Attached files
| file | filename |
|---|---|
| EX-31.4 - EXHIBIT 31.4 - Albertsons Companies, Inc. | acify17ex314.htm |
| EX-31.3 - EXHIBIT 31.3 - Albertsons Companies, Inc. | acify17ex313.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended February 24, 2018
OR
☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 333-205546
Albertsons Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware | 47-4376911 | |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
250 Parkcenter Blvd. | ||
Boise, Idaho | 83706 | |
(Address of principal executive offices) | (Zip Code) | |
Registrant's telephone number, including area code (208) 395-6200
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act: None
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. ☒ Yes ☐ No
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 ☒ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). ☒ Yes ☐ No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | o | Accelerated filer | o | ||
Non-accelerated filer | x (Do not check if a smaller reporting company) | Smaller reporting company | o | ||
Emerging Growth Company | o | ||||
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
As of May 11, 2018, the registrant had 279,654,028 shares of common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Explanatory Note | ||||
Albertsons Companies, Inc. (the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K (this "Amendment") for the fiscal year ended February 24, 2018, which was originally filed with the Securities and Exchange Commission ("SEC") on May 11, 2018 (the "Original Filing"). In response to a Securities and Exchange Commission comment letter dated May 31, 2018, this amendment makes certain revisions to the cover page and Part II, "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" of the Original Filing to reflect changes to the Company's Adjusted EBITDA reconciliation and critical accounting policies. | ||||
In addition, as required by Rule 12b-15 under the Securities Act of 1934, as amended, new certifications by the Company's principal executive and principal financial officer are filed as exhibits to this Amendment under Part IV, "Item 15. Exhibits, Financial Statement Schedules" hereof. | ||||
Except for the foregoing amended information or where otherwise noted, this Form Amendment does not reflect events that occurred after the Original Filing or modify or update those disclosures affected by subsequent events. | ||||
This Amended Filing should be read in conjunction with the Original Filing. | ||||
Albertsons Companies, Inc. and Subsidiaries
PART II
Item 7 - Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our Consolidated Financial Statements and related notes found in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018. This discussion contains forward-looking statements based upon current expectations that involve numerous risks and uncertainties. Our actual results may differ materially from those contained in any forward-looking statements.
Our last three fiscal years consisted of the 52 weeks ended February 24, 2018 ("fiscal 2017"), February 25, 2017 ("fiscal 2016") and February 27, 2016 ("fiscal 2015"). In this Management's Discussion and Analysis of Financial Condition and Results of Operations of Albertsons Companies, Inc., the words "Albertsons Companies," "ACI," "we," "us," "our" and "ours" refer to Albertsons Companies, Inc., together with its subsidiaries.
OVERVIEW
We are one of the largest food and drug retailers in the United States, with both a strong local presence and national scale. As of February 24, 2018, we operated 2,318 stores across 35 states and the District of Columbia under 20 well-known banners including Albertsons, Safeway, Vons, Jewel-Osco, Shaw’s, Acme, Tom Thumb, Randalls, United Supermarkets, Market Street, Pavilions, Star Market, Haggen and Carrs, as well as meal kit company Plated based in New York City. Over the past five years, we have completed a series of acquisitions that has significantly increased our portfolio of stores. We operated 2,318, 2,324, 2,271, 2,382, 1,075 and 192 stores as of February 24, 2018, February 25, 2017, February 27, 2016, February 28, 2015, February 20, 2014 and February 21, 2013, respectively. In addition, as of February 24, 2018, we operated 1,777 pharmacies, 1,275 in-store branded coffee shops, 397 adjacent fuel centers, 23 dedicated distribution centers, five Plated fulfillment centers and 20 manufacturing facilities.
Our operations and financial performance are affected by U.S. economic conditions such as macroeconomic conditions, credit market conditions and the level of consumer confidence. While the combination of improved economic conditions, the trend towards lower unemployment, higher wages and lower gasoline prices have contributed to improved consumer confidence, there is continued uncertainty about the strength of the economic recovery. If the current economic situation does not continue to improve or if it weakens, or if gasoline prices rebound, consumers may reduce spending, trade down to a less expensive mix of products or increasingly rely on food discounters, all of which could impact our sales growth. In addition, consumers’ perception or uncertainty related to the economic recovery and future fuel prices could also dampen overall consumer confidence and reduce demand for our product offerings. Both inflation and deflation affect our business. Food deflation could reduce sales growth and earnings, while food inflation could reduce gross profit margins. Several food items and categories, such as meat, eggs and dairy, experienced price deflation during 2017 and 2016, and such price deflation could continue in the future. We are unable to predict if the economy will continue to improve, or predict the rate at which the economy may improve, the direction of gasoline prices or if deflationary trends will occur. If the economy does not continue to improve or if it weakens or fuel prices increase, our business and results of operations could be adversely affected.
We currently expect to achieve approximately $823 million of annual synergies related to the Safeway acquisition on a run-rate basis by the end of fiscal 2018, with remaining associated one-time costs of approximately $200 million, including approximately $65 million of Safeway integration-related capital expenditures. Inclusion of the projected synergies should not be viewed as a representation that we in fact will achieve this annual synergy target by the end of fiscal 2018. To the extent we fail to achieve these synergies, our results of operations may be impacted, and any such impact may be material. We achieved synergies from the Safeway acquisition of approximately $575 million during fiscal 2016 and approximately $675 million during fiscal 2017.
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We have identified various synergies including corporate and division overhead savings, our own brands, vendor funds, the conversion of Albertsons and NALP to Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office, distribution and manufacturing organizations. Actual synergies, the expenses and cash required to realize the synergies and the sources of the synergies could differ materially from these estimates, and we cannot assure you that we will achieve the full amount of synergies on the schedule anticipated, or that these synergy programs will not have other adverse effect on our business. In light of these significant uncertainties, you should not place undue reliance on our estimated synergies.
Total debt, including both the current and long-term portions of capital lease obligations and net of deferred financing costs and debt discounts, decreased $462.1 million to $11.9 billion as of the end of fiscal 2017 compared to $12.3 billion as of the end of fiscal 2016. The decrease in fiscal 2017 was primarily due to the repurchase of certain NALP Notes and the repayment of term loans made in connection with our term loan repricing that occurred in June 2017. Our substantial indebtedness could have important consequences. For example it could: adversely affect the market price of our common stock; increase our vulnerability to general adverse economic and industry conditions; require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes, including acquisitions and costs related to revenue opportunities in connection with the Mergers; limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; place us at a competitive disadvantage compared to our competitors that have less debt; and limit our ability to borrow additional funds. See "Debt Management" contained in "Liquidity and Financial Resources."
In fiscal 2017, we spent approximately $1,547 million for capital expenditures, including approximately $200 million of Safeway integration-related capital expenditures. We expect to spend approximately $1,200 million in total for capital expenditures in fiscal 2018, or approximately 2.0% of our sales in fiscal 2017, including $65 million of Safeway integration-related capital expenditures. For fiscal 2017, we completed 166 upgrade and remodel projects and opened 15 new stores. For additional information on our capital expenditures, see the table under the caption "Projected fiscal 2018 Capital Expenditures" contained in "Liquidity and Financial Resources."
Reflecting consumer preferences, we have a significant focus on perishable products. Sales of perishable products accounted for approximately 41.0% and 40.9% of our sales in fiscal 2017 and 2016, respectively. We could suffer significant perishable product inventory losses and significant lost revenue in the event of the loss of a major supplier or vendor, disruption of our distribution network, extended power outages, natural disasters or other catastrophic occurrences. Our stores rely heavily on sales of perishable products, and product supply disruptions may have an adverse effect on our profitability and operating results.
We employed a diverse workforce of approximately 275,000, 273,000 and 274,000 associates as of February 24, 2018, February 25, 2017 and February 27, 2016, respectively. As of February 24, 2018, approximately 187,000 of our employees were covered by collective bargaining agreements. During fiscal 2018, collective bargaining agreements covering approximately 54,000 employees are scheduled to expire. If, upon the expiration of such collective bargaining agreements, we are unable to negotiate acceptable contracts with labor unions, it could increase our operating costs and disrupt our operations.
