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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-------------------------------
FORM 10-Q
Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For 13 Weeks Ended: August 1, 2002 Commission File Number: 1-6187
ALBERTSON'S, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 82-0184434
- ------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
- ----------------------------------------------- ----------
(Address) (Zip Code)
Registrant's telephone number, including area code: (208) 395-6200
--------------
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
----- -----
Number of Registrant's $1.00 par value
common shares outstanding at September 6, 2002: 398,876,409
1
PART I. FINANCIAL INFORMATION
ALBERTSON'S, INC.
CONSOLIDATED EARNINGS
(in millions except per share data)
(unaudited)
13 WEEKS ENDED 26 WEEKS ENDED
---------------------------------- --------------------------------------
August 1, August 2, August 1, August 2,
2002 2001 2002 2001
---------------- ----------------- ------------------ -------------------
Sales $8,941 $9,235 $17,862 $18,229
Cost of sales 6,317 6,648 12,631 13,071
---------------- ----------------- ------------------ -------------------
Gross profit 2,624 2,587 5,231 5,158
Selling, general and administrative expenses 2,148 2,256 4,269 4,410
Restructuring (credits) charges and other (37) 475 (22) 475
Merger-related credits (1) (15)
---------------- ----------------- ------------------ -------------------
Operating profit (loss) 513 (143) 984 288
Other expenses:
Interest, net (103) (109) (208) (216)
Other, net (14) (1) (17) (12)
---------------- ----------------- ------------------ -------------------
Earnings (loss) from continuing operations
before income taxes 396 (253) 759 60
Income tax expense (benefit) 156 (99) 297 30
---------------- ----------------- ------------------ -------------------
Net earnings (loss) from continuing operations 240 (154) 462 30
Discontinued operations:
Operating profit (loss) 20 6 (434) 9
Income tax expense (benefit) 7 3 (144) 4
---------------- ----------------- ------------------ -------------------
Net Earnings (loss) from discontinued operations 13 3 (290) 5
---------------- ----------------- ------------------ -------------------
NET EARNINGS (LOSS) $ 253 $ (151) $ 172 $ 35
---------------- ----------------- ------------------ -------------------
EARNINGS (LOSS) PER SHARE:
Basic $ 0.62 $(0.37) $ 0.42 $ 0.09
Diluted 0.62 (0.37) 0.42 0.09
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 407 406 407 406
Diluted 409 406 409 408
See Notes to Consolidated Financial Statements.
2
ALBERTSON'S, INC.
CONSOLIDATED BALANCE SHEETS
(in millions except par value)
(unaudited)
August 1, 2002 January 31, 2002
---------------------- ------------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 820 $ 85
Accounts and notes receivable, net 592 695
Inventories 2,984 3,196
Prepaid expenses 99 149
Refundable income taxes 51
Assets held for sale 221 326
Deferred income taxes 145 172
---------------------- ------------------------
TOTAL CURRENT ASSETS 4,912 4,623
LAND, BUILDINGS AND EQUIPMENT (net of
accumulated depreciation and amortization
of $5,856 and $5,753, respectively) 8,815 9,282
GOODWILL, net 1,399 1,468
INTANGIBLES, net 191 210
OTHER ASSETS 330 398
---------------------- ------------------------
$ 15,647 $ 15,981
====================== ========================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,012 $ 2,107
Salaries and related liabilities 539 584
Taxes other than income taxes 173 153
Income taxes payable 51
Self-insurance 205 198
Unearned income 80 88
Restructuring reserves 52 61
Current portion of capitalized lease obligations 13 14
Current maturities of long-term debt 130 123
Other 204 217
---------------------- ------------------------
TOTAL CURRENT LIABILITIES 3,408 3,596
LONG-TERM DEBT 4,954 5,060
CAPITALIZED LEASE OBLIGATIONS 285 276
SELF-INSURANCE 321 307
DEFERRED INCOME TAXES 51 71
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 745 756
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value; authorized
- 10 shares; designated - 3 shares of Series A
Junior Participating; issued - none
Common stock - $1.00 par value; authorized - 1,200 shares;
issued - 404 shares and 407 shares, respectively 404 407
Capital in excess of par 120 94
Accumulated other comprehensive loss (19) (19)
Retained earnings 5,378 5,433
---------------------- ------------------------
5,883 5,915
---------------------- ------------------------
$ 15,647 $ 15,981
====================== ========================
See Notes to Consolidated Financial Statements.
3
ALBERTSON'S, INC.
CONSOLIDATED CASH FLOWS
(in millions)
(unaudited)
26 WEEKS ENDED
----------------------------------------
August 1, August 2,
2002 2001
---------------- ------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 172 $ 35
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 496 495
Goodwill amortization 28
Discontinued operations noncash charges 356
Restructuring and other noncash (credits) charges (3) 454
Noncash merger-related credits (13)
Net loss on asset sales 12
Net deferred income taxes and other 18 (199)
Decrease in cash surrender value of Company-owned life insurance 18 13
Changes in operating assets and liabilities:
Receivables and prepaid expenses 152 92
Inventories 244 80
Accounts payable (96) (31)
Other current liabilities (149) 110
Self-insurance 21 30
Unearned income (6) (25)
Other long-term liabilities (12) (49)
---------------- -------------------
Net cash provided by operating activities 1,211 1,032
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (683) (742)
Proceeds from disposal of land, buildings and equipment 78 34
Proceeds from disposal of assets held for sale 430 85
Decrease (increase) in other assets 21 (5)
---------------- -------------------
Net cash used in investing activities (154) (628)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 613
Net commercial paper and bank line activity (743)
Payments on long-term borrowings (107) (52)
Cash dividends paid (154) (154)
Proceeds from stock options exercised 15 15
Common Stock purchased and retired (76)
---------------- -------------------
Net cash used in financing activities (322) (321)
---------------- -------------------
NET INCREASE IN CASH AND CASH EQUIVALENTS 735 83
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 85 57
---------------- -------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 820 $ 140
================ ===================
See Notes to Consolidated Financial Statements.
4
ALBERTSON'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
(unaudited)
Description of Business
Albertson's, Inc. (the Company) is incorporated under the laws of the State
of Delaware and is the successor to a business founded by J.A. Albertson in
1939. Based on sales, the Company is one of the world's largest food and drug
retailers.
As of August 1, 2002, the Company operated 2,267 stores in 31 Western,
Midwestern, Eastern and Southern states and 17 distribution centers,
strategically located in the Company's operating markets. The Company also
operated 174 fuel centers near existing stores.
Basis of Presentation
The accompanying unaudited consolidated financial statements include the
results of operations, financial position and cash flows of the Company and its
subsidiaries. All material intercompany balances have been eliminated.
In the opinion of management, the accompanying unaudited consolidated
financial statements include all adjustments necessary to present fairly, in all
material respects, the results of operations of the Company for the periods
presented. The statements have been prepared by the Company pursuant to the
rules and regulations of the Securities and Exchange Commission. Certain
information and footnote disclosures normally included in financial statements
prepared in accordance with accounting principles generally accepted in the
United States have been condensed or omitted pursuant to such rules and
regulations. It is suggested that these consolidated financial statements be
read in conjunction with the consolidated financial statements and accompanying
notes included in the Company's 2001 Annual Report on Form 10-K. The results of
operations for the 26 weeks ended August 1, 2002, are not necessarily indicative
of results for a full year.
The Company's Consolidated Balance Sheet as of January 31, 2002, has been
derived from the audited consolidated financial statements as of that date.
The preparation of the Company's consolidated financial statements, in
conformity with accounting principles generally accepted in the United States,
requires management to make estimates and assumptions. These estimates and
assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities as of the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from these estimates.
Inventory
Net earnings reflects the application of the LIFO method of valuing certain
inventories, based upon estimated annual inflation ("LIFO Indices"). Albertson's
recorded pretax LIFO expense of $10 and $15 for the 26 weeks ended August 1,
2002, and August 2, 2001, respectively. Actual LIFO Indices are calculated
during the fourth quarter of the year based upon a statistical sampling of the
cost of inventories.
Earnings Per Share ("EPS")
Basic EPS is based on the weighted average outstanding common shares. Diluted
EPS is based on the weighted average outstanding common shares reduced by the
dilutive effect of stock options.
5
The following table details the computation of EPS (shares in millions):
13 Weeks Ended 26 Weeks Ended
----------------------------------- ----------------------------------
August 1, August 2, August 1, August 2,
2002 2001 2002 2001
--------------- ---------------- -------------- ----------------
Basic EPS:
Net earnings (loss) $ 253 $ (151) $ 172 $ 35
=============== ================ ============== ================
Weighted average common shares
outstanding 407 406 407 406
--------------- ---------------- -------------- ----------------
Basic EPS $0.62 $(0.37) $0.42 $0.09
=============== ================ ============== ================
Diluted EPS:
Net earnings (loss) $ 253 $ (151) $ 172 $ 35
=============== ================ ============== ================
Weighted average common shares
outstanding 407 406 407 406
Potential common share equivalents
2 - 2 2
--------------- ---------------- -------------- ----------------
Weighted average shares outstanding
409 406 409 408
--------------- ---------------- -------------- ----------------
Diluted EPS $0.62 $(0.37) $0.42 $0.09
=============== ================ ============== ================
Calculation of potential common share equivalents:
Options to purchase potential common
shares 16 N.A. 16 11
Common shares assumed purchased with
potential proceeds (14) N.A. (14) (9)
--------------- ---------------- -------------- ----------------
Potential common share equivalents 2 N.A. 2 2
=============== ================ ============== ================
Calculation of potential common shares assumed purchased with potential
proceeds:
Potential proceeds from exercise of
options to purchase common shares $429 N.A. $439 $265
Common stock price used under the
treasury stock method $31.08 N.A. $31.42 $29.80
Potential common shares assumed
purchased with potential proceeds 14 N.A. 14 9
N.A. - Not applicable. Due to the operating loss for the 13 weeks ended
August 2, 2001, potential common share equivalents have an anti-dilutive
effect on EPS.
Outstanding options to purchase shares excluded from potential common share
equivalents (option price exceeded the average market price during the period)
amounted to 13 million shares for the 13 and 26 week periods ended August 1,
2002 and 15 million shares for the 13 and 26 week periods ended August 2, 2001.
Comprehensive Income
Comprehensive income refers to revenues, expenses, gains and losses that are
not included in net earnings but rather are recorded directly in stockholders'
equity. Items of comprehensive income other than net earnings were insignificant
for the periods ended August 1, 2002, and August 2, 2001.
6
Reclassifications
Certain reclassifications have been made in prior year's financial statements
to conform to classifications used in the current year.
Reporting Periods
The Company's quarterly reporting periods are generally 13 weeks and
periodically consist of 14 weeks because the Company's fiscal year ends on the
Thursday nearest to January 31 each year.
Discontinued Operations / Market Exits
On March 13, 2002, the Company's Board of Directors approved the second phase
of the Company's restructuring plan designed to improve future financial results
and to drive future competitiveness. This phase of the plan included the
complete exit of four underperforming markets: Memphis, Tennessee; Nashville,
Tennessee; Houston, Texas; and San Antonio, Texas. This involved the sale or
closure of 95 stores and two distribution centers. These sales and closures were
evaluated for lease liability or asset impairment, including goodwill, in
accordance with the Company's policy. The operating results and gains and losses
related to these market exits have been included in discontinued operations in
the Company's Consolidated Earnings statements. Discontinued operations
presentation is required for all current and prior periods under Statement of
Financial Accounting Standard (SFAS) No. 144 (refer to "Recently Adopted
Accounting Standards").
The discontinued operations generated sales of $290 and $680 for the 26 weeks
ended August 1, 2002, and August 2, 2001, respectively, and an operating profit
(loss) of $(434) and $9, respectively. For the 26 weeks ended August 1, 2002,
the discontinued operations operating loss of $434 consisted of operating losses
of $38 and asset impairments, lease liabilities and other costs of $396 as
described in the following table:
Other
Asset Impairments Lease Liabilities Costs Total
-------------------- -------------------- ----------- -----------
Additions $ 401 $ 26 $ 17 $ 444
Adjustments (45) (11) 8 (48)
Utilization (356) (2) (25) (383)
-------------------- -------------------- ----------- -----------
Reserve Balance at August 1, 2002 $ - $ 13 $ - $13
==================== ==================== =========== ===========
Asset impairment adjustments resulted from the Company realizing sales
proceeds in excess of amounts originally estimated on stores disposed of and
increases to net realizable values for stores under contract for sale. Lease
liability adjustments represent more favorable negotiated settlements than had
been originally estimated.
Other costs consist of amounts paid in connection with notification
regulations and negotiated contract terminations.
Assets related to discontinued operations are recorded at their estimated net
realizable value of $108 as of August 1, 2002 and reported as assets held for
sale in the Company's Consolidated Balance Sheet. These assets include land,
buildings, equipment, leasehold improvements and inventory and are being
actively marketed. As of August 1, 2002, all 95 stores had been closed. In
addition, 79 of the 95 stores and both distribution centers had been sold or
were under contract for sale as of August 1, 2002.
7
Restructuring
On July 17, 2001, the Company's Board of Directors approved the initial phase
of a restructuring plan designed to improve future financial results and to
drive future competitiveness. The plan included certain exit costs and employee
termination benefits, as described below.
Action Status
Reduction in administrative and corporate overhead Substantially complete
Closure of 165 underperforming retail stores 155 closed as of August 1, 2002
Consolidation and elimination of four division offices Completed
Process streamlining Ongoing
In connection with this restructuring plan, the Company recorded pre-tax
credits of $13, consisting of $20 of restructuring credits and $7 of other costs
for the 26 weeks ended August 1, 2002. The following table presents the pre-tax
credits and charges, incurred by category of expenditure, and related
restructuring reserves included in the Company's Consolidated Balance Sheets:
Employee
Severance Asset Lease
Costs Impairments Liabilities Total
-------------- ------------------ ------------------- -----------
Balance at January 31, 2002 $ 11 $ - $ 50 $ 61
Adjustments 5 (7) (11) (13)
Utilization (8) 7 (8) (9)
-------------- ------------------ ------------------- -----------
Balance at August 1, 2002 $ 8 $ - $ 31 $ 39
============== ================== =================== ===========
Asset impairment adjustments resulted from the Company realizing sales
proceeds in excess of amounts originally estimated on stores disposed of and
increases to the net realizable values for stores under contract for sale. Lease
liability adjustments represent more favorable negotiated settlements than had
been originally estimated.
