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 August 14, 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 637,733,614 shares of Common Stock ($1 par value) outstanding as of September 17, 2010.

 

 

 

PART I — FINANCIAL INFORMATION

 

Item 1.         Financial Statements.

 

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in millions, except per share amounts)

(unaudited)

 

		Second Quarter Ended						Two Quarters Ended
		August 14, 2010			August 15, 2009			August 14, 2010			August 15, 2009
Sales		$	18,796		$	17,728		$	43,560		$	40,517
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		14,577			13,646			33,745			30,912
Operating, general and administrative		3,208			3,085			7,403			7,111
Rent		149			150			349			350
Depreciation and amortization		368			348			846			801
Operating profit		494			499			1,217			1,343
Interest expense		102			115			234			278
Earnings before income tax expense		392			384			983			1,065
Income tax expense		124			133			340			383
Net earnings including noncontrolling interests		268			251			643			682
Net earnings (loss) attributable to noncontrolling interests		6			(4		)	7			(8		)
Net earnings attributable to The Kroger Co.		$	262		$	255		$	636		$	690
Net earnings attributable to The Kroger Co. per basic common share		$	0.41		$	0.39		$	0.99		$	1.06
Average number of common shares used in basic calculation		637			648			640			648
Net earnings attributable to The Kroger Co. per diluted common share		$	0.41		$	0.39		$	0.98		$	1.05
Average number of common shares used in diluted calculation		640			651			643			651
Dividends declared per common share		$	.095		$	.09		$	.19		$	.18

 

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)

 

		August 14,			January 30,
		2010			2010
ASSETS
Current assets
Cash and temporary cash investments		$	1,037		$	424
Deposits in-transit		748			654
Receivables		805			909
FIFO inventory		5,447			5,705
LIFO reserve		(797		)	(770		)
Prefunded employee benefits		¾			300
Prepaid and other current assets		306			261
Total current assets		7,546			7,483
Property, plant and equipment, net		14,003			13,929
Goodwill		1,158			1,158
Other assets		569			556
Total Assets		$	23,276		$	23,126
LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations		$	539		$	579
Trade accounts payable		3,851			3,890
Accrued salaries and wages		836			786
Deferred income taxes		354			354
Other current liabilities		2,345			2,118
Total current liabilities		7,925			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		7,208			7,420
Adjustment to reflect fair-value interest rate hedges		70			57
Long-term debt including obligations under capital leases and financing obligations		7,278			7,477
Deferred income taxes		555			568
Pension and postretirement benefit obligations		1,016			1,082
Other long-term liabilities		1,335			1,346
Total Liabilities		18,109			18,200
Commitments and contingencies (see Note 9)
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		3,333			3,361
Accumulated other comprehensive loss		(573		)	(593		)
Accumulated earnings		7,877			7,364
Common stock in treasury, at cost, 325 shares in 2010 and 316 shares in 2009		(6,433		)	(6,238		)
Total Shareowners’ Equity — The Kroger Co.		5,163			4,852
Noncontrolling interests		4			74
Total Equity		5,167			4,926
Total Liabilities and Equity		$	23,276		$	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)

 

		Two Quarters Ended
		August 14, 2010			August 15, 2009
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests		$	643		$	682
Adjustments to reconcile net earnings to net cash provided by operating activities:
Depreciation and amortization		846			801
LIFO charge		27			38
Stock-based employee compensation		44			45
Expense for Company-sponsored pension plans		34			19
Deferred income taxes		(16		)	90
Other		20			27
Changes in operating assets and liabilities net of effects from acquisitions of businesses:
Store deposits in-transit		(94		)	3
Receivables		33			39
Inventories		258			186
Prepaid expenses		255			209
Trade accounts payable		53			151
Accrued expenses		133			(78		)
Income taxes receivable and payable		180			186
Contribution to Company-sponsored pension plans		(99		)	(200		)
Other		2			(32		)
Net cash provided by operating activities		2,319			2,166
Cash Flows from Investing Activities:
Payments for capital expenditures		(952		)	(1,210		)
Proceeds from sale of assets		17			6
Payments for acquisitions		(7		)	(13		)
Other		3			(5		)
Net cash used by investing activities		(939		)	(1,222		)
Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		301			3
Dividends paid		(123		)	(117		)
Payments on long-term debt		(560		)	(413		)
Payments on credit facility		¾			(129		)
Excess tax benefits on stock-based awards		2			1
Proceeds from issuance of capital stock		16			8
Treasury stock purchases		(228		)	(80		)
Decrease in book overdrafts		(92		)	(116		)
Investment in the remaining interest of a variable interest entity		(86		)	¾
Other		3			5
Net cash used by financing activities		(767		)	(838		)
Net increase in cash and temporary cash investments		613			106
Cash and temporary cash investments:
Beginning of year		424			263
End of quarter		$	1,037		$	369
Reconciliation of capital expenditures:
Payments for property and equipment		$	(952	)	$	(1,210	)
Changes in construction-in-progress payables		¾			(45		)
Total capital expenditures		$	(952	)	$	(1,255	)
Disclosure of cash flow information:
Cash paid during the year for interest		$	249		$	303
Cash paid during the year for income taxes		$	181		$	115

