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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 Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
For 13 Weeks Ended: October 30, 2003 Commission File Number: 1-6187
ALBERTSON'S, INC.
-----------------------------------------------------
(Exact name of Registrant as specified in its charter)
Delaware 82-0184434
------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726
- ----------------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
(208) 395-6200
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(Registrant's telephone number, including area code)
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
----- ----
Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Exchange Act Rule 12b-2).
Yes x No
----- -----
There were 366,920,089 shares with a par value of $1.00 per share
outstanding at December 2, 2003.
1
ALBERTSON'S INC.
INDEX
PART I FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Earnings Statements for the 13 weeks ended October 30, 2003 and
October 31, 2002 3
Condensed Consolidated Earnings Statements for the 39 weeks ended October 30, 2003 and
October 31, 2002 4
Condensed Consolidated Balance Sheets as of October 30, 2003 and January 30, 2003 5
Condensed Consolidated Cash Flow Statements for the 39 weeks ended October 30, 2003 and
October 31, 2002 6
Notes to Condensed Consolidated Financial Statements 7
Independent Accountants' Report 14
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 15
Item 3. Quantitative and Qualitative Disclosures About Market Risk 20
Item 4. Controls and Procedures 20
PART II OTHER INFORMATION
Item 1. Legal Proceedings 21
Item 2. Changes in Securities and Use of Proceeds 22
Item 3. Defaults upon Senior Securities 22
Item 4. Submission of Matters to a Vote of Security Holders 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 22
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
------------------------------------------
October 30, October 31,
2003 2002
------------------- -------------------
Sales $ 8,796 $ 8,657
Cost of sales 6,270 6,128
------------------- -------------------
Gross profit 2,526 2,529
Selling, general and administrative expenses 2,267 2,151
Restructuring charges (credits) 4 (7)
------------------- -------------------
Operating profit 255 385
Other (expenses) income:
Interest, net (99) (88)
Other, net (7) 1
------------------- -------------------
Earnings from continuing operations before income taxes 149 298
Income tax expense 57 108
------------------- -------------------
Earnings from continuing operations 92 190
------------------- -------------------
Discontinued operations:
Operating loss - (10)
Gain on disposal - 7
Income tax benefit - 1
------------------- -------------------
Loss from discontinued operations - (2)
------------------- -------------------
Net earnings $ 92 $ 188
=================== ===================
Earnings (loss) per share:
Basic
Continuing operations $ 0.25 $ 0.48
Discontinued operations - (0.01)
------------------- -------------------
Net earnings $ 0.25 $ 0.47
=================== ===================
Diluted
Continuing operations $ 0.25 $ 0.48
Discontinued operations - (0.01)
------------------- -------------------
Net earnings $ 0.25 $ 0.47
=================== ===================
Weighted average number of common shares outstanding:
Basic 368 396
Diluted 369 397
See Notes to Condensed Consolidated Financial Statements.
3
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED EARNINGS STATEMENTS
(in millions, except per share data)
(unaudited)
39 weeks ended
------------------------------------------
October 30, October 31,
2003 2002
------------------- -------------------
Sales $ 26,789 $ 26,519
Cost of sales 19,063 18,736
------------------- -------------------
Gross profit 7,726 7,783
Selling, general and administrative expenses 6,732 6,420
Restructuring credits (11) (29)
------------------- -------------------
Operating profit 1,005 1,392
Other (expenses) income:
Interest, net (307) (296)
Other, net (6) (16)
------------------- -------------------
Earnings from continuing operations before income taxes 692 1,080
Income tax expense 266 415
------------------- -------------------
Earnings from continuing operations 426 665
------------------- -------------------
Discontinued operations:
Operating loss - (49)
Loss on disposal - (388)
Income tax benefit - 146
------------------- -------------------
Loss from discontinued operations - (291)
------------------- -------------------
Earnings before cumulative effect of change in accounting principle 426 374
Cumulative effect of change in accounting principle (net of tax $60) - (94)
------------------- -------------------
Net earnings $ 426 $ 280
=================== ===================
Earnings (loss) per share:
Basic
Continuing operations $ 1.16 $ 1.64
Discontinued operations - (0.72)
Cumulative effect of change in accounting principle (net of tax $0.15) - (0.23)
------------------- -------------------
Net earnings $ 1.16 $ 0.69
=================== ===================
Diluted
Continuing operations $ 1.16 $ 1.64
Discontinued operations - (0.72)
Cumulative effect of change in accounting principle (net of tax $0.15) - (0.23)
------------------- -------------------
Net earnings $ 1.16 $ 0.69
=================== ===================
Weighted average number of common shares outstanding:
Basic 368 403
Diluted 369 405
See Notes to Condensed Consolidated Financial Statements.