A considerable number of our employees are paid at rates related to the federal minimum wage. Additionally, many of our stores are located in states, including California, where the minimum wage is greater than the federal minimum wage and where a considerable number of employees receive compensation equal to the state's minimum wage. For example, as of February 24, 2018, we employed approximately 71,000 associates in California, where the current minimum wage was recently increased to $11.00 per hour effective January 1, 2018, and will gradually increase to $15.00 per hour by January 1, 2022. In Maryland, where we employed approximately 8,000 associates as of February 24, 2018, the minimum wage was recently increased to $9.25 per hour, and will gradually increase to $10.10 per hour by July 1, 2018. Moreover, municipalities may set minimum wages above the applicable state standards. For example, the minimum wage in Seattle, Washington, where we employed approximately 2,000 associates as of February 24,
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2018, was recently increased to $15.00 per hour effective January 1, 2017 for employers with more than 500 employees nationwide. In Chicago, Illinois, where we employed approximately 6,200 associates as of February 24, 2018, the minimum wage was recently increased to $11.00 per hour, and will gradually increase to $13.00 per hour by July 1, 2019. Any further increases in the federal minimum wage or the enactment of additional state or local minimum wage increases could increase our labor costs, which may adversely affect our results of operations and financial condition.
We participate in various multiemployer pension plans for substantially all employees represented by unions that require us to make contributions to these plans in amounts established under collective bargaining agreements. In fiscal 2017, we contributed $431.2 million to multiemployer pension plans. During fiscal 2018, we expect to contribute approximately $450 million to multiemployer pension plans, subject to collective bargaining agreements.
Our Strategy
Our operating philosophy is simple: We run great stores with a relentless focus on sales growth. We believe there are significant opportunities to grow sales and enhance profitability and Free Cash Flow, through execution of the following strategies:
Enhancing and Upgrading Our Fresh, Natural and Organic Offerings and Signature Products. We continue to enhance and upgrade our fresh, natural and organic offerings across our meat, produce, service deli and bakery departments to meet the changing tastes and preferences of our customers. We are rapidly growing our portfolio of USDA-certified organic products to include over 1,500 Own Brand products. In our recent acquisition of Plated, we added a meal kit company with leading technology and data capabilities, a strategic step for us as we continue to focus on innovation, personalization and customization. We also believe that continued innovation and expansion of our high-volume, high-quality and differentiated signature products will contribute to stronger sales growth.
Expanding Our Own Brands Offerings. We continue to drive sales growth and profitability by extending our Own Brand offerings across our banners, including high-quality and recognizable brands such as O Organics, Open Nature, Signature and Lucerne. Our Own Brand products achieved over $11.5 billion in sales during fiscal 2017.
Leveraging Our Effective and Scalable Loyalty Programs. We believe we can grow basket size and improve the shopping experience for our customers by expanding our just for U, MyMixx and fuel rewards programs. Over 13 million members are currently enrolled in our loyalty programs. We believe we can further enhance our merchandising and marketing programs by utilizing our customer analytics capabilities, including advanced digital marketing and mobile applications, to improve customer retention and provide targeted promotions to our customers. For example, our just for U and fuel rewards customers have demonstrated greater basket size, improved customer retention rates and an increased likelihood to redeem promotions offered in our stores.
Providing Our Customers with Convenient Digital Solutions. We seek to provide our customers with the means to shop how, when and where they choose. As consumer preferences evolve towards greater convenience, we are improving our online offerings, including home delivery and “Drive Up and Go” services. We continue to enhance our delivery platform to offer more delivery options and windows across our store base, including early morning deliveries, same-day deliveries, one-to-two hour deliveries by Instacart and unattended deliveries. In addition, we are seeking to expand our curbside “Drive Up and Go” program in order to enable customers to conveniently pick up their goods on the way home or to the office. We have added to our delivery offerings with our recent alliance with Instacart, offering delivery in as little as an hour across key market areas. We believe our strategy of providing customers with a variety of in-store and online options that suit their varying individual needs will drive additional sales growth and differentiate us from many of our competitors.
Capitalizing on Demand for Health and Wellness Services. We intend to leverage our portfolio of 1,777 pharmacies and our growing network of wellness clinics to capitalize on increasing customer demand for health and wellness services. Pharmacy customers are among our most loyal, and their average weekly spend on groceries is over 2.5x that
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of our non-pharmacy customers. We plan to continue to grow our pharmacy script counts through new patient prescription transfer programs and initiatives such as clinic, hospital and preferred network partnerships, which we believe will expand our access to more customers. To further enhance our pharmacy offerings, we recently acquired MedCart Specialty Pharmacy, a URAC- accredited specialty pharmacy with accreditation and license to operate in over 40 states, which will extend our ability to service our customers’ health needs. We believe that these efforts will drive sales and generate customer loyalty.
Continuously Evaluating and Upgrading Our Store Portfolio. We plan to pursue a disciplined but committed capital allocation strategy to upgrade, remodel and relocate stores to attract customers to our stores and to increase store volumes. We opened 15 new stores in the both fiscal 2016 and 2017, and expect to open a total of 12 new stores in fiscal 2018. We completed 166 upgrade and remodel projects in fiscal 2017 and expect to complete 110 to 120 upgrade and remodel projects during fiscal 2018.
We believe that our store base is in excellent condition, and we have developed a remodel strategy that is both cost-efficient and effective. In addition to store remodels, we continuously evaluate and optimize store formats to better serve the different customer demographics of each local community. We have identified approximately 300 stores across our divisions that we have started to re-merchandise to our “Premium” format, where we offer a greater assortment of unique items in our fresh and service departments, as well as more natural, organic and healthy products throughout the store. Additionally, we have started to reposition approximately 100 stores across our divisions from our “Premium” format to an “Ultra-Premium” format that also offers gourmet and artisanal products, upscale décor and experiential elements including walk-in wine cellars and wine and cheese tasting counters.
Driving Innovation. We intend to drive traffic and sales growth through constant innovation. We will remain focused on identifying emerging trends in food and sourcing new and innovative products. We are adjusting our store layouts to accommodate a greater assortment of grab-and-go, individually packaged, and snack-sized meals. We are also rolling out new merchandising initiatives across our store base, including the introduction of meal kits, product sampling events, quality prepared foods and in-store dining.
Sharing Best Practices Across Divisions. Our division leaders collaborate closely to ensure the rapid sharing of best practices. Recent examples include the expansion of our O Organics and Open Nature offerings across banners, the accelerated roll-out of signature products such as Albertsons’ in-store fresh-cut fruit and vegetables and implementing Safeway’s successful wine and floral shop strategies, with broader product assortments and new fixtures across many of our banners.
We believe the combination of these actions and initiatives, together with the attractive industry trends will position us to achieve sales growth.
Enhance Our Operating Margin. Our focus on sales growth provides an opportunity to enhance our operating margin by leveraging our fixed costs. We plan to realize further margin benefits through added scale from partnering with vendors and by achieving efficiencies in manufacturing and distribution. We are investing in our supply channel, including the automation of several of our distribution centers, in order to create efficiencies and reduce costs. In addition, we maintain a disciplined approach to expense management and budgeting.
Implement Our Synergy Realization Plan. We currently expect to achieve $823 million in annual run-rate synergies by the end of fiscal 2018 from our acquisition of Safeway, with remaining associated one-time costs of approximately $200 million, including approximately $65 million of Safeway integration-related capital expenditures. Our detailed synergy plan was developed on a bottom-up, function-by-function basis by combined Albertsons and Safeway teams. The plan includes capturing opportunities from corporate and division cost savings, simplifying business processes and rationalizing headcount. By the end of fiscal 2018, we expect that Safeway’s information technology systems will support all of our stores, distribution centers and systems, including financial reporting and payroll processing, as we wind down our transition services agreement for our Albertsons, Acme, Jewel-Osco, Shaw’s and Star Market banners
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with SuperValu. We are extending the expansive and high-quality own brands program developed at Safeway across all of our banners. We believe our increased scale will help us to optimize and improve our vendor relationships. We also plan to achieve marketing and advertising savings from lower print, production and broadcast rates in overlapping regions and reduced agency spend. Finally, we intend to consolidate managed care provider reimbursement programs, increase vaccine penetration and leverage our combined scale. During fiscal 2016 and 2017 we achieved synergies from the Safeway acquisition of approximately $575 million and $675 million, respectively, principally from corporate and division overhead savings, our own brands vendor funds, the conversion of Albertsons and NALP onto Safeway’s IT systems, marketing and advertising cost reduction and operational efficiencies within our back office and distribution and manufacturing organizations.
Selectively Grow Our Store Base Organically and Through Acquisition. We intend to continue to grow our store base organically through disciplined but committed investment in new stores. We opened 15 new stores during both fiscal 2016 and 2017 and completed 166 upgrade and remodel projects during fiscal 2017. We acquired 73 stores from A&P for our Acme banner and 35 stores from Haggen for our Albertsons banner during fiscal 2015, and we acquired an additional 29 stores from Haggen during fiscal 2016, of which 15 operate under the Haggen banner. We evaluate acquisition opportunities on an ongoing basis as we seek to strengthen our competitive position in existing markets or expand our footprint into new markets. We believe our healthy balance sheet and decentralized structure provides us with strategic flexibility and a strong platform to make acquisitions. We believe our successful track record of integration and synergy delivery provides us with an opportunity to further enhance sales growth, leverage our cost structure and increase profitability and Free Cash Flow through selected acquisitions. On November 16, 2017, we acquired an equity interest in El Rancho, a Texas-based specialty grocer with 16 stores that focuses on Latino customers. The agreement with El Rancho provides us with an opportunity to invest in the fast-growing Latino grocery sector, and complements our successful operation of a variety of store banners in neighborhoods with significant Latino populations. Consistent with this strategy, we regularly evaluate potential acquisition opportunities, including ones that would be significant to us, and we are currently participating in processes regarding several potential acquisition opportunities, including ones that would be significant to us.
Fiscal 2017 Highlights
• | Announced merger agreement with Rite Aid Corporation ("Rite Aid"), creating a leader in food, health and wellness |
• | Fourth quarter fiscal 2017 identical store sales were positive at 0.6% |
• | Accelerated growth of eCommerce and digital offerings, including expansion of 'Drive-Up and Go' |
• | Announced alliance with Instacart for same-day deliveries offered in over 1,300 stores |
• | Acquired DineInFresh, Inc. ("Plated"), a premier provider of meal kits, and initiated roll-out of Plated meal kits in-store |
• | Increased penetration in Own Brands by 60 basis points to 23% |
• | Increased registered households in Company loyalty programs by 24% |
• | Acquired an equity interest in El Rancho (as defined herein), a Texas-based Hispanic specialty grocer |
• | Acquired MedCart Specialty Pharmacy |
• | Supported local communities in hurricane relief efforts |
Reorganization Transactions
Prior to December 3, 2017, ACI had no material assets or operations. On December 3, 2017, Albertsons Companies LLC ("ACL") and its parent, AB Acquisition LLC, a Delaware limited liability company ("AB Acquisition"), completed a reorganization of its legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor Holdings LLC ("Albertsons Investor"), and KIM ACI, LLC ("KIM ACI"). In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM
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ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the AB Acquisition equity interests they received to ACI in exchange for common stock issued by ACI. As a result, Albertsons Investor and KIM ACI became the parents of ACI owning all of its outstanding common stock with AB Acquisition and its subsidiary, ACL, becoming wholly-owned subsidiaries of ACI. On February 25, 2018, ACL merged with and into ACI, with ACI as the surviving corporation (such transactions, collectively, the "Reorganization Transactions"). Prior to February 25, 2018, substantially all of the assets and operations of ACI were those of its subsidiary, ACL. The Reorganization Transactions were accounted for as a transaction between entities under common control, and accordingly, there was no change in the basis of the underlying assets and liabilities. The Consolidated Financial Statements are reflective of the changes that occurred as a result of the Reorganization Transactions. Prior to February 25,2018, the Consolidated Financial Statements of ACI reflect the net assets and operations of ACL.
Stores
The following table shows stores operating, acquired, opened, divested and closed during the periods presented:
52 weeks ended | |||||||||
February 24, 2018 | February 25, 2017 | February 27, 2016 | |||||||
Stores, beginning of period | 2,324 | 2,271 | 2,382 | ||||||
Acquired (1) | 5 | 78 | 74 | ||||||
Opened | 15 | 15 | 7 | ||||||
Divested | — | — | (153 | ) | |||||
Closed | (26 | ) | (40 | ) | (39 | ) | |||
Stores, end of period | 2,318 | 2,324 | 2,271 | ||||||
(1) Excludes acquired stores not yet re-opened as of the end of each respective period.
The following table summarizes our stores by size:
Number of Stores | Percent of Total | Retail Square Feet (1) | ||||||||||||||||
Square Footage | February 24, 2018 | February 25, 2017 | February 24, 2018 | February 25, 2017 | February 24, 2018 | February 25, 2017 | ||||||||||||
Less than 30,000 | 211 | 210 | 9.1 | % | 9.0 | % | 4.9 | 4.9 | ||||||||||
30,000 to 50,000 | 810 | 812 | 34.9 | % | 35.0 | % | 34.0 | 34.1 | ||||||||||
More than 50,000 | 1,297 | 1,302 | 56.0 | % | 56.0 | % | 76.5 | 76.6 | ||||||||||
Total Stores | 2,318 | 2,324 | 100.0 | % | 100.0 | % | 115.4 | 115.6 | ||||||||||
(1) In millions, reflects total square footage of retail stores operating at the end of the period.
ACQUISITIONS AND OTHER INVESTMENTS
Pending Rite Aid Merger
On February 18, 2018, we entered into a definitive merger agreement with Rite Aid, one of the nation's leading drugstore chains. At the effective time of the merger, each share of Rite Aid common stock issued and outstanding at such time will be converted into the right to receive 0.1000 of a share of ACI common stock, plus at the Rite Aid stockholder's election, either (i) an amount in cash equal to $0.1832 per share of Rite Aid common stock, without interest, or (ii) 0.0079 of a share of ACI common stock per share of Rite Aid common stock. Subject to the approval of Rite Aid's stockholders, and other customary closing conditions, the merger is expected to close early in the second half of calendar 2018. In connection with the proposed merger, we received a debt commitment letter pursuant to which, among other things, certain institutions have committed to provide ACI with (i) $4,667 million of commitments to a new $5,000 million aggregate principal amount best efforts asset-based revolving credit facility; (ii) incremental commitments under our existing asset-based loan facility in an aggregate principal amount of $1,000 million in the event that the
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Best-Efforts ABL Facility does not become effective on the closing date; (iii) a new asset-based term loan facility in an aggregate principal amount of $1,500 million; and (iv) a new secured bridge loan facility in an aggregate principal amount of $500 million less the gross proceeds received by us of new senior notes issued prior to the closing of the Mergers, in each case on the terms and subject to the conditions set forth in the debt commitment letter. The proceeds of the financing will be used, among other things, to partially refinance certain of Rite Aid’s existing indebtedness that is outstanding as of the closing of the Mergers.
MedCart
On May 31, 2017, we acquired MedCart Specialty Pharmacy, a URAC-accredited specialty pharmacy with accreditation and license to operate in over 40 states, which extends our ability to service our customers’ health needs.
Plated
On September 20, 2017, we acquired Plated, a provider of meal kit services. The deal advanced a shared strategy to reinvent the way consumers discover, purchase, and experience food. In teaming up with Plated, we added a meal kit company with leading technology and data capabilities.
El Rancho
On November 16, 2017, we acquired a 45% equity interest in each of Mexico Foods Parent LLC and La Fabrica Parent LLC ("El Rancho"), a Texas-based specialty grocer with 16 stores that focuses on Latino customers. We have the option to acquire the remaining 55% of El Rancho at any time until six months after the delivery of El Rancho’s financial results for the fiscal year ended December 31, 2021. If we elect to exercise the option to acquire the remaining equity of El Rancho, the price to be paid by us for the remaining equity will be calculated using a predetermined market-based formula. Our equity interest in El Rancho expands our presence in the fast-growing Latino grocery sector and complements our successful operation of a variety of store banners in neighborhoods with significant Latino populations.
Casa Ley
During the fourth quarter of fiscal 2017, we completed the sale of our equity method investment in Casa Ley, S.A. de C.V. ("Casa Ley") and distributed approximately $0.934 in cash per Casa Ley CVR (or approximately $222 million in the aggregate) pursuant to the terms of the Casa Ley CVR agreement.
Haggen Transaction
During the fourth quarter of fiscal 2014, in connection with the acquisition of Safeway, we announced that we had entered into agreements to sell 168 stores as required by the Federal Trade Commission (the "FTC") as a condition of closing the Safeway acquisition. We sold 146 of these stores to Haggen Holdings, LLC ("Haggen"). On September 8, 2015, Haggen commenced a case under Chapter 11 of the U.S. Bankruptcy Code in the United States Bankruptcy Court for the District of Delaware. After receiving FTC and state attorneys general clearance, and Bankruptcy Court approval, during the fourth quarter of fiscal 2015, we re-acquired 35 stores from Haggen for an aggregate purchase price of $32.6 million.
Haggen also secured Bankruptcy Court approval for bidding procedures for the sale of 29 additional stores. On March 25, 2016, we entered into a purchase agreement to acquire the 29 additional stores, which included 15 stores originally sold to Haggen as part of the FTC divestitures, and certain trade names and other intellectual property, for an aggregate purchase price of approximately $114 million. We completed the acquisition of these 29 stores on June 23, 2016 (such acquisition, together with the acquisition of 35 stores from Haggen during fiscal 2015, the "Haggen Transaction").
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A&P Transaction
In the fourth quarter of fiscal 2015, our indirect wholly owned subsidiary, Acme Markets, completed its acquisition of 73 stores from A&P (the "A&P Transaction"). The purchase price for the 73 stores, including the cost of acquired inventory, was $292.7 million. The acquired stores, which are principally located in the northern New York City suburbs, northern New Jersey and the greater Philadelphia area, are complementary to Acme Markets' existing store and distribution base and were re-bannered as Acme stores.
