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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
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Quarterly Report Under Section 13 or 15(d)
of the Securities Exchange Act of 1934
For 13 Weeks Ended: October 31, 2002 Commission File Number: 1-6187
ALBERTSON'S, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 82-0184434
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
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(Address) (Zip Code)
Registrant's telephone number, including area code: (208) 395-6200
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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
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There were 379,151,128 shares with a par value of $1.00 per share
outstanding at December 6, 2002.
ALBERTSON'S INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Earnings for the 13 and 39 weeks ended
October 31, 2002 and November 1, 2001 3
Condensed Consolidated Balance Sheets as of October 31, 2002
and January 31, 2002 4
Condensed Consolidated Cash Flows for the 39 weeks ended
October 31, 2002 and November 1, 2001 5
Notes to the Condensed Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
Item 4. Controls and Procedures 23
PART II OTHER INFORMATION
Item 1. Legal Proceedings 23
Item 2. Changes in Securities 23
Item 6. Exhibits and Reports on Form 8-K 23
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED EARNINGS
(in millions except per share data)
(unaudited)
13 WEEKS ENDED 39 WEEKS ENDED
-------------------------------------- ----------------------------------------
October 31, November 1, October 31, November 1,
2002 2001 2002 2001
------------------ ------------------- -------------------- -------------------
Sales $8,657 $9,036 $26,519 $27,265
Cost of sales 6,120 6,466 18,751 19,537
------------------ ------------------- -------------------- -------------------
Gross profit 2,537 2,570 7,768 7,728
Selling, general and administrative expenses 2,152 2,152 6,421 6,562
Restructuring (credits) charges and other (7) 1 (29) 476
Merger-related credits (15)
------------------ ------------------- -------------------- -------------------
Operating profit 392 417 1,376 705
Other expenses:
Interest, net (87) (110) (295) (326)
Other, net (7) (17) (19)
------------------ ------------------- -------------------- -------------------
Earnings from continuing operations before
income taxes 305 300 1,064 360
Income tax expense 111 123 408 153
------------------ ------------------- -------------------- -------------------
Net earnings from continuing operations 194 177 656 207
Discontinued operations:
Operating (loss) profit (3) (1) (437) 8
Income tax (benefit) expense (1) (145) 4
------------------ ------------------- -------------------- -------------------
Net (loss) earnings from discontinued
operations (2) (1) (292) 4
------------------ ------------------- -------------------- -------------------
NET EARNINGS $ 192 $ 176 $ 364 $ 211
------------------ ------------------- -------------------- -------------------
EARNINGS (LOSS) PER SHARE:
Basic
Continuing operations $ 0.49 $ 0.44 $1.63 $ 0.51
Discontinued operations (0.01) (0.01) (0.73) 0.01
------------------ ------------------- -------------------- -------------------
Net earnings $ 0.48 $ 0.43 $0.90 $ 0.52
================== =================== ==================== ===================
Diluted
Continuing operations $ 0.49 $ 0.43 $1.63 $ 0.51
Discontinued operations (0.01) (0.73) 0.01
------------------ ------------------- -------------------- -------------------
Net earnings $ 0.48 $ 0.43 $0.90 $ 0.52
================== =================== ==================== ===================
WEIGHTED AVERAGE NUMBER OF COMMON SHARES
OUTSTANDING:
Basic 396 406 403 406
Diluted 397 409 405 408
See Notes to Condensed Consolidated Financial Statements.
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions except par value)
(unaudited)
October 31, January 31,
2002 2002
----------------- -----------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 430 $ 61
Accounts and notes receivable, net 575 696
Inventories 3,180 3,196
Prepaid expenses and other 102 172
Refundable income taxes 17
Assets held for sale 189 326
Deferred income taxes 97 172
----------------- -----------------
TOTAL CURRENT ASSETS 4,590 4,623
LAND, BUILDINGS AND EQUIPMENT (net of accumulated depreciation and
amortization of $6,022 and $5,753, respectively) 8,964 9,282
GOODWILL, net 1,399 1,468
INTANGIBLES, net 184 210
OTHER ASSETS 332 398
----------------- -----------------
$ 15,469 $ 15,981
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $2,101 $2,107
Salaries and related liabilities 557 584
Taxes other than income taxes 194 153
Income taxes payable 51
Self-insurance 212 198
Unearned income 85 88
Restructuring reserves 44 61
Current portion of capitalized lease obligations 14 14
Current maturities of long-term debt 127 123
Other 244 217
----------------- -----------------
TOTAL CURRENT LIABILITIES 3,578 3,596
LONG-TERM DEBT 4,953 5,060
CAPITALIZED LEASE OBLIGATIONS 296 276
SELF-INSURANCE 334 307
DEFERRED INCOME TAXES 29 71
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 744 756
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 - 386
shares and 407 shares, respectively 386 407
Capital in excess of par 125 94
Accumulated other comprehensive loss (19) (19)
Retained earnings 5,043 5,433
----------------- -----------------
5,535 5,915
----------------- -----------------
$15,469 $ 15,981
================= =================
See Notes to Condensed Consolidated Financial Statements.
