10-Q 1 abs10q32001.txt FORM 10-Q SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------------- FORM 10-Q Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 For 39 Weeks Ended: November 1, 2001 Commission File Number: 1-6187 ALBERTSON'S, INC. ----------------------------------------------------- (Exact name of Registrant as specified in its charter) Delaware 82-0184434 ------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 250 Parkcenter Blvd., P.O. Box 20, Boise, Idaho 83726 ----------------------------------------------- ---------- (Address) (Zip Code) Registrant's telephone number, including area code: (208) 395-6200 -------------- 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 ----- ----- Number of Registrant's $1.00 par value common shares outstanding at December 5, 2001: 406,307,964 1 FORM 10-Q PART I. FINANCIAL INFORMATION ALBERTSON'S, INC. CONSOLIDATED EARNINGS (in millions except per share data) (unaudited)
13 WEEKS ENDED 39 WEEKS ENDED ---------------------------------- ---------------------------------- November 1, November 2, November 1, November 2, 2001 2000 2001 2000 ---------------- ----------------- ---------------- ----------------- Sales $ 9,363 $ 8,991 $ 28,271 $ 27,218 Cost of sales 6,708 6,438 20,243 19,507 ---------------- ----------------- ---------------- ----------------- Gross profit 2,655 2,553 8,028 7,711 Selling, general and administrative expenses 2,235 2,168 6,813 6,528 Restructuring charges and other 1 511 Merger-related charges (credits) 1 (15) 2 ---------------- ----------------- ---------------- ----------------- Operating profit 419 384 719 1,181 Other (expense) income: Interest, net (113) (99) (332) (281) Other, net (7) (1) (19) 3 ---------------- ----------------- ---------------- ----------------- Earnings before income taxes 299 284 368 903 Income tax expense 123 112 157 358 ---------------- ----------------- ---------------- ----------------- NET EARNINGS $ 176 $ 172 $ 211 $ 545 ================ ================= ================ ================= EARNINGS PER SHARE: Basic $ 0.43 $ 0.41 $ 0.52 $ 1.29 Diluted 0.43 0.41 0.52 1.29 WEIGHTED AVERAGE NUMBER OF COMMON SHARES OUTSTANDING: Basic 406 417 406 421 Diluted 409 417 408 421
See Notes to Consolidated Financial Statements. 2 FORM 10-Q ALBERTSON'S, INC. CONSOLIDATED BALANCE SHEETS (in millions)
November 1, 2001 February 1, (unaudited) 2001 ---------------------- ------------------- ASSETS CURRENT ASSETS: Cash and cash equivalents $ 50 $ 57 Accounts and notes receivable 625 547 Inventories 3,511 3,364 Prepaid expenses 84 155 Property held for sale 242 113 Deferred income taxes 199 70 Refundable income taxes 39 36 ---------------------- ------------------- TOTAL CURRENT ASSETS 4,750 4,342 LAND, BUILDINGS AND EQUIPMENT (net of accumulated depreciation and amortization of $5,662 and $5,372, respectively) 9,340 9,580 GOODWILL AND INTANGIBLES, net 1,619 1,705 OTHER ASSETS 410 451 ---------------------- ------------------- $ 16,119 $ 16,078 ====================== =================== LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 2,370 $ 2,163 Salaries and related liabilities 537 561 Taxes other than income taxes 198 141 Self-insurance 238 218 Unearned income 98 112 Merger related reserves 4 13 Restructuring reserves 47 Current portion of capitalized lease obligations 18 20 Current maturities of long-term debt 135 62 Other current liabilities 165 105 ---------------------- ------------------- TOTAL CURRENT LIABILITIES 3,810 3,395 LONG-TERM DEBT 5,347 5,715 CAPITALIZED LEASE OBLIGATIONS 258 227 SELF-INSURANCE 247 216 DEFERRED INCOME TAXES 80 116 OTHER LIABILITIES AND DEFERRED CREDITS 666 715 COMMITMENTS AND CONTINGENCIES STOCKHOLDERS' EQUITY: Preferred stock - $1.00 par value; authorized - 10 shares; issued - none Common stock - $1.00 par value; authorized - 1,200 shares; issued - 406 shares and 405 shares, respectively 406 405 Capital in excess of par value 84 48 Retained earnings 5,221 5,241 ---------------------- ------------------- 5,711 5,694 ---------------------- ------------------- $ 16,119 $ 16,078 ====================== ===================
See Notes to Consolidated Financial Statements. 3 FORM 10-Q ALBERTSON'S, INC. CONSOLIDATED CASH FLOWS (in millions) (unaudited)
39 WEEKS ENDED ----------------------------------------------- November 1, November 2, 2001 2000 -------------------- -------------------- CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings $ 211 $ 545 Adjustments to reconcile net earnings to net cash provided by operating activities: Depreciation and amortization 737 695 Goodwill amortization 43 42 Noncash restructuring charges and other 450 Noncash merger-related (credits) charges (13) 6 Net loss on asset sales 15 1 Net deferred income taxes and other (149) 29 Decrease (increase) in cash surrender value of Company-owned life insurance 21 (3) Changes in operating assets and liabilities: Receivables and prepaid expenses 16 111 Inventories (183) (46) Accounts payable 206 310 Other current liabilities 131 (117) Self-insurance 51 (1) Unearned income (25) 14 Other long-term liabilities (37) (21) -------------------- -------------------- Net cash provided by operating activities 1,474 1,565 CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures, net of proceeds from disposals (1,052) (1,167) Decrease in other assets 99 19 -------------------- -------------------- Net cash used in investing activities (953) (1,148) CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from long-term borrowings 613 527 Payments on long-term borrowings (70) (371) Net commercial paper and bank line activity (859) (187) Proceeds from stock options exercised 19 5 Cash dividends paid (231) (237) Stock purchased and retired (350) -------------------- -------------------- Net cash used in financing activities (528) (613) -------------------- -------------------- NET DECREASE IN CASH AND CASH EQUIVALENTS (7) (196) CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 57 245 -------------------- -------------------- CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 50 $ 49 ==================== ====================
