UNITED STATES | ||
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 May 26, 2007 | |
OR | ||
o | 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 | ||
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 o .
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x .
There were 709,347,252 shares of Common Stock ($1 par value) outstanding as of June 29, 2007.
Page 1 of 40
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
THE KROGER CO.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share amounts)
(unaudited)
First Quarter Ended | |||||
May 26, | May 20, | ||||
2007 | 2006 | ||||
Sales | $ | 20,726 | $ | 19,415 | |
Merchandise costs, including advertising, warehousing, and transportation, | |||||
excluding items shown separately below | 15,834 | 14,659 | |||
Operating, general and administrative | 3,609 | 3,528 | |||
Rent | 189 | 196 | |||
Depreciation and amortization | 404 | 388 | |||
Operating profit | 690 | 644 | |||
Interest expense | 146 | 155 | |||
Earnings before income tax expense | 544 | 489 | |||
Income tax expense | 207 | 183 | |||
Net earnings | $ | 337 | $ | 306 | |
Net earnings per basic common share | $ | 0.48 | $ | 0.42 | |
Average number of common shares used in basic calculation | 706 | 722 | |||
Net earnings per diluted share | $ | 0.47 | $ | 0.42 | |
Average number of common shares used in diluted calculation | 715 | 729 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
Page 2 of 40
THE KROGER CO.
CONSOLIDATED BALANCE SHEETS
(in millions, except per share amounts)
(unaudited)
May 26, | February 3, | ||||||
2007 | 2007 | ||||||
ASSETS | |||||||
Current assets | |||||||
Cash - In stores | $ | 150 | $ | 157 | |||
Cash - Temporary cash investments | 38 | 32 | |||||
Total cash | 188 | 189 | |||||
Deposits in-transit | 571 | 614 | |||||
Receivables | 719 | 778 | |||||
FIFO inventory | 5,166 | 5,059 | |||||
LIFO credit | (470 | ) | (450 | ) | |||
Prefunded employee benefits | 19 | 300 | |||||
Prepaid and other current assets | 254 | 265 | |||||
Total current assets | 6,447 | 6,755 | |||||
Property, plant and equipment, net | 11,907 | 11,779 | |||||
Goodwill | 2,120 | 2,192 | |||||
Other assets | 522 | 489 | |||||
Total Assets | $ | 20,996 | $ | 21,215 | |||
LIABILITIES | |||||||
Current liabilities | |||||||
Current portion of long-term debt including obligations under capital leases and financing | |||||||
obligations | $ | 1,414 | $ | 906 | |||
Accounts payable | 3,864 | 3,804 | |||||
Accrued salaries and wages | 718 | 796 | |||||
Deferred income taxes | 170 | 268 | |||||
Other current liabilities | 1,836 | 1,807 | |||||
Total current liabilities | 8,002 | 7,581 | |||||
Long-term debt including obligations under capital leases and financing obligations | |||||||
Face-value long-term debt including obligations under capital leases and financing obligations | 5,160 | 6,136 | |||||
Adjustment to reflect fair-value interest rate hedges | 17 | 18 | |||||
Long-term debt including obligations under capital leases and financing obligations | 5,177 | 6,154 | |||||
Deferred income taxes | 295 | 722 | |||||
Other long-term liabilities | 2,262 | 1,835 | |||||
Total Liabilities | 15,736 | 16,292 | |||||
Commitments and contingencies (see Note 9) | |||||||
SHAREOWNERS' EQUITY | |||||||
Preferred stock, $100 par, 5 shares authorized and unissued | | | |||||
Common stock, $1 par, 1,000 shares authorized; 943 shares issued in 2007 and 937 shares issued in | |||||||
2006 | 943 | 937 | |||||
Additional paid-in capital | 2,910 | 2,755 | |||||
Accumulated other comprehensive loss | (247 | ) | (259 | ) | |||
Accumulated earnings | 5,789 | 5,501 |
Page 3 of 40
Common stock in treasury, at cost, 235 shares in 2007 and 232 shares in 2006 | (4,135 | ) | (4,011 | ) | |||
Total Shareowners' Equity | 5,260 | 4,923 | |||||
Total Liabilities and Shareowners' Equity | $ | 20,996 | $ | 21,215 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
Page 4 of 40
THE KROGER CO.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions and unaudited)
Quarter Ended | |||||||
May 26, 2007 | May 20, 2006 | ||||||
Cash Flows from Operating Activities | |||||||
Net earnings | $ | 337 | $ | 306 | |||
Adjustments to reconcile net earnings to net cash provided by operating activities: | |||||||
Depreciation and amortization | 404 | 388 | |||||
LIFO charge | 20 | 10 | |||||
Stock option expense | 22 | 22 | |||||
Expense for Company-sponsored pension plans | 19 | 49 | |||||
Deferred income taxes | (12 | ) | (19 | ) | |||
Other | 8 | 51 | |||||
Changes in operating assets and liabilities net of effects from acquisitions of businesses: | |||||||
Store deposits in-transit | 43 | (35 | ) | ||||
Receivables | 50 | (16 | ) | ||||
Inventories | (109 | ) | 32 | ||||
Prepaid expenses | 286 | 224 | |||||
Accounts payable | 90 | 68 | |||||
Accrued expenses | (162 | ) | (117 | ) | |||
Income tax payables and receivables | 158 | 168 | |||||
Contribution to Company-sponsored pension plans | (50 | ) | (150 | ) | |||
Other | 5 | 3 | |||||
Net cash provided by operating activities | 1,109 | 984 | |||||
Cash Flows from Investing Activities | |||||||
Payments for property and equipment | (608 | ) | (420 | ) | |||
Proceeds from sale of assets | 14 | 53 | |||||
Other | (7 | ) | (3 | ) | |||
Net cash used by investing activities | (601 | ) | (370 | ) | |||
Cash Flows from Financing Activities | |||||||
Dividends paid | (46 | ) | | ||||
Proceeds from lease-financing transactions | 3 | | |||||
Payments on long-term debt | (214 | ) | (25 | ) | |||
Payments on bank revolver | (242 | ) | | ||||
Financing charges incurred | | (1 | ) | ||||
Proceeds from issuance of common stock | 151 | 49 | |||||
Treasury stock purchases | (132 | ) | (134 | ) | |||
Decrease in book overdrafts | (29 | ) | (54 | ) | |||
Net cash used by financing activities | (509 | ) | (165 | ) | |||
Net increase (decrease) in total cash | (1 | ) | 449 | ||||
Total cash: | |||||||
Beginning of year | 189 | 210 | |||||
End of quarter | $ | 188 | $ | 659 | |||
Reconciliation of capital expenditures | |||||||
Payments for property and equipment | $ | (608 | ) | $ | (420 | ) |
Page 5 of 40
Changes in construction-in-progress payables | 52 | (30 | ) | ||||
Total capital expenditures | $ | (556 | ) | $ | (450 | ) | |
Supplemental cash flow information | |||||||
Cash paid during the year for interest | $ | 140 | $ | 179 | |||
Cash paid during the year for income taxes | $ | 20 | $ | 24 |
The accompanying notes are an integral part of the Consolidated Financial Statements.
Page 6 of 40
N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS
All amounts in the notes to Consolidated Financial Statements are in millions except per share amounts.
Certain prior-year amounts have been reclassified to conform to current-year presentation.
1. A CCOUNTING P OLICIES
Basis of Presentation and Principles of Consolidation
The accompanying financial statements include the consolidated accounts of The Kroger Co. and its subsidiaries. The February 3, 2007 balance sheet was derived from audited financial statements and, due to its summary nature, does not include all disclosures required by generally accepted accounting principles (GAAP). Significant intercompany transactions and balances have been eliminated. References to the Company in these Consolidated Financial Statements mean the consolidated company.
In the opinion of management, the accompanying unaudited Consolidated Financial Statements include all normal, recurring adjustments that 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. The financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been omitted, pursuant to SEC regulations. Accordingly, the accompanying Consolidated Financial Statements should be read in conjunction with the 2006 Annual Report on Form 10-K of The Kroger Co. filed with the SEC on April 4, 2007.
The unaudited information in the Consolidated Financial Statements for the first quarters ended May 26, 2007 and May 20, 2006 includes the results of operations of the Company for the 16-week periods then ended.
Store Closing and Other Expense Allowances
All closed store liabilities related to exit or disposal activities initiated after December 31, 2002, are accounted for in accordance with SFAS No. 146, Accounting for Costs Associated with Exit or Disposal Activities . The Company provides for closed store liabilities relating to the present value of the estimated remaining noncancellable lease payments after the closing date, net of estimated subtenant income. The Company estimates the net lease liabilities using a discount rate to calculate the present value of the remaining net rent payments on closed stores. The closed store lease liabilities usually are paid over the lease terms associated with the closed stores, which generally have remaining terms ranging from one to 20 years. Adjustments to closed store liabilities primarily relate to changes in subtenant income and lease buyouts. Adjustments are made for changes in estimates in the period in which the change becomes known. Store closing liabilities are reviewed quarterly to ensure that any accrued amount that is not a sufficient estimate of future costs, or that no longer is needed for its originally intended purpose, is adjusted to income in the proper period.
Owned stores held for disposal are reduced to their estimated net realizable value. Costs to reduce the carrying values of property, equipment and leasehold improvements are accounted for in accordance with the Companys policy on impairment of long-lived assets. Inventory write-downs, if any, in connection with store closings, are classified in Merchandise costs. Costs to transfer inventory and equipment from closed stores are expensed as incurred.
The following table summarizes accrual activity for future lease obligations of stores closed in the normal course of business.
Future Lease Obligations | |||||||
2007 | 2006 | ||||||
Balance at beginning of year | $ | 33 | $ | 65 | |||
Additions | 2 | | |||||
Payments | (4 | ) | (2 | ) | |||
Adjustments | (1 | ) | | ||||
Balance at end of first quarter | $ | 30 | $ | 63 |
In addition, the Company maintains a $47 liability for facility closure costs for locations closed in California prior to the Fred Meyer merger in 1999 and an $8 liability for store closing costs related to two distinct, formalized plans that coordinated the closing of several locations over relatively short periods of time in 2000 and 2001.
Page 7 of 40
2. D EBT O BLIGATIONS
Long-term debt consists of:
May 26, | February 3, | ||||||
2007 | 2007 | ||||||
Credit Facility and Commercial Paper borrowings | $ | 110 | $ | 352 | |||
4.95% to 9.20% Senior Notes and Debentures due through 2031 | 5,716 | 5,916 | |||||
5.00% to 9.95% mortgages due in varying amounts through 2034 | 163 | 169 | |||||
Other | 145 | 144 | |||||
Total debt, excluding capital leases and financing obligations | 6,134 | 6,581 | |||||
Less current portion | (1,387 | ) | (878 | ) | |||
Total long-term debt, excluding capital leases and financing obligations | $ | 4,747 | $ | 5,703 |
3. C OMPREHENSIVE I NCOME
Comprehensive income is as follows:
First Quarter Ended | |||||
May 26, | May 20, | ||||
2007 | 2006 | ||||
Net earnings | $ | 337 | $ | 306 | |
Unrealized gain on hedging activities, net of tax (1) | 4 | 18 | |||
Amortization of amounts included in net periodic pension expense (2) | 7 | | |||
Other | 1 | | |||
Comprehensive income | $ | 349 | $ | 324 |
(1) | Amount is net of tax of $2 for the first quarter of 2007 and $11 for the first quarter of 2006. | |
(2) | Amount is net of tax of $5 for the first quarter of 2007 |
During 2007 and 2006, other comprehensive income consisted of reclassifications of unrealized gains on cash flow hedges into net earnings as well as market value adjustments to reflect cash flow hedges at fair value as of the respective balance sheet dates.
4. B ENEFIT P LANS
The following table provides the components of net periodic benefit costs for the Company-sponsored pension plans and other post-retirement benefits for the first quarter of 2007 and 2006.
First Quarter | |||||||||||||||
Pension Benefits | Other Benefits | ||||||||||||||
2007 | 2006 | 2007 | 2006 | ||||||||||||
Components of net periodic benefit cost: | |||||||||||||||
Service cost | $ | 13 | $ | 41 | $ | 5 | $ | 4 | |||||||
Interest cost | 45 | 41 | 6 | 6 | |||||||||||
Expected return on plan assets | (51 | ) | (47 | ) | | | |||||||||
Amortization of: | |||||||||||||||
Prior service cost | 1 | 2 | (2 | ) | (2 | ) | |||||||||
Actuarial (gain) loss | 11 | 12 | | | |||||||||||
Net periodic benefit cost | $ | 19 | $ | 49 | $ | 9 | $ | 8 |
Page 8 of 40
Net periodic benefit cost decreased in the first quarter of 2007 compared to the first quarter of 2006 due to participants in the cash balance formula of the consolidated retirement benefit plan being moved to a 401(k) retirement savings account plan effective January 1, 2007. The 401(k) retirement savings account plan will provide both Company matching contributions and other Company contributions based upon length of service, to eligible employees.
The Company contributed $50 and $150 to Company-sponsored pension plans in the first quarter of 2007 and 2006, respectively.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The Company recognizes expense in connection with these plans as contributions are funded, in accordance with SFAS No. 87, Employers Accounting for Pensions.
5. I NCOME T AXES
Effective February 4, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN No. 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The effect of adoption was to increase retained earnings by $4 and to decrease our accrual for uncertain tax positions by a corresponding amount. Additionally, we decreased goodwill and accrual for uncertain tax positions by $72 to reflect the measurement under the rules of FIN No. 48 of an uncertain tax position related to previous business combinations.
As of adoption, the total amount of unrecognized tax benefits for uncertain tax positions, including positions affecting only the timing of tax benefits, was $694. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $119.
To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in our Condensed Consolidated Statements of Operations. This accounting policy election is a continuation of the Companys historical policy. As of February 4, 2007, the amount of accrued interest and penalties included on the Condensed Consolidated Balance Sheets was $118.
The Internal Revenue Service (IRS) is currently conducting a field examination of our 2002 2004 U.S. tax returns. The examination is scheduled to be completed in late 2007. An examination of our 1999 2001 U.S. tax returns was completed in 2005. The Company currently is contesting two issues at the appellate level of the IRS. We anticipate that these matters may be resolved within the next 12 months. In the opinion of management, the ultimate disposition of the items noted above will not have a significant effect on our consolidated financial position, liquidity, or results of operations. Additionally, the Company has a case in the U.S. Tax Court. A decision on this case is not expected within the next 12 months. In connection with this case, the Company has extended the statute of limitations on its tax years after 1991.
As of May 26, 2007, there have been no material changes to the disclosures noted above.
The effective income tax rate was 38.1% for the first quarter of 2007 and 37.4% for the first quarter of 2006. The 2007 and 2006 effective income tax rates both differed from the federal statutory rate primarily due to the effect of state taxes.
6. E ARNINGS P ER C OMMON S HARE
Earnings per basic common share equals net earnings divided by the weighted average number of common shares outstanding. Earnings per diluted common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options, restricted stock and warrants.
Page 9 of 40
The following tables provide a reconciliation of net earnings and shares used in calculating earnings per basic common share to those used in calculating earnings per diluted common share:
First Quarter Ended | First Quarter Ended | ||||||||||||||
May 26, 2007 | May 20, 2006 | ||||||||||||||
Earnings | Shares | Per Share | Earnings | Shares | Per Share | ||||||||||
(Numerator) | (Denominator) | Amount | (Numerator) | (Denominator) | Amount | ||||||||||
Earnings per basic common share | $ | 337 | 706 | $ | 0.48 | $ | 306 | 722 | $ | 0.42 | |||||
Dilutive effect of stock options, restricted | |||||||||||||||
stock and warrants | 9 | 7 | |||||||||||||
Earnings per diluted common share | $ | 337 | 715 | $ | 0.47 | $ | 306 | 729 | $ | 0.42 |
The Company had options outstanding for approximately 33 shares during the first quarter of 2006, that were excluded from the computations of earnings per diluted common share because their inclusion would have had an anti-dilutive effect on earnings per share. At the end of the first quarter of 2007, the Company did not have a material amount of options excluded from the computation of earnings per diluted common share.
7. R ECENTLY I SSUED A CCOUNTING S TANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 will become effective for the Companys fiscal year beginning February 3, 2008. The Company is evaluating the effect the implementation of SFAS No. 157 will have on its Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for the Companys fiscal year beginning February 3, 2008. The Company is currently evaluating the effect the adoption of SFAS No. 159 will have on its Consolidated Financial Statements.
Effective February 4, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 . The effect of adoption is described in Note 5 to the Consolidated Financial Statements.
8. G UARANTOR S UBSIDIARIES
The Companys outstanding public debt (the Guaranteed Notes) is jointly and severally, fully and unconditionally guaranteed by The Kroger Co. and certain of its subsidiaries (the Guarantor Subsidiaries). At May 26, 2007, a total of approximately $5,716 of Guaranteed Notes were outstanding. The Guarantor Subsidiaries and non-guarantor subsidiaries are direct or indirect wholly-owned subsidiaries of The Kroger Co. Separate financial statements of The Kroger Co. and each of the Guarantor Subsidiaries are not presented because the guarantees are full and unconditional and the Guarantor Subsidiaries are jointly and severally liable. The Company believes that separate financial statements and other disclosures concerning the Guarantor Subsidiaries would not be material to investors.
The non-guaranteeing subsidiaries represent less than 3% on an individual and aggregate basis of consolidated assets, pre-tax earnings, cash flow and equity. Therefore, the non-guarantor subsidiaries information is not separately presented in the tables below.
There are no current restrictions on the ability of the Guarantor Subsidiaries to make payments under the guarantees referred to above. The obligations of each guarantor under its guarantee are limited to the maximum amount permitted under Bankruptcy Law, the Uniform Fraudulent Conveyance Act, the Uniform Fraudulent Transfer Act, or any similar Federal or state law (e.g. laws requiring adequate capital to pay dividends) respecting fraudulent conveyance or fraudulent transfer.
The following tables present summarized financial information as of February 3, 2007 and for the first quarter ended May 26, 2007 and May 20, 2006:
Page 10 of 40
Condensed Consolidating
Balance Sheets
As of May 26, 2007
The Kroger | Guarantor | ||||||||||||
Co. | Subsidiaries | Eliminations | Consolidated | ||||||||||
Current assets | |||||||||||||
Cash, including temporary cash investments | $ | 23 | $ | 165 | $ | | $ | 188 | |||||
Deposits in-transit | 65 | 506 | | 571 | |||||||||
Accounts receivable | 136 | 1,956 | (1,373 | ) | 719 | ||||||||
Inventory, net | 453 | 4,243 | | 4,696 | |||||||||
Prepaid and other current assets | 72 | 201 | | 273 | |||||||||
Total current assets | 749 | 7,071 | (1,373 | ) | 6,447 | ||||||||
Property, plant and equipment, net | 1,493 | 10,414 | | 11,907 | |||||||||
Goodwill | 56 | 2,064 | | 2,120 | |||||||||
Other assets and investments | 953 | 943 | (1,374 | ) | 522 | ||||||||
Investment in and advances to subsidiaries | 11,700 | | (11,700 | ) | | ||||||||
Total assets | $ | 14,951 | $ | 20,492 | $ | (14,447 | ) | $ | 20,996 | ||||
Current liabilities | |||||||||||||
Current portion of long-term debt including obligations under capital | |||||||||||||
leases and financing obligations | $ | 1,414 | $ | | $ | | $ | 1,414 | |||||
Accounts payable | 1,644 | 4,967 | (2,747 | ) | 3,864 | ||||||||
Other current liabilities | | 2,724 | | 2,724 | |||||||||
Total current liabilities | 3,058 | 7,691 | (2,747 | ) | 8,002 | ||||||||
Long-term debt including obligations under capital leases and | |||||||||||||
financing obligations | |||||||||||||
Face value long-term debt including obligations under capital leases | |||||||||||||
and financing obligations | 5,160 | | | 5,160 | |||||||||
Adjustment to reflect fair value interest rate hedges | 17 | | | 17 | |||||||||
Long-term debt including obligations under capital leases | |||||||||||||
and financing obligations | 5,177 | | | 5,177 | |||||||||
Other long-term liabilities | 1,456 | 1,101 | | 2,557 | |||||||||
Total liabilities | 9,691 | 8,792 | (2,747 | ) | 15,736 | ||||||||
Shareowners Equity | 5,260 | 11,700 | (11,700 | ) | 5,260 | ||||||||
Total liabilities and shareowners equity | $ | 14,951 | $ | 20,492 | $ | (14,447 | ) | $ | 20,996 |
Page 11 of 40
Condensed Consolidating
Balance Sheets
As of February 3, 2007
The Kroger | Guarantor | |||||||||||||
Co. | Subsidiaries | Eliminations | Consolidated | |||||||||||
Current assets | ||||||||||||||
Cash | $ | 25 | $ | 164 | $ | | $ | 189 | ||||||
Store deposits in-transit | 69 | 545 | | 614 | ||||||||||
Receivables | 168 | 1,982 | (1,372 | ) | 778 | |||||||||
Net inventories | 406 | 4,203 | | 4,609 | ||||||||||
Prepaid and other current assets | 371 | 194 | | 565 | ||||||||||
Total current assets | 1,039 | 7,088 | (1,372 | ) | 6,755 | |||||||||
Property, plant and equipment, net | 1,429 | 10,350 | | 11,779 | ||||||||||
Goodwill, net | 56 | 2,136 | | 2,192 | ||||||||||
Other assets | 647 | 1,149 | (1,307 | ) | 489 | |||||||||
Investment in and advances to subsidiaries | 11,510 | | (11,510 | ) | | |||||||||
Total assets | $ | 14,681 | $ | 20,723 | $ | (14,189 | ) | $ | 21,215 | |||||
Current liabilities | ||||||||||||||
Current portion of long-term debt including obligations under | ||||||||||||||
capital leases and financing obligations | $ | 906 | $ | | $ | | $ | 906 | ||||||
Accounts payable | 1,614 | 4,869 | (2,679 | ) | 3,804 | |||||||||
Other current liabilities | (537 | ) | 3,408 | | 2,871 | |||||||||
Total current liabilities | 1,983 | 8,277 | (2,679 | ) | 7,581 | |||||||||
Long-term debt including obligations under capital leases and financing | ||||||||||||||
obligations | ||||||||||||||
Face value long-term debt including obligations under capital leases | ||||||||||||||
and financing obligations | 6,136 | | | 6,136 | ||||||||||
Adjustment to reflect fair value interest rate hedges | 18 | | | 18 | ||||||||||
Long-term debt including obligations under capital leases | ||||||||||||||
and financing obligations | 6,154 | | | 6,154 | ||||||||||
Other long-term liabilities | 1,621 | 936 | | 2,557 | ||||||||||
Total liabilities | 9,758 | 9,213 | (2,679 | ) | 16,292 | |||||||||
Shareowners Equity | 4,923 | 11,510 | (11,510 | ) | 4,923 | |||||||||
Total liabilities and shareowners equity | $ | 14,681 | $ | 20,723 | $ | (14,189 | ) | $ | 21,215 |
Page 12 of 40
Condensed Consolidating
Statements of Operations
For the Quarter Ended May 26, 2007
The Kroger | Guarantor | |||||||||||||
Co. | Subsidiaries | Eliminations | Consolidated | |||||||||||
Sales | $ | 2,724 | $ | 18,361 | $ | (359 | ) | $ | 20,726 | |||||
Merchandise costs, including warehousing and transportation | 2,211 | 13,982 | (359 | ) | 15,834 | |||||||||
Operating, general and administrative | 522 | 3,087 | | 3,609 | ||||||||||
Rent | 36 | 153 | | 189 | ||||||||||
Depreciation and amortization | 46 | 358 | | 404 | ||||||||||
Operating profit (loss) | (91 | ) | 781 | | 690 | |||||||||
Interest expense | 144 | 2 | | 146 | ||||||||||
Equity in earnings of subsidiaries | 588 | | (588 | ) | | |||||||||
Earnings (loss) before income tax expense | 353 | 779 | (588 | ) | 544 | |||||||||
Income tax expense (benefit) | 16 | 191 | | 207 | ||||||||||
Net earnings (loss) | $ | 337 | $ | 588 | $ | (588 | ) | $ | 337 | |||||
Condensed Consolidating
Statements of Operations For the Quarter Ended May 20, 2006 |
||||||||||||||
The Kroger | Guarantor | |||||||||||||
Co. | Subsidiaries | Eliminations | Consolidated | |||||||||||
Sales | $ | 2,800 | $ | 16,911 | $ | (296 | ) | $ | 19,415 | |||||
Merchandise costs, including warehousing and transportation | 2,252 | 12,703 | (296 | ) | 14,659 | |||||||||
Operating, general and administrative | 521 | 3,007 | | 3,528 | ||||||||||
Rent | 48 | 148 | | 196 | ||||||||||
Depreciation and amortization | 47 | 341 | | 388 | ||||||||||
Operating profit (loss) | (68 | ) | 712 | | 644 | |||||||||
Interest expense | 153 | 2 | | 155 | ||||||||||
Equity in earnings of subsidiaries | 502 | | (502 | ) | | |||||||||
Earnings (loss) before income tax expense | 281 | 710 | (502 | ) | 489 | |||||||||
Income tax expense (benefit) | (25 | ) | 208 | | 183 | |||||||||
Net earnings | $ | 306 | $ | 502 | $ | (502 | ) | $ | 306 |
Page 13 of 40
Condensed Consolidating
Statements of Cash Flows
For the Quarter Ended May 26, 2007
Guarantor | ||||||||||||
The Kroger Co. | Subsidiaries | Consolidated | ||||||||||
Net cash provided by operating activities | $ | 709 | $ | 400 | $ | 1,109 | ||||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures, excluding acquisitions | (46 | ) | (562 | ) | (608 | ) | ||||||
Other | 4 | 3 | 7 | |||||||||
Net cash used by investing activities | (42 | ) | (559 | ) | (601 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Dividends paid | (46 | ) | | (46 | ) | |||||||
Proceeds from issuance of debt | 3 | | 3 | |||||||||
Reductions in debt | (456 | ) | | (456 | ) | |||||||
Proceeds from issuance of capital stock | 151 | | 151 | |||||||||
Treasury stock purchases | (132 | ) | | (132 | ) | |||||||
Other | 1 | (30 | ) | (29 | ) | |||||||
Net change in advances to subsidiaries | (190 | ) | 190 | | ||||||||
Net cash provided (used) by financing activities | (669 | ) | 160 | (509 | ) | |||||||
Net decrease in cash | (2 | ) | 1 | (1 | ) | |||||||
Cash: | ||||||||||||
Beginning of year | 25 | 164 | 189 | |||||||||
End of quarter | $ | 23 | $ | 165 | $ | 188 |
Page 14 of 40
Condensed Consolidating
Statements of Cash Flows
For the Quarter Ended May 20, 2006
Guarantor | ||||||||||||
The Kroger Co. | Subsidiaries | Consolidated | ||||||||||
Net cash provided (used) by operating activities | $ | 1,424 | $ | (440 | ) | $ | 984 | |||||
Cash flows from investing activities: | ||||||||||||
Capital expenditures, excluding acquisitions | (28 | ) | (392 | ) | (420 | ) | ||||||
Other | 21 | 29 | 50 | |||||||||
Net cash used by investing activities | (7 | ) | (363 | ) | (370 | ) | ||||||
Cash flows from financing activities: | ||||||||||||
Proceeds from issuance of debt | | | | |||||||||
Reductions in debt | (25 | ) | | (25 | ) | |||||||
Proceeds from issuance of capital stock | 49 | | 49 | |||||||||
Treasury stock purchases | (134 | ) | | (134 | ) | |||||||
Other | | (55 | ) | (55 | ) | |||||||
Net change in advances to subsidiaries | (851 | ) | 851 | | ||||||||
Net cash provided (used) by financing activities | (961 | ) | 796 | (165 | ) | |||||||
Net increase (decrease) in cash | 456 | (7 | ) | 449 | ||||||||
Cash: | ||||||||||||
Beginning of year | 39 | 171 | 210 | |||||||||
End of quarter | $ | 495 | $ | 164 | $ | 659 |
Page 15 of 40
9. C OMMITMENTS AND C ONTINGENCIES
The Company continuously evaluates contingencies based upon the best available evidence.
The Company 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 the Companys estimates, future earnings will be charged or credited.
The principal contingencies are described below:
Insurance The Companys workers compensation risks are self-insured in certain states. In addition, other workers compensation risks and certain levels of insured general liability risks are based on retrospective premium plans, deductible plans, and self-insured retention plans. The liability for workers compensation risks is accounted for on a present value basis. Actual claim settlements and expenses incident thereto may differ from the provisions for loss. Property risks have been underwritten by a subsidiary and are reinsured with unrelated insurance companies. Operating divisions and subsidiaries have paid premiums, and the insurance subsidiary has provided loss allowances, based upon actuarially determined estimates.
Litigation On October 6, 2006, the Company petitioned the Tax Court ( In Re: Ralphs Grocery Company and Subsidiaries, formerly known as Ralphs Supermarkets, Inc., Docket No. 20364-06 ) for a redetermination of deficiencies set by the Commissioner of Internal Revenue. The dispute at issue involves a 1992 transaction in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Section 338(h)(10) of the Internal Revenue Code. The Commissioner has determined that the acquisition of the stock was not a purchase as defined by Section 338(h)(3) of the Internal Revenue Code and that the acquisition does not qualify as a purchase. The Company has strong arguments in favor of its position and believes it is more likely than not that its position will be sustained. However, due to the inherent uncertainty involved in the litigation process, there can be no assurances that the Tax Court will rule in favor of the Company.
On February 2, 2004, the Attorney General for the State of California filed an action in Los Angeles federal court ( California, ex rel Lockyer v. Safeway, Inc. dba Vons, a Safeway Company; Albertsons, Inc. and Ralphs Grocery Company, a division of The Kroger Co., United States District Court Central District of California, Case No. CV04-0687) alleging that the Mutual Strike Assistance Agreement (the Agreement) between the Company, Albertsons, Inc. and Safeway Inc. (collectively, the Retailers), which was designed to prevent the union from placing disproportionate pressure on one or more of the Retailers by picketing such Retailer(s) but not the other Retailer(s) during the labor dispute in southern California, violated Section 1 of the Sherman Act. The lawsuit seeks declarative and injunctive relief. On May 25, 2005, the Court denied a motion for a summary judgment filed by the defendants. Ralphs and the other defendants filed a notice of an interlocutory appeal to the United States Court of Appeals for the Ninth Circuit. On November 29, 2005, the appellate court dismissed the appeal. On December 7, 2006, the Court denied a motion for summary judgment filed by the State of California. The Company continues to believe it has strong defenses against this lawsuit and is vigorously defending it. Although this lawsuit is subject to uncertainties inherent to the litigation process, based on the information presently available to the Company, management does not expect that the ultimate resolution of this action will have a material adverse effect on the Companys financial condition, results of operations or cash flows.
On August 12, 2000, Ralphs Grocery Company, along with several other potentially responsible parties, entered into a consent decree with the U. S. Environmental Protection Agency surrounding the purported release of volatile organic compounds in connection with industrial operations at a property located in Los Angeles, California. The consent decree followed the EPAs earlier Administrative Order No. 97-18 in which the EPA sought remedial action pursuant to its authority under the Comprehensive Environmental Remediation, Compensation and Liability Act. Under the consent decree, Ralphs contributes a share of the costs associated with groundwater extraction and treatment. The treatment process is expected to continue until at least 2012.
Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Companys financial position.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefore. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite managements current belief, material differences in actual outcomes or changes in managements evaluations or predictions could arise that could have a material adverse impact on the Companys financial condition or results of operation.
Guarantees The Company periodically enters into real estate joint ventures in connection with the development of certain properties. The Company usually sells its interests in such partnerships upon completion of the projects. As of May 26, 2007, the Company was a partner with 50% ownership in two real estate joint ventures for which it has guaranteed approximately $6 of debt incurred by the ventures. Based on the covenants underlying this indebtedness as of May 26, 2007, it is unlikely that the Company will be responsible for repayment of these obligations.
Assignments The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Companys assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
Benefit Plans The Company administers certain non-contributory defined benefit retirement plans and contributory defined contribution retirement plans for substantially all non-union employees and some union-represented employees as determined by the terms and conditions of collective bargaining agreements. Funding for the defined benefit pension plans is based on a review of the specific requirements and an evaluation of the assets and liabilities of each plan. Funding for the Companys matching and automatic contributions under the defined contribution plans is based on years of service, plan compensation, and amount of contributions by participants.
In addition to providing pension benefits, the Company provides certain health care benefits for retired employees. Funding for the retiree health care benefits occurs as claims or premiums are paid.
The determination of the obligation and expense for the Companys defined benefit retirement pension plan and other post-retirement benefits is dependent on the Companys selection of assumptions used by actuaries in calculating those amounts. Those assumptions are described in the Companys 2006 Annual Report on Form 10-K and include, among others, the discount rate, the expected long-term rate of return on plan assets, and the rates of increase in compensation and health care costs. Actual results that differ from the assumptions are accumulated and amortized over future periods and, therefore, generally affect the recognized expense and recorded obligation in such future periods. While the Company believes that the assumptions are appropriate, significant differences in actual experience or significant changes in assumptions may materially affect the pension and other post-retirement obligations and future expense.
Page 16 of 40
The Company contributed $50 and $150 to its Company-sponsored defined benefit pension plans in the first quarter of 2007 and 2006, respectively. The Company expects these contributions will reduce its minimum required contributions in future years. Among other things, investment performance of plan assets, the interest rates required to be used to calculate pension obligations and future changes in legislation will determine the amounts of any additional contributions. In addition, we expect matching cash contributions to our 401 (k) Retirement Savings Account Plan, a defined contribution plan, to total approximately $75 in 2007.
The Company also contributes to various multi-employer pension plans based on obligations arising from most of its collective bargaining agreements. These plans provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Trustees are appointed in equal number by employers and unions. The trustees typically are responsible for determining the level of benefits to be provided to participants as well as for such matters as the investment of the assets and the administration of the plans.
Based on the most recent information available to it, the Company believes that the present value of actuarial accrued liabilities in most or all of these multi-employer plans substantially exceeds the value of the assets held in trust to pay benefits. Because the Company is only one of a number of employers contributing to these plans, it is difficult to ascertain what the Companys share of the underfunding would be, although we anticipate the Companys contributions to these plans will increase each year. Although underfunding can result in the imposition of excise taxes on contributing employers, other factors such as increased contributions, changes in benefits, and improved investment performance can reduce underfunding so that excise taxes are not triggered. Moreover, if the Company were to exit certain markets or otherwise cease making contributions to these funds, the Company could trigger a substantial withdrawal liability. Any adjustment for withdrawal liability will be recorded when it is probable that a liability exists and can be reasonably determined, in accordance with SFAS No. 87, Employers Accounting for Pensions .
10. F AIR V ALUE I NTEREST R ATE H EDGES
In 2003, the Company reconfigured a portion of its interest derivative portfolio by terminating six interest rate swap agreements that were accounted for as fair value hedges. Approximately $114 of proceeds received as a result of these terminations were recorded as adjustments to the carrying values of the underlying debt and are being amortized over the remaining lives of the debt. As of May 26, 2007, the unamortized balances totaled approximately $42.
At the end of the first quarter of 2007, the Company maintained six interest rate swap agreements that are being accounted for as fair value hedges. As of May 26, 2007, liabilities totaling $29 have been recorded to reflect the fair value of these agreements, offset by reductions in the fair value of the underlying debt. In addition, the Company maintained three forward-starting interest rate swap agreements, with an aggregate notional amount totaling $750. As of May 26, 2007, assets totaling $18 have been recorded to reflect the fair value of these agreements, offset by increases in Other Comprehensive Income.
11. S UBSEQUENT E VENTS
On April 19, 2007, the Company entered into an agreement to acquire from SUPERVALU 18 Scotts Food and Pharmacy stores located in Northeast Indiana. The transaction was completed on June 29, 2007.
On June 20, 2007, the Company entered into an agreement to acquire 20 Farmer Jack Stores in Michigan. The transaction is expected to close in the second quarter of 2007.
On June 26, 2007, Kroger announced that the Board of Directors authorized a new $1 billion stock repurchase program. This repurchase program replaces the $500 million repurchase program announced on May 4, 2006. The new plan will facilitate the Companys strategy to use free cash flow to repurchase shares and pay dividends.
On June 29, 2007, the Company announced its Board of Directors declared the payment of a quarterly dividend of $.075 per share, payable on September 1, 2007, to shareholders of record as of the close of business on August 15, 2007.
Page 17 of 40
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis should be read in conjunction with the Consolidated Financial Statements.
O VERVIEW
First quarter total sales increased 6.7% to $20.7 billion. Identical supermarket sales increased 6.0% with fuel and 5.2% without fuel. This growth was broad-based across all of the Companys regional divisions and most departments.
Strong identical sales growth is a key driver of our objective to increase earnings and create value for shareholders. Excluding fuel, this marks the fifteenth consecutive quarter Kroger has reported positive identical supermarket sales, and the eighth consecutive quarter Kroger has reported identical supermarket sales in excess of 3%.
For the first quarter of 2007, net earnings totaled $337 million, or $0.47 per diluted share. These results included expenses of $0.02 per diluted share due to charges related to labor unrest at one of our distribution centers.
Our results demonstrate Krogers strategic plan to consistently deliver strong, sustainable growth over time. We continue to increase sales and invest in lower prices for our customers. We are balancing operating cost reductions with investments aimed at improving the overall shopping experience for our customers.
Since January 2000, Kroger has reduced debt by $2.2 billion, which has significantly improved our coverage ratios. Based on this progress, Kroger now plans to use free cash flow to repurchase shares and pay dividends.
Based on Krogers first quarter sales performance, we are raising the lower end of our expected range for annual identical supermarket sales growth, excluding fuel sales, to 3.5% from our previous expectation of 3.0%. Therefore, our expected identical sales growth for 2007 is 3.5% to 5.0%. In addition, despite the twocent effect of the labor unrest and the LIFO charge estimated to be higher than expected, our earnings guidance for 2007 remains at $1.60 - $1.65 per diluted share.
R ESULTS OF O PERATIONS
Net Earnings
Net earnings totaled $337 million for the first quarter of 2007, an increase of 10.1% from net earnings of $306 million for the first quarter of 2006. The increase in our net earnings was the result of leveraging our fixed costs with strong identical sales growth and improvements in net interest and rent expense, offset by an $18 million effect related to labor unrest at one of our distribution centers, and a LIFO charge of $20 million booked in the first quarter of 2007, compared to $10 million in the first quarter of 2006. First quarter 2006 results included a non-recurring legal expense charge of $45 million, or $.03 cents per diluted share.
This produced earnings of $0.47 per diluted share for the first quarter of 2007, which represented an increase of 11.9% over net earnings of $0.42 per diluted share for the first quarter of 2006. Earnings per share growth was also favorably affected by the repurchase of our stock over the past four quarters.
Page 18 of 40
Sales
Total Sales
(in millions)
First Quarter | |||||||||
Percentage | Percentage | ||||||||
2007 | Increase | 2006 | Increase | ||||||
Total supermarket sales | |||||||||
without fuel | $ | 17,876.4 | 5.3 % | $ | 16,973.2 | 5.9 % | |||
Total supermarket fuel sales | 1,584.7 | 22.4 % | 1,294.5 | 39.8 % | |||||
Total supermarket sales | 19,461.1 | 6.5 % | 18,267.7 | 7.8 % | |||||
Other sales (1) | 1,264.5 | 10.2 % | 1,147.5 | 15.3 % | |||||
Total sales | $ | 20,725.6 | 6.7 % | $ | 19,415.2 | 8.2 % |
(1) | Other sales primarily relate to sales at convenience stores, including fuel, jewelry stores and sales by our manufacturing plants to outside firms. |
The change in our total sales was primarily the result of identical store sales increases and inflation in dairy, produce, and other core grocery areas. Identical sales growth for the first quarter of 2007 was 6.0% with fuel and 5.2% excluding supermarket fuel operations. Increased transaction count and average transaction size in the first quarter of 2007 were both responsible for our increases in identical supermarket sales, excluding fuel.
We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Differences between total supermarket sales and identical supermarket sales primarily relate to changes in supermarket square footage. Our identical supermarket sales results are summarized in the table below. We used the identical supermarket dollar figures presented to calculate first quarter 2007 percent changes.
Identical Supermarket Sales
(in millions)
First Quarter | |||||||
2007 | 2006 | ||||||
Including fuel centers | $ | 18,552.5 | $ | 17,498.3 | |||
Excluding fuel centers | $ | 17,063.1 | $ | 16,226.9 | |||
Including fuel centers | 6.0 | % | 7.2 | % | |||
Excluding fuel centers | 5.2 | % | 5.6 | % |
We define a supermarket as comparable when it has been in operation for five full quarters, including expansions and relocations. Our comparable supermarket sales results are summarized in the table below. We used the comparable supermarket dollar figures presented to calculate the first quarter 2007 percent changes.
Comparable Supermarket Sales
(in millions)
First Quarter | |||||||
2007 | 2006 | ||||||
Including fuel centers | $ | 19,123.4 | $ | 17,967.2 | |||
Excluding fuel centers | $ | 17,566.6 | $ | 16,661.0 | |||
Including fuel centers | 6.4 | % | 7.5 | % | |||
Excluding fuel centers | 5.4 | % | 5.8 | % |
Page 19 of 40
FIFO Gross Margin
We calculate First-In, First-Out (FIFO) Gross Margin as follows: Sales minus merchandise costs plus Last-In, First-Out (LIFO) charge. Merchandise costs include advertising, warehousing and transportation, but exclude depreciation expense and rent expense. FIFO gross margin is an important measure used by management to evaluate merchandising and operational effectiveness.
Our FIFO gross margin rate was 23.70% for the first quarter of 2007, as compared to 24.55% for the first quarter of 2006. Retail fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations and expenses related to labor unrest at one of our distribution centers, our first quarter FIFO gross margin rate decreased 49 basis points compared to the first quarter of 2006, as we continue to reinvest operating cost savings into lower prices for our customers.
Operating, General and Administrative Expenses
Operating, general and administrative (OG&A) expenses consist primarily of employee-related costs such as wages, health care benefit costs and retirement plan costs. Among other items, rent expense, depreciation and amortization expense, and interest expense are not included in OG&A. OG&A expenses, as a percent of sales, decreased 76 basis points to 17.41% for the first quarter of 2007 from 18.17% for the first quarter of 2006. The effect of retail fuel operations accounted for a 14 basis point decrease in our OG&A rate. The growth in our retail fuel sales lowers our OG&A rate due to the very low OG&A rate on retail fuel sales as compared to non-fuel sales. Excluding the effect of retail fuel operations and the non-recurring legal expense in 2006, OG&A declined 36 basis points versus the first quarter of last year. This decline was driven by leveraging identical sales growth, increased productivity and progress we made in controlling our utility and health care costs. These gains were partially offset by higher credit card fees and investments made in associate training.
Rent Expense
Rent expense was $189 million, or .91% of sales, for the first quarter of 2007, compared to $196 million, or 1.01% of sales, for the first quarter of 2006. The decrease in rent expense in the first quarter of 2007, in total dollars, compared to the first quarter of 2006, was primarily due to lease buyout payments received from landlords in the first quarter of 2007 and the Companys strategy to own rather than lease whenever possible. The decrease in rent expense, as a percent of sales, reflects leverage obtained from strong sales growth.
Depreciation Expense
Depreciation expense was $404 million, or 1.95% of total sales, for the first quarter of 2007 compared to $388 million, or 2.00% of total sales, for the first quarter of 2006. The increase in depreciation expense, in total dollars, was the result of increased capital expenditures during the first quarter of 2007 compared to the first quarter of 2006. The decrease in depreciation expense, as a percent of sales, was the result of leverage obtained from strong sales growth.
Page 20 of 40
Interest Expense
Net interest expense was $146 million, or 0.71% of total sales, and $155 million, or 0.80% of total sales, in the first quarter of 2007 and 2006, respectively. The reduction in net interest expense for 2007, when compared to 2006, resulted from a $595 million reduction in total debt at May 26, 2007, compared to May 20, 2006.
Income Taxes
The effective income tax rate was 38.1% for the first quarter of 2007 and 37.4% for the first quarter of 2006. The 2007 and 2006 effective income tax rates both differed from the federal statutory rate primarily due to the effect of state taxes.
Because there is a high level of uncertainty regarding the timing of cash flows related to our income tax liabilities, including the amounts recorded as unrecognized tax benefit liabilities upon the adoption of FIN 48, the settlement periods and amounts cannot be determined. The Company will consider its FIN 48 liabilities for the "Contractual Obligations" table in its Annual Report on Form 10-K for the year ended February 2, 2008.
L IQUIDITY AND C APITAL R ESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated $1.1 billion of cash from operating activities during the first quarter of 2007, compared to $984 million in 2006. The majority of the cash from operating activities was generated from net earnings, adjusted for non-cash expenses. These non-cash expenses included depreciation, expense for company-sponsored pension plans (see discussion in Note 4 to the Consolidated Financial Statements), and, in 2006, a non-recurring $45 million legal charge. In addition, cash used for increases in inventory balances and decreases in accrued expenses in 2007 was offset by lower contributions to Kroger sponsored pension plans and decreases in receivables and deposits in-transit in the current year. We contributed $50 million to Kroger sponsored pension plans during the first quarter of 2007 compared to $150 million during the first quarter of 2006. Prepaid expenses also decreased significantly since year-end, reflecting prepayments of certain employee benefits at year-end.
Net cash used by investing activities
We used $601 million of cash for investing activities during the first quarter of 2007 compared to $370 million during the first quarter of 2006. The amount of cash used for investing activities increased in 2007 versus 2006 due to higher capital spending and decreased proceeds from sales of assets.
Net cash used by financing activities
We used $509 million of cash for financing activities in the first quarter of 2007 compared to $165 million in the first quarter of 2006. The increase in the amount of cash used for financing activities was the result of greater debt reduction and dividends paid, partially offset by increased proceeds from the issuance of common stock. Proceeds from the issuance of common stock represent exercises of employee stock options.
Debt Management
As of May 26, 2007, we maintained a $2.5 billion, five-year revolving credit facility that terminates in 2011. Outstanding borrowings under the credit agreement and commercial paper borrowings, and some outstanding letters of credit, reduce funds available under the credit agreement. In addition to the credit agreement, we maintained a $25 million money market line, borrowings under which also reduce the amount of funds available under our credit agreement. The money market line borrowings allowed us to borrow from banks at mutually agreed upon rates, usually at rates below the rates offered under the credit agreement. As of May 26, 2007, we had outstanding commercial paper totaling $131 million that reduced amount available under our credit agreement and had no borrowings under the money market line. The outstanding letters of credit that reduced the funds available under our credit agreement totaled $319 million as of May 26, 2007.
Our bank credit facility and the indentures underlying our publicly issued debt contain various restrictive covenants. As of May 26, 2007, we were in compliance with these financial covenants. Furthermore, management believes it is not reasonably likely that Kroger will fail to comply with these financial covenants in the foreseeable future.
Page 21 of 40
Total debt, including both the current and long-term portions of capital leases and lease-financing obligations, decreased $595 million to $6.6 billion as of the end of the first quarter of 2007, from $7.2 billion as of the end of the first quarter of 2006. Total debt decreased $469 million as of the end of the first quarter of 2007 from $7.1 billion as of year-end 2006. The decreases in 2007 resulted from the use of cash flow from operations to reduce outstanding debt, including for the repayment of $200 million, 7.65% senior notes which came due during the quarter, offset slightly by an increase in mark-to-market adjustments.
Common Stock Repurchase Program
During the first quarter of 2007, we invested $132 million to repurchase 4.7 million shares of Kroger stock at an average price of $28.17 per share. These shares were reacquired under two separate stock repurchase programs. The first is a $500 million repurchase program that was authorized by Krogers Board of Directors on May 4, 2006, which replaced the prior $500 million authorization. The second is a program that uses the cash proceeds from the exercises of stock options by participants in Krogers stock option and long-term incentive plans as well as the associated tax benefits. As of May 26, 2007, we had approximately $150 million remaining under the May 2006 repurchase program.
On June 26, 2007, Kroger announced that the Board of Directors authorized a new $1 billion stock repurchase program. This repurchase program replaces the $500 million repurchase program announced on May 4, 2006.
C APITAL E XPENDITURES
Capital expenditures totaled $556 million for the first quarter of 2007 compared to $450 million for the first quarter of 2006. During the first quarter of 2007, we opened, acquired, expanded or relocated 19 food stores and also completed 71 within-the-wall remodels. Total food store square footage increased 0.6% from the first quarter of 2006. Excluding acquisitions and operational closings, total food store square footage increased 1.6% in the first quarter of 2007 as compared to the first quarter of 2006.
C RITICAL A CCOUNTING P OLICIES
We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position, and we apply those accounting policies in a consistent manner. Except as noted below, our critical accounting policies are summarized in our 2006 Annual Report on Form 10-K filed with the SEC on April 4, 2007.
The preparation of financial statements in conformity with generally accepted accounting principles requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and other factors we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results could vary from those estimates.
Accounting for Uncertainty in Income Taxes
Effective February 4, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 (FIN No. 48), which prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure, and transition.
The effect of adoption was to increase retained earnings by $4 million and to decrease our accrual for uncertain tax positions by a corresponding amount. Additionally, we decreased goodwill and accrual for uncertain tax positions by $72 million to reflect the measurement under the rules of FIN No. 48 of an uncertain tax position related to previous business combinations.
As of adoption, the total amount of unrecognized tax benefits for uncertain tax positions, including positions affecting only the timing of tax benefits, was $694 million. The amount of unrecognized tax benefits that, if recognized, would affect the effective tax rate was $119 million.
To the extent interest and penalties would be assessed by taxing authorities on any underpayment of income tax, such amounts have been accrued and classified as a component of income tax expense in our Condensed Consolidated Statements of Operations. This accounting policy election is a continuation of the Companys historical policy and will continue to be consistently applied in the future. As of February 4, 2007, the amount of accrued interest and penalties included on the Condensed Consolidated Balance Sheets was $118 million.
Page 22 of 40
The IRS is currently conducting a field examination of our 2002 2004 U.S. tax returns. The examination is scheduled to be completed in late 2007. An examination of our 1999 - 2001 U.S. tax returns was completed in 2005. The Company currently is contesting two issues at the appellate level of the IRS. We anticipate that these matters may be resolved within the next 12 months. In the opinion of management, the ultimate disposition of the items noted above will not have a significant effect on our consolidated financial position, liquidity, or results of operations. Additionally, the Company has a case in the U.S. Tax Court. A decision on this case is not expected within the next 12 months. In connection with this case, the Company has extended the statue of limitations on its tax years after 1991.
As of May 26, 2007, there have been no material changes to the disclosures noted above.
R ECENTLY I SSUED A CCOUNTING S TANDARDS
In September 2006, the FASB issued SFAS No. 157, Fair Value Measurement . SFAS No. 157 defines fair value, establishes a framework for measuring fair value in GAAP and expands disclosures about fair value measurement. SFAS No. 157 does not require any new fair value measurements. SFAS No. 157 will become effective for the Companys fiscal year beginning February 3, 2008. We are evaluating the effect the implementation of SFAS No. 157 will have on our Consolidated Financial Statements.
In February 2007, the FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and Financial Liabilities-Including an amendment of FASB Statement No. 115. SFAS No. 159 permits entities to make an irrevocable election to measure certain financial instruments and other assets and liabilities at fair value on an instrument-by-instrument basis. Unrealized gains and losses on items for which the fair value option has been elected should be recognized into net earnings at each subsequent reporting date. SFAS No. 159 will be become effective for the Companys fiscal year beginning February 3, 2008. We are currently evaluating the effect the adoption of SFAS No. 159 will have on our Consolidated Financial Statements.
Effective February 4, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes an interpretation of FASB Statement No. 109 . The effect of adoption is described in Note 5 to the Consolidated Financial Statements.
Page 23 of 40
O UTLOOK
This discussion and analysis contains certain forward-looking statements about Krogers future performance. These statements are based on managements assumptions and beliefs in light of the information currently available. Such statements relate to, among other things: projected changes in net earnings; identical sales growth; expected pension plan contributions; our ability to generate operating cash flow; projected capital expenditures; square footage growth; opportunities to reduce costs; cash flow requirements; and our operating plan for the future; and are indicated by words such as comfortable, committed, will, expect, goal, should, intend, target, believe, anticipate, plan, striving, and similar words or phrases. These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially.
Statements elsewhere in this report and below regarding our expectations, projections, beliefs, intentions or strategies are forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. While we believe that the statements are accurate, uncertainties about the general economy, our labor relations, our ability to execute our plans on a timely basis and other uncertainties described below could cause actual results to differ materially.
Page 24 of 40
Various uncertainties and other factors could cause us to fail to achieve our goals. These include:
Page 25 of 40
We cannot fully foresee the effects of changes in economic conditions on Krogers business. We have assumed economic and competitive situations will not change significantly for 2007.
Other factors and assumptions not identified above could also cause actual results to differ materially from those set forth in our forward-looking statements. Accordingly, actual events and results may vary significantly from those included in, contemplated or implied by forward-looking statements made by us or our representatives.
Page 26 of 40
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
There have been no material changes in our exposure to market risk from the information provided in Item 7A. Quantitative and Qualitative Disclosures About Market Risk on our Form 10-K filed with the SEC on April 4, 2007.
Item 4. Controls and Procedures.
The Chief Executive Officer and the Chief Financial Officer, together with a disclosure review committee appointed by the Chief Executive Officer, evaluated Krogers disclosure controls and procedures as of the quarter ended May 26, 2007. Based on that evaluation, Krogers Chief Executive Officer and Chief Financial Officer concluded that Krogers disclosure controls and procedures were effective as of the end of the period covered by this report.
In connection with the evaluation described above, there was no change in Krogers internal control over financial reporting during the quarter ended May 26, 2007, that has materially affected, or is reasonably likely to materially affect, Krogers internal control over financial reporting.
Page 27 of 40
PART II - OTHER INFORMATION
Item 1. Legal Proceedings.
Litigation Various claims and lawsuits arising in the normal course of business, including suits charging violations of certain antitrust, wage and hour, or civil rights laws, are pending against the Company. Some of these suits purport or have been determined to be class actions and/or seek substantial damages. Any damages that may be awarded in antitrust cases will be automatically trebled. Although it is not possible at this time to evaluate the merits of all of these claims and lawsuits, nor their likelihood of success, the Company is of the belief that any resulting liability will not have a material adverse effect on the Companys financial position.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made adequate provisions therefore. Nonetheless, assessing and predicting the outcomes of these matters involve substantial uncertainties. It remains possible that despite managements current belief, material differences in actual outcomes or changes in managements evaluations or predictions could arise that could have a material adverse impact on the Companys financial condition or results of operation.
Page 28 of 40
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c)
ISSUER PURCHASES OF EQUITY SECURITIES
Maximum | ||||||||||
Dollar Value of | ||||||||||
Shares that May | ||||||||||
Total Number of | Yet Be | |||||||||
Shares Purchased | Purchased | |||||||||
Total Number | Average | as Part of Publicly | Under the Plans | |||||||
of Shares | Price Paid Per | Announced Plans | or Programs (3) | |||||||
Period (1) | Purchased | Share | or Programs (2) | (in millions) | ||||||
First four weeks | ||||||||||
February 4, 2007 to March 3, 2007 | 538,018 | $ | 25.92 | 538,018 | $ | 220 | ||||
Second four weeks | ||||||||||
March 4, 2007 to March 31, 2007 | 1,483,264 | $ | 26.89 | 1,450,000 | $ | 195 | ||||
Third four weeks | ||||||||||
April 1, 2007 to April 28, 2007 | 2,064,040 | 29.24 | 2,060,000 | $ | 165 | |||||
Fourth four weeks | ||||||||||
April 29, 2007 to May 26, 2007 | 1,082,329 | $ | 29.59 | 642,882 | $ | 150 | ||||
Total | 5,167,651 | $ | 28.29 | 4,690,900 | $ | 150 |
(1) | The reported periods conform to the Companys fiscal calendar composed of thirteen 28-day periods. The first quarter of 2007 contained four 28-day periods. | |
(2) | Shares were repurchased under (i) a $500 million stock repurchase program, authorized by the Board of Directors on May 4, 2006, and (ii) a program announced on December 6, 1999, to repurchase common stock to reduce dilution resulting from our employee stock option plans which program is limited to proceeds received from exercises of stock options and the tax benefits associated therewith. The programs have no expiration date but may be terminated by the Board of Directors at any time. On June 26, 2007, Kroger announced that the Board of Directors authorized a new $1 billion stock repurchase program, which replaces the program referenced in clause (i). Accordingly, the Company does not intend to make further purchases under the program referenced in clause (i). Total shares purchased include shares that were surrendered to the Company by participants in the Companys long-term incentive plans to pay for taxes on restricted stock awards. | |
(3) | Amounts shown in this column reflect amounts remaining under the $500 million stock repurchase program referenced in clause (i) of Note 2 above. Amounts to be invested under the program utilizing option exercise proceeds are dependent upon option exercise activity. |
Page 29 of 40
Item 6. Exhibits.
EXHIBIT 3.1 | - | Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006. | ||
EXHIBIT 3.2 | - | Regulations amended as of June 28, 2007. | ||
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 31.1 | - | Rule 13a14(a) / 15d14(a) Certifications Chief Executive Officer. | ||
EXHIBIT 31.2 | - | Rule 13a14(a) / 15d14(a) Certifications Chief Financial Officer. | ||
EXHIBIT 32.1 | - | Section 1350 Certifications. | ||
EXHIBIT 99.1 | - | Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. |
Page 30 of 40
SIGNATURES
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.
THE KROGER CO. | ||||
Dated: July 3, 2007 | By: | /s/ David B. Dillon | ||
David B. Dillon | ||||
Chairman of the Board and Chief Executive Officer | ||||
Dated: July 3, 2007 | By: | /s/ J. Michael Schlotman | ||
J. Michael Schlotman | ||||
Senior Vice President and Chief Financial Officer |
Page 31 of 40
Exhibit Index | ||
Exhibit 3.1 - | Amended Articles of Incorporation are hereby incorporated by reference to Exhibit 3.1 of the Companys Quarterly Report on Form 10-Q for the quarter ended May 20, 2006, filed with the SEC on June 29, 2006. | |
Exhibit 3.2 - | Regulations amended as of June 28, 2007. | |
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 31.1 - | Rule 13a14(a) / 15d14(a) Certifications Chief Executive Officer. | |
Exhibit 31.2 - | Rule 13a14(a) / 15d14(a) Certifications Chief Financial Officer. | |
Exhibit 32.1 - | Section 1350 Certifications. | |
Exhibit 99.1 - | Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. |
Page 32 of 40
EXHIBIT 3.2
REGULATIONS
OF
THE KROGER CO.
_________
ARTICLE I
SHAREHOLDERS
SECTION 1. ANNUAL MEETING. The annual meeting of the shareholders shall be held on the third Friday in May, or on such other date as may be designated by the board of directors, at such hour as may be designated in the notice of the meeting.
SECTION 2. ORDER OF BUSINESS.
A. Presiding Officer. The Chairman, or such other officer as may be designated by the board of directors, will preside over all meetings of shareholders.
B. Authorized Business. Only business that is properly brought may be conducted during any meeting of shareholders. In the case of annual meetings of shareholders, matters set forth in the Companys notice of annual meeting of shareholders, along with any Company presentation, will be properly brought before the meeting. For business properly to be brought by a shareholder before the annual meeting, advance notice of such business must be received by the secretary of the Company at the principal office of the Company not less than 45 calendar days prior to the date on which the Companys proxy statement for the prior years annual meeting of shareholder was first mailed to shareholders. Such notice must include a description in reasonable detail of the business desired to be brought along with the reasons for conducting such business, the name and record address of the shareholder proposing such business, the number of shares of the Company owned of record or beneficially by the shareholder along with evidence of ownership thereof, a description of any material interest the shareholder has in the subject of the business requested to be conducted, and any arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business, a representation that the shareholder intends to appear in person at the meeting to bring such matter before the meeting, and such other information regarding the business proposed by such shareholder as would be required to be included in the proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission. Without limiting the foregoing, if the business proposed to be brought by such shareholder at the annual meeting is the nomination of a person or persons for election to the board of directors, then the notice also must include as to each person whom the shareholder proposes to nominate for election as a director the name, age, business address and residence address of the person, the principal occupation or employment of the person, the number of shares of the Company owned of record or beneficially by the person, and any other information relating to the person that would be required to be included in a proxy statement relating to the election of directors.
In the case of a special meeting called by the board of directors or an officer or director of the Company, only matters set forth in the Companys notice of the meeting of shareholders, along with any Company presentation, will properly be brought before the meeting. In the case of a special meeting called by a shareholder, only matters set forth in the notice of the meeting of shareholders will properly be brought before the meeting. Such notice by a shareholder must include a description in reasonable detail of the business desired to be brought along with the reasons for conducting such business, the name and address of the shareholder proposing such business, the number of shares of the Company owned of record or beneficially by the shareholder along with evidence of ownership thereof, a description of any material interest the shareholder has in the subject of the business requested to be conducted and any arrangements or understandings between such shareholder and any other person or persons (including their names) in connection with the proposal of such business, a representation that the shareholder intends to appear in person at the meeting to bring such matter before the meeting, and such other information regarding the business proposed by such shareholder as would be required to be included in the proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission.
Page 33 of 40
C. Rules of Conduct. Rules of conduct governing all meetings of shareholders will be prepared by the Company and will be available to shareholders at the commencement of the meeting. Shareholders that desire to receive a copy of the rules of conduct prior to the date of a meeting may receive a copy of the then current rules of conduct upon written request to the secretary of the Company at the Companys principal office.
SECTION 3. PLACE OF MEETINGS. All meetings of the shareholders shall be held at the principal office of the Company in the City of Cincinnati or at such other place within or without the City of Cincinnati as may be designated in the notice of the meeting, provided that if the meeting is to be held outside of the City of Cincinnati such alternate location must first be approved by the board of directors.
ARTICLE II
BOARD OF DIRECTORS
SECTION 1. NUMBER. The Board of directors shall consist of not less than nine nor more than twenty-one members, the exact number to be fixed and determined from time to time by the Board of directors or at a meeting of the shareholders called for the purpose of electing directors, at which a quorum is present, by the affirmative vote of the holders of 75% of the shares which are entitled to vote on such proposal.
Members of the Board of directors shall be elected annually to terms of one year, provided that all directors then serving on the effective date of these regulations will continue to serve out the remainder of their unexpired terms.
SECTION 2. MEETINGS. An organization meeting of the Board of directors may be held, without notice, immediately after the annual meeting of the shareholders for the purpose of electing officers and attending to such other business as may properly come before the meeting. Additional regular meetings may be held at such times as may be determined from time to time by the directors.
SECTION 3. PLACE OF MEETINGS. All meetings of the Board of directors shall be held at the principal office of the Company in the City of Cincinnati or at such other place within or without the State of Ohio as may be designated in the notice of the meeting.
SECTION 4. COMMITTEES. The Board of directors may create an executive committee and any other committee of the directors, to consist of not less than 3 directors, and may delegate to any such committee any of the authority of the directors, however conferred, other than that of filling vacancies among the directors. The directors may appoint one or more directors as alternate members of any such committee, who may take the place of any absent member or members at any meeting of such committee. A majority of any such committee shall constitute a quorum for a meeting, and the act of a majority of the members of the committee present at a meeting at which a quorum is present shall be the act of the committee. The president shall be a member of the executive committee.
SECTION 5. REMOVAL AND VACANCIES.
A. Removals. All of the directors or any individual director may be removed by the holders of 75% of the shares then entitled to vote at an election of directors, but only for cause.
B. Vacancies. Any vacancy in the Board of directors shall be filled only by a vote of a majority of the directors then in office, although less than a quorum, or by a sole remaining director. Any director so elected shall serve until the next election of directors and until the directors successor shall be elected and qualified.
ARTICLE III
OFFICERS
SECTION 1. NUMBER AND TITLE. The officers of the Company shall be a president, such number of vice presidents as the Board of directors may from time to time determine, a secretary, a treasurer, and, in the discretion of the Board of directors, a chairman of the Board, one or more assistant secretaries, one or more assistant treasurers, and such other officers and assistant officers as the Board of directors may from time to time determine.
SECTION 2. POWERS AND DUTIES. Subject to such limitations as the Board of directors or the executive committee may from time to time prescribe, the officers of the Company shall each have such powers and perform such duties as generally pertain to their respective offices and such further powers and duties as may be conferred from time to time by the Board of directors or the executive committee or, in the case of all officers other than the chairman of the Board and the president, by the president.
Page 34 of 40
SECTION 3. BONDS. Any officer or employee may be required to give bond for the faithful discharge of his duties in such sum and with such surety or sureties as the Board of directors may from time to time determine. The premium on any bond or bonds provided for herein shall be paid by the Company.
ARTICLE IV
INDEMNIFICATION OF DIRECTORS, OFFICERS AND EMPLOYEES
A. Each director, officer or employee of the Company, each former director, officer or employee of the Company, and each person who is serving or shall have served at the request of the Company as a director, officer or employee of another corporation (his heirs, executors or administrators) shall be indemnified by the Company against expenses actually and necessarily incurred by him, and also against expenses, judgments, decrees, fines, penalties, or amounts paid in settlement, in connection with the defense of any pending or threatened action, suit, or proceeding, criminal or civil to which he is or may be made a party by reason of being or having been such director, officer or employee, provided,
(1) he is adjudicated or determined not to have been negligent or guilty of misconduct in the performance of his duty to the Company or such other corporation,
(2) he is determined to have acted in good faith in what he reasonably believed to be the best interest of the Company or of such other corporation, and
(3) in any matter the subject of a criminal action, suit, or proceeding, he is determined to have had no reasonable cause to believe that his conduct was unlawful.
The determination as to (2) and (3) and, in the absence of an adjudication as to (1) by a court of competent jurisdiction, the determination as to (1) shall be made by the directors of the Company acting at a meeting at which a quorum consisting of directors who are not parties to or threatened with any such action, suit, or proceeding is present. Any director who is a party to or threatened with any such action, suit or proceeding shall not be qualified to vote and, if for this reason a quorum of directors cannot be obtained to vote on such indemnification, no indemnification shall be made except in accordance with the procedure set forth in paragraph B of this Article IV.
B. In the event that a quorum of directors qualified to vote cannot be obtained to make any determination required by paragraph A, such determination may be made in writing signed by a majority of the directors who are qualified to vote regardless of a lack of quorum or, if there be less than three directors qualified to vote, by a board of three disinterested persons, who may be officers or employees of the Company, of good character appointed by the Board of directors to make such determination.
C. Notwithstanding paragraph A of Article IV, the Board of directors in its discretion may empower the president or any vice president of the Company to make the determinations, and cause the Company to indemnify any employee of the Company or other corporation which such employee is serving at the request of the Company (his heirs, executors or administrators), who is not a director or officer of the Company or such other corporation against any or all of the expenses, described and set forth in such paragraph A of Article IV.
D. The foregoing right of indemnification shall not be deemed exclusive of any other rights to which such director, officer or employee may be entitled under the articles, the regulations, any agreement, any insurance purchased by the corporation, vote of shareholders or otherwise as a matter of law.
ARTICLE V
CERTIFICATES FOR SECURITIES
If any certificate for securities of the Company should be lost, stolen or destroyed, any one of the president, the treasurer, or the secretary, upon being furnished with satisfactory evidence as to the loss, theft or destruction and as to the ownership of the certificate, and upon being furnished with appropriate security or indemnity to hold the Company harmless, may authorize a new certificate to be issued in lieu of the lost, stolen or destroyed certificate.
ARTICLE VI
SEAL
The seal of the Company shall be in such form as the Board of directors may from time to time determine.
Page 35 of 40
ARTICLE VII
AMENDMENTS
These regulations may be amended or repealed at any meeting of shareholders called for that purpose or without such meeting by the affirmative vote or consent of the holders of record of shares entitling them to exercise a majority of the voting power on such proposal, except that the affirmative vote or consent of the holders of record of shares entitling them to exercise 75% of the voting power on such proposal shall be required to amend, alter, change or repeal Sections 1 or 5 of Article II or this Article VII, or to amend, alter, change or repeal these regulations in any way inconsistent with the intent of the foregoing provisions.
As amended June 28, 2007
Page 36 of 40
EXHIBIT 31.1
I, David B. Dillon, certify that: | ||
1. | I have reviewed this quarterly report on Form 10-Q of The Kroger Co.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | ||
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and | ||
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): | |
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 3, 2007 | |
/s/ David B. Dillon |
|
David B. Dillon
Chairman of the Board and Chief Executive Officer (principal executive officer) |
Page 37 of 40
EXHIBIT 31.2
I, J. Michael Schlotman, certify that: | ||
1. | I have reviewed this quarterly report on Form 10-Q of The Kroger Co.; | |
2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | |
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | ||
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. | ||
c) evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | ||
d) disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and | ||
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): | |
a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and | ||
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
Date: July 3, 2007 | |
/s/ J. Michael Schlotman |
|
J. Michael Schlotman
Senior Vice President and Chief Financial Officer (principal financial officer) |
Page 38 of 40
EXHIBIT 32.1
NOTE: The referenced officers, based on their knowledge, furnish the following certification, pursuant to 18 U.S.C. §1350.
We, David B. Dillon, Chief Executive Officer and Chairman of the Board, and J. Michael Schlotman, Senior Vice President and Chief Financial Officer, of The Kroger Co. (the Company), do hereby certify in accordance with 18 U.S.C. §1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: | |||
1. | The Quarterly Report on Form 10-Q of the Company for the period ending May 26, 2007 (the Periodic Report) fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. §78m or 78o(d)); and | ||
2. | The information contained in the Periodic Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: July 3, 2007 | |
/s/ David B. Dillon | |
David B. Dillon
Chairman of the Board and Chief Executive Officer |
|
/s/ J. Michael Schlotman |
|
J. Michael Schlotman
Senior Vice President and Chief Financial Officer |
A signed original of this written statement as required by Section 906 of the Sarbanes-Oxley Act of 2002 has been provided to the The Kroger Co., and will be retained by The Kroger Co. and furnished to the SEC or its staff upon request.
Page 39 of 40
EXHIBIT 99.1
Schedule of computation of ratio of earnings to fixed charges of The Kroger Co. and consolidated subsidiary companies for the five fiscal years ended February 3, 2007 and for the quarters ended May 26, 2007 and May 20, 2006.
May 26, | May 20, | February 3, | January 28, | January 29, | January 31, | February 1, | ||||||||||||||||||||||
2007 | 2006 | 2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||||||||
(16 weeks) | (16 weeks) | (53 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | (52 weeks) | ||||||||||||||||||||||
(in millions of dollars) | ||||||||||||||||||||||||||||
Earnings: | ||||||||||||||||||||||||||||
Earnings before tax expense | $ | 544 | $ | 489 | $ | 1,748 | $ | 1,525 | $ | 286 | $ | 739 | $ | 1,950 | ||||||||||||||
Fixed charges | 259 | 271 | 870 | 895 | 950 | 983 | 1,000 | |||||||||||||||||||||
Capitalized interest | (5 | ) | (4 | ) | (13 | ) | (7 | ) | (5 | ) | (5 | ) | (5 | ) | ||||||||||||||
Pre-tax earnings before fixed charges | $ | 798 | $ | 756 | $ | 2,605 | $ | 2,413 | $ | 1,231 | $ | 1,717 | $ | 2,945 | ||||||||||||||
Fixed charges: | ||||||||||||||||||||||||||||
Interest | $ | 151 | $ | 159 | $ | 501 | $ | 518 | $ | 562 | $ | 609 | $ | 624 | ||||||||||||||
Portion of rental payments deemed to be | ||||||||||||||||||||||||||||
interest | 108 | 112 | 370 | 377 | 388 | 374 | 376 | |||||||||||||||||||||
Total fixed charges | $ | 259 | $ | 271 | $ | 871 | $ | 895 | $ | 950 | $ | 983 | $ | 1,000 | ||||||||||||||
Ratio of earnings to fixed charges | 3.1 | 2.8 | 3.0 | 2.7 | 1.3 | 1.7 | 2.9 |
Page 40 of 40