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED CASH FLOWS
(in millions)
(unaudited)
39 WEEKS ENDED
--------------------------------------------
October 31, November 1,
2002 2001
------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 364 $ 211
Adjustments to reconcile net earnings to net cash provided by operating
activities:
Depreciation and amortization 730 737
Goodwill amortization 43
Discontinued operations noncash charges 347
Restructuring and other noncash (credits) charges (2) 450
Noncash merger-related credits (13)
Net (gain) loss on asset sales (1) 15
Net deferred income taxes and other 48 (149)
Decrease in cash surrender value of Company-owned life insurance 17 21
Changes in operating assets and liabilities:
Receivables, prepaid expenses and other 190 16
Inventories 51 (196)
Accounts payable (6) 205
Other current liabilities (39) 131
Self-insurance 41 51
Unearned income (3) (25)
Other long-term liabilities (12) (36)
------------------ ---------------------
Net cash provided by operating activities 1,725 1,461
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (1,050) (1,108)
Proceeds from disposal of land, buildings and equipment 91 67
Proceeds from disposal of assets held for sale 472 97
Other 10 2
------------------ ---------------------
Net cash used in investing activities (477) (942)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 613
Net commercial paper and bank line activity (859)
Payments on long-term borrowings (116) (70)
Cash dividends paid (232) (231)
Proceeds from stock options exercised 16 19
Common Stock purchased and retired (547)
------------------ ---------------------
Net cash used in financing activities (879) (528)
------------------ ---------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 369 (9)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 61 37
------------------ ---------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 430 $ 28
================== =====================
See Notes to Condensed Consolidated Financial Statements.
ALBERTSON'S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
(unaudited)
NOTE A - THE COMPANY AND SIGNIFICANT ACCOUNTING POLICIES
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 October 31, 2002, the Company operated 2,285 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 189 fuel centers near existing stores.
Basis of Presentation
The accompanying unaudited condensed 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 condensed
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 condensed 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
filed with the Securities and Exchange Commission on April 18, 2002. The results
of operations for the 39 weeks ended October 31, 2002, are not necessarily
indicative of results for a full year.
The Company's Condensed Consolidated Balance Sheet as of January 31, 2002,
has been derived from the audited Consolidated Balance Sheet as of that date.
The preparation of the Company's condensed 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.
The financial statement presentation includes the results of two
significant restructuring initiatives that have been implemented in 2001 and
2002. On July 18, 2001, the Company's Board of Directors approved a
restructuring plan that included the closure of 165 underperforming retail
stores, reduction of administrative and corporate overhead and consolidation and
elimination of four division offices (refer to "Note E - Restructuring"). On
March 13, 2002, the Company's Board of Directors approved the second phase of
the restructuring plan which included the complete exit of four underperforming
markets resulting in the sale or closure of 95 stores and two distribution
centers (refer to "Note D - Discontinued Operations/Market Exits"). Although
these decisions were similar, the adoption of SFAS No. 144 "Accounting for the
Impairment or Disposal of Long-Lived Assets" on February 1, 2002 caused the
financial statement presentation of these actions to be dissimilar (SFAS No. 144
does not allow for the retroactive application of its provisions). 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 accompanying condensed
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 accompanying condensed consolidated earnings
statements for the periods prior to their sale or closure.
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.
Inventory
Net earnings reflects the application of the LIFO method of valuing certain
inventories. Quarterly inventory determinations under LIFO are partially based
on assumptions as to projected inventory levels at the end of the year and the
rate of inflation for the year. Albertson's recorded pretax LIFO expense of $10
and $23 for the 39 weeks ended October 31, 2002, and November 1, 2001,
respectively.
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 adjusted
by the dilutive effect of stock options.