4
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except par values)
(unaudited)
October 30, January 30,
2003 2003
----------------- -----------------
ASSETS
Current Assets:
Cash and cash equivalents $ 43 $ 162
Accounts and notes receivable, net 660 647
Inventories 3,191 2,973
Assets held for sale 68 120
Prepaid and other 238 366
----------------- -----------------
Total Current Assets 4,200 4,268
Land, buildings and equipment (net of accumulated depreciation and
amortization of $6,682 and $6,158, respectively) 9,158 9,029
Goodwill, net 1,400 1,399
Intangibles, net 196 214
Other assets 293 301
----------------- -----------------
Total Assets $ 15,247 $ 15,211
================= =================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable $ 1,898 $ 2,009
Salaries and related liabilities 565 599
Self-insurance 263 244
Current maturities of long-term debt and capital lease obligations 516 119
Other current liabilities 539 477
----------------- -----------------
Total Current Liabilities 3,781 3,448
Long-term debt 4,448 4,950
Capital lease obligations 313 307
Self-insurance 428 367
Other long-term liabilities and deferred credits 951 942
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 147 128
Accumulated other comprehensive loss (96) (96)
Retained earnings 4,908 4,793
----------------- -----------------
Total Stockholders' Equity 5,326 5,197
----------------- -----------------
Total Liabilities and Stockholders' Equity $ 15,247 $ 15,211
================= =================
See Notes to Condensed Consolidated Financial Statements.
5
ALBERTSON'S, INC.
CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
(in millions)
(unaudited)
39 weeks ended
--------------------------------------------
October 30, October 31,
2003 2002
------------------ ---------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 426 $ 280
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Depreciation and amortization 729 708
Net deferred income taxes and other 18 41
Discontinued operations noncash charges - 372
Cumulative effect of change in accounting principle - 94
(Increase) decrease in cash surrender value of insurance (3) 17
Changes in operating assets and liabilities:
Receivables, prepaid expenses and other 82 190
Inventories (218) 36
Accounts payable (102) -
Other current liabilities 32 (39)
Self-insurance 79 41
Other 17 (15)
------------------ ---------------------
Net cash provided by operating activities 1,060 1,725
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures (892) (1,050)
Proceeds from disposal of land, buildings and equipment 56 91
Proceeds from disposal of assets held for sale 98 472
Other (8) 10
------------------ ---------------------
Net cash used in investing activities (746) (477)
CASH FLOWS FROM FINANCING ACTIVITIES:
Cash dividends paid (210) (232)
Payments on long-term borrowings (115) (116)
Stock purchases and retirements (108) (547)
Proceeds from stock options exercised - 16
------------------ ---------------------
Net cash used in financing activities (433) (879)
Net (Decrease) Increase in Cash and Cash Equivalents (119) 369
Cash and Cash Equivalents at Beginning of Period 162 61
------------------ ---------------------
Cash and Cash Equivalents at End of Period $ 43 $ 430
================== =====================
See Notes to Condensed Consolidated Financial Statements.
6
ALBERTSON'S, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(dollars and shares 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 October 30, 2003, the Company operated 2,312 stores in 31 states. Retail
operations were supported by 17 major Company distribution operations,
strategically located in the Company's operating markets. The Company also
operated 227 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 and 39 weeks ended
October 30, 2003, are not necessarily indicative of results for a full year.
The Company's operating results and cash flows for the quarter ended October 31,
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 Emerging Issues Task Force
("EITF") Issue No. 02-16, "Accounting by a Customer (Including a Reseller) for
Certain Consideration Received from a Vendor" ("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.
Vendor Funds
The Company receives funds from many of the vendors whose products the Company
buys for resale in its stores. These vendor funds are provided to increase the
sell-through of the related products. The Company receives funds for a variety
of merchandising activities: placement of the vendor's products in the Company's
advertising; placement of the vendor's products in prominent locations in the
Company's stores; introduction of new products into the Company's distribution
system and retail stores; exclusivity rights in certain categories that have
slower-turning products; and to compensate for temporary price reductions
offered to customers on products held for sale at retail stores. The Company
also receives vendor funds for buying activities, such as volume commitment
rebates and credits for purchasing products in advance of their need. The terms
of vendor funds arrangements vary in length, from short term arrangements that
are completed within a quarter, to long term arrangements that are expected to
be completed within ten years.
7
Accounting for vendor funds is discussed in EITF 02-16, in which the EITF
reached consensus on two issues in November 2002 and provided transition rules
on those issues in January 2003 and March 2003. As a result of this guidance,
the Company adopted a new method for recognizing the vendor funds for
merchandising activities. As of the beginning of 2002, the Company recognizes as
a reduction of cost of sales vendor funds for merchandising activities when the
related products are sold. Under the previous accounting method for
merchandising vendor funds, these credits were recognized as a reduction to cost
of sales when the merchandising activity was performed in accordance with the
underlying agreements. In connection with the implementation of this new
accounting method, the Company recorded a charge in 2002 of $94, net of tax
benefit of $60.
The amount of vendor funds reducing the Company's inventory ("inventory offset")
as of October 30, 2003 was $134, an increase of $3 from the end of the second
quarter of 2003 and a decrease of $18 from the beginning of 2003. The vendor
funds inventory offset as of October 31, 2002 was $143, an increase of $8 from
the end of the second quarter of 2002 and a decrease of $15 from the beginning
of 2002. The inventory offset was determined by estimating the average inventory
turnover rates by product category for the Company's grocery, general
merchandise and lobby departments (these departments received over
three-quarters of the Company's vendor funds in 2002) and by average inventory
turnover rates by department for the Company's remaining inventory.
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 $12
for the 13 week and 39 week periods ended October 30, 2003, respectively, and $0
and $10 for the 13 week and 39 week periods ended October 31, 2002,
respectively.
Procurement, Distribution and Merchandising Costs
Cost of sales include, among other things, purchasing, inbound freight costs,
product quality testing costs, warehousing costs, internal transfer costs,
advertising, private label program costs and strategic sourcing program costs.