RESULTS OF OPERATIONS
The following table and related discussion sets forth certain information and comparisons regarding the components of our Consolidated Statements of Operations for fiscal 2017, fiscal 2016 and fiscal 2015, respectively (in millions):
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||||||||
Net sales and other revenue | $ | 59,924.6 | 100.0 | % | $ | 59,678.2 | 100.0 | % | $ | 58,734.0 | 100.0 | % | |||||
Cost of sales | 43,563.5 | 72.7 | 43,037.7 | 72.1 | 42,672.3 | 72.7 | |||||||||||
Gross profit | 16,361.1 | 27.3 | 16,640.5 | 27.9 | 16,061.7 | 27.3 | |||||||||||
Selling and administrative expenses | 16,223.7 | 27.1 | 16,000.0 | 26.8 | 15,660.0 | 26.7 | |||||||||||
Goodwill impairment | 142.3 | 0.2 | — | — | — | — | |||||||||||
Operating (loss) income | (4.9 | ) | — | 640.5 | 1.1 | 401.7 | 0.6 | ||||||||||
Interest expense, net | 874.8 | 1.5 | 1,003.8 | 1.7 | 950.5 | 1.6 | |||||||||||
(Gain) loss on debt extinguishment | (4.7 | ) | — | 111.7 | 0.2 | — | — | ||||||||||
Other expense (income) | 42.5 | — | (11.4 | ) | — | (7.0 | ) | — | |||||||||
Loss before income taxes | (917.5 | ) | (1.5 | ) | (463.6 | ) | (0.8 | ) | (541.8 | ) | (1.0 | ) | |||||
Income tax benefit | (963.8 | ) | (1.6 | ) | (90.3 | ) | (0.2 | ) | (39.6 | ) | — | ||||||
Net income (loss) | $ | 46.3 | 0.1 | % | $ | (373.3 | ) | (0.6 | )% | $ | (502.2 | ) | (1.0 | )% | |||
Identical Store Sales, Excluding Fuel
Identical store sales, on an actual basis, is defined as stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis, excluding fuel. Acquired stores become identical on the one-year anniversary date of their acquisition. Identical store sales results, on an actual basis, for the past three fiscal years were as follows:
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||
Identical store sales, excluding fuel | (1.3)% | (0.4)% | 4.4% | ||
Our identical store sales decrease in fiscal 2017 was driven by a decrease of 2.9% in customer traffic partially offset by an increase of 1.6% in average ticket size. During fiscal 2016 and the first half of fiscal 2017, our identical store sales were negatively impacted by food price deflation in certain categories, including meat, eggs and dairy, together with selective investments in price. Our fourth quarter of fiscal 2017 identical store sales were positive at 0.6%, which reflected the benefit from improvements in customer traffic trends and an increase in average ticket. We anticipate overall identical store sales growth of 1.5% to 2.0% during fiscal 2018 with such growth being weighted more to the second half of fiscal 2018.
Operating Results Overview
Net income was $46.3 million in fiscal 2017 compared to net loss of $373.3 million in fiscal 2016, an increase of $419.6 million. This improvement was primarily attributable to the Income tax benefit of $963.8 million, a $129.0 million reduction in interest expense and incremental synergies related to the Safeway acquisition, partially offset by
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a decrease in operating income of $645.4 million. The decrease in operating income was primarily driven by lower gross profit, goodwill and other asset impairment charges, higher employee related costs and increased depreciation and amortization expense.
The declines in identical store sales and operating results in fiscal 2017 compared to fiscal 2016 were driven by our performance during the first three quarters of fiscal 2017 as we achieved increases in identical store sales and improved operating results in the fourth quarter of fiscal 2017 compared to the fourth quarter of fiscal 2016. We believe the recent fourth quarter improvements in the trends and operating results of our business are attributable, in part, to our selective investments in price and the continuously increasing offerings we are providing to our customers and will continue into fiscal 2018.
Net Sales and Other Revenue
Net sales and other revenue increased $246.4 million, or 0.4%, from $59,678.2 million in fiscal 2016 to $59,924.6 million in fiscal 2017. The components of the change in Net sales and other revenue for fiscal 2017 were as follows (in millions):
Fiscal 2017 | |||
Net sales and other revenue for fiscal 2016 | $ | 59,678.2 | |
Additional sales due to new stores and acquisitions, net of store closings | 589.4 | ||
Increase in fuel sales | 411.2 | ||
Identical store sales decline of 1.3% | (740.4 | ) | |
Other (1) | (13.8 | ) | |
Net sales and other revenue for fiscal 2017 | $ | 59,924.6 | |
(1) Primarily relates to changes in non-identical store sales and other revenue.
The primary increase in Net sales and other revenue in fiscal 2017 as compared to fiscal 2016 was driven by an increase of $589.4 million from new stores and acquisitions, net of store closings, and an increase of $411.2 million in fuel sales primarily driven by higher average retail pump prices, partially offset by a decline of $740.4 million from our 1.3% decline in identical store sales.
Net sales and other revenue increased $944.2 million, or 1.6%, from $58,734.0 million in fiscal 2015 to $59,678.2 million in fiscal 2016. The components of the change in net sales and other revenue for fiscal 2016 were as follows (in millions):
Fiscal 2016 | |||
Net sales and other revenue for fiscal 2015 | $ | 58,734.0 | |
Additional sales due to A&P and Haggen Transactions, for the periods not considered identical | 1,843.4 | ||
Decline in sales from FTC-mandated divestitures | (444.5 | ) | |
Decline in fuel sales | (261.4 | ) | |
Identical store sales decline of 0.4% | (213.3 | ) | |
Other (1) | 20.0 | ||
Net sales and other revenue for fiscal 2016 | $ | 59,678.2 | |
(1) Primarily relates to changes in non-identical store sales and other revenue.
The primary increase in Net sales and other revenue in fiscal 2016 as compared to fiscal 2015 was driven by an increase of $1,843.4 million from the acquired A&P and Haggen stores, partially offset by a decline of $213.3 million from our 0.4% decline in identical store sales, a decline of $444.5 million in sales related to stores sold as part of the FTC divestiture process and $261.4 million in lower fuel sales driven by lower average retail pump prices.
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Gross Profit
Gross profit represents the portion of sales and other revenue remaining after deducting the cost of goods sold during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of cost of goods sold.
Gross profit margin decreased 60 basis points to 27.3% in fiscal 2017 compared to 27.9% in fiscal 2016. Excluding the impact of fuel, the gross profit margin decreased 50 basis points. The decrease in fiscal 2017 as compared to fiscal 2016 was primarily attributable to our investment in promotions and price and higher shrink expense as a percentage of sales, which was partially due to system conversions related to our integration.
Fiscal 2017 vs. Fiscal 2016 | Basis point increase (decrease) |
Investment in price and changes in product mix | (36) |
Shrink expense | (23) |
LIFO expense | (1) |
Safeway acquisition synergies | 10 |
Total | (50) |
Gross profit margin increased 60 basis points to 27.9% in fiscal 2016 compared to 27.3% in fiscal 2015. Excluding the impact of fuel, the gross profit margin increased 50 basis points. The increase was primarily attributable to synergies achieved as part of the Safeway integration related to the deployment of our own brand products across our Albertsons and New Albertsons, L.P. ("NALP") stores and improved vendor pricing and savings related to the consolidation of our distribution network. These increases were partially offset by higher shrink expense as a percentage of sales during fiscal 2016 compared to fiscal 2015.
Fiscal 2016 vs. Fiscal 2015 | Basis point increase (decrease) |
Safeway acquisition synergies | 43 |
Product mix | 28 |
Lower LIFO expense | 7 |
Higher shrink expense | (27) |
Other | (1) |
Total | 50 |
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Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
Selling and administrative expenses increased 30 basis points to 27.1% of Net sales and other revenue in fiscal 2017 from 26.8% in fiscal 2016. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue increased 40 basis points during fiscal 2017 compared to fiscal 2016.
Fiscal 2017 vs. Fiscal 2016 | Basis point increase (decrease) |
Employee wage and benefit costs | 20 |
Net property dispositions, asset impairment and lease exit costs | 18 |
Depreciation and amortization | 14 |
Store related costs | 12 |
Pension expense, net | (17) |
Safeway acquisition synergies | (7) |
Total | 40 |
Increased employee wage and benefit costs, asset impairments and lease exit costs, higher depreciation and amortization expense and higher store related costs during fiscal 2017 compared to fiscal 2016 were offset by lower pension costs and increased Safeway acquisition synergies. Increased employee wage and benefit costs and higher store related costs were primarily attributable to deleveraging of sales on fixed costs. Higher asset impairments and lease exit costs were primarily related to asset impairments in underperforming and closed stores. These increases were partially offset by lower pension expense, net driven by a $25.4 million settlement gain during fiscal 2017 primarily due to an annuity settlement on a portion of our defined benefit pension obligation.