 

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		—		—			7			—		—			—			—			—			7
Restricted stock issued		—		—			(55		)	(1	)	39			—			—			—			(16		)
Treasury stock activity:
Treasury stock purchases, at cost		—		—			—			3		(68		)	—			—			—			(68		)
Stock options exchanged		—		—			—			1		(12		)	—			—			—			(12		)
Tax benefits from exercise of stock options		—		—			17			—		—			—			—			—			17
Share-based employee compensation		—		—			45			—		—			—			—			—			45
Other comprehensive loss net of income tax of ($1)		—		—			—			—		—			(1		)	—			—			(1		)
Other		—		—			18			—		(16		)	—			—			(11		)	(9		)
Cash dividends declared ($0.18 per common share)		—		—			—			—		—			—			(119		)	—			(119		)
Net earnings including noncontrolling interests		—		—			—			—		—			—			690			(8		)	682
Balances at August 15, 2009		955		$	955		$	3,298		309		$	(6,096	)	$	(496	)	$	8,109		$	76		$	5,846
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			—		6			—			—			—			17
Restricted stock issued		—		—			(52		)	(1	)	35			—			—			—			(17		)
Treasury stock activity:
Treasury stock purchases, at cost		—		—			—			9		(203		)	—			—			—			(203		)
Stock options exchanged		—		—			—			1		(25		)	—			—			—			(25		)
Tax detriments from exercise of stock options		—		—			(16		)	—		—			—			—			—			(16		)
Share-based employee compensation		—		—			44			—		—			—			—			—			44
Other comprehensive gain net of income tax of $13		—		—			—			—		—			20			—			—			20
Other		—		—			8			—		(8		)	—			—			(10		)	(10		)
Investment in the remaining interest of a variable interest entity		—		—			(22		)	—		—			—			—			(67		)	(89		)
Cash dividends declared ($0.19 per common share)		—		—			—			—		—			—			(123		)	—			(123		)
Net earnings including noncontrolling interests		—		—			—			—		—			—			636			7			643
Balances at August 14, 2010		959		$	959		$	3,333		325		$	(6,433	)	$	(573	)	$	7,877		$	4		$	5,167

 

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 financial statements in 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 second quarter and two quarters ended August 14, 2010 and August 15, 2009, includes the results of operations of the Company for the 12 and 28-week periods then ended.

 

The Company reflects certain promotional allowances in its LIFO charge.  During the first quarter 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 in the Consolidated Financial Statements by $33 ($20 after-tax).

 

2.            STOCK OPTION PLANS

 

The Company recognized total stock-based compensation of $18 and $20 in the second quarter ended August 14, 2010 and August 15, 2009, respectively.  The Company recorded $44 and $45 of stock-based compensation for the first two quarters ended August 14, 2010 and August 15, 2009, respectively.  These costs were recognized as operating, general and administrative costs in the Company’s Consolidated Statements of Operations.

 

The Company grants options for common stock (“stock options”) to employees, as well as to its non-employee directors, under various plans at an option price equal to the fair market value of the stock at the date of grant. In addition to stock options, the Company awards restricted stock to employees and its non-employee directors under various plans.  Equity awards may be made once each quarter on a predetermined date.  It has been the Company’s practice to make a general annual grant to employees, which occurred in the second quarter of 2010.  Special grants may be made in the other three quarters.  It has been the Company’s practice to make a grant to non-employee directors in December of each year.

 

Stock options granted in the first two quarters of 2010 expire 10 years from the date of grant and vest from one year to five years from the date of grant. Restricted stock awards granted in the first two quarters of 2010 have restrictions that lapse in one year to five years from the date of the awards. All grants and awards become immediately exercisable, in the case of options, and restrictions lapse, in the case of restricted stock, upon certain changes of control of the Company.

 

6

 

Changes in equity awards outstanding under the plans are summarized below.