Selling, general and administrative expenses include, among other things,
merchandising planning and management costs, store-based purchasing and
receiving costs and inventory management costs.
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."
The following table represents the effect on net earnings and earnings 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 39 weeks ended
October 30, October 31, October 30, October 31,
2003 2002 2003 2002
- --------------------------------------------- ----------------- --------------- ---------------- ---------------
Net earnings as reported $ 92 $ 188 $ 426 $ 280
Add: Stock-based compensation expense
included in reported net earnings, net of
related tax effects 4 3 12 9
Deduct: Total stock-based compensation
expense determined under fair value based
method for all awards, net of related
tax effects (11) (11) (34) (35)
- --------------------------------------------- ----------------- --------------- ---------------- ---------------
Net earnings - pro forma $ 85 $ 180 $ 404 $ 254
============================================= ================= =============== ================ ===============
Basic earnings per share:
As reported $ 0.25 $ 0.47 $ 1.16 $ 0.69
Pro forma 0.23 0.45 1.10 0.63
============================================= ================= =============== ================ ===============
Diluted earnings per share:
As reported $ 0.25 $ 0.47 $ 1.16 $ 0.69
Pro forma 0.23 0.45 1.10 0.63
============================================= ================= =============== ================ ===============
8
Reclassifications
Certain reclassifications have been made to prior periods to conform to current
year presentations.
NOTE B - NEW AND 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 39 weeks ended October 30, 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 39 weeks ended October 30, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance could
be accounted for as equity, be classified as liabilities in statements of
financial position. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and was effective for the Company in the 13
week period ended October 30, 2003. The adoption of SFAS No. 150 did not have a
material effect on the Company's condensed consolidated financial statements for
the 13 weeks ended October 30, 2003.
In November 2003 the EITF confirmed as a consensus EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, 'Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor,' by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10"). EITF
03-10 will not impact the Company's existing accounting and reporting policies
for manufacturers' coupons that can be presented at any retailer that accepts
coupons. For arrangements with vendors that are entered into or modified after
the start of fiscal year 2004, we will record the vendor reimbursement as a
reduction of cost of sales (instead of sales) if the coupon can only be redeemed
at a Company retail store. This modification to our accounting and reporting
policies will only impact sales and cost of sales beginning in the Company's
first quarter of 2004.
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 (the "2001 restructuring
activities"). As of January 30, 2003, an accrual of $28 was recorded for these
settlements and costs. During the 13 week and 39 week periods ended October 30,
2003, the Company paid $3 and $7, respectively, and had favorable lease
termination settlements of $0 and $6, respectively, recorded in restructuring
charges (credits) in the condensed consolidated earnings statements, leaving a
balance of $15 as of October 30, 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 from four
underperforming markets (the "2002 market exits"). As of January 30, 2003, an
accrual of $11 was recorded for these settlements and costs. During the 13 week
and 39 week periods ended October 30, 2003, the Company paid $0 and $3,
respectively, leaving a balance of $8 as of October 30, 2003.
As of January 30, 2003, the Company had an accrual of $30 for closed store lease
termination costs. During the 13 week period ended October 30, 2003, the Company
recorded additional reserves of $3, had favorable lease termination settlements
of $3 and paid $2. During the 39 week period ended October 30, 2003, the Company
recorded additional reserves of $5, had favorable lease termination settlements
of $9 and paid $8, leaving a balance of $18 as of October 30, 2003.
The Company also sold certain closed stores in the 39 week period ended
October 30, 2003 which resulted in a gain of $6 (reflected in "Selling, general
and administrative expenses" in the condensed consolidated earnings statement).
9
NOTE D - INTANGIBLES
The carrying amount of intangibles was as follows:
October 30, January 30,
2003 2003
-------------------- --------------------
Amortizing:
Favorable acquired operating leases $215 $231
Customer lists and other contracts 56 53
-------------------- --------------------
271 284
Accumulated amortization (179) (173)
-------------------- --------------------
92 111
Non-Amortizing:
Liquor licenses 40 39
Pension related intangible assets 64 64
-------------------- --------------------
104 103
-------------------- --------------------
$196 $214
==================== ====================
NOTE E - CONTINGENCIES
Lawsuits, claims and other legal matters
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 Albertsons 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 (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 of the Rocher class decertification
issue 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.
10
An agreement was 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
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. A second claim
process was ordered by the court, but the parties are still waiting for final
instructions from the Court. 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. 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.
Contingent Lease Obligations
The Company is contingently liable for certain operating leases that were
assigned to third parties in connection with various store closures and
dispositions. If any of these third parties were to fail to perform their
obligations under the lease, the Company could be responsible for the lease
obligations. The Company was notified that certain of these third parties have
become insolvent and are seeking bankruptcy protection. At October 30, 2003,
approximately 23 store leases for which the Company is contingently liable were
subject to the bankruptcy proceedings of such third parties and 20 of such had
been rejected by the applicable third party. The Company has recorded pre-tax
charges of $15 and $22 for the 13 week and 39 week periods ended October 30,
2003, respectively, which represents the remaining minimum lease payments and
other payment obligations under the 20 rejected leases, less estimated sublease
income and discounted at the Company's credit-adjusted risk free interest rate.