Selling and administrative expenses increased 10 basis points to 26.8% of Net sales and other revenue in fiscal 2016 from 26.7% in fiscal 2015. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue was flat during fiscal 2016 compared to fiscal 2015.
Fiscal 2016 vs. Fiscal 2015 | Basis point increase (decrease) |
Depreciation and amortization | 26 |
Employee wage and benefit costs | 24 |
Pension expense, net, including the charge related to the Collington acquisition | 14 |
Net property dispositions, asset impairment and lease exit costs | (25) |
Acquisition and integration costs | (18) |
Safeway acquisition synergies | (14) |
Other | (7) |
Total | — |
Increased depreciation and amortization expense in addition to higher pension and employee wage and benefit costs during fiscal 2016 compared to fiscal 2015 were offset by gains on property dispositions, a decrease in acquisition and integration costs and increased Safeway acquisition synergies in fiscal 2016 compared to fiscal 2015. The increase in pension expense is primarily driven by the $78.9 million charge related to the acquisition of Collington Services, LLC ("Collington") from C&S Wholesale Grocers, Inc. during fiscal 2016. The increase in depreciation and amortization expense is primarily driven by an increase in property, equipment and intangibles balances primarily related to the A&P and Haggen transactions and capital expenditures.
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Interest Expense, Net
Interest expense, net was $874.8 million in fiscal 2017, $1,003.8 million in fiscal 2016 and $950.5 million in fiscal 2015. The decrease in Interest expense, net for fiscal 2017 compared to fiscal 2016 is primarily due to lower average interest rates on outstanding borrowings reflecting the benefit of our refinancing transactions during fiscal 2016 in addition to higher write off of deferred financing costs in fiscal 2016 related to the refinancing transactions.
The following details our components of Interest expense, net for the respective fiscal years (in millions):
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
ABL Facility, senior secured and unsecured notes, term loans and debentures | $ | 701.5 | $ | 764.3 | $ | 777.0 | |||||
Capital lease obligations | 96.3 | 106.8 | 97.0 | ||||||||
Amortization and write off of deferred financing costs | 56.1 | 84.4 | 69.3 | ||||||||
Amortization and write off of debt discounts | 16.0 | 22.3 | 12.9 | ||||||||
Other interest expense (income) | 4.9 | 26.0 | (5.7 | ) | |||||||
Interest expense, net | $ | 874.8 | $ | 1,003.8 | $ | 950.5 | |||||
The weighted average interest rate during the year was 6.5%, excluding amortization of debt discounts and deferred financing costs. The weighted average interest rate during fiscal 2016 and fiscal 2015 was 6.8%.
(Gain) Loss on Debt Extinguishment
During fiscal 2017, we repurchased NALP Notes with a par value of $160.0 million and a book value of $140.2 million for $135.5 million plus accrued interest of $3.7 million (the "NALP Notes Repurchase"). In connection with the NALP Notes Repurchase, we recorded a gain on debt extinguishment of $4.7 million.
On June 24, 2016, a portion of the net proceeds from the issuance of the 2024 Notes was used to fully redeem $609.6 million of 2022 Notes (the "Redemption"). In connection with the Redemption, we recorded a $111.7 million loss on debt extinguishment comprised of an $87.7 million make-whole premium and a $24.0 million write off of deferred financing costs and original issue discount.
Other Expense (Income)
For fiscal 2017, other expense was $42.5 million primarily driven by changes in our equity method investment in Casa Ley, changes in the fair value of the contingent value rights, which we refer to as CVRs, and gains and losses on the sale of investments. For fiscal 2016, other income was $11.4 million primarily driven by gains on the sale of certain investments and changes in our equity method investments. For fiscal 2015, other income was $7.0 million primarily driven by equity in the earnings of Casa Ley.
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Income Taxes
Income tax was a benefit of $963.8 million in fiscal 2017, $90.3 million in fiscal 2016, and $39.6 million in fiscal 2015. Prior to the Reorganization Transactions, a substantial portion of the businesses and assets were held and operated by limited liability companies, which are generally not subject to entity-level federal or state income taxation. On December 22, 2017, the Tax Cuts and Jobs Act (the "Tax Act") was signed into law and based on our current review of the Tax Act, we expect it to result in a significant ongoing benefit to us, primarily as the result of the reduction in the corporate tax rate from 35% to 21% and the ability to accelerate depreciation deductions for qualified property purchases. Beginning in fiscal 2018, we expect our effective tax rate to be in the mid-twenties before discrete items.
The components of the change in income taxes for the last three fiscal years were as follows:
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Income tax benefit at federal statutory rate | $ | (301.5 | ) | $ | (162.3 | ) | $ | (189.6 | ) | ||
State income taxes, net of federal benefit | (39.8 | ) | (20.2 | ) | (38.9 | ) | |||||
Change in valuation allowance | (218.0 | ) | 107.1 | 113.0 | |||||||
Unrecognized tax benefits | (36.5 | ) | (18.7 | ) | 3.1 | ||||||
Member loss | 83.1 | 16.6 | 60.4 | ||||||||
Charitable donations | — | (11.1 | ) | (11.1 | ) | ||||||
Tax credits | (9.1 | ) | (17.3 | ) | (6.9 | ) | |||||
Indemnification asset / liability | — | 5.1 | 14.0 | ||||||||
Effect of Tax Cuts and Jobs Act | (430.4 | ) | — | — | |||||||
CVR liability adjustment | (20.3 | ) | 7.5 | — | |||||||
Reorganization of limited liability companies | 46.7 | — | — | ||||||||
Nondeductible equity-based compensation expense | 1.6 | 4.2 | 12.3 | ||||||||
Other | (39.6 | ) | (1.2 | ) | 4.1 | ||||||
Income tax benefit | $ | (963.8 | ) | $ | (90.3 | ) | $ | (39.6 | ) | ||
The income tax benefit in fiscal 2017 includes a net $218.0 million non-cash benefit from the reversal of a valuation allowance during fiscal 2017 and a net non-cash benefit of $430.4 million in the fourth quarter of fiscal 2017 as a result of a reduction in net deferred tax liabilities due to the lower corporate income tax rate from the enactment of the Tax Act, partially offset by an increase of $46.7 million in net deferred tax liabilities from our limited liability companies related to the Reorganization Transactions.
Adjusted EBITDA
EBITDA, Adjusted EBITDA and Free Cash Flow (collectively, the "Non-GAAP Measures") are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income, gross profit and Net cash provided by operating activities. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA and Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. The presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
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For fiscal 2017, Adjusted EBITDA was $2.4 billion, or 4.0% of Net sales and other revenue compared to $2.8 billion, or 4.7% of Net sales and other revenue, for fiscal 2016. The decrease in Adjusted EBITDA primarily reflects lower gross profit, higher employee wage and benefit costs and deleveraging of sales on fixed costs in fiscal 2017 compared to fiscal 2016.
The following is a reconciliation of Net income (loss) to Adjusted EBITDA (in millions):
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Net income (loss) | $ | 46.3 | $ | (373.3 | ) | $ | (502.2 | ) | |||
Depreciation and amortization | 1,898.1 | 1,804.8 | 1,613.7 | ||||||||
Interest expense, net | 874.8 | 1,003.8 | 950.5 | ||||||||
Income tax benefit | (963.8 | ) | (90.3 | ) | (39.6 | ) | |||||
EBITDA | 1,855.4 | 2,345.0 | 2,022.4 | ||||||||
(Gain) loss on interest rate and commodity hedges, net | (6.2 | ) | (7.0 | ) | 16.2 | ||||||
Integration costs (1) | 156.2 | 144.1 | 124.7 | ||||||||
Acquisition-related costs (2) | 61.5 | 69.5 | 217.3 | ||||||||
(Gain) loss on debt extinguishment | (4.7 | ) | 111.7 | — | |||||||
Equity-based compensation expense | 45.9 | 53.3 | 97.8 | ||||||||
Net loss (gain) on property dispositions, asset impairment and lease exit costs (3) | 66.7 | (39.2 | ) | 103.3 | |||||||
Goodwill impairment | 142.3 | — | — | ||||||||
LIFO expense (benefit) | 3.0 | (7.9 | ) | 29.7 | |||||||
Collington acquisition (4) | — | 78.9 | — | ||||||||
Facility closures and related transition costs (5) | 12.4 | 23.0 | 25.0 | ||||||||
Miscellaneous adjustments (6) | 65.4 | 45.1 | 44.7 | ||||||||
Adjusted EBITDA | $ | 2,397.9 | $ | 2,816.5 | $ | 2,681.1 | |||||
(1) Related to activities to integrate acquired businesses, primarily the Safeway acquisition.
