SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x Quarterly report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the quarterly period ended
June 18, 1994 or
Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 for the transition period from
to
--------- -------
Commission file number 1-303
THE KROGER CO.
An Ohio Corporation I.R.S. Employer Identification
No. 31-0345740
1014 Vine Street, Cincinnati, OH 45202
- ---------------------------------------- ----------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (513) 762-4000
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 .
-------- ---------
There were 110,413,314 shares of Common Stock ($1 par value)
outstanding as of July 22, 1994.
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
The unaudited information for the quarters ended June 18, 1994 and
June 19, 1993 includes the results of operations of The Kroger Co.
for the 12 and 24 week periods ended June 18, 1994 and June 19,
1993, and of Dillon Companies, Inc. for the 13 and 26 week periods
ended July 2, 1994 and July 3, 1993. In the opinion of management,
the information reflects all adjustments (consisting only of normal
recurring adjustments) which are necessary for a fair presentation
of results of operations for such periods but should not be
considered as indicative of results for a full year.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
---------------------- -------------------
June 18, June 19, June 18, June 19,
1994 1993 1994 1993
---------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Sales . . . . . . . . . . . . . . . . . . . . . . . . . $5,394,228 $5,329,373 $10,723,032 $10,503,298
---------- ---------- ----------- -----------
Costs and expenses:
Merchandise costs, including warehousing and
transportation. . . . . . . . . . . . . . . . . . . . 4,081,213 4,074,455 8,134,114 8,038,894
Operating, general and administrative. . . . . . . . . 988,588 956,721 1,962,877 1,889,070
Rent . . . . . . . . . . . . . . . . . . . . . . . . . 70,757 68,586 142,822 136,155
Depreciation and amortization. . . . . . . . . . . . . 64,384 59,903 126,694 122,879
Interest expense, including interest on obligations
under capital leases, net . . . . . . . . . . . . . . 75,008 94,591 151,040 191,580
Other charges. . . . . . . . . . . . . . . . . . . . . 22,725 22,725
---------- ---------- ----------- -----------
Total. . . . . . . . . . . . . . . . . . . . . . . 5,279,950 5,276,981 10,517,547 10,401,303
---------- ---------- ----------- -----------
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Earnings before income tax expense, extraordinary
loss and cumulative effect of change in accounting . . 114,278 52,392 205,485 101,995
Tax expense . . . . . . . . . . . . . . . . . . . . . . 44,300 22,771 79,817 42,910
---------- ---------- ---------- -----------
Earnings before extraordinary loss and cumulative
effect of change in accounting . . . . . . . . . . . . 69,978 29,621 125,668 59,085
Extraordinary loss (net of income tax credit) . . . . . (2,645) (2,136) (10,978) (11,178)
Cumulative effect of change in accounting (net of
income tax credit) . . . . . . . . . . . . . . . . . . (159,193)
---------- ---------- ---------- -----------
Net earnings (loss). . . . . . . . . . . . . . . . $ 67,333 $ 27,485 $ 114,690 $ (111,286)
========== ========== ========== ===========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Primary earnings (loss) per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .62 $ .27 $ 1.12 $ .57
Extraordinary loss . . . . . . . . . . . . . . . . . . (.02) (.02) (.10) (.11)
Cumulative effect of change in accounting. . . . . . . (1.54)
----- ----- ------ ------
Net earnings (loss). . . . . . . . . . . . . . . . . $ .60 $ .25 $ 1.02 $(1.08)
===== ===== ====== ======
Average number of common shares used in primary per
share calculation. . . . . . . . . . . . . . . . . . . 112,966 108,393 112,445 103,079
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Fully diluted earnings (loss) per common share:
Earnings from operations . . . . . . . . . . . . . . . $ .57 $ .27 $ 1.02 $ .55
Extraordinary loss . . . . . . . . . . . . . . . . . . (.02) (.02) (.08) (.09)
Cumulative effect of change in accounting. . . . . . . (1.32)
----- ----- ------ ------
Net earnings (loss). . . . . . . . . . . . . . . . $ .55 $ .25 $ .94 $ (.86)
===== ===== ====== ======
Average number of common shares used in fully diluted
per share calculations . . . . . . . . . . . . . . . . 130,272 125,482 129,963 120,408
</TABLE>
- ---------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED BALANCE SHEET
(in thousands of dollars)
(unaudited)
<CAPTION>
June 18, January 1,
1994 1994
---------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash and temporary cash investments . . . . . . . . . . $ 105,590 $ 121,253
Receivables . . . . . . . . . . . . . . . . . . . . . . 249,363 287,925
Inventories:
FIFO cost . . . . . . . . . . . . . . . . . . . . . . 1,869,001 2,001,376
Less LIFO reserve . . . . . . . . . . . . . . . . . . (428,597) (422,097)
---------- ----------
1,440,404 1,579,279
Property held for sale. . . . . . . . . . . . . . . . . 52,091 37,721
Prepaid and other current assets. . . . . . . . . . . . 217,425 199,652
---------- ----------
Total current assets. . . . . . . . . . . . . . . . 2,064,873 2,225,830
Property, plant and equipment, net. . . . . . . . . . . . 2,033,774 1,981,308
Investments and other assets. . . . . . . . . . . . . . . 272,357 273,326
---------- ----------
Total Assets. . . . . . . . . . . . . . . . . . . . $4,371,004 $4,480,464
========== ==========
</TABLE>
<TABLE>
<S> <C> <C>
LIABILITIES
Current liabilities
Current portion of long-term debt . . . . . . . . . . . $ 83,776 $ 63,053
Current portion of obligations under
capital leases. . . . . . . . . . . . . . . . . . . . 8,267 7,962
Accounts payable. . . . . . . . . . . . . . . . . . . . 1,298,564 1,357,532
Other current liabilities . . . . . . . . . . . . . . . 881,856 822,284
---------- ----------
Total current liabilities . . . . . . . . . . . . . 2,272,463 2,250,831
Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,692,380 3,975,362
Obligations under capital leases. . . . . . . . . . . . . 159,729 159,651
Deferred income taxes . . . . . . . . . . . . . . . . . . 174,861 182,891
Other long-term liabilities . . . . . . . . . . . . . . . 377,445 371,371
---------- ----------
Total Liabilities . . . . . . . . . . . . . . . . . 6,676,878 6,940,106
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
SHAREOWNERS' DEFICIT
Common capital stock, par $1, at stated value
Authorized: 350,000,000 shares
Issued: 1994 - 119,785,798 shares
1993 - 118,549,173 shares. . . . . . . . . . . 322,312 308,534
Accumulated deficit . . . . . . . . . . . . . . . . . . . (2,376,242) (2,490,932)
Common stock in treasury, at cost
1994 - 9,907,937 shares
1993 - 10,901,846 shares . . . . . . . . . . . (251,944) (277,244)
---------- ----------
Total Shareowners' Deficit (2,305,874) (2,459,642)
---------- ----------
Total Liabilities and Shareowners' Deficit. . . . . . $4,371,004 $4,480,464
========== ==========
</TABLE>
- -------------------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of dollars)
(unaudited)
<CAPTION>
2 Quarters Ended
-------------------------------
June 18, June 19,
1994 1993
----------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net earnings(loss). . . . . . . . . . . . . . . . . . . . . . . $ 114,690 $ (111,286)
Adjustments to reconcile net earnings(loss) to net cash
provided by operating activities:
Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 10,978 11,178
Cumulative effect of change in accounting. . . . . . . . . . 159,193
Depreciation and amortization. . . . . . . . . . . . . . . . 126,694 122,879
Amortization of discount on Junior Subordinated Debentures . 41,780
Amortization of deferred financing costs . . . . . . . . . . 7,952 6,467
LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 6,500 7,750
Net increase in cash from changes in operating
assets and liabilities, detailed below . . . . . . . . . . 160,152 115,868
Other changes, net . . . . . . . . . . . . . . . . . . . . . 1,445 379
---------- ----------
Net cash provided by operating activities . . . . . . . . 428,411 354,208
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (182,255) (154,526)
Proceeds from sale of property, plant, and equipment. . . . . . 7,937 10,439
Increase in property held for sale. . . . . . . . . . . . . . . (14,330) (17,606)
Increase in other investments . . . . . . . . . . . . . . . . . (7,169) (24,071)
---------- ----------
Net cash used by investing activities . . . . . . . . . . (195,817) (185,764)
---------- ----------
</TABLE>
<TABLE>
<S> <C> <C>
CASH FLOWS FROM FINANCING ACTIVITIES:
Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (14,062) (16,019)
Financing charges incurred. . . . . . . . . . . . . . . . . . . (6,239) (5,829)
Principal payments under capital lease obligations. . . . . . . (3,911) (3,610)
Proceeds from issuance of long-term debt. . . . . . . . . . . . 84,546 300,333
Reductions in long-term debt. . . . . . . . . . . . . . . . . . (346,805) (678,440)
Proceeds from sale of treasury stock. . . . . . . . . . . . . . 22,290 17,769
Proceeds from issuance of capital stock . . . . . . . . . . . . 15,924 205,427
---------- ----------
Net cash used by financing activities . . . . . . . . . . (248,257) (180,369)
---------- ---------
</TABLE>
<TABLE>
<S> <C> <C>
Net increase (decrease) in cash and temporary cash investments. . (15,663) 11,925
Cash and temporary cash investments:
Beginning of year . . . . . . . . . . . . . . . . . . . . . . 121,253 103,995
---------- ----------
End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 105,590 $ 92,070
========== ==========
</TABLE>
<TABLE>
<S> <C> <C>
INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES:
Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 132,375 $ 102,141
Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 38,562 15,132
Prepaid and other current assets. . . . . . . . . . . . . . . (17,313) (21,541)
Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (58,968) (44,412)
Deferred income taxes . . . . . . . . . . . . . . . . . . . . (8,030) (14,327)
Other liabilities . . . . . . . . . . . . . . . . . . . . . . 73,526 78,875
---------- ----------
$ 160,152 $ 115,868
========== ==========
</TABLE>
- ---------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
<TABLE>
Supplemental disclosures of cash flow information:
<CAPTION>
2 Quarters Ended
--------------------------
June 18, June 19,
1994 1993
---------- ----------
<S> <C> <C>
Cash paid during the period for:
Interest (net of amount capitalized) $158,415 $167,356
Income taxes 67,408 49,836
</TABLE>
- ---------------------------------------------------------
The accompanying notes are an integral part
of the consolidated financial statements.
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
1. CONTINGENCIES
-------------
The Company continuously evaluates contingencies based upon
the best available evidence. Management believes that
allowances for loss have been provided to the extent necessary
and that its assessment of contingencies is reasonable. To
the extent that resolution of contingencies results in amounts
that vary from management's estimates, future earnings will be
charged or credited.
The principal contingencies are described below:
Income Taxes - The Company has settled all tax years through
1983 with the Internal Revenue Service. The Internal Revenue
Service has completed its examination of the Company's tax
returns for 1984 through 1986 and the Company has made
payments based on its proposed settlement. Efforts to settle
some unresolved issues for years 1984 through 1986 with the
Appeals Division of the Internal Revenue Service have been
unsuccessful. Therefore, the Company has filed a petition
with the United States Tax Court. The Company has provided
for this and other tax contingencies.
Insurance - The Company's workers' compensation risks are
self-insured in certain states and, where insured with a
third-party, are based on retrospective premiums. The
liability for these risks is accounted for on a present value
basis. In addition, certain levels of insured general
liability risks are based on retrospective premiums. Actual
claim settlements and expenses incident thereto may differ
from the provisions for loss. Other levels of general
liability risks have been underwritten by a subsidiary.
Operating divisions and subsidiaries have paid premiums, and
the insurance subsidiary has provided loss allowances, based
upon actuarially-determined estimates.
Litigation - The Company is involved in various legal actions
arising in the normal course of business. Management is of
the opinion that their outcome will not have a material
adverse effect on the Company's financial position or results
of operations.
2. INCOME TAXES
------------
The effective income tax rate differs from the expected
statutory rate primarily due to the effect of certain state
taxes.
3. DEPRECIATION
------------
Depreciation expense for the two quarters ended June 19, 1993
includes a $4.4 million charge related to a change in the
estimated useful life of certain computer equipment.
4. OTHER CHARGES
-------------
The other charge reflected in the second quarter 1993 earnings
is a pre-tax charge of $22.7 million in connection with the
disposition of 15 stores in San Antonio, Texas. Severance
pay, unemployment benefits costs and loss on sale of assets
are included in this charge.
<PAGE>
5. EXTRAORDINARY LOSS
------------------
The extraordinary loss for the two quarters ended June 18,
1994 and June 19, 1993 of $11.0 million and $11.2 million,
respectively (net of income taxes of $7.0 million and $6.9
million, respectively) and for the second quarter ended June
18, 1994 and June 19, 1993 of $2.6 million and $2.1 million,
respectively (net of income taxes of $1.6 million and $1.3
million, respectively) is related to the early retirement of
long-term debt. During the second quarter of 1994 the Company
redeemed its remaining outstanding 8-3/4% Senior Subordinated
Reset Notes and repurchased $52.9 million of its other senior
subordinated debt issues. Through two quarters of 1994, early
repurchases or redemptions of long-term debt have totalled
$296.6 million. Redemptions and purchases of debt were funded
by excess cash from operations, proceeds from miscellaneous
asset sales, proceeds from the sale of treasury stock to
employee benefit plans, proceeds from new issuances of debt,
and funds borrowed under the Company's working capital
facility. (See Note 7)
6. EARNINGS (LOSS) PER COMMON SHARE
--------------------------------
Primary earnings (loss) per common share equals net earnings
(loss) divided by the weighted average number of common shares
outstanding, after giving effect to dilutive stock options.
Fully diluted earnings (loss) per common share are computed by
adjusting both net earnings and shares outstanding for the
effect of the conversion of the Convertible Junior
Subordinated Debentures issued in March 1991 and the
Convertible Junior Subordinated Notes issued in December 1992.
7. LONG-TERM DEBT ISSUANCES
------------------------
In the second quarter of 1994 the Company issued $20.0 million
General Term Notes(R), Series B, with initial interest rates,
either fixed or variable, ranging from 6-1/4% to 8-1/4% and
maturities ranging from 1999 through 2004. Year-to-date
issuances include $13.4 million General Term Notes(R), Series
A and $63.3 million General Term Notes(R), Series B. The net
proceeds of the offerings were initially used to repay amounts
outstanding under the working capital facility and,
thereafter, the Company used amounts available under the
working capital facility to purchase, on the open market,
portions of its high-cost long-term debt and to fund the March
15, 1994 call of its 11-1/8% Senior Notes and the June 15,
1994 call of its 8-3/4% Senior Subordinated Reset Notes.
8. SUBSEQUENT EVENTS
-----------------
On July 19, 1994 the Company entered into a new bank credit
agreement. This agreement replaces the credit agreement dated
as of January 21, 1992. The agreement provides for a seven
year revolving credit facility in the amount of $1.75 billion.
The agreement reduces interest rates on the Company's bank debt
compared to comparable borrowings under the prior credit agree-
ment and allows the Company to significantly increase capital
expenditures.
The Company expects to incur an extraordinary loss in the
third quarter 1994 of approximately $6.3 million, net of
income tax credit, related to the write-off of deferred
financing costs associated with its previous credit agreement.
(R) Registered Service mark of J. W. Korth & Company
<PAGE>
On July 15, 1994, a subsidiary of Revco D.S., Inc. acquired
through merger Hook-SupeRx, Inc., a drug store company in
which the Company had owned a minority interest. As a part of
this transaction, all shareholders, including the Company,
received $13.75 in exchange for each share of Hook-SupeRx,
Inc.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- ---------------------
SALES
- -----
Total sales for the second quarter of 1994 were $5.4 billion
compared to $5.3 billion in the second quarter of 1993, a 1.2%
increase. Food stores sales for the second quarter 1994 were 3.6%
ahead of the second quarter 1993. The increase in food stores
sales resulted from, among other things, the Company's pricing and
promotional strategies tailored to individual markets and the
continued expansion of net square footage from new stores.
Inflation was not a factor in the Company's sales results. Sales
in identical food stores, stores that have been in operation for
one full year and have not been expanded or relocated, increased
1.8%.
A review of sales trends by lines of business includes:
<TABLE>
<CAPTION>
(in thousands of dollars)
% of 1994 2nd Quarter
----------------------
Lines of Business Sales 1994 1993 Change
--------------------- --------- ---------- ---------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.2% $5,022,777 $4,846,942 +3.6%
Convenience Stores .. 4.2% 228,558 247,035 (7.5%)
Other sales ........ 2.6% 142,893 235,396 (39.3%)
--------- ---------- ----------
Total sales ........ 100.0% $5,394,228 $5,329,373 +1.2%
</TABLE>
<TABLE>
<CAPTION>
(in thousands of dollars)
% of 1994 2 Quarters Year-to-date
------------------------
Lines of Business Sales 1994 1993 Change
--------------------- --------- ----------- ----------- ------
<S> <C> <C> <C> <C>
Food Stores ........ 93.0% $ 9,975,420 $ 9,576,501 +4.2%
Convenience Stores .. 4.0% 425,762 461,848 (7.8%)
Other sales ........ 3.0% 321,850 464,949 (30.1%)
--------- ----------- -----------
Total sales ........ 100.0% $10,723,032 $10,503,298 +2.1%
</TABLE>
Sales in identical convenience stores increased 1.4%. Convenience
stores' identical grocery sales increased 3.1% and identical
gasoline sales decreased .6%. The decrease in gasoline sales was
due to the combination of a 2.8% decrease in the average retail
price per gallon offset in part by a 2.3% increase in gallons sold.
The decrease in convenience stores sales is the result of excluding
certain franchised store sales which were included in reported
sales in prior years. Adjusting 1993 sales to exclude franchise
sales would result in a 3.7% increase in convenience store sales
for the quarter and 3.2% year-to-date.
Other sales include outside sales by the Company's manufacturing
divisions and sales of general merchandise to a drug store company
in which the Company had maintained an equity investment. (See
Subsequent Events) The drug store company completed an expansion
of its warehouse in early 1994 and discontinued its purchases from
the Company. In 1993, annual sales to the drug store company were
$472 million. Adjusting second quarter and two quarters year-to-
date sales for both years to eliminate these sales would produce
increases of 11.7% and 12.1%, respectively, in other sales.
Total sales for the quarter increased 4.7% after adjusting for the
other sales to the drug store company, the change in franchise
sales accounting, and the exclusion of sales from the Company's San
Antonio stores which were sold in August 1993.
Competitive pressures are expected to increase through the
remainder of the year as supercenters and other low-cost operators
continue to open in the Company's markets. The Company has
responded to new competition with effective programs that, in many
cases, have protected market share and increased sales.
EBITD
- -----
The Company's Credit Agreement and the indentures underlying
approximately $1.5 billion of publicly issued debt contain various
restrictive covenants, many of which are based on earnings before
interest, taxes, depreciation, LIFO charge, unusual and
extraordinary items ("EBITD"). All EBITD based covenants are
based, among other things, upon generally accepted accounting
principles ("GAAP") as applied on a date prior to January 3, 1993.
The ability to generate EBITD at levels sufficient to satisfy the
requirements of these agreements is a key measure of the Company's
financial strength. The presentation of EBITD is not intended to
be an alternative to any GAAP measure of performance but rather to
facilitate an understanding of the Company's performance compared
to its debt covenants. At June 18, 1994 the Company was in
compliance with all covenants of its Credit Agreement and publicly
issued debt. The Company believes it has adequate coverage of its
debt covenants to continue to respond effectively to competitive
conditions.
During the second quarter 1994, EBITD, which does not include the
effect of Statement of Financial Accounting Standards ("SFAS") No.
106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions", increased 9.8% to $261.2 million from $237.9 million.
Year-to-date 1994 EBITD increased 9.4% to $498.7 million from
$455.9 million. The increase in EBITD was the result of many
factors including strong identical store sales increases, benefits
from the Company's commitment to technology and logistics, private
label sales that are outpacing total sales increases, and positive
results from the Company's capital expansion program.
MERCHANDISE COSTS
- -----------------
Merchandise costs, including warehousing and transportation expense
and LIFO charges were favorably influenced by the Company's
investment of time and capital in areas such as coordinated
procurement, direct store delivery systems, consolidated warehouses
and other projects. Merchandise costs as a percent of sales in the
second quarter and year-to-date were:
<TABLE>
<CAPTION>
2nd Quarter Year-to-date
-------------- --------------
1994 1993 1994 1993
------ ------ ------ ------
<S> <C> <C> <C> <C>
Merchandise Costs - LIFO 75.66% 76.45% 75.86% 76.54%
LIFO charges .06% .07% .06% .07%
------ ------ ------ ------
Merchandise Costs - FIFO 75.60% 76.38% 75.80% 76.47%
</TABLE>
Merchandise costs also were favorably influenced by the
discontinuance of the low-margin sales to the drug store company.
Second quarter merchandise costs as a percent of sales adjusted for
these sales declined to 75.66% compared to 76.01% in 1993.
OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES
- ----------------------------------------------
Operating, general and administrative expenses in the second
quarter 1994 increased to 18.3% of sales from 18.0% last year.
Year-to-date operating, general and administrative expenses in 1994
were also 18.3% compared to 18.0% in 1993. Operating, general and
administrative expenses were essentially flat after adjusting for
sales to the drug store company and convenience store franchise
sales.
The Company's recent investment in technology has had a favorable
effect on costs by increasing employee productivity and reducing
store wages. During the quarter, employee costs, which include
wages, salaries, pension costs, and insurance costs declined as a
percent of sales.
The Company is continuing to implement technologies such as store
labor scheduling, point of sale upgrades and time and attendance
programs with the goal of reducing operating costs. Sales growth
has also helped to control operating, general and administrative
expenses as a percent of sales.
NET INTEREST EXPENSE
- --------------------
Net interest expense declined 20.7% to $75.0 million in the second
quarter 1994 from $94.6 million in last year's second quarter.
Year-to-date net interest expense totalled $151.0 million, down
21.2% from last year's first half total of $191.6 million. This
reduction is primarily due to the Company's progress in refinancing
its high-cost, long-term debt, the issuance of equity in 1993, and
improvements in working capital. Total long-term debt at the end
of the second quarter was $3.9 billion, down $269 million from the
second quarter of 1993.
The Company recently entered into a new bank credit agreement (see
Subsequent Events) which will reduce the Company's interest rates on
bank borrowings compared to comparable borrowings under the prior
credit agreement. Nonetheless, as a result of recent increases in
market interest rates, the Company is not revising its estimate of
$330-$340 million of interest expense for all of 1994. This
compares to $390.0 million for 1993.
NET EARNINGS
- ------------
The Company's net earnings in the second quarter 1994 were $67.3
million or $.55 per share on a fully diluted basis compared to net
earnings in the second quarter 1993 of $27.5 million or $.25 per
share. Earnings before the extraordinary loss and the cumulative
effect of a change in accounting totalled $70.0 million in second
quarter 1994 compared to $29.6 million in 1993. The second quarter
1993 included a $22.7 million pre-tax charge ($15.0 million after
tax) for the expenses expected to be incurred in connection with
the disposition of 15 stores in San Antonio, Texas. Year-to-date
earnings before the extraordinary loss and the cumulative effect of
a change in accounting totalled $125.7 million in 1994 compared to
$59.1 million in 1993. The Company had net earnings in 1994 of
$114.7 million compared to a net loss of $111.3 million in the
first half of 1993. Net earnings in 1993 were negatively affected
$159.2 million by the cumulative effect of the change in accounting
for retiree benefits. The first half of 1993 also includes a $4.4
million pre-tax charge related to a change in the estimated useful
life of certain computer equipment and a $22.7 million pre-tax
charge in connection with the San Antonio stores. Net earnings in
1994 were negatively affected by an extraordinary loss of $11.0
million or $.08 per share compared to an extraordinary loss of
$11.2 million or $.09 per share in 1993. The extraordinary loss in
both years resulted from the early retirement of the Company's
high-cost debt, including the redemption in 1994 of the Company's
11-1/8% Senior Notes and the 8-3/4% Senior Subordinated Reset Notes
and in 1993 of the Company's 12-7/8% Senior Subordinated
Debentures.
LIQUIDITY AND CAPITAL RESOURCES
- -------------------------------
During the first half of 1994 the Company redeemed the remaining
outstanding amount of its 11-1/8% Senior Notes and its 8-3/4%
Senior Subordinated Reset Notes and purchased $91.8 million of its
various senior subordinated debt issues.
At the end of the second quarter 1994 the Company had $317.9
million available under its working capital facility to meet short-
term liquidity needs.
Capital expenditures for the second quarter 1994 totaled $98.2
million compared to $80.9 million for the second quarter 1993.
Capital expenditures for the year are expected to total
approximately $500 million compared to $376.1 million during all of
1993. This will enable the Company to open or expand approximately
70-80 stores, including the January 1994 purchase of 10 AppleTree
stores located in Houston, Texas, and remodel an additional 60 to
70 stores. Through two quarters of 1994 the Company had opened,
acquired or expanded 33 food stores.
During the first half of 1994 the Company issued $76.8 million of
senior subordinated notes with interest rates ranging from 6% to 8-
1/4% and maturities ranging from 1999 through 2006. The net
proceeds of the offerings were initially used to repay amounts
outstanding under the working capital facility and thereafter the
Company used amounts available under the working capital facility
to purchase, on the open market, portions of its high-cost long-
term debt and to fund in part the March 15, 1994 call of its 11-
1/8% Senior Notes and the June 15, 1994 call of its 8-3/4% Senior
Subordinated Reset Notes.
Subsequent to the second quarter the Company issued 8.73% First
Mortgage Bonds in the amount of $24.6 million due June 15, 2009.
The proceeds from the bonds were used to repay amounts outstanding
under the working capital facility.
On July 19, 1994 the Company signed a new bank credit agreement
replacing its existing Credit Agreement dated as of January 21,
1992. The agreement is a seven year, $1.75 billion revolving loan
and provides for increases to the amount the Company is permitted
for capital expenditures. (See Subsequent Events)
CONSOLIDATED STATEMENT OF CASH FLOWS
- ------------------------------------
The Company generated $428.4 million of cash from operating
activities during the first half of 1994 compared to $354.2 million
last year which reflects the improved operating results of the
Company. The increase is also due to a decrease in accounts
receivable of $38.6 million during 1994 versus a decrease of $15.1
million in 1993 and a decrease in inventory levels during 1994 of
$132.4 million compared to a decrease of $102.1 million last year.
FIFO merchandise inventories decreased 1% from second quarter 1993
while square footage increased 3% during the same period.
Investing activities used $195.8 million in cash through two
quarters of 1994 compared to $185.8 million last year. Capital
expenditures increased $27.7 million from 1993. This use of cash
was offset by a $16.9 million decrease from 1993 in the purchase of
investments.
Year-to-date financing activities used $248.3 million in cash
compared to $130.4 million last year. The increase is due to a
decline of $400.8 million in proceeds from the sale of debt and
equity issues combined with a decline in long-term debt reductions
of $281.6 million.
SUBSEQUENT EVENTS
- -----------------
On July 19, 1994 the Company entered into a new bank credit
agreement. This agreement replaces the credit agreement dated as
of January 21, 1992. The agreement provides for a seven year
revolving credit facility in the amount of $1.75 billion. The
agreement reduces interest rates on the Company's bank debt
compared to comparable borrowings under the prior credit agree-
ment and allows the Company to significantly increase capital
expenditures.
The Company expects to incur an extraordinary loss in the third
quarter 1994 of approximately $6.3 million, net of income tax
credit, related to the write-off of deferred financing costs
associated with its previous credit agreement.
On July 15, 1994, a subsidiary of Revco D.S., Inc. acquired through
merger Hook-SupeRx, Inc., a drug store company in which the Company
had owned a minority interest. As a part of this transaction, all
shareholders, including the Company, received $13.75 in exchange
for each share of Hook-SupeRx, Inc.
<PAGE>
PART II - OTHER INFORMATION
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
(a) May 19, 1994 -- Annual Meeting
(c) The shareholders elected six directors to serve until the
annual meeting in 1997 and one director to serve until
the annual meeting in 1995 or until their successors have
been elected and qualified, ratified the selection of
Coopers & Lybrand as Company auditors for 1994, approved
an increase in the authorized shares of common stock from
350,000,000 shares to 500,000,000 shares, and approved
the 1994 Long-Term Incentive Plan.
Votes cast were as follows:
To Serve Until 1997 For Withheld Broker Non-Votes
- ------------------- --- -------- ----------------
Reuben V. Anderson 85,657,707 880,485 0
Richard L. Bere 80,599,925 5,938,267 0
Raymond B. Carey, Jr. 85,649,169 889,023 0
John D. Ong 83,949,926 2,588,266 0
Joseph A. Pichler 85,665,513 872,679 0
Martha Romayne Seger 85,378,464 1,159,728 0
To Serve Until 1995 For Withheld Broker Non-Votes
- ------------------- --- -------- ----------------
James D. Woods 85,654,650 883,542 0
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Coopers & 85,686,356 459,712 392,124 0
Lybrand
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
Increased Auth- 77,918,505 7,761,329 858,258 0
orized Shares
For Against Withheld Broker Non-Votes
--- ------- -------- ----------------
1994 Long-Term 60,467,618 18,354,887 1,001,738 6,713,949
Incentive Plan
<PAGE>
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibit 4.1 - Instruments defining the rights of holders
of long-term debt of the Company and its subsidiaries are
not filed as Exhibits because the amount of debt under
each instrument is less than 10% of the consolidated
assets of the Company. The Company undertakes to file
these instruments with the Commission upon request.
Exhibit 11.1 - Statement of Computation of Consolidated
Earnings (Loss) Per Share.
Exhibit 99.1 - Additional Exhibits - Statement of
Computation of Ratio of Earnings to Fixed Charges.
(b) The Company disclosed and filed its first quarter 1994
earnings release in its Current Report on Form 8-K dated
April 19, 1994.
<PAGE>
SIGNATURES
----------
Pursuant to the requirements of the Securities and Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
THE KROGER CO.
Dated: August 2, 1994 (Joseph A. Pichler)
Joseph A. Pichler
Chairman of the Board and
Chief Executive Officer
Dated: August 2, 1994 (W. Rodney McMullen)
W. Rodney McMullen
Vice President-Financial
Services and Control and
Principal Accounting Officer
<PAGE>
Exhibit Index
-------------
Exhibit
Exhibit 4.1 - Instruments defining the rights of holders of long-
term debt of the Company and its subsidiaries are
not filed as Exhibits because the amount of debt
under each instrument is less than 10% of the
consolidated assets of the Company. The Company
undertakes to file these instruments with the
Commission upon request.
Exhibit 11.1 - Statement of Computation of Consolidated Earnings
(Loss) Per Share.
Exhibit 99.1 - Additional Exhibits - Statement of Computation of
Ratio of Earnings to Fixed Charges.
<TABLE>
EXHIBIT 11.1
COMPUTATION OF CONSOLIDATED EARNINGS (LOSS) PER SHARE
(in thousands, except per share amounts)
(unaudited)
<CAPTION>
2nd Quarter Ended 2 Quarters Ended
----------------------- -----------------------
June 18, June 19, June 18, June 19,
1994 1993 1994 1993
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Earnings before extraordinary loss and
cumulative effect of change in accounting . . . . $ 69,978 $ 29,621 $ 125,668 $ 59,085
Extraordinary loss . . . . . . . . . . . . . . . . (2,645) (2,136) (10,978) (11,178)
Cumulative effect of change in accounting. . . . . (159,193)
--------- -------- --------- ---------
Net earnings (loss). . . . . . . . . . . . . . . . $ 67,333 $ 27,485 $ 114,690 $(111,286)
========= ======== ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
PRIMARY <F1>
- ------------
Weighted average common and dilutive
common equivalent shares:
Common stock outstanding . . . . . . . . . . . 109,546 105,744 108,903 100,576
Stock options. . . . . . . . . . . . . . . . . 3,420 2,649 3,542 2,503
--------- -------- --------- ---------
112,966 108,393 112,445 103,079
========= ======== ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Primary earnings from operations per share. . . . . $ .62 $ .27 $ 1.12 $ .57
Primary results of extraordinary loss per share . . (.02) (.02) (.10) (.11)
Primary results of cumulative effect of change
in accounting. . . . . . . . . . . . . . . . . . . (1.54)
--------- -------- --------- ---------
Primary net earnings (loss) per share . . . . . . . $ .60 $ .25 $ 1.02 $ (1.08)
========= ======== ========= =========
</TABLE>
<TABLE>
FULLY DILUTED <F1>
- ------------------
<S> <C> <C> <C> <C>
Weighted average common shares
and all other dilutive securities:
Common stock outstanding . . . . . . . . . . . 109,546 105,744 108,903 100,576
Stock options. . . . . . . . . . . . . . . . . 3,652 2,664 3,986 2,758
Convertible debt . . . . . . . . . . . . . . . 17,074 17,074 17,074 17,074
--------- -------- --------- ---------
130,272 125,482 129,963 120,408
========= ======== ========= =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C>
Fully diluted earnings from
operations per share <F2>. . . . . . . . . . . . $ .57 $ .27 $ 1.02 $ .55
Fully diluted results of extraordinary
loss per share . . . . . . . . . . . . . . . . . (.02) (.02) (.08) (.09)
Fully diluted results of cumulative effect of
change in accounting . . . . . . . . . . . . . . (1.32)
--------- -------- --------- ---------
Fully diluted net earnings (loss) per share <F2>. . $ .55 $ .25 $ .94 $ (.86)
========= ======== ========= =========
<FN>
<F1> The Convertible Junior Subordinated Debentures issued in March 1991 and the Convertible Junior Subordinated Notes issued in
December 1992 are not included in the computation of primary earnings per share since they are not common stock equivalents.
They are included in the fully diluted earnings per share calculation for the quarters ended June 18, 1994 and June 19, 1993 an
the two quarters ended June 18, 1994 and June 19, 1993.
<F2> Earnings used to calculate fully diluted earnings per share have been adjusted to reflect the tax effected interest expense of
$3.7 million for the quarters ended June 18, 1994 and June 19, 1993 and $7.3 million for the two quarters ended June 18, 1994
and June 19, 1993 that would have been avoided in connection with the assumed conversion of the convertible debt issues as of
the beginning of each year.
</TABLE>
<TABLE>
EXHIBIT 99.1
Schedule of computation of ratio of earnings to fixed charges of The Kroger Co. and consolidated subsidiary companies and
unconsolidated companies as if consolidated for the five fiscal years ended January 1, 1994 and for the two quarters ended June 18,
1994 and June 19, 1993.
<CAPTION>
Two Quarters Ended Fiscal Years Ended
--------------------- ---------------------------------------------------------------
June 18, June 19, January 1, January 2, December 28, December 29, December 30,
1994 1993 1994 1993 1991 1990 1989
(24 Weeks) (24 Weeks) (52 Weeks) (53 Weeks) (52 weeks) (52 weeks) (52 Weeks)
---------- ---------- ---------- ------------ ------------ ------------ ------------
(in thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Earnings
Earnings (loss) from
continuing operations
before tax expense
(credit), extraordinary
loss and cumulative
effect of change in
accounting . . . . . . . $205,485 $101,995 $283,938 $173,415 $168,595 $142,203 $ (8,739)
Fixed charges. . . . . . 233,209 270,624 556,008 640,004 687,226 708,455 788,239
Capitalized interest . . (772) (1,239) 230 (960) 122 (39) (839)
-------- -------- -------- -------- -------- -------- ---------
$437,922 $371,380 $840,176 $812,459 $855,943 $850,619 $778,661
======== ======== ======== ======== ======== ======== =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed Charges
Interest . . . . . . . . $152,372 $193,560 $391,693 $476,932 $536,485 $565,540 $651,038
Portion of rental
payments deemed to be
interest. . . . . . . . 80,837 77,064 164,315 163,072 150,741 142,915 137,201
-------- -------- -------- -------- -------- -------- ---------
$233,209 $270,624 $556,008 $640,004 $687,226 $708,455 $788,239
======== ======== ======== ======== ======== ======== =========
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C> <C> <C>
Ratio of Earnings to
Fixed Charges . . . . . 1.9 1.4 1.5 1.3 1.2 1.2 -
Dollar Deficiency of
Coverage. . . . . . . . N/A N/A N/A N/A N/A N/A ($9,578)
</TABLE>
