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 26 Weeks Ended: August 3, 2000 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 September 1, 2000: 421,038,228
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ALBERTSON'S, INC.
CONSOLIDATED EARNINGS
(in millions except per share data)
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 26 WEEKS ENDED
---------------------------------- --------------------------------------
August 3, July 29, August 3, July 29,
2000 1999 2000 1999
---------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Sales $9,213 $9,381 $18,227 $18,597
Cost of sales 6,572 6,826 13,076 13,539
---------------- ----------------- ------------------ -------------------
Gross profit 2,641 2,555 5,151 5,058
Selling, general and
administrative expenses 2,221 2,172 4,353 4,230
Merger-related (income)
expense (1) 458 1 430
---------------- ----------------- ------------------ -------------------
Operating profit (loss) 421 (75) 797 398
Other (expenses) income:
Interest, net (99) (78) (182) (160)
Other, net 3 1 4 5
---------------- ----------------- ------------------ -------------------
Earnings (loss) before
income taxes and extra-
ordinary item 325 (152) 619 243
Income taxes 131 53 246 210
---------------- ----------------- ------------------ -------------------
Earnings (loss) before
extraordinary item 194 (205) 373 33
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7 (23) (23)
---------------- ----------------- ------------------ -------------------
NET EARNINGS (LOSS) $ 194 $ (228) $ 373 $ 10
================ ================= ================== ===================
BASIC EARNINGS (LOSS) PER SHARE:
Earnings (loss) before
extraordinary item $ 0.46 $(0.49) $ 0.88 $ 0.08
Extraordinary item (0.06) (0.06)
---------------- ----------------- ------------------ -------------------
Net earnings (loss) $ 0.46 $(0.54) $ 0.88 $ 0.02
================ ================= ================== ===================
DILUTED EARNINGS (LOSS) PER SHARE:
Earnings (loss) before
extraordinary item $ 0.46 $(0.49) $ 0.88 $ 0.08
Extraordinary item (0.06) (0.06)
---------------- ----------------- ------------------ -------------------
Net earnings (loss) $ 0.46 $(0.54) $ 0.88 $ 0.02
================ ================= ================== ===================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 422,553 421,619 423,127 420,953
Diluted 423,190 421,619 423,416 422,317
</TABLE>
See Notes to Consolidated Financial Statements.
Page 2
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
August 3, 2000 February 3,
(unaudited) 2000
-------------------- -------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 107 $ 231
Accounts and notes receivable 536 587
Inventories 3,123 3,481
Prepaid expenses 83 154
Property held for resale 82 100
Deferred income taxes 26 29
-------------------- -------------------
TOTAL CURRENT ASSETS 3,957 4,582
OTHER ASSETS 428 456
GOODWILL AND INTANGIBLES, net 1,737 1,757
LAND, BUILDINGS AND EQUIPMENT (net of
accumulated depreciation and amortization
of $5,594 and $5,087, respectively) 9,197 8,913
-------------------- -------------------
$15,319 $15,708
==================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,231 $ 2,162
Salaries and related liabilities 499 555
Taxes other than income taxes 191 172
Income taxes 16 82
Self-insurance 175 187
Unearned income 105 110
Other current liabilities 109 115
Merger related accruals 16 33
Current maturities of long-term debt 94 623
Current capitalized lease obligations 18 19
-------------------- -------------------
TOTAL CURRENT LIABILITIES 3,454 4,058
LONG-TERM DEBT 4,894 4,805
CAPITALIZED LEASE OBLIGATIONS 207 187
SELF-INSURANCE 223 223
DEFERRED INCOME TAXES 86 52
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 631 681
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value; authorized - 10 shares; issued - none
Common stock - $1.00 par value; authorized - 1,200 shares; issued - 421
shares and 424 shares, respectively 421 424
Capital in excess of par value 58 145
Retained earnings 5,345 5,133
-------------------- -------------------
5,824 5,702
-------------------- -------------------
$15,319 $15,708
==================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
26 WEEKS ENDED
-----------------------------------------------
August 3, July 29,
2000 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 373 $ 10
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 458 419
Goodwill amortization 28 30
Noncash merger-related expense 3 304
Net loss (gain) on asset sales 8 (2)
Net deferred income taxes 37 (83)
Increase in cash surrender value of
Company-owned life insurance (4) (5)
Changes in operating assets and liabilities:
Receivables and prepaid expenses 109 112
Inventories 359 6
Accounts payable 69 (25)
Other current liabilities (130) 17
Self-insurance (11) (35)
Unearned income (20) (9)
Other long-term liabilities (35) (121)
-------------------- --------------------
Net cash provided by operating activities 1,244 618
CASH FLOWS FROM INVESTING ACTIVITIES:
Net capital expenditures excluding
noncash activities (708) (823)
Decrease in other assets 17 8
-------------------- --------------------
Net cash used in investing activities (691) (815)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 515 1,800
Payments on long-term borrowings (345) (835)
Net commercial paper and bank line activity (601) (756)
Proceeds from stock options exercised 5 20
Cash dividends paid (156) (112)
Stock purchased and retired (95)
-------------------- --------------------
Net cash (used in) provided by financing
activities (677) 117
-------------------- --------------------
NET DECREASE IN CASH AND CASH EQUIVALENTS (124) (80)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 231 116
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 107 $ 36
==================== ====================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 4
<PAGE>
ALBERTSON'S, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(dollars in millions, except per share data)
(unaudited)
Business Combination
On June 23, 1999, Albertson's, Inc. ("Albertson's" or the "Company") and
American Stores Company ("ASC") consummated a merger with the issuance of
approximately 177 million shares of Albertson's common stock (the "Merger"). The
Merger constituted a tax-free reorganization and has been accounted for as a
pooling-of-interests for accounting and financial reporting purposes.
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. Such adjustments consisted only of normal recurring items. 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 1999 Annual Report.
The balance sheet at February 3, 2000, 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.
Historical operating results are not necessarily indicative of future
results.
Goodwill
Goodwill resulting from business acquisitions represents the excess of cost
over fair value of net assets acquired and is being amortized over 40 years
using the straight-line method. Accumulated amortization amounted to $631 and
$602 at August 3, 2000, and February 3, 2000, respectively.
Reclassifications
Certain reclassifications have been made in prior year's financial statements
to conform to classifications used in the current year.
Page 5
<PAGE>
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.
Merger Related and Exit Costs
Results of operations for the 26 weeks ended August 3, 2000, include $83 of
merger-related costs ($52 after tax). The following table presents the pre-tax
costs incurred by category of expenditure and merger-related accruals included
in the Company's Consolidated Balance Sheets:
<TABLE>
<CAPTION>
------------------- ------------------ ------------------ -------------------
Exit Merger Period
Costs Charge Costs Total
------------------- ------------------ ------------------ -------------------
<S> <C> <C> <C> <C>
Merger related accruals at
February 3, 2000 $ 26 $ 3 $ 4 $ 33
Severance costs (1) 1 6 6
Write-down of assets to net
realizable value 14 14
Integration and other costs 63 63
------------------- ------------------ ------------------ -------------------
Total costs (1) 1 83 83
Cash expenditures (12) (2) (86) (100)
------------------- ------------------ ------------------ -------------------
Merger-related accruals at
August 3, 2000 $ 13 $ 2 $ 1 $ 16
=================== ================== ================== ===================
</TABLE>
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. Total
merger-related terminations were 663 employees as of August 3, 2000.
The write-down of assets to net realizable value includes the loss on
disposal of redundant facilities and information technology equipment which was
abandoned by the Company.
Integration and other costs consist primarily of incremental transition and
integration costs associated with integrating the operations of Albertson's and
ASC and are being expensed as incurred. These costs include such costs as
advertising, labor associated with system conversions and training and
relocation costs.
One-Time Charge
During the quarter ended May 4, 2000, a one-time charge of $20 was incurred
and included in selling, general and administrative expenses to reflect
liabilities related to certain previously assigned leases and subleases to
tenants who are in bankruptcy.
Income Taxes
The effective income tax rate for 2000 has decreased from 1999 as a result of
the effect during 1999 of certain merger related and exit costs for which there
were not corresponding tax benefits.
Page 6
<PAGE>
Indebtedness
The Company has two revolving credit agreements which provide for borrowings
up to $1,900. 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 August 3, 2000, no amounts were outstanding
under these agreements.
On May 9, 2000, the Company issued $500 of term notes under a shelf
registration statement filed with the Securities and Exchange Commission in
February 1999 (the "1999 Registration Statement"). The notes are comprised of
$275 of principal bearing interest at 8.35% due May 2010 and $225 of principal
bearing interest at 8.70% due May 2030. Proceeds were used to repay amounts
outstanding under the Company's commercial paper program. Additional securities
up to $700 remain available for issuance under the Company's 1999 Registration
Statement.
In conjunction with the debt issuance, on April 26, 2000, and May 3, 2000,
the Company entered into a 10-year treasury hedge for $250 and a 30-year
treasury hedge for $125. The hedges were settled on May 9, 2000, the date of the
issuance of the $500 debt, resulting in gains of $6. The gains will be amortized
over the term of the related 10-year and 30-year debt.
Supplemental Cash Flow Information
Selected cash payments and noncash activities were as follows:
<TABLE>
<CAPTION>
26 Weeks Ended 26 Weeks Ended
August 3, 2000 July 29, 1999
------------------------ ------------------------
<S> <C> <C>
Cash payments for:
Income taxes $266 $374
Interest, net of amounts
capitalized 182 170
Noncash transactions:
Capitalized leases incurred 28 11
Tax benefits related to stock
options 5
Liabilities assumed in connection
with asset acquisition 7
</TABLE>
Capital Stock
The Board of Directors, on April 25, 2000, adopted a stock purchase program
that authorizes, but does not require, the Company to purchase and retire up to
$500 of the Company's common stock during the period beginning April 25, 2000,
and ending April 30, 2001.
Recent Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This SAB, as amended by SAB No. 101A and No. 101B, is effective for
the Company's fourth quarter of fiscal year 2000. The SAB is not expected to
have a significant impact on the Company's accounting and reporting
requirements.
Page 7
<PAGE>
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard 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.
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact on the Company's accounting and reporting requirements.
Subsequent Event
On August 23, 2000, a class action complaint was filed against Jewel Food
Stores, Inc., an indirect 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 Supermarkets, Inc., Case No. 00L 009664) alleging milk price
fixing. The Company intends to vigorously defend against this lawsuit, and at
this stage of the litigation the Company believes that it has strong defenses
against 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.
Page 8
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(dollars in millions, except per share data)
Results of Operations - Second 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:
<TABLE>
<CAPTION>
Percent to Sales Percentage
13 weeks ended Increase
8-3-00 7-29-99 (Decrease)
---------------- ----------------- ------------------
<S> <C> <C> <C>
Sales 100.00% 100.00% (1.8%)
Gross profit 28.67 27.24 3.4
Selling, general and
administrative expenses 24.11 23.16 2.3
Merger-related (income)
expense (0.01) 4.88 (100.1)
Operating profit 4.57 (0.80) n.m.
Interest expense, net 1.07 0.83 26.7
Earnings before income taxes
and extraordinary item 3.53 (1.62) n.m.
Net earnings 2.11 (2.43) n.m.
n.m. - not meaningful
</TABLE>
Sales for the quarter ended August 3, 2000, increased by 4.6% over the same
quarter of the prior year, excluding sales from stores required to be divested.
Identical store sales increase 1.2% and comparable store sales, which include
replacement stores, increased 1.4%. Increases in sales are primarily
attributable to the continued development of new stores and identical and
comparable store sales increases. During the quarter the Company opened 17
combination food and drug stores, 1 conventional store and 6 stand alone
drugstores, while closing 16 supermarkets and 7 drugstores. Net retail square
footage decreased by 2.0% from the prior year. This decrease includes the impact
of the 6.1 million square feet, or 6.2%, lost due to the required divested
stores. Management estimates that there was overall inflation in products the
Company sells of approximately 0.2% (annualized).
In addition to store development, the Company has increased sales through
implementation of best practices across the Company and its investment in
programs initiated in recent years which are designed to provide solutions to
customer needs. These programs include the Front End Manager program; the home
meal solutions process called "Quick Fixin' Ideas;" special destination
categories; and increased emphasis on training programs utilizing Computer
Guided Training. To provide additional solutions to customer needs, the Company
has added new gourmet-quality bakery products and organic grocery and produce
items. Other solutions include neighborhood marketing, targeted advertising and
exciting new and remodeled stores.
Page 9
<PAGE>
Gross profit, as a percent to sales, increased primarily as a result of the
Merger creating buying synergies and margin improvements from the implementation
of best practices across the Company. The shifting of the sales mix towards the
higher margin departments is also contributing to the increase in gross profit
percentage. Gross profit improvements were also realized through the continued
utilization of Company-owned distribution facilities and increased buying
efficiencies. The pre-tax LIFO charge reduced gross profit by $6 (0.07% to
sales) for the 13 weeks ended August 3, 2000, as compared to $9 (0.10% to sales)
for the 13 weeks ended July 29, 1999. The lower LIFO charge is partially driven
by the decrease in inventory during the quarter due to the Company's focus on
inventory reduction.
Selling, general and administrative expenses, as a percent to sales,
increased due to integration costs associated with the Merger, higher labor
costs and related benefits associated with the Company's sales initiatives and
the sales mix shifting towards the higher customer service oriented sales
departments and depreciation expense as a result of the Company's expansion
program.
The Company is reestablishing its culture of thrift and plans to reduce
operating and interest expenses by $250 in fiscal 2001. This is expected to be
accomplished by eliminating all secondary costs that do not directly benefit
ongoing operations, and by reductions in capital expenditures and working
capital requirements.
Net interest expense for the 13 weeks ended August 3, 2000, increased due to
higher average outstanding debt during the 13 weeks ended August 3, 2000, as
compared to the 13 weeks ended July 29, 1999, and an increase in the weighted
average interest rate of the outstanding debt.
Merger-Related and Exit Costs
Results of operations for the 13 weeks ended August 3, 2000, include $26 of
merger related and exit costs ($17 after tax). The following table presents the
pre-tax costs incurred by category of expenditure:
<TABLE>
<CAPTION>
------------- ------------- -------------
Exit Period
Costs Costs Total
------------- ------------- -------------
<S> <C> <C> <C>
Severance costs $ (1) $ 3 $ 2
Write-down of assets to net realizable value 5 5
Integration and other costs 19 19
------------- ------------- -------------
Total costs $ (1) $27 $26
============= ============= =============
</TABLE>
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. Total
merger-related terminations were 663 employees as of August 3, 2000.
The write-down of assets to net realizable value includes the loss on
disposal of redundant facilities and information technology equipment which was
abandoned by the Company.
Page 10
<PAGE>
Integration and other costs consist primarily of incremental transition and
integration costs associated with integrating the operations of Albertson's and
ASC and are being expensed as incurred. These costs include such costs as
advertising, labor associated with system conversions and training and
relocation costs.
The Company expects to incur additional after-tax merger related and exit
costs of approximately $105 over the next two years which consist primarily of
expected integration costs and costs associated with other consolidation
activities for which plans have not yet been finalized.
Due to the significance of the 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:
<TABLE>
<CAPTION>
------------------------------------------------- ------------------------------------------------
13 Weeks Ended August 3, 2000 13 Weeks Ended July 29, 1999
------------------------------------------------- ------------------------------------------------
As W/O Percent As W/O Percent
Reported One-Time One-Time To Sales Reported One-Time One-Time To Sales
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $9,213 $9,213 100.00% $9,381 $9,381 100.00%
Cost of sales 6,572 $ (2) 6,570 71.32 6,826 $ (4) 6,822 72.72
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
Gross profit 2,641 2 2,643 28.68 2,555 4 2,559 27.28
Selling, general and
administrative expenses 2,221 (25) 2,196 23.84 2,172 (83) 2,089 22.27
Merger-related (income) expense
(1) 1 458 (458)
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
Operating profit (loss)
421 26 447 4.84 (75) 545 470 5.01
Interest expense, net
(99) (99) (1.07) (78) (78) (0.82)
Other income, net 3 3 0.03 1 1 0.01
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
Earnings (loss) before income
taxes and extra-ordinary item 325 26 351 3.81 (152) 545 393 4.19
Income taxes 131 9 140 1.52 53 104 157 1.68
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
Earnings (loss) before
extra-ordinary item
194 17 211 2.29 (205) 441 236 2.52
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7
(23) 23
------------ ------------ ----------- ----------- ----------- ----------- ------------ -----------
Net Earnings (Loss) $ 194 $ 17 $ 211 2.29% $ (228) $464 $ 236 2.52%
============ ============ =========== =========== =========== =========== ============ ===========
</TABLE>
Page 11
<PAGE>
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:
<TABLE>
<CAPTION>
Percent to Sales Percentage
26 weeks ended Increase
8-3-00 7-29-99 (Decrease)
---------------- ----------------- ------------------
<S> <C> <C> <C>
Sales 100.00% 100.00% (2.0%)
Gross profit 28.26 27.20 1.8
Selling, general and
administrative expenses 23.88 22.75 2.9
Merger-related expense 0.01 2.31 (99.8)
Operating profit 4.37 2.14 100.0
Interest expense, net 1.00 0.86 13.7
Earnings before income taxes
and extraordinary item 3.40 1.31 154.2
Net earnings 2.05 .06 n.m.
n.m. - not meaningful
</TABLE>
Sales for the 26 weeks ended August 3, 2000, increased by 4.4% over the same
period of the prior year, excluding sales from stores required to be divested.
Identical store sales increase 0.8% and comparable store sales, which include
replacement stores, increased 1.1%. Increases in sales are primarily
attributable to the continued development of new stores and identical and
comparable store sales increases. During the 26 weeks ended August 3, 2000, the
Company opened 32 combination food and drug stores, 1 conventional store and 12
stand alone drugstores, while closing 27 supermarkets and 9 drugstores. The new
stores include 6 stores that were acquired in two separate transactions. Net
retail square footage decreased by 2.0% from the prior year. This decrease
includes the impact of the 6.1 million square feet, or 6.2%, lost due to the
required divested stores. Management estimates that there was overall inflation
in products the Company sells of approximately 0.2% (annualized).
In addition to store development, the Company has increased sales through
implementation of best practices across the Company and its investment in
programs initiated in recent years which are designed to provide solutions to
customer needs. These programs include the Front End Manager program; the home
meal solutions process called "Quick Fixin' Ideas;" special destination
categories; and increased emphasis on training programs utilizing Computer
Guided Training. To provide additional solutions to customer needs, the Company
has added new gourmet-quality bakery products and organic grocery and produce
items. Other solutions include neighborhood marketing, targeted advertising and
exciting new and remodeled stores.
Gross profit, as a percent to sales, increased primarily as a result of the
Merger creating buying synergies and margin improvements from the implementation
of best practices across the Company. The shifting of the sales mix towards the
higher margin departments is also contributing to the increase in gross profit
percentage. Gross profit improvements were also realized through the continued
utilization of Company-owned distribution facilities and increased buying
efficiencies. The pre-tax LIFO charge reduced gross profit by $12 (0.07% to
sales) for the 26 weeks ended August 3, 2000, as compared to $18 (0.10% to
sales) for the 26 weeks ended July 29, 1999. The lower LIFO charge is partially
driven by the decrease in inventory during the period due to the Company's focus
on inventory reduction.
Page 12
<PAGE>
Selling, general and administrative expenses, as a percent to sales,
increased due to the impact of a one-time charge of $20 to reflect liabilities
related to certain previously assigned leases and subleases to tenants who are
in bankruptcy. Expense increases have also been driven by integration costs
associated with the Merger, higher labor costs and related benefits associated
with the Company's sales initiatives and the sales mix shifting towards the
higher customer service oriented sales departments and depreciation expense as a
result of the Company's expansion program.
The Company is reestablishing its culture of thrift and plans to reduce
operating and interest expenses by $250 in fiscal 2001. This is expected to be
accomplished by eliminating all secondary costs that do not directly benefit
ongoing operations, and by reductions in capital expenditures and working
capital requirements.
Net interest expense for the 26 weeks ended August 3, 2000, included a $16
interest expense reversal due to a favorable income tax settlement. The increase
in net interest expense, as adjusted by the interest expense reversal, resulted
from higher average outstanding debt and higher weighted average interest rates
during the 26 weeks ended August 3, 2000, as compared to the 26 weeks ended July
29, 1999.
Merger-Related and Exit Costs
Results of operations for the 26 weeks ended August 3, 2000, include $83 of
merger related and exit costs ($52 after tax). The following table presents the
pre-tax costs incurred by category of expenditure:
<TABLE>
<CAPTION>
------------- ------------- ------------- -------------
Exit Merger Period
Costs Charge Costs Total
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Severance costs $ (1) $1 $ 6 $ 6
Write-down of assets to net realizable value
14 14
Integration and other costs 63 63
------------- ------------- ------------- -------------
Total costs $ (1) $1 $83 $83
============= ============= ============= =============
</TABLE>
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. Total
merger-related terminations were 663 employees as of August 3, 2000.
The write-down of assets to net realizable value includes the loss on
disposal of stores divested as required and redundant facilities, and
information technology equipment which was abandoned by the Company.
Integration and other costs consist primarily of incremental transition and
integration costs associated with integrating the operations of Albertson's and
ASC and are being expensed as incurred. These costs include such costs as
advertising, labor associated with system conversions and training and
relocation costs.
The Company expects to incur additional after-tax merger related and exit
costs of approximately $105 over the next two years which consist primarily of
expected integration costs and costs associated with other consolidation
activities for which plans have not yet been finalized.
Page 13
<PAGE>
Due to the significance of the merger-related costs and other one-time
expenses and their effect on operating results, the following table is presented
to assist in the comparison of income statement components without these costs
and expenses:
<TABLE>
<CAPTION>
------------------------------------------------- -------------------------------------------------
26 Weeks Ended August 3, 2000 26 Weeks Ended July 29, 1999
------------------------------------------------- -------------------------------------------------
As W/O Percent As W/O Percent
Reported One-Time One-Time To Sales Reported One-Time One-Time To Sales
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $18,227 $18,227 100.00% $18,597 $18,597 100.00%
Cost of sales 13,076 $(23) 13,053 71.61 13,539 $ (4) 13,535 72.78
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
Gross profit 5,151 23 5,174 28.39 5,058 4 5,062 27.22
Selling, general and
administrative expenses 4,353 (79) 4,274 23.45 4,230 (87) 4,143 22.28
Merger-related expense
1 (1) 430 (430)
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
Operating profit 797 103 900 4.94 398 521 919 4.94
Interest expense, net (182) (182) (1.00) (160) (160) (0.86)
Other income, net 4 4 0.02 5 5 0.03
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
Earnings before income taxes
and extraordinary item 619 103 722 3.96 243 521 764 4.11
Income taxes 246 39 285 1.56 210 94 304 1.64
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
Earnings before extraordinary
item 373 64 437 2.40 33 427 460 2.47
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7 23 (23)
------------ ------------ ----------- ----------- ----------- ----------- ------------ ------------
Net Earnings $ 373 $ 64 $ 437 2.40% $ 10 $450 $ 460 2.47%
============ ============ =========== =========== =========== =========== ============ ============
</TABLE>
Liquidity and Capital Resources
Cash provided by operating activities during the 26 weeks ended August 3,
2000, increased to $1,244, compared to $618 in the prior year. The positive
effects of lower inventories and higher accounts payable leverage and higher
earnings were the primary drivers of this change. The Company has implemented
several initiatives designed to enhance working capital which include reducing
inventory and accounts receivable levels and increasing accounts payable
leverage. These improvements are expected to further reduce the cash
requirements of the business.
The Company's financing activities during the 26 weeks ended August 3, 2000,
include the net reduction of debt of $431 and the payment of dividends of $156.
Pursuant to the stock purchase program approved by Albertson's Board of
Directors on April 25, 2000, the Company purchased and retired 2,893,000 shares
of its common stock during the 26 weeks ended August 3, 2000, at a total cost
of $95.
Page 14
<PAGE>
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 $1,028
of commercial paper borrowings outstanding at August 3, 2000, compared to $1,302
outstanding as of July 29, 1999.
The Company has two revolving credit agreements which provide for borrowings
up to $1,900. 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. In addition, the Company has uncommitted bank lines
of credit totaling $345. As of August 3, 2000, no amounts were outstanding under
the credit facilities or bank lines.
On May 9, 2000, the Company issued $500 of term notes under a shelf
registration statement filed with the Securities and Exchange Commission in
February 1999 (the "1999 Registration Statement"). The notes are comprised of
$275 of principal bearing interest at 8.35% due May 2010 and $225 of principal
bearing interest at 8.70% due May 1, 2030. Proceeds were used to repay amounts
outstanding under the Company's commercial paper program. Additional securities
up to $700 remain available for issuance under the Company's 1999 Registration
Statement.
In conjunction with the debt issuance, on April 26, 2000, and May 3, 2000,
the Company entered into a 10-year treasury hedge for $250 and a 30-year
treasury hedge for $125. The hedges were settled on May 9, 2000, the date of the
issuance of the $500 debt, resulting in gains of $6. The gains will be amortized
over the term of the related 10-year and 30-year debt.
Recent Accounting Standards
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." This SAB summarizes certain of the staff's views in applying
generally accepted accounting principles to revenue recognition in financial
statements. This SAB, as amended by SAB No. 101A and No. 101B, is effective for
the Company's fourth quarter of fiscal year 2000. The SAB is not expected to
have a significant impact on the Company's accounting and reporting
requirements.
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This new standard 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.
This standard, as amended by SFAS No. 137, is effective for the Company's 2001
fiscal year. The Company has not yet completed its evaluation of this standard
or its impact on the Company's accounting and reporting requirements.
Page 15
<PAGE>
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 26 weeks ended August 3, 2000, or the 26 weeks ended July 29,
1999.
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 utilizing 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 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 and the Company's ability to integrate the operations
of ASC.
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.
Page 16
<PAGE>
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 page 27 of the Company's 1999
Annual Report to Stockholders.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
On August 23, 2000, a class action complaint was filed against Jewel Food
Stores, Inc., an indirect 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 Supermarkets, Inc., Case No. 00L 009664) alleging milk price
fixing. The Company intends to vigorously defend against this lawsuit, and at
this stage of the litigation the Company believes that it has strong defenses
against 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 in principle has been reached 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. The
proposed settlement is subject to court approval. Under the proposed settlement
agreement, current and former employees who meet eligibility criteria may
present their claims to a settlement administrator. While the Company cannot
specify the exact number of individuals who are likely to submit claims and the
exact amount of their claims, the $37 pre-tax ($22 after tax) one-time 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.
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.
Item 2. Changes in Securities
In accordance with the Company's $1,900 revolving credit agreement, the
Company's consolidated tangible net worth, as defined, shall not be less than
$2,100.
Item 3. Defaults upon Senior Securities
Not applicable.
Page 17
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
The Company held its Annual Meeting of Stockholders on June 15, 2000, and
transacted the following business:
(a) Election of Class II Directors:
<TABLE>
<CAPTION>
Nominee Votes For Votes Withheld
------------------------------ --------------------------- ----------------------------
<S> <C> <C> <C>
A. Gary Ames 374,543,074 4,439,203
Paul I. Corddry 374,585,295 4,396,982
Fernando R. Gumucio 372,627,025 6,355,252
Beatriz Rivera 374,526,141 4,456,136
Arthur K. Smith 374,432,738 4,549,539
Thomas J. Wilford 369,979,626 9,002,651
</TABLE>
Continuing Class I Directors (Term expiring in 2002):
<TABLE>
<S> <C> <C> <C>
Teresa Beck Clark A. Johnson Charles D. Lein
Victor L. Lund Gary G. Michael Thomas L. Stevens, Jr.
Steven D. Symms
</TABLE>
Continuing Class III Directors (Term expiring in 2001):
<TABLE>
<S> <C> <C> <C>
Cecil D. Andrus Pamela G. Bailey Henry I. Bryant
John B. Fery J. B. Scott Will M. Storey
</TABLE>
Director Emeritus:
<TABLE>
<S> <C>
Kathryn Albertson
</TABLE>
(b) Ratification of Appointment of Independent Auditors:
<TABLE>
<CAPTION>
Votes Broker
Votes For Against Abstentions Nonvotes
----------------------- ------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C>
376,811,000 851,603 1,319,674 0
</TABLE>
(c) Stockholder proposal to recommend declassification of the Board of
Directors:
<TABLE>
<CAPTION>
Votes Broker
Votes For Against Abstentions Nonvotes
----------------------- ------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C>
175,616,630 159,929,489 3,543,206 39,892,952
</TABLE>
(d) Stockholder proposal to recommend adoption of the CERES Principles for
environmental accountability:
<TABLE>
<CAPTION>
Votes Broker
Votes For Against Abstentions Nonvotes
----------------------- ------------------------ ----------------------- ------------------------
<S> <C> <C> <C> <C>
17,280,189 308,409,768 13,402,578 39,889,742
</TABLE>
Item 5. Other Information
Not applicable.
Page 18
<PAGE>
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
<TABLE>
<CAPTION>
Number Description
<S> <C> <C>
27 Financial data schedule for the 26 weeks ended August 3, 2000.
</TABLE>
b. The following reports on Form 8-K were filed during the quarter ended
August 3, 2000:
None
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: September 11, 2000 /S/ A. Craig Olson
--------------------- ---------------------------------
A. Craig Olson
Executive Vice President
and Chief Financial Officer
Page 19