See Notes to Consolidated Financial Statements. 4 FORM 10-Q ALBERTSON'S, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (dollars in millions, except per share data) (unaudited) Description of Business Albertson's, Inc. (the Company) is incorporated under the laws of the State of Delaware and is the successor to a business founded by J.A. Albertson in 1939. Based on sales, the Company is one of the world's largest food and drug retailers. As of November 1, 2001, the Company operated 2,528 stores in 36 Western, Midwestern, Eastern and Southern states. Retail operations are supported by 19 major Company distribution operations, strategically located in the Company's operating markets. The Company continues to expand its fuel centers in existing and new stores. As of November 1, 2001, the Company operated 197 fuel centers. Basis of Presentation The accompanying unaudited consolidated financial statements include the results of operations, account balances and cash flows of the Company and its subsidiaries. All material intercompany balances have been eliminated. In the opinion of management, the accompanying unaudited consolidated financial statements include all adjustments necessary to present fairly, in all material respects, the results of operations of the Company for the periods presented. The statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. It is suggested that these consolidated financial statements be read in conjunction with the consolidated financial statements and accompanying notes included in the Company's 2000 Annual Report. The results of operations for the 39 weeks ended November 1, 2001, are not necessarily indicative of results for a full year. The balance sheet at February 1, 2001, has been taken from the audited consolidated financial statements at that date. The preparation of the Company's consolidated financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions. These estimates and assumptions affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Inventory Net income reflects application of the LIFO method of valuing certain inventories, based upon estimated annual inflation ("LIFO Indices"). Albertson's recorded pretax LIFO expense of $23 and $20 for the 39 weeks ended November 1, 2001, and November 2, 2000, respectively. Actual LIFO Indices are calculated during the fourth quarter of the year based upon a statistical sampling of inventories. 5 FORM 10-Q Earnings Per Share ("EPS") Basic EPS is based on the weighted average outstanding common shares. Diluted EPS is based on the weighted average outstanding shares reduced by the dilutive effect of stock options(3.2 million and 40 thousand potential shares outstanding for the 13 weeks and 2.5 million and 109 thousand potential shares outstanding for the 39 weeks ended November 1, 2001, and November 2, 2000, respectively). Outstanding options excluded from the calculation because they were anti-dilutive amounted to 7.9 million and 16.6 million shares for the 13 weeks and 8.9 million and 16.3 million shares for the 39 weeks ended November 1, 2001, and November 2, 2000, respectively. Comprehensive Income Comprehensive income is net income adjusted for certain other items that are recorded directly to stockholders' equity. Comprehensive income consisted only of reported net earnings for the periods ended November 1, 2001, and November 2, 2000, as there were no significant items of other comprehensive income. Reclassifications Certain reclassifications have been made in prior year's financial statements to conform to classifications used in the current year. Reporting Periods The Company's quarterly reporting periods are generally 13 weeks and periodically consist of 14 weeks because the fiscal year ends on the Thursday nearest to January 31 each year. Goodwill Under the Company's current accounting policies, goodwill is allocated to certain markets based on prior acquisitions. As part of normal, on-going review of performance of markets, the Company reviews long-lived assets (including goodwill) for impairment whenever events and circumstances indicate that the carrying amount of the assets may not be recoverable. For example, significant assets removed from a market would trigger a review for possible impairment based on the future expected cash flows of the remaining assets. If the sum of the undiscounted expected future cash flows is less than the carrying amount of the assets, the Company recognizes an impairment loss. Impairments and costs incurred to close stores or markets, including lease termination costs, are recorded at the time executive management approves and commits to closing or relocating such assets. 6 FORM 10-Q Restructuring On July 17, 2001, the Company's Board of Directors approved a restructuring plan designed to improve future financial results and to drive future competitiveness. The plan includes certain exit costs and employee termination benefits, as described below, that will be incurred within approximately one year of the board approval date. Action Status Reduction in administrative and corporate overhead In Progress Closing of 165 underperforming retail stores In Progress Consolidation and elimination of four division Completed offices Process streamlining In Progress
As a result of the restructuring plan, the Company recorded pre-tax charges of $514 ($309 after tax or $0.76 per diluted share) for the 39 weeks ended November 1, 2001. In the current quarter, the Company recorded $4 of pre-tax charges related to restructuring, of which $3 was included with selling, general, and administrative expenses. The following table presents the pre-tax charges, incurred by category of expenditure, and related restructuring reserve accruals included in the Company's Consolidated Balance Sheets:
--------------- ------------------ ------------------- ---------- ---------- Employee Lease Severance Asset Termination Costs Impairments Costs Other Total --------------- ------------------ ------------------- ---------- ---------- Additions $ 44 $ 425 $ 37 $ 8 $514 Utilization 30 425 4 8 467 --------------- ------------------ ------------------- ---------- ---------- Balance at November 1, 2001 $ 14 $ $ 33 $ $ 47 =============== ================== =================== ========== ==========
Employee severance costs consist of severance pay, health care continuation costs, and outplacement service costs for employees who participated in the Company's Voluntary Separation Plan and for employees who were terminated or notified of termination under the Company's Involuntary Severance Plan. In accordance with the restructuring plan, 1,341 managerial and administrative positions above store level have been identified for termination. As of November 1, 2001, 951 positions have been terminated. As part of the Company's restructuring plan, all stores were reviewed utilizing a methodology based on return on invested capital. Based on this review, the Company identified and committed to close and dispose 165 underperforming stores in 25 states. All stores identified for closure were evaluated for asset impairment by comparing the fair value, less selling cost, to the recorded book value. Fair value used in the impairment calculation was based on third party offers or market value for comparable properties. For stores under operating lease agreements, the present values of any remaining liability under the lease, net of sublease recoveries, or lease termination costs were expensed. As of November 1, 2001, 43 stores have been closed. Assets to be disposed of include land, buildings, equipment, and leasehold improvements for stores and division offices that were included in the restructuring discussed above. These assets are recorded at their estimated fair value, less selling costs, and reported as property held for sale in the Company's Consolidated Balance Sheets. 7 FORM 10-Q Other costs include various expenses related to the Company's decision to exit certain insignificant businesses and the consolidation of the division offices. Closed Store Reserves When executive management approves and commits to closing or relocating a store, the remaining investment in land, building, leasehold, and equipment is reviewed for impairment and the difference between book value and fair market value, less selling costs, is expensed. For properties under operating lease agreements, the present value of any remaining liability under the lease, net of expected sublease recovery, is expensed. The following table shows the pre-tax expense, and related reserves, for closed stores and other surplus property:
--------------------- ---------------------- -------------------- Lease Asset Liabilities Impairments Total --------------------- ---------------------- -------------------- Balance at February 1, 2001 $22 $ $ 22 Additions 4 10 14 Adjustments 3 (10) (7) Adjustments - restructuring 22 26 48 Utilization (7) (26) (33) --------------------- ---------------------- -------------------- Balance at November 1, 2001 $44 $ $ 44 ===================== ====================== ====================
The restructuring plan included actions to accelerate the disposal of surplus property which included terminating leases through negotiated buyouts and selling owned properties through auctions. The $48 pre-tax restructuring adjustments recorded during the second quarter are the additional charges expected to be incurred as a result of these actions. This charge is included in selling, general and administrative expenses in the Company's Consolidated Earnings. $36 of the reserve balance as of November 1, 2001, is included with accounts payable and the remaining $8 is included with other liabilities and deferred credits in the Company's Consolidated Balance Sheets. The related assets are recorded at their estimated fair value, less selling costs, and reported as property held for sale in the Company's Consolidated Balance Sheets. Merger Related and Exit Costs As a result of the Company's merger with American Stores Company, results of operations for the 39 weeks ended November 1, 2001, include a net of $7 of merger-related credits ($4 after tax). The following table presents the pre-tax (credits) charges, incurred by category of expenditure, and merger-related accruals included in the Company's Consolidated Balance Sheets:
------------------ ---------------- ------------------- ----------- Asset Integration Impairments Severance And Other Total ------------------ ---------------- ------------------- ----------- Balance at February 1, 2001 $ $ 11 $ 2 $ 13 Additions 2 6 8 Adjustments (15) (15) Utilization 15 (9) (8) (2) ------------------ ---------------- ------------------- ----------- Balance at November 1, 2001 $ $ 4 $ $ 4 ================== ================ =================== ===========
8 FORM 10-Q Asset impairments include the loss on disposal of duplicate and abandoned facilities, including administrative offices, intangibles and information technology equipment which were abandoned by the Company. Operations for the 39 weeks ended November 1, 2001, included $15 of credits associated with the reversal of previous impairment charges related to the sale of the American Stores' Tower in Salt Lake City, Utah. The Company closed on the sale of this property on May 15, 2001, thus completing the asset dispositions resulting from the merger. Severance consists of retention costs for certain individuals and termination benefit liabilities for individuals who have already been terminated. Integration and other costs consist primarily of incremental transition and integration costs associated with integrating the operations of Albertson's and American Stores Company and are being expensed as incurred. These include such costs as labor associated with system conversions and training and relocation costs. Indebtedness The Company has two revolving credit agreements which provide for borrowings up to $1,650 and a committed bank line for $100. These agreements contain certain covenants, the most restrictive of which requires the Company to maintain consolidated tangible net worth, as defined, of at least $2,100. As of November 1, 2001, $25 was outstanding under the committed bank line agreement and no amounts were outstanding under the revolving credit agreements. On May 1, 2001, the Company issued $600 of term notes and debentures under a shelf registration statement filed with the Securities and Exchange Commission in February 2001 (the "2001 Registration Statement"). The notes are comprised of $200 of principal bearing interest at 7.25% due May 2013 and the debentures are comprised of $400 of principal bearing interest at 8.00% due May 2031. Proceeds were used to repay amounts outstanding under the Company's commercial paper program and other general corporate purposes. Additional securities up to $2,400 of principal remain available for issuance under the Company's 2001 Registration Statement. Supplemental Cash Flow Information Selected cash payments and noncash activities were as follows:
39 Weeks Ended 39 Weeks Ended November 1, 2001 November 2, 2000 ------------------------ ------------------------ Cash payments for: Income taxes $ 324 $ 414 Interest, net of amounts capitalized 249 254 Noncash transactions: Capitalized leases incurred 55 50 Capitalized leases terminated 13 2 Tax effects related to stock options (3) (11) Decrease (increase) in cash surrender value of Company-owned life insurance 21 (3)
9 FORM 10-Q Capital Stock During fiscal 2000, the Company purchased and retired 18.7 million shares of its common stock at a total cost of $451, or an average price of $24.15 per share, under a Board authorization which expired on December 6, 2001. No purchases were made during the 39 weeks ended November 1, 2001. The Board of Directors adopted a program on December 3, 2001, authorizing, at management's discretion, the Company to purchase and retire up to $500 of the Company's common stock beginning December 7, 2001 through December 31, 2002. Certain Accounting Matters On February 2, 2001, the Company adopted Statement of Financial Accounting Standards No. 133 ("SFAS 133"), "Accounting for Derivative Instruments and Hedging Activities," as amended. This new standard, as amended, establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other contracts, and for hedging activities. It requires that an entity recognize all derivatives as either assets or liabilities in the statement of financial position and measure those instruments at fair value. The adoption of this statement resulted in no transition adjustment or significant impact on financial results. The Company utilizes derivative contracts, such as treasury rate locks, for hedging interest rate risk associated with issuances of debt. During the 39 weeks ended November 1, 2001, there were no transactions. There were no outstanding derivative contracts as of November 1, 2001. In June 2001, the Financial Accounting Standards Board issued two new pronouncements: Statement of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141, which is effective for acquisitions initiated after June 30, 2001, prohibits the use of the pooling-of-interest method for business combinations and establishes the accounting and financial reporting requirements for business combinations accounted for by the purchase method. SFAS No. 142 requires that an intangible asset that is acquired shall be initially recognized and measured based on its fair value. The statement also provides that goodwill should not be amortized, but shall be tested for impairment annually, or more frequently if circumstances indicate potential impairment, through a comparison of fair value to its carrying amount. Existing goodwill will continue to be amortized through the remainder of fiscal 2001 at which time amortization will cease and the Company will perform a transitional goodwill impairment test. SFAS No. 142 is effective for fiscal periods beginning after December 15, 2001. The Company is currently evaluating the impact of the new accounting standards on existing goodwill and other intangible assets. While the ultimate impact of the new accounting standards has yet to be determined, goodwill amortization expense for the 39 weeks ended November 1, 2001, was $43, or $0.10 per diluted share. In July 2001, the Financial Accounting Standards Board issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 will become effective for Albertson's on January 31, 2003. The Company is currently analyzing the effect that this standard will have on its financial statements. In August 2001, the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets." SFAS No. 144 will become effective for Albertson's on February 1, 2002. The Company is currently analyzing the effect that this standard will have on its financial statements. 10 FORM 10-Q Legal Proceedings On April 5, 2000, a class action complaint was filed against Albertson's as well as American Stores Company, American Drug Stores, Inc., Sav-on Drug Stores, Inc. and Lucky Stores, Inc., wholly-owned subsidiaries of the Company, in the Superior Court for the County of Los Angeles, California (Mario Gardner, et al. v. American Stores Company, Albertson's, Inc., American Drug Stores, Inc., Sav-on Drug Stores, Inc. and Lucky Stores, Inc.) seeking recovery of overtime due to plaintiffs' allegation that they were improperly classified as exempt under California law. A class action with respect to Sav-on Drug assistant managers was certified by the court. A case with very similar claims, also involving the assistant drug managers and operating managers, was filed against the Company's subsidiary Sav-on Drug Stores, Inc. in Los Angeles Superior Court (Rocher, Dahlein et. al. v. Sav-on Drug Stores, Inc.) and was also certified as a class action. The Company has strong defenses against these lawsuits, and is vigorously defending them. Although these lawsuits are subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect the ultimate resolution of these actions to have a material adverse effect on the Company's financial condition. On August 23, 2000, a class action complaint was filed against Jewel Food Stores, Inc., a wholly-owned subsidiary of the Company, in the Circuit Court of Cook County, Illinois (Maureen Baker, et al., v. Jewel Food Stores, Inc. and Dominick's Finer Foods, Inc., Case No. 00L 009664) alleging milk price fixing. The Company has strong defenses against this lawsuit, and is vigorously defending it. Although this lawsuit is subject to the uncertainties inherent in the litigation process, based on the information presently available to the Company, management does not expect the ultimate resolution of this action to have a material adverse effect on the Company's financial condition. An agreement has been reached, and court approval granted, to settle eight purported multi-state cases combined in the United States District Court in Boise, Idaho, which raise various issues including "off the clock" work allegations. Under the settlement agreement, current and former employees who meet eligibility criteria are in the process of presenting their claims to a settlement administrator. While the Company cannot specify the exact amount of their claims, the $37 pre-tax ($22 after-tax) charge recorded by the Company in 1999 is the Company's current estimate of the total monetary liability, including attorney fees, for all eight cases. During the first quarter of 2001 this liability was reduced by an $18 cash payment for legal expenses. The Company is also involved in routine litigation incidental to operations. The Company utilizes various methods of alternative dispute resolution, including settlement discussions, to manage the costs and uncertainties inherent in the litigation process. In the opinion of management, the ultimate resolution of these legal proceedings will not have a material adverse effect on the Company's financial condition. 11 FORM 10-Q Subsequent Event On December 5, 2001, the Company entered into a definitive agreement with Maxi Drug, Inc., a Delaware Corp., d/b/a Brooks Pharmacy. The agreement provides that Brooks will acquire from Albertson's eighty Osco Drug stores in Maine, Massachusetts, and New Hampshire, for approximately $240. Fiscal 2000 sales for these stores represent an insignificant percentage of the Company's consolidated sales. The sale of these stores is expected to close in January 2002, subject to government review and approvals. 12 FORM 10-Q MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (dollars in millions, except per share data) Results of Operations - Third Quarter The following table sets forth certain income statement components expressed as a percent to sales and the year-to-year percentage changes in the amounts of such components:
Percent to Sales Percentage 13 weeks ended Increase 11-1-01 11-2-00 (Decrease) ---------------- ---------------- ------------------ Sales 100.00% 100.00% 4.1% Gross profit 28.35 28.40 4.0 Selling, general and administrative expenses 23.87 24.11 3.1 Operating profit 4.47 4.28 8.8 Interest expense, net (1.20) (1.11) 12.8 Earnings before income taxes 3.19 3.16 5.3 Net earnings 1.88 1.91 2.6
Increases in sales are primarily attributable to the continued development of new stores and identical and comparable store sales increases. Identical store sales increased 1.7% and comparable store sales, which include replacement stores, increased 2.3%. During the quarter the Company opened 21 combination food and drug stores, 3 warehouse stores and 24 stand alone drugstores, while closing 15 combination food and drug stores, 15 conventional stores, 1 warehouse store and 29 drugstores. Of the total 60 store closings, 38 related to the Company's restructuring plan. Net retail square footage increased by 2.4% from the prior year. Management estimates that there was overall inflation in products the Company sells of slightly over 1.0% (annualized). Sales inflation is being primarily driven by pharmacy products. During fiscal year 2000, the Company changed the alignment of the marketing organizational structure. Benefits continue to be realized from this change as promotion and merchandising is tailored to fit individual markets. The Company-wide "Focus on Fresh," has become a principal marketing target for this year and has created a new level of satisfaction for shoppers who enter our supermarkets. The Company announced a new customer service program in March and finished the last rollout meeting in May. This program, "Service First, Second to None," puts best practices from across the Company into a brand new package and into tools the stores can use to achieve the highest standards of customer service. 13 FORM 10-Q Albertson's has also increased focus on loyalty programs such as the new Associate Advantage Loyalty Card Program, and has entered a national agreement with Catalina Marketing Corporation to extend their program to all Albertson's combination food and drug stores. Subsequent to November 1, 2001, a loyalty card program was launched in the Dallas/Fort Worth division. The Company is also expanding its dual branding concept (a food and drug store under one roof) by opening Albertson's/Osco combination food and drug stores in Tucson, AZ as well as Albertson's/Sav-on combo stores in Reno, NV. Gross profit, as a percent to sales, decreased as a result of the Company's initiative to drive sales through more aggressive promotional pricing. The continued utilization of Company distribution facilities and increased buying efficiencies partially offset this decrease. The pre-tax LIFO charge reduced gross profit by $8 (0.08% to sales) for the 13 weeks ended November 1, 2001, and for the 13 weeks ended November 2, 2000. Selling, general and administrative (SG&A) expenses, as a percent to sales, decreased due to the Company's increased emphasis on cost control. Decreases resulted from lower labor and impairment charges. These decreases were partially offset by increased health and welfare benefit costs. SG&A expenses for the 13 weeks ended November 1, 2001, included $5 of restructuring and merger-related costs as compared to $19 for the 13 weeks ended November 2, 2000. The increase in net interest expense for the 13 weeks ended November 1, 2001, resulted from higher average outstanding debt and higher average interest rates during the 13 weeks ended November 1, 2001, as compared to the 13 weeks ended November 2, 2000. 14 FORM 10-Q Due to the significance of the costs associated with the restructuring plan and merger-related costs and their effect on operating results, the following table is presented to assist in the comparison of income statement components without these costs:
--------------------------------------------------- -------------------------------------------------- 13 Weeks Ended November 1, 2001 13 Weeks Ended November 2, 2000 --------------------------------------------------- -------------------------------------------------- Without Percent Without Percent As Adjust- adjust- To As Adjust- adjust- To Reported ments ments Sales Reported ments ments Sales ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Sales $9,363 $9,363 100.00% $8,991 $8,991 100.00% Cost of sales 6,708 6,708 71.65 6,438 $ (7) 6,431 71.52 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Gross profit 2,655 2,655 28.35 2,553 7 2,560 28.48 Selling, general and administrative expenses 2,235 $ (4) 2,231 23.82 2,168 (18) 2,150 23.91 Restructuring charges and other 1 (1) Merger-related charges 1 (1) ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Operating profit 419 5 424 4.53 384 26 410 4.57 Interest, net (113) (113) (1.20) (99) (99) (1.11) Other (expense) income, net (7) (7) (0.08) (1) (1) (0.01) ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Earnings before income taxes 299 5 304 3.26 284 26 310 3.45 Income tax expense 123 1 124 1.33 112 11 123 1.36 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Net earnings $ 176 $ 4 $ 180 1.92% $ 172 $ 15 $ 187 2.09% ============ ============ ============ ============ =========== =========== ============ ============= Earnings per share: Basic $0.43 $0.01 $0.44 $0.41 $0.04 $0.45 Diluted 0.43 0.01 0.44 0.41 0.04 0.45
15 FORM 10-Q Results of Operations - Year-to-Date The following table sets forth certain income statement components expressed as a percent to sales and the year-to-year percentage changes in the amounts of such components:
Percent to Sales Percentage 39 weeks ended Increase 11-1-01 11-2-00 (Decrease) ---------------- ---------------- ------------------ Sales 100.00% 100.00% 3.9% Gross profit 28.40 28.33 4.1 Selling, general and administrative expenses 24.10 23.98 4.4 Restructuring charges and other 1.81 n.m. Merger-related (credits) charges (0.05) 0.01 n.m. Operating profit 2.54 4.34 (39.2) Interest expense, net (1.17) (1.03) 17.9 Earnings before income taxes 1.30 3.32 (59.2) Net earnings 0.75 2.00 (61.3) n.m. - not meaningful
Increases in sales are primarily attributable to the continued development of new stores and identical and comparable store sales increases. Identical store sales increased 1.3% and comparable store sales, which include replacement stores, increased 1.7%. During the 39 weeks ended November 1, 2001, the Company opened 60 combination food and drug stores, 1 conventional store, 3 warehouse stores and 54 stand-alone drugstores, while closing 27 combination food and drug stores, 25 conventional stores, 5 warehouse stores and 45 drugstores. Of the total 102 store closings, 43 related to the Company's restructuring plan. The new stores include 6 stores that were acquired in three separate transactions. Net retail square footage increased by 2.4% from the prior year. Management estimates that there was overall inflation in products the Company sells of slightly over 1.0% (annualized). Sales inflation is being primarily driven by pharmacy products. Sales results for the 39 weeks ended November 1, 2001, were the results of trends and programs similar to those experienced for the 13 weeks ended November 1, 2001, which are discussed in Results of Operations - Third Quarter. Gross profit, as a percent to sales, increased as a result of the continued utilization of Company distribution facilities, increased buying efficiencies, and lower advertising costs due to the elimination of incremental advertising costs incurred in the prior year associated with the Lucky banner change. Gross margin increases were partially offset by the Company's initiative to drive sales through more aggressive promotional pricing. The pre-tax LIFO charge reduced gross profit by $23 (0.08% to sales) for the 39 weeks ended November 1, 2001, as compared to $20 (0.07% to sales) for the 39 weeks ended November 2, 2000. 16 FORM 10-Q Selling, general and administrative (SG&A) expenses, as a percent to sales, increased primarily due to costs associated with asset impairments and lease terminations related to the acceleration of the disposal of surplus property (refer to "Restructuring Plan" below). Increases in other components of SG&A, such as energy costs, health and welfare benefits, and depreciation expense associated with the Company's expansion program, were offset by lower labor, maintenance, supplies and travel costs. In addition, the increase was partially offset by a $20 charge recorded during first quarter 2000 for certain previously assigned leases and subleases to tenants who were in bankruptcy. The increase in net interest expense for the 39 weeks ended November 1, 2001, resulted primarily from higher average outstanding debt and higher average interest rates during the 39 weeks ended November 2, 2001, as compared to the 39 weeks ended November 2, 2000. This comparison also is impacted by a $16 interest expense reversal due to a favorable income tax settlement recorded in the first quarter of 2000. Restructuring Plan On July 17, 2001, the Company's Board of Directors approved a restructuring plan designed to improve future financial results and to drive future competitiveness. Major components of the plan include the closure of 165 underperforming retail stores, the reduction in administrative and corporate overhead, consolidating and eliminating four division offices and the acceleration of the disposal of surplus property. In accordance with the plan, the Company recorded pre-tax charges of $514 to cover employee severance costs, asset impairments, lease terminations, and other. In addition to these charges, the Company recorded (in selling, general and administrative expenses) pre-tax costs of $48 for asset impairments and lease terminations associated with the accelerated disposal of surplus property. These combined actions reduced operating profit for the 39 weeks ended November 1, 2001, by $562 and net earnings by $337. The Company expects to incur additional pre-tax charges of approximately $35 in future periods for certain actions related to the restructuring plan that have not yet been implemented. Merger-Related and Exit Costs Results of operations for the 39 weeks ended November 1, 2001, include a net of $7 of merger related credits ($4 after tax). The merger-related costs of integrating Albertson's, Inc. and American Stores Company have resulted in significant non-recurring charges and incremental expenses. These costs have had a significant effect on the prior two years' results of operations of the Company. Non-recurring charges and expenses of implementing integration actions were originally estimated to total $700 after income tax benefits. On an after-tax basis, and subsequent to the first quarter of 1999, the Company has incurred $634 of merger-related costs. With the exception of some system conversions, the integration is substantially complete and the Company does not expect to incur significant additional charges related to the merger. 17 FORM 10-Q Unusual Items During the quarter ended May 3, 2001, the Company recorded (in selling, general and administrative expenses) $9 of compensation related costs for the executive management changes. During the quarter ended May 4, 2000, a $20 charge was incurred and included in selling, general and administrative expenses for liabilities related to certain previously assigned leases and subleases to tenants who are in bankruptcy. Due to the significance of the costs associated with the restructuring plan and merger-related costs and other unusual items and their effect on operating results, the following table is presented to assist in the comparison of income statement components without these costs:
--------------------------------------------------- -------------------------------------------------- 39 Weeks Ended November 1, 2001 39 Weeks Ended November 2, 2000 --------------------------------------------------- -------------------------------------------------- Without Percent Without Percent As Adjust- adjust- To As Adjust- adjust- To Reported ments ments Sales Reported ments ments Sales ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Sales $28,271 $28,271 100.00% $27,218 $27,218 100.00% Cost of sales 20,243 20,243 71.60 19,507 $ (30) 19,477 71.56 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Gross profit 8,028 8,028 28.40 7,711 30 7,741 28.44 Selling, general and administrative expenses 6,813 $ (67) 6,746 23.86 6,528 (97) 6,431 23.63 Restructuring charges and other 511 (511) Merger-related (credits) charges (15) 15 2 (2) ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Operating profit 719 563 1,282 4.54 1,181 129 1,310 4.81 Interest, net (332) (332) (1.17) (281) (281) (1.03) Other (expense) income, net (19) (19) (0.07) 3 3 0.01 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Earnings before income taxes 368 563 931 3.29 903 129 1,032 3.79 Income taxes 157 224 381 1.35 358 50 408 1.50 ------------ ------------ ------------ ------------ ----------- ----------- ------------ ------------- Net Earnings $ 211 $ 339 $ 550 1.94% $ 545 $ 79 $ 624 2.29% ============ ============ ============ ============ =========== =========== ============ ============= Earnings per share: Basic $0.52 $0.83 $1.35 $1.29 $0.19 $1.48 Diluted 0.52 0.83 1.35 1.29 0.19 1.48
18 FORM 10-Q Liquidity and Capital Resources Cash provided by operating activities during the 39 weeks ended November 1, 2001 was $1,474 as compared to $1,565 in the prior year. Net earnings adjusted for noncash charges, changes in deferred income taxes and changes in income taxes payable for the 39 weeks ended November 1, 2001, was $497 as compared to $491 in the prior year. The increase in cash attributable to the adjusted operations is offset by the changes in operating assets and liabilities. The implementation of the strategic imperative to maximize return on invested capital (see Operational Initiatives) is expected to enhance working capital by eliminating unproductive assets, reducing inventory and accounts receivable levels and increasing accounts payable leverage. These improvements are expected to reduce the cash requirements of the business. Future sales of property held for sale over the next several quarters is expected to provide significant positive cash flow for the Company. During fiscal 2000, the Company purchased and retired 18.7 million shares of its common stock at a total cost of $451, or an average price of $24.15 per share, under a Board authorization which expired on December 6, 2001. No purchases were made during the 39 weeks ended November 1, 2001. The Board of Directors adopted a program on December 3, 2001, authorizing, at management's discretion, the Company to purchase and retire up to $500 of the Company's common stock beginning December 7, 2001 through December 31, 2002. The Company utilizes its commercial paper and bank line programs primarily to supplement cash requirements for seasonal fluctuations in working capital and to fund its capital expenditure program. Accordingly, commercial paper and bank line borrowings will fluctuate between reporting periods. The Company had $294 of commercial paper and bank line borrowings outstanding as of November 1, 2001, compared to $1,153 as of February 1, 2001, and $1,441 as of November 1, 2000. The Company has two revolving credit agreements which provide for borrowings up to $1,650 and a committed bank line of $100. These agreements contain certain covenants, the most restrictive of which requires the Company to maintain consolidated tangible net worth (CTNW), as defined, of at least $2,100. At the end of third quarter 2001, CTNW, as defined, was approximately $4,100. As of November 1, 2001, $25 was outstanding under the committed bank line agreement and no amounts were outstanding under the revolving credit agreements. On May 1, 2001, the Company issued $600 of term notes and debentures under a shelf registration statement filed with the Securities and Exchange Commission in February 2001 (the "2001 Registration Statement"). The notes are comprised of $200 of principal bearing interest at 7.25% due May 2013 and the debentures are comprised of $400 of principal bearing interest at 8.00% due May 2031. Proceeds were used to repay amounts outstanding under the Company's commercial paper program and for other general corporate purposes. Additional securities up to $2,400 of principal remain available for issuance under the Company's 2001 Registration Statement. 19 FORM 10-Q Operational Initiatives The Company is focused on five strategic imperatives with the goal of achieving the Company's full potential. 1) Aggressive cost and process control has been implemented. Each main category of expense, including labor, is being rigorously monitored by a member of executive management. As a result of these actions, the Company will reduce administrative and corporate overhead through the Board approved Voluntary Separation Plan and Involuntary Severance Plan. As a result of these effects, the Company's SG&A as a percent to sales trended lower than prior year levels. The Company is still focused in driving costs out of the business. 2) A formal process to review and measure investments, starting with a review of significant assets in the Company and using a return on invested capital approach, has been implemented. This review resulted in the identification of 165 underperforming stores which the Company has committed to close and dispose of. The Company has closed 43 stores at the end of third quarter. The Company plans to sell or close the remaining 122 stores by the end of July, 2002. In addition, the Company has formulated plans to accelerate the disposal of surplus property through an auction process. 3) A customer-focused approach to growth is being implemented by examining elements of the customer proposition. The Company plans to re-direct non-value added dollars saved from the expense and process control programs back into the marketplace in order to impact customers and drive growth. Subsequent to November 1, 2001, the Company launched a loyalty card program in the Dallas/Fort Worth division. 4) The Company plans to commit a greater share of its capital expenditures to information and process technology over the next three to five years with the goal of becoming an industry leader in technology. 5) The Company will strive to make Albertson's an employer of choice with less bureaucracy, fewer layers of management, stronger communication, better training programs and exciting new reward programs. To instill a sense of ownership at the store level the Company announced that all store directors and pharmacy mangers are now eligible for stock options subsequent to November 1, 2001. Environmental The Company has identified environmental contamination sites related primarily to underground petroleum storage tanks and ground water contamination at various store, warehouse, office and manufacturing facilities (related to current operations as well as previously disposed of businesses). The Company conducts an ongoing program for the inspection and evaluation of new sites proposed to be acquired by the Company and the remediation/monitoring of contamination at existing and previously owned sites. Undiscounted reserves have been established for each environmental contamination site unless an unfavorable outcome is remote. Although the ultimate outcome and expense of environmental remediation is uncertain, the Company believes that required remediation and continuing compliance with environmental laws, in excess of current reserves, will not have a material adverse effect on the financial condition of the Company. Charges against earnings for environmental remediation were not material for the 39 weeks ended November 1, 2001, or the 39 weeks ended November 2, 2000. 20 FORM 10-Q Cautionary Statement for Purposes of "Safe Harbor Provisions" of the Private Securities Litigation Reform Act of 1995 From time to time, information provided by the Company, including written or oral statements made by its representatives, may contain forward-looking information as defined in the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical facts, which address activities, events or developments that the Company expects or anticipates will or may occur in the future, including such things as integration of the operations of acquired or merged companies, expansion and growth of the Company's business, future capital expenditures and the Company's business strategy, contain forward-looking information. In reviewing such information it should be kept in mind that actual results may differ materially from those projected or suggested in such forward-looking information. This forward-looking information is based on various factors and was derived using numerous assumptions. Many of these factors have previously been identified in filings or statements made by or on behalf of the Company. Important assumptions and other important factors that could cause actual results to differ materially from those set forth in the forward-looking information include changes in the general economy, changes in consumer spending, competitive factors and other factors affecting the Company's business in or beyond the Company's control. These factors include changes in the rate of inflation, changes in state or federal legislation or regulation, adverse determinations with respect to litigation or other claims (including environmental matters), labor negotiations, the cost and stability of energy sources, the Company's ability to recruit and develop employees, its ability to develop new stores or complete remodels as rapidly as planned, its ability to implement new technology successfully, stability of product costs, the Company's ability to integrate the operations of acquired or merged companies, the Company's ability to execute its restructuring plan, and the Company's ability to achieve its five strategic imperatives. Other factors and assumptions not identified above could also cause the actual results to differ materially from those set forth in the forward-looking information. The Company does not undertake to update forward-looking information contained herein or elsewhere to reflect actual results, changes in assumptions or changes in other factors affecting such forward-looking information. Quantitative and Qualitative Disclosures About Market Risk There have been no material changes regarding the Company's market risk position from the information provided under the caption "Quantitative and Qualitative Disclosures About Market Risk" on pages 27 and 28 of the Company's 2000 Annual Report to Stockholders. PART II. OTHER INFORMATION Item 1. Legal Proceedings The information required under this item is included in the Notes to Consolidated Financial Statements under the caption "Legal Proceedings" on page 11 of Part I, Financial Information of this Report on Form 10-Q. This information is incorporated herein by this reference thereto. Item 2. Changes in Securities In accordance with the Company's $1,650 revolving credit agreement, the Company's consolidated tangible net worth, as defined, shall not be less than $2,100. 21 FORM 10-Q Item 3. Defaults upon Senior Securities Not applicable. Item 4. Submission of Matters to a Vote of Security Holders Not applicable. Item 5. Other Information On November 20, 2001, Robert J. Dunst, Jr. was named Executive Vice President and Chief Technology Officer. On September 17, 2001, Kathy Herbert was named as Executive Vice President of Human Resources. On December 3, 2001, to be effective on January 1, 2001, the size of the Board of Directors was increased to fourteen, and Bonnie G. Hill was appointed to the Board as a Class II Director to a term expiring on the date of the Annual Meeting of Shareholders in 2003. Item 6. Exhibits and Reports on Form 8-K a. Exhibits 10.41 Amended and Restated 1995 Stock Based Incentive Plan. 10.41.1 Form of 1995 Amended and Restated Stock-Based Incentive Plan Stock Option Agreement. 10.42 Employment agreement between the Company and Robert J. Dunst, Jr., dated November 16, 2001. b. There were no reports on Form 8-K filed during the quarter ended November 1, 2001. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. ALBERTSON'S, INC. ----------------------------------------- (Registrant) Date: December 12, 2001 /S/ Felicia D. Thornton ----------------------------------------- Felicia D. Thornton Executive Vice President and Chief Financial Officer 22