The following table details the computation of EPS (shares in millions):
13 Weeks Ended 39 Weeks Ended
------------------------------------------ ----------------------------------------
October 31, November 1, October 31, November 1,
2002 2001 2002 2001
------------------- ------------------- ------------------ -------------------
Basic EPS:
Net earnings $ 192 $ 176 $ 364 $ 211
=================== =================== ================== ===================
Weighted average common shares
outstanding 396 406 403 406
------------------- ------------------- ------------------ -------------------
Basic EPS $0.48 $0.43 $0.90 $0.52
=================== =================== ================== ===================
Diluted EPS:
Net earnings $ 192 $ 176 $ 364 $ 211
=================== =================== ================== ===================
Weighted average common shares
outstanding 396 406 403 406
Potential common share equivalents 1 3 2 2
------------------- ------------------- ------------------ -------------------
Weighted average shares
outstanding 397 409 405 408
------------------- ------------------- ------------------ -------------------
Diluted EPS $0.48 $0.43 $0.90 $0.52
=================== =================== ================== ===================
Calculation of potential common share equivalents:
Options to purchase potential common
shares 7 17 9 17
Common shares assumed purchased with
potential proceeds (6) (14) (7) (15)
------------- ----------------- ------------------ -------------------
Potential common share equivalents 1 3 2 2
============= ================= ================== ===================
Calculation of potential common shares assumed purchased with potential
proceeds:
Potential proceeds from exercise of
options to purchase common shares $147 $477 $215 $460
Common stock price used under the
treasury stock method $26.03 $33.16 $29.61 $30.88
Potential common shares assumed
purchased with potential proceeds 6 14 7 15
Outstanding options to purchase shares excluded from potential common share
equivalents (option price exceeded the average market price during the period)
amounted to 19.9 million and 7.9 million shares for the 13 weeks and 19.4
million and 8.9 million shares for the 39 weeks ended October 31, 2002, and
November 1, 2001, respectively.
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 October 31, 2002, and November 1, 2001.
Reclassifications
Certain reclassifications have been made in prior year's financial
statements to conform to classifications used in the current year.
NOTE B - RECENTLY ADOPTED ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard (`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 and indefinite life intangibles 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 39 weeks ended October
31, 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 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 Condensed Consolidated Earnings Statements. Under
this standard, a discontinued operation is based on identifiable cash flows and
therefore is defined as an individual store. Individual discontinued operations
resulting from normal store closures are not significant in the aggregate and,
therefore, are not presented as discontinued operations. Activity associated
with the Company's market exit plan involving the sale or closure of 95 stores
and two distribution centers has been presented as discontinued operations
(refer to "Note D - Discontinued Operations/Market Exits.")
NOTE C - GOODWILL
Albertsons adoption of SFAS No. 142 eliminated the amortization of goodwill
beginning in the first quarter of 2002. The following table adjusts net income
and net income per share for the adoption of SFAS No. 142:
13 Weeks Ended 39 Weeks Ended
----------------------------------- --------------------------------------
October 31, November 1, October 31, November 1,
2002 2001 2002 2001
---------------- ----------------- ----------------- -----------------
Net earnings as reported $192 $ 176 $364 $ 211
Add back goodwill amortization, net of tax 14 41
---------------- ----------------- ----------------- -----------------
Adjusted net earnings $192 $ 190 $364 $ 252
================ ================= ================= =================
Basic EPS $0.48 $ 0.43 $0.90 $0.52
Add back goodwill amortization, net of tax 0.03 0.10
---------------- ----------------- ----------------- -----------------
Adjusted Basic EPS (a) $0.48 $ 0.47 $0.90 $0.62
================ ================= ================= =================
Diluted EPS $0.48 $0.43 $0.90 $0.52
Add back goodwill amortization, net of tax 0.03 0.10
---------------- ----------------- ----------------- -----------------
Adjusted Diluted EPS $0.48 $ 0.46 $0.90 $0.62
================ ================= ================= =================
(a) Due to rounding, the individual components do not sum to the total adjusted
basic earnings per share for the 13 weeks ended November 1, 2001.
Changes in the net 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 October 31, 2002 $1,399
===============
In connection with the complete exit of certain markets discussed below,
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.
The carrying amount of intangible assets as of October 31, 2002, was as
follows:
Amortized:
FMV of operating leases $ 233
Customer lists and other contracts 52
-------------
285
Accumulated amortization (169)
-------------
116
Non-Amortized:
Liquor licenses 39
Pension related intangible assets 29
-------------
68
-------------
$ 184
=============
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.
NOTE D - 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 Condensed Consolidated Earnings Statements. Restatement of prior
year operating activity was required for the operations of the business
presented as discontinued operations in connection with the adoption of SFAS No.
144.
The discontinued operations generated sales of $290 and $1,006 for the 39
weeks ended October 31, 2002, and November 1, 2001, respectively, and an
operating loss of $437 and operating profit of $8, respectively. For the 39
weeks ended October 31, 2002, the discontinued operations operating loss of $437
consisted of operating losses of $49 and asset impairments, lease liabilities
and other costs of $388 as described in the following table:
Asset Lease Other
Impairments Liabilities Costs Total
------------------- ------------------- ----------- -----------
Additions $ 401 $ 26 $ 17 $ 444
Adjustments (54) (10) 8 (56)
Utilization (347) (3) (25) (375)
------------------- ------------------- ----------- -----------
Reserve Balance at October 31, 2002 $ - $ 13 $ - $ 13
=================== =================== =========== ===========
The reserve balance of $13 as of October 31, 2002 is included with the
restructuring reserves, in the Company's Condensed Consolidated Balance Sheet.
