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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: May 1, 2003 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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Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2). Yes x No
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There were 366,800,479 shares with a par value of $1.00 per share outstanding
at May 30, 2003.
1
ALBERTSON'S INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Earnings Statements for the 13 weeks ended May 1, 2003 and May 2, 2002 3
Condensed Consolidated Balance Sheets as of May 1, 2003 and January 30, 2003 4
Condensed Consolidated Cash Flow Statements for the 13 weeks ended May 1, 2003 and May 2, 2002 5
Notes to Condensed Consolidated Financial Statements 6
Independent Accountants' Report 9
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 12
Item 4. Controls and Procedures 12
PART II OTHER INFORMATION
Item 1. Legal Proceedings 12
Item 2. Changes in Securities and Use of Proceeds 13
Item 3. Defaults upon Senior Securities 13
Item 4. Submission of Matters to a Vote of Security Holders 13
Item 5. Other Information 13
Item 6. Exhibits and Reports on Form 8-K 13
2
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED EARNINGS STATEMENTS
(in millions, except per share data)
(unaudited)
13 WEEKS ENDED
---------------------------------------
May 1, May 2,
2003 2002
------------------- -------------------
Sales $8,940 $8,921
Cost of sales 6,387 6,298
------------------- -------------------
Gross profit 2,553 2,623
Selling, general and administrative expenses 2,179 2,121
Restructuring (credits) charges and other (7) 15
------------------- -------------------
Operating profit 381 487
Other (expenses) income:
Interest, net (103) (105)
Other, net 1 (3)
------------------- -------------------
Earnings from continuing operations before income taxes 279 379
Income tax expense 107 147
------------------- -------------------
Earnings from continuing operations 172 232
Discontinued operations:
Operating loss - (454)
Income tax benefit - (151)
------------------- -------------------
Loss from discontinued operations - (303)
------------------- -------------------
Earnings (loss) before cumulative effect of change in accounting principle 172 (71)
------------------- -------------------
Cumulative effect of change in accounting principle (net of tax $60) - (94)
------------------- -------------------
Net Earnings (Loss) $ 172 $ (165)
=================== ===================
Earnings (loss) per share:
Basic
Continuing operations $ 0.47 $ 0.57
Discontinued operations - (0.74)
Cumulative effect of change in accounting principle (net of tax $0.15) - (0.24)
------------------- -------------------
Net Earnings (Loss) $ 0.47 $ (0.41)
=================== ===================
Diluted
Continuing operations $ 0.47 $ 0.57
Discontinued operations - (0.74)
Cumulative effect of change in accounting principle (net of tax $0.15) - (0.23)
------------------- -------------------
Net Earnings (Loss) $ 0.47 $ (0.40)
=================== ===================
Weighted average number of common shares outstanding:
Basic 368 407
Diluted 369 409
See Notes to Condensed Consolidated Financial Statements.
3
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par values)
(unaudited)
May 1, January 30,
2003 2003
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 107 $ 162
Accounts and notes receivable, net 620 647
Inventories 2,944 2,973
Assets held for sale 124 120
Prepaid and other 305 366
----------------- -----------------
Total Current Assets 4,100 4,268
Land, buildings and equipment (net of accumulated depreciation and
amortization of $6,316 and $6,158, respectively) 9,086 9,029
Goodwill, net 1,399 1,399
Intangibles, net 212 214
Other assets 307 301
----------------- -----------------
Total Assets $ 15,104 $ 15,211
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $1,945 $2,009
Salaries and related liabilities 476 599
Self-insurance 246 244
Current maturities of long-term debt and capital leases obligations 167 119
Other current liabilities 497 477
----------------- -----------------
Total Current Liabilities 3,331 3,448
Long-term debt 4,950 4,950
Capitalized lease obligations 302 307
Self-insurance 378 367
Other long-term liabilities and deferred credits 946 942
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 - 367 shares
and 372 shares, respectively 367 372
Capital in excess of par 134 128
Accumulated other comprehensive loss (96) (96)
Retained earnings 4,792 4,793
----------------- -----------------
Total stockholders' equity 5,197 5,197
----------------- -----------------
Total Liabilities and Stockholders' Equity $15,104 $ 15,211
================= =================
See Notes to Condensed Consolidated Financial Statements.
