously evaluates contingencies based upon the best available evidence.

 

The Company believes that allowances for loss have been provided to the extent necessary and that its assessment of contingencies is reasonable.  To the extent that resolution of contingencies results in amounts that vary from the Company’s estimates, future earnings will be charged or credited.

 

The principal contingencies are described below:

 

Insurance — The Company’s workers’ compensation risks are self-insured in certain states. In addition, other workers’ compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans.  The liability for workers’ compensation risks is accounted for on a present value basis.  Actual claim settlements and expenses incident thereto may differ from the provisions for loss.  Property risks have been underwritten by a subsidiary and are reinsured with unrelated insurance companies.  Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.

 

Litigation — On October 6, 2006, the Company petitioned the Tax Court (In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06) for a redetermination of deficiencies set by the Commissioner of Internal Revenue.  The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code.  The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase.  The Company believes that it has strong arguments in favor of its position and believes it is more likely than not that its position will be sustained.  However, due to the inherent uncertainty involved in the litigation process, there can be no assurances that the Tax Court will rule in favor of the Company.  A decision on this case is expected within the next 12 months.  As of May 22, 2010, an adverse decision would require a cash payment up to approximately $496, including interest.  Any accounting implications of an adverse decision in this case would be charged through the statement of operations.

 

On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court (California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertson’s, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the “Agreement”) between the Company, Albertson’s, Inc. and Safeway Inc. (collectively, the “Retailers”), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 28, 2008, pursuant to a stipulation between the parties, the court entered a final judgment in favor of the defendants.  As a result of the stipulation and final judgment, there are no further claims to be litigated at the trial court level.  The Attorney General has appealed a trial court ruling to the Ninth Circuit Court of Appeals and the defendants are appealing a separate ruling.  Although this lawsuit is subject to uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

 

Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where it is reasonably possible to estimate and where an adverse outcome is probable.  Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite management’s current belief, material differences in actual outcomes or changes in management’s evaluation or predictions could arise that could have a material adverse effect on the Company’s financial condition, results of operations, or cash flows.

 

15



 

Assignments — The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions.  The Company could be required to satisfy the obligations under the leases if any of the assignees is unable to fulfill its lease obligations.  Due to the wide distribution of the Company’s assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.

 

Benefit Plans — The Company administers certain non-contributory defined benefit retirement plans and contributory defined contribution retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. Funding for the defined benefit pension plans is based on a review of the specific requirements, and an evaluation of the assets and liabilities, of each plan.  Funding for the Company’s matching and automatic contributions under the defined contribution plans is based on years of service, plan compensation, and amount of contributions by participants.

 

In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Funding for the retiree health care benefits occurs as claims or premiums are paid.

 

The determination of the obligation and expense for the Company’s defined benefit retirement pension plan and other post-retirement benefits is dependent on the Company’s selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in the Company’s 2009 Annual Repor