Employee severance costs consist of severance pay, health care continuation
costs, and outplacement service costs for employees who participated in the
Company's Voluntary Separation Plan and for employees who were terminated or
notified of termination under the Company's Involuntary Severance Plan. In the
initial phase of the restructuring plan, 1,341 managerial and administrative
positions above store level were identified for termination. As of August 1,
2002, 1,200 positions had been terminated.
As part of the Company's restructuring plan, all stores' financial
performance were reviewed utilizing a methodology based on return on invested
capital. Based on these reviews, the Company identified and committed to close
and dispose 165 underperforming stores in 25 states. All stores identified for
closure were evaluated for lease liability or asset impairment, including
goodwill, in accordance with the Company's policy. As of August 1, 2002,
155 stores had been closed. The Company is planning on closing the majority of
the remaining stores by fiscal year end.
Assets to be disposed of include land, buildings, equipment, leasehold
improvements and inventory for stores that were included in the initial phase of
the restructuring plan. These assets are recorded at their estimated net
realizable value of $66 as of August 1, 2002 and reported as assets held for
sale in the Company's Consolidated Balance Sheet.
8
Closed Store Reserves
When executive management approves and commits to closing or relocating a
store, the remaining investment in land, building, leasehold, and equipment is
reviewed for impairment and the difference between book value and estimated fair
market value, less selling costs, is recorded in selling, general and
administrative expenses. For properties under long-term lease agreements, the
present value of any remaining liability under the lease, discounted using
risk-free rates and net of expected sublease recovery, is recognized as a
liability and expensed. The following table shows the pre-tax expense, and
related reserves, for closed stores and other surplus property:
Lease Asset
Liabilities Impairments Total
---------------------- ---------------------- ---------------
Balance at January 31, 2002 $ 39 $ - $ 39
Additions 4 10 14
Adjustments 3 10 13
Utilization (11) (20) (31)
---------------------- ---------------------- ---------------
Balance at August 1, 2002 $ 35 $ - $ 35
====================== ====================== ===============
As of August 1, 2002, $28 of the reserve balance was included with accounts
payable and the remaining $7 was included with other long-term liabilities and
deferred credits in the Company's Consolidated Balance Sheet. The related assets
are recorded at their estimated realizable value of $47 as of August 1, 2002 and
reported as assets held for sale in the Company's Consolidated Balance Sheet.
Indebtedness
In support of the Company's commercial paper program, the Company has three
credit facilities totaling $1,400. These agreements contain certain covenants,
the most restrictive of which requires the Company to maintain consolidated
tangible net worth, as defined, of at least $3,000 and a fixed charge coverage
of at least 2.7 times. As of August 1, 2002, the Company's consolidated tangible
net worth, as defined, was approximately $4,268, and the fixed charge coverage
was 4.3 times. No borrowings were outstanding under these credit facilities as
of August 1, 2002.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
26 Weeks Ended
----------------------------------------------------
August 1, 2002 August 2, 2001
------------------------ ------------------------
Cash payments for:
Income taxes $ 247 $ 278
Interest, net of amounts capitalized 213 141
Noncash transactions:
Capitalized leases incurred 18 25
Capitalized leases terminated 5
Tax benefits related to stock options 2 2
Decrease in cash surrender value of Company-owned
life insurance 18 13
Deferred stock units expense 9 10
Capital Stock
The Board of Directors adopted a program on December 3, 2001, authorizing, at
management's discretion, the Company to purchase and retire up to $500 of the
Company's common stock beginning December 6, 2001 through December 31, 2002. On
September 5, 2002, the Board of Directors authorized an increase of $500 to this
program for a total of $1,000 of the Company's common stock that may be
purchased and retired by the Company through December 31, 2002. Through August
1, 2002, 2.7 million shares were purchased and retired for $76 under this
program. Subsequent to August 1, 2002 and through September 6, 2002, the Company
had purchased and retired an additional 5.6 million shares for $154 under this
program.
9
Recently Adopted Accounting Standards
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 142 "Goodwill and Other Intangible Assets" which requires that an intangible
asset that is acquired shall be initially recognized and measured based on its
fair value. The statement also provides that goodwill should not be amortized,
but shall be tested for impairment annually, or more frequently if circumstances
indicate potential impairment, through a comparison of fair value to its
carrying amount.
The Company adopted the provisions of SFAS No. 142 on February 1, 2002, and
accordingly no goodwill amortization was recorded for the 26 weeks ended
August 1, 2002. The Company has completed its transitional impairment review of
its goodwill as of February 1, 2002. The review was performed based on the
Company's reporting units which have been defined as the Company's 11 current
operating divisions. Historically, goodwill balances from business combinations
accounted for as purchases were allocated to each acquired store. When this
statement was adopted, the aggregate of the goodwill allocated to the stores in
each reporting unit became the reporting units' goodwill balance. In order to
determine if a reporting unit's goodwill was impaired, a combination of internal
analysis, focusing on each reporting unit's implied EBITDA multiple, and
estimates of fair value from a valuation specialists firm were used. Based on
these analyses, there was no impairment of goodwill at the adoption date. The
Company will analyze goodwill for impairment annually beginning in the fourth
quarter 2002 unless circumstances change that would warrant an interim review as
required by the statement.
The following table shows the effect of no longer amortizing goodwill:
13 Weeks Ended 26 Weeks Ended
-------------------------------- ---------------------------------
August 1, August 2, August 1, August 2,
2002 2001 2002 2001
-------------- -------------- -------------- --------------
Net earnings (loss) as reported $253 $(151) $172 $ 35
Add back goodwill amortization, net of tax 13 27
-------------- -------------- -------------- --------------
Adjusted net earnings $253 $(138) $172 $ 62
============== ============== ============== ==============
Basic and Diluted EPS $0.62 $(0.37) $0.42 $0.09
Add back goodwill amortization, net of tax 0.03 0.06
-------------- -------------- -------------- --------------
Adjusted Basic and Diluted EPS $0.62 $(0.34) $0.42 $0.15
============== ============== ============== ==============
Changes in the carrying amount of goodwill were as follows:
Goodwill as of January 31, 2002 $1,467
Write-off due to market exits (68)
--------------
Goodwill as of August 1, 2002 $1,399
==============
In connection with the complete exit of certain markets discussed above, the
Company wrote off $68 of goodwill, net for the quarter ended May 2, 2002. The
goodwill written off arose from the original acquisition of the operating assets
in those markets.