4
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in millions)
(unaudited)
13 WEEKS ENDED
--------------------------------------------
May 1, May 2,
2003 2002
------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings (loss) $ 172 $ (165)
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 239 251
Discontinued operations noncash charges - 401
Cumulative effect of change in accounting principle - 94
(Gain) loss on asset sales (6) 9
Net deferred income taxes and other 14 (82)
Changes in operating assets and liabilities:
Receivables, prepaid expenses and other 70 94
Inventories 29 202
Accounts payable (46) (148)
Other current liabilities (102) (29)
Self-insurance 13 8
Unearned income (8) 5
Other 6 (9)
------------------ ---------------------
Net cash provided by operating activities 381 631
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (354) (288)
Proceeds from disposal of land, buildings and equipment 35 42
Proceeds from disposal of assets held for sale 31 69
Other (10) 14
------------------ ---------------------
Net cash used in investing activities (298) (163)
CASH FLOWS FROM FINANCING ACTIVITIES:
Stock purchases and retirements (108) -
Cash dividends paid (71) (77)
Net commercial paper activity 50 -
Payments on long-term borrowings (9) (95)
Proceeds from stock options exercised - 10
------------------ ---------------------
Net cash used in financing activities (138) (162)
Net (Decrease) Increase in Cash and Cash Equivalents (55) 306
Cash and Cash Equivalents at Beginning of Period 162 61
------------------ ---------------------
Cash and Cash Equivalents at End of Period $ 107 $ 367
================== =====================
See Notes to Condensed Consolidated Financial Statements.
5
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. ("Albertsons" or 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 largest retail food
and drug chains in the world.
As of May 1, 2003, the Company operated 2,297 stores in 31 states. Retail
operations are supported by 17 major Company distribution operations,
strategically located in the Company's operating markets. The Company also
operated 212 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. These condensed consolidated financial 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. These condensed consolidated
financial statements should be read in conjunction with the consolidated
financial statements and accompanying notes included in the Company's 2002
Annual Report on Form 10-K filed with the Securities and Exchange Commission on
April 24, 2003. The results of operations for the 13 weeks ended May 1, 2003,
are not necessarily indicative of results for a full year.
The Company's operating results and cash flows for the quarter ended May 2, 2002
differ from the previously reported results due to the impact of the change in
the Company's method of accounting for vendor funds, as discussed in the
Company's 2002 Annual Report on Form 10-K. The information presented in the
financial statements reflects the adoption of EITF 02-16 in the fourth quarter
of 2002, retroactive to the beginning of 2002.
The Company's Condensed Consolidated Balance Sheet as of January 30, 2003, has
been derived from the audited Consolidated Balance Sheet as of that date.
Use of Estimates
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. Some of these estimates
require difficult, subjective or complex judgments about matters that are
inherently uncertain. As a result, actual results could differ from these
estimates. These estimates and assumptions affect the reported amounts of assets
and liabilities and the disclosure of contingent assets and liabilities at the
date of the financial statements, and the reported amounts of revenues and
expenses during the reporting period.
Inventory
Net earnings reflects the application of the LIFO method of valuing certain
inventories. Quarterly inventory determinations under LIFO are based on
assumptions as to projected inventory levels at the end of the year and the rate
of inflation for the year. Albertsons recorded pretax LIFO expense of $4 and $5
for the 13 weeks ended May 1, 2003, and May 2, 2002, respectively.
The Company's vendor fund inventory offset as of May 1, 2003 was $146, a
decrease of $6 from the beginning of 2003. The inventory offset as of May 2,
2002 was $143, a decrease of $16 from the beginning of 2002.
Stock-Based Compensation
The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board ("APB") Opinion No. 25,
"Accounting for Stock Issued to Employees," and has adopted the disclosure-only
alternative of Statement of Financial Accounting Standards ("SFAS") No. 123,
"Accounting for Stock-based Compensation," and SFAS No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure."