Based on an internal analysis of the current status of the remaining assigned
operating leases, the Company expects that any potential future losses for
rejected assigned operating leases would not have a material adverse effect on
its financial condition, results of operations or cash flows.
11
Note F- Computation of Earnings Per Share
13 weeks ended
-------------------------------------------------------------------
October 30, 2003 October 31, 2002
Basic Diluted Basic Diluted
------------- ------------- --------------- -------------
Earnings (loss) from:
Continuing operations $ 92 $ 92 $190 $190
Discontinued operations - - (2) (2)
------------- ------------- --------------- -------------
Net earnings $ 92 $ 92 $188 $188
============= ============= =============== =============
Weighted average common shares outstanding 368 368 396 396
============= ===============
Potential common share equivalents 1 1
------------- -------------
Weighted average shares outstanding 369 397
============= =============
Earnings (loss) per common share and common share
equivalents:
Continuing operations $0.25 $0.25 $0.48 $0.48
Discontinued operations - - (0.01) (0.01)
------------- ------------- --------------- -------------
Net earnings $0.25 $0.25 $0.47 $0.47
============= ============= =============== =============
Calculation of potential common share equivalents:
Options to purchase potential common shares 3 7
Potential common shares assumed purchased
with potential proceeds (2) (6)
------------- -------------
Potential common share equivalents 1 1
============= =============
Calculation of potential common shares
assumed purchased with potential proceeds
Potential proceeds from exercise of options
to purchase common shares $43 $147
Common stock price used under treasury
stock method $20.54 $26.03
------------- -------------
Potential common shares assumed
purchased with potential proceeds 2 6
============= =============
Anti-dilutive shares excluded from potential
common share equivalents 29 20
============= =============
12
39 weeks ended
-------------------------------------------------------------------
October 30, 2003 October 31, 2002
Basic Diluted Basic Diluted
------------- ------------- --------------- -------------
Earnings (loss) from:
Continuing operations $426 $426 $665 $665
Discontinued operations - - (291) (291)
Cumulative effect of change in
accounting principle - - (94) (94)
------------- ------------- --------------- -------------
Net earnings $426 $426 $280 $280
============= ============= =============== =============
Weighted average common shares outstanding 368 368 403 403
============= ===============
Potential common share equivalents 1 2
------------- -------------
Weighted average shares outstanding 369 405
============= =============
Earnings (loss) per common share and common share
equivalents:
Continuing operations $1.16 $1.16 $1.64 $1.64
Discontinued operations - - (0.72) (0.72)
Cumulative effect of change in
accounting principle - - (0.23) (0.23)
------------- ------------- --------------- -------------
Net earnings $1.16 $1.16 $0.69 $0.69
============= ============= =============== =============
Calculation of potential common share equivalents:
Options to purchase potential common shares 3 9
Potential common shares assumed purchased
with potential proceeds (2) (7)
------------- -------------
Potential common share equivalents 1 2
============= =============
Calculation of potential common shares
assumed purchased with potential proceeds
Potential proceeds from exercise of options
to purchase common shares $48 $215
Common stock price used under treasury
stock method $19.90 $29.61
------------- -------------
Potential common shares assumed
purchased with potential proceeds 2 7
============= =============
Anti-dilutive shares excluded from potential
common share equivalents 30 19
============= =============
13
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 October 30, 2003, and
the related condensed consolidated earnings statements and cash flow statements
for the thirteen and thirty-nine week periods ended October 30, 2003 and
October 31, 2002. These interim financial statements are the responsibility of
Albertson's 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 and 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 interim 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
December 4, 2003
14
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
Results of Operations
Results of operations for the 13 week period ended October 30, 2003 were
unfavorably impacted by two labor disputes, primarily the ongoing labor dispute
in Southern California (the "Labor Dispute"), and, to a much lesser degree, a
contract renewal at one of our Midwest distribution centers. These labor
disputes resulted in decreased sales in our Southern California combination food
and drug and conventional stores and decreased gross margin as a result of
inventory shrink, sales mix changes and increased distribution costs.
Pursuant to the terms of a multi-employer bargaining arrangement among the
Company, The Kroger Co. and Safeway Inc. (the "Retailers"), the Company "locked
out" its retail union associates in Southern California food stores on
October 12, 2003. This followed the United Food and Commercial Workers' ("UFCW")
decision to conduct a strike at Safeway Inc.'s Southern California Vons
Supermarket stores on October 11, 2003. In connection with the decision of the
Retailers to engage in multi-employer bargaining with the UFCW, the Retailers
entered into agreements which provide for "lock outs" in the event that any
Retailer is struck at any or all of its facilities when the other Retailers are
not and contain a provision designed to prevent the union from placing
disproportionate pressure on one or more Retailer by picketing such Retailer(s)
but not the other Retailer(s). No payments are made or received under said
provision of the agreements until the conclusion of the Labor Dispute, at which
time only net amounts will be paid. Amounts accrued under these agreements
during the current quarter did not have a material effect on the Company's
financial position, results of operations or cash flows. However, there can be
no assurance as to the future impact of these agreements on the Company.
On November 26, 2003, the Company received notice from the State of California's
Attorney General's Office that it had opened an investigation into possible
antitrust violations related to the agreements referred to above. The Company
believes that the agreements are lawful, and that similar agreements are not
uncommon in joint bargaining situations. The Company intends to vigorously
defend itself in any proceedings related to this investigation.