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.
Assets related to discontinued operations are recorded at their estimated
net realizable value of $81 as of October 31, 2002 and are reported as assets
held for sale in the Company's Condensed Consolidated Balance Sheet. These
assets include land, buildings, equipment and leasehold improvements and are
being actively marketed. As of October 31, 2002, all 95 stores and both
distribution centers had been sold or closed. In addition, 77 of the 95 stores
and one distribution center had been sold or were under contract for sale as of
October 31, 2002.
Other costs consist of amounts paid in connection with notification
regulations and negotiated contract terminations.
In connection with the market exit plan, the Company recorded pre-tax loss
from discontinued operations of $3 during the 13 weeks ended October 31, 2002.
Pre-tax credits of $9 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 charges of $1 were recognized for lease
liability adjustments. Pre-tax charges of $11 were recognized for operating
losses. During the 13 weeks ended November 1, 2001 the Company recorded pre-tax
operating losses of $1 for these discontinued operations.
NOTE E - 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 158 closed as of October 31, 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 $19, consisting of $27 of restructuring credits and $8 of other costs
included with selling, general and administrative expenses, for the 39 weeks
ended October 31, 2002. The following table presents the pre-tax restructuring
credits and charges, incurred by category of expenditure, and the related
restructuring reserves included in the Company's Condensed Consolidated Balance
Sheets:
Employee
Severance Asset Lease
Costs Impairments Liabilities Total
-------------- ------------------ -------------- -------------
Balance at January 31, 2002 $ 11 $ - $ 50 $ 61
Adjustments 2 (21) (8) (27)
Utilization (12) 21 (12) (3)
-------------- ------------------ -------------- -------------
Balance at October 31, 2002 $ 1 $ - $ 30 $ 31
============== ================== ============== =============
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 October 31,
2002, 1,292 positions had been terminated.
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.
Assets related to restructuring 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 $46 as of October 31, 2002 and are reported as
assets held for sale in the Company's Condensed Consolidated Balance Sheet.
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 October 31, 2002, 158
stores had been closed. The Company will close the majority of the remaining
stores by fiscal year end.
For the 13 weeks ended October 31, 2002, the Company recorded net pre-tax
credits of $7 for the restructuring plan. Pretax credits of $5 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 net realizable values for stores under contract for sale and
pre-tax credits of $2 were recognized for severance liability adjustments. In
the third quarter of the prior year the Company recorded pre-tax charges of $4
consisting of $1 for assets writedown and $3 of severance costs.
NOTE F - 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 8 17 25
Adjustments 1 10 11
Utilization (12) (27) (39)
---------------------- ---------------------- ---------------
Balance at October 31, 2002 $ 36 $ - $ 36
====================== ====================== ===============
As of October 31, 2002, $33 of the reserve balance was included with
accounts payable and the remaining $3 was included with other long-term
liabilities and deferred credits in the Company's Condensed Consolidated Balance
Sheet. The related assets are recorded at their estimated realizable value of
$29 as of October 31, 2002 and reported as assets held for sale in the Company's
Condensed Consolidated Balance Sheet.
NOTE G - 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,
as defined, of at least 2.7 times. As of October 31, 2002, the Company's
consolidated tangible net worth, as defined, was approximately $3,928, and its
fixed charge coverage, as defined, was 4.3 times. No borrowings were outstanding
under these credit facilities as of October 31, 2002.
NOTE H - SUPPLEMENTAL CASH FLOW INFORMATION
Selected cash payments and noncash activities were as follows:
39 Weeks Ended
--------------------------------------------------------
October 31, 2002 November 1, 2001
-------------------------- ---------------------------
Cash payments for:
Income taxes $ 302 $ 324
Interest, net of amounts capitalized 253 251
Noncash transactions:
Capitalized leases incurred 46 55
Capitalized leases terminated 14 13
Tax benefits related to stock options 2 3
Decrease in cash surrender value of Company-owned
life insurance 17 21
Deferred stock units expense 14 14
NOTE I - 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 October
31, 2002, 20.9 million shares were purchased and retired for $547, at an average
price of $26.18 per share under this program. Subsequent to October 31, 2002 and
through December 6, 2002, the Company had purchased and retired an additional
7.2 million shares for $157 under this program at an average price of $21.86.
The Board of Directors adopted a stock buyback program on December 9, 2002,
authorizing, at management's discretion, the Company to purchase and retire up
to $500 of the Company's common stock beginning January 1, 2003 and ending
December 31, 2003.
