Albertsons Companies(ACI) - 2025 Q1 - Quarterly Report

PART I - FINANCIAL INFORMATION This section presents the unaudited condensed consolidated financial statements and management's discussion and analysis Item 1 - Condensed Consolidated Financial Statements (unaudited) This section presents the unaudited condensed consolidated financial statements, including balance sheets, statements of operations, cash flows, and stockholders' equity, along with detailed notes explaining the basis of presentation, significant accounting policies, merger agreement details, fair value measurements, debt obligations, employee benefit plans, commitments and contingencies, other comprehensive income, and net income per share Condensed Consolidated Balance Sheets This section provides a snapshot of the company's financial position at specific points in time Condensed Consolidated Balance Sheet Highlights (in millions) | Metric | June 15, 2024 | February 24, 2024 | | :----------------- | :------------ | :---------------- | | Total Assets | $26,077.0 | $26,221.1 | | Total Liabilities | $23,163.9 | $23,473.6 | | Total Stockholders' Equity | $2,913.1 | $2,747.5 | Condensed Consolidated Statements of Operations and Comprehensive Income This section details the company's financial performance, including revenue, expenses, and net income Condensed Consolidated Statements of Operations Highlights (16 weeks ended, in millions, except per share data) | Metric | June 15, 2024 | June 17, 2023 | | :------------------------- | :------------ | :------------ | | Net sales and other revenue | $24,265.4 | $24,050.2 | | Gross margin | $6,738.9 | $6,662.7 | | Operating income | $459.6 | $622.2 | | Net income | $240.7 | $417.2 | | Basic net income per Class A common share | $0.42 | $0.73 | | Diluted net income per Class A common share | $0.41 | $0.72 | Condensed Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities Condensed Consolidated Statements of Cash Flows Highlights (16 weeks ended, in millions) | Metric | June 15, 2024 | June 17, 2023 | | :-------------------------------------------------------- | :------------ | :------------ | | Net cash provided by operating activities | $960.9 | $838.3 | | Net cash used in investing activities | $(538.0) | $(453.9) | | Net cash used in financing activities | $(320.8) | $(615.0) | | Cash and cash equivalents and restricted cash at end of period | $295.3 | $233.2 | Condensed Consolidated Statements of Stockholders' Equity This section presents changes in the company's equity over time, including net income and dividends Condensed Consolidated Statements of Stockholders' Equity Highlights (in millions) | Metric | June 15, 2024 | February 24, 2024 | | :------------------------------------ | :------------ | :---------------- | | Balance as of beginning of period | $2,747.5 | $1,610.7 | | Net income | $240.7 | $417.2 | | Cash dividends declared on common stock | $(69.5) | $(69.0) | | Other comprehensive loss (income), net of tax | $(1.3) | $1.1 | | Balance as of end of period | $2,913.1 | $2,000.0 | Notes to Condensed Consolidated Financial Statements This section provides detailed explanations and disclosures for the condensed consolidated financial statements NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note describes the accounting principles and policies used in preparing the interim financial statements - Interim financial statements are unaudited and include normal recurring adjustments, not necessarily indicative of full-year results[18] - LIFO expense decreased to $14.6 million for the 16 weeks ended June 15, 2024, from $34.0 million for the same period in 2023[19] - The company realized a $10.5 million gain in the first quarter of fiscal 2023 from the repurchase of its 45% ownership interest in El Rancho[20] - The effective tax rate increased to 22.3% for Q1 fiscal 2024 ($69.2 million expense) from 13.7% for Q1 fiscal 2023 ($66.1 million expense), primarily due to a $49.7 million reserve reduction in Q1 fiscal 2023[22][24] - The company operates 12 geographically based operating divisions, reported as one segment due to similar economic characteristics and operations[25] Net Sales and Other Revenue by Product Type (16 weeks ended, in millions) | Product Type | June 15, 2024 Amount | % of Total | June 17, 2023 Amount | % of Total | | :------------------------ | :------------------- | :--------- | :------------------- | :--------- | | Non-perishables | $12,054.0 | 49.7% | $12,086.8 | 50.3% | | Fresh | $7,904.9 | 32.6% | $7,889.3 | 32.8% | | Pharmacy | $2,622.8 | 10.8% | $2,300.1 | 9.6% | | Fuel | $1,320.9 | 5.4% | $1,400.4 | 5.8% | | Other | $362.8 | 1.5% | $373.6 | 1.5% | | Net sales and other revenue | $24,265.4 | 100.0% | $24,050.2 | 100.0% | - The company is currently evaluating the impact of ASU 2023-07 (Segment Reporting) and ASU 2023-09 (Income Tax Disclosures) on its financial statements[30][31] NOTE 2 - MERGER AGREEMENT This note details the terms and status of the merger agreement with The Kroger Co. and regulatory challenges - The merger agreement with The Kroger Co. was entered into on October 13, 2022, for $34.10 per share in cash, reduced by a $6.85 Special Dividend paid on January 20, 2023[32] - An amended divestiture plan with C&S Wholesale Grocers, LLC for select stores, banners, distribution centers, offices, and private label brands has been announced, eliminating the need for the previously contemplated SpinCo creation[34][36][37] - The FTC instituted an administrative proceeding and filed a lawsuit for a preliminary injunction on February 26, 2024, with state attorneys general in Washington and Colorado also filing suits; a preliminary injunction hearing in the Federal Action is set for August 26, 2024[39] - The merger's outside date has been extended to October 9, 2024, with a $600 million termination fee if regulatory approval is the only outstanding closing condition[38] NOTE 3 - FAIR VALUE MEASUREMENTS This note explains the valuation hierarchy and fair value of assets and liabilities, including debt - The company uses a three-level valuation hierarchy (Level 1, 2, 3) based on the transparency of inputs for fair value measurements[40] Assets Measured at Fair Value (June 15, 2024, in millions) | Asset Type | Total | Level 1 | Level 2 | Level 3 | | :-------------------- | :------ | :------ | :------ | :------ | | Short-term investments | $22.0 | $5.8 | $16.2 | $— | | Non-current investments | $107.4 | $6.7 | $100.7 | $— | | Derivative contracts | $1.0 | $— | $1.0 | $— | | Total | $130.4 | $12.5 | $117.9 | $— | - As of June 15, 2024, the fair value of total debt was $7,263.9 million compared to a carrying value of $7,484.0 million[46] - Long-lived assets and goodwill are measured at fair value on a non-recurring basis for impairment evaluation, utilizing Level 3 (unobservable) inputs[48] NOTE 4 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS This note details the company's long-term debt and finance lease obligations, including outstanding amounts Long-Term Debt and Finance Lease Obligations (in millions) | Metric | June 15, 2024 | February 24, 2024 | | :-------------------------------------------------------- | :------------ | :---------------- | | Senior Unsecured Notes due 2026 to 2030 | $6,509.7 | $6,506.4 | | New Albertsons L.P. Notes due 2026 to 2031 | $481.4 | $480.1 | | Safeway Inc. Notes due 2027 to 2031 | $375.5 | $375.4 | | ABL Facility | $— | $200.0 | | Other financing obligations | $29.8 | $29.9 | | Mortgage notes payable, secured | $16.4 | $16.4 | | Finance lease obligations | $444.6 | $460.4 | | Total debt | $7,857.4 | $8,068.6 | | Less current maturities | $(82.6) | $(285.2) | | Long-term portion | $7,774.8 | $7,783.4 | - The company repaid $200.0 million under the ABL Facility during the 16 weeks ended June 15, 2024, resulting in no outstanding amounts as of that date[51] NOTE 5 - EMPLOYEE BENEFIT PLANS This note outlines the components of net pension and post-retirement expense and company contributions Components of Net Pension and Post-Retirement Expense (Income) (16 weeks ended, in millions) | Component | June 15, 2024 | June 17, 2023 | | :--------------------------------- | :------------ | :------------ | | Estimated return on plan assets | $(28.1) | $(30.3) | | Service cost | $5.1 | $5.3 | | Interest cost | $25.9 | $25.7 | | Amortization of prior service cost | $0.1 | $0.1 | | Amortization of net actuarial gain | $(1.2) | $(0.6) | | Pension Expense (Income), net | $1.8 | $0.2 | | Other post-retirement benefits expense (income), net | $0.0 | $(0.1) | - The company contributed $12.7 million to its defined pension and post-retirement benefit plans during the 16 weeks ended June 15, 2024, and anticipates contributing an additional $72.7 million for the remainder of fiscal 2024[54] NOTE 6 - COMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS This note describes various legal claims, lawsuits, and potential liabilities the company faces - The company is subject to various claims and lawsuits, including class actions, but management believes any resulting liability will not have a material adverse effect on its financial condition[56] - Two False Claims Act (FCA) qui tam actions (Proctor v. Safeway and Schutte and Yarberry v. SuperValu) alleging overcharging federal healthcare programs were remanded by the U.S. Supreme Court in June 2023; the trial for Schutte is reset for September 30, 2024, with relators alleging damages exceeding $100 million before trebling[58][59][60][61][63] - The company is a defendant in Pharmacy Benefit Manager (PBM) litigation in Minnesota state court, challenging prescription-drug prices, with discovery ongoing and trial readiness scheduled for September 29, 2025[64][65] - The company is named in approximately 85 Opioid lawsuits; it settled cases in New Mexico and Nevada for $21.5 million (paid by insurers in FY2022), with three remaining state court claims in discovery and trials scheduled in 2025[67][68][70] - The company has received subpoenas and requests for information from the DOJ and state Attorneys General regarding potential violations of the federal Controlled Substances Act and FCA[71] NOTE 7 - OTHER COMPREHENSIVE INCOME OR LOSS This note details the components of other comprehensive income or loss, primarily from benefit plans - Current-period other comprehensive loss, net of tax, was $(1.3) million for the 16 weeks ended June 15, 2024, primarily from pension and post-retirement benefit plans[74] - The ending Accumulated Other Comprehensive Income (AOCI) balance was $86.7 million as of June 15, 2024, compared to $70.4 million as of June 17, 2023[74][76] NOTE 8 - NET INCOME PER CLASS A COMMON SHARE This note presents the basic and diluted net income per Class A common share and related calculations Net Income Per Class A Common Share (16 weeks ended) | Metric | June 15, 2024 | June 17, 2023 | | :------------------------------------------ | :------------ | :------------ | | Basic net income per Class A common share | $0.42 | $0.73 | | Diluted net income per Class A common share | $0.41 | $0.72 | - Weighted average diluted Class A common shares outstanding were 581.3 million for Q1 fiscal 2024, up from 580.1 million for Q1 fiscal 2023[80] - As of June 17, 2023, all Convertible Preferred Stock had been converted into Class A common stock, eliminating its impact on per-share calculations for Q1 fiscal 2024[77] Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial performance and condition for the first quarter of fiscal 2024, including an overview of operations, key financial highlights, and a detailed comparison of results against the prior year. It also discusses forward-looking statements, non-GAAP financial measures, and liquidity and capital resources FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS This section discusses inherent risks and uncertainties affecting future operating results - Forward-looking statements are subject to numerous risks and uncertainties, including those related to the Kroger merger (e.g., closing ability, consumer confidence, employee retention, litigation)[83][84] - Macroeconomic conditions such as food price inflation/deflation, fuel/commodity prices, and consumer behavior changes pose significant risks[84] - Operational risks include failure to achieve productivity initiatives, supply chain challenges, cyber incidents, and changes in wage rates or labor union contracts[84] NON-GAAP FINANCIAL MEASURES This section defines and explains the use of non-GAAP financial measures like EBITDA and Adjusted Net Income - EBITDA is defined as GAAP earnings (net loss) before interest, income taxes, depreciation, and amortization[87] - Adjusted EBITDA and Adjusted net income are non-GAAP measures that exclude items management does not consider in assessing ongoing core performance, used for evaluating operating performance and board/bank compliance[87][89] - Non-GAAP measures should not be considered as discretionary cash available for business growth; the company primarily relies on GAAP results[90] FIRST QUARTER OF FISCAL 2024 OVERVIEW This section provides an overview of the company's operational footprint and key financial and operating highlights - As of June 15, 2024, the company operated 2,269 stores, 1,725 pharmacies, 1,346 in-store coffee shops, 403 fuel centers, 22 distribution centers, and 19 manufacturing facilities[92] First Quarter Fiscal 2024 Financial and Operating Highlights | Metric | Value | | :------------------------------------ | :------------ | | Identical sales increase | 1.4% | | Digital sales increase | 23% | | Loyalty members | 41.4 million (up 15%) | | Net income | $241 million | | Net income per Class A common share | $0.41 | | Adjusted net income | $392 million | | Adjusted net income per Class A common share | $0.66 | | Adjusted EBITDA | $1,184 million| Store Count Changes (16 weeks ended) | Metric | June 15, 2024 | June 17, 2023 | | :------------------------ | :------------ | :------------ | | Stores, beginning of period | 2,269 | 2,271 | | Opened | 1 | 2 | | Closed | (1) | (1) | | Stores, end of period | 2,269 | 2,272 | RESULTS OF OPERATIONS This section analyzes the company's financial performance, including sales, margins, expenses, and net income - Net sales and other revenue increased 0.9% to $24,265.4 million for Q1 fiscal 2024, driven by a 1.4% increase in identical sales (primarily pharmacy) and digital sales growth, partially offset by lower fuel sales[102] - Identical sales, excluding fuel, increased 1.4% in Q1 fiscal 2024, compared to 4.9% in Q1 fiscal 2023[104] - Gross margin rate increased to 27.8% in Q1 fiscal 2024 (from 27.7% in Q1 fiscal 2023); excluding fuel and LIFO, the rate decreased 22 basis points due to higher pharmacy sales (lower margin), increased shrink, and higher digital costs, partially offset by productivity initiatives[106][108] - Selling and administrative expenses increased to 25.9% of Net sales in Q1 fiscal 2024 (from 25.0% in Q1 fiscal 2023); excluding fuel, the rate increased 79 basis points, primarily due to digital/omnichannel development, Merger-related costs, higher employee costs, increased occupancy, and third-party security[110] - Net income was $240.7 million ($0.41 per share) in Q1 fiscal 2024, down from $417.2 million ($0.72 per share) in Q1 fiscal 2023, which included a $49.7 million tax benefit[115][116] - Adjusted EBITDA decreased to $1,183.9 million (4.9% of Net sales) in Q1 fiscal 2024 from $1,318.5 million (5.5% of Net sales) in Q1 fiscal 2023[117][122] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's cash flow activities, debt management, and available liquidity - Net cash provided by operating activities increased to $960.9 million in Q1 fiscal 2024 (from $838.3 million in Q1 fiscal 2023), driven by working capital changes (lower inventory) and less cash paid for taxes and interest, despite lower Adjusted EBITDA and higher Merger-related costs[129] - Net cash used in investing activities increased to $538.0 million in Q1 fiscal 2024 (from $453.9 million in Q1 fiscal 2023), primarily due to $543.0 million in payments for property, equipment, and intangibles, including 17 remodels, one new store, and digital/technology investments[130][132] - Net cash used in financing activities decreased to $320.8 million in Q1 fiscal 2024 (from $615.0 million in Q1 fiscal 2023), mainly due to a $200.0 million ABL Facility repayment (vs. $500.0 million in prior year), dividends, and tax withholding[133] - The company paid $69.5 million ($0.12 per share) in cash dividends on Class A common stock in Q1 fiscal 2024 and announced the next quarterly dividend of $0.12 per share payable August 9, 2024[134] - The company believes it has significant liquidity sources (cash on hand, operating cash flows, ABL Facility) to meet its estimated $5.1 billion liquidity needs for the next 12 months, including working capital, merger costs, capital expenditures, and dividends[135] - As of June 15, 2024, there were no borrowings outstanding under the ABL Facility, with total availability of $3,954.2 million[136] CRITICAL ACCOUNTING POLICIES This section confirms no material changes to critical accounting policies from the prior annual report - There have been no material changes to the critical accounting policies from the Annual Report on Form 10-K for the fiscal year ended February 24, 2024[138] RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDS This section refers to disclosures regarding new accounting standards in the financial statement notes - Information on recently issued and recently adopted accounting standards is provided in Note 1 to the unaudited interim Condensed Consolidated Financial Statements[139] Item 3 - Quantitative and Qualitative Disclosures About Market Risk This section states that there have been no material changes in the company's exposure to market risk since its last Annual Report on Form 10-K - No material changes in market risk exposure have occurred since the Annual Report on Form 10-K for the fiscal year ended February 24, 2024[140] Item 4 - Controls and Procedures This section confirms the effectiveness of the company's disclosure controls and procedures and reports no material changes in internal control over financial reporting during the first quarter of fiscal 2024 - The Principal Executive Officer and Principal Financial Officer concluded that disclosure controls and procedures were effective as of the end of the period covered by this Form 10-Q[141] - There were no material changes in internal control over financial reporting during the first quarter of fiscal 2024[142] PART II - OTHER INFORMATION This section provides additional information, including legal proceedings and risk factors Item 1 - Legal Proceedings This section reiterates that the company is involved in various legal claims and lawsuits, and management believes that any resulting liability will not have a material adverse effect on the business or financial condition. It also refers to Note 6 for more detailed information - The company is subject to various claims and lawsuits, including those involving trade practices, wage and hour laws, and real estate disputes, some of which may be class actions[144] - Management believes that any resulting liability from these legal matters will not have a material adverse effect on the company's business or overall financial condition[144] - The company continually evaluates its exposure to loss contingencies and makes provisions where probable and reasonably estimable, but outcomes involve substantial uncertainties[145] Environmental Matters This section addresses the company's compliance with environmental laws and potential contamination liabilities - The company's operations are subject to environmental laws regarding waste management, air emissions, and underground storage tanks[146] - As an owner and operator of commercial real estate, the company may be liable for contamination clean-up at its facilities[146] - A $1 million threshold is used for disclosing environmental proceedings that may result in monetary sanctions[146] Item 1A - Risk Factors This section states that there have been no material changes to the risk factors previously disclosed in the company's Annual Report on Form 10-K - No material changes to the risk factors previously included in the Annual Report on Form 10-K for the fiscal year ended February 24, 2024[147] Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds This section reports that there were no unregistered sales of equity securities or use of proceeds during the period - No unregistered sales of equity securities occurred[147] - No use of proceeds from unregistered sales of equity securities[147] Item 3 - Defaults Upon Senior Securities This section reports that there were no defaults upon senior securities during the period - No defaults upon senior securities occurred[148] Item 4 - Mine Safety Disclosures This section states that mine safety disclosures are not applicable to the company - Mine Safety Disclosures are not applicable[148] Item 5 - Other Information This section reports that no directors or officers adopted or terminated Rule 10b5-1 trading arrangements during the first quarter of fiscal 2024 - None of the company's directors or officers adopted or terminated a Rule 10b5-1 trading arrangement or a non-Rule 10b5-1 trading arrangement in the first quarter of fiscal 2024[148] Item 6 - Exhibits This section lists all exhibits filed with the Form 10-Q, including various certifications and XBRL documents - Exhibits include certifications from the Principal Executive Officer and Principal Financial Officer (31.1, 31.2, 32.1) and various Inline XBRL documents (101.INS, 101.SCH, 101.CAL, 101.DEF, 101.LAB, 101.PRE, 104)[148] SIGNATURES This section includes the official signatures of the company's principal executive and financial officers - The report was signed on July 23, 2024, by Vivek Sankaran, Chief Executive Officer and Director, and Sharon McCollam, President and Chief Financial Officer[150]