(2) Includes expenses related to acquisition and financing activities, including management fees of $13.8 million in each year. Fiscal 2016 and Fiscal 2015 include adjustments to tax indemnification assets of $12.3 million and $30.8 million, respectively. Fiscal 2015 also includes losses of $44.2 million related to acquired contingencies in connection with the Safeway acquisition.
(3) Fiscal 2017 includes asset impairment losses of $100.9 million primarily related to underperforming stores. Fiscal 2016 includes a net gain of $42.9 million related to the disposition of a portfolio of surplus properties. Fiscal 2015 includes losses of $30.6 million related to leases assigned to Haggen as part of the FTC-mandated divestitures that were subsequently rejected during the Haggen bankruptcy proceedings and additional losses of $41.1 million related to the Haggen divestitures and its related bankruptcy.
(4) Fiscal 2016 charge to pension expense, net related to the settlement of a pre-existing contractual relationship and assumption of the pension plan related to the Collington acquisition.
(5) Includes costs related to facility closures and the transition to our decentralized operating model.
(6) Miscellaneous adjustments include the following:
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Lease related adjustments (a) | $ | 17.4 | $ | 27.0 | $ | 32.7 | |||||
Changes in our equity method investment in Casa Ley and related CVR adjustments | 53.8 | 1.5 | (13.7 | ) | |||||||
Costs related to initial public offering and Reorganization Transactions | 8.7 | 23.9 | 3.3 | ||||||||
Gain on sale of non-operating investments | (5.1 | ) | (9.7 | ) | (6.5 | ) | |||||
Foreign currency (gain) loss | (1.1 | ) | (2.6 | ) | 10.1 | ||||||
Other (b) | (8.3 | ) | 5.0 | 18.8 | |||||||
Total miscellaneous adjustments | $ | 65.4 | $ | 45.1 | $ | 44.7 | |||||
(a) Includes adjustments related to deferred rents, deferred gains and amortization of unfavorable leases on acquired Safeway surplus properties.
(b) Primarily includes estimated losses related to the security breach and pension expense in excess of cash contributions.
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The following is a reconciliation of Net cash provided by operating activities to Free Cash Flow, which we define as Adjusted EBITDA less capital expenditures (in millions):
Fiscal 2017 | Fiscal 2016 | Fiscal 2015 | |||||||||
Net cash provided by operating activities | $ | 1,018.8 | $ | 1,813.5 | $ | 901.6 | |||||
Income tax benefit | (963.8 | ) | (90.3 | ) | (39.6 | ) | |||||
Deferred income taxes | 1,094.1 | 219.5 | 90.4 | ||||||||
Interest expense, net | 874.8 | 1,003.8 | 950.5 | ||||||||
Changes in operating assets and liabilities | 222.1 | (251.9 | ) | 466.5 | |||||||
Amortization and write-off of deferred financing costs | (56.1 | ) | (84.4 | ) | (69.3 | ) | |||||
Integration costs | 156.2 | 144.1 | 124.7 | ||||||||
Acquisition-related costs | 61.5 | 69.5 | 217.3 | ||||||||
Other adjustments | (9.7 | ) | (7.3 | ) | 39.0 | ||||||
Adjusted EBITDA | 2,397.9 | 2,816.5 | 2,681.1 | ||||||||
Less: capital expenditures | (1,547.0 | ) | (1,414.9 | ) | (960.0 | ) | |||||
Free Cash Flow | $ | 850.9 | $ | 1,401.6 | $ | 1,721.1 | |||||
LIQUIDITY AND FINANCIAL RESOURCES
The following table sets forth the major sources and uses of cash and our cash and cash equivalents at the end of each period (in millions):
February 24, 2018 | February 25, 2017 | ||||||
Cash and cash equivalents at end of period | $ | 670.3 | $ | 1,219.2 | |||
Cash flows from operating activities | 1,018.8 | 1,813.5 | |||||
Cash flows from investing activities | (469.6 | ) | (1,076.2 | ) | |||
Cash flows from financing activities | (1,098.1 | ) | (97.8 | ) | |||
Net Cash Provided By Operating Activities
Net cash provided by operating activities was $1,018.8 million during fiscal 2017 compared to net cash provided by operating activities of $1,813.5 million during fiscal 2016. The decrease in net cash flow from operating activities during fiscal 2017 compared to fiscal 2016 was primarily due to the decrease in Adjusted EBITDA, principally reflecting the results in fiscal 2017 compared to fiscal 2016, and changes in working capital primarily related to accounts payable and accrued liabilities and the $42.3 million payment on the Rodman litigation (as further described herein), partially offset by a decrease in interest and income taxes paid of $110.7 million and $113.4 million, respectively. Fiscal 2016 cash provided by operating activities also includes a correction in the classification of certain book overdrafts resulting in an increase of $139.2 million.
Net cash provided by operating activities was $1,813.5 million during fiscal 2016 compared to net cash provided by operating activities of $901.6 million during fiscal 2015. The $911.9 million increase in net cash flow from operating activities during fiscal 2016 compared to fiscal 2015 was primarily due to an increase in operating income of $238.8 million, a Safeway acquisition settlement payment of $133.7 million in fiscal 2015 and changes in working capital primarily related to inventory and accounts payable partially offset by an increase in income taxes paid of $207.5 million. Fiscal 2016 cash provided by operating activities also includes the correction in the classification of certain book overdrafts discussed above.
Net Cash Used In Investing Activities
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Net cash used in investing activities during fiscal 2017 was $469.6 million primarily due to payments for property and equipment, including lease buyouts, of $1,547.0 million, which includes approximately $200 million of Safeway integration-related capital expenditures, and payments for business acquisitions of $148.8 million partially offset by proceeds from the sale of assets of $939.2 million and proceeds from the sale of our equity method investment in Casa Ley of $344.2 million. Asset sale proceeds primarily relate to the sale and subsequent leaseback of 94 store properties during the third and fourth quarters of fiscal 2017.
Net cash used in investing activities during fiscal 2016 was $1,076.2 million primarily due to payments for property and equipment, including lease buyouts, of $1,414.9 million, which includes approximately $250 million of Safeway integration-related capital expenditures, and payments for business acquisitions of $220.6 million partially offset by proceeds from the sale of assets of $477.0 million. Asset sale proceeds include the sale and 36-month leaseback of two distribution centers in Southern California and the sale of a portfolio of surplus properties.
Net cash used in investing activities was $811.8 million in fiscal 2015 primarily due to the merger consideration paid in connection with the Safeway acquisition appraisal settlement, purchase consideration paid for the A&P Transaction and the Haggen Transaction and cash paid for capital expenditures, partially offset by proceeds from the sale of our FTC-mandated divestitures in connection with the Safeway acquisition and a decrease in restricted cash due to the elimination of certain collateral requirements.
In fiscal 2018, we expect to spend approximately $1,200 million in capital expenditures, including approximately $65 million of Safeway integration-related capital expenditures, as follows (in millions):
Projected Fiscal 2018 Capital Expenditures | |||
Integration capital | $ | 65.0 | |
New stores and remodels | 400.0 | ||
Maintenance | 180.0 | ||
Supply chain | 125.0 | ||
IT | 150.0 | ||
Real estate and expansion capital | 280.0 | ||
Total | $ | 1,200.0 | |
Net Cash Used In Financing Activities
Net cash used in financing activities was $1,098.1 million in fiscal 2017 due primarily to payments on long-term debt and capital lease obligations of $977.8 million, payment of the Casa Ley CVR and a member distribution of $250.0 million, partially offset by proceeds from the issuance of long-term debt. Net cash used in financing activities was $97.8 million in fiscal 2016 due primarily to payments on long-term debt and capital lease obligations, partially offset by proceeds from the issuance of long-term debt. Net cash used in financing activities was $635.9 million in fiscal 2015 due primarily to payments on our asset-based revolving credit facility and term loan borrowings from the proceeds of the FTC-mandated divestitures, partially offset by $300.0 million in borrowings to fund the A&P Transaction.
Debt Management
Total debt, including both the current and long-term portions of capital lease obligations and net of debt discounts and deferred financing costs, decreased $462.1 million to $11.9 billion as of the end of fiscal 2017 compared to $12.3 billion as of the end of fiscal 2016. The decrease in fiscal 2017 was primarily due to the repurchase of the NALP Notes and the repayment made in connection with the term loan repricing described below.