NOTE J - LEGAL PROCEEDINGS
The Company is subject to various lawsuits, claims and other legal matters
that arise in the ordinary course of conducting business.
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 based upon 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
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 based upon 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. The Company
mailed notices of the settlement and claims forms to approximately 80,000
associates and former associates. Approximately 6,000 claims forms were
returned, of which approximately 5,000 were deemed by the settlement
administrator to be untimely or incapable of valuation. The court will consider
the manner in which claimants may cure such defects. Based on information
received from the claims administrator, the Company estimates that the value of
the approximately 1,000 other claims is up to $13.5, although many of those
claims amounts are still subject to challenge by the Company. 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. Subject to these and other uncertainties, the $37
pre-tax ($22 after-tax) charge recorded by the Company in 1999 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.
NOTE K - 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.
SFAS No. 146 will primarily impact the timing of the recognition of costs
associated with any future exit or disposal activities.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operating
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 the second quarter of 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
underperforming stores is proceeding as planned. As of October 31, 2002,
158 of these stores had been sold or closed. The Company will close the
majority of 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 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. During 2002 the Company rolled out the loyalty card
programs in four divisions and converted to the dual brand concept in two
markets. The Company is studying consumer preferences related to these
programs and will develop future roll-out plans based on this research.
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 extended its Albertsons.com on-line shopping
service to four markets in the current year and plans to roll out the
service to additional markets in the future.
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 analyzing 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 No. 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 condensed 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 condensed consolidated
earnings statements for the periods prior to their sale or closure.
Results of Operations - Third Quarter
The following table sets forth earnings 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
------------------------------------------ in Dollars
October 31, November 1, Increase
2002 2001 (Decrease)
------------------- ------------------- --------------
Sales 100.00% 100.00% (4.2)%
Gross profit 29.31 28.45 (1.3)
Selling, general and administrative expenses 24.86 23.82 0.0
Restructuring (credits) charges and other (0.08) 0.01 n.m.
Operating profit 4.53 4.62 (6.3)
Interest, net (1.01) (1.22) (21.2)
Other expenses, net (0.08) n.m.
Earnings from continuing operations before income
taxes 3.52 3.32 1.5
Net earnings from continuing operations 2.24 1.96 9.4
Net loss from discontinued operations (0.02) (0.01) n.m.
Net earnings 2.22 1.95 8.7
n.m. - not meaningful
Sales for the 13 weeks ended November 1, 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 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.) The sales decrease was offset in part by the
Company's capital expansion program. Sales were also impacted by declining
consumer confidence and escalating competitive activity. Identical store sales
decreased 2.0% and comparable store sales, which include replacement stores,
decreased 1.5%. During the third quarter of 2002, the Company opened 19
combination food and drug stores, 2 warehouse stores, and 7 stand alone
drugstores, while closing 4 combination food and drug stores, 2 conventional
stores, 2 warehouse stores, and 2 drugstores. Of the total 10 store closings, 3
related to the Company's restructuring plan. As of the end of third quarter of
2002, net retail square footage decreased by 8.3% from the end of the third
quarter of 2001. Management estimates that from the end of third quarter of 2001
to to the end of the current quarter, overall deflation in products the Company
sells was approximately 0.7%, as compared to inflation of 1.2% in the
corresponding period ended November 1, 2001.
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 and improvements in the pharmacy
department. Improvements in the pharmacy department resulted from increased
generic substitution and improved procurement practices. There was no pre-tax
LIFO charge for the 13 weeks ended October 31, 2002. For the 13 weeks ended
November 1, 2001, the pre-tax LIFO charge reduced gross profit by $8 or 0.08% to
sales.
Total selling, general and administrative expenses, as a percent to sales,
increased in third quarter of 2002 as compared to the prior year primarily due
to higher employee benefits and insurance costs. The impact of the elimination
of goodwill amortization in 2002 due to the adoption of SFAS 142 was offset by
increased depreciation expense associated with the Company's capital expenditure
programs.
Net interest expense for the 13 weeks ended October 31, 2002 included a $10
interest reserve reversal due to updated estimates of interest payable
associated with certain federal and state taxes. In addition, net interest
expense decreased as compared to the prior year as a result of lower average
outstanding debt balances.
The effective income tax rate from continuing operations decreased from
41.0% for the 13 weeks ended November 1, 2001 to 36.4% for the 13 weeks ended
October 31, 2002. The decrease was caused by the elimination of goodwill
amortization and the reflection of updated estimates of federal and state taxes
which were lower than amounts previously estimated. For the 13 week period ended
October 31, 2002, the rate was reduced to 36.4% to bring the rate for the 39
week period ended October 31, 2002 down to 38.4% from the 39.2% estimate used
for the 26 week period ended August 1, 2002.