6
The following table represents the effect on net earnings (loss) and earnings
(loss) per share that would have resulted if the Company had applied the fair
value based method and recognition provisions of SFAS No. 123 to stock-based
employee compensation:
13 Weeks Ended
May 1, 2003 May 2, 2002
------------------------------------------------------- ------------------- ---------------
Net earnings (loss) as reported $ 172 $ (165)
Add: Stock-based compensation expense included in
reported net earnings, net of related tax effects 4 3
Deduct: Total stock-based compensation expense
determined under fair value based method for all
awards, net of related tax effects (11) (12)
--------------------------------------------------------- ----------------- ---------------
Net earnings (loss) - pro forma $ 165 $ (174)
========================================================= ================= ===============
Basic earnings (loss) per share:
As reported $ 0.47 $ (0.41)
Pro forma 0.45 (0.43)
========================================================= ================= ===============
Diluted earnings (loss) per share:
As reported $ 0.47 $ (0.40)
Pro forma 0.45 (0.43)
========================================================= ================= ===============
Long-Term Debt
On May 1, 2003, the Company issued $50 in overnight commercial paper for working
capital purposes at an interest rate of 1.4% per annum. The outstanding balance
at May 1, 2003, is included in "Current maturities of long-term debt and capital
lease obligations" on the condensed consolidated balance sheet.
Reclassifications
Certain reclassifications have been made to the May 2, 2002 financial statements
to conform to classifications in the current quarter.
NOTE B - RECENTLY ADOPTED ACCOUNTING STANDARDS
In July 2001 the Financial Accounting Standards Board ("FASB") issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This statement
addresses financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. SFAS No. 143 became effective for the Company on January 31, 2003, and
did not have a material effect on the Company's condensed consolidated financial
statements for the quarter ended May 1, 2003.
In January 2003 the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities - an Interpretation of ARB No. 51." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of this
interpretation became effective for the Company on January 31, 2003, and did not
have a material effect on the Company's condensed consolidated financial
statements for the quarter ended May 1, 2003.
NOTE C - RESERVES FOR RESTRUCTURING ACTIVITIES, MARKET EXITS AND CLOSED STORES
In 2001 the Company recorded a pre-tax charge to earnings of $107 primarily for
lease settlements and severance costs in connection with the closure of
165 stores and the reduction of overhead functions. As of January 30, 2003, an
accrual of $28 was recorded for these settlements and costs. During the first
quarter of 2003, the Company paid $2 and had favorable lease termination
settlements of $2, leaving a balance of $24 as of May 1, 2003.
In 2002 the Company recorded a pre-tax charge to earnings of $51 primarily for
lease settlements and severance costs in connection with the exit of four
underperforming markets. As of January 30, 2003, an accrual of $11 was recorded
for these settlements and costs. During the first quarter of 2003, the Company
paid $1, leaving a balance of $10 as of May 1, 2003.
As of January 30, 2003, the Company had an accrual of $30 for closed store lease
termination costs. During the first quarter of 2003, the Company recorded
additional reserves of $2, had favorable lease termination settlements of $2 and
paid $3, leaving a balance of $27 as of May 1, 2003. The Company also sold
certain closed stores in the first quarter of 2003 which resulted in a gain of
$6 (reflected in "Selling, general and administrative expenses" on the condensed
consolidated earnings statement).
7
NOTE D - CONTINGENCIES
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 Albertsons 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 (Gardner, et al. v.
Albertson's, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs' allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers' compensation costs, cash shortages, premises liability and
"shrink" losses in violation of California law. In October 2001 the court
granted summary judgment against Sav-on Drug Stores, finding one of its bonus
plans unlawful under plaintiffs' liability theory. In August 2001 a class action
complaint with very similar claims, also involving bonus-eligible managers, was
filed against Albertson's, Inc., Lucky Stores, Inc. and American Stores Company,
wholly-owned subsidiaries of the Company, in the Superior Court for the County
of Los Angeles, California (Petersen, et al. v. Lucky Stores, Inc., et al.). 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 Albertsons 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 (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs' allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 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
Gardner case is on hold pending the review by 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.
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, and 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 met eligibility criteria have been allowed to present their
off-the-clock work 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 claim forms were
returned, of which approximately 5,000 were deemed by the settlement
administrator to be incapable of valuation, presumed untimely, or both. The
court is considering the status and handling of these 5,000 claims. The claims
administrator was able to assign a value to approximately 1,000 claims, which
amount to a total of approximately $14, although the value of many of those
claims is 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 with respect to
such claims. Based on the information presently available to it, management does
not expect that the satisfaction of valid claims submitted pursuant to the
settlement will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company is also involved in routine legal proceedings incidental to its
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.
The statements above reflect management's current expectations based on the
information presently available to the Company. However, predicting the outcomes
of claims and litigation and estimating related costs and exposures involve
substantial uncertainties that could cause actual outcomes, costs and exposures
to vary materially from current expectations. In addition, the Company regularly
monitors its exposure to the loss contingencies associated with these matters
and may from time to time change its predictions with respect to outcomes and
its estimates with respect to related costs and exposures. It is possible that
material differences in actual outcomes, costs and exposures relative to current
predictions and estimates, or material changes in such predictions or estimates,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
8
INDEPENDENT ACCOUNTANTS' REPORT
To the Board of Directors and Stockholders of Albertson's, Inc.:
Boise, Idaho
We have reviewed the accompanying condensed consolidated balance sheet of
Albertson's, Inc. and subsidiaries ("Albertsons") as of May 1, 2003, and the
related condensed consolidated earnings statements and cash flow statements for
the thirteen-week periods ended May 1, 2003 and May 2, 2002. These financial
statements are the responsibility of Albertsons management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such condensed consolidated financial statements for them to be in
conformity with accounting principles generally accepted in the United States of
America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of
Albertsons as of January 30, 2003, and the related consolidated statements of
earnings, stockholders' equity, and cash flows for the year then ended (not
presented herein); and in our report dated March 20, 2003, we expressed an
unqualified opinion on those consolidated financial statements. In our opinion,
the information set forth in the accompanying condensed consolidated balance
sheet as of January 30, 2003, is fairly stated, in all material respects, in
relation to the consolidated balance sheet from which it has been derived.
/S/ DELOITTE & TOUCHE LLP
Boise, Idaho
June 4, 2003
9
ALBERTSON'S, INC.
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 Operations
Net earnings were $172 or $0.47 per diluted share in the first quarter of 2003,
compared to a net loss of $165 or $0.40 per diluted share in the first quarter
of 2002. The improvement was the result of a charge of $94 in the first quarter
of 2002 related to the Company's adoption of a new accounting principle for the
recognition of vendor funds, a net loss from discontinued operations of $303 in
the first quarter of 2002, and a decrease of $60 in earnings from continuing
operations in the first quarter of 2003 as compared to 2002.
Earnings from continuing operations were $172 or $0.47 per diluted share in the
first quarter of 2003 compared to $232 or $0.57 per diluted share in first
quarter of 2002. Earnings from continuing operations in the first quarter of
2003 decreased 26% from the first quarter of 2002 due to a reduction in
identical store sales of 1.2%, a decrease in gross margin of 84 basis points to
28.6%, and increased selling, general and administrative expenses.
Sales were $8,940 and $8,921 in the first quarter of 2003 and 2002,
respectively. The slight sales growth was generated primarily by sales at stores
opened in the past year; comparable store sales which includes sales at
replacement stores decreased by 0.9% in 2003 versus 2002, and identical store
sales decreased 1.2% in 2003 versus 2002. During the first quarter of 2003, the
Company opened 20 combination food and drug stores and 12 stand-alone
drugstores, while closing 3 combination food and drug stores, 8 conventional
stores, and 11 drugstores. Management estimates that overall inflation in
products the Company sells was approximately 0.2%, as compared to deflation of
0.4% in the corresponding period ended May 2, 2002.
Gross profit, as a percentage of sales, decreased from 29.4% in 2002 to 28.6% in
2003. The decrease resulted from the Company's decision to lower sales prices in
key product categories (primarily in the grocery and general merchandise
departments) and selected geographic markets to maintain market-share, as well
as increased promotional pricing Company-wide. Also, the Company realized
cost-savings as part of its strategic sourcing program and re-invested those
savings in targeted price reductions. The pharmacy department's gross profit as
a percentage of sales improved in 2003 versus 2002 due to increased generic
substitution.
Total selling, general and administrative expenses, as a percent to sales,
increased to 24.4% in first quarter of 2003 as compared to 23.8% in first
quarter 2002 primarily due to higher employee benefits costs, occupancy costs,
and workers' compensation costs, offset by reductions in salaries and wages and
asset impairment costs.