10
The carrying amount of intangible assets as of August 1, 2002, was as
follows:
Amortized:
FMV of operating leases $ 243
Customer lists and other contracts 51
----------------
294
Accumulated amortization (171)
----------------
123
Non-Amortized:
Liquor licenses 39
Pension related intangible assets 29
----------------
68
----------------
$ 191
================
Amortized intangible assets have remaining useful lives from 2 to 38 years.
Projected amortization expense for intangible assets is: $24, $21, $18, $12, and
$7 for Fiscal 2002, 2003, 2004, 2005 and 2006, respectively.
The Company adopted SFAS No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets," effective February 1, 2002. SFAS No. 144 replaces SFAS
No. 121 regarding impairment losses on long-lived assets to be held and used or
to be disposed of. The adoption of this standard did not have a material impact
on the Company's impairment policy. However, the standard broadens the
definition of what constitutes a discontinued operation and how the results of a
discontinued operation are to be measured and presented. This resulted in
classifying the operations of certain stores as discontinued operations in the
Company's Consolidated Earnings statements. Under this standard, a discontinued
operation is based on identifiable cash flows and therefore is defined as an
individual store. Individual, insignificant discontinued operations must be
aggregated together for presentation purposes.
New Accounting Standards
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 will become effective for Albertson's on January 31,
2003. The Company is currently analyzing the effect that this standard will have
on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a
liability for the costs associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan as
required under EITF Issue No. 94-3. The Company is required to adopt SFAS No.
146 for exit or disposal activities that are initiated after December 31, 2002.
Statement 146 will primarily impact the timing of the recognition of costs
associated with any future exit or disposal activities.
Legal Proceedings
In March 2000, a class action complaint was filed against Albertson's as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Mario Gardner, et al.
v. Albertson's, Inc., American Stores Company, American Drug Stores, Inc.,
Sav-on Drug Stores, Inc. and Lucky Stores, Inc.) by bonusing managers seeking
recovery of additional bonus payments due to plaintiffs' allegation that the net
profit upon which their bonuses were calculated improperly included workers'
compensation costs, cash shortages, premises liability and "shrink" losses in
violation of California law. In October 2001 the court granted summary judgment
in favor of the Sav-on Drug Stores plaintiffs on this liability theory. In
August 2001 a class action complaint with very similar claims, also involving
the bonusing managers, was filed against Albertson's as well as Lucky Stores,
Inc. and American Stores Company, wholly-owned subsidiaries of the Company, in
11
the Superior Court for the County of Los Angeles, California (Taft Petersen et
al. v. Lucky Stores, Inc., American Stores Company and Albertson's, Inc.). In
June 2002 the cases were consolidated and in August 2002 a class action with
respect to the consolidated case was certified by the court. The Company has
strong defenses against this lawsuit, and is vigorously defending it. Although
this lawsuit is subject to the 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.
In April 2000 a class action complaint was filed against Albertson's as well
as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc.
and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the
Superior Court for the County of Los Angeles, California (Mario Gardner, et al.
v. American Stores Company, Albertson's, Inc., American Drug Stores, Inc.,
Sav-on Drug Stores, Inc. and Lucky Stores, Inc.) by assistant managers and
operating managers seeking recovery of overtime due to plaintiffs' allegation
that they were improperly classified as exempt under California law. A class
action with respect to Sav-on Drug Stores assistant managers was certified by
the court. A case with very similar claims, also involving the assistant
managers and operating managers, was filed against the Company's subsidiary
Sav-on Drug Stores, Inc. in the Superior Court for the County of Los Angeles,
California (Rocher, Dahlin et al. v. Sav-on Drug Stores, Inc.) and was also
certified as a class action. In April 2002, the Court of Appeal of the State of
California Second Appellate District reversed the Rocher class certification,
leaving only two plaintiffs. The California Supreme Court has accepted
plaintiffs' request for review of this class decertification. The
decertification of the Gardner case is on hold pending the result in the
California Supreme Court. The Company has strong defenses against these
lawsuits, and is vigorously defending them. Although these lawsuits are subject
to the uncertainties inherent in the litigation process, based on the
information presently available to the Company, management does not expect that
the ultimate resolution of these lawsuits will have a material adverse effect on
the Company's financial condition, results of operations or cash flows.
In August 2000 a class action complaint was filed against Jewel Food Stores,
Inc., a wholly-owned subsidiary of the Company, in the Circuit Court of Cook
County, Illinois (Maureen Baker, et al., v. Jewel Food Stores, Inc. and
Dominick's Supermarkets, Inc., Case No. 00L 009664) alleging milk price fixing.
In December 2001 the Company's motion for summary judgment was denied, and leave
to appeal was denied in April 2002. In July 2002, a class was certified,
consisting of all people residing in the Chicagoland area who bought milk at
retail from either or both of the defendants between August 23, 1996 and
August 23, 2000. Trial is scheduled for January, 2003. The Company has strong
defenses against this lawsuit, and is vigorously defending it. Although this
lawsuit is subject to the 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.
An agreement has been reached, and court approval granted, to settle eight
purported class and/or collective actions which were consolidated in the United
States District Court in Boise, Idaho, which raised various issues including
"off the clock" work allegations and allegations regarding certain salaried
grocery managers' exempt status. Under the settlement agreement, current and
former employees who meet eligibility criteria have been allowed to present
their claims to a settlement administrator. Additionally, current and former
grocery managers employed in the State of California have been allowed to
present their exempt status claims to a settlement administrator. Although the
general deadline for the submission of claims has passed, certain individuals
(including individuals whose initial claim submissions were deemed defective or
untimely) have been granted additional time to submit, correct or seek to
establish the timely submission of their claims. The Company is presently unable
to determine the number of individuals who may ultimately submit valid claims or
the amounts that it may ultimately be required to pay in respect of valid
claims. The $37 pre-tax ($22 after-tax) charge recorded by the Company in 1999
12
continues to reflect the Company's current estimate of its total monetary
liability, including attorney fees payable to counsel for the plaintiff class,
for all eight cases. During the first quarter of 2001 this accrual was reduced
by an $18 cash payment of attorney fees to counsel for the plaintiff class.
The statements above reflect management's current expectations based on the
information presently available to the Company. However, these expectations are
subject to various uncertainties, and if the outcome of one or more of these
matters is unfavorable, the adverse effect on the Company's financial condition,
results of operations or cash flows could be material.
The Company is also involved in routine legal proceedings incidental to
operations. The Company utilizes various methods of alternative dispute
resolution, including settlement discussions, to manage the costs and
uncertainties inherent in the litigation process. Management does not expect
that the ultimate resolution of these legal proceedings will have a material
adverse effect on the Company's financial condition, results of operations or
cash flows.
13
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Operational Initiatives
The Company continues to be focused on its five strategic imperatives as
discussed on pages 49 and 50 of the Company's 2001 Annual Report to
Stockholders.
1) Aggressive Cost and Process Control. Through the continued focus on expenses,
overhead and store processes the Company has achieved its initial target of
$250 in annualized expense reductions and remains on track to reduce costs by
a total of $500 by second quarter 2003. The tougher than expected economy
coupled with a more robust competitive environment has driven the Company to
increase its annualized expense reduction target to $750.
