Edgar Filing: KROGER CO

kr_Current_Folio_10Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended November 4, 2017

☐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)


Ohio		31-0345740
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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 ☒ 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 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 whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer (do not check if a smaller reporting company)	☐	Smaller reporting company	☐
		Emerging growth company	☐

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. ☐

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

There were 881,361,794 shares of Common Stock ($1 par value) outstanding as of December 4, 2017.

PART I – FINANCIAL INFORMATION

Item 1.Financial Statements.

THE KROGER CO.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)


	Third Quarter Ended				Three Quarters Ended
	November 4,		November 5,		November 4,		November 5,
(In millions, except per share amounts)	2017		2016		2017		2016
Sales	$	27,749	$	26,557	$	91,631	$	87,726
Merchandise costs, including advertising, warehousing, and transportation, excluding items shown separately below		21,532		20,653		71,422		68,019
Operating, general and administrative		4,708		4,443		15,606		14,695
Rent		196		199		691		666
Depreciation and amortization		573		549		1,871		1,768

Operating profit		740		713		2,041		2,578
Interest expense		136		124		453		396

Earnings before income tax expense		604		589		1,588		2,182
Income tax expense		215		206		552		727

Net earnings including noncontrolling interests		389		383		1,036		1,455
Net loss attributable to noncontrolling interests		(8)		(8)		(17)		(14)

Net earnings attributable to The Kroger Co.	$	397	$	391	$	1,053	$	1,469

Net earnings attributable to The Kroger Co. per basic common share	$	0.44	$	0.41	$	1.16	$	1.54

Average number of common shares used in basic calculation		887		940		901		946

Net earnings attributable to The Kroger Co. per diluted common share	$	0.44	$	0.41	$	1.15	$	1.52

Average number of common shares used in diluted calculation		893		953		910		962

Dividends declared per common share	$	0.125	$	0.120	$	0.370	$	0.345

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

THE KROGER CO.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited)


	Third Quarter Ended				Three Quarters Ended
	November 4,		November 5,		November 4,		November 5,
(In millions)	2017		2016		2017		2016
Net earnings including noncontrolling interests	$	389	$	383	$	1,036	$	1,455

Other comprehensive income (loss)
Realized gains and losses on available for sale securities, net of income tax(1)		—		—		—		(20)
Amortization of amounts included in net periodic pension expense(2)		10		8		33		23
Unrealized gains and losses on cash flow hedging activities, net of income tax(3)		9		46		(26)		(52)
Amortization of unrealized gains and losses on cash flow hedging activities, net of income tax(4)		1		—		2		1

Total other comprehensive income (loss)		20		54		9		(48)

Comprehensive income		409		437		1,045		1,407
Comprehensive loss attributable to noncontrolling interests		(8)		(8)		(17)		(14)
Comprehensive income attributable to The Kroger Co.	$	417	$	445	$	1,062	$	1,421

(1)

Amount is net of tax of $(16) for the first three quarters of 2016.

(2)

Amount is net of tax of $5 for the third quarter of 2017 and $4 for the third quarter of 2016. Amount is net of tax of $19 for the first three quarters of 2017 and $14 for the first three quarters of 2016.

(3)

Amount is net of tax of $5 for the third quarter of 2017 and $27 for the third quarter of 2016. Amount is net of tax of $(15) for the first three quarters of 2017 and $(31) for the first three quarters of 2016.

(4)

Amount is net of tax of $1 for the third quarter of 2017 and 2016. Amount is net of tax of $2 for the first three quarters of 2017 and $1 for the first three quarters of 2016.

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

THE KROGER CO.

CONSOLIDATED BALANCE SHEETS

(unaudited)


	November 4,		January 28,
(In millions, except par amounts)	2017		2017
ASSETS
Current assets
Cash and temporary cash investments	$	352	$	322
Store deposits in-transit		1,163		910
Receivables		1,452		1,649
FIFO inventory		8,222		7,852
LIFO reserve		(1,305)		(1,291)
Assets held for sale		604		—
Prepaid and other current assets		437		898
Total current assets		10,925		10,340

Property, plant and equipment, net		20,966		21,016
Intangibles, net		1,113		1,153
Goodwill		3,035		3,031
Other assets		989		965

Total Assets	$	37,028	$	36,505

LIABILITIES
Current liabilities
Current portion of long-term debt including obligations under capital leases and financing obligations	$	1,729	$	2,252
Trade accounts payable		6,307		5,818
Accrued salaries and wages		1,074		1,234
Deferred income taxes		—		251
Liabilities held for sale		259		—
Other current liabilities		3,521		3,305
Total current liabilities		12,890		12,860

Long-term debt including obligations under capital leases and financing obligations		13,118		11,825
Deferred income taxes		2,452		1,927
Pension and postretirement benefit obligations		522		1,524
Other long-term liabilities		1,835		1,659

Total Liabilities		30,817		29,795

Commitments and contingencies (see Note 7)