Net interest expense in the first quarter of 2003 was $103, a decrease of $2
compared to the first quarter of 2002, primarily due to a slight decrease in the
Company's effective interest rate. Capitalized interest expense was $4 and $5 in
the first quarter of 2003 and 2002, respectively. The slight decrease was due to
a reduction in the Company's average effective interest rate.
Critical Accounting Policies
The preparation of financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues
and expenses and related disclosure of contingent assets and liabilities. The
accompanying condensed consolidated financial statements are prepared using the
same critical accounting policies discussed in the Company's 2002 Annual Report
on Form 10-K.
The Company's vendor fund inventory offset as of May 1, 2003 was $146, a
decrease of $6 from the beginning of 2003. The inventory offset as of May 2,
2002 was $143, a decrease of $16 from the beginning of 2002.
Recent Accounting Standards
In July 2001 the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards "SFAS" No. 143, "Accounting for Asset
Retirement Obligations." This statement addresses financial accounting and
reporting for obligations associated with the retirement of tangible long-lived
assets and the associated asset retirement costs. SFAS No. 143 became effective
for the Company on January 31, 2003, and did not have a material effect on the
Company's condensed consolidated financial statements for the quarter ended
May 1, 2003.
In January 2003 the FASB issued Interpretation No. 46 ("FIN 46"), "Consolidation
of Variable Interest Entities - an Interpretation of ARB No. 51." FIN 46
requires certain variable interest entities to be consolidated by the primary
beneficiary of the entity if the equity investors in the entity do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. The provisions of this
interpretation became effective for the Company on January 31, 2003, and did not
have a material effect on the Company's condensed consolidated financial
statements for the quarter ended May 1, 2003.
10
Liquidity and Capital Resources
Cash provided by operating activities during the first quarter of 2003 was $381
compared to $631 for the same period in the prior year. The decrease in 2003 is
due primarily to a reduction in earnings before discontinued operations and the
cumulative effect of a change in accounting principle, and the prior year
inventory reduction connected with the 2002 market exits.
Cash flow used by investing activities in the first quarter of 2003 increased to
$298 compared to $163 in 2002 primarily because of the Company's store
development program, technology investments and a reduction of asset sales.
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 $50 in
commercial paper borrowings outstanding at May 1, 2003, and no outstanding
borrowing at January 30, 2003.
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 no less than 2.7 times. As of May 1, 2003,
the Company was in compliance with these requirements. No borrowings were
outstanding under these credit facilities as of May 1, 2003.
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 May 1, 2003, up to $2,400 of debt securities
remain available for issuance under the Company's 2001 Registration Statement.
The Company's Board of Directors extended the Company's 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. In the first quarter of 2003, the Company
repurchased 5.3 million shares of its common stock for a total expenditure of
$108 at an average price of $20.26 per share.
Contractual Obligations and Commercial Commitments
There have been no material changes regarding the Company's contractual
obligations and commercial commitments from the information provided in Note Y
"Contractual Obligations and Commercial Commitments" in the Company's 2002
Annual Report on Form 10-K.
Letters of Credit
The Company had outstanding letters of credit of $103 as of May 1, 2003,
consisting of $91 of standby letters of credit covering primarily workers'
compensation or performance obligations and $12 of commercial letters of credit
supporting the Company's merchandise import program.
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 are material to the Company.
Related Party Transactions
There were no material related party transactions during the first quarter of
2003.
Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private
Securities Litigation Reform Act of 1995
All statements other than statements of historical fact contained in this and
other documents disseminated by the Company, including statements regarding the
Company's expected financial performance, are forward-looking information as
defined in the Private Securities Litigation Reform Act of 1995. In reviewing
such information about the future performance of the Company, it should be kept
in mind that actual results may differ materially from those projected or
suggested in such forward-looking information since predictions regarding future
results of operations and other future events are subject to inherent
uncertainties.
These statements may relate to, among other things: investing to increase sales;
changes in cash flow; increases in insurance and employee benefit costs;
attainment of cost reduction goals; achieving sales increases and increases in
identical sales; opening and remodeling stores; and the Company's five strategic
imperatives; and are indicated by words or phrases such as "expects," "plans,"
"believes," "estimate," and "goal." In reviewing such information about the
future performance of the Company, it should be kept in mind that actual results
may differ materially from those projected or suggested in such forward-looking
information.