2) Maximize Return on Invested Capital. The restructuring plan announced on
July 18, 2001, that involved the closing and disposition of 165 under-
performing stores is proceeding as planned. As of August 1, 2002, 155 of
these stores had been sold or closed. The Company is planning on closing the
majority of the remaining stores by fiscal year end. In connection with the
Company's market exit plan announced on March 13, 2002, the Company has sold
or closed all 95 stores and two distribution centers located in non-strategic
markets.
3) Customer-focused Approach to Growth. The Company's "Focus on Fresh"
initiative has resulted in strong gross profit performance in the Company's
fresh departments. The Company plans to continue the roll out of dual branded
stores and loyalty card programs to additional markets during the remainder
of Fiscal 2002.
4) Company-wide Focus on Technology. The Company has embraced a company-wide
focus on technology with the goal of becoming an industry leader. The Company
has committed a greater share of its capital expenditures to information and
process technology to serve customers and improve operating efficiencies. The
Company plans to continue to roll out its Albertsons.com on-line shopping
service to additional markets.
5) Energized Associates. The Company has continued to build stronger
communication systems, improve training programs and implement new
performance-based reward programs in order to energize associates.
Comparability of Company's Operating Results
The financial statement presentation for two significant restructuring
initiatives that have been implemented in the past two years should be
considered in order to analyze the Company's accompanying operating results in
2002 and 2001. Even though the Company's decision to sell or close 165 stores on
July 18, 2001 was similar to its decision to sell or close 95 stores and two
distribution centers on March 13, 2002, the adoption of SFAS No. 144 "Accounting
for the Impairment or Disposal of Long-Lived Assets" after the first phase but
before the second phase of the restructuring caused the financial statement
presentation of these actions to be dissimilar. (SFAS 144 does not allow for
retroactive application of its provisions, so each phase of the restructuring
plan followed different reporting guidelines.) The Company's 2001 financial
statements have been restated to classify the results of operations for the 95
stores and two distribution centers as "discontinued operations"; their net
sales, cost of sales, and selling, general and administrative expenses have been
reflected on a net basis in the "discontinued operations: operating profit
(loss)" line in the consolidated earnings statements. The net sales, cost of
sales, and selling, general and administrative expenses generated by the 165
stores are included in those respective lines in the consolidated earnings
statements for the periods prior to their sale or closure.
14
Results of Operations - Second Quarter
The following table sets forth certain income statement components expressed
as a percent to sales and the year-to-year percentage changes in the amounts of
such components:
Percent to Sales
13 weeks ended Percentage
-------------------------------------- Increase
August 1, 2002 August 2, 2001 (Decrease)
----------------- ---------------- ----------------
Sales 100.00% 100.00% (3.2)%
Gross profit 29.34 28.01 1.4
Selling, general and administrative expenses 24.02 24.43 (4.8)
Restructuring (credits) charges and other (0.41) 5.15 n.m.
Operating profit (loss) 5.73 (1.55) n.m.
Interest, net (1.15) (1.18) (5.8)
Other expenses, net (0.16) (0.01) n.m.
Earnings (loss) from continuing operations before income
taxes 4.42 (2.74) n.m.
Net earnings (loss) from continuing operations 2.67 (1.68) n.m.
Net earnings from discontinued operations 0.15 0.04 n.m.
Net earnings (loss) 2.82 (1.64) n.m.
n.m. - not meaningful
Sales for the 13 weeks ended August 2, 2001 have been restated from
previously reported amounts to exclude sales associated with discontinued
operations which represent sales of the 95 stores included in the Company's
market exit plan. The decrease in reported sales is primarily attributable to
the Company's restructuring plan initiated in July 2001, which included the sale
or closure of 165 stores, and the sale of 80 New England Osco drugstores in the
fourth quarter of 2001. (These stores' sales are included in the 2001 and 2002
periods until their closure.) Sales were also impacted by continued softness
in the economy. The sales decrease was offset in part, by the Company's capital
expansion program. Identical store sales decreased 0.6% and comparable store
sales, which include replacement stores, decreased 0.1%. During the second
quarter of 2002, the Company opened 13 combination food and drug stores and
9 stand alone drugstores, while closing 42 combination food and drug stores,
11 conventional stores, and 17 drugstores. Of the total 70 store closings,
54 related to the Company's restructuring plan. Net retail square footage
decreased by 9.1% from the prior year. Management estimates that during the
current quarter overall deflation in products the Company sells was
approximately 0.5% as compared to inflation of 1.0% in the second quarter of the
prior year.
In addition to store development, the Company has increased sales through its
continued implementation of best practices across its divisions and its
customer-focused approach to growth. These programs include: the "Focus on
Fresh" initiative; a renewed focus on customer service through the "Service
First, Second to None" program; expansion of the preferred loyalty card program;
dual branded combination stores; and expansion of the on-line shopping service.
Gross profit, as a percent to sales, increased as a result of strong
performance in the fresh departments, improvements in the pharmacy department
and improved shrink and inventory control processes. Improvements in the
pharmacy department resulted from the increased generic substitution and
improved procurement practices. The pre-tax LIFO charge reduced gross profit by
$5 (0.06% to sales) for the 13 weeks ended August 1, 2002, and $8 (0.08% to
sales) for the 13 weeks ended August 2, 2001.
15
Total selling, general and administrative (SG&A) expenses, as a percent to
sales, decreased as a result of the following: the Company's restructuring plan
adopted in the second quarter of 2001 included a plan to accelerate the
disposition of surplus property through negotiated lease buyouts and selling
properties through auctions which resulted in pre-tax charges of $48 being
recorded in SG&A during the 13 weeks ended August 2, 2001; the Company's
continued emphasis on cost control and implementing best practices across the
Company through its SWIFT programs resulted in reduced labor costs as a percent
to sales; and, the discontinuation of goodwill amortization in the current year.
These decreases were offset by increased benefits and workers' compensation
costs.
Other expenses, as a percent to sales, increased due to charges associated
with decreases in the cash surrender value of Company-owned life insurance
policies. Cash surrender values of these policies are adjusted for fluctuations
in the market value of underlying investments. Since the middle of July 2002,
the underlying investments have been converted to fixed income securities from
equities in order to mitigate the market volatility.
Discontinued Operations, Restructuring and Other Non-Routine Items
Discontinued Operations / Market Exits - On March 13, 2002, the Company's
Board of Directors approved the second phase of the Company's restructuring plan
designed to improve future financial results and to drive future
competitiveness. As a result, the Company completely exited four underperforming
markets: Memphis, Tennessee; Nashville, Tennessee; Houston, Texas; and San
Antonio, Texas. These market exits were accomplished through a combination of
store closures and store sales and involved a total of 95 stores. In connection
with the market exits, Albertson's sold its Tulsa, Oklahoma distribution center
to Fleming Companies, Inc. and closed its Houston, Texas distribution center.
The operations and resulting gains and losses related to these market exits have
been presented as discontinued operations in accordance with the adoption of
SFAS No. 144.