Following the start of the "lock out", the Company implemented its labor dispute
operations plan which included the hiring and training of temporary workers,
temporarily reassigning key associates from other divisions and increasing store
security. As of December 8, 2003 the Labor Dispute is on-going.
13 week period ended October 30, 2003
Sales were $8,796 and $8,657 in the 13 week periods ended October 30, 2003 and
October 31, 2002, respectively. The sales growth for the 13 week period ended
October 30, 2003 as compared to the prior year was generated primarily by sales
at stores opened during the past year, partially offset by reductions in sales
in Southern California as a result of the Labor Dispute. Comparable store sales
for the total Company, which includes sales at replacement stores, decreased
0.8% and identical store sales decreased 1.1%. Excluding food and drug stores in
our Southern California Division for the last 19 days of the 13 week periods
ended October 30, 2003 and October 31, 2002, comparable store sales increased
0.7% and identical store sales increased 0.3%.
The following table reconciles actual comparable store sales and identical store
sales to adjusted comparable store sales and identical store sales as presented
herein. The Company presents these non-GAAP financial measures because it
believes a comparison of actual to adjusted store sales data is useful to
investors to communicate management's belief of the impact of the Labor Dispute
on trends in sales experienced during the majority of the third quarter.
15
Actual Labor Adjusted
Comparable Dispute Comparable
Store Sales Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
13 weeks ended October 30, 2003 $ 8,460 $ (280) (1) $ 8,180
13 weeks ended October 31, 2002 8,528 (402) (2) 8,126
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year change (68) 54
13 weeks ended October 31, 2002 8,528 8,126
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Comparable store sales percent (0.8)% 0.7%
====================================================== ================== =============== ===== ==================
Actual Identical Labor Adjusted
Store Sales Dispute Identical
Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
13 weeks ended October 30, 2003 $ 8,348 $ (274) (3) $ 8,074
13 weeks ended October 31, 2002 8,443 (397) (4) 8,046
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year Change (95) 28
13 weeks ended October 31, 2002 8,443 8,046
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Identical store sales percent (1.1)% 0.3%
====================================================== ================== =============== ===== ==================
(1) Represents the change in comparable Southern California Division food and
drug store sales in 2003 during the last 19 days of the third quarter. Includes
the effect of minimal incremental benefits in Southern California drug store
sales during the last 19 days of the quarter that the Company believes were due
primarily to the Labor Dispute. The third quarter labor dispute outside of
Southern California did not impact sales.
(2) Represents the change in comparable Southern California Division food and
drug store sales in 2002 during the last 19 days of the third quarter.
(3) Represents the change in identical Southern California Division food and
drug store sales in 2003 during the last 19 days of the third quarter. Includes
the effect of minimal incremental benefits in Southern California drug store
sales during the last 19 days of the quarter that the Company believes were due
primarily to the Labor Dispute. The third quarter labor dispute outside of
Southern California did not impact sales.
(4) Represents the change in identical Southern California Division food and
drug store sales in 2002 during the last 19 days of the third quarter.
During the 13 week period ended October 30, 2003, the Company opened
12 combination food and drug stores, seven stand-alone drugstores and two fuel
centers, while closing two combination food and drug stores, three conventional
stores, and seven stand-alone drugstores. Management estimates that overall
inflation in products the Company sells was approximately 1.1% over the twelve
months ended October 30, 2003, as compared to deflation of 0.7% in the twelve
months ended October 31, 2002.
Gross profit, as a percentage of sales, in the 13 week period ended October 30,
2003 declined 49 basis points to 28.7% as compared to the 13 week period ended
October 31, 2002. This was a result of decreased sales leverage due to the Labor
Dispute and the Company's decision to invest gross margin in key product
categories (primarily in the grocery and general merchandise departments) and
selected geographic markets to maintain market share, as well as increased
Company-wide promotional pricing. The effect of lower pricing was partially
offset by realized cost savings as part of the Company's strategic sourcing
program and private label sales growth. The pharmacy department's gross profit
as a percentage of sales improved in 2003 versus 2002 primarily due to increased
generic substitution.
Selling, general and administrative expenses, as a percent of sales, increased
to 25.8% for the 13 week period ended October 30, 2003, as compared to 24.9% for
the 13 week period ended October 31, 2002. This increase was primarily
attributable to the lack of sales leverage due to the Labor Dispute as well as
higher employee benefit costs, depreciation, contingent lease charges, salaries
and wages and workers' compensation costs. Labor Dispute costs were primarily
related to the hiring and training of temporary workers, travel costs for
temporarily reassigned key associates from other Company divisions, increased
store security and legal costs. The higher benefit costs experienced during the
quarter are due, in part, to increases in mandatory contributions to
multi-employer health care and pension plans to which the Company contributes.
Contribution amounts are established under the Company's collective bargaining
agreements, which are up for renewal at varying times over the next several
years. If the health care and pension plan provisions of certain of these
collective bargaining agreements cannot be renegotiated in a manner that reduces
the prospective health care and pension costs of the Company as the Company
intends, the Company's selling, general and administrative expenses could
continue to increase, possibly significantly, in the future.
