Document/ExhibitDescriptionPagesSize 1: 10-Q Quarterly Report HTML 845K
2: EX-31.1 Certification -- §302 - SOA'02 HTML 24K
3: EX-31.2 Certification -- §302 - SOA'02 HTML 24K
4: EX-32.1 Certification -- §906 - SOA'02 HTML 20K
11: R1 Cover Page HTML 69K
12: R2 Condensed Consolidated Balance Sheets HTML 117K
13: R3 Condensed Consolidated Balance Sheets HTML 52K
(Parenthetical)
14: R4 Condensed Consolidated Statements of Operations HTML 97K
and Comprehensive Income
15: R5 Condensed Consolidated Statements of Cash Flows HTML 114K
16: R6 Condensed Consolidated Statements of Stockholders' HTML 105K
Equity
17: R7 Basis of Presentation and Summary of Significant HTML 71K
Accounting Policies
18: R8 Fair Value Measurements HTML 66K
19: R9 Derivative Financial Instruments HTML 30K
20: R10 Long-Term Debt and Finance Lease Obligations HTML 35K
21: R11 Stockholders' Equity and Convertible Preferred HTML 34K
Stock
22: R12 Employee Benefit Plans HTML 63K
23: R13 Commitments and Contingencies and Off Balance HTML 43K
Sheet Arrangements
24: R14 Other Comprehensive Income or Loss HTML 55K
25: R15 Net Income Per Class A Common Share HTML 65K
26: R16 Basis of Presentation and Summary of Significant HTML 56K
Accounting Policies (Policies)
27: R17 Basis of Presentation and Summary of Significant HTML 49K
Accounting Policies (Tables)
28: R18 Fair Value Measurements (Tables) HTML 61K
29: R19 Derivative Financial Instruments (Tables) HTML 30K
30: R20 Long-Term Debt and Finance Lease Obligations HTML 32K
(Tables)
31: R21 Employee Benefit Plans (Tables) HTML 52K
32: R22 Other Comprehensive Income or Loss (Tables) HTML 54K
33: R23 Net Income Per Class A Common Share (Tables) HTML 63K
34: R24 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT HTML 127K
ACCOUNTING POLICIES - Narrative (Details)
35: R25 BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT HTML 43K
ACCOUNTING POLICIES - Sales Revenue by Similar
Products (Details)
36: R26 FAIR VALUE MEASUREMENTS - Schedule of Assets and HTML 48K
Liabilities Measured at Fair Value (Details)
37: R27 FAIR VALUE MEASUREMENTS - Narrative (Details) HTML 22K
38: R28 DERIVATIVE FINANCIAL INSTRUMENTS - Narrative HTML 21K
(Details)
39: R29 DERIVATIVE FINANCIAL INSTRUMENTS - Schedule of HTML 24K
Cash Flow Hedges (Details)
40: R30 LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS - HTML 86K
Narrative (Details)
41: R31 LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS - HTML 52K
Schedule of Long-term Debt (Details)
42: R32 Stockholders' Equity and Convertible Preferred HTML 150K
Stock (Details)
43: R33 EMPLOYEE BENEFIT PLANS - Schedule of Components of HTML 46K
Net Pension and Post-retirement Expense (Details)
44: R34 EMPLOYEE BENEFIT PLANS - Narrative (Details) HTML 59K
45: R35 COMMITMENTS AND CONTINGENCIES AND OFF BALANCE HTML 18K
SHEET ARRANGEMENTS - Guarantees (Details)
46: R36 COMMITMENTS AND CONTINGENCIES AND OFF BALANCE HTML 31K
SHEET ARRANGEMENTS - Legal Contingencies (Details)
47: R37 OTHER COMPREHENSIVE INCOME OR LOSS - Changes in HTML 69K
the AOCI Balance (Details)
48: R38 Net Income Per Class A Common Share (Details) HTML 86K
50: XML IDEA XML File -- Filing Summary XML 90K
10: XML XBRL Instance -- aci-20201205_htm XML 1.78M
49: EXCEL IDEA Workbook of Financial Reports XLSX 76K
6: EX-101.CAL XBRL Calculations -- aci-20201205_cal XML 184K
7: EX-101.DEF XBRL Definitions -- aci-20201205_def XML 571K
8: EX-101.LAB XBRL Labels -- aci-20201205_lab XML 1.34M
9: EX-101.PRE XBRL Presentations -- aci-20201205_pre XML 748K
5: EX-101.SCH XBRL Schema -- aci-20201205 XSD 114K
51: JSON XBRL Instance as JSON Data -- MetaLinks 329± 474K
52: ZIP XBRL Zipped Folder -- 0001646972-21-000010-xbrl Zip 285K
(Exact name of registrant as specified in its charter)
iDelaware
i47-4376911
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i250 Parkcenter Blvd.
iBoise,
iIdahoi83706
(Address of principal executive offices and zip code)
(i208) i395-6200
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
iClass
A common stock, $0.01 par value
iACI
iNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒iYes☐ No
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒iYes☐ No
Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer,""accelerated filer,""smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
☐
Accelerated filer
☐
iNon-accelerated
filer
☒
Smaller reporting company
i☐
Emerging growth company
i☐
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). i☐ Yes ☒ No
As
of January 12, 2021, the registrant had i465,533,258 shares of Class A common stock, par value $0.01 per share, outstanding.
Current
maturities of long-term debt and finance lease obligations
i212.4
i221.4
Current
maturities of operating lease obligations
i585.8
i563.1
Other
current liabilities
i1,135.5
i1,102.7
Total
current liabilities
i6,597.3
i5,904.3
Long-term
debt and finance lease obligations
i8,328.0
i8,493.3
Long-term
operating lease obligations
i5,355.6
i5,402.8
Deferred
income taxes
i566.6
i613.8
Other
long-term liabilities
i2,498.0
i2,042.8
Commitments
and contingencies
i
i
Series A convertible preferred stock, $ii0.01/
par value; i1,750,000 shares authorized, ii924,000/
shares issued and outstanding as of December 5, 2020 and iiino//
shares authorized, issued and outstanding as of February 29, 2020
i844.3
i—
Series
A-1 convertible preferred stock, $ii0.01/
par value; i1,410,000 shares authorized, ii826,000/
shares issued and outstanding as of December 5, 2020 and iiino//
shares authorized, issued and outstanding as of February 29, 2020
i754.8
i—
STOCKHOLDERS'
EQUITY
Undesignated preferred stock, $ii0.01/
par value; i96,840,000 shares authorized, ino shares issued as of December 5, 2020 and i30,000,000
shares authorized, ino shares issued as of February 29, 2020
i—
i—
Class
A common stock, $ii0.01/ par value; ii1,000,000,000/
shares authorized, i585,530,715 and i582,997,251 shares issued as of December 5, 2020 and February
29, 2020, respectively
i5.9
i5.8
Class
A-1 convertible common stock, $ii0.01/ par
value; i150,000,000 shares authorized, ino shares issued as of December 5, 2020 and iino/
shares authorized and issued as of February 29, 2020
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1 - iBASIS
OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
iBasis of Presentation
The accompanying interim Condensed Consolidated Financial Statements include the accounts of Albertsons Companies, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions were eliminated. The Condensed
Consolidated Balance Sheet as of February 29, 2020 is derived from the Company's annual audited Consolidated Financial Statements for the fiscal year ended February 29, 2020, which should be read in conjunction with these Condensed Consolidated Financial Statements and which are included in the Company's Prospectus dated June 25, 2020 filed with the Securities and Exchange Commission ("SEC") pursuant to Rule 424(b) of the Securities Act of 1933, as amended, relating to the Company's Registration Statement on Form S-1 (File No. 333-236956).
Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for the year. The Company's results of operations are for the 12 and 40 weeks ended December 5, 2020 and November 30, 2019.