In connection with the market exit plan, the Company recorded pre-tax credits
from discontinued operations of $20 during the 13 weeks ended August 1, 2002.
Pre-tax credits of $45 were recognized for asset impairment adjustments
resulting from the Company realizing sales proceeds in excess of amounts
originally estimated on stores disposed of and increases to net realizable
values for stores under contract for sale. Pre-tax credits of $11 were
recognized for lease liability adjustments where more favorable negotiated
settlements have been reached than had been originally estimated. Pre-tax
charges of $36 were recognized for operating losses. During the 13 weeks ended
August 2, 2001 the Company recorded pre-tax operating profit of $6 for these
discontinued operations.
Restructuring - On July 17, 2001, the Company's Board of Directors approved a
restructuring plan designed to improve future financial results and to drive
future competitiveness. The plan included certain exit costs and employee
termination benefits as described below.
Action Status
Reduction in administrative and corporate overhead Substantially complete
Closure of 165 underperforming retail stores 155 closed as of August 1, 2002
Consolidation and elimination of four division offices Completed
Process streamlining Ongoing
16
As a result of this restructuring plan, the Company recorded net pre-tax
credits of $31 for the 13 weeks ended August 1, 2002. Pretax credits of $17 were
recognized for assets impairment adjustments resulting from the Company
realizing sales proceeds in excess of amounts originally estimated on stores
disposed of and increases to the net realizable values for stores under contract
for sale. Pre-tax credits of $19 were recognized for lease liability adjustments
where more favorable negotiated settlements have been reached than had been
originally estimated and pre-tax charges of $5 were recognized for severance and
other costs. In the second quarter of the prior year the Company recorded
pre-tax charges of $558 consisting of $35 for inventory write-downs, $416 for
assets writedowns, $63 in lease liabilities in excess of related sublease income
and $44 of severance costs.
Summary of Discontinued Operations, Restructuring and Other Non-Routine Items
- - Due to the significance of discontinued operations, restructuring charges,
merger-related charges (credits), other non-routine items and the discontinuance
of goodwill amortization and their effect on operating results, the following
table is presented to assist in the comparison of selected earnings statement
components as reported and as provided supplementally to reflect adjustments to
exclude the effects of these charges and credits:
13 Weeks Ended 13 Weeks Ended
August 1, 2002 August 2, 2001
------------------------------------------- ------------------------------------------
As Reported Adj. As Adjusted As Reported Adj. As Adjusted
------------ --------------- ------------ ------------ -------------- ------------
Sales $8,941 $8,941 $9,235 $9,235
Cost of sales 6,317 6,317 6,648 $(35)(a) 6,613
Selling, general and administrative
expenses 2,148 $(4)(a) 2,144 2,256 (48)(a) 2,192
(14)(b)
(2)(c)
Restructuring (credits) charges and other (37) 35 (a) - 475 (475)(a) -
2 (c)
Merger-related credits (1) 1 (c) -
Other expenses:
Interest, net (103) (103) (109) (109)
Other, net (14) (14) (1) (1)
Income tax expense 156 (13)(d) 143 (99) 225 (d) 126
Discontinued operations:
Operating (loss)income 20 (20)(e) - 6 (6)(e) -
Tax (benefit) expense 7 (7)(e) - 3 (3)(e) -
(a) Relates to the Company's restructuring plan adopted on July 17, 2001
(b) Adjustment to exclude goodwill amortization
(c) Other costs and adjustments related to the Company's merger with American
Stores Company
(d) Tax effect of the various adjustments
(e) Relates to the Company's market exit plan adopted on March 13, 2002
Note: The net earnings per share impact of the supplemental items was to
reduce reported EPS by $0.08 for the 13 weeks ended August 1, 2002
and increase reported EPS by $0.85 for the 13 weeks August 2, 2001.
17
Results of Operations - Year-to-Date
The following table sets forth certain income statement components expressed
as a percent to sales and the year-to-year percentage changes in the amounts of
such components:
Percent to Sales
26 weeks ended Percentage
-------------------------------------- Increase
August 1, 2002 August 2, 2001 (Decrease)
----------------- ---------------- ----------------
Sales 100.00% 100.00% (2.0)%
Gross profit 29.29 28.29 1.4
Selling, general and administrative expenses 23.90 24.19 (3.2)
Restructuring (credits) charges and other (0.12) 2.61 n.m.
Merger-related credits (0.08) n.m.
Operating profit 5.51 1.57 n.m.
Interest, net (1.16) (1.18) (3.6)
Other expenses, net (0.09) (0.07) n.m.
Earnings from continuing operations before income taxes 4.25 0.32 n.m.
Net earnings from continuing operations 2.59 0.16 n.m.
Net (loss) earnings from discontinued operations (1.62) 0.03 n.m.
Net earnings 0.97 0.19 n.m.
Sales for the 26 weeks ended August 2, 2001 have been restated from
previously reported amounts to exclude sales associated with discontinued
operations which represent sales of the 95 stores included in the Company's
market exit plan. The decrease in reported sales is primarily attributable to
the Company's restructuring plan initiated in July 2001, which included the sale
or closure of 165 stores, and the sale of 80 New England Osco drugstores in the
fourth quarter of 2001. (These stores' sales are included in the 2001 and 2002
periods until their closure.) Sales were also impacted by continued softness
in the economy. The sales decrease was offset in part, by comparable sales
increases and by the Company's capital expansion program. Identical store sales
were flat and comparable store sales, which include replacement stores,
increased 0.6%. During the 26 weeks ended August 1, 2002, the Company opened
27 combination food and drug stores and 19 stand alone drugstores, while closing
134 combination food and drug stores, 18 conventional stores, 3 warehouse stores
and 45 drugstores. Of the total 200 store closings, 171 related to the Company's
restructuring plans. Net retail square footage decreased by 9.1% from the prior
year. Management estimates that during the current period overall deflation in
products the Company sells was approximately 0.5% as compared to inflation of
1.0% in the same period of the prior year.
Sales results for the 26 weeks ended August 1, 2002, were the results of
trends and programs similar to those experienced for the 13 weeks ended
August 1, 2002, which are discussed in Results of Operations - Second Quarter.
Gross profit, as a percent to sales, increased as a result of strong
performance in the fresh departments, improvements in the pharmacy department
and improved shrink and inventory control processes. Improvements in the
pharmacy department resulted from the increased generic substitution and
improved procurement practices. The pre-tax LIFO charge reduced gross profit by
$10 (0.06% to sales) for the 26 weeks ended August 1, 2002, and $15 (0.08% to
sales) for the 26 weeks ended August 2, 2001.
18
Total selling, general and administrative (SG&A) expenses, as a percent to
sales, decreased as a result of the following: the Company's restructuring plan
adopted in the second quarter of 2001 included a plan to accelerate the
disposition of surplus property through negotiated lease buyouts and selling
properties through auctions which resulted in pre-tax charges of $48 being
recorded in SG&A during the 26 weeks ended August 2, 2001; the Company's
continued emphasis on cost control and implementing best practices across the
Company through its SWIFT programs resulted in reduced labor costs as a percent
to sales; and, discontinuation of goodwill amortization in the current year.
These decreases were offset by increased benefits and workers' compensation
costs.
Other expenses, as a percent to sales, increased due to charges associated
with decreases in the cash surrender value of Company-owned life insurance
policies. Cash surrender values of these policies are adjusted for fluctuations
in the market value of underlying investments. Since the middle of July 2002,
the underlying investments have been converted to fixed income securities from
equities in order to mitigate the market volatility.
Discontinued Operations, Restructuring and Other Non-Routine Items
Discontinued Operations / Market exits - In connection with the market exit
plan, the Company recorded pre-tax charges from discontinued operations of $434
during the 26 weeks ended August 1, 2002. The pre-tax charges are comprised of
$356 of charges on the write-down of assets to estimated net realizable value,
$15 of charges on lease liabilities in excess of related estimated sublease
income and $63 of operating losses and other costs. During the 26 weeks ended
August 2, 2001, the Company recorded pre-tax earnings of $9 associated with the
discontinued operations.
Restructuring - In connection with the restructuring plan, the Company
recorded net pre-tax credits of $13 for the 26 weeks ended August 2, 2002.
Pre-tax credits of $7 were recognized for asset impairment adjustments resulting
from the Company realizing sales proceeds in excess of amounts originally
estimated on stores disposed of and increases to the net realizable values for
stores under contract for sale. Pre-tax credits of $11 were recognized for lease
liability adjustments where more favorable negotiated settlements have been
reached than had been originally estimated. Pre-tax charges of $5 were
recognized for severance and other costs. In the second quarter of the prior
year the Company recorded pre-tax charges of $558 consisting of $35 for
inventory write-downs, $416 of charges for the write-down of assets to estimated
net realizable value, $63 of charges for lease liabilities in excess of related
sublease income and $44 of severance and other costs.
Merger-Related and Exit Costs - Results of operations for the 26 weeks ended
August 2, 2001, include a net of $10 of merger related credits consisting of $15
of credits associated with the reversal of previous impairment charges and $5 of
additional severance and integration costs.
Other Non-Routine Items - During the quarter ended May 3, 2001, the Company
recorded $9 of compensation related costs for the executive management changes.
19
Summary of Discontinued Operations, Restructuring and Other Non-Routine Items
- - Due to the significance of discontinued operations, restructuring charges,
merger-related charges (credits), other non-routine items and the discontinuance
of goodwill amortization and their effect on operating results, the following
table is presented to assist in the comparison of selected earnings statement
components as reported and as provided supplementally to reflect adjustments to
exclude the effects of these charges and credits:
26 Weeks Ended 26 Weeks Ended
August 1, 2002 August 2, 2001
------------------------------------------- ------------------------------------------
As Reported Adj. As Adjusted As Reported Adj. As Adjusted
------------ --------------- ------------ ------------ -------------- ------------
Sales $17,862 $17,862 $18,229 $18,229
Cost of sales 12,631 12,631 13,071 $(35)(a) 13,036
Selling, general and administrative
expenses 4,269 $ (8) (a) 4,261 4,410 (48)(a) 4,319
(28)(b)
(15)(c)
Restructuring (credits) charges and other (22) 21 (a) - 475 (475)(a) -
1 (c)
Merger-related credits (15) 15 (c) -
Other expenses:
Interest, net (208) (208) (216) (216)
Other, net (17) (17) (12) (12)
Income tax expense 297 (5) (d) 292 30 224 (d) 254
Discontinued operations:
Operating (loss)income (434) 434 (e) - 9 (9)(e) -
Tax (benefit) expense (144) 144 (e) 4 (4)(e)
(a) Relates to the Company's restructuring plan adopted on July 17, 2001
(b) Adjustment to exclude goodwill amortization
(c) Other costs and adjustments related to the merger and executive
management changes
(d) Tax effect of the various adjustments
(e) Relates to the Company's market exit plan adopted on March 13, 2002
Note: The net earnings per share impact of the supplemental items was to
increase reported EPS by $0.69 and $0.88 for the 26 weeks ended
August 1, 2002 and August 2, 2001, respectively.
The costs of the Company's restructuring plan have resulted in significant
charges and incremental expenses. These costs had significant effects on the
results of operations of the Company. Through August 1, 2002, the Company has
recognized total pre-tax charges of $982 ($627 after tax) associated with the
Company's restructuring plan and related discontinued operations. The total
noncash portion of these charges amounted to $773 and the Company expects to
generate net cash proceeds of approximately $605 (before tax) when all of the
related assets are sold.
20
Liquidity and Capital Resources
Cash provided by operating activities during the 26 weeks ended August 1,
2002, was $1,211 compared to $1,032 in the prior year. Free cash flow, defined
as cash provided by operating activities plus proceeds from disposal of land,
buildings and equipment, and proceeds from disposal of assets held for sale,
less net capital expenditures, dividends paid, and common stock purchases was
$806 for the 26 weeks ended August 1, 2002, compared to $255 in the prior year.
The increase in free cash flows resulted primarily from the Company's initiative
to dispose of surplus property, underperforming stores and other assets related
to market exits.
The implementation of the Company's strategic imperative to maximize return
on invested capital (see Operational Initiatives) is expected to further enhance
working capital by eliminating unproductive assets and reducing inventory and
accounts receivable levels. Future sales of assets held for sale over the next
two quarters is expected to continue to provide significant positive cash flow
for the Company.
The Company utilizes its commercial paper and bank line programs primarily to
supplement cash requirements for seasonal fluctuations in working capital and to
fund its capital expenditure program. Accordingly, commercial paper and bank
line borrowings will fluctuate between reporting periods. The Company had no
commercial paper or bank line borrowings outstanding at August 1, 2002, or
January 31, 2002.
In support of the Company's commercial paper program, the Company has three
credit facilities totaling $1,400. These agreements also contain certain
covenants, the most restrictive of which requires the Company to maintain
consolidated tangible net worth, as defined, of at least $3,000 and a fixed
charge coverage of at least 2.7 times. As of August 1, 2002, the Company's
consolidated tangible net worth, as defined, was approximately $4,268, and the
fixed charge coverage was 4.3 times. No borrowings were outstanding under these
credit facilities as of August 1, 2002.
The Company filed a shelf registration statement with the Securities and
Exchange Commission, which became effective in February 2001 (the "2001
Registration Statement"), to authorize the issuance of up to $3,000 in debt
securities. The Company intends to use the net proceeds of any securities sold
pursuant to the 2001 Registration Statement for retirement of debt and general
corporate purposes, including the potential purchase of outstanding shares of
Albertson's common stock. As of August 1, 2002, securities up to $2,400 of
principal remain available for issuance under the Company's 2001 Registration
Statement.
The Board of Directors adopted a program on December 3, 2001, authorizing, at
management's discretion, the Company to purchase and retire up to $500 of the
Company's common stock beginning December 6, 2001, through December 31, 2002.
The Board of Directors on September 5, 2002 authorized an increase of $500 to
this program for a total of $1,000 of the Company's common stock that may be
purchased and retired by the Company through December 31, 2002. During the
quarter, the Company purchased and retired 2.7 million shares of its common
stock at a total cost of $76, or an average price of $27.77 per share under this
program. Subsequent to August 1, 2002 and through September 6, 2002, the Company
had purchased and retired an additional 5.6 million shares for $154, or an
average price of $27.35 under this program.
Contractual Obligations and Commercial Commitments
There have been no material changes regarding the Company's contractual
obligations and commercial commitments from the information provided under the
caption "Contractual Obligations and Commercial Commitments" on page 58 and 59
of the Company's 2001 Annual Report to Stockholders.
Letters of Credit
The Company had outstanding Letters of Credit of $124 as of August 1, 2002,
all of which were issued under separate bilateral agreements with multiple
financial institutions. Of the $124 outstanding at August 1, 2002, $105 were
standby letters of credit covering primarily workers' compensation or
21
performance obligations. The remaining $19 were commercial letters of credit
supporting the Company's merchandise import program. The Company pays issuance
fees that vary, depending on type, which average 0.6% of the outstanding balance
of the letters of credit.
Off Balance Sheet Arrangements
Albertson's, Inc. has no significant investments that are accounted for under
the equity method in accordance with accounting principles generally accepted in
the United States. Investments that are accounted for under the equity method
have no liabilities associated with them that would be considered material to
Albertson's.
Quantitative and Qualitative Disclosures about Market Risk
There have been no material changes regarding the Company's market risk
position from the information provided under the caption "Quantitative and
Qualitative Disclosures About Market Risk" on page 60 of the Company's 2001
Annual Report to Stockholders.
Controls and Procedures
Subsequent to management's most recent evaluation, which was completed on
September 4, 2002, there have been no significant changes in the Company's
internal controls or, to the Company's knowledge, in other factors that could
significantly affect these controls.
Related Party Transactions
There have been no material related party transactions during the 26 weeks
ended August 1, 2002, or August 2, 2001.
Recent Accounting Standards
In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 will become effective for Albertson's on January 31,
2003. The Company is currently analyzing the effect that this standard will have
on its financial statements.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities." SFAS No. 146 addresses financial accounting
and reporting for costs associated with exit or disposal activities and
nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 requires recognition of a
liability for the costs associated with an exit or disposal activity when the
liability is incurred, as opposed to when the entity commits to an exit plan as
required under EITF Issue No. 94-3. The Company is required to adopt
SFAS No. 146 for exit or disposal activities that are initiated after
December 31, 2002. Statement 146 will primarily impact the timing of the
recognition of costs associated with any future exit or disposal activities.
Environmental
The Company has various identified environmental liabilities, the majority of
which are related to soil and groundwater contamination from underground
petroleum storage tanks and former dry cleaning operations at certain store,
warehouse, office and manufacturing facilities. Such liabilities affect current
operations as well as previously divested properties. The Company conducts an
ongoing program for the inspection and evaluation of new sites proposed to be
acquired by the Company and the remediation/monitoring of contamination at
existing and previously owned sites. Undiscounted reserves have been established
for each identified environmental liability unless an unfavorable outcome is
remote. Although the ultimate outcome and expense of these environmental
liabilities is uncertain, the Company believes that required remediation and
continuing compliance with environmental laws, in excess of current reserves,
will not have a material adverse effect on the financial condition, results of
operations or cash flows of the Company. Charges against earnings for
environmental remediation were not material for the 26 weeks ended August 1,
2002, or August 2, 2001.
22
Cautionary Statement for Purposes of "Safe Harbor Provisions"
of the Private Securities Litigation Reform Act of 1995
From time to time, information provided by the Company, including written or
oral statements made by its 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 the Company expects or anticipates will
or may occur in the future, including such things as integration of the
operations of acquired or merged companies, expansion and growth of the
Company's business, future capital expenditures and the Company's business
strategy, contain forward-looking information. In reviewing such information it
should be kept in mind that actual results may differ materially from those
projected or suggested in such forward-looking information. This forward-looking
information is based on various factors and was derived using various
assumptions. Many of these factors have previously been identified in filings or
statements made by or on behalf of the Company.
Important assumptions and other important factors that could cause actual
results to differ materially from those set forth in the forward-looking
information include changes in the general economy, changes in interest rates,
changes in consumer spending, actions taken by competitors, particularly those
intended to improve their market share, and other factors affecting the
Company's business in or beyond the Company's control. These factors include
changes in the rate of inflation, changes in state or federal legislation or
regulation, adverse determinations with respect to litigation or other claims
(including environmental matters), labor negotiations, the cost and stability of
energy sources, the Company's ability to recruit, retain and develop employees,
its ability to develop new stores or complete remodels as rapidly as planned,
its ability to implement new technology successfully, stability of product
costs, the Company's ability to integrate the operations of acquired or merged
companies, the Company's ability to execute its restructuring plan, and the
Company's ability to achieve its five strategic imperatives.
Other factors and assumptions not identified above could also cause the
actual results to differ materially from those set forth in the forward-looking
information. The Company does not undertake to update forward-looking
information contained herein or elsewhere to reflect actual results, changes in
assumptions, or changes in other factors affecting such forward-looking
information.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required under this item is included in the Notes to
Consolidated Financial Statements under the caption "Legal Proceedings" on page
11 of Part I, Financial Information of this Report on Form 10-Q. This
information is incorporated herein by this reference thereto.
Item 2. Changes in Securities
In accordance with the Company's $1,400 revolving credit agreements, the
Company's consolidated tangible net worth, as defined, shall not be less than
$3,000.
Item 3. Defaults upon Senior Securities
Not applicable
Item 4. Submission of Matters to a Vote of Security Holders
Information regarding the Company's Annual meeting of Stockholders held on
June 6, 2002, was included under Item 4 of the Company's Form 10-Q for the
quarter ended May 2, 2002.
Item 5. Other Information
None
23
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
99.1 Certification of CEO and CFO Pursuant to 18 U.S.C.
Section 1350, as Adopted Pursuant to Section 906
of the Sarbanes-Oxley Act of 2002.
b. The following reports on Form 8-K were filed during the quarter ended
August 2, 2002:
Current Report on Form 8-K dated May 21, 2002, summarizing the press
release issued on May 21, 2002 which raised first quarter 2002
earnings per share guidance and reported preliminary sales for the
first quarter of 2002.
SIGNATURE
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.
ALBERTSON'S, INC.
----------------------------------------
(Registrant)
Date: September 13, 2002 /S/ Felicia D. Thornton
----------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
24
CERTIFICATIONS
I, Lawrence R. Johnston, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Albertson's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/ Lawrence R. Johnston
----------------------------------------
Lawrence R. Johnston
Chairman of the Board and
and Chief Executive Officer
I, Felicia D. Thornton, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Albertson's, Inc.;
2. Based on my knowledge, this quarterly report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to
make the statements made, in light of the circumstances under which such
statements were made, not misleading with respect to the period covered by
this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this quarterly report.
Date: September 13, 2002 /S/ Felicia D. Thornton
----------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
25