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
losses from discontinued operations of $3 during the 13 weeks ended October 31,
2002. Pre-tax credits of $9 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 charges of $1 were recognized
for lease liability adjustments. Pre-tax charges of $11 were recognized for
operating losses. During the 13 weeks ended November 1, 2001 the Company
recorded pre-tax operating losses of $1 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 158 closed as of October 31, 2002
Consolidation and elimination of four division offices Completed
Process streamlining Ongoing
In connection with this restructuring plan, the Company recorded net
pre-tax credits of $7 for the 13 weeks ended October 31, 2002. Pretax credits of
$5 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 net realizable values for stores under contract for
sale and pre-tax credits of $2 were recognized for severance liability
adjustments. In the third quarter of the prior year the Company recorded pre-tax
charges of $4 consisting of $1 for assets writedown and $3 of severance costs.
Summary of Discontinued Operations, Restructuring and Other Non-Routine
Items - Due to the significance of discontinued operations, restructuring
charges, other non-routine items and the discontinuance of goodwill amortization
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
October 31, 2002 November 1, 2001
-------------------------------------- ---------------------------------------
As As As As
Reported Adj. Adjusted Reported Adj. Adjusted
------------- ------- ----- ---------- ------------ --------- -- -------------
Sales $8,657 $8,657 $9,036 $9,036
Cost of sales 6,120 6,120 6,466 6,466
Selling, general and administrative expenses 2,152 2,152 2,152 $ (3)(a) 2,133
(14)(b)
(2)(c)
Restructuring (credits) charges and other (7) $ 7 (a) - 1 (1)(a) -
Other expenses:
Interest, net (87) (87) (110) (110)
Other, net - - (7) (7)
Income tax expense 111 (3)(d) 108 123 3 (d) 126
Discontinued operations:
Operating (loss) income (3) 3 (e) - (1) 1 (e) -
Tax (benefit) expense (1) 1 (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: Net earnings per share was not impacted by these supplemental items for
the 13 weeks ended October 31, 2002. The impact of these supplemental
items was a decrease to reported diluted net earnings per share of $0.04
for the 13 weeks ended November 1, 2001.
Results of Operations - Year-to-Date
The following table sets forth certain earnings components expressed as a
percent to sales and the year-to-year percentage changes in the amounts of such
components:
Percent to Sales
39 weeks ended Percentage
------------------------------------------ in Dollars
October 31, November 1, Increase
2002 2001 (Decrease)
-------------------- ----------------- ---------------
Sales 100.00% 100.00% (2.7)%
Gross profit 29.29 28.35 0.5
Selling, general and administrative expenses 24.21 24.07 (2.2)
Restructuring (credits) charges and other (0.11) 1.74 n.m.
Merger-related credits (0.05) n.m.
Operating profit 5.19 2.59 95.0
Interest, net (1.11) (1.20) (9.6)
Other expenses, net (0.06) (0.07) (16.2)
Earnings from continuing operations before income
taxes 4.02 1.32 195.7
Net earnings from continuing operations 2.48 0.76 216.7
Net (loss) earnings from discontinued operations (1.11) 0.02 n.m.
Net earnings 1.37 0.78 72.5
n.m. - not meaningful
Sales for the 39 weeks ended November 1, 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.) The sales decrease was offset in part by the
Company's capital expansion program. Sales were also impacted by declining
consumer confidence and escalating competitive activity. Identical store sales
decreased 0.7% and comparable store sales, which include replacement stores,
decreased 0.1%. During the 39 weeks ended October 31, 2002, the Company opened
46 combination food and drug stores, 2 warehouse stores and 26 stand alone
drugstores, while closing 138 combination food and drug stores, 20 conventional
stores, 5 warehouse stores and 47 drugstores. Of the total 210 store closings,
174 related to the Company's restructuring plans. As of the end of third quarter
of 2002, net retail square footage decreased by 8.3% from the end of the third
quarter of 2001. Management estimates that from the end of the third quarter of
2001 to the end of the current quarter, overall deflation in products the
Company sells was approximately 0.7%, as compared to inflation of 1.2% in the
corresponding period ended November 1, 2001.
Sales results for the 39 weeks ended October 31, 2002, were favorably
affected by trends and programs similar to those experienced for the 13 weeks
ended October 31, 2002, which are discussed in Results of Operations - Third
Quarter.
Gross profit, as a percent to sales, increased as a result of strong
performance in the fresh departments and improvements in the pharmacy
department. Improvements in the pharmacy department resulted from increased
generic substitution and improved procurement practices. The pre-tax LIFO charge
reduced gross profit by $10 (0.04% to sales) for the 39 weeks ended October 31,
2002, and $23 (0.08% to sales) for the 39 weeks ended November 1, 2001.