Significant
Accounting Policies
iRestricted cash: Restricted cash is included in Other current assets or Other assets depending on the remaining term of the restriction and primarily relates to funds held in escrow. The Company had $i50.6
million and $i8.2 million of restricted cash as of December 5, 2020 and February 29, 2020, respectively.
iInventories,
net: Substantially all of the Company's inventories consist of finished goods valued at the lower of cost or market and net of vendor allowances. The Company uses either item-cost or the retail inventory method to value inventory at the lower of cost or market before application of any last-in, first-out ("LIFO") reserve. Interim LIFO inventory costs are based on management's estimates of expected year-end inventory levels and inflation rates. The Company recorded LIFO expense of $i14.3
million and $i2.6 million for the 12 weeks ended December 5, 2020 and November 30, 2019, respectively, and $i37.5
million and $i18.9 million for the 40 weeks ended December 5, 2020 and November 30, 2019, respectively.
iEquity-based
compensation: The Company maintains the Albertsons Companies, Inc. Restricted Stock Unit Plan (the "Restricted Stock Unit Plan"), which was previously named the "Albertsons Companies, Inc. Phantom Unit Plan" (the "Phantom Unit Plan"). Prior to being amended and restated on June 9, 2020, the Phantom Unit Plan provided for grants of "Phantom Units" to certain employees, directors and consultants. Each Phantom Unit provided a participant with a contractual right to receive, upon vesting, ione
management incentive unit in each of the Company's parents, Albertsons Investor Holdings LLC ("Albertsons Investor") and KIM ACI, LLC ("KIM ACI"). Upon the amendment and restatement of the Phantom Unit Plan as the Restricted Stock Unit Plan, all outstanding Phantom Units were converted into i11.3 million
restricted stock units of the Company ("Restricted Stock Units" or "RSUs"), including i1.9 million performance-based RSUs that were not deemed granted for accounting purposes, under the Restricted Stock Unit Plan, subject to substantially identical terms and conditions as applied prior to the conversion.
No changes to vesting conditions or the fair value of the award occurred as a result of the conversion. Upon vesting, an award of Restricted Stock Units will be settled in shares of the Company's common stock. Equity-based compensation expense related to these awards recognized by the Company was $i13.6 million and $i6.3
million for the 12 weeks ended December 5, 2020 and November 30, 2019, respectively. For the 40 weeks ended December 5, 2020 and November 30, 2019, equity-based compensation expense recognized by the Company related to these awards was $i39.4 million and
$i21.8 million, respectively. The Company recorded an income tax benefit of $i3.5
million and $i1.6 million for the 12 weeks ended December 5, 2020 and November 30, 2019, respectively. For the 40 weeks ended December 5, 2020 and November 30, 2019, the Company recorded
an
income tax benefit of $i10.1 million and $i5.7 million,
respectively. As of December 5, 2020, there was $i98.0 million of unrecognized costs related to i8.7
million unvested RSUs deemed granted for accounting purposes. That cost is expected to be recognized over a weighted average period of i2.0 years.
On April 25, 2019, upon the commencement of employment, the Company's President
and Chief Executive Officer was granted direct equity interests in each of the Company's parents, Albertsons Investor and KIM ACI. These equity interests generally vest over ifive years, with i50%
based solely on a service period and i50% upon a service period and achievement of certain performance-based thresholds. On June 30, 2020, upon consummation of the Company's initial public offering ("IPO"), the unvested direct equity interests in each of the
Company's parents converted into i1.7 million shares of restricted common stock of the Company ("RSAs"), including i0.6
million performance-based RSAs that are not deemed granted for accounting purposes. No changes to vesting conditions or the fair value of the award occurred as a result of the conversion. For the 12 weeks ended December 5, 2020 and November 30, 2019, equity-based compensation expense recognized by the Company related to these RSAs was $i1.5 million and
$i0.9 million, respectively. For the 40 weeks ended December 5, 2020 and November 30, 2019, equity-based compensation expense recognized by the Company related to these RSAs was $i4.0
million and $i3.0 million, respectively. As of December 5, 2020, there was $i7.3
million of unrecognized costs related to i1.1 million RSAs deemed granted for accounting purposes. That cost is expected to be recognized over a weighted average period of i3.0
years.
Treasury stock: On June 9, 2020, the Company used $i1,680.0 million, an amount equal to the proceeds from the sale and issuance of the Company's Series A-1 convertible preferred stock ("Series A-1 preferred
stock") and Series A convertible preferred stock ("Series A preferred stock" and together with the Series A-1 preferred stock, the "Convertible Preferred Stock"), to repurchase i101,611,736 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 i6,837,970
shares of its Class A common stock held by the stockholder for an aggregate purchase price of $i82.0 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 new share repurchase program that allows the Company to repurchase up to $i300 million
of its Class A common stock. As part of the share repurchase program, during the 12 weeks ended December 5, 2020, the Company, through a series of open-market transactions, repurchased i6,797,962 shares of its Class A common stock for an aggregate purchase price of $i102.7
million.
iIncome taxes:Income tax expense was $i29.5 million, representing a
i19.3% effective tax rate, for the 12 weeks ended December 5, 2020. Income tax expense was $i12.9 million, representing
a i19.1% effective tax rate for the 12 weeks ended November 30, 2019. Income tax expense was $i342.6 million,
representing a i25.6% effective tax rate, for the 40 weeks ended December 5, 2020. Income tax expense was $i110.5
million, representing a i21.7% effective tax rate, for the 40 weeks ended November 30, 2019. The effective income tax rate for the 12 weeks ended December 5, 2020 differs from the federal income tax statutory rate of 21% primarily due to state taxes, offset by discrete benefits related to income tax credits and equity-based compensation deductions. The effective income tax rate for the 40 weeks ended December 5, 2020
differs from the federal income tax statutory rate of 21% primarily due to state taxes and certain discrete nondeductible transaction-related costs, partially offset by discrete benefits related to income tax credits and equity-based compensation deductions.
iSegments: 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 eCommerce channels. The Company's 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 i12
operating divisions, which are reported in ione 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 ione
store format. Each division offers through its stores and eCommerce 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./
iRevenue Recognition: Revenues
from the retail sale of products are recognized at the point of sale or delivery 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 $i245.6 million and $i218.5
million as of December 5, 2020 and February 29, 2020, respectively, and are recorded in Receivables, net. For eCommerce related sales, which primarily 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 as of December 5,
2020 and February 29, 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 $i91.6 million as of December 5, 2020 and $i52.2
million as of February 29, 2020. Breakage amounts were immaterial for the 12 and 40 weeks ended December 5, 2020 and November 30, 2019, respectively.
(1)
eCommerce related sales are included in the categories to which the revenue pertains.
(2) Consists primarily of general merchandise, grocery and frozen foods.
(3) Consists primarily of produce, dairy, meat, deli, floral and seafood.
(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.
/
CARES Act: TheCoronavirus 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 allows 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. For the 40 weeks ended December 5,
2020, the Company deferred approximately $i396 million of the employer-paid portion of social security taxes, which is included in Other long-term liabilities. The CARES Act also includes a technical correction to permit 100% bonus depreciation of eligible qualified improvement property. The
Company will continue to assess the effect of the CARES Act and ongoing other government legislation related to the COVID-19 pandemic that may be issued, including the Consolidated Appropriations Act, 2021 signed into law on December 27, 2020.
i
Recently issued accounting standards: In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Simplifying
the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will take effect for public entities for annual reporting periods beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this standard on its Consolidated Financial Statements.
In
June 2020, the FASB issued 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. Early adoption is permitted. The Company is currently evaluating the effect of this standard on its Consolidated Financial Statements.
NOTE 2 - iiFAIR
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; and
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.
i
The following table
presents assets and liabilities which were measured at fair value on a recurring basis as of December 5, 2020 (in millions):
Fair Value Measurements
Total
Quoted prices in
active markets for identical assets (Level 1)
(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 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.
(1)
Primarily relates to Mutual Funds (Level 1) and Corporate Bonds (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 December 5, 2020, the fair value of total debt was $i8,534.2 million compared to the carrying value of $i8,023.5
million, excluding debt discounts and deferred financing costs. As of February 29, 2020, the fair value of total debt was $i8,486.2 million compared to the carrying value of $i8,162.2
million, excluding debt discounts and deferred financing costs.
Assets Measured at Fair Value on a Non-Recurring 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 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.
NOTE 3 - iDERIVATIVE
FINANCIAL INSTRUMENTS
The aggregate notional amount of the Company's Swaps as of December 5, 2020 and February 29, 2020 were $ii2,023.0/
million, of which none were designated as cash flow hedges as defined by GAAP.
Loss on undesignated portion of interest rate swaps
$
(i19.7)
$
i—
Other
income, net
Loss on designated portion of interest rate swaps
$
i—
$
(i33.3)
Other
comprehensive income (loss), net of tax
/
NOTE 4 - iLONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
i
The
Company's long-term debt and finance lease obligations as of December 5, 2020 and February 29, 2020, net of unamortized debt discounts of $i39.5 million and $i41.3
million, respectively, and deferred financing costs of $i71.0 million and $i72.9 million, respectively, consisted of the following (in millions):
Senior Unsecured Notes due 2023 to 2030, interest rate range of i3.25% to i7.50%
$
i6,885.4
$
i6,884.5
Safeway
Inc. Notes due 2021 to 2031, interest rate range of i4.75% to i7.45%
i504.2
i642.1
New
Albertsons L.P. Notes due 2026 to 2031, interest rate range of i6.52% to i8.70%
i468.4
i466.0
Other
financing obligations
i37.3
i37.2
Mortgage
notes payable, secured
i17.7
i18.2
Finance
lease obligations
i627.4
i666.7
Total
debt
i8,540.4
i8,714.7
Less
current maturities
(i212.4)
(i221.4)
Long-term
portion
$
i8,328.0
$
i8,493.3
/
Senior
Unsecured Notes
On August 31, 2020, the Company and substantially all of its subsidiaries completed the issuance of $i750.0 million in aggregate principal amount of i3.250%
Senior Unsecured Notes which will mature on March 15, 2026 (the "2026 Notes") and $i750.0 million in aggregate principal amount of i3.500%
Senior Unsecured Notes which will mature on March 15, 2029 (the "2029 Notes" and together with the 2026 Notes, the "New Notes"). Interest on the New Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The New Notes have not been and will not be registered with the SEC. The New 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 New Notes. On September 11,
2020, proceeds from the New Notes, together with approximately $i60 million cash on hand, were used to fully redeem the $i1,250.0 million in aggregate principal amount outstanding of the
Company's i6.625% Senior Unsecured Notes due 2024 (the "2024 Redemption"). In connection with the 2024 Redemption, the Company paid an associated redemption premium of
$i41.4
million. The Company recorded a $i49.1 million loss on debt extinguishment related to the 2024 Redemption, comprised of the $i41.4
million redemption premium and $i7.7 million write-off of deferred financings costs.
On September 16, 2020, remaining proceeds from the New Notes were used to fund the partial redemption of $i250.0
million of the $i1,250.0 million in aggregate principal amount outstanding (the "September Partial 2025 Redemption") of the Company's i5.75%
Senior Unsecured Notes due 2025 (the "2025 Notes"). In connection with the September Partial 2025 Redemption, the Company paid an associated redemption premium of $i7.2 million. The Company recorded an $i8.6
million loss on debt extinguishment related to the September Partial 2025 Redemption, comprised of the $i7.2 million redemption premium and a $i1.4
million write-off of deferred financing costs.
On December 22, 2020, subsequent to the end of the third quarter of fiscal 2020, the Company and substantially all of its subsidiaries completed the issuance of $i600.0 million in aggregate principal amount of additional
2029 Notes (the "Additional 2029 Notes"). The Additional 2029 Notes were issued under the same indenture as the 2029 Notes issued by the Company on August 31, 2020. Interest on the Additional 2029 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The Additional 2029 Notes have not been and will not be registered with the SEC. The Additional 2029 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 Additional 2029 Notes. On January 4, 2021, proceeds from the Additional 2029 Notes, together with approximately $i230 million of cash on hand, were used to fund another partial redemption of $i800.0
million of the $i1,000.0 million in aggregate principal amount outstanding of the 2025 Notes (the "January Partial 2025 Redemption").
Safeway Notes
The Company repaid the remaining $i136.8
million in aggregate principal amount of Safeway Inc.'s ("Safeway") i3.95% Notes due 2020 on their maturity date, August 15, 2020.
ABL Facility
On March 12, 2020, the Company provided notice to the lenders to
borrow $i2.0 billion under the Company's amended and restated senior secured asset-based loan facility (as amended, the "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 $i2.0
billion in full on June 19, 2020 and as of December 5, 2020, there were iino/
amounts outstanding under the Company's ABL Facility, and letters of credit ("LOC") issued under the LOC sub-facility were $i354.6 million. There were iino/
amounts outstanding under the Company's ABL Facility as of February 29, 2020, and letters of credit issued under the LOC sub-facility were $i454.5 million.
NOTE 5 - iSTOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK
Common Stock
On June 8, 2020, the Company amended and restated its certificate
of incorporation to authorize i1,150,000,000 shares of common stock, par value $i0.01 per share, of which i1,000,000,000
shares were classified as Class A common stock ("Class A common stock") and i150,000,000 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 December 5, 2020, there were i585,530,715
shares of Class A common stock and i466,611,426 shares of Class A common stock issued and outstanding, respectively, and iino/
shares of Class A-1 common stock issued or outstanding. As of February 29, 2020, there were i582,997,251 shares of Class A common stock and i579,325,630
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 ione
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 ione-for-one basis
to voting shares of Class A common stock.
In connection with the IPO, the Company established a dividend policy pursuant to which the Company intends to pay a quarterly dividend on its Common Stock in an annual amount equal to $i0.400 per common share. On October 14, 2020, the
Company announced the first quarterly dividend payment of $ii0.100/
per common share which was paid on November 10, 2020 to stockholders of record as of the close of business on October 26, 2020. On January 12, 2021, subsequent to the end of the third quarter of fiscal 2020, the Company announced the next quarterly dividend payment of $ii0.100/
per common share to be paid on February 10, 2021 to stockholders of record as of the close of business on January 26, 2021.
Stock Split
On June 18, 2020, the Company effected a i2.072-for-1
stock split of its Common Stock, without any change in the total shares authorized or the par value per share. All information related to the Company's Common Stock and per Class A common share amounts for all periods presented in the accompanying Condensed Consolidated Financial Statements have been retroactively adjusted to give effect to the i2.072-for-1 stock split.
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 i50,000,000 shares of Class A common stock at an initial price to the public of $i16.00
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 IPO.
Convertible Preferred Stock and Investor Exchange Right
On June 8, 2020, the Company amended and restated its certificate
of incorporation to authorize i100,000,000 shares of preferred stock, par value $i0.01 per share, of which i1,750,000
shares were designated Series A preferred stock and i1,410,000 shares were designated Series A-1 preferred stock. On June 9, 2020 (the "Preferred Closing Date"), the Company sold and issued (i) an aggregate of i1,410,000
shares of Series A-1 preferred stock and (ii) an aggregate of i340,000 shares of Series A preferred stock. The Company received aggregate proceeds of $i1.68
billion from the sale and issuance of the Convertible Preferred Stock which has an aggregate liquidation preference of $i1.75 billion.
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 ione-for-one basis to shares of voting Series A preferred stock. On June 29, 2020, holders of i584,000
shares of Series A-1 preferred stock were relieved from the relevant antitrust restrictions resulting in the automatic conversion into i584,000 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
holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of i6.75% 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 i2.25% on such dividend payment date. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that the Company pays on its Common Stock to the extent that such cash dividends exceed $i206.25
million per fiscal year. On September 15, 2020, the Company declared a quarterly cash dividend of $ii36.4/
million to holders of the Convertible Preferred Stock, which was paid on September 30, 2020. On December 15, 2020, subsequent to the end of the third quarter of fiscal 2020, the Company declared a quarterly cash dividend of $ii29.5/ million
to holders of the Convertible Preferred Stock, which was paid on December 30, 2020.
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 $i17.22
per share and an initial conversion rate of i58.064 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 $i20.50
per share (or i119% of the initial conversion price), as may be adjusted, for at least i20
trading days in any period of i30 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 i12-month period unless the last reported sale price of the Class A common stock has equaled or exceeded $i23.42
(or i136% of the initial conversion price), as may be adjusted, for at least i20
trading days in any period of i30 consecutive trading days.
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 i105%, 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 i110%,
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 i165%
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 $i36.5 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 i30 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 i110%,
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 i110%,
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 contributed $i1.7 million and $i58.0 million to its defined pension plans and
post-retirement benefit plans during the 12 and 40 weeks ended December 5, 2020, respectively. For the 12 and 40 weeks ended November 30, 2019, the Company contributed $i2.0 million and $i9.0
million, respectively. At the Company's discretion, additional funds may be contributed to the defined benefit pension plans. The Company currently anticipates contributing an additional $i4.4 million to these plans for the remainder of fiscal 2020.
Defined
Contribution Plans and Supplemental Retirement Plans
Total contributions expensed for defined contribution plans (401(k) plans) were $i15.3 million and $i12.7
million for the 12 weeks ended December 5, 2020 and November 30, 2019, respectively. For the 40 weeks ended December 5, 2020 and November 30, 2019, total contributions expensed were $i53.4 million and $i45.3 million,
respectively.
Multiemployer Pension Plans
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 March 5, 2020, the
Company agreed with the two applicable local unions to new collective bargaining agreements pursuant to which the Company contributes to FELRA and MAP. These agreements were subject to
final approval by the Pension Benefit Guaranty Corporation ("PBGC"), the local unions and the largest contributing employer, which was reached on December 31, 2020. In connection with these final agreements, to address the pending insolvency of FELRA, the
Company and the two local unions, along with the largest contributing employer, agreed to combine MAP into FELRA (the "Combined Plan") on December 31, 2020. Immediately upon the combination, the Combined Plan terminated and commencing February 2021, the Company is required to annually pay $i23.2 million to the Combined Plan for the next i25
years. This payment replaces the Company's previous annual contribution to both FELRA and MAP, which was a combined $i26.2 million in fiscal 2019. Immediately after the combination, the Company received a release of all withdrawal liability and mass withdrawal liability from FELRA, MAP, the Combined Plan, and the PBGC. In addition to the $i23.2
million annual payment, the Company will begin to contribute to a new multiemployer pension plan. This new multiemployer plan will be limited to providing benefits to participants in MAP and FELRA in excess of the benefits the PBGC insures under law. These contributions are expected to commence in June 2022 and are currently estimated to be between approximately $i10 to $i12
million annually for i10 years.The Company preliminarily expects to record a non-cash pre-tax charge of approximately $i595 million
($i445 million, net of tax) in the fourth quarter of fiscal 2020 to record the pension obligation for these benefits earned for prior service.The evaluation of the accounting charge is ongoing, and the estimated impact is preliminary and subject to change. Furthermore, the Company will establish and contribute to a new Variable Annuity Pension Plan (the "Combined
VAPP") that will provide benefits to participants for future services, effective January 1, 2021. The Company will also contribute approximately $i4 million to the Combined VAPP to fund certain administrative expenses and establish a stabilization reserve for the Combined VAPP.
On July
21, 2020, the Company announced that it had entered into a tentative 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 inine
UFCW local unions entered into a Memorandum of Understanding ("MOU") 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 inine 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 will pay, by June 2023, an aggregate of approximately $i286 million to the National Fund, in full satisfaction of the Company's withdrawal liability amount and mass withdrawal
liability amount. The Company has paid $i147.3 million as of the end of the third quarter of fiscal 2020 and will pay the remaining amount in two installments over the next i30
months, any portion of which may be prepaid, in whole or in part. The Company will also pre-fund a transition reserve in the National VAPP to support certain grandfathered participants by making a payment in the fourth quarter of 2020 of approximately $i8 to $i9
million to the National VAPP. The Company recorded a pre-tax charge of approximately $i286 million ($i213
million, net of tax) in the third quarter of fiscal 2020 to record the withdrawal liability for these benefits earned for prior service.
NOTE 7 - iCOMMITMENTS AND CONTINGENCIES AND OFF BALANCE SHEET ARRANGEMENTS
Guarantees
California Department of Industrial Relations:
On October 24, 2012, the Office of Self-Insurance Plans, a program within the director's office of the California Department of Industrial Relations (the "DIR"), notified SUPERVALU INC. ("SuperValu"), which was then the owner of New Albertsons L.P., a wholly-owned subsidiary of the Company, that additional collateral was required to be posted in connection with the Company's, and certain other subsidiaries', California self-insured workers' compensation obligations pursuant to applicable regulations. The notice from the DIR stated that the additional collateral was required as a result of an increase in estimated future liabilities, as determined
by the DIR pursuant to a review of the self-insured California workers'
compensation claims with respect to the applicable businesses. On January 21, 2014, the Company entered into a Collateral Substitution Agreement with the California Self-Insurers' Security Fund to provide collateral. The collateral not covered by the California Self-Insurers' Security Fund is covered by an irrevocable LOC for the benefit of the State of California Office of Self-Insurance Plans. The amount of
the LOC is 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 $i40.1 million as of December 5, 2020 and $i90.3
million as of February 29, 2020, respectively.
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, including as a result of the economic dislocation caused by the response to the COVID-19 pandemic. 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 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 can be reasonably estimated and an adverse outcome is probable. 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.
Office of Inspector General: In January 2016, the Company received a subpoena from the Office of the Inspector General of the Department of Health and Human Services (the "OIG") pertaining to the pricing of drugs offered under the Company's MyRxCare discount program and the impact on reimbursements to Medicare, Medicaid and TRICARE (the "Government Health Programs"). In particular, the OIG requested information on the relationship between the prices charged for drugs under the MyRxCare program and the "usual and customary" prices reported by the Company in claims for reimbursements
to the Government Health Programs or other third-party payors. The Company cooperated with the OIG in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
Civil Investigative Demands: On December 16, 2016, the Company received a civil investigative demand from the United States Attorney for the District of Rhode Island in connection with a False Claims Act ("FCA") investigation relating to the
Company's influenza vaccination programs. The investigation concerns whether the Company's provision of store coupons to its customers who received influenza vaccinations in its store pharmacies constituted
an improper benefit to those customers under the federal Medicare and Medicaid programs. The Company believes that its provision of the store coupons to its customers is an allowable incentive to encourage vaccinations. The
Company cooperated with the U.S. Attorney in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.
The Company has received a civil investigative demand dated February 28, 2020 from the United States Attorney for the Southern District of New York in connection with an FCA investigation relating to the Company's dispensing practices regarding insulin pen products. The investigation seeks documents regarding the
Company's policies, practices and procedures, as well as dispensing data, among other things. The Company will cooperate with the U.S. Attorney in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.
Terraza/Lorenz: iTwo
lawsuits were brought against Safeway and the Safeway Benefits Plan Committee (the "Benefit Plans Committee," and together with Safeway, the "Safeway Benefits Plans Defendants") and other third parties alleging breaches of fiduciary duty under the Employee Retirement Income Security Act of 1974, as amended ("ERISA") with respect to Safeway's 401(k) Plan (the "Safeway 401(k) Plan"). On July 14, 2016, a complaint ("Terraza") was filed in the United States District Court for the Northern District of California by a participant in the Safeway 401(k) Plan individually and on behalf of the Safeway 401(k) Plan. An amended complaint was filed on November 18, 2016. On August 25, 2016, a second complaint ("Lorenz") was filed in the United States District Court for the Northern District of
California by another participant in the Safeway 401(k) Plan individually and on behalf of all others similarly situated against the Safeway Benefits Plans Defendants and against the Safeway 401(k) Plan's former record-keepers. An amended complaint was filed on September 16, 2016, and a second amended complaint was filed on November 21, 2016. In general, both lawsuits alleged that the Safeway Benefits Plans Defendants breached their fiduciary duties under ERISA regarding the selection of investments offered under the Safeway 401(k) Plan and the fees and expenses related to those investments. All parties filed summary judgment motions which were heard and taken under submission on August 16, 2018. Plaintiffs' motions were denied, and defendants' motions were granted in part and denied in part. Bench trials for both matters
were set for May 6, 2019. A settlement in principle was reached before trial. On September 13, 2019, settlement papers were filed with the Court along with a motion for preliminary approval of the settlement. A hearing for preliminary approval was set for November 20, 2019, but the Court vacated the hearing. The Court issued an order on March 30, 2020 requesting some minor changes to the notice procedures, and plaintiffs submitted an amended motion for preliminary approval.On September 8, 2020, the Court granted plaintiffs' amended motion, and the matter has been set for a final approval hearing on April 26, 2021. The
Company has recorded an estimated liability for these matters.
False Claims Act: iTwo qui tam actions alleging violations of the FCA have 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 U.S. District Court for the Central District of Illinois, the relator alleges that Safeway overcharged government healthcare programs by not providing the 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.
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
government healthcare programs by not providing the 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. The appeal is now pending in the Seventh Circuit Court of Appeals. Oral argument is scheduled for January 19, 2021.
In both of the above cases, the 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 $i100 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.
The
Company was also subject to another FCA qui tam action entitled United States ex rel. Zelickowski v. Albertson's LLC. In that case, the relators alleged that Albertson's LLC ("Albertson's") overcharged federal healthcare programs by not providing the government, as a part of its usual and customary prices to the government, the benefit of discounts given to customers who enrolled in the Albertson's discount-club program. The complaint was originally filed under seal and amended on June 20, 2017. On December 17, 2018, the case was dismissed, without prejudice.
Alaska Attorney General's Investigation: On May 22, 2018, the
Company received a subpoena from the Office of the Attorney General for the State of Alaska (the "Alaska Attorney General") stating that the Alaska Attorney General has reason to believe the Company has engaged in unfair or deceptive trade practices under Alaska's Unfair Trade Practices and Consumer Act and seeking documents regarding the Company's policies, procedures, controls, training, dispensing practices and other matters in connection with the sale and marketing of opioid pain medications. The Company responded to the subpoena on July 30, 2018 and has not received any further communication from the Alaska Attorney General. The
Company does not currently have a basis to believe it has violated Alaska's Unfair Trade Practices and Consumer Act; however, at this time, the Company is unable to determine the probability of the outcome of this matter or estimate a range of reasonably possible loss, if any.
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 i70
suits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over i2,000 cases have been consolidated as Multi-District Litigation ("MDL") pursuant to 28 U.S.C. §1407. In two matters--MDL No. 2804 filed by The Blackfeet Tribe of the Blackfeet Indian Reservation and State of New Mexico v. Purdue Pharma L.P., et al.--the Company filed motions to dismiss,
which were denied, and the Company has now answered the complaints. The MDL cases are stayed pending bellwether trials, and the only active matter is the New Mexico action where a September 2021 trial date has been set. The Company is vigorously defending these matters and believes that these cases are without merit. At this early 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.
California Air Resources Board: Upon the inspection by the California Air Resources Board ("CARB") of several of
the Company's stores in California, it was determined that the Company failed certain paperwork and other administrative requirements. As a result of the inspections, the Company proactively undertook a broad evaluation of the record keeping and administrative practices at all of its stores in California. In connection with this evaluation, the Company retained a third party to conduct an audit and correct deficiencies identified across its California store base. The Company is working with CARB to resolve these compliance issues and comply
with governing regulations, and that work is ongoing. CARB has made an opening demand regarding potential fines and
penalties.The parties are in negotiations to reach a settlement. The Company has recorded an estimated liability for this matter.
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. The Company has answered the complaint and is vigorously defending the matter. 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 will seek court approval of the settlement. 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 8 - iOTHER 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 the stockholders. Generally, for the Company, total comprehensive income or loss equals net income plus or minus adjustments for pension and other post-retirement liabilities and interest rate swaps. 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. iChanges
in the AOCI balance by component are shown below (in millions):
Other
comprehensive (loss) income before reclassifications
(i31.8)
(i44.9)
i10.1
i3.0
Amounts
reclassified from accumulated other comprehensive income
i1.5
(i1.7)
i3.2
i—
Tax
benefit (expense)
i8.0
i12.1
(i3.4)
(i0.7)
Current-period
other comprehensive (loss) income, net of tax
(i5.7)
(i33.3)
i24.8
i2.8
Ending
balance
$
i85.6
$
(i29.9)
$
i113.6
$
i1.9
(1)
Related to the fiscal 2019 adoption of ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income".
NOTE 9 - iNET INCOME PER CLASS A 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 $i206.25
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 restricted stock units and awards 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.
Net
income allocated to Class A common stockholders - Basic
$
i96.4
$
i54.8
$
i910.9
$
i398.6
Weighted
average Class A common shares outstanding - Basic (1)
i468.7
i579.4
i511.0
i579.3
Basic
net income per Class A common share
$
i0.21
$
i0.09
$
i1.78
$
i0.69
Diluted
net income per Class A common share
Net income allocated to Class A common stockholders - Basic
$
i96.4
$
i54.8
$
i910.9
$
i398.6
Accrued
dividends on Convertible Preferred Stock
i—
i—
i58.1
i—
Earnings
allocated to Convertible Preferred Stock
i—
i—
i25.4
i—
Net
income allocated to Class A common stockholders - Diluted
$
i96.4
$
i54.8
$
i994.4
$
i398.6
Weighted
average Class A common shares outstanding - Basic (1)
i468.7
i579.4
i511.0
i579.3
Dilutive
effect of:
Restricted stock units and awards
i3.4
i1.5
i4.0
i0.5
Convertible
preferred stock (2)
i—
i—
i65.3
i—
Weighted
average Class A common shares outstanding - Diluted (3)
i472.1
i580.9
i580.3
i579.8
Diluted
net income per Class A common share
$
i0.20
$
i0.09
$
i1.71
$
i0.69
(1)
There were iino/
common shares remaining to be issued for the 12 and 40 weeks ended December 5, 2020, compared to ii0.1/
million common shares remaining to be issued for the 12 and 40 weeks ended November 30, 2019, respectively.
(2) Reflects the number of shares of Convertible Preferred Stock issued, if converted into Common Stock for the period outstanding.
(3) There were i101.6 million potential common shares outstanding related to convertible
preferred stock that were antidilutive for the 12 weeks ended December 5, 2020 and ino potential common shares outstanding that were antidilutive for the 40 weeks ended December 5, 2020. There were iino/
potential common shares outstanding that were antidilutive for the 12 and 40 weeks ended November 30, 2019.
Item 2 - Management's Discussion and Analysis of Financial
Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as "may,""should,""expects,""plans,""anticipates,""could,""intends,""target,""projects,""contemplates,""believes,""estimates,""predicts,""potential," or "continue" or the negative of these terms
or other similar expressions. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. These risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include those related to the COVID-19 pandemic, about which there are still many unknowns, including the duration of the pandemic and the extent of its impact. The Company undertakes no obligation to update or revise any such statements as a result of new information, future events or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements
do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company,""we,""us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries.
NON-GAAP FINANCIAL MEASURES
We define EBITDA as generally accepted accounting principles ("GAAP") earnings (net loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as earnings (net loss) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not
consider in assessing our ongoing core performance. We define Adjusted Net Income as GAAP net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted Net Income Per Class A Common Share as Adjusted Net Income divided by the weighted average diluted Class A common shares outstanding, as adjusted to reflect all restricted stock units and awards outstanding at the end of the period. We define Adjusted Free Cash Flow as Adjusted EBITDA less capital expenditures. See "Results of Operations" for further discussion and a reconciliation of Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow.
EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow (collectively, the "Non-GAAP Measures")
are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing core operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow provide helpful information to analysts and investors
to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. Our presentation of
Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Non-GAAP Measures should not be considered as measures of discretionary
cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.
COVID-19
We continue to experience significant increases in demand in stores as people have adjusted to the new circumstances resulting from the COVID-19 pandemic. There also continues to be a substantial increase in customer demand and engagement with our eCommerce offerings as a result of the pandemic, including both home delivery and our Drive Up & Go curbside pickup. We have responded to this increased demand for our eCommerce offerings by hiring additional associates, retaining additional third-party service providers and expanding our Drive Up & Go offerings.
Responding
to the pandemic has also significantly increased our expenses. We continue to clean and disinfect all departments, restrooms, and other high-touch points of our stores often, including check stands and service counters, and hourly disinfecting of high-touch areas. This is in addition to our rigorous food safety and sanitation programs that were already in place. We have also provided additional wages and benefits to our associates with appreciation and bonus pay, as well as expanded sick pay.
Most of the states in which we operate have anti-price gouging statutes, which place limits on our ability to increase prices after an officially declared emergency. Certain state governors declared an emergency near the outset of the COVID-19 pandemic, thus triggering the application of anti-price gouging statutes. As the COVID-19 pandemic began, we implemented procedures to assure compliance with
anti-price gouging laws, including instruction and guidance to our retail operators on the price restrictions to which we needed to adhere, all of which remain in place.
We believe that some of the changes that have been implemented, in our stores and the country as a whole, will be permanent. However, the ultimate significance of the pandemic on our financial condition, results of operations, or cash flows will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the nature and effectiveness of governmental and public actions taken in response.
As of December 5, 2020, we operated 2,253 retail food and drug stores with 1,727 pharmacies, 400 associated fuel centers, 22 dedicated distribution centers and 20 manufacturing facilities. In addition to our retail footprint, we strive to differentiate through our best in class Own Brands and rapidly expanding eCommerce options, which primarily include home delivery sales and Drive Up & Go curbside pickup. The following table shows stores operating, opened and closed during the periods presented:
The following table and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 12 and 40 weeks ended December 5, 2020 ("third quarter of fiscal 2020" and "first 40 weeks of fiscal 2020") and 12 and 40 weeks ended November 30, 2019 ("third quarter of fiscal 2019" and "first
40 weeks of fiscal 2019").
Gain on property dispositions and impairment losses, net
(47.0)
(0.1)
(482.7)
(1.0)
Operating
income
1,792.3
3.3
1,110.5
2.3
Interest expense, net
425.1
0.8
557.5
1.2
Loss
on debt extinguishment
57.7
0.1
65.8
0.1
Other income, net
(27.5)
(0.1)
(21.9)
—
Income
before income taxes
1,337.0
2.5
509.1
1.0
Income tax expense
342.6
0.6
110.5
0.2
Net
income
$
994.4
1.9
%
$
398.6
0.8
%
Net Sales and Other Revenue
Net sales and other revenue increased 9.3% to $15,408.9 million for the third quarter of fiscal 2020 from $14,103.2 million for the third quarter of fiscal 2019. The increase in Net sales and other revenue was primarily driven by our 12.3% increase in identical sales,
partially offset by a reduction in sales related to the stores closed since the third quarter of fiscal 2019 and $265.4 million in lower fuel sales.
Net sales and other revenue increased 14.7% to $53,918.1 million for the first 40 weeks of fiscal 2020 from $47,018.3 million for the first 40 weeks of fiscal 2019. The increase in Net sales and other revenue was primarily driven by our 18.4% increase in identical sales, partially offset by a reduction in sales related to the stores closed since the third quarter of fiscal 2019 and $975.1 million in lower fuel sales.
Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer internet sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 12 and 40 weeks ended December 5, 2020 and the 12 and 40 weeks ended November 30, 2019, respectively, were:
The
increase in identical sales for the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 was a direct result of significant demand due to the COVID-19 pandemic, including 225% growth in our digital sales during the third quarter of fiscal 2020 as more customers shifted to online home delivery and Drive Up & Go.
Gross Profit
Gross profit represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.
Gross
profit margin increased to 29.3% during the third quarter of fiscal 2020 compared to 28.3% during the third quarter of fiscal 2019. Excluding the impact of fuel, gross profit margin increased 25 basis points compared to the third quarter of fiscal 2019. The increase in gross profit margin was driven by improvements in shrink expense and leveraging of our distribution, warehousing and supplies costs, partially offset by expenses related to our growth in digital sales and select investments in promotions and price. The increase was also partially offset by $19.1 million of costs related to the COVID-19 pandemic, including expanded sick pay, incremental labor for enhanced cleaning and health screening to support and protect our supply chain employees and other warehousing and inventory costs.
Third
quarter of fiscal 2020 vs. Third quarter of fiscal 2019
Basis point increase (decrease)
Shrink
55
Distribution, warehousing and supplies
7
Depreciation and rent expense
2
Advertising and sales and product mix
(20)
COVID-19 pandemic related costs
(13)
Other
(6)
Total
25
Gross
profit margin increased to 29.4% during the first 40 weeks of fiscal 2020 compared to 28.0% during the first 40 weeks of fiscal 2019. Excluding the impact of fuel, gross profit margin increased 65 basis points compared to the first 40 weeks of fiscal 2019. The increase in gross profit margin was driven by improvements in shrink expense and leveraging of our distribution, warehousing and supplies costs. Gross profit margin was also favorably impacted from leveraging of advertising costs and shifts in sales mix which was partially offset by expenses related to our growth in digital sales and select investments in promotions and price. The increase was also partially offset by $97.0 million of costs related to the COVID-19 pandemic, including employee appreciation pay, expanded sick pay, incremental labor for enhanced cleaning and health screening to support and protect our supply chain employees and other warehousing and
inventory costs.
First 40 weeks of fiscal 2020 vs. First 40 weeks of fiscal 2019
Basis point increase (decrease)
Shrink
67
Distribution, warehousing
and supplies
7
Advertising and sales and product mix
7
Depreciation and rent expense
3
COVID-19 pandemic related costs
(19)
Total
65
Selling and Administrative Expenses
Selling and
administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
Selling and administrative expenses increased to 28.0% of Net sales and other revenue during the third quarter of fiscal 2020 compared to 27.0% of Net sales and other revenue for the third quarter of fiscal 2019. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue increased 40 basis points during the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily driven by the $285.7 million charge related to the previously announced withdrawal from the UFCW National Fund, partially
offset by rent and occupancy costs, depreciation and amortization and employee wage and benefit costs, attributable to sales leverage driven by significantly higher identical sales. Selling and administrative expenses were also favorably impacted by lower third-party fees and services, partially driven by cost reduction initiatives. Employee wage and benefit costs included $117.0 million of COVID-19 pandemic related incremental labor, which includes $44.7 million in bonus pay to front-line associates and $72.3 million for enhanced cleaning and health screening and expanded sick pay to front-line associates. In addition, we also incurred $13.7 million in additional COVID-19 pandemic costs related to supplies and outside services, which included personal protective equipment for our stores and employees.
Third
quarter of fiscal 2020 vs. Third quarter of fiscal 2019
Basis point increase (decrease)
Rent and occupancy costs
(50)
Depreciation and amortization
(41)
Third-party fees and services
(21)
Employee wage and benefit costs
(12)
COVID-19 pandemic related costs, excluding incremental employee wages and benefits
9
Other
(1)
155
Total
40
(1) Includes the $285.7 million charge related to the UFCW National Fund withdrawal. See Note 6 - Employee benefit plans, included elsewhere in this document, for more information.
Selling and administrative expenses decreased to 26.2% of Net sales and other revenue during the first 40 weeks of fiscal 2020 compared to 26.7% of Net sales and other revenue for the first 40 weeks of fiscal 2019. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 120 basis points during the first 40 weeks of fiscal 2020 compared to the first 40 weeks of fiscal 2019. The decrease in Selling
and administrative expenses as a percentage of Net sales and other revenue was driven by employee wage and benefit costs, depreciation and amortization and rent and occupancy costs, attributable to sales leverage driven by significantly higher identical sales. The decrease was also attributable to lower third-party fees and services, partially driven by cost reduction initiatives. The decrease was partially offset by the $285.7 million charge related to the previously announced withdrawal from the UFCW National Fund. Employee wage and benefit costs included
$354.5
million of COVID-19 pandemic related employee appreciation and bonus pay, which includes expanded sick pay, to front-line associates and $275.0 million of incremental labor for enhanced cleaning and health screening. In addition, we also incurred $104.1 million in additional COVID-19 pandemic costs related to supplies and outside services, which included personal protective equipment for our stores and employees. We also contributed $53.0 million to hunger relief in our communities during the first 40 weeks of fiscal 2020.
First 40 weeks of fiscal 2020 vs. First 40 weeks of fiscal 2019
Basis point increase (decrease)
Employee wage and benefit
costs
(60)
Depreciation and amortization
(60)
Rent and occupancy costs
(60)
Third-party fees and services
(13)
COVID-19 pandemic related costs, excluding incremental employee wages and benefits
30
Other (1)
43
Total
(120)
(1)
Includes the $285.7 million charge related to the UFCW National Fund withdrawal. See Note 6 - Employee benefit plans, included elsewhere in this document, for more information.
Gain on Property Dispositions and Impairment Losses, Net
For the third quarter of fiscal 2020, net gain on property dispositions and impairment losses was $59.0 million, primarily driven by $62.9 million of gains from the sale of assets, partially offset by $3.9 million of asset impairments. For the third quarter of fiscal 2019, net gain on property dispositions and impairment losses was $18.7 million, primarily driven by $20.9 million of gains from the sale of assets, partially offset by $2.2 million of asset impairments.
For the first 40 weeks of fiscal
2020, net gain on property dispositions and impairment losses was $47.0 million, primarily driven by $73.6 million of gains from the sale of assets, partially offset by $26.6 million of asset impairments, primarily related to right-of-use assets. For the first 40 weeks of fiscal 2019, net gain on property dispositions and impairment losses was $482.7 million, primarily driven by $539.0 million of gains from the sale of assets including $463.6 million of gains related to sale leaseback transactions during the second quarter of fiscal 2019, partially offset by $56.3 million of asset impairments including an impairment loss of $38.6 million related to certain assets of our meal kit operations.
Interest Expense, Net
Interest expense, net was $115.9 million during the third quarter of fiscal 2020 compared to $154.8 million during the third quarter
of fiscal 2019. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the third quarter of fiscal 2020 was 5.5%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.3% during the third quarter of fiscal 2019.
Interest expense, net was $425.1 million during the first 40 weeks of fiscal 2020 compared to $557.5 million during the first 40 weeks of fiscal 2019. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during first 40 weeks of fiscal 2020 was 5.9%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.4% during the first 40 weeks of fiscal
2019.
Loss on debt extinguishment was $8.6 million during third quarter of fiscal 2020 and $57.7 million during the first 40 weeks of fiscal 2020, compared to no loss on debt extinguishment during the third quarter of fiscal 2019 and $65.8 million during the first 40 weeks of fiscal 2019. The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2020 primarily
consisted of a redemption premium payment and write-off of debt discounts associated with the 2024 Redemption and the September Partial 2025 Redemption. The loss on debt extinguishment during the first 40 weeks of fiscal 2019 primarily consisted of the write-off of debt discounts associated with the tender offer and various repurchases of notes.
Other Income, Net
For the third quarter of fiscal 2020, Other income, net was $19.2 million compared to $15.9 million for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Other income, net was $27.5 million compared to $21.9 million for the first 40 weeks of fiscal 2019. Other income, net during both the third quarter of fiscal 2020 and the first 40 weeks of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement
expense and income related to our equity investment, partially offset by recognized losses on interest rate swaps. Other income, net during both the third quarter of fiscal 2019 and the first 40 weeks of fiscal 2019 was primarily driven by non-service cost components of net pension and post-retirement expense and unrealized gains from non-operating investments.
Income Taxes
Income tax expense was $29.5 million, representing a 19.3% effective tax rate, for the third quarter of fiscal 2020. Income tax expense was $12.9 million, representing a 19.1% effective tax rate, for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Income tax expense was $342.6 million, representing a 25.6% effective tax rate. Income tax expense was $110.5 million, representing a 21.7% effective tax rate, for
the first 40 weeks of fiscal 2019. The increase in income tax expense for both the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 was primarily driven by the increase in income before income taxes. The effective income tax rate for the third quarter of fiscal 2020 was favorably impacted by discrete benefits related to income tax credits and equity-based compensation deductions. The effective income tax rate for the first 40 weeks of fiscal 2020 was favorably impacted by income tax credits and equity-based compensation, offset by certain nondeductible transaction-related costs. The effective income tax rate for both the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 was favorably impacted by income tax credits.
Adjusted EBITDA, Adjusted Net
Income and Adjusted Net Income Per Class A Common Share
For the third quarter of fiscal 2020, Adjusted EBITDA was $967.7 million, or 6.3% of Net sales and other revenue, compared to $634.4 million, or 4.5% of Net sales and other revenue, for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Adjusted EBITDA was $3,607.1 million, or 6.7% of Net sales and other revenue, compared to $2,078.8 million, or 4.4% of Net sales and other revenue for the first 40 weeks of fiscal 2019. The increase in Adjusted EBITDA for the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 primarily relates to the 12.3% and 18.4% increase in identical sales, respectively, and the improved sales leverage experienced in gross margin and selling and administrative expenses as a percent of sales.
The following tables reconcile Net income to Adjusted net income, and Net income per Class A common share to Adjusted net income per Class A common share (in millions, except per share data):
Amortization
of debt discount and deferred financing costs (c)
(4.9)
(25.1)
(16.1)
(68.9)
Interest expense, net
115.9
154.8
425.1
557.5
Amortization
of intangible assets resulting from acquisitions (b)
(12.9)
(65.3)
(43.5)
(227.0)
Depreciation and amortization (e)
362.9
384.3
1,171.7
1,281.9
Adjusted
EBITDA
$
967.7
$
634.4
$
3,607.1
$
2,078.8
(1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation.
(2) Related to conversion activities and related costs associated with integrating acquired businesses, primarily the Safeway acquisition. Also
includes expenses related to management fees paid in connection with acquisition and financing activities.
(3) Includes $44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020. Also includes $53 million of charitable contributions to our communities and hunger relief and $36.9 million in final reward payments to front-line associates at the end of the first quarter of fiscal 2020.
(4) Primarily includes costs related to store damage, inventory losses and community support as a result of the civil disruption during late May and early June in certain markets.
(5) Related to the previously announced withdrawal from the UFCW National Fund.
Lease
and lease-related costs for surplus and closed stores
8.8
4.5
38.3
16.5
Net realized and unrealized (gain) loss on non-operating investments
(3.5)
(10.0)
1.2
(2.5)
Certain
legal and regulatory accruals and settlements, net
—
0.1
—
(1.8)
Other (a)
2.1
3.0
13.4
12.2
Total
miscellaneous adjustments
$
8.6
$
4.6
$
56.0
$
37.7
(a) Primarily includes adjustments for unconsolidated equity investments and certain contract termination costs.
(7) Represents the conversion of convertible preferred stock to the fully outstanding as-converted
Class A common shares as of the end of each respective period, for periods in which the convertible preferred stock is antidilutive under GAAP.
(8) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.
(9) Reflects the per share impact of Non-GAAP adjustments for each period presented. See the reconciliation of Net income to Adjusted net income above for further details.
(10)Reflects the impact of Non-GAAP adjustments for each period presented. See the reconciliation of Net income to Adjusted net income above for further details.
Non-GAAP adjustment classifications within the Consolidated Statement of Operations:
Cash
and cash equivalents and restricted cash at end of period
$
1,886.7
$
416.6
Cash flows provided by operating activities
2,996.0
1,387.0
Cash flows used in investing activities
(944.3)
(25.4)
Cash flows
used in financing activities
(643.9)
(1,912.7)
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $2,996.0 million for the first 40 weeks of fiscal 2020 compared to $1,387.0 million for the first 40 weeks of fiscal 2019. The increase in cash flow from operations compared to the first 40 weeks of fiscal 2019 was due to improvements in operating performance and changes in working capital primarily related to accounts payable as our business adjusted for the significant increase in sales volume during the first 40 weeks of fiscal 2020, deferral of the employer-paid portion of social
security taxes and a decrease in cash paid for interest. These increases were partially offset by the $147.3 million payment to the UFCW National Fund, an increase in cash paid for income taxes, the $75.0 million payment to the UFCW & Employers Midwest Pension Fund pension settlement and additional contributions to our defined benefit pension plans and post-retirement benefit plans.
Net cash used in investing activities
was $944.3 million for the first 40 weeks of fiscal 2020 compared to $25.4 million for the first 40 weeks of fiscal 2019.
For the first 40 weeks of fiscal 2020, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $1,083.0 million, partially offset by proceeds from the sale of assets of $143.9 million. Payments for property and equipment included the opening of seven new stores, completion of 225 remodels and continued investment in our digital and eCommerce technology. For the full fiscal year of 2020, we expect capital expenditures to be in the range of $1.65 billion to $1.75 billion. For the first 40 weeks of fiscal 2019, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $1,083.7 million, offset by proceeds from the sale of assets of $1,061.0
million. Payments for property and equipment included the opening of 12 new stores, completion of 153 remodels and continued investment in our digital and eCommerce technology. Proceeds from the sale of assets primarily includes the sale and leaseback of 53 store properties and one distribution center for $931.3 million, net of closing costs, during the second quarter of fiscal 2019 and certain other property dispositions during the first 40 weeks of fiscal 2019.
Net Cash Used in Financing Activities
Net cash used in financing activities was $643.9 million during the third quarter of fiscal 2020compared to $1,912.7 million during the third quarter of fiscal 2019.
Net cash used in financing activities during the first 40 weeks of fiscal 2020 consisted primarily of the $1.5 billion issuance and subsequent $1.5 billion redemption of Senior Unsecured Notes (as further discussed below), the $2.0 billion borrowing and subsequent repayment of the ABL Facility, the repurchase of outstanding Class A common stock, the issuance of the Convertible Preferred Stock and dividends paid on our Class A common stock and Convertible Preferred Stock.
Debt Management
On August 31, 2020, we completed the issuance of $750.0 million in aggregate principal amount of 2026 Notes and $750.0 million in aggregate principal amount of 2029 Notes. Proceeds
from the New Notes, together with approximately $60 million cash on hand, were used to fund the 2024 Redemption. In connection with the 2024 Redemption, we paid an associated redemption premium of $41.4 million and recorded a $49.1 million loss on debt extinguishment, 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 New Notes were used to fund the September Partial 2025 Redemption. In connection with the September Partial 2025 Redemption, we paid an associated redemption premium of $7.2 million. We 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, subsequent to the end of the third quarter of fiscal 2020, we completed the issuance of $600.0 million in aggregate principal amount of Additional 2029 Notes. The Additional 2029 Notes were issued under the same indenture as the 2029 Notes issued by us on August 31, 2020. Interest on the Additional 2029 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The Additional 2029 Notes have not been and will not be registered with the SEC. The Additional 2029 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the our subsidiaries
that are not issuers under the indenture governing such Additional 2029 Notes. On January 4, 2021, proceeds from the
Additional 2029 Notes, together with approximately $230 million of cash on hand, were used to fund the January Partial 2025 Redemption.
On March 12, 2020,
we provided notice to the lenders of our ABL Facility to borrow $2.0 billion as a precautionary measure in order to increase our cash position and preserve flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. We repaid the $2.0 billion in full on June 19, 2020 and as of December 5, 2020, we had no borrowings outstanding under our $4.0 billion ABL Facility and total availability of approximately $3.6 billion (net of letter of credit usage).
Liquidity Needs
We estimate our liquidity needs over the next 12 months to be in the range of $4.75 billion to $5.25 billion, which includes anticipated requirements for working capital, capital expenditures, including pending
acquisitions, pension obligations, interest payments and scheduled principal payments of debt, dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to respond effectively to competitive conditions. In addition, we may enter into refinancing and sale leaseback transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility.
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 addition, the holders of Convertible Preferred Stock will participate in cash dividends that we pay on our Common Stock to the extent that such cash dividends exceed $206.25 million per fiscal year. On September 15, 2020 and December 15, 2020, we declared a quarterly cash dividend of $36.4 million and $29.5 million, respectively, to holders of the Convertible Preferred Stock, which was paid on September 30, 2020 and December 30, 2020, respectively.
In connection with the IPO, we established a dividend policy pursuant to which we intend to pay a quarterly dividend
on our Common Stock in an annual amount equal to $0.400 per common share. On October 14, 2020, we announced the first quarterly dividend payment of $0.100 per common share which was paid on November 10, 2020 to stockholders of record as of the close of business on October 26, 2020. On January 12, 2021, we announced the next quarterly dividend payment of $0.100 per common share to be paid on February 10, 2021 to stockholders of record as of the close of business on January 26, 2021.
Common Stock Repurchase Program
On
October 14, 2020, our Board of Directors authorized a new share repurchase program that allows us to repurchase up to $300 million of our Common Stock. Purchases under the Common Stock repurchase program are made opportunistically at management's discretion. During the third quarter of fiscal 2020, as part of the share repurchase program, we repurchased 6,797,962 shares of our Class A common stock for an aggregate purchase price of $102.7 million.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position,
and we apply those accounting policies in a fair and consistent manner. See the Critical Accounting Policies section included in our Prospectus dated June
25, 2020 filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, relating to our Registration Statement on Form S-1 (File No. 333-236956) for a discussion of our significant accounting policies.
RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 1 - Basis of presentation and summary of significant accounting policies of our unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.
Item
3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our exposure to market risk from the information provided in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020.
Item 4 - Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Quarterly
Report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter ended December 5, 2020 that have materially affected, or are reasonably likely
to materially affect, our internal control over financial reporting.
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 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 in this Form 10-Q 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. See the matters under the caption Legal Proceedings in Note 7 - Commitments and contingencies and off balance sheet arrangements in the unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.
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 can be reasonably estimated and an adverse outcome is probable. 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.
(1)
On September 14, 2020, the Company repurchased 6,837,970 shares of its outstanding common stock from a stockholder at a price of $12.00 per share.
(2) On October 14, 2020, the Company's Board of Directors authorized a new share repurchase program that allows the Company to repurchase up to $300.0 million of the Company's common stock. Purchases under the common stock repurchase program are made opportunistically at management's discretion.
EXHIBIT 101.INS - Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
