FORM 10-Q
18
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 2, 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 December 6, 2000: 409,294,951
Page 1
<PAGE>
PART I. FINANCIAL INFORMATION
ALBERTSON'S, INC.
CONSOLIDATED EARNINGS
(in millions except per share data)
(unaudited)
<TABLE>
<CAPTION>
13 WEEKS ENDED 39 WEEKS ENDED
---------------------------------- --------------------------------------
November 2, October 28, November 2, October 28,
2000 1999 2000 1999
---------------- ----------------- ------------------ -------------------
<S> <C> <C> <C> <C>
Sales $8,991 $8,982 $27,218 $27,579
Cost of sales 6,438 6,517 19,514 20,056
---------------- ----------------- ------------------ -------------------
Gross profit 2,553 2,465 7,704 7,523
Selling, general and
administrative expenses 2,168 2,148 6,521 6,378
Merger-related expense
(income) 1 (21) 2 409
Litigation Settlement 37 37
---------------- ----------------- ------------------ -------------------
Operating profit 384 301 1,181 699
Other (expenses) income:
Interest, net (99) (84) (281) (244)
Other, net (1) 3 5
---------------- ----------------- ------------------ -------------------
Earnings before
income taxes and extra-
ordinary item 284 217 903 460
Income taxes 112 87 358 297
---------------- ----------------- ------------------ -------------------
Earnings before
extraordinary item 172 130 545 163
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7 (23)
---------------- ----------------- ------------------ -------------------
NET EARNINGS $ 172 $ 130 $ 545 $ 140
================ ================= ================== ===================
BASIC EARNINGS PER SHARE:
Earnings before
extraordinary item $ 0.41 $ 0.31 $ 1.29 $ 0.39
Extraordinary item (0.06)
---------------- ----------------- ------------------ -------------------
Net earnings $ 0.41 $ 0.31 $ 1.29 $ 0.33
================ ================= ================== ===================
DILUTED EARNINGS PER SHARE:
Earnings before
extraordinary item $ 0.41 $ 0.31 $ 1.29 $ 0.39
Extraordinary item (0.06)
---------------- ----------------- ------------------ -------------------
Net earnings $ 0.41 $ 0.31 $ 1.29 $ 0.33
================ ================= ================== ===================
WEIGHTED AVERAGE NUMBER OF
COMMON SHARES OUTSTANDING:
Basic 417 424 421 422
Diluted 417 424 421 423
</TABLE>
See Notes to Consolidated Financial Statements.
Page 2
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED BALANCE SHEETS
(in millions)
<TABLE>
<CAPTION>
November 2,
2000 February 3,
(unaudited) 2000
------------------- -------------------
ASSETS
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 38 $ 231
Accounts and notes receivable 531 587
Inventories 3,527 3,481
Prepaid expenses 83 155
Property held for resale 82 100
Refundable income taxes 7
Deferred income taxes 30 29
------------------- -------------------
TOTAL CURRENT ASSETS 4,298 4,583
OTHER ASSETS 427 456
GOODWILL AND INTANGIBLES, net 1,721 1,760
LAND, BUILDINGS AND EQUIPMENT (net of
accumulated depreciation and amortization
of $5,509 and $5,087, respectively) 9,467 8,911
------------------- -------------------
$15,913 $15,710
=================== ===================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 2,486 $ 2,162
Salaries and related liabilities 512 555
Taxes other than income taxes 193 172
Income taxes 82
Self-insurance 180 187
Unearned income 118 110
Other current liabilities 129 115
Merger-related accruals 15 33
Current maturities of long-term debt 116 623
Current capitalized lease obligations 18 19
------------------- -------------------
TOTAL CURRENT LIABILITIES 3,767 4,058
LONG-TERM DEBT 5,295 4,805
CAPITALIZED LEASE OBLIGATIONS 223 187
SELF-INSURANCE 229 222
DEFERRED INCOME TAXES 89 52
OTHER LONG-TERM LIABILITIES AND DEFERRED CREDITS 660 684
STOCKHOLDERS' EQUITY:
Preferred stock - $1.00 par value; authorized - 10 shares; issued - none
Common stock - $1.00 par value; authorized - 1,200 shares; issued - 409
shares and 424 shares, respectively 409 424
Capital in excess of par value 46 145
Retained earnings 5,195 5,133
------------------- -------------------
5,650 5,702
------------------- -------------------
$15,913 $15,710
=================== ===================
</TABLE>
See Notes to Consolidated Financial Statements.
Page 3
<PAGE>
ALBERTSON'S, INC.
CONSOLIDATED CASH FLOWS
(in millions)
(unaudited)
<TABLE>
<CAPTION>
39 WEEKS ENDED
-----------------------------------------------
November 2, October 28,
2000 1999
-------------------- --------------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings $ 545 $ 140
Adjustments to reconcile net earnings to
net cash provided by operating activities:
Depreciation and amortization 695 637
Goodwill amortization 42 44
Noncash merger-related expense 6 283
Net loss on asset sales 1 6
Net deferred income taxes 26 (22)
Increase in cash surrender value of
Company-owned life insurance (3) (5)
Changes in operating assets and liabilities:
Receivables and prepaid expenses 113 134
Inventories (46) (277)
Accounts payable 324 200
Other current liabilities (117) 13
Self-insurance (1) (58)
Unearned income 14 (34)
Other long-term liabilities (31) (62)
-------------------- --------------------
Net cash provided by operating activities 1,568 999
CASH FLOWS FROM INVESTING ACTIVITIES:
Net capital expenditures excluding
noncash activities (1,167) (1,298)
Proceeds from divestitures 359
Decrease (increase) in other assets 19 (157)
-------------------- --------------------
Net cash used in investing activities (1,148) (1,096)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term borrowings 527 1,817
Payments on long-term borrowings (371) (947)
Net commercial paper and bank line activity (187) (498)
Proceeds from stock options exercised 5 30
Cash dividends paid (237) (188)
Stock purchased and retired (350)
Tax payments for options exercised (14)
-------------------- --------------------
Net cash (used in) provided by financing
activities (613) 200
-------------------- --------------------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS (193) 103
CASH AND CASH EQUIVALENTS AT BEGINNING
OF PERIOD 231 116
-------------------- --------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 38 $ 219
==================== ====================
</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 $645 and
$603 at November 2, 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 39 weeks ended November 2, 2000, include $109
of merger-related costs ($68 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 4
Write-down of assets to net
realizable value 3 21 24
Integration and other costs 81 81
------------------- ------------------ ------------------ -------------------
Total costs (1) 2 108 109
Cash expenditures (13) (4) (110) (127)
------------------- ------------------ ------------------ -------------------
Merger-related accruals at
November 2, 2000 $ 12 $1 $2 $ 15
=================== ================== ================== ===================
</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 November 2, 2000, and no
further terminations are expected to be made under this plan.
The write-down of assets to net realizable value includes the loss on
disposal of redundant facilities and information technology equipment 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 November 2, 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 are being
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>
39 Weeks Ended 39 Weeks Ended
November 2, 2000 October 28, 1999
------------------------ ------------------------
<S> <C> <C>
Cash payments for:
Income taxes $414 $377
Interest, net of amounts
capitalized 254 223
Noncash transactions:
Capitalized leases incurred 50 11
Capitalized leases terminated 2 14
Tax effects related to stock
options (11) 8
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. As of November 2, 2000, 14,563,000 shares of the
Company's common stock, at a total cost of $350, has been purchased and retired
under this authorization. This authorization has been increased to $1,500 and
its term has been extended to December 6, 2001. Refer to the "Subsequent Event"
note.
Page 7
<PAGE>
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 and No. 138, 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.
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 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 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.
Page 8
<PAGE>
Subsequent Event
The Board of Directors on December 6, 2000, increased the current $500 stock
purchase program by an additional $1,000, for a total of $1,500 authorized for
the purchase of Company common stock. The revised stock purchase program
authorizes, but does not require, the Company to purchase and retire up to
$1,500 of the Company's common stock during the period beginning April 25, 2000,
and ending December 6, 2001.
Page 9
<PAGE>
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:
<TABLE>
<CAPTION>
Percent to Sales
13 weeks ended Percentage
11-2-00 10-28-99 Increase
---------------- ----------------- ------------------
<S> <C> <C> <C>
Sales 100.00% 100.00% 0.1%
Gross profit 28.40 27.45 3.6
Selling, general and
administrative expenses 24.11 23.91 0.9
Merger-related expense
(income) 0.01 (0.23) n.m.
Operating profit 4.28 3.35 27.8
Interest expense, net 1.11 0.94 18.2
Earnings before
income taxes 3.16 2.41 31.2
Net earnings 1.91 1.45 32.3
n.m. - not meaningful
</TABLE>
Sales for the quarter ended November 2, 2000, increased 0.1% in total, and
increased by 2.9% when excluding sales from stores required to be divested, over
the same quarter of the prior year. Identical store sales decreased 0.5% and
comparable store sales, which include replacement stores, decreased 0.2%.
Increases in sales are primarily attributable to the continued development of
new stores. During the quarter the Company opened 13 combination food and drug
stores and 6 stand alone drugstores, while closing 8 supermarkets and 6
drugstores. Net retail square footage increased by 4.0% from the prior year.
Management estimates that there was overall inflation in products the Company
sells of approximately 0.3% (annualized).
As part of its efforts to increase sales, the Company continues to implement
best practices across the Company and make investments in programs to fine tune
pricing, increase promotions, and 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 10
<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 higher margin departments such as Service Deli, Pharmacy and Bakery
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 $8 (0.08% to sales) for the 13 weeks
ended November 2, 2000, as compared to $9 (0.10% to sales) for the 13 weeks
ended October 28, 1999.
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.
Net interest expense for the 13 weeks ended November 2, 2000, increased
primarily due to a higher weighted average interest rate on the outstanding debt
during the 13 weeks ended November 2, 2000, as compared to the 13 weeks ended
October 28, 1999.
Merger-Related and Exit Costs
Results of operations for the 13 weeks ended November 2, 2000, include $26 of
merger-related and exit costs ($15 after tax). The following table presents the
pre-tax costs incurred by category of expenditure:
<TABLE>
<CAPTION>
------------- ------------- -------------
Merger Period
Charge Costs Total
------------- ------------- -------------
<S> <C> <C> <C>
Severance costs $(2) $ 1 $(1)
Write-down of assets to net realizable value 3 5 8
Integration and other costs 19 19
------------- ------------- -------------
Total costs $ 1 $25 $26
============= ============= =============
</TABLE>
Severance costs consist of obligations to employees who were terminated or
were notified of termination under a plan authorized by senior management. There
were no merger-related terminations during the quarter ended November 2, 2000,
and no further terminations are expected under this plan.
The write-down of assets to net realizable value includes the estimated loss
on disposal of redundant facilities and information technology equipment
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.
Page 11
<PAGE>
The Company expects to incur additional after-tax merger-related and exit
costs of approximately $90 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 and other one-time 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 November 2, 2000 13 Weeks Ended October 28, 1999
------------------------------------------------- -------------------------------------------------
W/O Percent W/O Percent
As One- One- To As One- One- To
Reported Time Time Sales Reported Time Time Sales
------------ ---------- ------------ ------------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $8,991 $8,991 100.00% $8,982 $8,982 100.00%
Cost of sales 6,438 $ (7) 6,431 71.52 6,517 $ (17) 6,500 72.36
------------ ---------- ------------ ------------ ------------ ---------- ----------- -------------
Gross profit 2,553 7 2,560 28.48 2,465 17 2,482 27.64
Selling, general and
administrative expenses 2,168 (18) 2,150 23.91 2,148 (59) 2,089 23.26
Merger-related expense (income) 1 (1) (21) 21
Litigation settlement 37 (37)
------------ ---------- ------------ ------------ ------------ ---------- ----------- -------------
Operating profit 384 26 410 4.57 301 92 393 4.38
Interest expense, net (99) (99) (1.11) (84) (84) (0.94)
Other expense, net (1) (1) (0.01)
------------ ---------- ------------ ------------ ------------ ---------- ----------- -------------
Earnings before income taxes 284 26 310 3.45 217 92 309 3.44
Income taxes 112 11 123 1.36 87 37 124 1.38
------------ ---------- ------------ ------------ ------------ ---------- ----------- -------------
Net Earnings $172 $15 $187 2.09% $130 $55 $185 2.06%
============ ========== ============ ============ ============ ========== =========== =============
</TABLE>
Page 12
<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
39 weeks ended Increase
11-2-00 10-28-99 (Decrease)
---------------- ----------------- ------------------
<S> <C> <C> <C>
Sales 100.00% 100.00% (1.3)%
Gross profit 28.30 27.28 2.4
Selling, general and
administrative expenses 23.96 23.13 2.2
Merger-related expense 0.01 1.48 n.m.
Operating profit 4.34 2.54 68.9
Interest expense, net 1.03 0.88 1.5
Earnings before
income taxes 3.32 1.67 96.3
Net earnings 2.00 0.51 288.3
n.m. - not meaningful
</TABLE>
Sales for the 39 weeks ended November 2, 2000, decreased by 1.3% in total,
and increased by 3.9% when excluding sales from stores required to be divested,
over the same period of the prior year. Identical store sales increased 0.3% and
comparable store sales, which include replacement stores, increased 0.6%.
Increases in sales are primarily attributable to the continued development of
new stores and identical and comparable store sales increases. During the 39
weeks ended November 2, 2000, the Company opened 45 combination food and drug
stores, 1 conventional store, 1 warehouse store and 18 stand alone drugstores,
while closing 35 supermarkets and 15 drugstores. The new stores include 6 stores
that were acquired in two separate transactions during second quarter. Net
retail square footage increased by 4.0% from the prior year. Management
estimates that there was overall inflation in products the Company sells of
approximately 0.3% (annualized).
As part of its efforts to increase sales, the Company continues to implement
best practices across the Company and make investments in programs to fine tune
pricing, increase promotions, and 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 such as Service Deli, Pharmacy and Bakery 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 $20 (0.07% to sales) for the 39
weeks ended November 2, 2000, as compared to $27 (0.10% to sales) for the 39
weeks ended October 28, 1999.
Page 13
<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.
Net interest expense for the 39 weeks ended November 2, 2000, included a $16
interest expense reversal due primarily to a favorable income tax settlement.
The increase in net interest expense, as adjusted by the interest expense
reversal, resulted primarily from higher weighted average interest rates during
the 39 weeks ended November 2, 2000, as compared to the 39 weeks ended October
28, 1999.
Merger-Related and Exit Costs
Results of operations for the 39 weeks ended November 2, 2000, include $109
of merger-related and exit costs ($68 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 $4
Write-down of assets to net realizable value 3 21 24
Integration and other costs 81 81
------------- ------------- ------------- -------------
Total costs $ (1) $2 $108 $109
============= ============= ============= =============
</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 November 2, 2000, and no
further terminations are expected under this plan.
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 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 $90 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 14
<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>
------------------------------------------------- -------------------------------------------------
39 Weeks Ended November 2, 2000 39 Weeks Ended October 28, 1999
------------------------------------------------- -------------------------------------------------
W/O Percent W/O Percent
As One- One- To As One- One- To
Reported Time Time Sales Reported Time Time Sales
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Sales $27,218 $27,218 100.00% $27,579 $27,579 100.00%
Cost of sales 19,514 $(30) 19,484 71.58 20,056 $ (21) 20,035 72.65
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
Gross profit 7,704 30 7,734 28.42 7,523 21 7,544 27.35
Selling, general and
administrative expenses 6,521 (97) 6,424 23.60 6,378 (146) 6,232 22.60
Merger-related expense 2 (2) 409 (409)
Litigation settlement 37 (37)
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
Operating profit 1,181 129 1,310 4.81 699 613 1,312 4.76
Interest expense, net (281) (281) (1.03) (244) (244) (0.88)
Other income, net 3 3 0.01 5 5 0.02
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
Earnings before income taxes
and extraordinary item 903 129 1,032 3.79 460 613 1,073 3.89
Income taxes 358 50 408 1.50 297 131 428 1.55
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
Earnings before extraordinary
item 545 79 624 2.29 163 482 645 2.34
Extraordinary loss on
extinguishment of debt, net
of tax benefit of $7 (23) 23
------------- --------- ------------ ------------ ------------ ---------- ----------- -------------
Net Earnings $ 545 $ 79 $ 624 2.29% $ 140 $ 505 $ 645 2.34%
============= ========= ============ ============ ============ ========== =========== =============
</TABLE>
Liquidity and Capital Resources
Cash provided by operating activities during the 39 weeks ended November 2,
2000, increased to $1,568, compared to $999 in the prior year. The positive
effects of higher earnings, increased inventory turns at distribution centers
and stronger accounts payable leverage 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 39 weeks ended November 2,
2000, include the net reduction of debt of $31 and the payment of dividends of
$237. Pursuant to the stock buyback program approved by Albertson's Board of
Directors on April 25, 2000, the Company purchased and retired 14,563,000 shares
of its common stock during the 39 weeks ended November 2, 2000, at a total cost
of $350.
Page 15
<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 $1,416
of commercial paper borrowings outstanding at November 2, 2000, compared to
$1,628 outstanding as of February 3, 2000.
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 November 2, 2000, $25 was outstanding under the
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 are being
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 and No. 138, 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 16
<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 39 weeks ended November 2, 2000, or the 39 weeks ended October
28, 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 17
<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 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 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 18
<PAGE>
Item 4. Submission of Matters to a Vote of Security Holders
Not applicable
Item 5. Other Information
On December 7, 2000, Gary G. Michael, chairman of the board and chief
executive officer of Albertson's, Inc. announced his intention to retire at the
time of the Company's next annual meeting, June of 2001.
Albertson's Board of Directors has formed a search committee to review
internal and external candidates for Mr. Michael's successor.
Item 6. Exhibits and Reports on Form 8-K
a. Exhibits
Number Description
27 Financial data schedule for the 39 weeks ended November 2,
2000.
b. The following reports on Form 8-K were filed during the quarter ended
November 2, 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: December 11, 2000 /S/ A. Craig Olson
--------------------- ---------------------------------
A. Craig Olson
Executive Vice President
and Chief Financial Officer
Page 19