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Outstanding debt, including current maturities and net of debt discounts and deferred financing costs, principally consisted of (in millions):
February 24, 2018 | |||
Term loans | $ | 5,610.7 | |
Notes and debentures | 5,136.9 | ||
Capital leases | 864.6 | ||
Other notes payable and mortgages | 263.6 | ||
Total debt, including capital leases | $ | 11,875.8 | |
On June 16, 2017, we repaid $250.0 million of the existing term loans. In addition, on June 27, 2017, we entered into a repricing amendment to the term loan agreement which established three new term loan tranches. The new tranches currently consist of $2,998.6 million of a new Term B-4 Loan, $1,133.6 million of a new Term B-5 Loan and $1,588.0 million of a new Term B-6 Loan (collectively, the "New Term Loans"). The (i) new Term B-4 Loan will mature on August 25, 2021, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 2.75%, (ii) new Term B-5 Loan will mature on December 21, 2022, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.00%, and (iii) new Term B-6 Loan will mature on June 22, 2023, and has an interest rate of LIBOR, subject to a 0.75% floor, plus 3.00%. The New Term Loans, together with cash on hand, were used to repay the term loans then outstanding under the term loan agreement. See Note 8 - Long-term debt in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information related to our outstanding debt.
During fiscal 2017, certain subsidiaries sold 94 of our store properties for an aggregate purchase price, net of closing costs, of approximately $962 million. In connection with the sale and subsequent leaseback, we entered into lease agreements for each of the properties for initial terms of 20 years with varying multiple five-year renewal options. The aggregate initial annual rent payments for the 94 properties will be approximately $65 million, with scheduled rent increases occurring generally every one or five years over the initial 20-year term. We qualified for sale-leaseback and operating lease accounting on 80 of the store properties and recorded a deferred gain of $360.1 million, which is being amortized over the respective lease periods. The remaining 14 stores did not qualify for sale-leaseback accounting primarily due to continuing involvement with adjacent properties that have not been legally subdivided from the store properties. We expect these store properties to qualify for sale-leaseback accounting once the adjacent properties have been legally subdivided. The financing lease liability recorded for the 14 store properties was $133.4 million.
Liquidity and Factors Affecting Liquidity
We estimate our liquidity needs over the next fiscal year to be in the range of $3.75 billion to $4.25 billion, which includes anticipated requirements for working capital, capital expenditures, interest payments and scheduled principal payments of debt, operating leases, capital leases and our TSA agreements with SUPERVALU INC. ("SuperValu"). Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions. In addition, we may enter into refinancing transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility. See "Contractual Obligations" for a more detailed description of our commitments as of the end of fiscal 2017.
As of February 24, 2018, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.1 billion (net of letter of credit usage). As of February 25, 2017, we had no borrowings outstanding under our ABL Facility and total availability of approximately $3.0 billion (net of letter of credit usage).
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The ABL Facility contains no financial maintenance covenants unless and until (a) excess availability is less than (i) 10% of the lesser of the aggregate commitments and the then-current borrowing base at any time or (ii) $250 million at any time or (b) an event of default is continuing. If any such event occurs, we must maintain a fixed charge coverage ratio of 1.0:1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.
During fiscal 2017 and fiscal 2016, there were no financial maintenance covenants in effect under the ABL Facility because the conditions listed above (and similar conditions in our refinanced asset-based revolving credit facilities) had not been met.
CONTRACTUAL OBLIGATIONS
The table below presents our significant contractual obligations as of February 24, 2018 (in millions) (1):
Payments Due Per Year | ||||||||||||||||||||
Total | 2018 | 2019-2020 | 2021-2022 | Thereafter | ||||||||||||||||
Long-term debt (2) | $ | 11,340.5 | $ | 66.1 | $ | 535.5 | $ | 4,186.3 | $ | 6,552.6 | ||||||||||
Estimated interest on long-term debt (3) | 4,398.0 | 625.1 | 1,232.4 | 987.7 | 1,552.8 | |||||||||||||||
Operating leases (4) | 6,970.9 | 798.6 | 1,499.0 | 1,167.7 | 3,505.6 | |||||||||||||||
Capital leases (4) | 1,399.4 | 184.6 | 324.0 | 260.3 | 630.5 | |||||||||||||||
Other long-term liabilities (5) | 1,267.7 | 308.5 | 409.5 | 169.5 | 380.2 | |||||||||||||||
SuperValu TSA (6) | 58.3 | 58.0 | 0.3 | — | — | |||||||||||||||
Purchase obligations (7) | 367.2 | 140.9 | 87.9 | 66.7 | 71.7 | |||||||||||||||
Total contractual obligations | $ | 25,802.0 | $ | 2,181.8 | $ | 4,088.6 | $ | 6,838.2 | $ | 12,693.4 | ||||||||||
(1) The contractual obligations table excludes funding of pension and other postretirement benefit obligations, which totaled $21.9 million in fiscal 2017 and is expected to total $55.8 million in fiscal 2018. This table excludes contributions under various multi-employer pension plans, which totaled $431.2 million in fiscal 2017 and is expected to total approximately $450 million in fiscal 2018.
(2) Long-term debt amounts exclude any debt discounts and deferred financing costs. See Note 8 - Long-term debt in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information.
(3) Amounts include contractual interest payments using the interest rate as of February 24, 2018 applicable to our variable interest term debt instruments and stated fixed rates for all other debt instruments, excluding interest rate swaps. See Note 8 - Long-term debt in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information.
(4) Represents the minimum rents payable under operating and capital leases, excluding common area maintenance, insurance or tax payments, for which we are obligated.
(5) Consists of self-insurance liabilities, which have not been reduced by insurance-related receivables, and deferred cash consideration related to Plated. Excludes the $160.1 million of assumed withdrawal liabilities related to Safeway's previous closure of its Dominick's division, and excludes the unfunded pension and postretirement benefit obligation of $564.7 million. The amount of unrecognized tax benefits of $356.0 million as of February 24, 2018 has been excluded from the contractual obligations table because a reasonably reliable estimate of the timing of future tax settlements cannot be determined. Excludes contingent consideration because the timing and settlement is uncertain. Also excludes deferred tax liabilities and certain other deferred liabilities that will not be settled in cash and other lease-related liabilities already reflected as operating lease commitments.
(6) Represents minimum contractual commitments expected to be paid under the SuperValu TSA and the wind-down agreement, executed on April 16, 2015. See Note 13 - Related parties and other relationships in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information.
(7) Purchase obligations include various obligations that have specified purchase commitments. As of February 24, 2018, future purchase obligations primarily relate to fixed asset, marketing and information technology commitments, including fixed price contracts. In addition, not included in the contractual obligations table are supply contracts to purchase product for resale to consumers which are typically of a short-term nature with limited or no purchase commitments. We also enter into supply contracts which typically include either volume commitments or fixed expiration dates, termination provisions and other customary contractual considerations. The supply contracts that are cancelable have not been included above.
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Guarantees
We are party to a variety of contractual agreements pursuant to which it may be obligated to indemnify the other party for certain matters. These contracts primarily relate to our commercial contracts, operating leases and other real estate contracts, trademarks, intellectual property, financial agreements and various other agreements. Under these agreements, we may provide certain routine indemnifications relating to representations and warranties (for example, ownership of assets, environmental or tax indemnifications) or personal injury matters. The terms of these indemnifications range in duration and may not be explicitly defined. We believe that if it were to incur a loss in any of these matters, the loss would not have a material effect on our financial statements.
We are liable for certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, we could be responsible for the lease obligation. See Note 14 - Commitments and contingencies and off balance sheet arrangements in our Consolidated Financial Statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information. Because of the wide dispersion among third parties and the variety of remedies available, we believe that if an assignee became insolvent it would not have a material effect on our financial condition, results of operations or cash flows.
In the ordinary course of business, we enter into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.
Letters of Credit
We had letters of credit of $576.8 million outstanding as of February 24, 2018. The letters of credit are maintained primarily to support our performance, payment, deposit or surety obligations. We typically pay bank fees of 1.25% plus a fronting fee of 0.125% on the face amount of the letters of credit.
NEW ACCOUNTING POLICIES NOT YET ADOPTED
See Note 1 - Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for new accounting pronouncements which have not yet been adopted.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a fair and consistent manner. See Note 1 - Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for a discussion of our significant accounting policies.
Management believes the following critical accounting policies reflect its more subjective or complex judgments and estimates used in the preparation of our consolidated financial statements.
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Vendor Allowances
Consistent with standard practices in the retail industry, we receive allowances from many of the vendors whose products we buy for resale in our stores. These vendor allowances are provided to increase the sell-through of the related products. We receive vendor allowances for a variety of merchandising activities: placement of the vendors' products in our advertising; display of the vendors' products in prominent locations in our stores; supporting the introduction of new products into our retail stores and distribution systems; exclusivity rights in certain categories; and compensation for temporary price reductions offered to customers on products held for sale at retail stores. We also receive vendor allowances for buying activities such as volume commitment rebates, credits for purchasing products in advance of their need and cash discounts for the early payment of merchandise purchases. The majority of the vendor allowance contracts have terms of less than one year.
