REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Stockholders and the Board of Directors of Albertsons Companies, Inc.
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of Albertsons Companies, Inc. and subsidiaries (the "Company") as of February 26, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of February 26, 2022, based on criteria established in Internal Control — Integrated Framework (2013) issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (PCAOB), the consolidated financial statements and the related notes (collectively referred to as the "financial statements") as of and for the year ended February 26, 2022, of the Company and our report dated April 26, 2022, expressed an unqualified opinion on those financial statements.
Basis for Opinion
The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management's Report on Internal Control Over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company's internal control over financial reporting is a process designed 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Boise, Idaho
April 26, 2022
Albertsons Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
| | | | | | | | | | | | | | |
| | February 26, 2022 | | February 27, 2021 |
ASSETS | | | |
Current assets | | | |
| Cash and cash equivalents | $ | 2,902.0 | | | $ | 1,717.0 | |
| Receivables, net | 560.6 | | | 550.9 | |
| Inventories, net | 4,500.8 | | | 4,301.3 | |
| Prepaid assets | 301.6 | | | 317.2 | |
| Other current assets | 101.4 | | | 101.6 | |
| Total current assets | 8,366.4 | | | 6,988.0 | |
| | | | |
Property and equipment, net | 9,349.6 | | | 9,412.7 | |
Operating lease right-of-use assets | 5,908.4 | | | 6,015.6 | |
Intangible assets, net | 2,285.0 | | | 2,108.8 | |
Goodwill | 1,201.0 | | | 1,183.3 | |
Other assets | 1,012.6 | | | 889.6 | |
TOTAL ASSETS | $ | 28,123.0 | | | $ | 26,598.0 | |
| | | | |
LIABILITIES | | | |
Current liabilities | | | |
| Accounts payable | $ | 4,236.8 | | | $ | 3,487.3 | |
| Accrued salaries and wages | 1,554.9 | | | 1,474.7 | |
| Current maturities of long-term debt and finance lease obligations | 828.8 | | | 212.4 | |
| Current operating lease obligations | 640.6 | | | 605.3 | |
| Current portion of self-insurance liability | 333.3 | | | 321.4 | |
| Taxes other than income taxes | 344.6 | | | 339.1 | |
| Other current liabilities | 409.5 | | | 392.0 | |
| Total current liabilities | 8,348.5 | | | 6,832.2 | |
| | | | |
Long-term debt and finance lease obligations | 7,136.3 | | | 8,101.2 | |
Long-term operating lease obligations | 5,419.9 | | | 5,548.0 | |
Deferred income taxes | 799.8 | | | 533.7 | |
Long-term self-insurance liability | 837.8 | | | 837.7 | |
Other long-term liabilities | 1,277.6 | | | 1,821.8 | |
| | | | |
Commitments and contingencies | | | |
Series A convertible preferred stock, $0.01 par value; 1,750,000 shares authorized, 745,410 and 924,000 shares issued and outstanding as of February 26, 2022 and February 27, 2021, respectively | 681.1 | | | 844.3 | |
Series A-1 convertible preferred stock, $0.01 par value; 1,410,000 shares authorized, 653,776 and 826,000 shares issued and outstanding as of February 26, 2022 and February 27, 2021, respectively | 597.4 | | | 754.8 | |
| | | | |
STOCKHOLDERS' EQUITY | | | |
| Undesignated preferred stock, $0.01 par value; 96,840,000 shares authorized, no shares issued as of February 26, 2022 February 27, 2021 | — | | | — | |
| Class A common stock, $0.01 par value; 1,000,000,000 shares authorized, 587,904,283 and 585,574,666 shares issued as of February 26, 2022 and February 27, 2021, respectively | 5.9 | | | 5.9 | |
| Class A-1 convertible common stock, $0.01 par value; 150,000,000 shares authorized, no shares issued as of February 26, 2022 and February 27, 2021 | — | | | — | |
| Additional paid-in capital | 2,032.2 | | | 1,898.9 | |
| Treasury stock, at cost, 99,640,065 shares held as of February 26, 2022 and 120,009,647 shares held as of February 27, 2021, respectively | (1,647.4) | | | (1,907.0) | |
| Accumulated other comprehensive income | 69.0 | | | 63.5 | |
| Retained earnings | 2,564.9 | | | 1,263.0 | |
| Total stockholders' equity | 3,024.6 | | | 1,324.3 | |
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | 28,123.0 | | | $ | 26,598.0 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(in millions, except per share data)
9.9
| | | | | | | | | | | | | | | | | |
| 52 weeks ended February 26, 2022 | | 52 weeks ended February 27, 2021 | | 53 weeks ended February 29, 2020 |
Net sales and other revenue | $ | 71,887.0 | | | $ | 69,690.4 | | | $ | 62,455.1 | |
Cost of sales | 51,164.6 | | | 49,275.9 | | | 44,860.9 | |
Gross margin | 20,722.4 | | | 20,414.5 | | | 17,594.2 | |
| | | | | |
Selling and administrative expenses | 18,300.5 | | | 18,835.8 | | | 16,641.9 | |
Gain on property dispositions and impairment losses, net | (15.0) | | | (38.8) | | | (484.8) | |
| | | | | |
Operating income | 2,436.9 | | | 1,617.5 | | | 1,437.1 | |
| | | | | |
Interest expense, net | 481.9 | | | 538.2 | | | 698.0 | |
Loss on debt extinguishment | 3.7 | | | 85.3 | | | 111.4 | |
Other (income) expense, net | (148.2) | | | (134.7) | | | 28.5 | |
Income before income taxes | 2,099.5 | | | 1,128.7 | | | 599.2 | |
| | | | | |
Income tax expense | 479.9 | | | 278.5 | | | 132.8 | |
Net income | $ | 1,619.6 | | | $ | 850.2 | | | $ | 466.4 | |
| | | | | |
Other comprehensive income (loss), net of tax: | | | | | |
| | | | | |
Recognition of pension gain (loss) | 5.8 | | | 183.0 | | | (210.5) | |
| | | | | |
Other | (0.3) | | | (1.0) | | | 0.7 | |
Other comprehensive income (loss) | $ | 5.5 | | | $ | 182.0 | | | $ | (209.8) | |
| | | | | |
Comprehensive income | $ | 1,625.1 | | | $ | 1,032.2 | | | $ | 256.6 | |
| | | | | |
Net income per Class A common share: | | | | | |
Basic net income per Class A common share | $ | 2.73 | | | $ | 1.53 | | | $ | 0.80 | |
Diluted net income per Class A common share | 2.70 | | | 1.47 | | | 0.80 | |
Weighted average Class A common shares outstanding: | | | | | |
Basic | 469.6 | | | 500.3 | | | 579.4 | |
Diluted | 475.3 | | | 578.1 | | | 580.3 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
| | | | | | | | | | | | | | | | | |
| 52 weeks ended February 26, 2022 | | 52 weeks ended February 27, 2021 | | 53 weeks ended February 29, 2020 |
Cash flows from operating activities: | | | | | |
Net income | $ | 1,619.6 | | | $ | 850.2 | | | $ | 466.4 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
Gain on property dispositions and impairment losses, net | (15.0) | | | (38.8) | | | (484.8) | |
| | | | | |
Depreciation and amortization | 1,681.3 | | | 1,536.9 | | | 1,691.3 | |
Operating lease right-of-use assets amortization | 623.9 | | | 581.5 | | | 570.3 | |
LIFO expense | 115.2 | | | 58.7 | | | 18.4 | |
Deferred income tax | 219.0 | | | (112.3) | | | (5.9) | |
Pension and post-retirement benefits income | (54.7) | | | (36.4) | | | (2.0) | |
Contributions to pension and post-retirement benefit plans | (29.8) | | | (60.0) | | | (11.0) | |
(Gain) loss on interest rate swaps and commodity hedges, net | (22.8) | | | 16.9 | | | 50.6 | |
Deferred financing costs | 23.4 | | | 20.9 | | | 39.8 | |
Loss on debt extinguishment | 3.7 | | | 85.3 | | | 111.4 | |
Equity-based compensation expense | 101.2 | | | 59.0 | | | 32.8 | |
Other operating activities | (77.0) | | | (143.0) | | | 2.5 | |
Changes in operating assets and liabilities, net of effects of acquisition of businesses: | | | | | |
Receivables, net | (22.4) | | | 0.4 | | | 60.8 | |
Inventories, net | (313.8) | | | 9.2 | | | (38.1) | |
Accounts payable, accrued salaries and wages and other accrued liabilities | 679.5 | | | 787.4 | | | 85.3 | |
Operating lease liabilities | (604.6) | | | (563.3) | | | (584.4) | |
Pension withdrawal liabilities | (131.0) | | | 672.3 | | | (62.3) | |
Self-insurance assets and liabilities | 18.6 | | | 6.5 | | | (4.0) | |
Other operating assets and liabilities | (300.9) | | | 171.1 | | | (33.2) | |
Net cash provided by operating activities | 3,513.4 | | | 3,902.5 | | | 1,903.9 | |
| | | | | |
Cash flows from investing activities: | | | | | |
Business acquisitions, net of cash acquired | (25.4) | | | (97.9) | | | — | |
Payments for property, equipment and intangibles, including lease buyouts | (1,606.5) | | | (1,630.2) | | | (1,475.1) | |
Proceeds from sale of assets | 51.9 | | | 161.6 | | | 1,096.7 | |
Other investing activities | 41.1 | | | (5.5) | | | (0.1) | |
Net cash used in investing activities | (1,538.9) | | | (1,572.0) | | | (378.5) | |
|
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
| | | | | | | | | | | | | | | | | |
| | | | | |
| | | | | |
| 52 weeks ended February 26, 2022 | | 52 weeks ended February 27, 2021 | | 53 weeks ended February 29, 2020 |
Cash flows from financing activities: | | | | | |
Proceeds from issuance of long-term debt | $ | — | | | $ | 4,094.0 | | | $ | 3,874.0 | |
Payments on long-term borrowings | (330.9) | | | (4,446.7) | | | (5,676.6) | |
Payments of obligations under finance leases | (78.0) | | | (79.9) | | | (109.3) | |
Payment of redemption premium on debt extinguishment | (2.9) | | | (71.6) | | | — | |
Payments for debt financing costs | (11.0) | | | (21.9) | | | (53.2) | |
Dividends paid on common stock | (207.4) | | | (93.7) | | | — | |
Dividends paid on convertible preferred stock | (114.6) | | | (66.0) | | | — | |
Proceeds from convertible preferred stock | — | | | 1,680.0 | | | — | |
Third party issuance costs on convertible preferred stock | — | | | (80.9) | | | — | |
Treasury stock purchase, at cost | — | | | (1,881.2) | | | — | |
Employee tax withholding on vesting of restricted stock units | (29.4) | | | (14.1) | | | (18.8) | |
| | | | | |
Other financing activities | (15.3) | | | (59.8) | | | (30.3) | |
Net cash used in financing activities | (789.5) | | | (1,041.8) | | | (2,014.2) | |
| | | | | |
Net increase (decrease) in cash and cash equivalents and restricted cash | 1,185.0 | | | 1,288.7 | | | (488.8) | |
Cash and cash equivalents and restricted cash at beginning of period | 1,767.6 | | | 478.9 | | | 967.7 | |
Cash and cash equivalents and restricted cash at end of period | $ | 2,952.6 | | | $ | 1,767.6 | | | $ | 478.9 | |
| | | | | |
Reconciliation of capital investments: | | | | | |
Payments for property, equipment and intangibles, including payments for lease buyouts | $ | (1,606.5) | | | $ | (1,630.2) | | | $ | (1,475.1) | |
Lease buyouts | 11.7 | | | (13.0) | | | 7.7 | |
Total payments for capital investments, excluding lease buyouts | $ | (1,594.8) | | | $ | (1,643.2) | | | $ | (1,467.4) | |
| | | | | |
Supplemental cash flow information: | | | | | |
Non-cash investing and financing activities were as follows: | | | | | |
Additions of finance lease obligations, excluding business acquisitions | $ | 81.0 | | | $ | 38.8 | | | $ | — | |
Purchases of property and equipment included in accounts payable | 499.7 | | | 360.8 | | | 230.8 | |
Interest and income taxes paid: | | | | | |
Interest paid, net of amount capitalized | 480.3 | | | 574.3 | | | 718.5 | |
Income taxes paid | 240.9 | | | 366.2 | | | 228.8 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' Equity
(in millions, except share data)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Class A Common Stock | | Additional paid in capital | | Treasury Stock | | Accumulated other comprehensive income (loss) | | Retained earnings | | Total stockholders' equity |
| Shares | | Amount | | | Shares | | Amount | | | |
Balance as of February 23, 2019 | 579,443,146 | | | $ | 5.8 | | | $ | 1,811.2 | | | 3,671,621 | | | $ | (25.8) | | | $ | 91.3 | | | $ | (431.8) | | | $ | 1,450.7 | |
Issuance of common stock to Company's parents | 3,554,105 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | 32.8 | | | — | | | — | | | — | | | — | | | 32.8 | |
Employee tax withholding on vesting of restricted stock units | — | | | — | | | (18.8) | | | — | | | — | | | — | | | — | | | (18.8) | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Adoption of new accounting standards, net of tax | — | | | — | | | — | | | — | | | — | | | 16.6 | | | 558.0 | | | 574.6 | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 466.4 | | | 466.4 | |
Other comprehensive loss, net of tax | — | | | — | | | — | | | — | | | — | | | (226.4) | | | — | | | (226.4) | |
Other activity | — | | | — | | | (0.9) | | | — | | | — | | | — | | | (0.3) | | | (1.2) | |
Balance as of February 29, 2020 | 582,997,251 | | | 5.8 | | | 1,824.3 | | | 3,671,621 | | | (25.8) | | | (118.5) | | | 592.3 | | | 2,278.1 | |
Issuance of common stock to Company's parents | 1,312,859 | | | — | | | — | | | — | | | — | | | — | | | — | | | — | |
Equity-based compensation | — | | | — | | | 59.0 | | | — | | | — | | | — | | | — | | | 59.0 | |
Shares issued and employee tax withholding on vesting of restricted stock units | 1,264,556 | | | 0.1 | | | (14.1) | | | — | | | — | | | — | | | — | | | (14.0) | |
Equity reclassification | — | | | — | | | 30.0 | | | — | | | — | | | — | | | — | | | 30.0 | |
Repurchase of common stock | — | | | — | | | — | | | 116,338,026 | | | (1,881.2) | | | — | | | — | | | (1,881.2) | |
Cash dividends declared on common stock ($0.20 per common share) | — | | | — | | | — | | | — | | | — | | | — | | | (93.7) | | | (93.7) | |
Dividends accrued on convertible preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (86.0) | | | (86.0) | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 850.2 | | | 850.2 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 182.0 | | | — | | | 182.0 | |
Other activity | — | | | — | | | (0.3) | | | — | | | — | | | — | | | 0.2 | | | (0.1) | |
Balance as of February 27, 2021 | 585,574,666 | | | 5.9 | | | 1,898.9 | | | 120,009,647 | | | (1,907.0) | | | 63.5 | | | 1,263.0 | | | 1,324.3 | |
Equity-based compensation | — | | | — | | | 101.2 | | | — | | | — | | | — | | | — | | | 101.2 | |
Shares issued and employee tax withholding on vesting of restricted stock units | 2,329,617 | | | — | | | (29.4) | | | — | | | — | | | — | | | — | | | (29.4) | |
Convertible preferred stock conversions | — | | | — | | | 61.0 | | | (20,369,582) | | | 259.6 | | | — | | | — | | | 320.6 | |
| | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | |
Cash dividends declared on common stock ($0.44 per common share) | — | | | — | | | — | | | — | | | — | | | — | | | (207.4) | | | (207.4) | |
Dividends accrued on convertible preferred stock | — | | | — | | | — | | | — | | | — | | | — | | | (109.4) | | | (109.4) | |
| | | | | | | | | | | | | | | |
Net income | — | | | — | | | — | | | — | | | — | | | — | | | 1,619.6 | | | 1,619.6 | |
Other comprehensive income, net of tax | — | | | — | | | — | | | — | | | — | | | 5.5 | | | — | | | 5.5 | |
Other activity | — | | | — | | | 0.5 | | | — | | | — | | | — | | | (0.9) | | | (0.4) | |
Balance as of February 26, 2022 | 587,904,283 | | | $ | 5.9 | | | $ | 2,032.2 | | | 99,640,065 | | | $ | (1,647.4) | | | $ | 69.0 | | | $ | 2,564.9 | | | $ | 3,024.6 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
Albertsons Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Albertsons Companies, Inc. and its subsidiaries (the "Company" or "ACI") is a food and drug retailer that, as of February 26, 2022, operated 2,276 retail stores together with 402 associated fuel centers, 22 dedicated distribution centers, 20 manufacturing facilities and various digital platforms. The Company's retail food businesses and in-store pharmacies operate throughout the United States under 24 banners including Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw's, Star Market, United Supermarkets, Market Street, Haggen, Kings Food Markets and Balducci's Food Lovers Market. The Company has no separate assets or liabilities other than its investments in its subsidiaries, and all of its business operations are conducted through its operating subsidiaries.
Basis of Presentation
The Company's Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Intercompany transactions and accounts have been eliminated in consolidation for all periods presented. The Company's investments in unconsolidated affiliates are recorded using the equity method.
Significant Accounting Policies
Fiscal year: The Company's fiscal year ends on the last Saturday in February. Unless the context otherwise indicates, reference to a fiscal year of the Company refers to the calendar year in which such fiscal year commences. The Company's first quarter consists of 16 weeks, the second, third and fourth quarters generally each consist of 12 weeks, and the fiscal year generally consists of 52 weeks. For the fiscal years ended February 26, 2022 and February 27, 2021 the fiscal years consisted of 52 weeks. For the fiscal year ended February 29, 2020, the fourth quarter consisted of 13 weeks, and the fiscal year consisted of 53 weeks.
Use of estimates: The preparation of the Company's Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods presented. Certain estimates require difficult, subjective or complex judgments about matters that are inherently uncertain. Actual results could differ from those estimates.
Cash and cash equivalents: Cash equivalents include all highly liquid investments with original maturities of three months or less at the time of purchase and outstanding deposits related to credit and debit card sales transactions that settle within a few days. Cash and cash equivalents related to credit and debit card transactions were $538.8 million and $525.3 million as of February 26, 2022 and February 27, 2021, respectively. The Company has significant amounts of cash and cash equivalents that are in excess of federally insured limits. Though the Company has not experienced any losses on its cash and cash equivalents to date and it does not anticipate incurring any losses, the Company cannot be assured that it will not experience losses on its cash and cash equivalents.
Restricted cash: Restricted cash is included in Other current assets and Other assets within the Consolidated Balance Sheets and primarily relates to surety bonds and funds held in escrow. As of both February 26, 2022 and February 27, 2021, the Company had $50.6 million of restricted cash.
Receivables, net: Receivables consist primarily of trade accounts receivable, pharmacy accounts receivable, tenant receivables and vendor receivables. Management makes estimates of the uncollectibility of its accounts receivable. In determining the adequacy of the allowances for doubtful accounts, management analyzes the value of collateral,
historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments, estimations and assumptions based on the information considered and could result in a further adjustment of receivables. The allowance for doubtful accounts and bad debt expense were not material for any of the periods presented.
Inventories, net: Substantially all of the Company's inventories consist of finished goods valued at the lower of cost or net realizable value and net of vendor allowances.
As of February 26, 2022, and February 27, 2021, approximately 83.7% and 84.9%, respectively, of the Company's inventories were valued under the last-in, first-out ("LIFO") method. The Company primarily uses the retail inventory or the item-cost method to determine inventory cost before application of any LIFO adjustment. Under the retail inventory method, inventory cost is determined, before the application of any LIFO adjustment, by applying a cost-to-retail ratio to various categories of similar items to the retail value of those items. Under the item-cost method, the most recent purchase cost is used to determine the cost of inventory before the application of any LIFO adjustment. Replacement or current cost was higher than the carrying amount of inventories valued using LIFO by $317.4 million and $202.2 million as of February 26, 2022 and February 27, 2021, respectively. During fiscal 2021, fiscal 2020 and fiscal 2019, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2021, fiscal 2020 and fiscal 2019 purchases. As a result, cost of sales decreased by $11.3 million, $11.8 million and $12.9 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Cost for the remaining inventories, which consists primarily of perishable and fuel inventories, was determined using the most recent purchase cost, which approximates the first-in, first-out ("FIFO") method. Perishables are counted every four weeks and are carried at the last purchased cost which approximates FIFO cost. Fuel inventories are carried at the last purchased cost, which approximates FIFO cost. The Company records inventory shortages based on actual physical counts at its facilities and also provides allowances for inventory shortages for the period between the last physical count and the balance sheet date.
Property and equipment, net: Property and equipment is recorded at cost or fair value for assets acquired as part of a business combination, and depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally as follows: buildings - seven to 40 years; leasehold improvements - the shorter of the remaining lease term or ten to 20 years; fixtures and equipment - three to 20 years; and specialized supply chain equipment - six to 25 years.
Property and equipment under finance leases are recorded at the lower of the present value of the future minimum lease payments or the fair value of the asset and are amortized on the straight-line method over the lesser of the lease term or the estimated useful life. Interest capitalized on property under construction was immaterial for all periods presented.
Leases: The Company leases certain retail stores, distribution centers, office facilities and equipment from third parties. The Company determines whether a contract is or contains a lease at contract inception. Operating and finance lease assets and liabilities are recognized at the lease commencement date. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease obligations and long-term operating lease obligations on the Consolidated Balance Sheets. Finance leases are included in Property and equipment, net, current maturities of long-term debt and finance lease obligations and long-term debt and finance lease obligations on the Consolidated Balance Sheets. Operating lease assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are based on the present value of remaining lease payments over the lease term. As the rate implicit in the Company's leases is not readily determinable, the Company's applicable incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms, is used in calculating the present value of the sum of the lease payments. Operating lease assets are based on the lease liability, adjusted for any prepayments, lease incentives and initial direct costs incurred. The typical real estate lease period is 15 to 20
years with renewal options for varying terms and, to a limited extent, options to purchase. The Company includes renewal options that are reasonably certain to be exercised as part of the lease term.
The Company has lease agreements with non-lease components that relate to the lease components. Certain leases contain percent rent based on sales, escalation clauses or payment of executory costs such as property taxes, utilities, insurance and maintenance. Non-lease components primarily relate to common area maintenance. Non-lease components and the lease components to which they relate are accounted for together as a single lease component for all asset classes. The Company recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether lease payments are fixed or variable.
Impairment of long-lived assets: The Company regularly reviews its individual stores' operating performance, together with current market conditions, for indicators of impairment. When events or changes in circumstances indicate that the carrying value of the individual store's assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For assets held for sale, the Company recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairments are recorded as a component of Gain on property dispositions and impairment losses, net.
Intangible assets, net: Intangible assets with finite lives consist primarily of trade names, naming rights, customer prescription files and internally developed software. Intangible assets with finite lives are amortized on a straight-line basis over an estimated economic life ranging from three to 40 years. The Company reviews finite-lived intangible assets for impairment in accordance with its policy for long-lived assets. Intangible assets with indefinite useful lives, which are not amortized, consist of restricted covenants and liquor licenses. The Company reviews intangible assets with indefinite useful lives and tests for impairment annually on the first day of the fourth quarter and also if events or changes in circumstances indicate the occurrence of a triggering event. The review consists of comparing the estimated fair value of the cash flows generated by the asset to the carrying value of the asset.
Cloud computing arrangements that are service contracts: The Company enters into hosted cloud computing arrangements that are considered to be service contracts and capitalizes certain development costs related to implementing the cloud computing arrangement. As of February 26, 2022 and February 27, 2021, the Company had capitalized implementation costs of $186.4 million and $107.0 million, respectively, included in Other assets. The Company amortizes the costs over the related service contract period of the hosting arrangement. Amortization expense for the implementation costs was $38.3 million, $15.2 million and $0.6 million for fiscal 2021, fiscal 2020 and fiscal 2019 respectively, and is included within Selling and administrative expenses.
Goodwill: Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination. Goodwill is not amortized as the Company reviews goodwill for impairment annually on the first day of its fourth quarter and also if events or changes in circumstances indicate the occurrence of a triggering event. The Company reviews goodwill for impairment by initially considering qualitative factors to determine whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis. Based on the qualitative analysis performed in fiscal 2021, the Company determined that there was no goodwill impairment.
Business combination measurements: In accordance with applicable accounting standards, the Company estimates the fair value of acquired assets and assumed liabilities as of the acquisition date of business
combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.
The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.
Equity method investments: Investments in certain companies over which the Company exerts significant influence, but does not control the financial and operating decisions, are accounted for as equity method investments. For equity method investments, the Company regularly reviews its investments to determine whether there is a decline in fair value below carrying value. If there is a decline that is other-than-temporary, the investment is written down to fair value. As of February 26, 2022 and February 27, 2021, the Company has equity method investments of $247.9 million and $182.0 million, respectively, included in Other assets. Equity in earnings from unconsolidated affiliates was $63.5 million, $59.2 million and $1.5 million for fiscal 2021, fiscal 2020 and fiscal 2019 respectively, and is included in Other (income) expense, net.
The Company's equity method investments include an equity interest in Mexico Foods Parent LLC and La Fabrica Parent LLC ("El Rancho"), a Texas-based specialty grocer. The investment represents a 45% ownership interest in El Rancho which the Company is accounting for under the equity method. The Company has the option to acquire the remaining 55% of El Rancho at any time until six months after the delivery of El Rancho's financial results for the fiscal year ended December 31, 2021. If the Company elects to exercise the option to acquire the remaining equity of El Rancho, the price to be paid will be calculated using a predetermined market-based formula.
Other investments: Investments in equity securities with a readily determinable fair value, not accounted for under the equity method, are recorded at fair value with realized and unrealized gains and losses included in Other (income) expense, net. For equity securities without a readily determinable fair value, the investment is recorded at cost, less any impairment, plus or minus adjustments related to observable transactions for the same or similar securities, with realized and unrealized gains and losses included in Other (income) expense, net. As of February 26, 2022 and February 27, 2021, the Company has other investments of $118.6 million and $152.8 million, respectively, included in Other assets. Net realized and unrealized gains were $15.5 million, $43.0 million and $11.5 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
Company-Owned life insurance policies ("COLI"): The Company has COLI policies that have a cash surrender value. The Company has loans against these policies. The Company has no intention of repaying the loans prior to maturity or cancellation of the policies. Therefore, the Company offsets the cash surrender value by the related loans. As of February 26, 2022 and February 27, 2021, the cash surrender values of the policies were $139.7 million and $148.3 million, and the balances of the policy loans were $82.6 million and $89.9 million, respectively. The net balance of the COLI policies is included in Other assets.
Derivatives: The Company has entered into several pay fixed, receive variable interest rate swap contracts ("Swaps") to manage its exposure to changes in interest rates. Swaps are recognized in the Consolidated Balance
Sheets at fair value. The Swaps are not designated as cash flow hedges, and as a result, all changes in fair value are recorded in current period earnings, rather than through other comprehensive income (loss).
The Company has also entered into contracts to purchase electricity and natural gas at fixed prices for a portion of its energy needs. The Company expects to take delivery of the electricity and natural gas in the normal course of business. Contracts that qualify for the normal purchase exception under derivatives and hedging accounting guidance are not recorded at fair value. Energy purchased under these contracts is expensed as delivered. The Company also manages its exposure to changes in diesel prices utilized in the Company's distribution process through the use of short-term heating oil derivative contracts. These contracts are economic hedges of price risk and are not designated or accounted for as hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in current period earnings.
Self-Insurance liabilities: The Company is primarily self-insured for workers' compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company has established stop-loss amounts that limit the Company's further exposure after a claim reaches the designated stop-loss threshold. Stop-loss amounts for claims incurred for the years presented range from $0.25 million to $5.0 million per claim, depending upon the type of insurance coverage and the year the claim was incurred. In determining its self-insurance liabilities, the Company performs a continuing review of its overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.
The Company has reinsurance receivables of $20.5 million and $24.6 million recorded within Receivables, net and $44.5 million and $47.0 million recorded within Other assets as of February 26, 2022 and February 27, 2021, respectively. The self-insurance liabilities and related reinsurance receivables are recorded gross.
Changes in self-insurance liabilities consisted of the following (in millions):
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Beginning balance | $ | 1,159.1 | | | $ | 1,147.4 | |
Expense, net of actuarial adjustments | 310.5 | | | 285.6 | |
Claim payments | (298.5) | | | (273.9) | |
Ending balance | 1,171.1 | | | 1,159.1 | |
Less current portion | (333.3) | | | (321.4) | |
Long-term portion | $ | 837.8 | | | $ | 837.7 | |
Benefit plans and Multiemployer plans: Substantially all of the Company's employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to sponsored defined benefit plans. Certain employees participate in a long-term retention incentive bonus plan. The Company also provides certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement.
The Company recognizes a liability for the underfunded status of the defined benefit plans as a component of Other long-term liabilities. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive income (loss). The determination of the Company's obligation and related expense for its sponsored pensions and other post-retirement benefits is dependent, in part, on management's selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.
Most union employees participate in multiemployer retirement plans pursuant to collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by the Company. Pension expense for the multiemployer plans is recognized as contributions are funded.
Equity-based compensation: The Company recognizes equity-based compensation expense for restricted stock units ("Restricted Stock Units" or "RSUs") and restricted common stock of the Company ("RSAs") granted to employees and non-employee directors. Actual forfeitures are recognized as they occur. Equity-based compensation expense is based on the fair value on the grant date and is recognized over the requisite service period of the award, generally between one and five years from the date of the award. The fair value of the RSUs and RSAs with a service condition or performance-based condition is generally determined using the fair market value of the Company's Class A common stock on the grant date.
Revenue recognition: Revenues from the retail sale of products are recognized at the point of sale to the customer, net of returns and sales tax. Pharmacy sales are recorded upon the customer receiving the prescription. Third-party receivables from pharmacy sales were $247.5 million and $262.5 million as of February 26, 2022 and February 27, 2021, respectively. For digital related sales, which include home delivery and Drive Up & Go curbside pickup, revenues are recognized upon either pickup in store or delivery to the customer and may include revenue for separately charged delivery services. Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Discounts provided to customers by vendors, usually in the form of coupons, are not recognized as a reduction in sales, provided the coupons are redeemable at any retailer that accepts coupons. The Company recognizes revenue and records a corresponding receivable from the vendor for the difference between the sales prices and the cash received from the customer. The Company records a contract liability when rewards are earned by customers in connection with the Company's loyalty programs. As rewards are redeemed or expire, the Company reduces the contract liability and recognizes revenue. The contract liability balance was immaterial in fiscal 2021 and fiscal 2020.
The Company records a contract liability when it sells its own proprietary gift cards. The Company records a sale when the customer redeems the gift card. The Company's gift cards do not expire. The Company reduces the contract liability and records revenue for the unused portion of gift cards ("breakage") in proportion to its customers' pattern of redemption, which the Company determined to be the historical redemption rate. The Company's contract liability related to gift cards was $104.3 million and $98.1 million as of February 26, 2022 and February 27, 2021, respectively.
Disaggregated Revenues
The following table represents sales revenue by product type (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
| Amount (1) | | % of Total | | Amount (1)(2) | | % of Total | | Amount (1)(2) | | % of Total |
Non-perishables (3) | $ | 36,486.7 | | | 50.8 | % | | $ | 37,520.0 | | | 53.8 | % | | $ | 31,897.2 | | | 51.1 | % |
Fresh (4) | 24,636.8 | | | 34.3 | % | | 23,674.5 | | | 34.0 | % | | 20,885.8 | | | 33.4 | % |
Pharmacy | 5,823.3 | | | 8.1 | % | | 5,195.8 | | | 7.4 | % | | 5,236.8 | | | 8.4 | % |
Fuel | 3,747.5 | | | 5.2 | % | | 2,236.5 | | | 3.2 | % | | 3,430.4 | | | 5.5 | % |
Other (5) | 1,192.7 | | | 1.6 | % | | 1,063.6 | | | 1.6 | % | | 1,004.9 | | | 1.6 | % |
Total (6) | $ | 71,887.0 | | | 100.0 | % | | $ | 69,690.4 | | | 100.0 | % | | $ | 62,455.1 | | | 100.0 | % |
(1) Digital related sales are included in the categories to which the revenue pertains.
(2) In the fourth quarter of fiscal 2021, to better align with internal management reporting, the Company revised its presentation of sales revenue by product type, primarily to reclassify dairy sales from "Perishables" to "Non-perishables" and then titled its former "Perishables" product category "Fresh." Fiscal 2020 and fiscal 2019 have been adjusted to reflect this presentation.
(3) Consists primarily of general merchandise, grocery, dairy and frozen foods.
(4) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.
(5) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.
(6) Fiscal 2019 includes approximately $1.1 billion of incremental Net sales and other revenue due to the additional 53rd week.
Cost of sales and vendor allowances: Cost of sales includes, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehousing and distribution costs, Own Brands program costs and digital-related third-party delivery and handling costs.
The Company receives vendor allowances or rebates ("Vendor Allowances") for a variety of merchandising initiatives and buying activities. The terms of the Company's Vendor Allowances arrangements vary in length but are primarily expected to be completed within a quarter. The Company records Vendor Allowances as a reduction of Cost of sales when the associated products are sold. Vendor Allowances that have been earned as a result of completing the required performance under terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. The reduction of inventory for these Vendor Allowances was $54.1 million and $57.9 million as of February 26, 2022 and February 27, 2021, respectively.
Advertising costs are included in Cost of sales and are expensed in the period the advertising occurs. Cooperative advertising funds are recorded as a reduction of Cost of sales when the advertising occurs. Advertising costs were $440.5 million, $385.1 million and $405.6 million, net of cooperative advertising allowances of $72.9 million, $72.7 million and $91.9 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
Selling and administrative expenses: Selling and administrative expenses consist primarily of store and corporate employee-related costs such as salaries and wages, health and welfare, workers' compensation and pension benefits, as well as marketing and merchandising, rent, occupancy and operating costs, amortization of intangibles and other administrative costs.
Income taxes: The Company's income before taxes is primarily from domestic operations. Deferred taxes are provided for the net tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Valuation allowances are established where management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company reviews tax positions taken or expected to be taken on tax returns to determine whether and to what extent a tax benefit can be recognized. The Company evaluates its positions taken and establishes liabilities in accordance with the applicable accounting guidance for uncertain tax positions. The Company reviews these liabilities as facts and circumstances change and adjusts accordingly. The Company recognizes any interest and penalties associated with uncertain tax positions as a component of Income tax expense. U.S. shareholders of a controlled foreign corporation are required to provide U.S. taxes on its share of global intangible low-taxed income ("GILTI"). The current and deferred tax impact of GILTI is not material to the Company. Accordingly, the Company will report the tax impact of GILTI as a period cost and not provide deferred taxes for the basis difference that would be expected to reverse as GILTI.
Segments: The Company and its subsidiaries offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services in its stores or through digital channels. The Company's retail operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance. The Company's operating segments and reporting units are its 12 divisions, which are reported in one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Across all operating segments, the Company operates primarily one store format. Each division offers, through its stores and digital channels, the same general mix of products with similar pricing to similar categories of customers, has similar
distribution methods, operates in similar regulatory environments and purchases merchandise from similar or the same vendors.
Recently issued accounting standards: In August 2020, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2020-06 "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity and modifies the guidance on diluted earnings per share calculations as a result of these changes. ASU 2020-06 will take effect for public entities for annual reporting periods beginning after December 15, 2021, and interim periods within those fiscal years. The Company currently does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements and related disclosures, but evaluation is continuing.
NOTE 2 - ACQUISITIONS
On January 23, 2021, the Company acquired 27 stores operated by Kings Food Markets and Balducci's Food Lovers Market ("Kings and Balducci's"). The purchase price was $98.1 million, and the transaction was accounted for under the acquisition method of accounting. The purchase price was allocated to the fair values of the identifiable assets and liabilities. Net assets acquired of $102.0 million primarily consisted of fixed assets, intangibles and inventory, valued at $41.0 million, $31.6 million and $18.1 million, respectively. Intangible assets acquired primarily consisted of tradenames. The Company recognized a bargain purchase gain of $3.9 million as the amount by which the fair value of the net assets acquired exceeded the purchase consideration paid. The bargain purchase was recognized as a gain within Selling and administrative expenses for fiscal 2020. The Company believes it was able to acquire the net assets for lower than fair value due to the financial condition of Kings and Balducci's which was in bankruptcy proceedings. Pro forma results are not presented as the acquisition was not considered material to the Company. Third-party acquisition-related costs were immaterial for fiscal 2020 and were expensed as incurred as a component of Selling and administrative expenses.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following (in millions):
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Land | $ | 2,124.0 | | | $ | 2,096.8 | |
Buildings | 5,211.3 | | | 4,880.6 | |
Property under construction | 661.0 | | | 938.9 | |
Leasehold improvements | 2,176.1 | | | 1,887.1 | |
Fixtures and equipment | 7,542.0 | | | 6,630.5 | |
Property and equipment under finance leases | 750.0 | | | 755.0 | |
Total property and equipment | 18,464.4 | | | 17,188.9 | |
| | | |
Accumulated depreciation and amortization | (9,114.8) | | | (7,776.2) | |
Total property and equipment, net | $ | 9,349.6 | | | $ | 9,412.7 | |
Depreciation expense was $1,392.0 million, $1,297.7 million and $1,244.7 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Amortization expense related to finance lease assets was $63.8 million, $67.4 million and $90.2 million in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Fixed asset impairment losses of $2.6 million, $8.0 million and $21.8 million were recorded as a component of Gain on property dispositions and impairment losses, net in fiscal 2021, fiscal 2020 and fiscal 2019, respectively. The impairment losses primarily relate to assets
in underperforming stores, certain surplus properties and fiscal 2019 also includes certain leasehold interests and equipment related to the Plated meal kit subscription and delivery business.
NOTE 4 - INTANGIBLE ASSETS
The Company's Intangible assets, net consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | February 26, 2022 | | February 27, 2021 |
| Estimated useful lives (Years) | | Gross carrying amount | | Accumulated amortization | | Net | | Gross carrying amount | | Accumulated amortization | | Net |
Trade names | 40 | | $ | 1,935.8 | | | $ | (361.9) | | | $ | 1,573.9 | | | $ | 1,941.7 | | | $ | (312.5) | | | $ | 1,629.2 | |
| | | | | | | | | | | | | |
Customer prescription files | 5 | | 1,430.8 | | | (1,375.8) | | | 55.0 | | | 1,511.3 | | | (1,458.6) | | | 52.7 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
Internally developed software | 3 to 5 | | 1,126.3 | | | (564.3) | | | 562.0 | | | 777.5 | | | (441.1) | | | 336.4 | |
Other intangible assets (1) | 3 to 6 | | 58.2 | | | (52.1) | | | 6.1 | | | 52.3 | | | (48.8) | | | 3.5 | |
Total finite-lived intangible assets | | | 4,551.1 | | | (2,354.1) | | | 2,197.0 | | | 4,282.8 | | | (2,261.0) | | | 2,021.8 | |
Liquor licenses and restricted covenants | Indefinite | | 88.0 | | | — | | | 88.0 | | | 87.0 | | | — | | | 87.0 | |
Total intangible assets, net | | | $ | 4,639.1 | | | $ | (2,354.1) | | | $ | 2,285.0 | | | $ | 4,369.8 | | | $ | (2,261.0) | | | $ | 2,108.8 | |
(1) Other intangible assets includes covenants not to compete, specialty accreditation and licenses and patents.
Amortization expense for intangible assets was $187.2 million, $156.6 million and $355.8 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively. Estimated future amortization expense associated with the net carrying amount of intangibles with finite lives is as follows (in millions):
| | | | | |
Fiscal Year | Amortization Expected |
2022 | $ | 244.7 | |
2023 | 216.2 | |
2024 | 171.5 | |
2025 | 124.8 | |
2026 | 60.1 | |
Thereafter | 1,379.7 | |
Total | $ | 2,197.0 | |
In fiscal 2021 and fiscal 2019 there were $12.3 million and $34.1 million of intangible asset impairment losses, respectively, recorded as a component of Gain on property dispositions and impairment losses, net. There were no intangible asset impairment losses in fiscal 2020. The fiscal 2019 impairment loss was driven by the continued under performance of the Plated meal kit subscription and delivery operations and primarily relates to the Plated tradename, and to a lesser extent, certain other Plated intangible assets. The fair value was determined using an income approach which included a relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rate, royalty rate, discount rate and estimated tax rate.
NOTE 5 - FAIR VALUE MEASUREMENTS
The accounting guidance for fair value established a framework for measuring fair value and established a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability at the measurement date. The three levels are defined as follows:
Level 1 - Quoted prices in active markets for identical assets or liabilities;
Level 2 - Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table presents assets and liabilities which are measured at fair value on a recurring basis as of February 26, 2022 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Short-term investments (1) | | $ | 14.4 | | | $ | 4.9 | | | $ | 9.5 | | | $ | — | |
Non-current investments (2) | | 114.7 | | | 10.9 | | | 103.8 | | | — | |
Derivative contracts (3) | | 18.6 | | | — | | | 18.6 | | | — | |
Total | | $ | 147.7 | | | $ | 15.8 | | | $ | 131.9 | | | $ | — | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative contracts (4) | | $ | 10.4 | | | $ | — | | | $ | 10.4 | | | $ | — | |
| | | | | | | | |
Total | | $ | 10.4 | | | $ | — | | | $ | 10.4 | | | $ | — | |
(1) Primarily relates to Mutual Funds (Level 1) and Certificates of Deposit (Level 2). Included in Other current assets.
(2) Primarily relates to investments in publicly traded stock (Level 1) and certain equity investments, U.S. Treasury Notes and Corporate Bonds (Level 2). Included in Other assets.
(3) Primarily relates to energy derivative contracts. Included in Other assets.
(4) Primarily relates to interest rate swaps. Included in Other current liabilities.
The following table presents assets and liabilities which are measured at fair value on a recurring basis as of February 27, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
| | Total | | Quoted prices in active markets for identical assets (Level 1) | | Significant observable inputs (Level 2) | | Significant unobservable inputs (Level 3) |
Assets: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
Short-term investments (1) | | $ | 11.9 | | | $ | 4.4 | | | $ | 7.5 | | | $ | — | |
Non-current investments (2) | | 110.2 | | | 40.3 | | | 69.9 | | | — | |
Total | | $ | 122.1 | | | $ | 44.7 | | | $ | 77.4 | | | $ | — | |
| | | | | | | | |
Liabilities: | | | | | | | | |
Derivative contracts (3) | | $ | 40.0 | | | $ | — | | | $ | 40.0 | | | $ | — | |
| | | | | | | | |
Total | | $ | 40.0 | | | $ | — | | | $ | 40.0 | | | $ | — | |
(1) Primarily relates to Mutual Funds and Certificates of Deposit (Level 2). Included in Other current assets.
(2) Primarily relates to investments in publicly traded stock (Level 1) and U.S. Treasury Notes and Corporate Bonds (Level 2). Included in Other assets.
(3) Primarily relates to interest rate swaps. Included in Other current liabilities.
The estimated fair value of the Company's debt, including current maturities, was based on Level 2 inputs, being market quotes or values for similar instruments, and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. As of February 26, 2022, the fair value of total debt was $7,531.5 million compared to a carrying value of $7,484.6 million, excluding debt discounts and deferred financing costs. As of February 27, 2021, the fair value of total debt was $8,150.7 million compared to the carrying value of $7,815.5 million, excluding debt discounts and deferred financing costs.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a non-recurring basis, including long-lived assets and goodwill, which are evaluated for impairment. Long-lived assets include store-related assets such as property and equipment, operating lease assets and certain intangible assets. The inputs used to determine the fair value of long-lived assets and a reporting unit are considered Level 3 measurements due to their subjective nature.
The Company recorded long-lived asset impairment losses of $31.1 million, $30.2 million and $77.4 million during fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
The aggregate notional amount of all Swaps as of February 26, 2022 and February 27, 2021, were $593.0 million and $1,653.0 million, respectively, of which none were designated as cash flow hedges as defined by GAAP.
On February 5, 2020, the Company repaid in full its term loans using cash on hand and proceeds from the issuance of new notes (as further discussed in Note 7 - Long-term debt and finance lease obligations). Consequently, the Company discontinued cash flow hedge accounting for the interest rate swap agreements that were entered into to hedge the interest rate risk on the then existing variable rate term loans. In accordance with hedge accounting guidance, the net unrealized loss of $37.1 million, associated with the discontinued hedging relationship, recorded within Accumulated other comprehensive income (loss), was reclassified into Other (income) expense, net in fiscal 2019 in the Consolidated Statements of Operations and Comprehensive Income.
Activity related to the Swaps consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 | | Location of gain (loss) recognized from derivatives |
Gain (loss) on undesignated portion of interest rate swaps | | $ | 3.3 | | | $ | (19.5) | | | $ | (47.9) | | | Other (income) expense, net |
Loss on designated portion of interest rate swaps | | $ | — | | | $ | — | | | $ | (3.4) | | | Other comprehensive income (loss), net of tax |
NOTE 7 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The Company's long-term debt as of February 26, 2022 and February 27, 2021, net of debt discounts of $41.4 million and $44.8 million, respectively, and deferred financing costs of $57.5 million and $69.8 million, respectively, consisted of the following (in millions):
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Senior Unsecured Notes due 2023 to 2030, interest rate range of 3.25% to 7.50% | $ | 6,492.5 | | | $ | 6,680.5 | |
| | | |
Safeway Inc. Notes due 2027 to 2031, interest rate range of 7.25% to 7.45% | 374.4 | | | 504.3 | |
New Albertsons L.P. Notes due 2026 to 2031, interest rate range of 6.52% to 8.70% | 472.6 | | | 469.1 | |
Other financing obligations | 29.1 | | | 29.4 | |
Mortgage notes payable, secured | 17.1 | | | 17.6 | |
Finance lease obligations (see Note 8) | 579.4 | | | 612.7 | |
Total debt | 7,965.1 | | | 8,313.6 | |
Less current maturities | (828.8) | | | (212.4) | |
Long-term portion | $ | 7,136.3 | | | $ | 8,101.2 | |
As of February 26, 2022, the future maturities of long-term debt, excluding finance lease obligations, debt discounts and deferred financing costs, consisted of the following (in millions):
| | | | | |
2022 | $ | 750.8 | |
2023 | 0.9 | |
2024 | 16.9 | |
2025 | 14.1 | |
2026 | 2,760.1 | |
Thereafter | 3,941.8 | |
Total | $ | 7,484.6 | |
The Company's asset-based loan ("ABL") facility (the "ABL Facility") and certain of the outstanding notes and debentures have, restrictive covenants, subject to the right to cure in certain circumstances, calling for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain debt arrangements. There are no restrictions on the Company's ability to receive distributions from its subsidiaries to fund interest and principal payments due under the ABL Facility and the Company's senior unsecured notes (the "Senior Unsecured Notes"). Each of the ABL Facility and the Senior Unsecured Notes restrict the ability of the Company to pay dividends and distribute property to the Company's stockholders. As a result, all of the Company's consolidated net assets are effectively restricted with respect to their ability to be transferred to the Company's stockholders. Notwithstanding the foregoing, the ABL Facility and the
Senior Unsecured Notes each contain customary exceptions for certain dividends and distributions, including the ability to make cumulative distributions under the Senior Unsecured Notes of up to the greater of $1.0 billion or 4.0% of the Company's total assets (which is measured at the time of such distribution) and the ability to make distributions if certain payment conditions are satisfied under the ABL Facility. The Company was in compliance with all such covenants and provisions as of and for the fiscal year ended February 26, 2022.
ABL Facility
At both February 26, 2022 and February 27, 2021, there were no borrowings outstanding under the Company's ABL Facility, and letters of credit issued under the LOC sub-facility were $249.4 million and $354.6 million, respectively. On December 20, 2021, the Company's existing ABL Facility, which provides for a $4,000.0 million senior secured revolving credit facility, was amended and restated to, among other things, extend the maturity date of the facility to December 20, 2026 and reduce the unused fee to 0.25%. The new ABL Facility has an interest rate of LIBOR plus a margin ranging from 1.25% to 1.50% and also provides for a letters of credit ("LOC") sub-facility of $1,500.0 million. As part of the amendment, the Company capitalized $11.0 million of deferred financing costs, recorded within Other assets in the Consolidated Balance Sheets, and wrote-off $3.5 million of unamortized deferred financing costs to interest expense in the Consolidated Statements of Operations and Comprehensive Income.
On March 12, 2020, the Company provided notice to the lenders to borrow $2,000.0 million under the Company's ABL Facility as a precautionary measure in order to increase its cash position and preserve flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. The Company repaid the $2,000.0 million in full on June 19, 2020.
The ABL Facility is guaranteed by the Company's existing and future direct and indirect wholly owned domestic subsidiaries that are not borrowers, subject to certain exceptions. The ABL Facility is secured by, subject to certain exceptions, (i) a first-priority lien on substantially all of the ABL Facility priority collateral and (ii) a first-priority lien on substantially all other assets (other than real property). The ABL Facility contains no financial covenant unless and until (a) excess availability is less than (i) 10.0% of the lesser of the aggregate commitments and the then-current borrowing base at any time or is (ii) $250.0 million at any time or (b) an event of default is continuing. If any of such events occur, the Company must maintain a fixed charge coverage ratio of 1.0 to 1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.
Senior Unsecured Notes
Fiscal 2019
On August 15, 2019, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 5.875% senior unsecured notes due February 15, 2028 (the "2028 Notes"). Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. Proceeds from the 2028 Notes were used to partially fund the fiscal 2019 term loan repayment (see Albertsons Term Loans below).
On November 22, 2019, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 4.625% senior unsecured notes due January 15, 2027 (the "2027 Notes"). Interest on the 2027 Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2020. Proceeds from the 2027 Notes were used to partially fund the fiscal 2019 term loan repayment (see Albertsons Term Loans below).
On February 5, 2020, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of new 3.50% senior unsecured notes due February 15, 2023 (the "2023 Notes"), $600.0 million in aggregate principal amount of additional 2027 Notes (the "Additional 2027 Notes") and $1,000.0 million in aggregate principal amount of new 4.875% senior unsecured notes due February 15, 2030 (the "2030 Notes" and together with the 2023 Notes and Additional 2027 Notes, the "February Notes"). The Additional 2027 Notes were issued as "additional securities" under the indenture governing the outstanding 2027 Notes. The Additional 2027 Notes are expected to be treated as a single class with the outstanding 2027 Notes for all purposes and have the same terms as those of the outstanding 2027 Notes. Interest on the 2023 Notes and 2030 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2020. The proceeds received from the issuance of the February Notes, together with approximately $18 million of cash on hand, were used to (i) to partially fund the fiscal 2019 term loan repayment (see Albertsons Term Loans below) and (ii) pay fees and expenses related to the fiscal 2019 term loan repayment and the issuance of the February Notes.
Fiscal 2020
On August 31, 2020, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 3.250% senior unsecured notes due March 15, 2026 (the "New 2026 Notes") and $750.0 million in aggregate principal amount of 3.500% senior unsecured notes due March 15, 2029 (the "2029 Notes" and together with the New 2026 Notes, the "August Notes"). Interest on the August Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. On September 11, 2020, a portion of the proceeds from the issuance of the August Notes, together with approximately $60 million of cash on hand, were used to fund the full redemption of the $1,250.0 million aggregate principal amount outstanding of the Company's 6.625% senior unsecured notes due 2024 (the "2024 Redemption"). In connection with the 2024 Redemption, the Company paid an associated redemption premium of $41.4 million. The Company recorded a $49.1 million loss on debt extinguishment related to the 2024 Redemption, comprised of the $41.4 million redemption premium and $7.7 million write-off of deferred financings costs.
On September 16, 2020, remaining proceeds from the issuance of the August Notes were used to fund the partial redemption of $250.0 million of the $1,250.0 million in aggregate principal amount outstanding (the "September Partial 2025 Redemption") of the Company's 5.750% senior unsecured notes due September 2025 (the "2025 Notes"). In connection with the September Partial 2025 Redemption, the Company paid an associated redemption premium of $7.2 million. The Company recorded an $8.6 million loss on debt extinguishment related to the September Partial 2025 Redemption, comprised of the $7.2 million redemption premium and a $1.4 million write-off of deferred financing costs.
On December 22, 2020, the Company and substantially all of its subsidiaries completed the issuance of $600.0 million in aggregate principal amount of additional 2029 Notes (the "Additional 2029 Notes"). The Additional 2029 Notes were issued as "additional securities" under the indenture governing the outstanding 2029 Notes. The Additional 2029 Notes are expected to be treated as a single class with the outstanding 2029 Notes for all purposes and have the same terms as those of the outstanding 2029 Notes. On January 4, 2021, proceeds from the issuance of the Additional 2029 Notes, together with approximately $230 million of cash on hand, were used to fund a partial redemption of $800.0 million of the $1,000.0 million in aggregate principal amount outstanding of the 2025 Notes (the "January Partial 2025 Redemption"). In connection with the January Partial 2025 Redemption, the Company paid an associated redemption premium of $23.0 million. The Company recorded a $27.6 million loss on debt extinguishment related to the January Partial 2025 Redemption, comprised of the $23.0 million redemption premium and a $4.6 million write-off of deferred financing costs.
Fiscal 2021
On November 1, 2021, the Company redeemed the remaining $200.0 million aggregate principal amount outstanding of its 2025 Notes (the "2025 Redemption"), which were redeemed using cash on hand, at a redemption price of 101.438% of the principal amount thereof plus accrued and unpaid interest. The Company recorded a $3.7 million loss on debt extinguishment related to the 2025 Redemption, comprised of a $2.9 million redemption premium and a $0.8 million write-off of deferred financing costs.
The 2023 Notes, the $600.0 million in aggregate principal amount of 7.5% senior unsecured notes due March 15, 2026 (the "2026 Notes"), the New 2026 Notes, the 2027 Notes, the Additional 2027 Notes, the 2028 Notes, the 2029 Notes, the Additional 2029 Notes and the 2030 Notes have not been and will not be registered with the SEC. Each of these notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company’s subsidiaries that are not issuers under the indenture governing such notes.
The Company, an issuer and direct or indirect parent of each of the other issuers of the 2023 Notes, the 2026 Notes, the New 2026 Notes, the 2027 Notes, the Additional 2027 Notes, the 2028 Notes, the 2029 Notes, the Additional 2029 Notes and the 2030 Notes, has no independent assets or operations. All of the direct or indirect subsidiaries of the Company, other than subsidiaries that are issuers, or guarantors, as applicable, of the 2023 Notes, the 2026 Notes, the New 2026 Notes, the 2027 Notes, the Additional 2027 Notes, the 2028 Notes, the 2029 Notes, the Additional 2029 Notes and the 2030 Notes are minor, individually and in the aggregate.
Safeway Notes
On May 24, 2019, the Company completed a cash tender offer and early redemption of Safeway notes with a par value of $34.1 million and a book value of $33.3 million for $32.6 million, plus accrued and unpaid interest of $0.7 million (the "Safeway Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the Safeway Tender of $0.5 million.
The Company repaid the remaining $136.8 million in aggregate principal amount of Safeway's 3.95% Notes due 2020 on their maturity date, August 15, 2020. The Company also repaid the remaining $130.0 million in aggregate principal amount of Safeway's 4.75% Notes due 2021 on their maturity date, December 1, 2021.
NALP Notes
On May 24, 2019, the Company completed a cash tender offer and early redemption of New Albertsons L.P.'s ("NALP") Notes with a par value of $402.9 million and a book value of $363.7 million for $382.7 million, plus accrued and unpaid interest of $8.2 million (the "NALP Notes Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Tender of $19.1 million.
Also during fiscal 2019, the Company repurchased NALP Notes on the open market with an aggregate par value of $553.9 million and a book value of $502.0 million for $547.5 million plus accrued and unpaid interest of $11.3 million (the "NALP Notes Repurchase"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Repurchase of $46.2 million.
Albertsons Term Loans
Through a series of repayments and refinancing transactions during fiscal 2019, the Company repaid $4,662.9 million of aggregate principal amount under its term loan facilities, which effectively represented the full repayment of the entire outstanding term loan balance, along with accrued and unpaid interest and fees and expenses. In connection with these repayments and refinancing transactions, the Company used approximately $864 million of cash on hand and proceeds from the issuance of the 2027 Notes, the 2028 Notes and the February Notes. In connection with the repayments and refinancing transactions, the Company wrote-off $15.2 million of deferred financing costs and $29.9 million of original issue discount which was included as a component in Loss on debt extinguishment, and expensed $20.6 million of deferred financing costs and $27.6 million of original issue discount which was included as a component of Interest expense, net.
Deferred Financing Costs and Interest Expense, Net
Financing costs incurred to obtain all financing, except for ABL Facility financing, are recognized as a direct reduction from the carrying amount of the debt liability and are amortized over the term of the related debt using the effective interest method. Financing costs incurred to obtain ABL Facility financing are capitalized and amortized over the ABL Facility term using the straight-line method. Deferred financing costs associated with ABL Facility financing are included in Other assets and were $25.0 million and $25.9 million as of February 26, 2022 and February 27, 2021, respectively.
Interest expense, net consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
ABL Facility, senior secured and unsecured notes, term loans and debentures | $ | 400.0 | | | $ | 463.4 | | | $ | 565.3 | |
Finance lease obligations | 61.6 | | | 70.5 | | | 79.8 | |
Amortization of deferred financing costs (1) | 23.4 | | | 20.9 | | | 39.8 | |
Amortization of debt (premiums) discounts, net | (0.2) | | | (0.6) | | | 34.1 | |
Other interest income | (2.9) | | | (16.0) | | | (21.0) | |
Interest expense, net | $ | 481.9 | | | $ | 538.2 | | | $ | 698.0 | |
(1) Fiscal 2021 amortization of deferred financing costs includes $3.5 million of deferred financing costs expensed in connection with the ABL amendment. Fiscal 2019 amortization of deferred financing costs included $20.6 million of deferred financing costs expensed in connection with the term loan amendment and repayments.
NOTE 8 - LEASES
The components of total lease cost, net consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Classification | | Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Operating lease cost (1) | | Cost of sales and Selling and administrative expenses (3) | | $ | 1,046.9 | | | $ | 1,016.2 | | | $ | 1,011.6 | |
Finance lease cost | | | | | | | | |
Amortization of lease assets | | Cost of sales and Selling and administrative expenses (3) | | 63.8 | | | 67.4 | | | 90.4 | |
Interest on lease liabilities | | Interest expense, net | | 61.6 | | | 70.5 | | | 79.8 | |
Variable lease cost (2) | | Cost of sales and Selling and administrative expenses (3) | | 428.6 | | | 423.8 | | | 402.9 | |
Sublease income | | Net sales and other revenue | | (84.3) | | | (91.3) | | | (111.8) | |
Total lease cost, net | | | | $ | 1,516.6 | | | $ | 1,486.6 | | | $ | 1,472.9 | |
(1) Includes short-term lease cost, which is immaterial.
(2) Represents variable lease costs for both operating and finance leases. Includes contingent rent expense and other non-fixed lease related costs, including property taxes, common area maintenance and property insurance.
(3) Supply chain-related amounts are included in Cost of sales.
Balance sheet information related to leases as of February 26, 2022 and February 27, 2021 consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Classification | | February 26, 2022 | | February 27, 2021 |
Assets | | | | | | |
Operating | | Operating lease right-of-use assets | | $ | 5,908.4 | | | $ | 6,015.6 | |
Finance | | Property and equipment, net | | 373.4 | | | 384.9 | |
Total lease assets | | | | $ | 6,281.8 | | | $ | 6,400.5 | |
| | | | | | |
Liabilities | | | | | | |
Current | | | | | | |
Operating | | Current operating lease obligations | | $ | 640.6 | | | $ | 605.3 | |
Finance | | Current maturities of long-term debt and finance lease obligations | | 78.0 | | | 81.5 | |
Long-term | | | | | | |
Operating | | Long-term operating lease obligations | | 5,419.9 | | | 5,548.0 | |
Finance | | Long-term debt and finance lease obligations | | 501.4 | | | 531.2 | |
Total lease liabilities | | | | $ | 6,639.9 | | | $ | 6,766.0 | |
The following table presents cash flow information for leases (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Cash paid for amounts included in the measurement of lease liabilities: | | | | | |
Operating cash flows from operating leases | $ | 1,001.6 | | | $ | 973.7 | | | $ | 995.8 | |
Operating cash flows from finance leases | 61.6 | | | 70.5 | | | 79.8 | |
Financing cash flows from finance leases | 78.0 | | | 79.9 | | | 109.3 | |
Right-of-use assets obtained in exchange for operating lease obligations | 606.2 | | | 763.1 | | | 1,195.2 | |
Right-of-use assets obtained in exchange for finance lease obligations | 75.4 | | | 35.8 | | | — | |
Gains on sale leaseback transactions, net | — | | | — | | | 487.1 | |
Impairment of right-of-use operating lease assets | 14.7 | | | 15.9 | | | 15.4 | |
Impairment of right-of-use finance lease assets | 1.5 | | | 6.3 | | | 6.1 | |
The following table presents the weighted average lease term and discount rate for leases:
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Weighted average remaining lease term - operating leases | 11.1 years | | 11.7 years |
Weighted average remaining lease term - finance leases | 9.0 years | | 8.8 years |
Weighted average discount rate - operating leases | 6.5 | % | | 6.7 | % |
Weighted average discount rate - finance leases | 11.2 | % | | 12.3 | % |
Future minimum lease payments for operating and finance lease obligations as of February 26, 2022 consisted of the following (in millions):
| | | | | | | | | | | |
| Lease Obligations |
Fiscal year | Operating Leases | | Finance Leases |
2022 | $ | 935.6 | | | $ | 114.3 | |
2023 | 962.3 | | | 118.8 | |
2024 | 878.8 | | | 102.4 | |
2025 | 791.6 | | | 89.1 | |
2026 | 712.9 | | | 72.9 | |
Thereafter | 4,461.5 | | | 347.1 | |
Total future minimum obligations | 8,742.7 | | | 844.6 | |
Less interest | (2,682.2) | | | (265.2) | |
Present value of net future minimum lease obligations | 6,060.5 | | | 579.4 | |
Less current portion | (640.6) | | | (78.0) | |
Long-term obligations | $ | 5,419.9 | | | $ | 501.4 | |
The Company subleases certain property to third parties. Future minimum tenant operating lease payments remaining under these non-cancelable operating leases as of February 26, 2022 was $239.7 million.
During the second quarter of fiscal 2019, the Company, through three separate transactions, completed the sale and leaseback of 53 store properties and one distribution center for an aggregate purchase price, net of closing costs, of $931.3 million. In connection with the sale leaseback transactions, the Company entered into lease agreements for each of the properties for initial terms ranging from 15 to 20 years. The aggregate initial annual rent payment for the properties is approximately $53 million and includes 1.50% to 1.75% annual rent increases over the initial lease terms. All of the properties qualified for sale leaseback and operating lease accounting, and the Company recorded total gains of $463.6 million, which is included as a component of Gain on property dispositions and impairment losses, net. The Company also recorded operating lease right-of-use assets and corresponding operating lease liabilities of $602.5 million.
NOTE 9 - STOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK
Common Stock
On June 8, 2020, the Company amended and restated its certificate of incorporation to authorize 1,150,000,000 shares of common stock, par value $0.01 per share, of which 1,000,000,000 shares were classified as Class A common stock ("Class A common stock") and 150,000,000 shares were classified as Class A-1 convertible common stock ("Class A-1 common stock" and together with the Class A common stock, the "Common Stock"). As of February 26, 2022, there were 587,904,283 and 488,264,218 shares of Class A common stock issued and outstanding, respectively, and no shares of Class A-1 common stock issued or outstanding. As of February 27, 2021, there were 585,574,666 and 465,565,019 shares of Class A common stock issued and outstanding, respectively. For all prior periods presented, use of Class A common stock refers to the Company's common stock pre-reclassification.
The terms of the Class A common stock are substantially identical to the terms of the Class A-1 common stock, except that the Class A-1 common stock does not have voting rights. Each holder of Class A common stock is entitled to one vote for each share owned of record on all matters voted upon by stockholders. A majority vote is required for all action to be taken by stockholders, except as otherwise provided for in the Company's amended and restated certificate of incorporation and amended and restated bylaws or as required by law. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of the Company's Common Stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of legally available funds. In the event of the Company's liquidation, dissolution or winding-up, the holders of Common Stock are entitled to share equally and ratably in the Company's assets, if any, remaining after the payment of all of debts and liabilities and the liquidation preference of any outstanding preferred stock. Shares of Class A-1 common stock would be issued upon the conversion of the Company's outstanding Series A-1 preferred stock. When permitted under the relevant antitrust restrictions, any issued shares of Class A-1 common stock would automatically convert on a one-for-one basis to voting shares of Class A common stock.
The Company has established a dividend policy pursuant to which the Company intends to pay a quarterly dividend on its Class A common stock. The Company paid cash dividends on its Class A common stock of $207.4 million and $93.7 million during fiscal 2021 and fiscal 2020, respectively. On April 12, 2022, the Company announced the next quarterly dividend payment of $0.12 per share of Class A common stock to be paid on May 10, 2022 to stockholders of record as of the close of business on April 26, 2022. Future dividends will be made at the discretion of the Company's board of directors and will depend on, among other things, general and economic conditions, industry standards, the Company's financial condition and operating results, the Company's available cash and current and anticipated cash needs, restrictions under the documentation governing certain of the Company's indebtedness, including the ABL Facility and Senior Unsecured Notes, capital requirements, regulations and contractual, legal, tax and regulatory restrictions, and such other factors as the Company's board of directors may deem relevant.
Initial Public Offering
The Company's Class A common stock began trading on the New York Stock Exchange on June 26, 2020 under the symbol "ACI" and on June 30, 2020, certain selling stockholders completed the sale of a total of 50,000,000 shares of Class A common stock at an initial price to the public of $16.00 per share. The Company did not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders in the Initial Public Offering ("IPO").
Convertible Preferred Stock and Investor Exchange Right
On June 8, 2020, the Company amended and restated its certificate of incorporation to authorize 100,000,000 shares of convertible preferred stock, par value $0.01 per share, of which 1,750,000 shares were designated Series A convertible preferred stock ("Series A preferred stock") and 1,410,000 shares were designated Series A-1 convertible preferred stock ("Series A-1 preferred stock" and together with the Series A preferred stock, the "Convertible Preferred Stock"). On June 9, 2020 (the "Preferred Closing Date"), the Company sold and issued (i) an aggregate of 1,410,000 shares of Series A-1 preferred stock and (ii) an aggregate of 340,000 shares of Series A preferred stock. The Company received aggregate proceeds of $1,680.0 million from the sale and issuance of the Convertible Preferred Stock which has an aggregate liquidation preference of $1,750.0 million. The Convertible Preferred Stock is presented outside of permanent equity at its original issuance price less costs incurred, due to it being contingently redeemable, as described below.
The terms of the Series A preferred stock are substantially identical to the terms of the Series A-1 preferred stock, except that the Series A preferred stock will vote together with Class A common stock on an as-converted basis, but the Series A-1 preferred stock cannot vote with Class A common stock on an as converted basis. When permitted under the relevant antitrust restrictions, shares of the Company's Series A-1 preferred stock will convert on a one-for-one basis to shares of voting Series A preferred stock. On June 29, 2020, holders of 584,000 shares of Series A-1 preferred stock were relieved from the relevant antitrust restrictions resulting in the automatic conversion into 584,000 shares of voting Series A preferred stock. The Convertible Preferred Stock, with respect to dividend rights and/or distribution rights upon the liquidation, winding-up or dissolution, as applicable, ranks senior to each class of Common Stock and junior to existing and future indebtedness and other liabilities.
The Series A-1 preferred stock is convertible at the option of the holders thereof at any time into shares of Class A-1 common stock (which are identical to the Class A common stock, except that the Class A-1 common stock does not include voting rights) and the Series A preferred stock is convertible at the option of the holders thereof at any time into shares of Class A common stock, each at an initial conversion price of $17.22 per share and an initial conversion rate of 58.064 shares of Common Stock per share of Convertible Preferred Stock, subject to certain anti-dilution adjustments. At any time after June 30, 2023, if the last reported sale price of the Class A common stock has equaled or exceeded $20.50 per share (or 119% of the initial conversion price), as may be adjusted, for at least 20 trading days in any period of 30 consecutive trading days, the Company will have the right to cause all, or any portion, of the outstanding Series A-1 preferred stock or Series A preferred stock to convert into the relevant number of shares of Class A-1 common stock or Class A common stock, as applicable; provided that the Company will not be permitted to effect a mandatory conversion with respect to more than one-third of the aggregate outstanding shares, as of the date of the first notice date, of Series A-1 preferred stock and Series A preferred stock in any 12-month period unless the last reported sale price of the Class A common stock has equaled or exceeded $23.42 (or 136% of the initial conversion price), as may be adjusted, for at least 20 trading days in any period of 30 consecutive trading days.
During the fourth quarter of fiscal 2021, certain holders of the Company's Convertible Preferred Stock converted 350,813 shares of Convertible Preferred Stock into 20,369,582 shares of the Company's Class A common stock, which were issued from treasury stock. See Treasury Stock below and the Consolidated Statements of Stockholders' Equity for additional information. There were 1,399,186 and 1,750,000 shares of Convertible Preferred Stock outstanding as of February 26, 2022 and February 27, 2021, respectively. Subsequent to the end of fiscal 2021, through April 19, 2022, certain holders of the Company's Convertible Preferred Stock converted approximately 312,640 shares of Convertible Preferred Stock into 18,153,134 shares of the Company's Class A common stock. As a result, the Company has issued, in the aggregate, 38,522,716 shares of Class A common stock to holders of Convertible Preferred Stock related to these non-cash conversions, representing approximately 38% of the originally issued Convertible Preferred Stock.
The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75% of the liquidation preference per share of the Convertible Preferred Stock. In the event that the Company does not declare and pay any dividends in cash, the Company may instead, only for two quarters, pay such dividends by increasing the liquidation preference of the Convertible Preferred Stock at a rate equal to the applicable cash dividend rate plus 2.25% on such dividend payment date. In addition, the holders of Convertible Preferred Stock participate in cash dividends that the Company pays on its common stock to the extent that such cash dividends exceed $206.25 million per fiscal year. The Company paid cash dividends to holders of the Convertible Preferred Stock of $114.6 million and $66.0 million during fiscal 2021 and fiscal 2020, respectively. On March 15, 2022, the Company declared a quarterly cash dividend of $22.8 million to holders of Convertible Preferred Stock, which was paid on March 31, 2022.
At any time following June 9, 2026, the Company may redeem all, but not less than all, of the Convertible Preferred Stock then outstanding at a redemption price equal to the product of the liquidation preference of the Convertible Preferred Stock then outstanding and 105%, plus accrued and unpaid dividends. In the event that the Company receives a notice of an intention to exchange the shares of Convertible Preferred Stock for equity interests in certain of the Company's subsidiaries pursuant to the real estate agreement (as discussed below), the Company will have the right to redeem all, but not less than all, of its Convertible Preferred Stock then outstanding at a redemption price equal to the product of the aggregate liquidation preference of the Convertible Preferred Stock of such holder then outstanding and 110%, plus accrued and unpaid dividends. The Convertible Preferred Stock is also convertible, at the option of the holder, upon the occurrence of certain fundamental change events, including a change in control or delisting of the Company at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for the Company's Common Stock upon such change in control, plus in certain conditions accrued and unpaid dividends through June 30, 2023 or June 30, 2024, as applicable.
Concurrent with the issuance and sale of the Convertible Preferred Stock, a newly formed consolidated real estate subsidiary of the Company entered into a real estate agreement with an affiliate of the holders ("RE Investor") of the Convertible Preferred Stock. Under the terms of the real estate agreement, prior to the closing of the Convertible Preferred Stock, the Company was to place into its real estate subsidiary fee owned real estate properties with an appraised value of 165% of the liquidation preference of the Convertible Preferred Stock or a combination of real estate properties and cash. This resulted in the Company contributing approximately $36.5 million of cash into a restricted escrow account to make up for the shortfall on the appraised value of owned properties placed into the real estate subsidiary. The real estate agreement provides the RE Investor with the unilateral right, upon the occurrence of specified trigger events, to exercise an investor exchange right to exchange all of the outstanding Convertible Preferred Stock for certain real estate assets or the real estate subsidiary's equity interests in its subsidiary special purpose entities holding such real estate assets, subject to certain provisions as further defined in the real estate agreement (the "Investor Exchange Right"). The Investor Exchange Right may be exercised if any of the following were to occur: (i) the Convertible Preferred Stock remains outstanding as of June 9, 2027, (ii) if a fundamental change occurs after June 30, 2024 and the related fundamental change stock price is less than the conversion price, (iii) a downgrade by one or more gradations or withdrawal of the Company's credit rating by certain rating agencies, as a result of which the Company's credit rating is B- (or its equivalent) or lower, (iv) the
failure by the Company to pay a dividend on the Convertible Preferred Stock, which failure continues for 30 days after such dividend's due date, or (v) a bankruptcy filing. The target amount of real estate assets (net of taxes and fees) to be received in exchange for the Convertible Preferred Stock will be the product of the liquidation preference and 110%, plus an amount equal to any accrued and unpaid dividends. The Investor Exchange Right may be exercised unless the Company redeems all of the outstanding Convertible Preferred Stock at a redemption price, if such redemption occurs after the Company receives a notice of intent to exercise the Investor Exchange Right, equal to the product of the aggregate liquidation preference of the Convertible Preferred Stock then outstanding and 110%, plus accrued and unpaid dividends. Upon completion of the Investor Exchange Right, subsidiaries of the Company, as the applicable tenant, will enter into a master lease agreement with the RE Investor or designated affiliate as the landlord, solely with respect to the real estate properties that have been transferred directly or indirectly to the RE Investor, substantially the same as the current master lease agreements between the Company's consolidated real estate subsidiaries and the Company's consolidated operating subsidiaries.
The Company assessed the Convertible Preferred Stock for any beneficial conversion features or embedded derivatives, including the conversion option and investor exchange right, and did not identify any features that would require bifurcation from the Convertible Preferred Stock and receive separate accounting treatment.
Treasury Stock
On June 9, 2020, the Company used $1,680.0 million, an amount equal to the proceeds from the sale and issuance of the Company's Convertible Preferred Stock, to repurchase 101,611,736 shares of Class A common stock from the Company's parents (the "June 2020 Repurchase"). The proceeds received by the Company's parents from the June 2020 Repurchase were distributed to their members, which include the Company's sponsors and current and former members of management.
On September 14, 2020, the Company entered into a stock repurchase agreement with a stockholder pursuant to which the Company repurchased 6,837,970 shares of its Class A common stock held by the stockholder for an aggregate purchase price of $82.0 million. The stockholder was subject to a court-mandated wind-down, and a court-appointed receiver was directed to liquidate the stockholder's assets. The price was agreed to between the Company and the receiver (on behalf of the stockholder). In establishing the price, the parties took into account, among many other factors that they each deemed relevant, an applicable discount related to the selling restrictions that a third-party buyer would have had if such third-party buyer purchased the shares, including relevant lock-up agreements.
On October 14, 2020, the Company's board of directors authorized a share repurchase program that allows the Company to repurchase up to $300.0 million of its Class A common stock. As part of the share repurchase program, during fiscal 2020, the Company, through a series of open-market transactions, repurchased 7,888,320 shares of its Class A common stock for an aggregate purchase price of $119.1 million.
During the fourth quarter of fiscal 2021, the Company reissued 20,369,582 shares of treasury stock, at cost, upon conversion of approximately 350,813 shares of Convertible Preferred Stock into Class A common stock, as discussed above. Shares of treasury stock are reissued based on specific identification.
NOTE 10 - EQUITY-BASED COMPENSATION
The Company maintains the Albertsons Companies, Inc. Restricted Stock Unit Plan (the "Restricted Stock Unit Plan"). Under the Restricted Stock Unit Plan, subsequent to the IPO, 43.6 million shares of Class A common stock have been authorized for issuance as equity awards. As of February 26, 2022, 37.7 million shares of Class A common stock remained available for future awards.
Under the Restricted Stock Unit Plan, the Company recognizes equity-based compensation expense for RSUs and RSAs granted to employees and non-employee directors. Upon vesting, RSUs and RSAs will be settled in shares of the Company's Class A common stock. RSUs generally vest over three years from the grant date, based on a service period, or upon a combination of both a service period and achievement of certain performance-based thresholds, and RSAs generally vest over five years from the grant date, with 50% based solely on a service period and 50% upon a service period and achievement of certain performance-based thresholds. For performance-based RSUs and RSAs granted in fiscal 2021, the number of shares of the Company's Class A common stock to be received at vesting can be adjusted within a predetermined range based on the Company's actual performance for fiscal 2021 relative to the fiscal 2021 performance target.
Equity-based compensation expense recognized in the Consolidated Statements of Operations, net of forfeitures, was as follows (in millions):
| | | | | | | | | | | | | | | | | | | | |
| | Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
RSUs | | $ | 93.2 | | | $ | 53.5 | | | $ | 28.9 | |
RSAs | | 8.0 | | | 5.5 | | | 3.9 | |
Total equity-based compensation expense | | $ | 101.2 | | | $ | 59.0 | | | $ | 32.8 | |
Total related tax benefit | | $ | 23.9 | | | $ | 13.7 | | | $ | 7.5 | |
During fiscal 2021, the Company issued 4.8 million RSUs to its employees and directors, of which 3.5 million shares were granted for accounting purposes. The 3.5 million issued and granted awards consist of 2.9 million RSUs that have solely time-based vesting and 0.6 million performance-based RSUs that were granted upon the establishment of the fiscal 2021 performance target and that would vest upon both the achievement of such performance target and continued service through the vesting period. Additionally, 2.2 million previously issued performance-based RSUs and RSAs were granted in fiscal 2021 upon the establishment of the fiscal 2021 annual performance target and that would vest upon both the achievement of such performance target and continued service through the vesting period. The 5.7 million RSUs and RSAs granted in fiscal 2021 have an aggregate grant date value of $113.2 million. The aggregate grant date value of RSUs and RSAs granted was $94.5 million and $20.0 million in fiscal 2020 and fiscal 2019, respectively.
The following summarizes the activity of RSUs and RSAs during fiscal 2021:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Time-Based | | Performance-Based |
| | Number of shares (in millions) | | Weighted average grant date fair value | | Number of shares (in millions) | | Weighted average grant date fair value |
Unvested, February 27, 2021 | | 6.0 | | | $ | 11.95 | | | 2.2 | | | $ | 14.39 | |
| | | | | | | | |
Granted | | 2.9 | | | 21.33 | | | 2.8 | | | 17.95 | |
Vested | | (3.8) | | | 12.68 | | | (0.5) | | | 17.59 | |
Forfeited or cancelled | | (0.3) | | | 13.72 | | | — | | | — | |
Unvested, February 26, 2022 | | 4.8 | | | $ | 16.98 | | | 4.5 | | | $ | 16.26 | |
During fiscal 2021, fiscal 2020 and fiscal 2019, the aggregate fair value of RSUs and RSAs that vested was $120.9 million, $54.3 million and $29.3 million, respectively. The number of RSUs and RSAs vested includes shares of common stock that the Company withheld on behalf of employees to satisfy statutory tax withholding requirements.
As of February 26, 2022, the Company had $94.4 million of unrecognized compensation cost related to 8.3 million unvested granted RSUs. That cost is expected to be recognized over a weighted average period of 1.7 years. As of
February 26, 2022, the Company had $3.6 million of unrecognized costs related to 1.0 million unvested granted RSAs. That cost is expected to be recognized over a weighted average period of 2.2 years.
Upon the establishment of the annual performance target for fiscal 2022 and fiscal 2023, the remaining 1.6 million issued performance-based RSUs and 0.3 million performance-based RSAs will be granted for accounting purposes, as applicable.
NOTE 11 - INCOME TAXES
The components of income tax expense consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Current | | | | | |
Federal (1) | $ | 211.1 | | | $ | 307.0 | | | $ | 87.2 | |
State (2) | 49.2 | | | 84.5 | | | 49.2 | |
Foreign | 0.6 | | | (0.7) | | | 2.3 | |
Total Current | 260.9 | | | 390.8 | | | 138.7 | |
| | | | | |
Deferred | | | | | |
Federal | 198.3 | | | (92.5) | | | (14.1) | |
State | 12.4 | | | (27.3) | | | (1.1) | |
Foreign | 8.3 | | | 7.5 | | | 9.3 | |
Total Deferred | 219.0 | | | (112.3) | | | (5.9) | |
Income tax expense | $ | 479.9 | | | $ | 278.5 | | | $ | 132.8 | |
(1) Federal current tax expense net of $0.5 million, $5.7 million and $66.8 million tax benefit of net operating losses ("NOL") in fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
(2) State current tax expense net of $16.7 million and $22.6 million tax benefit of NOLs in fiscal 2020 and fiscal 2019, respectively. There was no tax benefit of NOLs in fiscal 2021.
The difference between the actual tax provision and the tax provision computed by applying the statutory federal income tax rate of 21% to Income before income taxes was attributable to the following (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Income tax expense at federal statutory rate | $ | 440.9 | | | $ | 237.0 | | | $ | 125.8 | |
State income taxes, net of federal benefit | 100.7 | | | 58.0 | | | 32.3 | |
Change in valuation allowance | (2.5) | | | (0.5) | | | (7.2) | |
Unrecognized tax benefits | (33.9) | | | 8.6 | | | 7.7 | |
Charitable donations | (6.1) | | | (8.2) | | | (6.9) | |
Tax Credits | (20.3) | | | (23.3) | | | (23.5) | |
Other | 1.1 | | | 6.9 | | | 4.6 | |
Income tax expense | $ | 479.9 | | | $ | 278.5 | | | $ | 132.8 | |
Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. The Company's deferred tax assets and liabilities consisted of the following (in millions):
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Deferred tax assets: | | | |
Compensation and benefits | $ | 229.5 | | | $ | 275.0 | |
Net operating loss | 107.0 | | | 118.4 | |
Pension & postretirement benefits | 280.2 | | | 333.1 | |
Self-Insurance | 275.3 | | | 271.0 | |
Tax credits | 30.7 | | | 39.0 | |
Lease obligations | 1,740.7 | | | 1,785.7 | |
Other | 97.4 | | | 96.2 | |
Gross deferred tax assets | 2,760.8 | | | 2,918.4 | |
Less: valuation allowance | (113.6) | | | (130.4) | |
Total deferred tax assets | 2,647.2 | | | 2,788.0 | |
| | | |
Deferred tax liabilities: | | | |
Depreciation and amortization | 1,348.3 | | | 1,233.7 | |
Inventories | 361.8 | | | 335.9 | |
| | | |
Operating lease assets | 1,530.1 | | | 1,570.4 | |
Other | 206.8 | | | 181.7 | |
Total deferred tax liabilities | 3,447.0 | | | 3,321.7 | |
| | | |
Net deferred tax liability | $ | (799.8) | | | $ | (533.7) | |
| | | |
Noncurrent deferred tax asset | $ | — | | | $ | — | |
Noncurrent deferred tax liability | (799.8) | | | (533.7) | |
Total | $ | (799.8) | | | $ | (533.7) | |
The valuation allowance activity on deferred tax assets was as follows (in millions):
| | | | | | | | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 | | February 29, 2020 |
Beginning balance | $ | 130.4 | | | $ | 135.1 | | | $ | 139.5 | |
Additions charged to income tax expense | 2.1 | | | 2.7 | | | 3.5 | |
Reductions credited to income tax expense | (4.6) | | | (3.2) | | | (10.7) | |
Changes to other comprehensive income or loss and other | (14.3) | | | (4.2) | | | 2.8 | |
Ending balance | $ | 113.6 | | | $ | 130.4 | | | $ | 135.1 | |
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. On the basis of this evaluation, as of February 26, 2022, a valuation allowance of $113.6 million has been recorded for the portion of the deferred tax asset that is not more likely than not to be realized, consisting primarily of tax credits and carryovers in jurisdictions where the Company has minimal presence or does not expect to have future taxable income. The Company will continue to evaluate the need to adjust the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted depending on the Company's performance in certain subsidiaries or jurisdictions.
The Company currently has federal and state NOL carryforwards of $21.2 million and $1,397.5 million, respectively, which will begin to expire in 2022 and continue through the fiscal year ending February 2042. As of February 26, 2022, the Company had $30.7 million of state credit carryforwards, the majority of which will expire in 2023. The Company had no federal credit carryforwards as of February 26, 2022.
Changes in the Company's unrecognized tax benefits consisted of the following (in millions):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Beginning balance | $ | 368.8 | | | $ | 373.8 | | | $ | 376.2 | |
| | | | | |
Increase related to tax positions taken in the current year | 1.2 | | | 1.5 | | | 0.9 | |
Increase related to tax positions taken in prior years | 0.3 | | | 1.8 | | | 3.0 | |
Decrease related to tax position taken in prior years | (0.1) | | | (1.1) | | | (2.2) | |
| | | | | |
Decrease related to settlements with taxing authorities | (72.9) | | | (3.7) | | | (4.1) | |
Decrease related to lapse of statute of limitations | (21.3) | | | (3.5) | | | — | |
Ending balance | $ | 276.0 | | | $ | 368.8 | | | $ | 373.8 | |
Included in the balance of unrecognized tax benefits as of February 26, 2022, February 27, 2021 and February 29, 2020 are tax positions of $202.6 million, $277.4 million and $268.2 million, respectively, which would reduce the Company's effective tax rate if recognized in future periods. Of the $202.6 million that could impact tax expense, the Company has recorded $7.2 million of indemnification assets that would offset any future recognition. As of February 26, 2022, the Company is no longer subject to federal income tax examinations for the fiscal years prior to 2012 and in most states, is no longer subject to state income tax examinations for fiscal years before 2012. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. For fiscal 2021, fiscal 2020 and fiscal 2019, the Company recognized expense related to interest and penalties, net of settlement adjustments, of $3.0 million, $8.2 million and $9.6 million, respectively.
The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $186.2 million in the next 12 months due to ongoing tax examinations and expiration of statutes of limitations.
The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The Company analyzed the various income tax and non-income tax provisions of the CARES Act based on currently available technical guidance and determined that aside from an impact to the timing of cash flows, there is no material impact to the Company's Consolidated Financial Statements. Specifically, as it relates to the Company, the CARES Act allowed for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. The $213.3 million deferred as of February 26, 2022 was recorded in Accrued salaries and wages, and the $426.6 million deferred as of February 27, 2021 was recorded in Accrued salaries and wages and Other long-term liabilities.
NOTE 12 - EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS
Employer Sponsored Pension Plans
The Company sponsors a defined benefit pension plan (the "Safeway Plan") for substantially all of its employees under the Safeway banners not participating in multiemployer pension plans. The Safeway Plan is frozen to non-union employees but continues to remain fully open to union employees and past service benefits, including future interest credits, for non-union employees continue to be accrued under the Safeway Plan. The Company also sponsors a defined benefit pension plan (the "Shaw's Plan") covering union employees under the Shaw's banner. Under the United banner, the Company sponsors a frozen plan (the "United Plan") covering certain United employees and an unfunded Retirement Restoration Plan that provides death benefits and supplemental income payments for certain executives after retirement.
Other Post-Retirement Benefits
In addition to the Company's pension plans, the Company provides post-retirement medical and life insurance benefits to certain employees. Retirees share a portion of the cost of the post-retirement medical plans. The Company pays all the cost of the life insurance plans. These plans are unfunded.
The following table provides a reconciliation of the changes in the retirement plans' benefit obligation and fair value of assets over the two-year period ended February 26, 2022 and a statement of funded status as of February 26, 2022 and February 27, 2021 (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Post-Retirement Benefits |
| February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
Change in projected benefit obligation: | | | | | | | |
Beginning balance | $ | 2,370.5 | | | $ | 2,516.2 | | | $ | 21.2 | | | $ | 20.9 | |
Service cost | 21.8 | | | 15.7 | | | — | | | — | |
Interest cost | 39.9 | | | 48.6 | | | 0.2 | | | 0.4 | |
Actuarial (gain) loss | (52.4) | | | 11.9 | | | (0.4) | | | 1.3 | |
Plan participant contributions | — | | | — | | | — | | | 0.2 | |
Benefit payments (including settlements) | (379.3) | | | (221.9) | | | (2.0) | | | (1.6) | |
Plan amendments | 0.7 | | | — | | | — | | | — | |
Ending balance | $ | 2,001.2 | | | $ | 2,370.5 | | | $ | 19.0 | | | $ | 21.2 | |
| | | | | | | |
Change in fair value of plan assets: | | | | | | | |
Beginning balance | $ | 1,941.6 | | | $ | 1,743.7 | | | $ | — | | | $ | — | |
Actual return on plan assets | 72.1 | | | 361.2 | | | — | | | — | |
Employer contributions | 27.9 | | | 58.6 | | | 2.0 | | | 1.4 | |
Plan participant contributions | — | | | — | | | — | | | 0.2 | |
Benefit payments (including settlements) | (379.3) | | | (221.9) | | | (2.0) | | | (1.6) | |
Ending balance | $ | 1,662.3 | | | $ | 1,941.6 | | | $ | — | | | $ | — | |
| | | | | | | |
Components of net amount recognized in financial position: | | | | | | | |
Other current liabilities | $ | (6.2) | | | $ | (6.3) | | | $ | (2.7) | | | $ | (2.8) | |
Other long-term liabilities | (332.7) | | | (422.6) | | | (16.3) | | | (18.4) | |
Funded status | $ | (338.9) | | | $ | (428.9) | | | $ | (19.0) | | | $ | (21.2) | |
The actuarial gain for fiscal 2021 related to the projected benefit obligation was primarily driven by an increase in discount rates. The actuarial loss related to the projected benefit obligation for fiscal 2020 was immaterial.
Amounts recognized in Accumulated other comprehensive income (loss) consisted of the following (in millions):
| | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Post-Retirement Benefits |
| February 26, 2022 | | February 27, 2021 | | February 26, 2022 | | February 27, 2021 |
Net actuarial (gain) | $ | (84.5) | | | $ | (76.7) | | | $ | (8.4) | | | $ | (8.4) | |
Prior service cost | 1.8 | | | 1.4 | | | — | | | — | |
| $ | (82.7) | | | $ | (75.3) | | | $ | (8.4) | | | $ | (8.4) | |
Information for the Company's pension plans, all of which have an accumulated benefit obligation in excess of plan assets as of February 26, 2022 and February 27, 2021, is shown below (in millions):
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Projected benefit obligation | $ | 2,001.2 | | | $ | 2,370.5 | |
Accumulated benefit obligation | 1,997.5 | | | 2,366.4 | |
Fair value of plan assets | 1,662.3 | | | 1,941.6 | |
The following table provides the components of net pension and post retirement (income) expense for the retirement plans and other changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Pension | | Other Post-Retirement Benefits |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 | | Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Components of net (income) expense: | | | | | | | | | | | |
Estimated return on plan assets | $ | (101.1) | | | $ | (103.9) | | | $ | (110.1) | | | $ | — | | | $ | — | | | $ | — | |
Service cost | 21.8 | | | 15.7 | | | 14.7 | | | — | | | — | | | 0.6 | |
Interest cost | 39.9 | | | 48.6 | | | 80.6 | | | 0.2 | | | 0.4 | | | 0.7 | |
Amortization of prior service cost | 0.3 | | | 0.2 | | | 0.4 | | | — | | | 1.9 | | | 3.7 | |
Amortization of net actuarial loss (gain) | 0.8 | | | 2.0 | | | 0.5 | | | (0.4) | | | (0.6) | | | (0.5) | |
(Income) loss due to settlement accounting | (16.2) | | | (0.7) | | | 7.4 | | | — | | | — | | | — | |
(Income) expense, net | (54.5) | | | (38.1) | | | (6.5) | | | (0.2) | | | 1.7 | | | 4.5 | |
| | | | | | | | | | | |
Changes in plan assets and benefit obligations recognized in Other comprehensive income (loss): | | | | | | | | | | | |
Net actuarial (gain) loss | (23.2) | | | (245.8) | | | 318.9 | | | (0.4) | | | 1.3 | | | (2.6) | |
Amortization of net actuarial (loss) gain | (0.8) | | | (2.0) | | | (0.5) | | | 0.4 | | | 0.6 | | | 0.5 | |
Prior service cost | 0.7 | | | — | | | (1.1) | | | — | | | — | | | — | |
Amortization of prior service cost | (0.3) | | | (0.2) | | | (0.4) | | | — | | | (1.9) | | | (3.7) | |
Settlement income (loss) | 16.2 | | | 0.7 | | | (7.4) | | | — | | | — | | | — | |
Total recognized in Other comprehensive income (loss) | (7.4) | | | (247.3) | | | 309.5 | | | — | | | — | | | (5.8) | |
Total net expense and changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) | $ | (61.9) | | | $ | (285.4) | | | $ | 303.0 | | | $ | (0.2) | | | $ | 1.7 | | | $ | (1.3) | |
During fiscal 2021, the Company purchased a group annuity policy and transferred $203.5 million of pension plan assets to an insurance company (the "Annuity Purchase"), thereby reducing the Company's defined benefit pension obligations by $205.4 million. As a result of the Annuity Purchase, the Company recorded a settlement gain of $11.1 million during fiscal 2021.
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. When the accumulation of actuarial gains and losses exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets, the excess is amortized over either the average remaining lifetime of all participants or the average remaining service period of active participants. No significant prior service
costs or estimated net actuarial gain or loss is expected to be amortized from Other comprehensive income (loss) into periodic benefit cost during fiscal 2022.
Assumptions
The weighted average actuarial assumptions used to determine year-end projected benefit obligations for pension plans were as follows:
| | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 |
Discount rate | 3.26 | % | | 2.84 | % |
Rate of compensation increase | 3.01 | % | | 3.01 | % |
Cash balance plan interest crediting rate | 2.35 | % | | 2.35 | % |
The weighted average actuarial assumptions used to determine net periodic benefit costs for pension plans were as follows:
| | | | | | | | | | | | | | | | | |
| February 26, 2022 | | February 27, 2021 | | February 29, 2020 |
Discount rate | 2.60 | % | | 2.83 | % | | 4.17 | % |
Expected return on plan assets | 5.73 | % | | 6.18 | % | | 6.36 | % |
Cash balance plan interest crediting rate | 2.35 | % | | 2.40 | % | | 3.05 | % |
Discount Rate Assumption. The discount rate reflects the current rate at which the pension obligations could be settled at each measurement date. In all years presented, the discount rates were determined by matching the expected plan benefit payments against a spot rate yield curve constructed to replicate above median yields of AA-graded corporate bonds.
Asset Return Assumption. Expected return on pension plan assets is based on historical experience of the Company's portfolios and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation.
Retirement and Mortality Rates. On February 26, 2022, the Company adopted the new MP-2021 mortality improvement projection scale which assumes an improvement in life expectancy at a marginally faster rate than the MP-2020 projection scale. The change in mortality assumption and future mortality improvement resulted in an immaterial increase in the Company's current year benefit obligations and future expenses.
Investment Policies and Strategies. The Company has adopted and implemented an investment policy for the defined benefit pension plans that incorporates a strategic long-term asset allocation mix designed to meet the Company's long-term pension requirements. This asset allocation policy is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. The investment policy also emphasizes the following key objectives: (1) maintaining a diversified portfolio among asset classes and investment styles; (2) maintaining an acceptable level of risk in pursuit of long-term economic benefit; (3) maximizing the opportunity for value-added returns from active investment management while establishing investment guidelines and monitoring procedures for each investment manager to ensure the characteristics of the portfolio are consistent with the original investment mandate; and (4) maintaining adequate controls over administrative costs.
The following table summarizes actual allocations for the Safeway Plan which had $1,371.8 million in plan assets as of February 26, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | | Plan Assets |
Asset category | | Target | | February 26, 2022 | | February 27, 2021 |
Equity | | 65% | | 65.4 | % | | 68.3 | % |
Fixed income | | 35% | | 32.7 | % | | 31.2 | % |
Cash and other | | —% | | 1.9 | % | | 0.5 | % |
Total | | 100% | | 100.0 | % | | 100.0 | % |
The following table summarizes the actual allocations for the Shaw's Plan which had $252.3 million in plan assets as of February 26, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | | Plan Assets |
Asset category | | Target | | February 26, 2022 | | February 27, 2021 |
Equity | | 65% | | 60.5 | % | | 69.2 | % |
Fixed income | | 35% | | 31.1 | % | | 28.2 | % |
Cash and other | | —% | | 8.4 | % | | 2.6 | % |
Total | | 100% | | 100.0 | % | | 100.0 | % |
The following table summarizes the actual allocations for the United Plan which had $38.2 million in plan assets as of February 26, 2022:
| | | | | | | | | | | | | | | | | | | | |
| | | | Plan Assets |
Asset category | | Target (1) | | February 26, 2022 | | February 27, 2021 |
Equity | | 50% | | 48.1 | % | | 45.0 | % |
Fixed income | | 50% | | 41.4 | % | | 55.0 | % |
Cash and other | | —% | | 10.5 | % | | — | % |
Total | | 100% | | 100.0 | % | | 100.0 | % |
(1) The target market value of equity securities for the United Plan is 50% of plan assets. If the equity percentage exceeds 60% or drops below 40%, the asset allocation is adjusted to target.
Pension Plan Assets
The fair value of the Company's pension plan assets as of February 26, 2022, excluding pending transactions of $67.7 million payable to an intermediary agent, by asset category are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
Asset category | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Assets Measured at NAV |
Cash and cash equivalents (1) | | $ | 12.0 | | | $ | 12.0 | | | $ | — | | | $ | — | | | $ | — | |
Short-term investment collective trust (2) | | 72.5 | | | — | | | 72.5 | | | — | | | — | |
Common and preferred stock: (3) | | | | | | | | | | |
Domestic common and preferred stock | | 160.3 | | | 160.3 | | | — | | | — | | | — | |
International common stock | | 58.2 | | | 58.2 | | | — | | | — | | | — | |
Collective trust funds (2) | | 648.1 | | | — | | | — | | | — | | | 648.1 | |
Corporate bonds (4) | | 120.5 | | | — | | | 120.5 | | | — | | | — | |
Mortgage- and other asset-backed securities (5) | | 32.7 | | | — | | | 32.7 | | | — | | | — | |
Mutual funds (6) | | 240.8 | | | 150.1 | | | 90.7 | | | — | | | — | |
U.S. government securities (7) | | 319.4 | | | — | | | 319.4 | | | — | | | — | |
Other securities (8) | | 65.5 | | | — | | | 21.7 | | | — | | | 43.8 | |
Total | | $ | 1,730.0 | | | $ | 380.6 | | | $ | 657.5 | | | $ | — | | | $ | 691.9 | |
The fair value of the Company's pension plan assets as of February 27, 2021, excluding pending transactions of $76.1 million payable to an intermediary agent, by asset category are as follows (in millions):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Fair Value Measurements |
Asset category | | Total | | Quoted Prices in Active Markets for Identical Assets (Level 1) | | Significant Observable Inputs (Level 2) | | Significant Unobservable Inputs (Level 3) | | Assets Measured at NAV |
Cash and cash equivalents (1) | | $ | 5.3 | | | $ | 15.3 | | | $ | (10.0) | | | $ | — | | | $ | — | |
Short-term investment collective trust (2) | | 63.1 | | | — | | | 63.1 | | | — | | | — | |
Common and preferred stock: (3) | | | | | | | | | | |
Domestic common and preferred stock | | 169.8 | | | 169.8 | | | — | | | — | | | — | |
International common stock | | 56.3 | | | 56.3 | | | — | | | — | | | — | |
Collective trust funds (2) | | 868.6 | | | — | | | — | | | — | | | 868.6 | |
Corporate bonds (4) | | 120.9 | | | — | | | 120.9 | | | — | | | — | |
Mortgage- and other asset-backed securities (5) | | 34.1 | | | — | | | 34.1 | | | — | | | — | |
Mutual funds (6) | | 346.4 | | | 178.7 | | | 61.0 | | | — | | | 106.7 | |
U.S. government securities (7) | | 282.0 | | | — | | | 282.0 | | | — | | | — | |
Other securities (8) | | 71.2 | | | — | | | 25.2 | | | — | | | 46.0 | |
Total | | $ | 2,017.7 | | | $ | 420.1 | | | $ | 576.3 | | | $ | — | | | $ | 1,021.3 | |
(1) The carrying value of these items approximates fair value.
(2) These investments are valued based on the Net Asset Value ("NAV") of the underlying investments and are provided by the fund issuers. There are no unfunded commitments or redemption restrictions for these funds.
(3) The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for identical stock, an industry valuation model is used which maximizes observable inputs.
(4) The fair value of corporate bonds is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs.
(5) The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for comparable securities, the fair value is based upon an industry valuation model which maximizes observable inputs.
(6) These investments are open-ended mutual funds that are registered with the SEC which are valued using the NAV. The NAV of the mutual funds is a published price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the fund's liabilities, expressed on a per-share basis. There are no unfunded commitments, or redemption restrictions for these funds, and the funds are required to transact at the published price.
(7) The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model which maximizes observable inputs.
(8) Level 2 Other securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Also included in Other securities is a commingled fund valued based on the NAV of the underlying investments and is provided by the issuer and exchange-traded derivatives that are valued based on quoted prices in an active market for identical derivatives, assets and liabilities. Funds meeting the practical expedient are included in the Assets Measured at NAV column. Exchange-traded derivatives are valued based on quoted prices in an active market for identical derivatives assets and liabilities. Non-exchange-traded derivatives are valued using industry valuation models, which maximize observable inputs, such as interest-rate yield curve data, foreign exchange rates and applicable spot and forward rates.
Contributions
In fiscal 2021, fiscal 2020 and fiscal 2019, the Company contributed $29.8 million, $60.0 million and $11.0 million, respectively, to its pension and post-retirement plans. The Company's funding policy for the defined benefit pension plan is to contribute the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, and other applicable laws as determined by the Company's external actuarial consultant. At the Company's discretion, additional funds may be contributed to the defined benefit pension plans. The Company expects to contribute approximately $21 million to its pension and post-retirement plans in fiscal 2022. The Company will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid to plan participants (in millions):
| | | | | | | | | | | |
| Pension Benefits | | Other Benefits |
2022 | $ | 193.1 | | | $ | 2.7 | |
2023 | 186.0 | | | 2.6 | |
2024 | 179.7 | | | 2.3 | |
2025 | 172.9 | | | 2.0 | |
2026 | 166.3 | | | 1.7 | |
2027 – 2031 | 668.7 | | | 5.8 | |
Multiemployer Pension Plans
The Company currently contributes to 27 multiemployer pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants, the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded.
The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
•Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers.
•Though the unfunded obligations of a multiemployer plan are not a liability of the Company, if a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
•With respect to some multiemployer plans, if the Company chooses to stop participating, or makes market exits or store closures or otherwise has participation in the plan fall below certain levels, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as withdrawal liability. The Company generally records the actuarially determined liability at an undiscounted amount.
The Company's participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employer Identification Number ("EIN") and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act of 2006 ("PPA") zone status available for fiscal 2021 and fiscal 2020 is for the plan's year ending at December 31, 2020 and December 31, 2019, respectively. The zone status is based on information received from the plans and is certified by each plan's actuary. The FIP/RP Status Pending/Implemented column indicates plans for which a funding improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or has been implemented by the plan trustees.
The following tables contain information about the Company's multiemployer plans. Certain plans have been aggregated in the Other funds line in the following table, as the contributions to each of these plans are not individually material.
| | | | | | | | | | | | | | | | | | | | |
| EIN - PN | Pension Protection Act zone status (1) | Company's 5% of total plan contributions | FIP/RP status pending/implemented |
|
|
Pension fund | 2021 | 2020 | 2020 | 2019 |
UFCW-Northern California Employers Joint Pension Trust Fund | 946313554 - 001 | Red | Red | Yes | Yes | Implemented |
Western Conference of Teamsters Pension Plan | 916145047 - 001 | Green | Green | No | No | No |
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan (4) | 951939092 - 001 | Red | Red | Yes | Yes | Implemented |
Combined Plan (8) | 526128473 - 001 | Red | Red | Yes | Yes | Implemented |
Sound Retirement Trust (6) | 916069306 - 001 | Red | Red | Yes | Yes | Implemented |
Bakery and Confectionery Union and Industry International Pension Fund | 526118572 - 001 | Red | Red | Yes | Yes | Implemented |
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund | 236396097 - 001 | Red | Red | Yes | Yes | Implemented |
Rocky Mountain UFCW Unions & Employers Pension Plan | 846045986 - 001 | Green | Green | Yes | Yes | No |
UFCW Local 152 Retail Meat Pension Fund (5) | 236209656 - 001 | Red | Red | Yes | Yes | Implemented |
Desert States Employers & UFCW Unions Pension Plan | 846277982 - 001 | Green | Green | Yes | Yes | No |
UFCW International Union - Industry Pension Fund (5)(9) | 516055922 - 001 | Green | Green | No | Yes | No |
| | | | | | |
Retail Food Employers and UFCW Local 711 Pension Trust Fund | 516031512 - 001 | Red | Red | Yes | Yes | Implemented |
Oregon Retail Employees Pension Trust | 936074377 - 001 | Red | Green | Yes | Yes | Implemented |
Intermountain Retail Store Employees Pension Trust (7) | 916187192 - 001 | Red | Red | Yes | Yes | Implemented |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Contributions of Company (in millions) | Surcharge imposed (2) | Expiration date of collective bargaining agreements | Total collective bargaining agreements | Most significant collective bargaining agreement(s)(3) |
Pension fund | 2021 | 2020 | 2019 | Count | Expiration |
UFCW-Northern California Employers Joint Pension Trust Fund | $ | 128.1 | | $ | 123.2 | | $ | 103.8 | | No | 8/3/2019 to 10/9/2021 | 85 | 78 | 10/9/2021 |
Western Conference of Teamsters Pension Plan | 68.6 | | 66.9 | | 64.9 | | No | 3/4/2020 to 2/28/2027 | 53 | 10 | 9/21/2025 |
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan (4) | 138.4 | | 133.7 | | 116.1 | | No | 3/11/2018 to 3/6/2026 | 45 | 43 | 3/6/2022 |
Combined Plan (8) | — | | 26.6 | | 26.2 | | No | 10/26/2019 to 2/24/2024 | 19 | 15 | 10/28/2023 |
Sound Retirement Trust (6) | 61.4 | | 53.8 | | 44.3 | | No | 5/4/2019 to 1/25/2025 | 129 | 14 | 5/7/2022 |
Bakery and Confectionery Union and Industry International Pension Fund | 18.2 | | 18.7 | | 18.5 | | No | 10/2/2016 to 1/23/2027 | 109 | 35 | 9/6/2020 |
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund | 12.0 | | 12.0 | | 14.9 | | No | 1/25/2022 to 12/31/2026 | 6 | 2 | 1/25/2022 |
Rocky Mountain UFCW Unions & Employers Pension Plan | 15.7 | | 15.5 | | 12.3 | | No | 1/8/2022 to 2/15/2025 | 85 | 25 | 2/19/2022 |
UFCW Local 152 Retail Meat Pension Fund (5) | 11.6 | | 11.1 | | 10.9 | | No | 5/2/2024 | 4 | 4 | 5/2/2024 |
Desert States Employers & UFCW Unions Pension Plan | 11.6 | | 8.9 | | 8.9 | | No | 11/3/2022 to 10/21/2023 | 16 | 13 | 10/21/2023 |
UFCW International Union - Industry Pension Fund (5)(9) | — | | 4.6 | | 9.5 | | No | 8/3/2019 to 2/21/2026 | 28 | 6 | 6/11/2022 |
| | | | | | | | |
Retail Food Employers and UFCW Local 711 Pension Trust Fund | 8.6 | | 8.6 | | 7.3 | | No | 5/3/2022 to 12/17/2023 | 7 | 4 | 3/5/2022 |
Oregon Retail Employees Pension Trust | 12.0 | | 10.0 | | 8.9 | | No | 7/31/2021 to 11/12/2022 | 129 | 20 | 1/29/2022 |
Intermountain Retail Store Employees Pension Trust (7) | 7.9 | | 6.9 | | 5.8 | | No | 5/19/2018 to 6/20/2024 | 54 | 17 | 4/6/2024 |
Other funds | 29.6 | | 23.5 | | 17.0 | | | | | | |
Total Company contributions to U.S. multiemployer pension plans | $ | 523.7 | | $ | 524.0 | | $ | 469.3 | | | | | | |
(1) PPA established three categories (or "zones") of plans: (1) "Green Zone" for healthy; (2) "Yellow Zone" for endangered; and (3) "Red Zone" for critical. These categories are based upon multiple factors, including the funding ratio of the plan assets to plan liabilities.
(2) Under the PPA, a surcharge may be imposed when employers make contributions under a collective bargaining agreement that is not in compliance with a rehabilitation plan. As of February 26, 2022, the collective bargaining agreements under which the Company was making contributions were in compliance with rehabilitation plans adopted by the applicable pension fund.
(3) These columns represent the number of most significant collective bargaining agreements aggregated by common expiration dates for each of the pension funds listed above.
(4) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at March 31, 2021 and March 31, 2020.
(5) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at June 30, 2020 and June 30, 2019.
(6) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at September 30, 2020 and September 30, 2019.
(7) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at August 31, 2020 and August 31, 2019.
(8) As further described below, effective December 31, 2020, the Mid Atlantic Pension Fund combined into the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund to form the Combined Plan, and immediately upon combination the Company withdrew from the Combined Plan under the terms of the agreement with the applicable local unions, the largest contributing employer and the PBGC.
(9) As further described below, effective June 30, 2020, the Company withdrew from the UFCW National Fund and began contributing to the UFCW National VAPP.
FELRA and MAP: The Company was the second largest contributing employer to the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund ("FELRA") which was projected by FELRA to become insolvent in the first quarter of 2021, and to the Mid-Atlantic UFCW and Participating Pension Fund ("MAP"). The Company continued to fund all of its required contributions to FELRA and MAP.
On December 31, 2020, the Company reached agreement with the two local unions, along with the largest contributing employer, and the Pension Benefit Guaranty Corporation ("PBGC") to combine MAP into FELRA (the "Combined Plan") effective December 31, 2020. As a result, the Company withdrew from the Combined Plan under the terms of the agreement with the applicable unions, the largest contributing employer and the PBGC and received a release of all withdrawal liability and mass withdrawal liability from FELRA, MAP, the Combined Plan and the PBGC. Commencing February 2021, the Company is required to annually pay $23.2 million to the Combined Plan for the next 25 years. This payment replaces the Company's previous annual contribution to both FELRA and MAP. In addition to the $23.2 million annual payment, the Company will begin to contribute to a new multiemployer pension plan limited to providing benefits to the former participants in MAP and FELRA in excess of the benefits the PBGC insures under law (the "Excess Plan"). These contributions were expected to commence in June 2022 and were expected to be approximately $13.7 million annually for 10 years. The Company recorded a non-cash pre-tax charge of $607.2 million ($449.4 million, net of tax) in the fourth quarter of fiscal 2020 to record the pension obligation for these benefits earned for prior service. The pension obligation was determined using a risk-free rate commensurate with the respective payment term related to the Combined Plan and the Excess Plan. Furthermore, the Company has established and will contribute to a new Variable Annuity Pension Plan (the "Combined VAPP") that provides benefits to participants for future services, effective January 1, 2021. The Company will contribute approximately $4 million to the Combined VAPP to fund certain administrative expenses and establish a stabilization reserve for the Combined VAPP.
The American Rescue Plan Act ("ARP Act"), which was signed into law on March 11, 2021, established a special financial assistance program for financially troubled multiemployer pension plans. Under the ARP Act, eligible multiemployer plans can apply to receive a one-time cash payment in the amount projected by the PBGC to pay pension benefits through the plan year ending 2051. On July 9, 2021, the PBGC issued its interim final rule with respect to the special financial assistance program. The PBGC interim final rule provided direction on the application and eligibility requirements, including which plans will have priority, the determination of the amount of financial assistance to be provided and conditions and restrictions that apply to plans that receive the assistance. The Combined Plan was eligible to receive one-time special financial assistance and qualified to submit its application for $1.2 billion in special financial assistance in the fourth quarter of fiscal 2021. The $1.2 billion in special financial assistance is expected to provide the funding for the Combined Plan to remain solvent for at least 25 years. Although the special financial assistance will have no impact on the Company's $23.2 million payment obligation to the Combined Plan, the Company's estimated funding requirements for the Excess Plan were reduced as the contributions are now not expected to commence until approximately 2045. As a result, in the fourth quarter of fiscal 2021, the Company recorded a non-cash pre-tax gain of $106.3 million ($78.7 million, net of tax) to reduce the pension liability for the Excess Plan to approximately $19 million.
National Fund: On July 21, 2020, the Company announced that it had entered into an agreement with the trustees of the United Food and Commercial Workers International Union ("UFCW") Union-Industry Pension Fund ("National Fund"), providing that the Company will permanently cease to have any obligation to contribute to the National Fund, a multiemployer pension plan, and will completely withdraw from the National Fund, effective as of June 30, 2020. The Company and nine UFCW local unions entered into a Memorandum of Understanding that permitted the withdrawal and required the establishment of a new Variable Annuity Pension Plan (the "National VAPP") that will provide benefits to participants for future services, effective as of July 1, 2020. On November 30, 2020, these agreements became effective upon ratification by the membership of each of these nine local unions and the related agreements with the local unions whose members participate in the National Fund and are employed by the two largest contributors to the National Fund. As a result, the Company agreed to pay an aggregate of $285.7 million to the National Fund, in full satisfaction of the Company's withdrawal liability amount and mass withdrawal
liability amount. The Company recorded a pre-tax charge of approximately $285.7 million ($213.0 million, net of tax) in the third quarter of fiscal 2020 to record the withdrawal liability. The Company paid $147.3 million in fiscal 2020 and will pay the remaining amount in two equal installments of $69.2 million no later than each June 30, 2022 and June 30, 2023, any portion of which may be prepaid, in whole or in part. During fiscal 2021, the Company also pre-funded a transition reserve in the National VAPP to support certain grandfathered participants of approximately $8 million to the National VAPP.
Midwest Plan: As a part of the Safeway acquisition, the Company assumed withdrawal liabilities related to Safeway's 2013 closure of its Dominick's division. The Company recorded a $221.8 million multiemployer pension withdrawal liability related to Safeway's withdrawal from these plans. One of the plans, the UFCW & Employers Midwest Pension Fund (the "Midwest Plan"), had asserted the Company may be liable for mass withdrawal liability, if the plan had a mass withdrawal, in addition to the liability the Midwest Plan already had assessed. The Company disputed that the Midwest Plan would have the right to assess mass withdrawal liability on the Company and the Company also disputed in arbitration the amount of the withdrawal liability the Midwest Plan had assessed. On March 12, 2020, the Company agreed to a settlement of these matters and the withdrawal liability with the Midwest Plan's Board of Trustees. As a result of the settlement, the Company agreed to pay $75.0 million, in a lump sum, which was paid in the first quarter of fiscal 2020, and forego any amounts already paid to the Midwest Plan. The Company recorded a gain of $43.3 million in the fourth quarter of fiscal 2019 to reduce the previously recorded estimated withdrawal liability to the settlement amount.
Collective Bargaining Agreements
As of February 26, 2022, the Company had approximately 290,000 employees, of which approximately 200,000 were covered by collective bargaining agreements. During fiscal 2021, collective bargaining agreements covering approximately 60,000 employees were renegotiated. As of February 26, 2022, collective bargaining agreements covering approximately 115,000 employees have expired or are scheduled to expire in fiscal 2022, including collective bargaining agreements covering approximately 74,000 employees that have been renegotiated subsequent to the end of fiscal 2021.
Multiemployer Health and Welfare Plans
The Company makes contributions to multiemployer health and welfare plans in amounts specified in the applicable collective bargaining agreements. These plans provide medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The majority of the Company's contributions cover active employees and as such, may not constitute contributions to a postretirement benefit plan. However, the Company is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to active employee plans. Total contributions to multiemployer health and welfare plans were $1.2 billion, for each of fiscal 2021, fiscal 2020 and fiscal 2019.
Defined Contribution Plans and Supplemental Retirement Plans
Many of the Company's employees are eligible to contribute a percentage of their compensation to defined contribution plans ("401(k) Plans"). Participants in the 401(k) Plans may become eligible to receive a profit-sharing allocation in the form of a discretionary Company contribution based on employee compensation. In addition, the Company may also provide matching contributions based on the amount of eligible compensation contributed by the employee. All Company contributions to the 401(k) Plans are made at the discretion of the Company's board of directors. The Company provides supplemental retirement benefits through a Company sponsored deferred executive compensation plan, which provides certain key employees with retirement benefits that supplement those provided by the 401(k) Plans. Total contributions accrued for these plans were $75.5 million, $85.8 million and $63.2 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively.
NOTE 13 - RELATED PARTIES
In connection with the Safeway acquisition, the Company entered into a four-year management agreement, as extended through fiscal 2019, with Cerberus Capital Management, L.P. ("Cerberus") and the consortium of investors, which commenced on January 30, 2015, requiring an annual management fee of $13.8 million. The agreement was extended again in fiscal 2020, payable in quarterly installments, effective through the IPO date. Prior to the IPO, the Company made one quarterly payment for management fees of $3.4 million in fiscal 2020.
The Company paid Cerberus Operations and Advisory Company, LLC ("COAC"), an affiliate of Cerberus, fees totaling approximately $0.2 million, $0.1 million and $0.3 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, for consulting services provided in connection with improving the Company's operations.
The Company paid Cerberus Technology Solutions ("CTS"), an affiliate of Cerberus, fees totaling approximately $7.0 million, $5.5 million, and $4.4 million for fiscal 2021, fiscal 2020 and fiscal 2019, respectively, for information technology advisory and implementation services in connection with modernizing the Company's information systems.
NOTE 14 - COMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS
Guarantees
California Department of Industrial Relations: On October 24, 2012, the Company entered into a Collateral Substitution Agreement with the California Self-Insurers' Security Fund to provide collateral related to certain California self-insured workers' compensation obligations pursuant to applicable regulations. The collateral not covered by the California Self-Insurers' Security Fund is covered by surety bonds for the benefit of the State of California Office of Self-Insurance Plans. A portion of the surety bonds is covered by irrevocable LOCs. The collateral requirements are adjusted annually based on semi-annual filings of an actuarial study reflecting liabilities as of December 31 of each year reduced by claim closures and settlements. The related LOC was $9.2 million as of February 26, 2022 and $40.1 million as of February 27, 2021.
Lease Guarantees: The Company may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, the Company could be responsible for the lease obligation. Because of the wide dispersion among third parties and the variety of remedies available, the Company believes that if an assignee became insolvent, it would not have a material effect on the Company's financial condition, results of operations or cash flows.
The Company also provides guarantees, indemnifications and assurances to others in the ordinary course of its business.
Legal Proceedings
The Company is subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes, as well as other matters. Some of these claims or suits purport or may be determined to be class actions and/or seek substantial damages. It is the opinion of the Company's management that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on the Company's business or financial condition.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where the loss contingency is probable and can be reasonably estimated. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for the Company's exposure in excess of the amount accrued is expected to be immaterial to the Company. It remains possible that despite management's current belief, material differences in actual outcomes or changes in management's evaluation or predictions could arise that could have a material effect on the Company's financial condition, results of operations or cash flows.
False Claims Act: Two qui tam actions alleging violations of the False Claims Act ("FCA") have also been filed against the Company and its subsidiaries. Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim.
In United States ex rel. Proctor v. Safeway, filed in the United States District Court for the Central District of Illinois, the relator alleges that Safeway overcharged federal government healthcare programs by not providing the federal government, as part of its usual and customary prices, the benefit of discounts given to customers in pharmacy membership discount and price-matching programs. The relator filed his complaint under seal on November 11, 2011, and the complaint was unsealed on August 26, 2015. The relator amended the complaint on March 31, 2016. On June 12, 2020, the Court granted Safeway's motion for summary judgment, holding that the relator could not prove that Safeway acted with the intent required under the FCA, and judgment was issued on June 15, 2020. On July 10, 2020, the relator filed a motion to alter or amend the judgment and to supplement the record, which Safeway opposed. On November 13, 2020, the Court denied relator's motion, and on December 11, 2020, relator filed a notice of appeal. Oral argument took place September 9, 2021 and the Seventh Circuit Court of Appeals affirmed the judgement in the Company's favor on April 5, 2022.
In United States ex rel. Schutte and Yarberry v. SuperValu, New Albertson's, Inc., et al., also filed in the Central District of Illinois, the relators allege that defendants (including various subsidiaries of the Company) overcharged federal government healthcare programs by not providing the federal government, as a part of usual and customary prices, the benefit of discounts given to customers who requested that defendants match competitor prices. The complaint was originally filed under seal and amended on November 30, 2015. On August 5, 2019, the Court granted relators' motion for partial summary judgment, holding that price-matched prices are the usual and customary prices for those drugs. On July 1, 2020, the Court granted the defendants' motions for summary judgment and dismissed the case, holding that the relator could not prove that defendants acted with the intent required under the FCA. Judgment was issued on July 2, 2020. On July 9, 2020, the relators filed a notice of appeal. Oral argument was held on January 19, 2021. On August 12, 2021, the Court of Appeals for the Seventh Circuit affirmed the grant of summary judgment in the Company's favor. On September 23, 2021, the relators filed a petition for rehearing en banc with the Seventh Circuit. On December 3, 2021, the Seventh Circuit denied relators' petition. On April 1, 2022, relators filed a petition to seek review by the U.S. Supreme Court.
In both of the above cases, the federal government previously investigated the relators' allegations and declined to intervene. The relators elected to pursue their respective cases on their own and in each case have alleged FCA damages in excess of $100 million before trebling and excluding penalties. The Company is vigorously defending each of these matters and believes each of these cases is without merit. The Company has recorded an estimated liability for these matters.
Pharmacy Benefit Manager (PBM) Litigation: The Company (including its subsidiary, Safeway Inc.) is a defendant in a lawsuit filed on January 21, 2021, in Minnesota state court, captioned Health Care Service Corp. et al. v. Albertsons Companies, LLC, et al. The action challenges certain prescription-drug prices reported by the Company to a pharmacy benefit manager, Prime Therapeutics LLC ("Prime"), which in turn contracted with the health-insurer plaintiffs to adjudicate and process prescription-drug reimbursement claims.
On December 7, 2021, the Company filed a motion to dismiss the complaint. On January 14, 2022, the court denied the Company's motion to dismiss as to all but one count, plaintiffs' claim of negligent misrepresentation. On January 21, 2022, the Company and co-defendant SUPERVALU, Inc. ("SUPERVALU") filed a third-party complaint against Prime, asserting various claims, including: indemnification, fraud and unjust enrichment. On February 17, 2022, the Company filed in the Minnesota Court of Appeals (the "Appeals Court") an interlocutory appeal of the denial of their motion to dismiss on personal jurisdiction grounds (the "Jurisdictional Appeal"). On February 24, 2022, the Company and SUPERVALU filed in the trial court an unopposed motion to stay proceedings, pending the resolution of the Jurisdictional Appeal. The parties agreed on March 6, 2022, to an interim stay in the trial court pending a ruling on the unopposed motion to stay proceedings. The Jurisdictional Appeal is currently pending.
The Company is vigorously defending the claims filed against it, and believes the claims are without merit. The Company also intends to prosecute its claims against Prime with equal vigor. The Company has recorded an estimated liability for these matters.
Opioid Litigation: The Company is one of dozens of companies that have been named in various lawsuits alleging that defendants contributed to the national opioid epidemic. At present, the Company is named in over 90 suits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over 2,000 cases have been consolidated as Multi-District Litigation ("MDL") pursuant to 28 U.S.C. §1407. Most of these cases have been stayed pending bellwether trials. At present, the most active case is a matter in New Mexico state court where we have been in active discovery and where a September 2022 trial date has been set. A trial has also been scheduled in Nevada state court for April 2023. The MDL Court and a state court in Utah are currently considering position statements from the parties in connection with scheduling bellwether trials and it is likely that the Company may be included in one or more of those anticipated bellwether trials. The Company is vigorously defending these matters and believes that these cases are without merit. At this stage in the proceedings, the Company is unable to determine the probability of the outcome of these matters or the range of reasonably possible loss, if any.
Plated Litigation: On September 1, 2020, a complaint entitled Shareholder Representative Services LLC v. Albertsons Companies Inc. was filed in Delaware Chancery Court where Shareholder Representative Services LLC sued on behalf of former shareholders and rightsholders of DineInFresh, Inc. d/b/a Plated ("Plated"). Plaintiff alleged that, following the Company's acquisition of Plated, pursuant to a September 19, 2017 Agreement and Plan of Merger, the Company intentionally engaged in conduct to prevent Plated from reaching certain milestones that would have resulted in post-acquisition consideration paid to Plated shareholders and rightsholders. Plaintiff alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and fraudulent inducement. On October 21, 2020, the Company filed a motion to dismiss the complaint. On June 7, 2021, the Court granted the motion in part, dismissing all claims except for the breach-of-contract claim. The Company is vigorously defending itself in the lawsuit and believes that the case is without merit. At this stage in the proceedings, the Company is unable to determine the probability of the outcome of the matter or the range of reasonably possible loss, if any.
FACTA: On May 31, 2019, a putative class action complaint entitled Martin v. Safeway was filed in the California Superior Court for the County of Alameda, alleging the Company failed to comply with the Fair and Accurate Credit Transactions Act ("FACTA") by printing receipts that failed to adequately mask payment card numbers as required by FACTA. The plaintiff claims the violation was "willful" and exposes the Company to statutory damages provided for in FACTA. On January 8, 2020, the Company commenced mediation discussions with plaintiff's counsel and reached a settlement in principle on February 24, 2020. The parties have sought court approval of the settlement. A hearing is scheduled for May 4, 2022 during which the court will review the settlement for approval. The Company has recorded an estimated liability for this matter.
Other Commitments
In the ordinary course of business, the Company enters into various supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations.
NOTE 15 - OTHER COMPREHENSIVE INCOME OR LOSS
Total comprehensive earnings are defined as all changes in stockholders' equity during a period, other than those from investments by or distributions to stockholders. Generally, for the Company, total comprehensive income equals net income plus or minus adjustments for pension and other post-retirement liabilities. Total comprehensive earnings represent the activity for a period net of tax
While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period, accumulated other comprehensive income or loss ("AOCI") represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. Changes in the AOCI balance by component are shown below (in millions):
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2021 |
| Total | | | | Pension and Post-retirement benefit plan items | | | | Other |
Beginning AOCI balance | $ | 63.5 | | | | | $ | 61.3 | | | | | $ | 2.2 | |
| | | | | | | | | |
Other comprehensive income (loss) before reclassifications | 22.1 | | | | | 22.9 | | | | | (0.8) | |
Amounts reclassified from Accumulated other comprehensive income (1) | (15.5) | | | | | (15.5) | | | | | — | |
Tax (expense) benefit | (1.1) | | | | | (1.6) | | | | | 0.5 | |
Current-period other comprehensive income (loss), net | 5.5 | | | | | 5.8 | | | | | (0.3) | |
Ending AOCI balance | $ | 69.0 | | | | | $ | 67.1 | | | | | $ | 1.9 | |
| | | | | | | | | | | | | | | | | | | | | |
| Fiscal 2020 |
| Total | | | | Pension and Post-retirement benefit plan items | | | | Other |
Beginning AOCI balance | $ | (118.5) | | | | | $ | (121.7) | | | | | $ | 3.2 | |
| | | | | | | | | |
Other comprehensive income (loss) before reclassifications | 242.5 | | | | | 244.5 | | | | | (2.0) | |
Amounts reclassified from Accumulated other comprehensive income (1) | 2.8 | | | | | 2.8 | | | | | — | |
Tax (expense) benefit | (63.3) | | | | | (64.3) | | | | | 1.0 | |
Current-period other comprehensive income (loss), net | 182.0 | | | | | 183.0 | | | | | (1.0) | |
Ending AOCI balance | $ | 63.5 | | | | | $ | 61.3 | | | | | $ | 2.2 | |
(1) These amounts are included in the computation of net pension and post-retirement (income) expense. For additional information, see Note 12 - Employee benefit plans and collective bargaining agreements.
NOTE 16 - NET INCOME PER COMMON SHARE
The Company calculates basic and diluted net income per Class A common share using the two-class method. The two-class method is an allocation formula that determines net income per Class A common share for each share of Class A common stock and Convertible Preferred Stock, a participating security, according to dividends declared and participation rights in undistributed earnings. Under this method, all earnings (distributed and undistributed) are allocated to Class A common shares and Convertible Preferred Stock based on their respective rights to receive dividends. The holders of Convertible Preferred Stock participate in cash dividends that the Company pays on its common stock to the extent that such cash dividends exceed $206.25 million per fiscal year. In applying the two-class method to interim periods, the Company allocates income to its quarterly periods independently and discretely from its year-to-date and annual periods. Basic net income per Class A common share is computed by dividing net income allocated to Class A common stockholders by the weighted average number of Class A common shares outstanding for the period, including Class A common shares to be issued with no prior remaining contingencies prior to issuance. Diluted net income per Class A common share is computed based on the weighted average number of shares of Class A common stock outstanding during each period, plus potential Class A common shares considered outstanding during the period, as long as the inclusion of such awards is not antidilutive. Potential Class A common shares consist of unvested RSUs and RSAs and Convertible Preferred Stock, using the more dilutive of either the two-class method or as-converted stock method. Performance-based RSUs are considered dilutive when the related performance criterion has been met.
The components of basic and diluted net income per common share were as follows (in millions, except per share data):
| | | | | | | | | | | | | | | | | |
| Fiscal 2021 | | Fiscal 2020 | | Fiscal 2019 |
Basic net income per Class A common share | | | | | |
Net income | $ | 1,619.6 | | | $ | 850.2 | | | $ | 466.4 | |
Accrued dividends on Convertible Preferred Stock | (109.4) | | | (86.0) | | | — | |
Earnings allocated to Convertible Preferred Stock | (226.2) | | | — | | | — | |
Net income allocated to Class A common stockholders - Basic | $ | 1,284.0 | | | $ | 764.2 | | | $ | 466.4 | |
| | | | | |
Weighted average Class A common shares outstanding - Basic (1) | 469.6 | | | 500.3 | | | 579.4 | |
| | | | | |
Basic net income per Class A common share | $ | 2.73 | | | $ | 1.53 | | | $ | 0.80 | |
| | | | | |
Diluted net income per Class A common share | | | | | |
Net income allocated to Class A common stockholders - Basic | $ | 1,284.0 | | | $ | 764.2 | | | $ | 466.4 | |
Accrued dividends on Convertible Preferred Stock | — | | | 86.0 | | | — | |
Earnings allocated to Convertible Preferred Stock | — | | | — | | | — | |
Net income allocated to Class A common stockholders - Diluted | $ | 1,284.0 | | | $ | 850.2 | | | $ | 466.4 | |
| | | | | |
Weighted average Class A common shares outstanding - Basic (1) | 469.6 | | | 500.3 | | | 579.4 | |
Dilutive effect of: | | | | | |
Restricted stock units and awards | 5.7 | | | 4.1 | | | 0.9 | |
Convertible Preferred Stock (2) | — | | | 73.7 | | | — | |
Weighted average Class A common shares outstanding - Diluted (3) | 475.3 | | | 578.1 | | | 580.3 | |
| | | | | |
Diluted net income per Class A common share | $ | 2.70 | | | $ | 1.47 | | | $ | 0.80 | |
(1) Fiscal 2021, fiscal 2020 and fiscal 2019 include 2.7 million, 1.1 million and 1.3 million common shares remaining to be issued, respectively.
(2) Reflects the number of shares of Convertible Preferred Stock issued, if converted into Common Stock for the period outstanding. For fiscal 2021, 97.7 million potential common shares outstanding related to Convertible Preferred Stock were antidilutive.
(3) There were no potential common shares outstanding that were antidilutive for fiscal 2021, fiscal 2020 and fiscal 2019.