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;
11
changes in consumer spending; actions taken by new or existing competitors
(including nontraditional competitors), particularly those intended to improve
their market share (such as pricing and promotional activities); 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; the Company's ability to develop new
stores or complete remodels as rapidly as planned; the Company's 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 plans; 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 projected or suggested 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 predictions, assumptions, estimates 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" of the Company's 2002 Annual Report on Form 10-K.
Item 4. Controls and Procedures
Albertsons 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 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 Albertsons 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 (Gardner, et al. v.
Albertson's, Inc., et al.) by bonus-eligible managers seeking recovery of
additional bonus compensation based upon plaintiffs' allegation that the
calculation of profits on which their bonuses were based improperly included
expenses for workers' compensation costs, cash shortages, premises liability and
"shrink" losses in violation of California law. In October 2001 the court
granted summary judgment against Sav-on Drug Stores, finding one of its bonus
plans unlawful under plaintiffs' liability theory. In August 2001 a class action
complaint with very similar claims, also involving bonus-eligible managers, was
filed against Albertson's, Inc., Lucky Stores, Inc. and American Stores Company,
wholly-owned subsidiaries of the Company, in the Superior Court for the County
of Los Angeles, California (Petersen, et al. v. Lucky Stores, Inc., et al.). 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 Albertsons 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 (Gardner, et al. v.
American Stores Company, et al.) by assistant managers seeking recovery of
overtime pay based upon plaintiffs' allegation that they were improperly
classified as exempt under California law. In May 2001 a class action with
respect to Sav-on Drug Stores assistant managers was certified by the court. A
case with very similar claims, involving the Sav-on Drug Stores assistant
managers and operating managers, was also filed in April 2000 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
Gardner case is on hold pending the review by 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.
12
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, and 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 met eligibility criteria have been allowed to present their
off-the-clock work 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 claim forms were
returned, of which approximately 5,000 were deemed by the settlement
administrator to be incapable of valuation, presumed untimely, or both. The
court is considering the status and handling of these 5,000 claims. The claims
administrator was able to assign a value to approximately 1,000 claims, which
amount to a total of approximately $14, although the value of many of those
claims is 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 with respect to
such claims. Based on the information presently available to it, management does
not expect that the satisfaction of valid claims submitted pursuant to the
settlement will have a material adverse effect on the Company's financial
condition, results of operations or cash flows.
The Company is also involved in routine legal proceedings incidental to its
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.
The statements above reflect management's current expectations based on the
information presently available to the Company. However, predicting the outcomes
of claims and litigation and estimating related costs and exposures involve
substantial uncertainties that could cause actual outcomes, costs and exposures
to vary materially from current expectations. In addition, the Company regularly
monitors its exposure to the loss contingencies associated with these matters
and may from time to time change its predictions with respect to outcomes and
its estimates with respect to related costs and exposures. It is possible that
material differences in actual outcomes, costs and exposures relative to current
predictions and estimates, or material changes in such predictions or estimates,
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
10.47 Long-term Incentive Plan (effective as of February 1, 2003).
11 Computation of Earnings Per Common Share
15 Letter re: Unaudited Interim Financial Statements
99.1 Certification of CEO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
99.2 Certification of CFO Pursuant to 18 U.S.C. Section 1350,
as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
13
b. The following reports under Item 9. Regulation FD Disclosure on Form 8-K
were filed during the quarter ended May 1, 2003.
Current report on Form 8-K dated March 20, 2003, including the
Company's press release which discussed the Company's earnings for the
fourth quarter of 2002 and for fiscal year 2002 and the Company's 2003
guidance.
Current report on Form 8-K dated February 26, 2003, including press
release regarding the dismissal of the class action lawsuit Maureen
Baker et al. vs. Jewel Food Stores, Inc. and Dominick's Supermarkets,
Inc.
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: June 6, 2003 /S/ Felicia D. Thornton
-----------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
14
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: June 6, 2003 /S/ Lawrence R. Johnston
------------------------------------------
Lawrence R. Johnston
Chairman of the Board and
Chief Executive Officer
15
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: June 6, 2003 /S/ Felicia D. Thornton
------------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
16