Total selling, general and administrative expenses, as a percent to sales,
increased as compared to the prior year primarily due to higher employee
benefits and insurance costs. The increase was partially offset by a decrease in
salaries.
Net interest expense for the 39 weeks ended October 31, 2002 included a $10
interest reserve reversal due to updated estimates of interest payable
associated with certain federal and state taxes. In addition, net interest
expense decreased as compared to the prior year as a result of lower average
outstanding debt balances.
The effective income tax rate from continuing operations decreased from
42.5% for the 39 weeks ended November 1, 2001 to 38.4% for the 39 weeks ended
October 31, 2002. The decrease was caused by higher earnings from continuing
operations, the elimination of goodwill amortization and the reflection of
updated estimates of federal and state taxes which were lower than amounts
previously estimated.
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 $437
during the 39 weeks ended October 31, 2002. The pre-tax charges are comprised of
$347 of charges on the write-down of assets to estimated net realizable value,
$16 of charges on lease liabilities in excess of related estimated sublease
income, $49 of operating losses and $25 of other costs. During the 39 weeks
ended November 1, 2001, the Company recorded pre-tax earnings of $8 associated
with the discontinued operations.
Restructuring - In connection with the restructuring plan, the Company
recorded net pre-tax credits of $19 for the 39 weeks ended October 31, 2002.
Pre-tax credits of $21 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 $8 were recognized
for lease liability adjustments where more favorable negotiated settlements have
been reached than had been originally estimated. Pre-tax charges of $10 were
recognized for severance and other costs. In the prior year the Company recorded
pre-tax charges of $561 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 $47 of
severance and other costs.
Merger-Related and Exit Costs - Results of operations for the 39 weeks
ended November 1, 2001, include $8 of net merger related credits consisting of
$15 of credits associated with the reversal of previous impairment charges and
$7 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.
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 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:
39 Weeks Ended 39 Weeks Ended
October 31, 2002 November 1, 2001
------------------------------------------- ---------------------------------------
As As As As
Reported Adj. Adjusted Reported Adj. Adjusted
------------- ------------- ---- ----------- ------------- ------------ --- ---------
Sales $26,519 $26,519 $27,265 $27,265
Cost of sales 18,751 18,751 19,537 $(35) (a) 19,502
Selling, general and administrative
expenses 6,421 (8) (a) 6,413 6,562 (51) (a) 6,452
(42) (b)
(17) (c)
Restructuring (credits) charges and other (29) 27 (a) - 476 (476) (a) -
2 (c)
Merger-related credits (15) 15 (c) -
Other expenses:
Interest, net (295) (295) (326) (326)
Other, net (17) (17) (19) (19)
Income tax expense 408 (8) (d) 400 153 227 (d) 380
Discontinued operations:
Operating (loss)income (437) 437 (e) - 8 (8) (e) -
Tax (benefit) expense (145) 145 (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 impact of these supplemental items was a decrease to reported diluted
earnings per share of $0.69 and $0.92 for the 39 weeks ended October 31,
2002 and November 1, 2001, respectively.
The costs of the Company's restructuring and market exit plans have
resulted in significant charges and incremental expenses. These costs had
significant effects on the results of operations of the Company. Through
October 31, 2002, the Company has recognized total pre-tax charges of
$978 ($624 after tax) associated with the Company's restructuring and
market exit plans. The total noncash portion of these charges amounted to
$761 and the Company expects to generate net cash proceeds of
approximately $600 (before tax) when all of the related assets are sold.
Liquidity and Capital Resources
Cash provided by operating activities during the 39 weeks ended October 31,
2002, was $1,725 compared to $1,461 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
$459 for the 39 weeks ended October 31, 2002, compared to $286 in the prior
year. The increase in free cash flows resulted primarily from the Company's
initiative to sell underperforming stores, assets related to market exits, and
surplus property, offset by purchases of its common stock.
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 are expected to
continue to provide positive cash flow for the Company.
The Company utilizes its commercial paper and bank line programs primarily
to supplement cash required for seasonal fluctuations in working capital and to
fund its capital expenditure program. Accordingly, commercial paper and bank
line borrowings may fluctuate between reporting periods. The Company had no
commercial paper or bank line borrowings outstanding at October 31, 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 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,
as defined, of at least 2.7 times. As of October 31, 2002, the Company's
consolidated tangible net worth, as defined, was approximately $3,928, and its
fixed charge coverage, as defined, was 4.3 times. No borrowings were outstanding
under these credit facilities as of October 31, 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 October 31, 2002, up to $2,400 of debt
securities 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. 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 October
31, 2002, 20.9 million shares were purchased and retired for $547, at an average
price of $26.18 per share under this program. Subsequent to October 31, 2002 and
through December 6, 2002, the Company had purchased and retired an additional
7.2 million shares for $157, at an average price of $21.86 under this program.