Restructuring charges during the 13 week period ended October 30, 2003 totaled
$4 as compared to credits of $7 in the corresponding period in 2002. The
increase in restructuring charges in 2003 as opposed to 2002 was primarily due
to losses on disposition of assets and reductions in the estimated fair market
values of assets to be sold related to the Company's 2001 restructuring
activities.
16
The decrease in other (expenses) income, net of $8 for the 13 week period ended
October 30, 2003, as compared to the corresponding period in 2002, relates to
losses in the earnings of minority equity investments.
Interest, net, during the 13 week period ended October 30, 2003 totaled $99 as
compared with $88 for the corresponding period in the prior year. This increase
was attributable to less interest being capitalized on construction projects
during 2003. The decrease in capitalized interest was due to an overall
reduction in capital expenditures, particularly for new stores.
Earnings from continuing operations were $92 for the 13 week period ended
October 30, 2003 compared to $190 for the 13 week period ended October 31, 2002.
This decrease was due to a reduction in identical store sales of 1.1%, a
decrease in gross margin, the impact of the labor disputes, and increases in
employee benefit costs, depreciation, contingent lease charges, salaries and
wages and workers' compensation costs.
The Company's effective tax rate for the 13 week period ended October 30, 2003
was 38.4% as compared to 36.4% for the 13 week period ended October 31, 2002.
For the 13 week period ended October 31, 2002, the rate was reduced to 36.4% to
reflect updated estimates of federal and state taxes in 2002 which were lower
than amounts previously estimated.
Net earnings were $92 or $0.25 per diluted share for the 13 week period ended
October 30, 2003, compared to net earnings of $188 or $0.47 per diluted share
for the 13 week period ended October 31, 2002. This decline was the result of
the decrease in earnings from continuing operations.
39 week period ended October 30, 2003
Sales were $26,789 and $26,519 for the 39 week periods ended October 30, 2003
and October 31, 2002, respectively. The sales growth for the 39 week period
ended October 30, 2003 as compared to the prior year was generated primarily by
sales at stores opened in the past year, partially offset by a decrease in
comparable store sales of 0.9% and a decrease in identical store sales of 1.3%
for the 39 week period ended October 30, 2003. Also impacting results were
reduced sales in Southern California as a result of the Labor Dispute. Excluding
food and drug stores in Southern California for the last 19 days of the 39 week
periods ended October 30, 2003 and October 31, 2002, comparable store sales
decreased 0.5% and identical store sales decreased 0.8%.
The following table reconciles actual comparable store sales and identical store
sales to adjusted comparable store sales and identical store sales as presented
herein. The Company presents these non-GAAP financial measures because it
believes a comparison of actual to adjusted store sales data is useful to
investors to communicate management's belief of the impact of the Labor Dispute
on trends in sales experienced during the majority of the third quarter.
Actual Labor Adjusted
Comparable Dispute Comparable
Store Sales Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
39 weeks ended October 30, 2003 $ 25,586 $ (276) (1) $ 25,310
39 weeks ended October 31, 2002 25,824 (398) (2) 25,426
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year change (238) (116)
39 weeks ended October 31, 2002 25,824 25,426
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Comparable store sales percent (0.9)% (0.5)%
====================================================== ================== =============== ===== ==================
Actual Identical Labor Adjusted
Store Sales Dispute Identical
Adjustment Store Sales
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
39 weeks ended October 30, 2003 $ 25,172 $ (269) (3) $ 24,903
39 weeks ended October 31, 2002 25,504 (392) (4) 25,112
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Year to year change (332) (209)
39 weeks ended October 31, 2002 25,504 25,112
- ------------------------------------------------------ ------------------ --------------- ----- ------------------
Identical store sales percent (1.3)% (0.8)%
====================================================== ================== =============== ===== ==================
(1) Represents the change in comparable Southern California Division food and
drug store sales in 2003 during the last 19 days of the third quarter. Includes
the effect of minimal incremental benefits in Southern California drug store
sales during the last 19 days of the quarter that the Company believes were due
primarily to the Labor Dispute. The third quarter labor dispute outside of
Southern California did not impact sales.
(2) Represents the change in comparable Southern California Division food and
drug store sales in 2002 during the last 19 days of the third quarter.
(3) Represents the change in identical Southern California Division food and
drug store sales in 2003 during the last 19 days of the third quarter. Includes
the effect of minimal incremental benefits in Southern California drug store
sales during the last 19 days of the quarter that the Company believes were due
primarily to the Labor Dispute. The third quarter labor dispute outside of
Southern California did not impact sales.
(4) Represents the change in identical Southern California Division food and
drug store sales in 2002 during the last 19 days of the third quarter.
17
For the 39 week period ended October 30, 2003, the Company opened 52 combination
food and drug stores, 21 stand-alone drugstores and 28 fuel centers, while
closing 11 combination food and drug stores, 17 conventional stores and
20 stand-alone drugstores.
Gross profit, as a percentage of sales, decreased 51 basis points for the
39 week period ended October 30, 2003 to 28.8% as compared to the corresponding
period in 2002. This decrease in gross profit resulted from the lack of sales
leverage due to the Labor Dispute and 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. The effect
of lower pricing was partially offset by realized cost savings as part of the
Company's strategic sourcing program and private label sales growth. The
pharmacy department's gross profit as a percentage of sales improved in 2003
versus 2002 primarily due to increased generic substitution.