SHAREHOLDERS’ EQUITY

Preferred shares, $100 per share, 5 shares authorized and unissued		—		—
Common shares, $1 par per share, 2,000 shares authorized; 1,918 shares issued in 2017 and 2016		1,918		1,918
Additional paid-in capital		3,124		3,070
Accumulated other comprehensive loss		(706)		(715)
Accumulated earnings		16,263		15,543
Common shares in treasury, at cost, 1,037 shares in 2017 and 994 shares in 2016		(14,364)		(13,118)

Total Shareholders’ Equity - The Kroger Co.		6,235		6,698
Noncontrolling interests		(24)		12

Total Equity		6,211		6,710

Total Liabilities and Equity	$	37,028	$	36,505

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

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)


	Three Quarters Ended
	November 4,		November 5,
(In millions)	2017		2016
Cash Flows from Operating Activities:
Net earnings including noncontrolling interests	$	1,036	$	1,455
Adjustments to reconcile net earnings including noncontrolling interests to net cash provided by operating activities:
Depreciation and amortization		1,871		1,768
LIFO charge		46		19
Stock-based employee compensation		118		110
Expense for Company-sponsored pension plans		68		62
Deferred income taxes		267		5
Other		5		(27)
Changes in operating assets and liabilities net of effects from mergers of businesses:
Store deposits in-transit		(268)		(120)
Receivables		45		48
Inventories		(466)		(798)
Prepaid and other current assets		426		219
Trade accounts payable		620		509
Accrued expenses		26		(144)
Income taxes receivable and payable		143		267
Contribution to Company-sponsored pension plans		(1,000)		—
Other		117		83

Net cash provided by operating activities		3,054		3,456

Cash Flows from Investing Activities:
Payments for property and equipment, including payments for lease buyouts		(2,137)		(3,025)
Proceeds from sale of assets		120		114
Payments for acquisitions, net of cash acquired		(16)		(401)
Other		(2)		39

Net cash used by investing activities		(2,035)		(3,273)

Cash Flows from Financing Activities:
Proceeds from issuance of long-term debt		1,503		1,785
Payments on long-term debt		(769)		(1,332)
Net borrowings (payments) on commercial paper		(45)		1,200
Dividends paid		(333)		(316)
Proceeds from issuance of capital stock		31		51
Treasury stock purchases		(1,292)		(1,401)
Other		(84)		(73)

Net cash used by financing activities		(989)		(86)

Net increase in cash and temporary cash investments		30		97

Cash and temporary cash investments:
Beginning of year		322		277
End of year	$	352	$	374

Reconciliation of capital investments:
Payments for property and equipment, including payments for lease buyouts	$	(2,137)	$	(3,025)
Payments for lease buyouts		9		5
Changes in construction-in-progress payables		(149)		14
Total capital investments, excluding lease buyouts	$	(2,277)	$	(3,006)

Disclosure of cash flow information:
Cash paid during the year for interest	$	469	$	410
Cash paid during the year for income taxes	$	168	$	450

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

THE KROGER CO.

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS’ EQUITY

(unaudited)


									Accumulated
				Additional					Other
	Common Stock			Paid-In		Treasury Stock			Comprehensive		Accumulated		Noncontrolling
(In millions, except per share amounts)	Shares	Amount		Capital		Shares	Amount		Loss		Earnings		Interest		Total
Balances at January 30, 2016	1,918	$	1,918	$	2,980	951	$	(11,409)	$	(680)	$	14,011	$	(22)	$	6,798
Issuance of common stock:
Stock options exercised	—		—		—	(4)		51		—		—		—		51
Restricted stock issued	—		—		(111)	(2)		55		—		—		—		(56)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	37		(1,319)		—		—		—		(1,319)
Stock options exchanged	—		—		—	2		(82)		—		—		—		(82)
Share-based employee compensation	—		—		110	—		—		—		—		—		110
Other comprehensive loss net of income tax of $(32)	—		—		—	—		—		(48)		—		—		(48)
Other	—		—		60	—		(63)		—		—		54		51
Cash dividends declared ($0.345 per common share)	—		—		—	—		—		—		(330)		—		(330)
Net earnings including noncontrolling interests	—		—		—	—		—		—		1,469		(14)		1,455

Balances at November 5, 2016	1,918	$	1,918	$	3,039	984	$	(12,767)	$	(728)	$	15,150	$	18	$	6,630

Balances at January 28, 2017	1,918	$	1,918	$	3,070	994	$	(13,118)	$	(715)	$	15,543	$	12	$	6,710
Issuance of common stock:
Stock options exercised	—		—		—	(2)		31		—		—		—		31
Restricted stock issued	—		—		(115)	(2)		82		—		—		—		(33)
Treasury stock activity:
Treasury stock purchases, at cost	—		—		—	45		(1,247)		—		—		—		(1,247)
Stock options exchanged	—		—		—	2		(45)		—		—		—		(45)
Share-based employee compensation	—		—		118	—		—		—		—		—		118
Other comprehensive income net of income tax of $6	—		—		—	—		—		9		—		—		9
Other	—		—		51	—		(67)		—		—		(19)		(35)
Cash dividends declared ($0.370 per common share)	—		—		—	—		—		—		(333)		—		(333)
Net earnings including noncontrolling interests	—		—		—	—		—		—		1,053		(17)		1,036

Balances at November 4, 2017	1,918	$	1,918	$	3,124	1,037	$	(14,364)	$	(706)	$	16,263	$	(24)	$	6,211

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

NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS

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

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 in which the Company is the primary beneficiary. The January 28, 2017 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 adjustments, all of which are of a normal, recurring nature that are necessary for a fair statement 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 Company’s Annual Report on Form 10-K for the fiscal year ended January 28, 2017.