The Board of Directors adopted a stock buyback program on December 9, 2002,
authorizing, at management's discretion, the Company to purchase and retire up
to $500 of the Company's common stock beginning January 1, 2003 and ending
December 31, 2003.
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 $132 as of October 31,
2002, all of which were issued under separate bilateral agreements with multiple
financial institutions. Of the $132 outstanding at October 31, 2002, $126 were
standby letters of credit covering primarily workers' compensation or
performance obligations. The remaining $6 were commercial letters of credit
supporting the Company's merchandise import program. The Company pays issuance
fees that vary, depending on type, which average 0.7% of the outstanding balance
of the letters of credit.
Off Balance Sheet Arrangements
The Company has no significant off balance sheet arrangements including
equity method investments. Investments that are accounted for under the equity
method have no liabilities associated with them that would be considered
material to the Company.
Related Party Transactions
There were no material related party transactions during the 39 weeks ended
October 31, 2002, or November 1, 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 39 weeks ended October 31,
2002, or November 1, 2001.
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 and operating initiatives, 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.
Item 3. 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.
Item 4. Controls and Procedures
Albertson's management, including the Chief Executive Officer and Chief
Financial Officer, have evaluated the effectiveness of the Company's disclosure
controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) as
of a date within 90 days prior to the filing of this report. Based on this
evaluation, the Chief Executive Officer and Chief Financial Officer concluded
that the Company's disclosure controls and procedures are effective to provide
reasonable assurance that information required to be disclosed by the Company in
the reports that it files or submits under the Exchange Act is recorded,
processed, summarized and reported within the time periods specified by the
Securities and Exchange Commission's rules and forms. Subsequent to the date of
this evaluation, there have not been any significant changes in the Company's
internal controls or, to management's knowledge, in other factors that could
significantly affect the Company's internal controls.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
The information required under this item is included in the Notes to
Condensed Consolidated Financial Statements under the caption "Note J - Legal
Proceedings" on page 12 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
Not applicable.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.42 Albertsons Severance Plan for Officers effective October 1, 2002.
10.43 Albertsons Change of Control Severance Agreement for Chief Operating Officer and Executive
Vice President effective November 1, 2002.
10.44 Albertsons Change of Control Severance Agreement for Senior Vice Presidents and Group Vice
Presidents effective November 1, 2002.
10.45 Albertsons Change of Control Severance Agreement for Vice Presidents effective November 1,
2002.
10.46 Albertsons Amended and Restated 1995 Stock-Based Incentive Plan as amended effective
December 9, 2002.
10.46.1 Form of Award of Stock Option.
10.46.2 Form of Award of Deferred Stock Units.
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 under Item 9. Regulation FD Disclosure on Form
8-K were filed during the quarter ended October 31, 2002:
Current report on Form 8-K dated September 4, 2002, including sworn
statements submitted to the SEC from each of the Principal Executive
Officer, Lawrence R. Johnston, and Principal Financial Officer,
Felicia D. Thornton, pursuant to the Securities and Exchange
Commission Order No. 4-460.
Current report on Form 8-K dated October 31, 2002, summarizing the
press release issued on October 31, 2002 which lowered third quarter
and fiscal year 2002 earnings per share guidance.
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: December 11, 2002 /S/ Felicia D. Thornton
-------------------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 11, 2002 /S/ Lawrence R. Johnston
------------------------------------------------
Lawrence R. Johnston
Chairman of the Board 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;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined
in exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
a) Designed such disclosure controls and procedures to ensure that material
information relating to the registrant, including its consolidated
subsidiaries, is made known to us by others within those entities,
particularly during the period in which this quarterly report is being
prepared;
b) Evaluated the effectiveness of the registrant's disclosure controls and
procedures as of a date within 90 days prior to the filing date of this
quarterly report (the "Evaluation Date"); and
c) Presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based on our
evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrant's auditors and the audit
committee of registrant's board of directors (or persons performing the
equivalent function):
a) All significant deficiencies in the design or operation of internal
controls which could adversely affect the registrant's ability to
record, process, summarize and report financial data and have identified
for the registrant's auditors any material weaknesses in internal
controls; and
b) Any fraud, whether or not material, that involves management or other
employees who have a significant role in the registrant's internal
controls; and
6. The registrant's other certifying officers and I have indicated in this
quarterly report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal
controls subsequent to the date of our most recent evaluation, including
any corrective actions with regard to significant deficiencies and material
weaknesses.
Date: December 11, 2002 /S/ Felicia D. Thornton
----------------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer