UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended May 22, 2010

 

OR

 

o      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 1-303

 

 

(Exact name of registrant as specified in its charter)

 

 

 

1014 Vine Street, Cincinnati, OH 45202

(Address of principal executive offices)

(Zip Code)

 

(513) 762-4000

(Registrant’s telephone number, including area code)

 

Unchanged

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes  x  No  o

 

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes  x  No  o

 

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. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes  o  No  x.

 

There were 642,071,330 shares of Common Stock ($1 par value) outstanding as of June 25, 2010.

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.           Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

		First Quarter Ended
		May 22,			May 23,
		2010			2009
Sales		$	24,764		$	22,789
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		19,168			17,266
Operating, general and administrative		4,195			4,026
Rent		200			200
Depreciation and amortization		478			453
Operating profit		723			844
Interest expense		132			163
Earnings before income tax expense		591			681
Income tax expense		216			250
Net earnings including noncontrolling interests		375			431
Net earnings (loss) attributable to noncontrolling interests		1			(4		)
Net earnings attributable to The Kroger Co.		$	374		$	435
Net earnings attributable to The Kroger Co. per basic common share		$	0.58		$	0.67
Average number of common shares used in basic calculation		641			648
Net earnings attributable to The Kroger Co. per diluted common share		$	0.58		$	0.66
Average number of common shares used in diluted calculation		645			651
Dividends declared per common share		$	.095		$	.09

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

2

 

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(in millions, except per share amounts)

(unaudited)

 

		May 22,			January 30,
		2010			2010
ASSETS
Current assets
Cash and temporary cash investments		$	602		$	424
Deposits in-transit		675			654
Receivables		828			909
FIFO inventory		5,557			5,705
LIFO reserve		(785		)	(770		)
Prefunded employee benefits		3			300
Prepaid and other current assets		302			261
Total current assets		7,182			7,483
Property, plant and equipment, net		13,976			13,929
Goodwill		1,158			1,158
Other assets		565			556
Total Assets		$	22,881		$	23,126
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations		$	528		$	579
Trade accounts payable		3,963			3,890
Accrued salaries and wages		832			786
Deferred income taxes		354			354
Other current liabilities		2,124			2,118
Total current liabilities		7,801			7,727
Long-term debt including obligations under capital leases and financing obligations
Face-value of long-term debt including obligations under capital leases and financing obligations		6,936			7,420
Adjustment to reflect fair-value interest rate hedges		61			57
Long-term debt including obligations under capital leases and financing obligations		6,997			7,477
Deferred income taxes		560			568
Pension and postretirement benefit obligations		1,075			1,082
Other long-term liabilities		1,342			1,346
Total Liabilities		17,775			18,200
Commitments and contingencies (see Note 8)
SHAREOWNERS’ EQUITY
Preferred stock, $100 par per share, 5 shares authorized and unissued		¾			¾
Common stock, $1 par per share, 1,000 shares authorized; 959 shares issued in 2010 and 958 shares issued in 2009		959			958
Additional paid-in capital		3,364			3,361
Accumulated other comprehensive loss		(577		)	(593		)
Accumulated earnings		7,676			7,364
Common stock in treasury, at cost, 319 shares in 2010 and 316 shares in 2009		(6,314		)	(6,238		)
Total Shareowners’ Equity - The Kroger Co.		5,108			4,852
Noncontrolling interests		(2		)	74
Total Equity		5,106			4,926
Total Liabilities and Equity		$	22,881		$	23,126

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

3

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in millions and unaudited)

 

		Quarter Ended
		May 22, 2010			May 23, 2009
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests		$	375		$	431
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		478			453
LIFO charge		15			23
Stock-based employee compensation		26			25
Expense for Company-sponsored pension plans		22			12
Deferred income taxes		(8		)	54
Other		10			6
Changes in operating assets and liabilities net of effects from acquisitions of businesses:
Store deposits in-transit		(20		)	(26		)
Receivables		12			18
Inventories		148			25
Prepaid expenses		255			171
Trade accounts payable		156			245
Accrued expenses		(55		)	(97		)
Income taxes receivable and payable		165			176
Contribution to Company-sponsored pension plans		(27		)	(200		)
Other		1			(28		)
Net cash provided by operating activities		1,553			1,288
Cash Flows from Investing Activities:
Payments for capital expenditures		(542		)	(635		)
Proceeds from sale of assets		8			6
Payments for acquisitions		(7		)	¾
Other		(3		)	(5		)
Net cash used by investing activities		(544		)	(634		)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		3			3
Dividends paid		(61		)	(59		)
Payments on long-term debt		(544		)	(25		)
Payments on credit facility		¾			(129		)
Excess tax benefits on stock-based awards		1			¾
Proceeds from issuance of capital stock		12			2
Treasury stock purchases		(80		)	(20		)
Decrease in book overdrafts		(83		)	(53		)
Investment in the remaining interest of a variable interest entity		(86		)	¾
Other		7			2
Net cash used by financing activities		(831		)	(279		)
Net increase in cash and temporary cash investments		178			375
Cash and temporary cash investments:
Beginning of year		424			263
End of quarter		$	602		$	638
Reconciliation of capital expenditures:
Payments for property and equipment		$	(542	)	$	(635	)
Changes in construction-in-progress payables		(1		)	(18		)
Total capital expenditures		$	(543	)	$	(653	)
Disclosure of cash flow information:
Cash paid during the quarter for interest		$	149		$	163
Cash paid during the quarter for income taxes		$	54		$	37

 

The accompanying notes are an integral part of the Consolidated Financial Statements.

 

4

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(in millions, except per share amounts)

(unaudited)

 

															Accumulated
							Additional								Other
		Common Stock					Paid-In			Treasury Stock					Comprehensive			Accumulated			Noncontrolling
		Shares		Amount			Capital			Shares		Amount			Gain (Loss)			Earnings			Interest			Total
Balances at January 31, 2009		955		$	955		$	3,266		306		$	(6,039	)	$	(495	)	$	7,538		$	95		$	5,320
Issuance of common stock:
Stock options exercised		—		—			2			—		—			—			—			—			2
Restricted stock issued		—		—			(5		)	—		3			—			—			—			(2		)
Treasury stock activity:
Treasury stock purchases, at cost		—		—			—			1		(17		)	—			—			—			(17		)
Stock options exchanged		—		—			—			—		(3		)	—			—			—			(3		)
Tax benefits from exercise of stock options		—		—			2			—		—			—			—			—			2
Share-based employee compensation		—		—			25			—		—			—			—			—			25
Other comprehensive gain net of income tax of $-		—		—			—			—		—			1			—			—			1
Other		—		—			1			—		—			—			—			(7		)	(6		)
Cash dividends declared ($0.09 per common share)		—		—			—			—		—			—			(59		)	—			(59		)
Net earnings including noncontrolling interests		—		—			—			—		—			—			435			(4		)	431
Balances at May 23, 2009		955		$	955		$	3,291		307		$	(6,056	)	$	(494	)	$	7,914		$	84		$	5,694
Balances at January 30, 2010		958		$	958		$	3,361		316		$	(6,238	)	$	(593	)	$	7,364		$	74		$	4,926
Issuance of common stock:
Stock options exercised		1		1			10			—		2			—			—			—			13
Restricted stock issued		—		—			(3		)	—		2			—			—			—			(1		)
Treasury stock activity:
Treasury stock purchases, at cost		—		—			—			2		(59		)	—			—			—			(59		)
Stock options exchanged		—		—			—			1		(21		)	—			—			—			(21		)
Tax detriments from exercise of stock options		—		—			(8		)	—		—			—			—			—			(8		)
Share-based employee compensation		—		—			26			—		—			—			—			—			26
Other comprehensive gain net of income tax of $6		—		—			—			—		—			16			—			—			16
Other		—		—			—			—		—			—			(1		)	(10		)	(11		)
Investment in the remaining interest of a variable interest entity		—		—			(22		)	—		—			—			—			(67		)	(89		)
Cash dividends declared ($0.095 per common share)		—		—			—			—		—			—			(61		)	—			(61		)
Net earnings including noncontrolling interests		—		—			—			—		—			—			374			1			375
Balances at May 22, 2010		959		$	959		$	3,364		319		$	(6,314	)	$	(577	)	$	7,676		$	(2	)	$	5,106

 

The accompanying notes are an integral part of the consolidated financial statements.

 

5

 

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

 

All amounts in the notes to Consolidated Financial Statements are in millions except per share amounts.

 

Certain prior-year amounts have been reclassified to conform to current-year presentation.

 

1.              ACCOUNTING POLICIES

 

Basis of Presentation and Principles of Consolidation

 

The accompanying financial statements include the consolidated accounts of The Kroger Co., its wholly-owned subsidiaries, and the Variable Interest Entities (“VIE”) in which the Company is the primary beneficiary.  The January 30, 2010 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (“GAAP”). Significant intercompany transactions and balances have been eliminated. References to the “Company” in these Consolidated Financial Statements mean the consolidated company.

 

In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the 2009 Annual Report on Form 10-K of The Kroger Co. for the fiscal year ended January 30, 2010.

 

The unaudited information in the Consolidated Financial Statements for the first quarter ended May 22, 2010, and May 23, 2009, includes the results of operations of the Company for the 16-week periods then ended.

 

The Company reflects certain promotional allowances in its LIFO charge. During the first quarter of the 2010 LIFO analysis, the Company revised the LIFO reserve to reflect certain prior year promotional allowances in prior year LIFO indices. By not including these promotional allowances in all LIFO indices, the Company overstated its LIFO reserve for years 2007 and prior. The Company believes this correction is not material to any individual year or any quarterly period within the years presented. As a result, the Company has increased beginning accumulated earnings and reduced its LIFO reserve on the Consolidated Financial Statements by $33 ($20 after-tax).

 

2.              DEBT OBLIGATIONS

 

Long-term debt consists of:

 

		May 22,			January 30,
		2010			2010
3.90% to 8.00% Senior Notes and Debentures due through 2038		$	6,808		$	7,308
5.00% to 9.50% Mortgages due in varying amounts through 2034		81			105
Other		156			163
Total debt, excluding capital leases and financing obligations		7,045			7,576
Less current portion		(497		)	(549		)
Total long-term debt, excluding capital leases and financing obligations		$	6,548		$	7,027

 

With the proceeds received from the Company’s third quarter of 2009 issuance of $500 of senior notes bearing an interest rate of 3.90% due in 2015, the Company repaid $500 of senior notes bearing an interest rate of 8.05% that matured in the first quarter of 2010.

 

6

 

3.              COMPREHENSIVE INCOME

 

Comprehensive income is as follows:

 

		First Quarter Ended
		May 22, 2010			May 23, 2009
Net earnings including noncontrolling interests		$	375		$	431
Unrealized gain on available for sale securities, net of income tax		7			—
Amortization of amounts included in net periodic pension expense, net of income tax(1)		8			—
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax		1			1
Comprehensive income		391			432
Comprehensive income (loss) attributable to noncontrolling interests		1			(4		)
Comprehensive income attributable to The Kroger Co.		$	390		$	436

 

(1)

Amount is net of tax of $6 for the first quarter of 2010.

 

4.              BENEFIT PLANS

 

The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first quarter of 2010 and 2009.

 

		First Quarter
		Pension Benefits						Other Benefits
		2010			2009			2010			2009
Components of net periodic benefit cost:
Service cost		$	14		$	10		$	4		$	3
Interest cost		52			54			6			5
Expected return on plan assets		(60		)	(54		)	—			—
Amortization of:
Prior service cost		—			1			(2		)	(2		)
Actuarial loss (gain)		16			1			(1		)	(1		)
Net periodic benefit cost		$	22		$	12		$	7		$	5

 

The Company contributed $27 and $200 to Company-sponsored pension plans in the first quarter of 2010 and 2009, respectively.

 

The Company contributed $37 and $35 to employee 401(k) retirement savings accounts in the first quarter of 2010 and 2009, respectively.

 

The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded.

 

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5.              EARNINGS PER COMMON SHARE

 

Net earnings attributable to The Kroger Co. per basic common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding.  Net earnings attributable to The Kroger Co. per diluted common share equals net earnings attributable to The Kroger Co. less income allocated to participating securities divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options.  The following table provides a reconciliation of net earnings attributable to The Kroger Co. and shares used in calculating net earnings attributable to The Kroger Co. per basic common share to those used in calculating net earnings attributable to The Kroger Co. per diluted common share:

 

		First Quarter Ended								First Quarter Ended
		May 22, 2010								May 23, 2009
		Earnings (Numerator)			Shares (Denominator)		Per Share Amount			Earnings (Numerator)			Shares (Denominator)		Per Share Amount
Net earnings attributable to The Kroger Co. per basic common share		$	371		641		$	0.58		$	432		648		$	0.67
Dilutive effect of stock options					4								3
Net earnings attributable to The Kroger Co. per diluted common share		$	371		645		$	0.58		$	432		651		$	0.66

 

The Company had undistributed and distributed earnings to participating securities totaling $3 in both the first quarters of 2010 and 2009.

 

The Company had options outstanding for approximately 19 and 21 shares during the first quarter of 2010 and 2009, respectively, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share.

 

6.              RECENTLY ADOPTED ACCOUNTING STANDARDS

 

In January 2010, the Financial Accounting Standards Board (“FASB”) amended its standards related to fair value measurements and disclosures, which are effective for interim and annual fiscal periods beginning after December 15, 2009, except for disclosures about certain Level 3 activity that will not become effective until interim and annual periods beginning after December 15, 2010.  The new standard requires the Company to disclose transfers in and out of Level 1 and Level 2 fair value measurements and describe the reasons for the transfers as well as activity in Level 3 fair value measurements.  The new standard also requires a more detailed level of disaggregation of the assets and liabilities being measured as well as increased disclosures regarding inputs and valuation techniques of the fair value measurements.  See Note 9 to the Consolidated Financial Statements for the Company’s fair value measurements and disclosures.

 

In June 2009, the FASB amended its existing standards related to the consolidation of VIE’s, which was effective for interim and annual fiscal periods beginning after November 15, 2009.  The new standard requires an entity to analyze whether its variable interests give it a controlling financial interest of a VIE and outlines what defines a primary beneficiary.  The new standard amends GAAP by: (a) changing certain rules for determining whether an entity is a VIE; (b) replacing the quantitative approach previously required for determining the primary beneficiary with a more qualitative approach; and (c) requiring entities to continuously analyze whether they are the primary beneficiary of a VIE, among other amendments.  The new standard also requires enhanced disclosures regarding an entity’s involvement in a VIE.  The adoption of these new standards did not have a material effect on the Company’s Consolidated Financial Statements.

 

8

 

7.    GUARANTOR SUBSIDIARIES

 

The Company’s outstanding public debt (the “Guaranteed Notes”) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and some of its subsidiaries (the “Guarantor Subsidiaries”).  At May 22, 2010, a total of approximately $6,808 of Guaranteed Notes was outstanding.  The Guarantor Subsidiaries and non-guarantor subsidiaries are wholly-owned subsidiaries of The Kroger Co.  Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable.  The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.

 

The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow, and equity.  Therefore, the non-guarantor subsidiaries’ information is not separately presented in the tables below.

 

There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above, except, however, the obligations of each guarantor under its guarantee are limited to the maximum amount as will result in obligations of such guarantor under its guarantee not constituting a fraudulent conveyance or fraudulent transfer for purposes of Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g., adequate capital to pay dividends under corporate laws).

 

9

 

The following tables present summarized financial information as of May 22, 2010 and January 30, 2010 and for the first quarter ended May 22, 2010 and May 23, 2009:

 

Condensed Consolidating

Balance Sheets

As of May 22, 2010

 

		The Kroger Co.			Guarantor Subsidiaries			Eliminations			Consolidated
Current assets
Cash and temporary cash investments		$	25		$	577		$	—		$	602
Deposits in-transit		71			604			—			675
Receivables		2,172			655			(1,999		)	828
Net inventories		505			4,267			—			4,772
Prepaid and other current assets		98			207			—			305
Total current assets		2,871			6,310			(1,999		)	7,182
Property, plant and equipment, net		1,835			12,141			—			13,976
Goodwill		5			1,153			—			1,158
Other assets		870			1,801			(2,106		)	565
Investment in and advances to subsidiaries		9,864			—			(9,864		)	—
Total assets		$	15,445		$	21,405		$	(13,969	)	$	22,881
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations		$	528		$	—		$	—		$	528
Trade accounts payable		364			3,599			—			3,963
Other current liabilities		875			6,540			(4,105		)	3,310
Total current liabilities		1,767			10,139			(4,105		)	7,801
Long-term debt including obligations under capital leases and financing obligations
Face value of long-term debt including obligations under capital leases and financing obligations		6,936			—			—			6,936
Adjustment to reflect fair value interest rate hedges		61			—			—			61
Long-term debt including obligations under capital leases and financing obligations		6,997			—			—			6,997
Other long-term liabilities		1,575			1,402			—			2,977
Total liabilities		10,339			11,541			(4,105		)	17,775
Shareowners’ Equity		5,106			9,864			(9,864		)	5,106
Total liabilities and equity		$	15,445		$	21,405		$	(13,969	)	$	22,881

 

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