Selling, general and administrative expenses for the 39 week period ended
October 30, 2003, as a percent of sales, increased to 25.1% as compared to 24.2%
in the corresponding period in the prior year. This increase was primarily due
to lack of sales leverage due to the Labor Dispute as well as increased
depreciation, employee benefits, workers' compensation costs and contingent
lease charges.
Earnings from continuing operations were $426 for the 39 week period ended
October 30, 2003, compared to earnings from continuing operations of $665 for
the 39 week period ended October 31, 2002. This decrease was due to a decrease
in identical store sales of 1.3%, a decrease in gross margin and an increase in
depreciation, employee benefits, workers' compensation costs and contingent
lease charges.
The decrease in other expenses from $16 in 2002 to $6 in 2003 relates to
unfavorable market adjustments in the prior year of $17 to the cash surrender
value of company owned life insurance policies used to fund the Company's
obligations under deferred compensation plans for its officers, key employees
and directors, partially offset by increased losses in the earnings of minority
interest equity investments in 2003.
Interest, net, during the 39 week period ended October 30, 2003 totaled $307 as
compared with $296 in the prior year. This increase was attributable to less
interest being capitalized on construction projects during 2003. The decrease in
capitalized interest was due to an overall reduction in the capital
expenditures, particularly for new stores.
Net earnings were $426 or $1.16 per diluted share for the 39 week period ended
October 30, 2003, compared to net earnings of $280 or $0.69 per diluted share
for the 39 week period ended October 31, 2002. The improvement in 2003 was a
result of a charge of $291 in 2002 related to a strategic decision to exit
underperforming markets and a charge of $94 in 2002 related to the adoption of a
new accounting principle for the recognition of vendor funds, partially offset
by the reduction in earnings from continuing operations in 2003.
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.
Vendor Funds
The Company receives funds from many of the vendors whose products the Company
buys for resale in its stores. These vendor funds are provided to increase the
sell-through of the related products. The Company receives funds for a variety
of merchandising activities: placement of the vendor's products in the Company's
advertising; placement of the vendor's products in prominent locations in the
Company's stores; introduction of new products into the Company's distribution
system and retail stores; exclusivity rights in certain categories that have
slower-turning products; and to compensate for temporary price reductions
offered to customers on products held for sale at retail stores. The Company
also receives vendor funds for buying activities, such as volume commitment
rebates and credits for purchasing products in advance of their need. The terms
of vendor funds arrangements vary in length, from short term arrangements that
are completed within a quarter, to long term arrangements that are expected to
be completed within ten years.
Accounting for vendor funds is discussed in EITF 02-16, in which the EITF
reached consensus on two issues in November 2002 and provided transition rules
on those issues in January 2003 and March 2003. As a result of this guidance,
the Company adopted a new method for recognizing the vendor funds for
merchandising activities. As of the beginning of 2002, the Company recognizes as
a reduction of cost of sales vendor funds for merchandising activities when the
related products are sold. Under the previous accounting method for
merchandising vendor funds, these credits were recognized as a reduction to cost
of sales when the merchandising activity was performed in accordance with the
underlying agreements. In connection with the implementation of this new
accounting method, the Company recorded a charge in 2002 of $94, net of tax
benefit of $60.
18
The amount of vendor funds reducing the Company's inventory ("inventory offset")
as of October 30, 2003 was $134, an increase of $3 from the end of the second
quarter of 2003 and a decrease of $18 from the beginning of 2003. The vendor
funds inventory offset as of October 31, 2002 was $143, an increase of $8 from
the end of the second quarter of 2002 and a decrease of $15 from the beginning
of 2002. The inventory offset was determined by estimating the average inventory
turnover rates by product category for the Company's grocery, general
merchandise and lobby departments (these departments received over
three-quarters of the Company's vendor funds in 2002) and by average inventory
turnover rates by department for the Company's remaining inventory.
Recent 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 39 weeks ended October 30, 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 39 weeks ended October 30, 2003.
In May 2003 the FASB issued SFAS No. 150, "Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity." SFAS No. 150
requires that certain financial instruments, which under previous guidance could
be accounted for as equity, be classified as liabilities in statements of
financial position. SFAS No. 150 is effective for financial instruments entered
into or modified after May 31, 2003, and was effective for the Company in the
13 week period ended October 30, 2003. The adoption of SFAS No. 150 did not have
a material effect on the Company's condensed consolidated financial statements
for the 13 weeks ended October 30, 2003.
In November 2003 the EITF confirmed as a consensus EITF Issue No. 03-10,
"Application of EITF Issue No. 02-16, 'Accounting by a Customer (Including a
Reseller) for Certain Consideration Received from a Vendor,' by Resellers to
Sales Incentives Offered to Consumers by Manufacturers" ("EITF 03-10").
EITF 03-10 will not impact the Company's existing accounting and reporting
policies for manufacturers' coupons that can be presented at any retailer that
accepts coupons. For arrangements with vendors that are entered into or modified
after the start of fiscal year 2004, we will record the vendor reimbursement as
a reduction of cost of sales (instead of sales) if the coupon can only be
redeemed at a Company retail store. This modification to our accounting and
reporting policies will only impact sales and cost of sales beginning in the
Company's first quarter of 2004.
