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 November 6, 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.

 

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 635,950,237 shares of Common Stock ($1 par value) outstanding as of December 10, 2010.

 

 

 



 

PART I — FINANCIAL INFORMATION

 

Item 1.   Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

 

 

Third Quarter Ended

 

Three Quarters Ended

 

 

 

November 6,
2010

 

November 7,
2009

 

November 6,
2010

 

November 7,
2009

 

Sales

 

$

18,698

 

$

17,662

 

$

62,258

 

$

58,179

 

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

 

14,571

 

13,662

 

48,316

 

44,574

 

Operating, general and administrative

 

3,199

 

3,137

 

10,602

 

10,248

 

Rent

 

154

 

152

 

503

 

502

 

Depreciation and amortization

 

368

 

356

 

1,214

 

1,157

 

Goodwill impairment charge

 

¾

 

1,113

 

¾

 

1,113

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

406

 

(758

)

1,623

 

585

 

Interest expense

 

103

 

105

 

337

 

383

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) before income tax expense

 

303

 

(863

)

1,286

 

202

 

Income tax expense

 

96

 

13

 

436

 

396

 

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

207

 

(876

)

850

 

(194

)

Net earnings (loss) attributable to noncontrolling interests

 

5

 

(1

)

12

 

(9

)

 

 

 

 

 

 

 

 

 

 

Net earnings (loss) attributable to The Kroger Co.

 

$

202

 

$

(875

)

$

838

 

$

(185

)

 

 

 

 

 

 

 

 

 

 

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

 

$

0.32

 

$

(1.35

)

$

1.30

 

$

(0.29

)

Average number of common shares used in basic calculation

 

633

 

646

 

638

 

647

 

 

 

 

 

 

 

 

 

 

 

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

 

$

0.32

 

$

(1.35

)

$

1.30

 

$

(0.29

)

Average number of common shares used in diluted calculation

 

636

 

646

 

641

 

647

 

 

 

 

 

 

 

 

 

 

 

Dividends declared per common share

 

$

.105

 

$

.095

 

$

.295

 

$

.275

 

 

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)

 

 

 

November 6,

 

January 30,

 

 

 

2010

 

2010

 

ASSETS

 

 

 

 

 

Current assets

 

 

 

 

 

Cash and temporary cash investments

 

$

758

 

$

424

 

Deposits in-transit

 

755

 

654

 

Receivables

 

847

 

909

 

FIFO inventory

 

6,065

 

5,705

 

LIFO reserve

 

(809

)

(770

)

Prefunded employee benefits

 

¾

 

300

 

Prepaid and other current assets

 

291

 

261

 

Total current assets

 

7,907

 

7,483

 

 

 

 

 

 

 

Property, plant and equipment, net

 

14,106

 

13,929

 

Goodwill

 

1,158

 

1,158

 

Other assets

 

584

 

556

 

 

 

 

 

 

 

Total Assets

 

$

23,755

 

$

23,126

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

Current liabilities

 

 

 

 

 

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

 

$

547

 

$

579

 

Trade accounts payable

 

4,179

 

3,890

 

Accrued salaries and wages

 

837

 

786

 

Deferred income taxes

 

354

 

354

 

Other current liabilities

 

2,423

 

2,118

 

Total current liabilities

 

8,340

 

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

 

7,191

 

7,420

 

Adjustment to reflect fair-value interest rate hedges

 

70

 

57

 

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

 

7,261

 

7,477

 

 

 

 

 

 

 

Deferred income taxes

 

577

 

568

 

Pension and postretirement benefit obligations

 

989

 

1,082

 

Other long-term liabilities

 

1,327

 

1,346

 

 

 

 

 

 

 

Total Liabilities

 

18,494

 

18,200

 

 

 

 

 

 

 

Commitments and contingencies (see Note 9)

 

 

 

 

 

 

 

 

 

 

 

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

 

3,343

 

3,361

 

Accumulated other comprehensive loss

 

(565

)

(593

)

Accumulated earnings

 

8,013

 

7,364

 

Common stock in treasury, at cost, 327 shares in 2010 and 316 shares in 2009

 

(6,486

)

(6,238

)

 

 

 

 

 

 

Total Shareowners’ Equity - The Kroger Co.

 

5,264

 

4,852

 

Noncontrolling interests

 

(3

)

74

 

 

 

 

 

 

 

Total Equity

 

5,261

 

4,926

 

 

 

 

 

 

 

Total Liabilities and Equity

 

$

23,755

 

$

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)

 

 

 

Three Quarters Ended

 

 

 

November 6,
2010

 

November 7,
2009

 

Cash Flows from Operating Activities:

 

 

 

 

 

Net earnings (loss) including noncontrolling interests

 

$

850

 

$

(194

)

Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:

 

 

 

 

 

Depreciation and amortization

 

1,214

 

1,157

 

LIFO charge

 

39

 

48

 

Goodwill impairment charge

 

¾

 

1,113

 

Asset impairment charge

 

22

 

44

 

Stock-based employee compensation

 

62

 

64

 

Expense for Company-sponsored pension plans

 

50

 

24

 

Deferred income taxes

 

5

 

51

 

Other

 

(11

)

15

 

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

 

 

 

 

 

Store deposits in-transit

 

(101

)

(38

)

Receivables

 

(2

)

(4

)

Inventories

 

(359

)

(434

)

Prepaid expenses

 

270

 

228

 

Trade accounts payable

 

288

 

351

 

Accrued expenses

 

214

 

(1

)

Income taxes receivable and payable

 

138

 

229

 

Contribution to Company-sponsored pension plans

 

(141

)

(265

)

Other

 

(4

)

(13

)

 

 

 

 

 

 

Net cash provided by operating activities

 

2,534

 

2,375

 

 

 

 

 

 

 

Cash Flows from Investing Activities:

 

 

 

 

 

Payments for capital expenditures

 

(1,423

)

(1,766

)

Proceeds from sale of assets

 

34

 

7

 

Payments for acquisitions

 

(7

)

(23

)

Other

 

(4

)

(13

)

 

 

 

 

 

 

Net cash used by investing activities

 

(1,400

)

(1,795

)

 

 

 

 

 

 

Cash Flows from Financing Activities:

 

 

 

 

 

Proceeds from issuance of long-term debt

 

301

 

505

 

Dividends paid

 

(183

)

(176

)

Payments on long-term debt

 

(570

)

(426

)

Payments on credit facility

 

¾

 

(129

)

Excess tax benefits on stock-based awards

 

2

 

2

 

Proceeds from issuance of capital stock

 

24

 

30

 

Treasury stock purchases

 

(292

)

(130

)

Increase (decrease) in book overdrafts

 

1

 

(4

)

Investment in the remaining interest of a variable interest entity

 

(86

)

¾

 

Other

 

3

 

2

 

 

 

 

 

 

 

Net cash used by financing activities

 

(800

)

(326

)

 

 

 

 

 

 

Net increase in cash and temporary cash investments

 

334

 

254

 

 

 

 

 

 

 

Cash and temporary cash investments:

 

 

 

 

 

Beginning of year

 

424

 

263

 

End of quarter

 

$

758

 

$

517

 

 

 

 

 

 

 

Reconciliation of capital expenditures:

 

 

 

 

 

Payments for property and equipment

 

$

(1,423

)

$

(1,766

)

Changes in construction-in-progress payables

 

(25

)

(65

)

Total capital expenditures

 

$

(1,448

)

$

(1,831

)

 

 

 

 

 

 

Disclosure of cash flow information:

 

 

 

 

 

Cash paid during the year for interest

 

$

371

 

$

434

 

Cash paid during the year for income taxes

 

$

334

 

$

119

 

 

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

 

27

 

 

1

 

 

 

 

30

 

Restricted stock issued

 

 

 

(56

)

(1

)

40

 

 

 

 

(16

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

5

 

(106

)

 

 

 

(106

)

Stock options exchanged

 

 

 

 

1

 

(24

)

 

 

 

(24

)

Tax benefits from exercise of stock options

 

 

 

20

 

 

 

 

 

 

20

 

Share-based employee compensation

 

 

 

64

 

 

 

 

 

 

64

 

Other comprehensive gain net of income tax of $2

 

 

 

 

 

 

4

 

 

 

4

 

Other

 

 

 

18

 

 

(17

)

 

 

(17

)

(16

)

Cash dividends declared ($0.275 per common share)

 

 

 

 

 

 

 

(181

)

 

(181

)

Net earnings (loss) including noncontrolling interests

 

 

 

 

 

 

 

(185

)

(9

)

(194

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at November 7, 2009

 

957

 

$

957

 

$

3,339

 

311

 

$

(6,145

)

$

(491

)

$

7,172

 

$

69

 

$

4,901

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

9

 

(1

)

14

 

 

 

 

24

 

Restricted stock issued

 

 

 

(52

)

(1

)

35

 

 

 

 

(17

)

Treasury stock activity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Treasury stock purchases, at cost

 

 

 

 

12

 

(259

)

 

 

 

(259

)

Stock options exchanged

 

 

 

 

1

 

(33

)

 

 

 

(33

)

Tax detriments from exercise of stock options

 

 

 

(22

)

 

 

 

 

 

(22

)

Share-based employee compensation

 

 

 

62

 

 

 

 

 

 

62

 

Other comprehensive gain net of income tax of $17

 

 

 

 

 

 

28

 

 

 

28

 

Other

 

 

 

7

 

 

(5

)

 

 

(22

)

(20

)

Investment in the remaining interest of a variable interest entity

 

 

 

(22

)

 

 

 

 

(67

)

(89

)

Cash dividends declared ($0.295 per common share)

 

 

 

 

 

 

 

(189

)

 

(189

)

Net earnings including noncontrolling interests

 

 

 

 

 

 

 

838

 

12

 

850

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balances at November 6, 2010

 

959

 

$

959

 

$

3,343

 

327

 

$

(6,486

)

$

(565

)

$

8,013

 

$

(3

)

$

5,261

 

 

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 financial statements in the 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 third quarter and three quarters ended November 6, 2010 and November 7, 2009, includes the results of operations of the Company for the 12 and 40-week periods then ended.

 

The Company reflects certain promotional allowances in its LIFO charge.  During the first quarter 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 in the Consolidated Financial Statements by $33 ($20 after-tax).

 

2.              EQUITY INCENTIVE PLANS

 

The Company recognized total stock-based compensation of $18 and $19 in the third quarter ended November 6, 2010 and November 7, 2009, respectively.  The Company recorded $62 and $64 of stock-based compensation for the first three quarters ended November 6, 2010 and November 7, 2009, respectively.  These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statements of Operations.

 

The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. In addition to stock options, the Company awards restricted stock to employees and its non-employee directors under various plans.  Equity awards may be made once each quarter on a predetermined date.  It has been the Company’s practice to make a general annual grant to employees, which occurred in the second quarter of 2010.  Special grants may be made in the other three quarters.  It has been the Company’s practice to make a grant to non-employee directors in December of each year.

 

Stock options granted in the first three quarters of 2010 expire 10 years from the date of grant and vest from one year to five years from the date of grant. Restricted stock awards granted in the first three quarters of 2010 have restrictions that lapse in one year to five years from the date of the awards. All grants and awards become immediately exercisable, in the case of options, and restrictions lapse, in the case of restricted stock, upon certain changes of control of the Company.

 

6



 

Changes in equity awards outstanding under the plans are summarized below.

 

Stock Options

 

 

 

Shares subject
to option

 

Weighted-average
exercise price

 

Outstanding, January 30, 2010

 

34.7

 

$

21.30

 

Granted

 

3.6

 

$

20.21

 

Exercised

 

(1.7

)

$

16.20

 

Canceled or Expired

 

(0.4

)

$

21.65

 

 

 

 

 

 

 

Outstanding, November 6, 2010

 

36.2

 

$

21.42

 

 

Restricted Stock

 

 

 

Restricted shares
outstanding

 

Weighted-average
grant-date fair value

 

Outstanding, January 30, 2010

 

4.4

 

$

24.25

 

Granted

 

2.3

 

$

20.22

 

Lapsed

 

(2.2

)

$

23.68

 

Canceled

 

(0.1

)

$

23.35

 

 

 

 

 

 

 

Outstanding, November 6, 2010

 

4.4

 

$

22.42

 

 

The weighted-average fair value of stock options granted during the first three quarters ended November 6, 2010 and November 7, 2009, was $5.11 and $6.30, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term, and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

 

The following table reflects the weighted average assumptions used for grants awarded to option holders:

 

 

 

2010

 

2009

 

Risk-free interest rate

 

2.57%

 

3.17%

 

Expected dividend yield

 

2.00%

 

1.80%

 

Expected volatility

 

26.87%

 

28.05%

 

Expected term

 

6.9 Years

 

6.8 Years

 

 

3.              DEBT OBLIGATIONS

 

Long-term debt consists of:

 

 

 

November 6,

 

January 30,

 

 

 

2010

 

2010

 

3.90% to 8.05% Senior Notes due through 2040

 

$

7,106

 

$

7,308

 

5.00% to 9.88% Mortgages due in varying amounts through 2034

 

76

 

105

 

Other

 

149

 

163

 

 

 

 

 

 

 

Total debt, excluding capital leases and financing obligations

 

7,331

 

7,576

 

 

 

 

 

 

 

Less current portion

 

(514

)

(549

)

 

 

 

 

 

 

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

 

$

6,817

 

$

7,027

 

 

7



 

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.

 

In the second quarter of 2010, the Company issued $300 of senior notes bearing an interest rate of 5.40% due in 2040.

 

4.              COMPREHENSIVE INCOME

 

Comprehensive income is as follows:

 

 

 

Third Quarter Ended

 

Year-To-Date

 

 

 

November 6,
2010

 

November 7,
2009

 

November 6,
2010

 

November 7,
2009

 

Net earnings (loss) including noncontrolling interests

 

$

207

 

$

(876

)

$

850

 

$

(194

)

Unrealized gain on available for sale securities, net of income tax(1)

 

 

 

5

 

 

Amortization of amounts included in net periodic pension expense, net of income tax(2)

 

7

 

4

 

21

 

2

 

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

 

1

 

1

 

2

 

2

 

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss)

 

215

 

(871

)

878

 

(190

)

Comprehensive income (loss) attributable to noncontrolling interests

 

5

 

(1

)

12

 

(9

)

 

 

 

 

 

 

 

 

 

 

Comprehensive income (loss) attributable to The Kroger Co.

 

$

210

 

$

(870

)

$

866

 

$

(181

)

 


(1)         Amount is net of tax of $1 for the third quarter of 2010.  Amount is net of tax of $4 for the first three quarters of 2010.

(2)         Amount is net of tax of $3 for the third quarter of 2010 and $2 for the third quarter of 2009.  Amount is net of tax of $13 for the first three quarters of 2010 and $2 for the first three quarters of 2009.

 

5.              BENEFIT PLANS

 

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

 

 

 

Third Quarter

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

10

 

$

12

 

$

3

 

$

3

 

Interest cost

 

38

 

36

 

4

 

5

 

Expected return on plan assets

 

(45

)

(53

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

1

 

(1

)

(2

)

Actuarial loss

 

12

 

9

 

(1

)

(2

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

15

 

$

5

 

$

5

 

$

4

 

 

8



 

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

 

 

 

Year-To-Date

 

 

 

Pension Benefits

 

Other Benefits

 

 

 

2010

 

2009

 

2010

 

2009

 

Components of net periodic benefit cost:

 

 

 

 

 

 

 

 

 

Service cost

 

$

33

 

$

28

 

$

10

 

$

8

 

Interest cost

 

129

 

130

 

14

 

15

 

Expected return on plan assets

 

(151

)

(147

)

 

 

Amortization of:

 

 

 

 

 

 

 

 

 

Prior service cost

 

 

2

 

(4

)

(5

)

Actuarial loss

 

39

 

11

 

(3

)

(4

)

 

 

 

 

 

 

 

 

 

 

Net periodic benefit cost

 

$

50

 

$

24

 

$

17

 

$

14

 

 

The Company contributed $141 and $265 to Company-sponsored pension plans in the first three quarters of 2010 and 2009, respectively.

 

The Company contributed $93 and $88 to employee 401(k) retirement savings accounts in the first three quarters 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.

 

6.              EARNINGS PER COMMON SHARE

 

Net earnings (loss) attributable to The Kroger Co. per basic common share equals net earnings (loss) attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding.  Net earnings (loss) attributable to The Kroger Co. per diluted common share equals net earnings (loss) 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 (loss) attributable to The Kroger Co. and shares used in calculating net earnings (loss) attributable to The Kroger Co. per basic common share to those used in calculating net earnings (loss) attributable to The Kroger Co. per diluted common share:

 

 

 

Third Quarter Ended

 

Third Quarter Ended

 

 

 

November 6, 2010

 

November 7, 2009

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

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

 

$

201

 

633

 

$

0.32

 

$

(875

)

646

 

$

(1.35

)

Dilutive effect of stock options

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

201

 

636

 

$

0.32

 

$

(875

)

646

 

$

(1.35

)

 

 

 

Year –To-Date

 

Year-To-Date

 

 

 

November 6, 2010

 

November 7, 2009

 

 

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

Earnings
(Numerator)

 

Shares
(Denominator)

 

Per Share
Amount

 

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

 

$

832

 

638

 

$

1.30

 

$

(185

)

647

 

$

(0.29

)

Dilutive effect of stock options

 

 

 

3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

$

832

 

641

 

$

1.30

 

$

(185

)

647

 

$

(0.29

)

 

9



 

The Company had undistributed and distributed earnings to participating securities totaling $1 in the third quarter of 2010.  For the first three quarters of 2010, the Company had undistributed and distributed earnings to participating securities totaling $6.  Due to the Company having a net loss in both the third quarter and first three quarters of 2009, no allocation was made to participating securities due to the anti-dilutive effect.

 

The Company had options outstanding for approximately 23 shares during the third quarter of 2010 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.  For the first three quarters of 2010, the Company had options outstanding for approximately 21 shares, 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.

 

7.              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 become effective for 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 10 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 VIEs, 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.              GUARANTOR SUBSIDIARIES

 

As of November 6, 2010, the Company’s outstanding public debt (the “Guaranteed Notes”) was jointly and severally, fully and unconditionally guaranteed by some of the Company’s subsidiaries (the “Guarantor Subsidiaries”).  At November 6, 2010, a total of approximately $7,106 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 that 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).

 

10



 

The following tables present summarized financial information as of November 6, 2010 and January 30, 2010 and for the third quarter, and three quarters ended November 6, 2010 and November 7, 2009:

 

Condensed Consolidating

Balance Sheets

As of November 6, 2010

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Current assets

 

 

 

 

 

 

 

 

 

Cash and temporary cash investments

 

$

27

 

$

731

 

$

 

$

758

 

Deposits in-transit

 

81

 

674

 

 

755

 

Receivables

 

2,217

 

629

 

(1,999

)

847

 

Net inventories

 

552

 

4,704

 

 

5,256

 

Prepaid and other current assets

 

89

 

202

 

 

291

 

 

 

 

 

 

 

 

 

 

 

Total current assets

 

2,966

 

6,940

 

(1,999

)

7,907

 

 

 

 

 

 

 

 

 

 

 

Property, plant and equipment, net

 

1,876

 

12,230

 

 

14,106

 

Goodwill

 

5

 

1,153

 

 

1,158

 

Other assets

 

915

 

1,903

 

(2,234

)

584

 

Investment in and advances to subsidiaries

 

10,247

 

 

(10,247

)

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

16,009

 

$

22,226

 

$

(14,480

)

$

23,755

 

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

 

 

 

 

 

 

 

 

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

 

$

547

 

$

 

$

 

$

547

 

Trade accounts payable

 

391

 

3,788

 

 

4,179

 

Other current liabilities

 

1,056

 

6,791

 

(4,233

)

3,614

 

 

 

 

 

 

 

 

 

 

 

Total current liabilities

 

1,994

 

10,579

 

(4,233

)

8,340

 

 

 

 

 

 

 

 

 

 

 

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

 

7,191

 

 

 

7,191

 

Adjustment to reflect fair value interest rate hedges

 

70

 

 

 

70

 

 

 

 

 

 

 

 

 

 

 

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

 

7,261

 

 

 

7,261

 

Other long-term liabilities

 

1,493

 

1,400

 

 

2,893

 

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

10,748

 

11,979

 

(4,233

)

18,494

 

 

 

 

 

 

 

 

 

 

 

Shareowners’ Equity

 

5,261

 

10,247

 

(10,247

)

5,261

 

 

 

 

 

 

 

 

 

 

 

Total liabilities and equity

 

$

16,009

 

$

22,226

 

$

(14,480

)

$

23,755

 

 

11



 

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

 

 

12



 

Condensed Consolidating

Statements of Operations

For the Quarter Ended November 6, 2010

 

 

 

The Kroger Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

2,394

 

$

16,644

 

$

(340

)

$

18,698

 

Merchandise costs, including advertising, warehousing and transportation

 

1,931

 

12,980

 

(340

)

14,751

 

Operating, general and administrative

 

411

 

2,788

 

 

3,199

 

Rent

 

31

 

123

 

 

154

 

Depreciation and amortization

 

40

 

328

 

 

368

 

 

 

 

 

 

 

 

 

 

 

Operating profit (loss)

 

(19

)

425

 

 

406

 

Interest expense

 

102

 

1

 

 

103

 

Equity in earnings of subsidiaries

 

349

 

 

(349

)

 

 

 

 

 

 

 

 

 

 

 

Earnings before income tax expense

 

228

 

424

 

(349

)

303

 

Income tax expense

 

26

 

70

 

 

96

 

 

 

 

 

 

 

 

 

 

 

Net earnings including noncontrolling interests

 

202

 

354

 

(349

)

207

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to noncontrolling interests

 

 

5

 

 

5

 

 

 

 

 

 

 

 

 

 

 

Net earnings attributable to The Kroger Co.

 

$

202

 

$

349

 

$

(349

)

$

202

 

 

Condensed Consolidating

Statements of Operations

For the Quarter Ended November 7, 2009

 

 

 

The Kroger
Co.

 

Guarantor
Subsidiaries

 

Eliminations

 

Consolidated

 

Sales

 

$

2,240

 

$

15,763

 

$

(341

)

$

17,662

 

Merchandise costs, including advertising, warehousing and transportation

 

1,836

 

12,167

 

(341

)

13,662

 

Operating, general and administrative

 

350

 

2,787

 

 

3,137

 

Rent

 

27

 

125

 

 

152

 

Depreciation and amortization

 

39

 

317

 

 

356

 

Goodwill impairment charge

 

 

1,113

 

 

1,113

 

 

 

 

 

 

 

 

 

 

 

Operating loss

 

(12

)

(746

)

 

(758

)

Interest expense

 

103

 

2

 

 

105

 

Equity in earnings of subsidiaries

 

(735

)

 

735

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income tax expense

 

(850

)

(748

)

735

 

(863

)

Income tax expense (benefit)

 

25

 

(12

)

 

13

 

 

 

 

 

 

 

 

 

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