 

Stock Options

 

		Shares subject to option		Weighted-average exercise price
Outstanding, January 30, 2010		34.7		$	21.30
Granted		3.5		$	20.19
Exercised		(1.1	)	$	16.41
Canceled or Expired		(0.4	)	$	21.06
Outstanding, August 14, 2010		36.7		$	21.35

 

Restricted Stock

 

		Restricted shares outstanding		Weighted-average grant-date fair value
Outstanding, January 30, 2010		4.4		$	24.25
Granted		2.3		$	20.20
Lapsed		(2.1	)	$	23.62
Canceled		(0.2	)	$	23.66
Outstanding, August 14, 2010		4.4		$	22.46

 

The weighted-average fair value of stock options granted during the first two quarters ended August 14, 2010 and August 15, 2009, was $5.11 and $6.30, respectively. The fair value of each stock option grant was estimated on the date of grant using the Black-Scholes option-pricing model, based on the assumptions shown in the table below. The Black-Scholes model utilizes extensive accounting judgment and financial estimates, including the term employees are expected to retain their stock options before exercising them, the volatility of the Company’s stock price over that expected term, the dividend yield over the term, and the number of awards expected to be forfeited before they vest. Using alternative assumptions in the calculation of fair value would produce fair values for stock option grants that could be different than those used to record stock-based compensation expense in the Consolidated Statements of Operations.

 

The following table reflects the weighted average assumptions used for grants awarded to option holders:

 

		2010		2009
Risk-free interest rate		2.57%		3.17%
Expected dividend yield		2.00%		1.80%
Expected volatility		26.87%		28.05%
Expected term		6.9 Years		6.8 Years

 

3.            DEBT OBLIGATIONS

 

Long-term debt consists of:

 

		August 14,			January 30,
		2010			2010
3.90% to 8.05% Senior Notes due through 2040		$	7,106		$	7,308
5.00% to 9.88% Mortgages due in varying amounts through 2034		78			105
Other		149			163
Total debt, excluding capital leases and financing obligations		7,333			7,576
Less current portion		(507		)	(549		)
Total long-term debt, excluding capital leases and financing obligations		$	6,826		$	7,027

 

7

 

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.

 

In the second quarter of 2010, the Company issued $300 of senior notes bearing an interest rate of 5.40% due in 2040.

 

4.            COMPREHENSIVE INCOME

 

Comprehensive income is as follows:

 

		Second Quarter Ended						Year-To-Date
		August 14, 2010			August 15, 2009			August 14, 2010			August 15, 2009
Net earnings including noncontrolling interests		$	268		$	251		$	643		$	682
Unrealized gain (loss) on available for sale securities, net of income tax(1)		(2		)	—			5			—
Amortization of amounts included in net periodic pension expense, net of income tax(2)		6			(2		)	14			(2		)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(3)		—			—			1			1
Comprehensive income		272			249			663			681
Comprehensive income (loss) attributable to noncontrolling interests		6			(4		)	7			(8		)
Comprehensive income attributable to The Kroger Co.		$	266		$	253		$	656		$	689

 

(1)	Amount is net of tax of $2 for the second quarter of 2010. Amount is net of tax of $2 for the first two quarters of 2010.
(2)	Amount is net of tax of $4 for the second quarter of 2010 and $(1) for the second quarter of 2009. Amount is net of tax of $10 for the first two quarters of 2010 and $(1) for the first two quarters of 2009.
(3)	Amount is net of tax of $1 for the second quarter of 2010. Amount is net of tax of $1 for the first two quarters of 2010.

 

5.              BENEFIT PLANS

 

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

 

		Second Quarter
		Pension Benefits						Other Benefits
		2010			2009			2010			2009
Components of net periodic benefit cost:
Service cost		$	10		$	8		$	3		$	2
Interest cost		38			40			4			5
Expected return on plan assets		(45		)	(40		)	—			—
Amortization of:
Prior service cost		—			—			(1		)	(1		)
Actuarial loss		12			1			(1		)	(1		)
Net periodic benefit cost		$	15		$	9		$	5		$	5

 

8

 

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

 

		Year-To-Date
		Pension Benefits						Other Benefits
		2010			2009			2010			2009
Components of net periodic benefit cost:
Service cost		$	22		$	16		$	7		$	5
Interest cost		89			94			10			10
Expected return on plan assets		(106		)	(94		)	—			—
Amortization of:
Prior service cost		—			1			(3		)	(3		)
Actuarial loss		29			2			(2		)	(2		)
Net periodic benefit cost		$	34		$	19		$	12		$	10

 

The Company contributed $99 and $200 to Company-sponsored pension plans in the first two quarters of 2010 and 2009, respectively.  The Company now expects to contribute approximately $140 to these plans in 2010.

 

The Company contributed $65 and $62 to employee 401(k) retirement savings accounts in the first two quarters 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.

 

6.            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:

 

		Second Quarter Ended								Second Quarter Ended
		August 14, 2010								August 15, 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		$	260		637		$	0.41		$	253		648		$	0.39
Dilutive effect of stock options					3								3
Net earnings attributable to The Kroger Co. per diluted common share		$	260		640		$	0.41		$	253		651		$	0.39

 

		Year –To-Date								Year-To-Date
		August 14, 2010								August 15, 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		$	631		640		$	0.99		$	685		648		$	1.06
Dilutive effect of stock options					3								3
Net earnings attributable to The Kroger Co. per diluted common share		$	631		643		$	0.98		$	685		651		$	1.05

 

9