Liquidity and Capital Resources
Cash provided by operating activities during the 39 weeks ended October 30, 2003
was $1,060 compared to $1,725 for the same period in the prior year. The
decrease in 2003, as compared to 2002, was due primarily to a decrease in
earnings from continuing operations; an increase in inventories due to increased
store count and increased safety stock attributable to the Labor Dispute; and a
decrease in accounts payable due to timing of disbursements.
Cash flow used by investing activities during the 39 weeks ended October 30,
2003 increased to $746 compared to $477 in 2002. This increase was a result of
2002 investing activities that included proceeds from the sale of assets
(associated with the 2001 restructuring activities and the 2002 market exits)
that were $409 greater than asset sale proceeds received in 2003, partially
offset by lower capital expenditures in 2003. The Company is continuing to
implement its 2003 capital expenditure plan, which includes outlays for new
stores, store remodels and information technology.
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 borrowings outstanding at October 30, 2003 and 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 October 30,
2003, the Company was in compliance with these requirements. No borrowings were
outstanding under these credit facilities as of October 30, 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
19
corporate purposes, including the potential purchase of outstanding shares of
Albertsons common stock. As of October 30, 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. During the first
three quarters of 2002, 20.9 million shares were purchased and retired under the
buyback program for a total expenditure of $547 at an average price of $26.18
per share. Since the first quarter of 2003 the Company has not repurchased any
shares of its common stock.
Contractual Obligations and Commercial Commitments
The Company had outstanding letters of credit of $91 as of October 30, 2003,
consisting of $76 of standby letters of credit covering primarily workers'
compensation or performance obligations and $15 of commercial letters of credit
supporting the Company's merchandise import program.
Except as disclosed under "Contingent Lease Obligations" in Note E to the
unaudited condensed consolidated financial statements included elsewhere in this
report, there have been no other material changes regarding the Company's
contractual obligations and commercial commitments from the information provided
in Note Y "Contractual Obligations and Commitments" in the Company's 2002 Annual
Report on Form 10-K.
Off-Balance Sheet Arrangements
The Company had no significant off-balance sheet arrangements (including equity
method investments) as of October 30, 2003. 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 39 week period
ended October 30, 2003.
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" in the Company's 2002 Annual Report on Form 10-K.
Item 4. Controls and Procedures
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-15e) as of October 30, 2003. 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.
In October 2003, the Company implemented a new general ledger system, which
included new hardware and software. This is the first phase of a multi-year
effort to improve the Company's financial systems. This implementation has
resulted in certain changes to business processes and internal controls
impacting financial reporting. Management is taking the necessary steps to
monitor and maintain appropriate internal controls during this period of change.
These steps include deploying resources to mitigate internal control risks,
processing the new system parallel with the legacy system for five months and
performing multiple levels of reconciliations.
Other than as described above, there were no changes in the Company's internal
control over financial reporting that occurred during the Company's most
recently completed fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Company's internal control over
financial reporting.
PART II. OTHER INFORMATION
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: non-GAAP
financial measures included in this filing; statements of expectation regarding
the third quarter 2003 results had the Labor Dispute in Southern California not
occurred; investing to increase sales; changes in cash flow; increases in
insurance and employee benefit costs; attainment of cost reduction goals;
impacts of the Southern California Labor Dispute; achieving sales increases and
20
increases in comparable and identical sales; opening and remodeling stores; and
the Company's five strategic imperatives. These statements 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 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); labor negotiations, particularly the result of negotiations related
to the current Labor Dispute in Southern California; adverse determinations with
respect to litigation or other claims (including environmental matters);
employee benefit costs; 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; the Company's ability to achieve its five strategic
imperatives; and other factors affecting the Company's business in or beyond the
Company's control. These other factors include changes in the rate of inflation;
changes in state or federal legislation or regulation; the cost and stability of
energy sources; changes in the general economy; and changes in interest rates.
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 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 Albertsons 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 (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 of the Rocher class decertification
issue 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 was 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
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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
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. A second claim
process was ordered by the court, but the parties are still waiting for final
instructions from the Court. 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.
On November 1, 2001, the Environmental Protection Agency ("EPA") notified Jewel
Food Stores, an indirect wholly-owned subsidiary of the Company, of alleged
violations of the Clean Air Act. No notice of violation was issued, but the
Company and the EPA entered into discussions that are expected to result in a
consent decree establishing technical protocols for the refrigerant management
program; setting a penalty of $0.1; and requiring the installation of and
changes to a non-ozone depleting refrigerant.
The Company is also involved in routine legal proceedings incidental to its
operations. 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 Form of Director Indemnification Agreement*
15 Letter re: Unaudited Interim Financial Statements
31.1 Certification of CEO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
31.2 Certification of CFO Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
32 Certification Pursuant to 18 U.S.C. Section 1350, as
Adopted Pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002
--------------
* Management contract required to be filed as an exhibit hereto.
22
b. The following reports on Form 8-K were filed or furnished during the quarter
ended October 30, 2003.
Current report on Form 8-K dated September 26, 2003 filed pursuant to
Item 5, Other Events, regarding amendments to the Company's
stockholder rights plan.
Current report on Form 8-K dated September 4, 2003 furnished pursuant
to Item 12, Results of Operations and Financial Condition, including
the Company's press release which discussed the Company's sales and
earnings for the second quarter of 2003.
23
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 8, 2003 /S/ Felicia D. Thornton
-----------------------------------------------------
Felicia D. Thornton
Executive Vice President
and Chief Financial Officer
24