We recognize vendor allowances for merchandising activities as a reduction of cost of sales when the related products are sold. Vendor allowances that have been earned because of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The amount and timing of recognition of vendor allowances as well as the amount of vendor allowances to be recognized as a reduction of ending inventory require management judgment and estimates. We determine these amounts based on estimates of current year purchase volume using forecast and historical data and a review of average inventory turnover data. These judgments and estimates affect our reported gross profit, operating earnings (loss) and inventory amounts. Our historical estimates have been reliable in the past, and we believe the methodology will continue to be reliable in the future. Based on previous experience, we do not expect significant changes in the level of vendor support.
Self-Insurance Liabilities
We are primarily self-insured for workers' compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. We have established stop-loss amounts that limit our further exposure after a claim reaches the designated stop-loss threshold. In determining our self-insurance liabilities, we perform a continuing review of our overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.
Any actuarial projection of self-insured losses is subject to a high degree of variability. Litigation trends, legal interpretations, benefit level changes, claim settlement patterns and similar factors influenced historical development trends that were used to determine the current year expense and, therefore, contributed to the variability in the annual expense. However, these factors are not direct inputs into the actuarial projection, and thus their individual impact cannot be quantified.
Long-Lived Asset Impairment
We regularly review our individual stores' operating performance, together with current market conditions, for indications of impairment. When events or changes in circumstances indicate that the carrying value of an individual store's assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For property and equipment held for sale, we recognize impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairment losses were $100.9 million, $46.6 million and $40.2 million in fiscal 2017, 2016 and 2015, respectively.
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Business Combination Measurements
In accordance with applicable accounting standards, we estimate the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.
The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used, as appropriate, for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.
Goodwill
As of February 24, 2018, our goodwill totaled $1,183.3 million, of which $917.3 million related to our acquisition of Safeway. We review goodwill for impairment in the fourth quarter of each year, and also upon the occurrence of triggering events. We perform reviews of each of our reporting units that have goodwill balances. We review goodwill for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. We may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis. Beginning on February 26, 2017, ACI prospectively adopted accounting guidance that simplifies goodwill impairment testing. See Note 1 - Description of business, basis of presentation and summary of significant accounting policies in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for additional information.
In the second quarter of the fiscal year ended February 24, 2018, there was a sustained decline in the market multiples of publicly traded peer companies. In addition, during the second quarter of fiscal year ended February 24, 2018, we revised our short-term operating plan. As a result, we determined that an interim review of the recoverability of our goodwill was necessary. Consequently, we recorded a goodwill impairment loss of $142.3 million, substantially all within the Acme reporting unit relating to the November 2015 acquisition of stores from A&P, due to changes in the estimate of our long-term future financial performance to reflect lower expectations for growth in revenue and earnings than previously estimated. The goodwill impairment loss was based on a quantitative analysis using a combination of a discounted cash flow model (income approach) and a guideline public company comparative analysis (market approach).
Goodwill has been allocated to all of the Company's reporting units and none of its reporting units have a zero or negative carrying amount of net assets. As of February 24, 2018, there are two reporting units with no goodwill due to the impairment loss recorded during the second quarter of the fiscal year ended February 24, 2018. There are nine reporting units with an aggregate goodwill balance of $1,093.9 million of which the fair value of each reporting unit
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was substantially in excess of its carrying value to indicate a remote likelihood of a future impairment loss. There are two reporting units with an aggregate goodwill balance of $89.4 million where it is reasonably possible that future changes in judgments, assumptions and estimates we made in assessing the fair value of the reporting unit could cause us to recognize impairment charges on a portion of the goodwill balance within each reporting unit. For example, a future decline in market conditions, continued under performance of these two reporting units or other factors could negatively impact the estimated future cash flows and valuation assumptions used to determine the fair value of these two reporting units and lead to future impairment charges.
The annual evaluation of goodwill performed for our reporting units during the fourth quarters of fiscal 2017, 2016 and 2015 did not result in impairment.
Employee Benefit Plans
Substantially all of our employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to a dedicated defined benefit plan for Safeway, a plan for Shaw's and a plan for United employees. Certain employees participate in a long-term retention incentive bonus plan. We also provide certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by us.
We recognize a liability for the under-funded status of the defined benefit plans as a component of pension and post-retirement benefit obligations. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive income (loss). The determination of our obligation and related expense for our sponsored pensions and other post-retirement benefits is dependent, in part, on management's selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.
The objective of our discount rate assumptions was intended to reflect the rates at which the pension benefits could be effectively settled. In making this determination, we take into account the timing and amount of benefits that would be available under the plans. As of February 27, 2016, we changed the method used to estimate the service and interest rate components of net periodic benefit cost for our defined benefit pension plans and other post-retirement benefit plans. Historically, the service and interest rate components were estimated using a single weighted average discount rate derived from the yield curve used to measure the benefit obligation at the beginning of the period. We have elected to use a full yield curve approach in the estimation of service and interest cost components of net pension and other post-retirement benefit plan expense by applying the specific spot rates along the yield curve used in the determination of the projected benefit obligation to the relevant projected cash flows. We utilized weighted discount rates of 4.21% and 4.25% for our pension plan expenses for fiscal 2017 and fiscal 2016, respectively. To determine the expected rate of return on pension plan assets held by us for fiscal 2017, we considered current and forecasted plan asset allocations as well as historical and forecasted rates of return on various asset categories. Our weighted assumed pension plan investment rate of return was 6.40% and 6.96% for fiscal 2017 and fiscal 2016, respectively. See Note 12 - Employee benefit plans and collective bargaining agreements in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for more information on the asset allocations of pension plan assets.
Sensitivity to changes in the major assumptions used in the calculation of our pension and other post-retirement plan liabilities is illustrated below (dollars in millions).
Percentage Point Change | Projected Benefit Obligation Decrease / (Increase) | Expense Decrease / (Increase) | |||
Discount rate | +/- 1.00% | $258.9 / $(321.0) | $20.3 / $4.9 | ||
Expected return on assets | +/- 1.00% | - / - | $18.7 / $(18.7) | ||
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In fiscal 2017 and 2016, we contributed $21.9 million and $11.5 million, respectively, to our pension and post-retirement plans. We expect to contribute $55.8 million to our pension and post-retirement plans in fiscal 2018.
Income Taxes and Uncertain Tax Positions
We review the tax positions taken or expected to be taken on tax returns to determine whether and to what extent a benefit can be recognized in our consolidated financial statements. See Note 11 - Income taxes in our consolidated financial statements, included in Item 8 - "Financial Statements and Supplementary Data" of Part II of our Annual Report on Form 10-K for the fiscal year ended February 24, 2018 filed May 11, 2018, for the amount of unrecognized tax benefits and other disclosures related to uncertain tax positions. Various taxing authorities periodically examine our income tax returns. These examinations include questions regarding our tax filing positions, including the timing and amount of deductions and the allocation of income to various tax jurisdictions. In evaluating these various tax filing positions, including state and local taxes, we assess our income tax positions and record tax benefits for all years subject to examination based upon management's evaluation of the facts, circumstances and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50% likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in our financial statements. A number of years may elapse before an uncertain tax position is examined and fully resolved. As of February 24, 2018, we are no longer subject to federal income tax examinations for fiscal years prior to 2012 and in most states, we are no longer subject to state income tax examinations for fiscal years before 2007. Tax years 2007 through 2017 remain under examination. The assessment of our tax position relies on the judgment of management to estimate the exposures associated with our various filing positions.
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PART IV
Item 15 - Exhibits, Financial Statement Schedules
(a)(1) Financial Statements
No financial statements are filed with this Amendment.
(a)(2) Financial Statement Schedules
No financial statement schedules are filed with this Amendment.
(a)(3)
The exhibits listed in the exhibit index of the Original Filing and the exhibits listed in the exhibit index of this Amendment are filed with, or incorporated by reference, in this report. We are filing the following documents as exhibits to this Amendment.
Exhibit No. | Description | Filer | Date Filed | Form | Exhibit No. |
31.3 | * | * | * | * | |
31.4 | * | * | * | * | |
*Filed herewith
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Albertsons Companies, Inc. has duly caused this Amendment No. 1 to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of New York, State of New York on June 4, 2018.
Albertsons Companies, Inc. | ||
By: | /s/ Robert G. Miller | |
Name: | Robert G. Miller | |
Title: | Chairman of the Board of Directors and Chief Executive Officer (Principal Executive Officer) | |
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