The unaudited information in the Consolidated Financial Statements for the third quarter and three quarters ended November 4, 2017 and November 5, 2016, includes the results of operations of the Company for the 12 and 40-week periods then ended.

Fair Value Measurements

Fair value measurements are classified and disclosed in one of the following three categories:

Level 1 – Quoted prices are available in active markets for identical assets or liabilities;

Level 2 – Pricing inputs are other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable;

Level 3 – Unobservable pricing inputs in which little or no market activity exists, therefore requiring an entity to develop its own assumptions about the assumptions that market participants would use in pricing an asset or liability.

The Company records cash and temporary cash investments, store deposits in-transit, receivables, prepaid and other current assets, trade accounts payable, accrued salaries and wages and other current liabilities at approximated fair value. Certain other investments and derivatives are recorded as Level 1, 2 or 3 instruments. Refer to Note 2 for the disclosure of debt instrument fair values.

2.DEBT OBLIGATIONS

Long-term debt consists of:


	November 4,		January 28,
	2017		2017
1.50% to 8.00% Senior Notes due through 2048	$	12,198	$	11,311
5.63% to 12.75% Mortgages due in varying amounts through 2027		32		38
0.91% to 1.36% Commercial paper borrowings due through November 2017		1,380		1,425
Other		454		541

Total debt, excluding capital leases and financing obligations		14,064		13,315
Less current portion		(1,677)		(2,197)

Total long-term debt, excluding capital leases and financing obligations	$	12,387	$	11,118

In the second quarter of 2017, the Company issued $400 of senior notes due in fiscal year 2022 bearing an interest rate of 2.80%, $600 of senior notes due in fiscal year 2027 bearing an interest rate of 3.70% and $500 of senior notes due in fiscal year 2048 bearing an interest rate of 4.65%. Additionally, in the third quarter of 2017, the Company repaid, upon maturity, $600 of senior notes bearing an interest rate of 6.40%, with proceeds from the second quarter senior notes issuances. In connection with the senior note issuances, the Company also terminated forward-starting interest rate swap agreements with an aggregate notional amount of $600. These forward-starting interest rate swap agreements were hedging the variability in future benchmark interest payments attributable to changing interest rates on the forecasted issuance of fixed-rate debt issued during the second quarter of 2017. Since these forward-starting interest rate swap agreements were classified as cash flow hedges, the unamortized loss of $20, $12 net of tax, has been deferred in Accumulated Other Comprehensive Loss, the Company will continue to amortize to earnings as the interest payments are made.

In the third quarter of 2017, the Company entered into an amended and restated $2,750 unsecured revolving credit facility (the “Amended and Restated Credit Agreement”), with a termination date of August 29, 2022, unless extended as permitted under the Amended and Restated Credit Agreement. This Amended and Restated Credit Agreement amended the Company’s $2,750 credit facility that would otherwise have terminated on June 30, 2019. The notable changes from the previous agreement include: (1) the Company has the ability to increase the size of the Amended and Restated Credit Agreement by up to an additional $1,000, subject to certain conditions compared to $750 in the prior agreement; (2) the Company’s Public Debt Rating, as opposed to the Company’s Leverage Ratio, is now used as one of the factors in calculating the Company’s Interest Rate, Commitment Fee, and Letter of Credit Fees; (3) reduced annual Commitment and certain Letter of Credit Fees at the Company’s current Public Debt Rating. Public Debt Rating means, as of any date, the rating that has been most recently announced by either S&P or Moody’s, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. The financial covenants in the Amended and Restated Credit Agreement did not change compared to the prior credit agreement.

The fair value of the Company’s long-term debt, including current maturities, was estimated based on the quoted market prices for the same or similar issues adjusted for illiquidity based on available market evidence. If quoted market prices were not available, the fair value was based upon the net present value of the future cash flow using the forward interest rate yield curve in effect at November 4, 2017 and January 28, 2017. At November 4, 2017, the fair value of total debt was $14,504 compared to a carrying value of $14,064. At January 28, 2017, the fair value of total debt was $13,905 compared to a carrying value of $13,315.

3.BENEFIT PLANS

The following table provides the components of net periodic benefit cost for the Company-sponsored defined benefit pension plans and other post-retirement benefit plans for the third quarters of 2017 and 2016.

Third Quarter Ended

Pension Benefits

Other Benefits

November 4,

November 5,

November 4,

November 5,

2017

2016

2017

2016

Components of net periodic benefit cost: