UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 1)
For the fiscal year ended February 29, 2020
OR
For the transition period from _____ to _____
Commission File Number: 001-39350
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
(Address of principal executive offices and zip code)
(208 ) 395-6200
(Registrant's telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered under Section 12(b) of the Exchange Act:
Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
Securities registered under Section 12(g) of the Exchange Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐ No ☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐ No ☒ (Note: The registrant was a voluntary filer and not subject to the filing requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934 prior to June 26, 2020. Although not subject to these filing requirements, the registrant has filed all reports that would have been required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months had the registrant been subject to such requirements.)
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ 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 | ☐ | ||
☒ | Smaller reporting company | ||||
Emerging growth company | |||||
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 has filed a report on and attestation to its management's assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
As of May 13, 2020, the registrant had 580,638,489 shares of common stock, par value $0.01 per share, outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
None
Explanatory Note | ||||
Albertsons Companies, Inc. (the "Company") is filing this Amendment No. 1 to its Annual Report on Form 10-K (this "Amendment") for the fiscal year ended February 29, 2020, which was originally filed with the Securities and Exchange Commission ("SEC") on May 13, 2020 (the "Original Filing"), in order to reflect where appropriate, a 2.072-for-1 forward stock split of the Company's common stock which was approved and effected on June 18, 2020 (the "Stock Split"). This Amendment makes certain updates and revisions to the cover page, Part II, "Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities" and "Item 8. Financial Statements and Supplementary Data" and Part III, "Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters" and "Item 13. Certain Relationships and Related Transactions, and Director Independence" of the Original Filing to give effect to the Stock Split by retroactively adjusting all information related to the Company's common stock and per common share amounts for all periods presented. | ||||
In addition, as required by Rule 12b-15 under the Securities Act of 1934, as amended, new certifications by the Company's principal executive officer and principal financial officer are filed as exhibits to this Amendment under Part IV, "Item 15. Exhibits, Financial Statement Schedules" hereof. | ||||
Except for the foregoing amended information or where otherwise noted, this Amendment does not reflect events that occurred after the Original Filing or modify or update those disclosures affected by subsequent events. | ||||
This Amendment should be read in conjunction with the Original Filing. | ||||
Albertsons Companies, Inc. and Subsidiaries
Page | |||
As used in this Form 10-K, unless the context otherwise requires, references to "Albertsons," the "Company," "ACI," "we," "us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries. Our last three fiscal years consisted of the 53 weeks ended February 29, 2020 ("fiscal 2019"), the 52 weeks ended February 23, 2019 ("fiscal 2018") and the 52 weeks ended February 24, 2018 ("fiscal 2017"). Our next four fiscal years consist of the 52 weeks ending February 27, 2021 ("fiscal 2020"), February 26, 2022 ("fiscal 2021"), February 25, 2023 ("fiscal 2022") and February 24, 2024 ("fiscal 2023").
PART II
Item 5 - Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchase of Equity Securities
As of the date of this report, there is no publicly-traded market for the Company's common stock. All of the shares of the Company's common stock are held by Albertsons Investor Holdings LLC ("Albertsons Investor") and KIM ACI, LLC ("KIM ACI").
On April 23, 2020, the Company issued 1,184,163 shares of common stock to Albertsons Investor and 128,696 shares of common stock to KIM ACI related to the settlement of Phantom Units upon vesting.
Distributions
On June 30, 2017, the Company's predecessor, Albertsons Companies, LLC, made a cash distribution of $250.0 million to its equityholders. ACI's board of directors may change or eliminate the payment of future dividends to the Company's common stockholders at its discretion, without notice to the stockholders. Any future determination relating to ACI's dividend policy will be made at the sole discretion of ACI's board of directors and will depend on a number of factors, including general and economic conditions, industry standards, ACI's financial condition and operating results, ACI's available cash and current and anticipated cash needs, restrictions under the documentation governing certain of ACI's indebtedness, capital requirements, regulations, contractual, legal, tax and regulatory restrictions and implications on the payment of dividends by ACI to its stockholders and by the Company's subsidiaries to ACI, and such other factors as ACI's board of directors may deem relevant.
5
Item 8 - Financial Statements and Supplementary Data
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of Albertsons Companies, Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of Albertsons Companies, Inc. and its subsidiaries (the "Company") as of February 29, 2020 and February 23, 2019, the related consolidated statements of operations and comprehensive income, cash flows, and stockholders'/member equity for the 53 weeks ended February 29, 2020, the 52 weeks ended February 23, 2019 and the 52 weeks ended February 24, 2018 and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of February 29, 2020 and February 23, 2019, and the results of its operations and its cash flows for each of the three years in the period ended February 29, 2020, in conformity with accounting principles generally accepted in the United States of America.
Change in Accounting Principle
As discussed in Note 1 to the financial statements, effective February 24, 2019, the Company adopted FASB ASC Topic 842, Leases, using the modified retrospective transition method. The impact to the financial statements as the result of this adoption was material.
Basis for Opinion
These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Boise, Idaho
May 5, 2020 (June 18, 2020 as to the effect of the stock split described in Note 17)
We have served as the Company's auditor since 2006.
6
Albertsons Companies, Inc. and Subsidiaries
Consolidated Balance Sheets
(in millions, except share data)
February 29, 2020 | February 23, 2019 | |||||||
ASSETS | ||||||||
Current assets | ||||||||
Cash and cash equivalents | $ | $ | ||||||
Receivables, net | ||||||||
Inventories, net | ||||||||
Prepaid assets | ||||||||
Other current assets | ||||||||
Total current assets | ||||||||
Property and equipment, net | ||||||||
Operating lease right-of-use assets | — | |||||||
Intangible assets, net | ||||||||
Goodwill | ||||||||
Other assets | ||||||||
TOTAL ASSETS | $ | $ | ||||||
LIABILITIES | ||||||||
Current liabilities | ||||||||
Accounts payable | $ | $ | ||||||
Accrued salaries and wages | ||||||||
Current maturities of long-term debt and finance lease obligations | ||||||||
Current operating lease obligations | — | |||||||
Current portion of self-insurance liability | ||||||||
Taxes other than income taxes | ||||||||
Other current liabilities | ||||||||
Total current liabilities | ||||||||
Long-term debt and finance lease obligations | ||||||||
Long-term operating lease obligations | — | |||||||
Deferred income taxes | ||||||||
Long-term self-insurance liability | ||||||||
Other long-term liabilities | ||||||||
Commitments and contingencies | ||||||||
STOCKHOLDERS' EQUITY | ||||||||
Preferred stock, $0.01 par value; 30,000,000 shares authorized, no shares issued and outstanding as of February 29, 2020 and February 23, 2019, respectively | ||||||||
Common stock, $0.01 par value; 1,000,000,000 shares authorized, 579,325,630 and 575,771,525 shares issued and outstanding as of February 29, 2020 and February 23, 2019, respectively | ||||||||
Additional paid-in capital | ||||||||
Treasury stock, at cost, 3,671,621 shares held as of February 29, 2020 and February 23, 2019, respectively | ( | ) | ( | ) | ||||
Accumulated other comprehensive (loss) income | ( | ) | ||||||
Retained earnings (accumulated deficit) | ( | ) | ||||||
Total stockholders' equity | ||||||||
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
7
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Operations and Comprehensive Income
(in millions, except per share data)
53 weeks ended February 29, 2020 | 52 weeks ended February 23, 2019 | 52 weeks ended February 24, 2018 | |||||||||
Net sales and other revenue | $ | $ | $ | ||||||||
Cost of sales | |||||||||||
Gross profit | |||||||||||
Selling and administrative expenses | |||||||||||
(Gain) loss on property dispositions and impairment losses, net | ( | ) | ( | ) | |||||||
Goodwill impairment | |||||||||||
Operating income (loss) | ( | ) | |||||||||
Interest expense, net | |||||||||||
Loss (gain) on debt extinguishment | ( | ) | |||||||||
Other expense (income), net | ( | ) | ( | ) | |||||||
Income (loss) before income taxes | ( | ) | |||||||||
Income tax expense (benefit) | ( | ) | ( | ) | |||||||
Net income | $ | $ | $ | ||||||||
Other comprehensive income (loss), net of tax: | |||||||||||
(Loss) gain on interest rate swaps | ( | ) | ( | ) | |||||||
Recognition of pension (loss) gain | ( | ) | ( | ) | |||||||
Foreign currency translation adjustment | ( | ) | |||||||||
Other | ( | ) | ( | ) | |||||||
Other comprehensive (loss) income | $ | ( | ) | $ | ( | ) | $ | ||||
Comprehensive income | $ | $ | $ | ||||||||
Net income per common share: | |||||||||||
Basic net income per common share | $ | $ | $ | ||||||||
Diluted net income per common share | |||||||||||
Weighted average common shares outstanding: | |||||||||||
Basic | |||||||||||
Diluted | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
8
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
53 weeks ended February 29, 2020 | 52 weeks ended February 23, 2019 | 52 weeks ended February 24, 2018 | |||||||||
Cash flows from operating activities: | |||||||||||
Net income | $ | $ | $ | ||||||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
(Gain) loss on property dispositions and impairment losses, net | ( | ) | ( | ) | |||||||
Goodwill impairment | |||||||||||
Depreciation and amortization | |||||||||||
Operating lease right-of-use assets amortization | — | — | |||||||||
LIFO expense | |||||||||||
Deferred income tax | ( | ) | ( | ) | ( | ) | |||||
Pension and post-retirement benefits (income) expense | ( | ) | ( | ) | |||||||
Contributions to pension and post-retirement benefit plans | ( | ) | ( | ) | ( | ) | |||||
Loss (gain) on interest rate swaps and commodity hedges, net | ( | ) | ( | ) | |||||||
Amortization and write-off of deferred financing costs | |||||||||||
Loss (gain) on debt extinguishment | ( | ) | |||||||||
Equity-based compensation expense | |||||||||||
Other operating activities | ( | ) | |||||||||
Changes in operating assets and liabilities, net of effects of acquisition of businesses: | |||||||||||
Receivables, net | |||||||||||
Inventories, net | ( | ) | |||||||||
Accounts payable, accrued salaries and wages and other accrued liabilities | ( | ) | |||||||||
Operating lease liabilities | ( | ) | — | — | |||||||
Self-insurance assets and liabilities | ( | ) | ( | ) | ( | ) | |||||
Other operating assets and liabilities | ( | ) | ( | ) | |||||||
Net cash provided by operating activities | |||||||||||
Cash flows from investing activities: | |||||||||||
Business acquisitions, net of cash acquired | ( | ) | |||||||||
Payments for property, equipment and intangibles, including payments for lease buyouts | ( | ) | ( | ) | ( | ) | |||||
Proceeds from sale of assets | |||||||||||
Proceeds from sale of Casa Ley | |||||||||||
Other investing activities | ( | ) | ( | ) | |||||||
Net cash used in investing activities | ( | ) | ( | ) | ( | ) | |||||
9
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Cash Flows
(in millions)
53 weeks ended February 29, 2020 | 52 weeks ended February 23, 2019 | 52 weeks ended February 24, 2018 | |||||||||
Cash flows from financing activities: | |||||||||||
Proceeds from issuance of long-term debt | $ | $ | $ | ||||||||
Payments on long-term borrowings | ( | ) | ( | ) | ( | ) | |||||
Payments of obligations under finance leases | ( | ) | ( | ) | ( | ) | |||||
Payments for debt financing costs | ( | ) | ( | ) | ( | ) | |||||
Payment of Casa Ley contingent value right | ( | ) | |||||||||
Employee tax withholding on vesting of phantom units | ( | ) | ( | ) | ( | ) | |||||
Member distributions | ( | ) | |||||||||
Purchase of treasury stock, at cost | ( | ) | |||||||||
Proceeds from financing leases | |||||||||||
Other financing activities | ( | ) | ( | ) | ( | ) | |||||
Net cash used in financing activities | ( | ) | ( | ) | ( | ) | |||||
Net (decrease) increase in cash and cash equivalents and restricted cash | ( | ) | ( | ) | |||||||
Cash and cash equivalents and restricted cash at beginning of period | |||||||||||
Cash and cash equivalents and restricted cash at end of period | $ | $ | $ | ||||||||
Reconciliation of capital investments: | |||||||||||
Payments for property and equipment, including payments for lease buyouts | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Payments for lease buyouts | |||||||||||
Total payments for capital investments, excluding lease buyouts | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||
Supplemental cash flow information: | |||||||||||
Non-cash investing and financing activities were as follows: | |||||||||||
Additions of finance lease obligations, excluding business acquisitions | $ | $ | $ | ||||||||
Purchases of property and equipment included in accounts payable | |||||||||||
Interest and income taxes paid: | |||||||||||
Interest paid, net of amount capitalized | |||||||||||
Income taxes paid | |||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
10
Albertsons Companies, Inc. and Subsidiaries
Consolidated Statements of Stockholders' / Member Equity
(in millions, except share data)
Albertsons Companies, LLC | Albertsons Companies, Inc. | ||||||||||||||||||||||||||||||||||||||
Member investment | Accumulated other comprehensive income (loss) | (Accumulated deficit) / Retained earnings | Common Stock | Additional paid in capital | Treasury Stock | Accumulated other comprehensive (loss) income | Retained earnings (accumulated deficit) | Total stockholders' / member equity | |||||||||||||||||||||||||||||||
Shares | Amount | ||||||||||||||||||||||||||||||||||||||
Balance as of February 25, 2017 | $ | $ | ( | ) | $ | ( | ) | — | $ | — | $ | — | $ | — | $ | — | $ | — | $ | ||||||||||||||||||||
Equity-based compensation prior to Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Employee tax withholding on vesting of phantom units prior to Reorganization Transactions | ( | ) | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Member distribution | ( | ) | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Other member activity | ( | ) | — | — | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Net loss prior to Reorganization Transactions | — | — | ( | ) | — | — | — | — | — | — | ( | ) | |||||||||||||||||||||||||||
Other comprehensive income, net of tax prior to Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Reorganization Transactions | ( | ) | ( | ) | — | ( | ) | — | |||||||||||||||||||||||||||||||
Equity-based compensation after Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Employee tax withholding on vesting of phantom units after Reorganization Transactions | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||||
Net income after Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other comprehensive income, net of tax after Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Balance as of February 24, 2018 | — | — | — | ( | ) | ||||||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Employee tax withholding on vesting of phantom units | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||||
Treasury stock purchases, at cost | — | — | — | ( | ) | — | — | ( | ) | — | — | ( | ) | ||||||||||||||||||||||||||
Reorganization Transactions | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other activity | — | — | — | — | — | ( | ) | — | — | ||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||
Balance as of February 23, 2019 | — | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||||||||
Issuance of common stock to Company's parents | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||
Equity-based compensation | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Employee tax withholding on vesting of phantom units | — | — | — | — | — | ( | ) | — | — | — | ( | ) | |||||||||||||||||||||||||||
Adoption of new accounting standards, net of tax | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||
Net income | — | — | — | — | — | — | — | — | |||||||||||||||||||||||||||||||
Other comprehensive loss, net of tax | — | — | — | — | — | — | — | ( | ) | — | ( | ) | |||||||||||||||||||||||||||
Other activity | — | — | — | — | — | ( | ) | — | — | ( | ) | ( | ) | ||||||||||||||||||||||||||
Balance as of February 29, 2020 | $ | — | $ | — | $ | — | $ | $ | $ | ( | ) | $ | ( | ) | $ | $ | |||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
11
Albertsons Companies, Inc. and Subsidiaries
Notes to Consolidated Financial Statements
NOTE 1 - DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Description of Business
Albertsons Companies, Inc. and its subsidiaries (the "Company" or "ACI") is a food and drug retailer that, as of February 29, 2020, operated 2,252 retail stores together with 402 associated fuel centers, 23 dedicated distribution centers, 20 manufacturing facilities and various online platforms. The Company's retail food businesses and in-store pharmacies operate throughout the United States under the banners Albertsons, Safeway, Vons, Pavilions, Randalls, Tom Thumb, Carrs, Jewel-Osco, Acme, Shaw's, Star Market, United Supermarkets, Market Street and Haggen. The Company has no separate assets or liabilities other than its investments in its subsidiaries, and all of its business operations are conducted through its operating subsidiaries.
Basis of Presentation and Reorganization Transactions
The Company's Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP"). Intercompany transactions and accounts have been eliminated in consolidation for all periods presented. The Company's investments in unconsolidated affiliates are recorded using the equity method.
Prior to December 3, 2017, ACI had no material assets or operations. On December 3, 2017, Albertsons Companies, LLC ("ACL") and its parent, AB Acquisition LLC, a Delaware limited liability company ("AB Acquisition"), completed a reorganization of its legal entity structure whereby the existing equityholders of AB Acquisition each contributed their equity interests in AB Acquisition to Albertsons Investor Holdings LLC ("Albertsons Investor") and KIM ACI, LLC ("KIM ACI"). In exchange, equityholders received a proportionate share of units in Albertsons Investor and KIM ACI, respectively. Albertsons Investor and KIM ACI then contributed all of the AB Acquisition equity interests they received to ACI in exchange for common stock issued by ACI. As a result, Albertsons Investor and KIM ACI became the parents of ACI, owning all of its outstanding common stock, with AB Acquisition and its subsidiary, ACL, becoming wholly-owned subsidiaries of ACI. On February 25, 2018, ACL merged with and into ACI, with ACI as the surviving corporation (such transactions, collectively, the "Reorganization Transactions"). Prior to February 25, 2018, substantially all of the assets and operations of ACI were those of its subsidiary, ACL. The Reorganization Transactions were accounted for as a transaction between entities under common control and, accordingly, there was no change in the basis of the underlying assets and liabilities. The Consolidated Financial Statements are reflective of the changes that occurred as a result of the Reorganization Transactions. Prior to February 25, 2018, the Consolidated Financial Statements of ACI reflect the net assets and operations of ACL.
Prior Period Reclassifications
Certain prior period amounts have been reclassified to conform to the current period presentation, specifically the reclassification of gains and losses from property dispositions and impairment losses from Selling and administrative expenses to (Gain) loss on property dispositions and impairment losses, net on the Consolidated Statements of Operations and Comprehensive Income.
Significant Accounting Policies
Fiscal year: The Company's fiscal year ends on the last Saturday in February. Unless the context otherwise indicates, reference to a fiscal year of the Company refers to the calendar year in which such fiscal year commences. The Company's first quarter consists of 16 weeks, the second, third and fourth quarters generally each consist of 12 weeks, and the fiscal year generally consists of 52 weeks. For the fiscal year ended February 29, 2020, the fourth quarter consisted of 13 weeks, and the fiscal year consisted of 53 weeks. For each of the prior years presented, the fiscal year consisted of 52 weeks.
12
Use of estimates: The preparation of the Company's Consolidated Financial Statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the reporting periods presented. Certain estimates require difficult, subjective or complex judgments about matters that are inherently uncertain. Actual results could differ from those estimates.
Receivables, net: Receivables consist primarily of trade accounts receivable, pharmacy accounts receivable and vendor receivables. Management makes estimates of the uncollectibility of its accounts receivable. In determining the adequacy of the allowances for doubtful accounts, management analyzes the value of collateral, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments, estimations and assumptions based on the information considered and could result in a further adjustment of receivables. The allowance for doubtful accounts and bad debt expense were not material for any of the periods presented.
Inventories, net: Substantially all of the Company's inventories consist of finished goods valued at the lower of cost or market and net of vendor allowances.
As of February 29, 2020 and February 23, 2019, approximately 85.6 % and 85.9 %, respectively, of the Company's inventories were valued under the last-in, first-out ("LIFO") method. The Company primarily uses the retail inventory or the item-cost method to determine inventory cost before application of any LIFO adjustment. Under the retail inventory method, inventory cost is determined, before the application of any LIFO adjustment, by applying a cost-to-retail ratio to various categories of similar items to the retail value of those items. Under the item-cost method, the most recent purchase cost is used to determine the cost of inventory before the application of any LIFO adjustment. Replacement or current cost was higher than the carrying amount of inventories valued using LIFO by $143.5 million and $125.1 million as of February 29, 2020 and February 23, 2019, respectively. During fiscal 2019, fiscal 2018 and fiscal 2017, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2019, fiscal 2018 and fiscal 2017 purchases. As a result, cost of sales decreased by $12.9 million, $18.1 million and $16.7 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Cost for the remaining inventories, which represents perishable and fuel inventories, was determined using the most recent purchase cost, which approximates the first-in, first-out ("FIFO") method. Perishables are counted every four weeks and are carried at the last purchased cost which approximates FIFO cost. Fuel inventories are carried at the last purchased cost, which approximates FIFO cost. The Company records inventory shortages based on actual physical counts at its facilities and also provides allowances for inventory shortages for the period between the last physical count and the balance sheet date.
13
Property and equipment, net: Property and equipment is recorded at cost or fair value for assets acquired as part of a business combination, and depreciation is calculated on the straight-line method over the estimated useful lives of the assets. Estimated useful lives are generally as follows: buildings - seven to 40 years; leasehold improvements - the shorter of the remaining lease term or ten to 20 years; fixtures and equipment - three to 20 years; and specialized supply chain equipment - six to 25 years.
Property and equipment under finance leases are recorded at the lower of the present value of the future minimum lease payments or the fair value of the asset and are amortized on the straight-line method over the lesser of the lease term or the estimated useful life. Interest capitalized on property under construction was immaterial for all periods presented.
Leases: The Company leases certain retail stores, distribution centers, office facilities and equipment from third parties. The Company determines whether a contract is or contains a lease at contract inception. Operating and finance lease assets and liabilities are recognized at the lease commencement date. Operating leases are included in operating lease right-of-use ("ROU") assets, current operating lease obligations and long-term operating lease obligations on the Consolidated Balance Sheets. Finance leases are included in Property and equipment, net, current maturities of long-term debt and finance lease obligations and long-term debt and finance lease obligations on the Consolidated Balance Sheets. Operating lease assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are based on the present value of remaining lease payments over the lease term. As the rate implicit in the Company's leases is not readily determinable, the Company's applicable incremental borrowing rate, which is estimated to approximate the interest rate on a collateralized basis with similar terms, is used in calculating the present value of the sum of the lease payments. Operating lease assets are based on the lease liability, adjusted for any prepayments, lease incentives and initial direct costs incurred. The typical real estate lease period is 15 to 20 years with renewal options for varying terms and, to a limited extent, options to purchase. The Company includes renewal options that are reasonably certain to be exercised as part of the lease term.
The Company has lease agreements with non-lease components that relate to the lease components. Certain leases contain percent rent based on sales, escalation clauses or payment of executory costs such as property taxes, utilities, insurance and maintenance. Non-lease components primarily relate to common area maintenance. Non-lease components and the lease components to which they relate are accounted for together as a single lease component for all asset classes. The Company recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether lease payments are fixed or variable.
Impairment of long-lived assets: The Company regularly reviews its individual stores' operating performance, together with current market conditions, for indicators of impairment. When events or changes in circumstances indicate that the carrying value of the individual store's assets may not be recoverable, its future undiscounted cash flows are compared to the carrying value. If the carrying value of store assets to be held and used is greater than the future undiscounted cash flows, an impairment loss is recognized to record the assets at fair value. For assets held for sale, the Company recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the fair value. Fair values are based on discounted cash flows or current market rates. These estimates of fair value can be significantly impacted by factors such as changes in the current economic environment and real estate market conditions. Long-lived asset impairments are recorded as a component of (Gain) loss on property dispositions and impairment losses, net.
Intangible assets, net: Intangible assets with finite lives consist primarily of trade names, naming rights, customer prescription files and internally developed software. Intangible assets with finite lives are amortized on a straight-line basis over an estimated economic life ranging from three to 40 years. The Company reviews finite-lived intangible assets for impairment in accordance with its policy for long-lived assets. Intangible assets with indefinite useful lives, which are not amortized, consist of restricted covenants and liquor licenses. The Company reviews intangible assets with indefinite useful lives and tests for impairment annually on the first day of the fourth quarter and also if events
14
or changes in circumstances indicate the occurrence of a triggering event. The review consists of comparing the estimated fair value of the cash flows generated by the asset to the carrying value of the asset.
Business combination measurements: In accordance with applicable accounting standards, the Company estimates the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.
The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.
Goodwill: Goodwill represents the difference between the purchase price and the fair value of assets and liabilities acquired in a business combination. Goodwill is not amortized as the Company reviews goodwill for impairment annually on the first day of its fourth quarter and also if events or changes in circumstances indicate the occurrence of a triggering event. The Company reviews goodwill for impairment by initially considering qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, including goodwill, as a basis for determining whether it is necessary to perform a quantitative analysis. If it is determined that it is more likely than not that the fair value of reporting unit is less than its carrying amount, a quantitative analysis is performed to identify goodwill impairment. If it is determined that it is not more likely than not that the fair value of the reporting unit is less than its carrying amount, it is unnecessary to perform a quantitative analysis. The Company may elect to bypass the qualitative assessment and proceed directly to performing a quantitative analysis.
During the second quarter of fiscal 2017, there was a sustained decline in the market multiples of publicly traded peer companies. In addition, during the second quarter of fiscal 2017, the Company revised its short-term operating plan. As a result, the Company determined that an interim review of its recoverability of goodwill was necessary. Consequently, during the second quarter of fiscal 2017, the Company recorded a goodwill impairment loss of $142.3 million, substantially all within the Acme reporting unit relating to the November 2015 acquisition of stores from The Great Atlantic and Pacific Tea Company, Inc., due to changes in the estimate of its long-term future financial performance to reflect lower expectations for growth in revenue and earnings than previously estimated. The goodwill impairment loss was based on a quantitative analysis using a combination of a discounted cash flow model (income approach) and a guideline public company comparative analysis (market approach).
Business combination measurements: In accordance with applicable accounting standards, the Company estimates the fair value of acquired assets and assumed liabilities as of the acquisition date of business combinations. These fair value adjustments are input into the calculation of goodwill related to the excess of the purchase price over the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in the acquisition.
The fair value of assets acquired and liabilities assumed are determined using market, income and cost approaches from the perspective of a market participant. The fair value measurements can be based on significant inputs that are not readily observable in the market. The market approach indicates value for a subject asset based on available market pricing for comparable assets. The market approach used includes prices and other relevant information generated by
15
market transactions involving comparable assets, as well as pricing guides and other sources. The income approach indicates value for a subject asset based on the present value of cash flows projected to be generated by the asset. Projected cash flows are discounted at a required market rate of return that reflects the relative risk of achieving the cash flows and the time value of money. The cost approach, which estimates value by determining the current cost of replacing an asset with another of equivalent economic utility, was used for certain assets for which the market and income approaches could not be applied due to the nature of the asset. The cost to replace a given asset reflects the estimated reproduction or replacement cost for the asset, adjusted for obsolescence, whether physical, functional or economic.
Investment in unconsolidated affiliates: The Company records equity in earnings from unconsolidated affiliates in Other income. Income from unconsolidated affiliates, excluding losses related to the disposal of the Company's investment in Casa Ley, S.A. de C.V. ("Casa Ley"), was immaterial in fiscal 2019, fiscal 2018 and fiscal 2017.
El Rancho: On November 16, 2017, the Company acquired an equity interest in Mexico Foods Parent LLC and La Fabrica Parent LLC ("El Rancho"), a Texas-based specialty grocer, for $100.0 million purchase consideration, consisting of $70.0 million in cash and $30.0 million of equity in the Company. The investment represents a 45 % ownership interest in El Rancho which the Company is accounting for under the equity method. The Company has the option to acquire the remaining 55 % of El Rancho at any time until six months after the delivery of El Rancho's financial results for the fiscal year ended December 31, 2021. If the Company elects to exercise the option to acquire the remaining equity of El Rancho, the price to be paid will be calculated using a predetermined market-based formula.
Casa Ley: During the fourth quarter of fiscal 2017, the Company sold its equity method investment in Casa Ley to Tenedora CL del Noroeste, S.A. de C.V. for ₱6.5 billion Mexican pesos (approximately $348.4 million in U.S. dollars). In connection with the sale, the Company recorded a loss, net of $25.0 million in the third quarter of fiscal 2017, which is included in Other income, driven by the change in the fair value of the assets held for sale and the change in fair value of the related Casa Ley contingent value rights ("CVRs"). Net proceeds from the sale were used to distribute approximately $222 million in cash (or approximately $0.934 in cash per Casa Ley CVR) pursuant to the terms of the Casa Ley CVR agreement.
Derivatives: The Company entered into several pay fixed, receive variable interest rate swap contracts ("Swaps") to manage its exposure to changes in interest rates. Swaps are recognized in the Consolidated Balance Sheets at fair value. If a Swap is recorded using hedge accounting, changes in the fair value of Swaps designated as cash flow hedges are recorded in accumulated other comprehensive (loss) income until the hedged item is recognized in earnings. Changes in fair value for Swaps that do not meet the criteria for hedge accounting, or for which the Company has not elected hedge accounting are recorded in current period earnings. The Company assesses, both at the inception of the hedge and on an ongoing basis, whether derivatives used as hedging instruments are highly effective in offsetting the changes in the fair value or cash flow of the hedged items. If it is determined that a derivative is not highly effective as a hedge or ceases to be highly effective, the Company discontinues hedge accounting prospectively.
The Company has also entered into contracts to purchase electricity and natural gas at fixed prices for a portion of its energy needs. The Company expects to take delivery of the electricity and natural gas in the normal course of business. Contracts that qualify for the normal purchase exception under derivatives and hedging accounting guidance are not recorded at fair value. Energy purchased under these contracts is expensed as delivered. The Company also manages its exposure to changes in diesel prices utilized in the Company's distribution process through the use of short-term
16
heating oil derivative contracts. These contracts are economic hedges of price risk and are not designated or accounted for as hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in current period earnings.
Self-Insurance liabilities: The Company is primarily self-insured for workers' compensation, property, automobile and general liability. The self-insurance liability is undiscounted and determined actuarially, based on claims filed and an estimate of claims incurred but not yet reported. The Company has established stop-loss amounts that limit the Company's further exposure after a claim reaches the designated stop-loss threshold. Stop-loss amounts for claims incurred for the years presented range from $0.5 million to $5.0 million per claim, depending upon the type of insurance coverage and the year the claim was incurred. In determining its self-insurance liabilities, the Company performs a continuing review of its overall position and reserving techniques. Since recorded amounts are based on estimates, the ultimate cost of all incurred claims and related expenses may be more or less than the recorded liabilities.
The Company has reinsurance receivables of $22.5 million and $20.3 million recorded within Receivables, net and $43.9 million and $41.1 million recorded within Other assets as of February 29, 2020 and February 23, 2019, respectively. The self-insurance liabilities and related reinsurance receivables are recorded gross.
Changes in self-insurance liabilities consisted of the following (in millions):
February 29, 2020 | February 23, 2019 | ||||||
Beginning balance | $ | $ | |||||
Expense | |||||||
Claim payments | ( | ) | ( | ) | |||
Other reductions (1) | ( | ) | ( | ) | |||
Ending balance | |||||||
Less current portion | ( | ) | ( | ) | |||
Long-term portion | $ | $ | |||||
(1) Primarily reflects actuarial adjustments for claims experience and systematic adjustments to the fair value of assumed self-insurance liabilities from acquisitions.
Benefit plans and Multiemployer plans: Substantially all of the Company's employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans, in addition to dedicated defined benefit plans for certain Safeway Inc. ("Safeway"), Shaw's and United Supermarkets, LLC ("United") employees. Certain employees participate in a long-term retention incentive bonus plan. The Company also provides certain health and welfare benefits, including short-term and long-term disability benefits to inactive disabled employees prior to retirement.
The Company recognizes a liability for the underfunded status of the defined benefit plans as a component of Other long-term liabilities. Actuarial gains or losses and prior service costs or credits are recorded within Other comprehensive (loss) income. The determination of the Company's obligation and related expense for its sponsored pensions and other post-retirement benefits is dependent, in part, on management's selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate and expected long-term rate of return on plan assets.
17
pickup, revenues are recognized upon either pickup in store or delivery to the customer and may include revenue for separately charged delivery services. Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Discounts provided to customers by vendors, usually in the form of coupons, are not recognized as a reduction in sales, provided the coupons are redeemable at any retailer that accepts coupons. The Company recognizes revenue and records a corresponding receivable from the vendor for the difference between the sales prices and the cash received from the customer. The Company records a contract liability when rewards are earned by customers in connection with the Company's loyalty programs. As rewards are redeemed or expire, the Company reduces the contract liability and recognizes revenue. The contract liability balance was immaterial in fiscal 2019 and fiscal 2018.
Disaggregated Revenues
The following table represents sales revenue by type of similar product (in millions):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | ||||||||||||||||||
Amount (1) | % of Total | Amount (1) | % of Total | Amount (1) | % of Total | |||||||||||||||
Non-perishables (2) | $ | % | $ | % | $ | % | ||||||||||||||
Perishables (3) | % | % | % | |||||||||||||||||
Pharmacy | % | % | % | |||||||||||||||||
Fuel | % | % | % | |||||||||||||||||
Other (4) | % | % | % | |||||||||||||||||
Total (5) | $ | % | $ | % | $ | % | ||||||||||||||
(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.
(5) Fiscal 2019 includes approximately $1.1 billion of incremental Net sales and other revenue due to the additional 53rd week.
Cost of sales and vendor allowances: Cost of sales includes, among other things, purchasing, inbound freight costs, product quality testing costs, warehousing costs, internal transfer costs, advertising costs, private label program costs and strategic sourcing program costs.
18
$405.6 million, $422.3 million and $497.5 million, net of cooperative advertising allowances of $91.9 million, $101.3 million and $81.1 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
Selling and administrative expenses: Selling and administrative expenses consist primarily of store and corporate employee-related costs such as salaries and wages, health and welfare, workers' compensation and pension benefits, as well as marketing and merchandising, rent, occupancy and operating costs, amortization of intangibles and other administrative costs.
Income taxes: Prior to the Reorganization Transactions, ACL was organized as a limited liability company, wholly owned by its parent, AB Acquisition. As such, income taxes in respect of these operations were payable by the equity members of AB Acquisition. Entity-level federal and state taxes were provided on ACL's Subchapter C corporation subsidiaries, and state income taxes on its limited liability company subsidiaries where applicable. Upon completion of the Reorganization Transactions, all of the operating subsidiaries became subsidiaries of Albertsons Companies, Inc., with all operations taxable as part of a consolidated group for federal and state income tax purposes. In connection with the Reorganization Transactions, in the fourth quarter of fiscal 2017, the Company recorded deferred income taxes on operations held by limited liability companies and previously taxed to the equity members. The Company's income (loss) before taxes is primarily from domestic operations.
Deferred taxes are provided for the net tax effects of temporary differences between the financial reporting and income tax basis of assets and liabilities using enacted tax rates in effect for the year in which the differences are expected to reverse. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income in the period that includes the enactment date. Valuation allowances are established where management determines that it is more likely than not that some portion or all of a deferred tax asset will not be realized. The Company reviews tax positions taken or expected to be taken on tax returns to determine whether and to what extent a tax benefit can be recognized. The Company evaluates its positions taken and establishes liabilities in accordance with the applicable accounting guidance for uncertain tax positions. The Company reviews these liabilities as facts and circumstances change and adjusts accordingly. The Company recognizes any interest and penalties associated with uncertain tax positions as a component of Income tax expense. The Tax Act requires a U.S. shareholder of a controlled foreign corporation to provide U.S. taxes on its share of global intangible low-taxed income ("GILTI"). The current and deferred tax impact of GILTI is not material to the Company. Accordingly, the Company will report the tax impact of GILTI as a period cost and not provide deferred taxes for the basis difference that would be expected to reverse as GILTI.
The Company is contractually indemnified by SUPERVALU INC. ("SuperValu") for any tax liability of New Albertsons L.P. ("NALP") arising from tax years prior to the NALP acquisition. The Company is also contractually obligated to pay SuperValu any tax benefit it receives in a tax year after the NALP acquisition as a result of an indemnification payment made by SuperValu. An indemnification asset and liability, where necessary, has been recorded to reflect this arrangement.
Recently adopted accounting standards: On February 25, 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASC Topic 842 supersedes existing lease guidance, including ASC 840 - Leases. Among other things, ASU 2016-02 requires recognition of a Right-of-use asset and liability for future lease payments for contracts that meet the
19
definition of a lease and requires disclosure of certain information about leasing arrangements. On July 30, 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative effect adjustment in the period of adoption. The new guidance requires both classifications of leases, operating and finance, to be recognized on the balance sheet. The new guidance also results in a change in naming convention for leases historically classified as capital leases. Under the new guidance, these leases are now referred to as finance leases. Consistent with prior GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on its classification.
The Company adopted the guidance effective February 24, 2019 by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and as a result did not restate the prior periods presented in the Consolidated Financial Statements. The Company elected certain practical expedients permitted under the transitional guidance, including retaining historical lease classification, evaluating whether any expired contracts are or contain leases, and not applying hindsight in determining the lease term. The Company also elected the practical expedient to not separate lease and non-lease components within the lessee lease transaction for all classes of assets. Lastly, the Company elected the short-term lease exception for all classes of assets, and therefore does not apply the recognition requirements for leases of 12 months or less.
The adoption of the standard resulted in the recognition of an operating lease ROU asset of $5.3 billion and an operating lease liability of $5.4 billion. Included in the measurement of the new operating lease ROU asset is the reclassification of certain balances, including those historically recorded as lease exit cost liabilities, deferred rent and beneficial and unfavorable lease interests. The adoption also resulted in a cumulative effect transitional adjustment of $776.0 million ($574.6 million, net of tax) to retained earnings related to the elimination of $865.8 million deferred gains on sale leaseback transactions, partially offset by the recognition of $87.3 million in impairment losses on operating lease assets and the removal of $17.2 million and $14.7 million, respectively, of assets and liabilities related to finance lease obligations under previously existing build-to-suit accounting arrangements. Several other immaterial reclassifications of historical asset and liability line items were also recorded in the Company's Consolidated Balance Sheets upon adoption.
In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted this guidance in the first quarter of fiscal 2019 and applied the amendments in the period of adoption. The adoption of this standard resulted in a $16.6 million adjustment to both Retained earnings (accumulated deficit) and Accumulated other comprehensive income. The standard did not have a material impact on the Company's Consolidated Statements of Operations and the Consolidated Statements of Cash Flows.
Recently issued accounting standards: In December 2019, the FASB issued ASU 2019-12, "Simplifying the Accounting for Income Taxes." This ASU 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. This ASU 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. The ASU 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.
20
NOTE 2 - ACQUISITIONS
Fiscal 2017
Plated
On September 20, 2017, the Company acquired DineInFresh, Inc. ("Plated"), a provider of meal kit services, for purchase consideration of $219.5 million, consisting of cash consideration of $117.3 million, deferred cash consideration with a fair value of $42.1 million, and contingent consideration with a fair value of $60.1 million on the acquisition date. The Plated acquisition was accounted for under the acquisition method of accounting. The purchase price was allocated to the fair values of the identifiable assets and liabilities, with any excess of purchase price over the fair value recognized as goodwill. Net assets acquired primarily consisted of intangible assets and goodwill valued at $67.1 million and $146.2 million, respectively. Intangible assets acquired consisted of trademarks and tradenames, customer lists and software. The goodwill was primarily attributable to synergies the Company expected to achieve related to the acquisition and was allocated to the Company's operating segments which are its reporting units. In connection with the acquisition, the Company also expensed $6.3 million related to unvested equity awards of Plated. The goodwill is not deductible for tax purposes. Pro forma results are not presented as the acquisition was not considered material to the Company. Third-party acquisition-related costs were immaterial for fiscal 2017 and were expensed as incurred as a component of Selling and administrative expenses. As of February 29, 2020, there was $25.0 million remaining to be paid in deferred consideration and no amount is expected to be paid in contingent consideration.
MedCart
On May 31, 2017, the Company acquired MedCart Specialty Pharmacy for $34.5 million, including the cost of acquired inventory. The acquisition was accounted for under the acquisition method of accounting and resulted in $11.6 million of goodwill that is deductible for tax purposes. Pro forma results are not presented, as the acquisition was not considered material to the Company.
NOTE 3 - PROPERTY AND EQUIPMENT
Property and equipment, net consisted of the following (in millions):
February 29, 2020 | February 23, 2019 | ||||||
Land | $ | $ | |||||
Buildings | |||||||
Property under construction | |||||||
Leasehold improvements | |||||||
Fixtures and equipment | |||||||
Property and equipment under finance leases | |||||||
Total property and equipment | |||||||
Accumulated depreciation and amortization | ( | ) | ( | ) | |||
Total property and equipment, net | $ | $ | |||||
Depreciation expense was $1,244.7 million, $1,257.7 million and $1,330.5 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Amortization expense related to finance lease assets was $90.2 million, $101.4 million and $120.2 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Fixed asset impairment losses of $21.8 million, $31.0 million and $78.8 million were recorded as a component of (Gain) loss on property dispositions and impairment losses, net in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The impairment losses primarily relate to assets in underperforming stores, certain surplus properties and fiscal 2019 also includes certain leasehold interests and equipment related to the Plated meal kit subscription and delivery business.
21
NOTE 4 - INTANGIBLE ASSETS
The Company's Intangible assets, net consisted of the following (in millions):
February 29, 2020 | February 23, 2019 | ||||||||||||||||||||||||
Estimated useful lives (Years) | Gross carrying amount | Accumulated amortization | Net | Gross carrying amount | Accumulated amortization | Net | |||||||||||||||||||
Trade names | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
Beneficial lease rights (1) | ( | ) | |||||||||||||||||||||||
Customer prescription files | ( | ) | ( | ) | |||||||||||||||||||||
Internally developed software | ( | ) | ( | ) | |||||||||||||||||||||
Other intangible assets (2) | 3 to 6 | ( | ) | ( | ) | ||||||||||||||||||||
Total finite-lived intangible assets | ( | ) | ( | ) | |||||||||||||||||||||
Liquor licenses and restricted covenants | Indefinite | — | — | ||||||||||||||||||||||
Total intangible assets, net | $ | $ | ( | ) | $ | $ | $ | ( | ) | $ | |||||||||||||||
(1) Upon adoption of ASU 2016-02 - "Leases (Topic 842)", beneficial lease rights were reclassified and included in operating lease right-of-use assets. See Note 1 - Description of business, basis of presentation and summary of significant accounting policies for additional information.
(2) Other intangible assets includes covenants not to compete, specialty accreditation and licenses and patents.
Amortization expense for intangible assets was $355.8 million, $379.7 million and $447.4 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively. Estimated future amortization expense associated with the net carrying amount of intangibles with finite lives is as follows (in millions):
Fiscal Year | Amortization Expected | ||
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
Intangible asset impairment losses of $34.1 million, $5.3 million and $22.1 million were recorded as a component of (Gain) loss on property dispositions and impairment losses, net, in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The fiscal 2019 impairment loss was driven by the continued under performance of the Plated meal kit subscription and delivery operations and primarily relates to the Plated tradename, and to a lesser extent, certain other Plated intangible assets. The fair value was determined using an income approach which included a relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rate, royalty rate, discount rate and estimated tax rate. Fiscal 2018 and fiscal 2017 impairment losses primarily relate to underperforming stores, and fiscal 2017 also includes a $12.8 million loss related to information technology assets in connection with the Company's development of a new digital platform.
22
NOTE 5 - FAIR VALUE MEASUREMENTS
The accounting guidance for fair value established a framework for measuring fair value and established a three-level valuation hierarchy for disclosure of fair value measurement. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability at the measurement date. The three levels are defined as follows:
Level 1 - | Quoted prices in active markets for identical assets or liabilities; |
Level 2 - | Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable; |
Level 3 - | Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability. |
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table presents assets and liabilities which are measured at fair value on a recurring basis as of February 29, 2020 (in millions):
Fair Value Measurements | ||||||||||||||||
Total | Quoted prices in active markets for identical assets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money Market | $ | $ | $ | $ | ||||||||||||
Short-term investments (1) | ||||||||||||||||
Non-current investments (2) | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Derivative contracts (3) | $ | $ | $ | $ | ||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
(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.
23
The following table presents assets and liabilities which are measured at fair value on a recurring basis as of February 23, 2019 (in millions):
Fair Value Measurements | ||||||||||||||||
Total | Quoted prices in active markets for identical assets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||
Assets: | ||||||||||||||||
Cash equivalents: | ||||||||||||||||
Money Market | $ | $ | $ | $ | ||||||||||||
Short-term investments (1) | ||||||||||||||||
Non-current investments (2) | ||||||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
Liabilities: | ||||||||||||||||
Derivative contracts (3) | $ | $ | $ | $ | ||||||||||||
Total | $ | $ | $ | $ | ||||||||||||
(1) Primarily relates to Mutual Funds. 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.
Contingent consideration obligations are a Level 3 measurement based on cash flow projections and other assumptions for the milestone performance targets. Changes in fair value of the contingent consideration are recorded in the consolidated statements of operations within Other expense (income), net.
The estimated fair value of the Company's debt, including current maturities, was based on Level 2 inputs, being market quotes or values for similar instruments, and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. As of February 29, 2020, the fair value of total debt was $8,486.2 million compared to a carrying value of $8,162.2 million, excluding debt discounts and deferred financing costs. As of February 23, 2019, the fair value of total debt was $9,801.2 million compared to the carrying value of $10,086.3 million, excluding debt discounts and deferred financing costs.
Assets Measured at Fair Value on a Nonrecurring Basis
The Company measures certain assets at fair value on a non-recurring basis, including long-lived assets and goodwill, which are evaluated for impairment. Long-lived assets include store-related assets such as property and equipment, operating lease assets and certain intangible assets. The inputs used to determine the fair value of long-lived assets and a reporting unit are considered Level 3 measurements due to their subjective nature.
24
NOTE 6 - DERIVATIVE FINANCIAL INSTRUMENTS
The aggregate notional amount of all Swaps as of February 29, 2020 and February 23, 2019, were $2,023.0 million and $2,123.2 million, of which none and $2,065.2 million are designated as cash flow hedges, respectively, as defined by GAAP.
On February 5, 2020, the Company repaid in full the Albertsons Term Loans (as defined in Note 7 - Long-term debt and finance lease obligations ) using cash on hand and proceeds from the issuance of new notes (as further discussed in Note 7 - Long-term debt and finance lease obligations). Consequently, the Company discontinued cash flow hedge accounting for the interest rate swap agreements that were entered into to hedge the interest rate risk on the then existing variable rate term loans. In accordance with hedge accounting guidance, the net unrealized loss of $37.1 million, associated with the discontinued hedging relationship, recorded within Accumulated other comprehensive (loss) income, was reclassified into Other expense (income), net in the Consolidated Statement of Operations and Comprehensive Income.
Activity related to the Swaps consisted of the following (in millions):
Amount of (loss) income recognized from derivatives | ||||||||||||||
Swaps designated as hedging instruments | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | Location of (loss) income recognized from Swaps | ||||||||||
Designated interest rate swaps | $ | ( | ) | $ | ( | ) | $ | Other comprehensive income (loss), net of tax | ||||||
Amount of (loss) income recognized from derivatives | ||||||||||||||
Swaps not designated as hedging instruments | Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | Location of (loss) income recognized from Swaps | ||||||||||
Undesignated, ineffective or discontinued portion of interest rate swaps | $ | ( | ) | $ | $ | Other expense (income), net | ||||||||
25
NOTE 7 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The Company's long-term debt as of February 29, 2020 and February 23, 2019, net of debt discounts of $41.3 million and $197.0 million, respectively, and deferred financing costs of $72.9 million and $65.2 million, respectively, consisted of the following (in millions):
February 29, 2020 | February 23, 2019 | ||||||
Senior Unsecured Notes due 2023, 2024, 2025, 2026, 2027, 2028 and 2030 interest rate of 3.50%, 6.625%, 5.750%, 7.5%, 4.625%, 5.875% and 4.875%, respectively | $ | $ | |||||
Albertsons Term Loans, interest range of 4.45% to 5.69% | |||||||
Safeway Inc. Notes due 2020 to 2031, interest rate range of 3.95% to 7.45% | |||||||
New Albertson's L.P. Notes due 2026 to 2031, interest rate range of 6.52% to 8.70% | |||||||
Other notes payable, unsecured | |||||||
Mortgage notes payable, secured | |||||||
Finance lease obligations (see Note 8) | |||||||
Total debt | |||||||
Less current maturities | ( | ) | ( | ) | |||
Long-term portion | $ | $ | |||||
As of February 29, 2020, the future maturities of long-term debt, excluding finance lease obligations, debt discounts and deferred financing costs, consisted of the following (in millions):
2020 | $ | ||
2021 | |||
2022 | |||
2023 | |||
2024 | |||
Thereafter | |||
Total | $ | ||
The Company's term loans (the "Albertsons Term Loans") had, and the ABL Facility and certain of the outstanding notes and debentures have, restrictive covenants, subject to the right to cure in certain circumstances, calling for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain debt arrangements. There are no restrictions on the Company's ability to receive distributions from its subsidiaries to fund interest and principal payments due under the ABL Facility, the Albertsons Term Loans and the Company's senior unsecured notes (the "Senior Unsecured Notes"). Each of the ABL Facility, Albertsons Term Loans and the Senior Unsecured Notes restrict the ability of the Company to pay dividends and distribute property to the Company's stockholders. As a result, all of the Company's consolidated net assets are effectively restricted with respect to their ability to be transferred to the Company's stockholders. Notwithstanding the foregoing, the ABL Facility, the Albertsons Term Loans and the Senior Unsecured Notes each contain customary exceptions for certain dividends and distributions, including the ability to make cumulative distributions under the Albertsons Term Loans and Senior Unsecured Notes of up to the greater of $1.0 billion or 4.0 % of the Company's total assets (which is measured at the time of such distribution) and the ability to make distributions if certain payment conditions are satisfied under the ABL Facility. During fiscal 2017, the Company utilized the foregoing exception in connection with distributions to equity holders (as described in Note 9 - Stockholders' Equity). The Company was in compliance with all such covenants and provisions as of and for the fiscal year ended February 29, 2020.
26
Albertsons Term Loans
As of February 25, 2017, the Albertsons Term Loans under the Albertsons term loan agreement totaled $6,013.9 million, excluding debt discounts and deferred financing costs. The Albertsons Term Loans consisted of a Term B-4 Loan of $3,271.8 million with an interest rate of LIBOR, subject to a 0.75 % floor, plus 3.00 %, a Term B-5 Loan of $1,142.1 million with an interest rate of LIBOR, subject to a 0.75 % floor, plus 3.25 %, and a Term B-6 Loan of $1,600.0 million with an interest rate of LIBOR, subject to a 0.75 % floor, plus 3.25 %.
On June 16, 2017, the Company repaid $250.0 million of the existing term loans. In connection with the repayment, the Company wrote off $7.6 million of previously deferred financing costs and original issue discount. The amounts expensed were included as a component of Interest expense, net.
On June 27, 2017, the Company entered into a repricing amendment to the term loan agreement which established three new term loan tranches. The new tranches consisted of $3,013.6 million of a new Term B-4 Loan, $1,139.3 million of a new Term B-5 Loan and $1,596.0 million of a new Term B-6 Loan. The (i) new Term B-4 Loan had a maturity date of August 25, 2021, and had an interest rate of LIBOR, subject to a 0.75 % floor, plus 2.75 %, (ii) new Term B-5 Loan had a maturity date of December 21, 2022, and had an interest rate of LIBOR, subject to a 0.75 % floor, plus 3.00 %, and (iii) new Term B-6 Loan had a maturity date of June 22, 2023, and had an interest rate of LIBOR, subject to a 0.75 % floor, plus 3.00 %. The repricing amendment to the term loans was accounted for as a debt modification. In connection with the term loan amendment, the Company expensed $3.9 million of newly incurred financing costs and also expensed $17.8 million of previously deferred financing costs associated with the original term loans. The amounts expensed were included as a component of Interest expense, net.
On November 16, 2018, the Company repaid approximately $976 million in aggregate principal amount of the $2,976.0 million term loan tranche B-4 (the "2017 Term B-4 Loan") along with accrued and unpaid interest on such amount and fees and expenses related to the Term Loan Repayment and the 2018 Term B-7 Loan (each as defined below), for which the Company used approximately $610 million of cash on hand and approximately $410 million of borrowings under the ABL Facility (such repayment, the "Term Loan Repayment"). Substantially concurrently with the Term Loan Repayment, the Company amended the Company's Second Amended and Restated Term Loan Agreement, dated as of August 25, 2014 and effective as of January 30, 2015 (as amended, the "Term Loan Agreement"), to establish a new term loan tranche and amend certain provisions of the Term Loan Agreement. The new tranche consisted of $2,000.0 million of new term B-7 loans (the "2018 Term B-7 Loan"). The 2018 Term B-7 Loan, together with cash on hand, was used to repay in full the remaining principal amount outstanding under the 2017 Term B-4 Loan (the "2018 Term Loan Refinancing"). The 2018 Term Loan Refinancing was accounted for as a debt modification or extinguishment on a lender by lender basis. In connection with the 2018 Term Loan Refinancing and Term Loan Repayment, the Company expensed $4.1 million of newly incurred financing costs and capitalized $3.6 million of new incurred financing costs and $15.0 million of original issue discount. For previously deferred financing costs and original issue discount associated with the 2017 Term B-4 Loan, the Company expensed $12.9 million of financing costs and $8.6 million of original issue discount. The amounts expensed were included as a component of Interest expense, net. The 2018 Term B-7 Loan had a maturity date of November 17, 2025. The 2018 Term B-7 Loan amortized, on a quarterly basis, at a rate of 1.0 % per annum of the original principal amount of the 2018 Term B-7 Loan (which payments will be reduced as a result of the application of prepayments in accordance with the terms therewith). The 2018 Term B-7 Loan bore interest, at the borrower's option, at a rate per annum equal to either (a) the base rate plus 2.00 % or (b) LIBOR, subject to a 0.75 % floor, plus 3.0 %.
On August 15, 2019, the Company repaid $1,570.6 million of aggregate principal amount outstanding under its term loan facilities, along with accrued and unpaid interest and fees and expenses, for which the Company used approximately $864 million of cash on hand and proceeds from the issuance of the 2028 Notes (as defined below) (such repayment, the "2019-1 Term Loan Repayment"). Contemporaneously with the 2019-1 Term Loan Repayment, the Company refinanced the remaining amounts outstanding with new term loan tranches. The new tranches consisted of $3,100.0 million in aggregate principal, of which $1,500.0 million had a maturity date of November 17, 2025 and $1,600.0 million had a maturity date of August 17, 2026. For newly incurred financing costs and original issue discount, the
27
Company expensed $4.2 million of financing costs and recorded $4.4 million of financing costs and $15.5 million of original issue discount as a reduction of the principal amount. For previously deferred financing costs and original issue discount, the Company expensed $15.5 million of financing costs and $13.3 million of original issue discount. The amounts expensed were included as a component of Interest expense, net.
The new loans amortized, on a quarterly basis, at a rate of 1.0 % per annum of the original principal amount (which payments would have been reduced as a result of the application of prepayments in accordance with the terms therewith). The new loans bore interest, at the borrower's option, at a rate per annum equal to either (a) the base rate plus 1.75 % or (b) LIBOR, subject to a 0.75 % floor, plus 2.75 %.
On November 22, 2019, the Company repaid $742.5 million of aggregate principal amount outstanding under its term loan facility, along with accrued and unpaid interest and fees and expenses, with the proceeds from the issuance of the 2027 Notes (as defined below) (such repayment, the "2019-2 Term Loan Repayment"). In connection with the 2019-2 Term Loan Repayment, the Company expensed $5.1 million of previously deferred financing costs and $14.3 million of original issue discount. The amounts expensed were included as a component of Interest expense, net.
On February 5, 2020, the Company repaid $2,349.8 million of aggregate principal amount outstanding under its term loan facilities, which represented the entire outstanding term loan balance, along with accrued and unpaid interest and fees and expenses, with cash on hand and the proceeds from the issuance of the New Notes (as defined below) (such repayment, the "2019-3 Term Loan Repayment"). In connection with the 2019-3 Term Loan Repayment, the Company expensed $15.2 million of previously deferred financing costs and $29.9 million of original issue discount. The amounts expensed, along with related fees, were included as a component of Loss (gain) on debt extinguishment.
The Albertsons Term Loan facilities were guaranteed by Albertsons' existing and future direct and indirect wholly owned domestic subsidiaries that were not borrowers, subject to certain exceptions. The Albertsons Term Loan facilities were secured by, subject to certain exceptions, (i) a first-priority lien on substantially all of the assets of the borrowers and guarantors (other than accounts receivable, inventory and related assets of the proceeds thereof (the "Albertsons ABL Priority Collateral")) and (ii) a second-priority lien on substantially all of the Albertsons ABL Priority Collateral.
Asset-Based Loan Facility
On November 16, 2018, the Company's existing ABL Facility, which provides for a $4,000.0 million senior secured revolving credit facility, was amended and restated in connection with the 2018 Term Loan Refinancing to extend the maturity date of the facility to November 16, 2023. The ABL Facility has an interest rate of LIBOR plus a margin ranging from 1.25 % to 1.75 % and also provides for a letters of credit ("LOC") sub-facility of $1,975.0 million. In connection with the ABL Facility amendment, the Company capitalized $13.5 million of financing costs.
During fiscal 2018, borrowings of $610.0 million under the ABL Facility were used in connection with the Term Loan Repayment and the Safeway Notes Repurchase (as defined below). The $610.0 million was repaid on December 2, 2018.
As of February 29, 2020 and February 23, 2019, there were no outstanding borrowings and the ABL LOC sub-facility had $454.5 million and $520.8 million letters of credit outstanding, respectively.
On March 12, 2020, the Company provided notice to the lenders to borrow $2.0 billion under the ABL Facility (the "ABL Borrowing"), so that a total of $2.0 billion (excluding $454.5 million in letters of credit) was outstanding immediately following the ABL Borrowing. The interest rate at the time of the ABL Borrowing under the ABL Facility was approximately 2.0 % (which represents 30-day LIBOR plus 125 basis points). The Company increased its borrowings under the ABL Facility as a precautionary measure in order to increase its cash position and preserve financial flexibility in light of current uncertainty in the global markets resulting from the coronavirus (COVID-19)
28
pandemic. In accordance with the terms of the ABL Facility, the proceeds from the ABL Borrowing may in the future be used for working capital, general corporate or other purposes permitted by the ABL Facility.
The ABL Facility is guaranteed by the Company's existing and future direct and indirect wholly owned domestic subsidiaries that are not borrowers, subject to certain exceptions. The ABL Facility is secured by, subject to certain exceptions, (i) a first-priority lien on substantially all of the ABL Facility priority collateral and (ii) a second-priority lien on substantially all other assets (other than real property). Following the 2019-3 Term Loan Repayment, the ABL Facility has a first-priority lien on substantially all other assets (other than real property). The ABL Facility contains no financial covenant unless and until (a) excess availability is less than (i) 10.0 % of the lesser of the aggregate commitments and the then-current borrowing base at any time or is (ii) $250.0 million at any time or (b) an event of default is continuing. If any of such events occur, the Company must maintain a fixed charge coverage ratio of 1.0 to 1.0 from the date such triggering event occurs until such event of default is cured or waived and/or the 30th day that all such triggers under clause (a) no longer exist.
Senior Unsecured Notes
On May 31, 2016, Albertsons Companies, LLC and substantially all of its subsidiaries completed the issuance of $1,250.0 million in aggregate principal amount of 6.625 % Senior Unsecured Notes (the "2024 Notes") which will mature on June 15, 2024. Interest on the 2024 Notes is payable semi-annually in arrears on June 15 and December 15 of each year, commencing on December 15, 2016. The 2024 Notes are also fully and unconditionally guaranteed, jointly and severally, by each of the subsidiaries that are additional issuers under the indenture governing such notes.
On August 9, 2016, Albertsons Companies, LLC and substantially all of its subsidiaries completed the issuance of $1,250.0 million in aggregate principal amount of 5.750 % Senior Unsecured Notes (the "2025 Notes") which will mature on March 15, 2025. Interest on the 2025 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2017. The 2025 Notes are also fully and unconditionally guaranteed, jointly and severally, by each of the subsidiaries that are additional issuers under the indenture governing such notes.
On February 5, 2019, the Company and substantially all of its subsidiaries completed the issuance of $600.0 million in aggregate principal amount of 7.5 % Senior Unsecured Notes which will mature on March 15, 2026 (the "2026 Notes"). Interest on the 2026 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on September 15, 2019. The 2026 Notes have not been and will not be registered with the SEC. The 2026 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of our subsidiaries that are not issuers under the indenture governing such notes. A portion of the proceeds from the 2026 Notes was used to fully redeem the Safeway 5.00 % Senior Notes due in 2019.
On August 15, 2019, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 5.875 % Senior Unsecured Notes which will mature on February 15, 2028 (the "2028 Notes"). Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The 2028 Notes have not been and will not be registered with the SEC. The 2028 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's subsidiaries that are not issuers under the indenture governing such notes. Proceeds from the 2028 Notes were used to partially fund the 2019-1 Term Loan Repayment.
On November 22, 2019, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 4.625 % Senior Unsecured Notes which will mature on January 15, 2027 (the "2027 Notes"). Interest on the 2027 Notes is payable semi-annually in arrears on January 15 and July 15 of each year, commencing on July 15, 2020. The 2027 Notes have not been and will not be registered with the SEC. The 2027 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's subsidiaries that are not issuers under the indenture governing such notes. Proceeds from the 2027 Notes were used to fund the 2019-2 Term Loan Repayment.
29
On February 5, 2020, the Company completed the issuance of $750.0 million in aggregate principal amount of new 3.50 % senior notes due February 15, 2023 (the "2023 Notes"), $600.0 million in aggregate principal amount of additional 2027 Notes (the "Additional 2027 Notes") and $1,000.0 million in aggregate principal amount of new 4.875 % senior notes due February 15, 2030 (the "2030 Notes" and together with the 2023 Notes and Additional 2027 Notes, the "New Notes"). The net proceeds received from the issuance of the New Notes, together with approximately $18 million of cash on hand, were used to (i) to fund the 2019-3 Term Loan Repayment and (ii) pay fees and expenses related to the 2019-3 Term Loan Repayment and the issuance of the New Notes.
The Additional 2027 Notes were issued as "additional securities" under the indenture governing the outstanding 2027 Notes (the "Existing 2027 Notes"). The Additional 2027 Notes are expected to be treated as a single class with the Existing 2027 Notes for all purposes and have the same terms as those of the Existing 2027 Notes.
Interest on the 2023 Notes and 2030 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on August 15, 2020.
The 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 notes.
The Company, an issuer and direct or indirect parent of each of the other issuers of the 2023 Notes, the 2024 Notes, the 2025 Notes, the 2026 Notes, the 2027 Notes (and Additional 2027 Notes), the 2028 Notes and the 2030 Notes, has no independent assets or operations. All of the direct or indirect subsidiaries of the Company, other than subsidiaries that are issuers, or guarantors, as applicable, of the 2023 Notes, the 2024 Notes, the 2025 Notes, the 2026 Notes, the 2027 Notes (and Additional 2027 Notes), the 2028 Notes and the 2030 Notes are minor, individually and in the aggregate.
Safeway Notes
During fiscal 2018, Safeway repurchased its 7.45 % Senior Debentures due 2027 and 7.25 % Debentures due 2031 with a par value of $333.7 million and a book value of $322.4 million for $333.7 million plus accrued interest of $7.7 million (the "Safeway Notes Repurchase"). The Company recognized a loss on debt extinguishment related to the Safeway Notes Repurchase of $11.3 million.
On February 6, 2019, a portion of the net proceeds from the issuance of the 2026 Notes were used to fully redeem $268.6 million of principal of Safeway 5.00 % Senior Notes due 2019, and to pay an associated make-whole premium of $3.1 million and accrued interest of $6.4 million (the "2019 Redemption"). The Company recognized a loss on debt extinguishment related to the 2019 Redemption of $3.1 million.
On May 24, 2019, the Company completed a cash tender offer and early redemption of Safeway notes with a par value of $34.1 million and a book value of $33.3 million for $32.6 million, plus accrued and unpaid interest of $0.7 million (the "Safeway Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the Safeway Tender of $0.5 million.
NALP Notes
During fiscal 2017, the Company repurchased NALP Notes with a par value of $160.0 million and a book value of $140.2 million for $135.5 million plus accrued interest of $3.7 million (the "2017 NALP Notes Repurchase"). In connection with the 2017 NALP Notes Repurchase, the Company recorded a gain on debt extinguishment of $4.7 million.
During fiscal 2018, the Company repurchased NALP Notes with a par value of $108.4 million and a book value of $96.4 million for $90.7 million plus accrued interest of $1.2 million (the "2018 NALP Notes Repurchase"). In connection with the 2018 NALP Notes Repurchase, the Company recorded a gain on debt extinguishment of $5.7 million.
30
On May 24, 2019, the Company completed a cash tender offer and early redemption of NALP Notes with a par value of $402.9 million and a book value of $363.7 million for $382.7 million, plus accrued and unpaid interest of $8.2 million (the "NALP Notes Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Tender of $19.1 million.
Also during fiscal 2019, the Company repurchased NALP Notes on the open market with an aggregate par value of $553.9 million and a book value of $502.0 million for $547.5 million plus accrued and unpaid interest of $11.3 million (the "NALP Notes Repurchase"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Repurchase of $46.2 million.
Merger Related Financing
On June 25, 2018, in connection with the Merger Agreement, the Company issued $750.0 million in aggregate principal amount of floating rate senior secured notes (the "Floating Rate Notes") at an issue price of 99.5 %. As a result of the Termination Agreement with Rite Aid on August 8, 2018, the Company redeemed all of the Floating Rate Notes at a redemption price equal to 99.5 % of the aggregate principal amount of the notes, plus accrued and unpaid interest.
Deferred Financing Costs and Interest Expense, Net
Financing costs incurred to obtain all financing other than ABL Facility financing are recognized as a direct reduction from the carrying amount of the debt liability and amortized over the term of the related debt using the effective interest method. Financing costs incurred to obtain ABL Facility financing are capitalized and amortized over the term of the related debt facilities using the straight-line method. Deferred financing costs associated with ABL Facility financing are included in Other assets and were $35.4 million and $45.1 million as of February 29, 2020 and February 23, 2019, respectively.
During fiscal 2019, total amortization of deferred financing costs of $39.8 million included $20.6 million of deferred financing costs written off in connection with the Albertsons Term Loan amendment and reductions. During fiscal 2018, total amortization of deferred financing costs of $42.7 million included $12.9 million of deferred financing costs written off in connection with the Albertsons Term Loan amendment and reductions. During fiscal 2017, total amortization of deferred financing costs of $56.1 million included $22.2 million of deferred financing costs written off in connection with the Albertsons Term Loan amendments and reductions.
Interest expense, net consisted of the following (in millions):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||
ABL Facility, senior secured and unsecured notes, term loans and debentures | $ | $ | $ | ||||||||
Finance lease obligations | |||||||||||
Deferred financing costs | |||||||||||
Debt discounts | |||||||||||
Other interest (income) expense | ( | ) | ( | ) | |||||||
Interest expense, net | $ | $ | $ | ||||||||
31
NOTE 8 - LEASES
The components of total lease cost, net consisted of the following (in millions):
Classification | Fiscal 2019 | |||||
Operating lease cost (1) | Cost of sales and Selling and administrative expenses (3) | $ | ||||
Finance lease cost | ||||||
Amortization of lease assets | Cost of sales and Selling and administrative expenses (3) | |||||
Interest on lease liabilities | Interest expense, net | |||||
Variable lease cost (2) | Cost of sales and Selling and administrative expenses (3) | |||||
Sublease income | Net sales and other revenue | ( | ) | |||
Total lease cost, net | $ | |||||
(1) Includes short-term lease cost, which is immaterial.
(2) Represents variable lease costs for both operating and finance leases. Includes contingent rent expense and other non-fixed lease related costs, including property taxes, common area maintenance and property insurance.
(3) Supply chain-related amounts are included in Cost of sales.
Balance sheet information related to leases as of February 29, 2020 consisted of the following (in millions):
Classification | February 29, 2020 | |||||
Assets | ||||||
Operating | Operating lease right-of-use assets | $ | ||||
Finance | Property and equipment, net | |||||
Total lease assets | $ | |||||
Liabilities | ||||||
Current | ||||||
Operating | Current operating lease obligations | $ | ||||
Finance | Current maturities of long-term debt and finance lease obligations | |||||
Long-term | ||||||
Operating | Long-term operating lease obligations | |||||
Finance | Long-term debt and finance lease obligations | |||||
Total lease liabilities | $ | |||||
32
The following table presents cash flow information and the weighted average lease term and discount rate for leases (dollars in millions):
Fiscal 2019 | |||
Gains on sale leaseback transactions, net | $ | ||
Cash paid for amounts included in the measurement of lease liabilities: | |||
Operating cash flows from operating leases | |||
Operating cash flows from finance leases | |||
Financing cash flows from finance leases | |||
Right-of-use assets obtained in exchange for operating lease obligations | |||
Right-of-use assets obtained in exchange for finance lease obligations | |||
Impairment of right-of-use operating lease assets | |||
Impairment of right-of-use finance lease assets | |||
Weighted average remaining lease term - operating leases | |||
Weighted average remaining lease term - finance leases | |||
Weighted average discount rate - operating leases | % | ||
Weighted average discount rate - finance leases | % | ||
Future minimum lease payments for operating and finance lease obligations as of February 29, 2020 consisted of the following (in millions):
Lease Obligations | |||||||
Fiscal year | Operating Leases | Finance Leases | |||||
2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
Thereafter | |||||||
Total future minimum obligations | |||||||
Less interest | ( | ) | ( | ) | |||
Present value of net future minimum lease obligations | |||||||
Less current portion | ( | ) | ( | ) | |||
Long-term obligations | $ | $ | |||||
The Company subleases certain property to third parties. Future minimum tenant operating lease payments remaining under these non-cancelable operating leases as of February 29, 2020 was $340.1 million.
During the second quarter of fiscal 2019, the Company, through three separate transactions, completed the sale and leaseback of 53 store properties and one distribution center for an aggregate purchase price, net of closing costs, of $931.3 million. In connection with the sale leaseback transactions, the Company entered into lease agreements for each of the properties for initial terms ranging from 15 to 20 years. The aggregate initial annual rent payment for the properties is approximately $53 million and includes 1.50 % to 1.75 % annual rent increases over the initial lease terms. All of the properties qualified for sale leaseback and operating lease accounting, and the Company recorded total gains of $463.6 million, which is included as a component of (Gain) loss on property dispositions and impairment losses, net. The Company also recorded operating lease right-of-use assets and corresponding operating lease liabilities of $602.5 million.
33
Future minimum lease payments for operating and capital lease obligations as of February 23, 2019 under the previous lease accounting standard consisted of the following (in millions):
Lease Obligations | |||||||
Fiscal year | Operating Leases | Capital Leases | |||||
2019 | $ | $ | |||||
2020 | |||||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
Thereafter | |||||||
Total future minimum obligations | $ | ||||||
Less interest | ( | ) | |||||
Present value of net future minimum lease obligations | |||||||
Less current portion | ( | ) | |||||
Long-term obligations | $ | ||||||
Rent expense and tenant rental income under operating leases under the previous lease accounting standard consisted of the following (in millions):
Fiscal 2018 | Fiscal 2017 | ||||||
Minimum rent | $ | $ | |||||
Contingent rent | |||||||
Total rent expense | |||||||
Tenant rental income | ( | ) | ( | ) | |||
Total rent expense, net of tenant rental income | $ | $ | |||||
During fiscal 2018, the Company, through three separate transactions, completed the sale and leaseback of seven of the Company's distribution centers for an aggregate purchase price, net of closing costs, of approximately $950 million. In connection with the sale leasebacks, the Company entered into lease agreements for each of the properties for initial terms of 15 to 20 years. The aggregate initial annual rent payment for the properties was approximately $55 million and includes 1.50 % to 1.75 % annual rent increases over the initial lease terms. The Company qualified for sale leaseback and operating lease accounting on all of the distribution centers, and the Company recorded total deferred gains of $362.5 million. Under the previous lease accounting standard, the deferred gains were being amortized over the respective lease periods and, upon adoption of ASC Topic 842 on February 24, 2019, the related unamortized deferred gains were recognized as a transitional adjustment to retained earnings.
34
NOTE 9 - STOCKHOLDERS' EQUITY
Equity-Based Compensation
The Company maintains the Albertsons Companies, Inc. Phantom Unit Plan (formerly, the AB Acquisition LLC Phantom Unit Plan) (the "Phantom Unit Plan"), an equity-based incentive plan, which provides for grants of phantom units ("Phantom Units") to certain employees, directors and consultants. Prior to the Reorganization Transactions, the Phantom Unit Plan was maintained by its former parent, AB Acquisition, and each Phantom Unit provided the participant with a contractual right to receive, upon vesting, one incentive unit in AB Acquisition. Subsequent to the Reorganization Transactions, each Phantom Unit now provides the participant with a contractual right to receive, upon vesting, one management incentive unit in each of the Company's parents, Albertsons Investor and KIM ACI, that collectively own all of the outstanding shares of the Company. The Phantom Units vest over a service period, or upon a combination of both a service period and achievement of certain performance-based thresholds. The fair value of the Phantom Units is determined using an option pricing model, adjusted for lack of marketability and using an expected term or time to liquidity based on judgments made by management.
During fiscal 2019, the Company granted 0.6 million Phantom Units to its employees and directors, consisting of 0.4 million new awards issued and granted in fiscal 2019 and 0.2 million previously issued awards of performance-based Phantom Units that were deemed granted upon the establishment of the fiscal 2019 performance target and that would vest upon both the achievement of such performance target and continued service through the last day of fiscal 2019. The 0.4 million new awards issued and granted in fiscal 2019 include 0.3 million Phantom Units that have solely time-based vesting and 0.1 million performance-based Phantom Units that were deemed granted upon the establishment of the fiscal 2019 annual performance target and that would vest upon both the achievement of such performance target and continued service through the last day of fiscal 2019. The 0.6 million Phantom Units deemed granted have an aggregate grant date value of $20.0 million.
Equity-based compensation expense recognized by the Company related to Phantom Units was $28.9 million, $47.7 million and $45.9 million in fiscal 2019, fiscal 2018 and fiscal 2017, respectively. The Company recorded an income tax benefit related to Phantom Units of $7.5 million, $12.9 million and $15.6 million related to equity-based compensation in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
As of February 29, 2020, the Company had $30.2 million of unrecognized compensation cost related to 0.9 million unvested Phantom Units. That cost is expected to be recognized over a weighted average period of 2.0 years. The aggregate fair value of Phantom Units that vested in fiscal 2019 was $29.3 million.
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 five years , with 50 % based solely on a service period and 50 % upon a service period and achievement of certain performance-based thresholds. The fair value of the equity interests is determined using an option pricing model, adjusted for lack of marketability and using an expected term or time to liquidity based on judgments made by management. The fair value of the equity interests deemed granted in fiscal 2019 was approximately $10.8 million, which excludes approximately 40 % of the equity units that vest based upon the achievement of future fiscal year annual performance targets that will only be deemed granted for accounting purposes upon the establishment of such respective future fiscal year annual performance targets. Equity-based compensation expense recognized by the Company related to these equity interests was $3.9 million for fiscal 2019. As of February 29, 2020, there was $6.9 million of unrecognized costs related to the equity interests deemed granted. That cost is expected to be recognized over a weighted average period of 4.0 years.
35
Treasury Stock
During fiscal 2018, the Company repurchased 3,671,621 shares of common stock allocable to certain current and former members of management (the "management holders") for $25.8 million in cash. The shares are classified as treasury stock on the Consolidated Balance Sheet. The shares repurchased represented a portion of the shares allocable to management. Proceeds from the repurchase were used by the management holders to repay outstanding loans of the management holders with a third-party financial institution. As there is no current active market for shares of the Company's common stock, the shares were repurchased at a negotiated price between the Company and the management holders.
Distribution
On June 30, 2017, the Company's predecessor, Albertsons Companies, LLC, made a cash distribution of $250.0 million to its equityholders, which resulted in a modification of certain vested awards. As a result of the modification, equity-based compensation expense recognized for fiscal 2017 includes $2.4 million of additional expense.
NOTE 10 - INCOME TAXES
The components of income tax expense (benefit) consisted of the following (in millions):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||
Current | |||||||||||
Federal (1) | $ | $ | $ | ||||||||
State (2) | ( | ) | |||||||||
Foreign | |||||||||||
Total Current | |||||||||||
Deferred | |||||||||||
Federal | ( | ) | ( | ) | ( | ) | |||||
State | ( | ) | ( | ) | ( | ) | |||||
Foreign | ( | ) | |||||||||
Total Deferred | ( | ) | ( | ) | ( | ) | |||||
Income tax expense (benefit) | $ | $ | ( | ) | $ | ( | ) | ||||
(1) Federal current tax expense net of $66.8 million, $12.8 million and $22.4 million tax benefit of net operating losses ("NOL") in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
(2) State current tax expense net of $22.6 million, $9.5 million and $9.6 million tax benefit of NOLs in fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
36
The difference between the actual tax provision and the tax provision computed by applying the statutory federal income tax rate to income (loss) before income taxes was attributable to the following (in millions):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||
Income tax expense (benefit) at federal statutory rate | $ | $ | $ | ( | ) | ||||||
State income taxes, net of federal benefit | ( | ) | |||||||||
Change in valuation allowance | ( | ) | ( | ) | ( | ) | |||||
Tax Cuts and Jobs Act | ( | ) | ( | ) | |||||||
Unrecognized tax benefits | ( | ) | ( | ) | |||||||
Member loss | |||||||||||
Charitable donations | ( | ) | ( | ) | |||||||
Tax Credits | ( | ) | ( | ) | ( | ) | |||||
CVR liability adjustment | ( | ) | |||||||||
Reorganization of limited liability companies | |||||||||||
Nondeductible equity-based compensation expense | |||||||||||
Other | ( | ) | ( | ) | |||||||
Income tax expense (benefit) | $ | $ | ( | ) | $ | ( | ) | ||||
The valuation allowance activity on deferred tax assets was as follows (in millions):
February 29, 2020 | February 23, 2019 | February 24, 2018 | |||||||||
Beginning balance | $ | $ | $ | ||||||||
Additions charged to income tax expense | |||||||||||
Reductions credited to income tax expense | ( | ) | ( | ) | ( | ) | |||||
Changes to other comprehensive income or loss and other | ( | ) | |||||||||
Ending balance | $ | $ | $ | ||||||||
The Tax Act, enacted in December 2017, resulted in significant changes to U.S. income tax and related laws. The Company is impacted by a number of aspects of the Tax Act, most notably the reduction in the top U.S. corporate income tax rate from 35% to 21%, a one-time transition tax on the accumulated unremitted foreign earnings and profits of the Company's foreign subsidiaries and 100% expensing of certain qualified property acquired and placed in service after September 27, 2017.
The SEC staff issued Staff Accounting Bulletin No. 118 ("SAB 118"), which allowed companies to record a provisional amount during a measurement period not to extend beyond one year from the date of enactment, which ended in the fourth quarter of fiscal 2018. In fiscal 2017, the Company recorded a provisional non-cash tax benefit of $430.4 million. In fiscal 2018, the Company recorded $56.9 million of additional tax benefit, primarily to account for refinement of transition tax and the remeasurement of deferred taxes. The Company completed its analysis of the Tax Act in fiscal 2018 based on currently available technical guidance. The Company will continue to assess further guidance issued by the Internal Revenue Service ("IRS") and record the impact of such guidance, if any, in the year issued.
In connection with the Reorganization Transactions, the Company recorded deferred tax liabilities in excess of deferred tax assets of $46.7 million in fiscal 2017 for the limited liability companies held by AB Acquisition and taxed previously to the members.
Also in connection with the Reorganization Transactions, the Company reorganized its Subchapter C corporation subsidiaries which allows the Company to use deferred tax assets, which previously had offsetting valuation allowance, against future taxable income of certain other Subchapter C subsidiaries that have a history of taxable income and are projected to continue to have future taxable income. The Company reassessed its valuation allowance based on available negative and positive evidence to estimate if sufficient taxable income will be generated to use existing deferred tax
37
assets. On the basis of this evaluation, the Company released a substantial portion of its valuation allowance against its net deferred tax assets, resulting in a $218.0 million non-cash tax benefit in fiscal 2017. The Company continues to maintain a valuation allowance against net deferred tax assets in jurisdictions where it is not more likely than not to be realized.
Prior to the Reorganization Transactions, taxes on income from limited liability companies held by AB Acquisition were payable by the members in accordance with their respective ownership percentages, resulting in tax expense of $83.1 million in fiscal 2017 for losses benefited by the members.
Deferred income taxes reflect the net tax effects of temporary differences between the bases of assets and liabilities for financial reporting and income tax purposes. The Company's deferred tax assets and liabilities consisted of the following (in millions):
February 29, 2020 | February 23, 2019 | ||||||
Deferred tax assets: | |||||||
Compensation and benefits | $ | $ | |||||
Net operating loss | |||||||
Pension & postretirement benefits | |||||||
Reserves | |||||||
Self-Insurance | |||||||
Tax credits | |||||||
Lease obligations | |||||||
Other | |||||||
Gross deferred tax assets | |||||||
Less: valuation allowance | ( | ) | ( | ) | |||
Total deferred tax assets | |||||||
Deferred tax liabilities: | |||||||
Debt discounts | |||||||
Depreciation and amortization | |||||||
Inventories | |||||||
Operating lease assets | |||||||
Other | |||||||
Total deferred tax liabilities | |||||||
Net deferred tax liability | $ | ( | ) | $ | ( | ) | |
Noncurrent deferred tax asset | $ | $ | |||||
Noncurrent deferred tax liability | ( | ) | ( | ) | |||
Total | $ | ( | ) | $ | ( | ) | |
The Company assesses the available positive and negative evidence to estimate if sufficient future taxable income will be generated to use the existing deferred tax assets. On the basis of this evaluation, as of February 29, 2020, a valuation allowance of $135.1 million has been recorded for the portion of the deferred tax asset that is not more likely than not to be realized, consisting primarily of carryovers in jurisdictions where the Company has minimal presence or does not expect to have future taxable income. The Company will continue to evaluate the need to adjust the valuation allowance. The amount of the deferred tax asset considered realizable, however, could be adjusted depending on the Company's performance in certain subsidiaries or jurisdictions.
The Company currently has federal and state NOL carryforwards of $32.3 million and $1,696.8 million, respectively, which will begin to expire in 2020 and continue through the fiscal year ending February 2040. As of February 29,
38
2020, the Company had $41.7 million of state credit carryforwards, the majority of which will expire in 2023. The Company had no federal credit carryforwards as of February 29, 2020.
Changes in the Company's unrecognized tax benefits consisted of the following (in millions):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||
Beginning balance | $ | $ | $ | ||||||||
Increase related to tax positions taken in the current year | |||||||||||
Increase related to tax positions taken in prior years | |||||||||||
Decrease related to tax position taken in prior years | ( | ) | ( | ) | ( | ) | |||||
Decrease related to settlements with taxing authorities | ( | ) | ( | ) | ( | ) | |||||
Decrease related to lapse of statute of limitations | ( | ) | ( | ) | |||||||
Ending balance | $ | $ | $ | ||||||||
Included in the balance of unrecognized tax benefits as of February 29, 2020, February 23, 2019 and February 24, 2018 are tax positions of $268.2 million, $267.7 million and $249.0 million, respectively, which would reduce the Company's effective tax rate if recognized in future periods. Of the $268.2 million that could impact tax expense, the Company has recorded $7.9 million of indemnification assets that would offset any future recognition. As of February 29, 2020, the Company is no longer subject to federal income tax examinations for the fiscal years prior to 2012 and in most states, is no longer subject to state income tax examinations for fiscal years before 2007. The Company recognizes accrued interest and penalties related to unrecognized tax benefits as a component of income tax expense. The Company recognized expense related to interest and penalties, net of settlement adjustments, of $9.6 million, $1.8 million and $4.6 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
In fiscal 2017, the Company adopted the IRS safe harbor rule for taxpayers operating retail establishments for determining whether expenditures paid or incurred to remodel or refresh a qualified building are deductible. As a result of adopting this safe harbor, the Company reduced $70.1 million of uncertain tax benefit in fiscal 2017, and there was no impact on the tax provision due to an offsetting deferred adjustment. The Company believes it is reasonably possible that the reserve for uncertain tax positions may be reduced by approximately $137.6 million in the next 12 months due to ongoing tax examinations and expiration of statutes of limitations.
NOTE 11 - EMPLOYEE BENEFIT PLANS AND COLLECTIVE BARGAINING AGREEMENTS
Pension Plans
The Company sponsors a defined benefit pension plan (the "Safeway Plan") for substantially all of its employees under the Safeway banners not participating in multiemployer pension plans. Effective April 1, 2015, the Company implemented a soft freeze of the Safeway Plan. A soft freeze means that all existing employees as of March 31, 2015 then participating remained in the Safeway Plan, but any new non-union employees hired after that date would instead earn retirement benefits under an enhanced 401(k) program. On December 30, 2018, the Company implemented a hard freeze of non-union benefits of employees of the Safeway Plan and all future benefit accruals for non-union employees ceased as of that date. Instead, non-union participants earned retirement benefits under the Company's 401(k) plans. The Safeway Plan continues to remain fully open to union employees and past service benefits, including future interest credits, for non-union employees continue to be accrued under the Safeway Plan. The hard freeze resulted in an immaterial curtailment charge in fiscal 2018.
The Company sponsors a defined benefit pension plan (the "Shaw's Plan") covering union employees under the Shaw's banner. Under the United banner, the Company sponsors a frozen plan (the "United Plan") covering certain United employees and an unfunded Retirement Restoration Plan that provides death benefits and supplemental income payments for certain United senior executives after retirement.
39
Other Post-Retirement Benefits
In addition to the Company's pension plans, the Company provides post-retirement medical and life insurance benefits to certain employees. Retirees share a portion of the cost of the post-retirement medical plans. The Company pays all the cost of the life insurance plans. The plans are unfunded.
The following table provides a reconciliation of the changes in the retirement plans' benefit obligation and fair value of assets over the two-year period ended February 29, 2020 and a statement of funded status as of February 29, 2020 and February 23, 2019 (in millions):
Pension | Other Post-Retirement Benefits | ||||||||||||||
February 29, 2020 | February 23, 2019 | February 29, 2020 | February 23, 2019 | ||||||||||||
Change in projected benefit obligation: | |||||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||
Service cost | |||||||||||||||
Interest cost | |||||||||||||||
Actuarial loss (gain) | ( | ) | ( | ) | |||||||||||
Plan participant contributions | |||||||||||||||
Benefit payments (including settlements) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Plan amendments | ( | ) | |||||||||||||
Ending balance | $ | $ | $ | $ | |||||||||||
Change in fair value of plan assets: | |||||||||||||||
Beginning balance | $ | $ | $ | $ | |||||||||||
Actual return on plan assets | |||||||||||||||
Employer contributions | |||||||||||||||
Plan participant contributions | |||||||||||||||
Benefit payments (including settlements) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Ending balance | $ | $ | $ | $ | |||||||||||
Components of net amount recognized in financial position: | |||||||||||||||
Other current liabilities | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Other long-term liabilities | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Funded status | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||
Amounts recognized in Accumulated other comprehensive (loss) income consisted of the following (in millions):
Pension | Other Post-Retirement Benefits | ||||||||||||||
February 29, 2020 | February 23, 2019 | February 29, 2020 | February 23, 2019 | ||||||||||||
Net actuarial loss (gain) | $ | $ | ( | ) | $ | ( | ) | $ | ( | ) | |||||
Prior service cost | |||||||||||||||
$ | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||||
40
Information for the Company's pension plans, all of which have an accumulated benefit obligation in excess of plan assets as of February 29, 2020 and February 23, 2019, is shown below (in millions):
February 29, 2020 | February 23, 2019 | ||||||
Projected benefit obligation | $ | $ | |||||
Accumulated benefit obligation | |||||||
Fair value of plan assets | |||||||
The following table provides the components of net pension and post retirement (income) expense for the retirement plans and other changes in plan assets and benefit obligations recognized in Other comprehensive (loss) income (in millions):
Pension | Other Post-Retirement Benefits | ||||||||||||||
Fiscal 2019 | Fiscal 2018 | Fiscal 2019 | Fiscal 2018 | ||||||||||||
Components of net expense: | |||||||||||||||
Estimated return on plan assets | $ | ( | ) | $ | ( | ) | $ | $ | |||||||
Service cost | |||||||||||||||
Interest cost | |||||||||||||||
Amortization of prior service cost | |||||||||||||||
Amortization of net actuarial loss (gain) | ( | ) | ( | ) | ( | ) | |||||||||
Loss due to settlement accounting | |||||||||||||||
Loss due to curtailment accounting | |||||||||||||||
(Income) expense, net | ( | ) | |||||||||||||
Changes in plan assets and benefit obligations recognized in Other comprehensive (loss) income: | |||||||||||||||
Net actuarial loss (gain) | ( | ) | ( | ) | |||||||||||
Settlement loss | ( | ) | |||||||||||||
Curtailment loss | ( | ) | |||||||||||||
Amortization of net actuarial (loss) gain | ( | ) | |||||||||||||
Prior service cost | ( | ) | |||||||||||||
Amortization of prior service cost | ( | ) | ( | ) | ( | ) | ( | ) | |||||||
Total recognized in Other comprehensive (loss) income | ( | ) | ( | ) | |||||||||||
Total net expense and changes in plan assets and benefit obligations recognized in Other comprehensive (loss) income | $ | $ | $ | ( | ) | $ | ( | ) | |||||||
Prior service costs are amortized on a straight-line basis over the average remaining service period of active participants. When the accumulation of actuarial gains and losses exceeds 10% of the greater of the projected benefit obligation and the fair value of plan assets, the excess is amortized over either the average remaining lifetime of all participants or the average remaining service period of active participants. No significant prior service costs or estimated net actuarial gain or loss is expected to be amortized from Other comprehensive (loss) income into periodic benefit cost during fiscal 2020.
41
Assumptions
The weighted average actuarial assumptions used to determine year-end projected benefit obligations for pension plans were as follows:
February 29, 2020 | February 23, 2019 | ||||
Discount rate | % | % | |||
Rate of compensation increase | % | % | |||
The weighted average actuarial assumptions used to determine net periodic benefit costs for pension plans were as follows:
February 29, 2020 | February 23, 2019 | ||||
Discount rate | % | % | |||
Expected return on plan assets: | % | % | |||
On February 29, 2020, the Company adopted the latest Society of Actuaries' mortality table for private pension plans for calculating the Company's 2019 year-end benefit obligations. This table assumes a slight improvement in life expectancy in the future compared to the RP-2014 mortality table used for calculating the Company's 2018 year-end benefit obligations and 2019 expense. Similarly, on February 29, 2020, the Company adopted the new MP-2019 mortality improvement projection scale which assumes an improvement in life expectancy at a marginally slower rate than the MP-2018 projection scale. The change in mortality assumption and future mortality improvement resulted in an immaterial decrease in the Company's current year benefit obligations and future expenses.
The Company has adopted and implemented an investment policy for the defined benefit pension plans that incorporates a strategic long-term asset allocation mix designed to meet the Company's long-term pension requirements. This asset allocation policy is reviewed annually and, on a regular basis, actual allocations are rebalanced to the prevailing targets. The investment policy also emphasizes the following key objectives: (1) maintaining a diversified portfolio among asset classes and investment styles; (2) maintaining an acceptable level of risk in pursuit of long-term economic benefit; (3) maximizing the opportunity for value-added returns from active investment management while establishing investment guidelines and monitoring procedures for each investment manager to ensure the characteristics of the portfolio are consistent with the original investment mandate; and (4) maintaining adequate controls over administrative costs.
The following table summarizes actual allocations for the Safeway Plan which had approximately $1,445 million in plan assets as of February 29, 2020:
Plan Assets | ||||||||
Asset category | Target | February 29, 2020 | February 23, 2019 | |||||
Equity | % | % | ||||||
Fixed income | % | % | ||||||
Cash and other | ( | )% | % | |||||
Total | % | % | ||||||
42
The following table summarizes the actual allocations for the Shaw's Plan which had approximately $264 million in plan assets as of February 29, 2020:
Plan Assets | ||||||||
Asset category | Target | February 29, 2020 | February 23, 2019 | |||||
Equity | % | % | ||||||
Fixed income | % | % | ||||||
Cash and other | % | % | ||||||
Total | % | % | ||||||
The following table summarizes the actual allocations for the United Plan which had approximately $35 million in plan assets as of February 29, 2020:
Plan Assets | ||||||||
Asset category | Target (1) | February 29, 2020 | February 23, 2019 | |||||
Equity | % | % | ||||||
Fixed income | % | % | ||||||
Cash and other | % | ( | )% | |||||
Total | % | % | ||||||
(1) | The target market value of equity securities for the United Plan is |
Expected return on pension plan assets is based on historical experience of the Company's portfolios and the review of projected returns by asset class on broad, publicly traded equity and fixed-income indices, as well as target asset allocation.
43
Pension Plan Assets
The fair value of the Company's pension plan assets as of February 29, 2020, excluding pending transactions of $95.1 million payable to an intermediary agent, by asset category are as follows (in millions):
Fair Value Measurements | ||||||||||||||||||||
Asset category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Assets Measured at NAV | |||||||||||||||
Cash and cash equivalents (1) | $ | $ | $ | $ | $ | |||||||||||||||
Short-term investment collective trust (2) | ||||||||||||||||||||
Common and preferred stock: (3) | ||||||||||||||||||||
Domestic common and preferred stock | ||||||||||||||||||||
International common stock | ||||||||||||||||||||
Collective trust funds (2) | ||||||||||||||||||||
Corporate bonds (4) | ||||||||||||||||||||
Mortgage- and other asset-backed securities (5) | ||||||||||||||||||||
Mutual funds (6) | ||||||||||||||||||||
U.S. government securities (7) | ||||||||||||||||||||
Other securities (8) | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
(1) | The carrying value of these items approximates fair value. |
(2) | These investments are valued based on the Net Asset Value ("NAV") of the underlying investments and are provided by the fund issuers. There are no unfunded commitments or redemption restrictions for these funds. Funds meeting the practical expedient are included in the Assets Measured at NAV column. |
(3) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for identical stock, an industry valuation model is used which maximizes observable inputs. |
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs. |
(5) | The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for comparable securities, the fair value is based upon an industry valuation model which maximizes observable inputs. |
(6) | These investments are open-ended mutual funds that are registered with the SEC which are valued using the NAV. The NAV of the mutual funds is a published price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the fund's liabilities, expressed on a per-share basis. There are no unfunded commitments, or redemption restrictions for these funds, and the funds are required to transact at the published price. |
(7) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model which maximizes observable inputs. |
(8) | Level 2 Other securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Also included in Other securities is a commingled fund valued based on the NAV of the underlying investments and is provided by the issuer and exchange-traded derivatives that are valued based on quoted prices in an active market for identical derivatives, assets and liabilities. Funds meeting the practical expedient are included in the Assets Measured at NAV column. Exchange-traded derivatives are valued based on quoted prices in an active market for identical derivatives assets and liabilities. Non-exchange-traded derivatives are valued using industry valuation models, which maximize observable inputs, such as interest-rate yield curve data, foreign exchange rates and applicable spot and forward rates. |
44
The fair value of the Company's pension plan assets as of February 23, 2019, excluding pending transactions of $79.5 million payable to an intermediary agent, by asset category are as follows (in millions):
Fair Value Measurements | ||||||||||||||||||||
Asset category | Total | Quoted Prices in Active Markets for Identical Assets (Level 1) | Significant Observable Inputs (Level 2) | Significant Unobservable Inputs (Level 3) | Assets Measured at NAV | |||||||||||||||
Cash and cash equivalents (1) | $ | $ | $ | $ | $ | |||||||||||||||
Short-term investment collective trust (2) | ||||||||||||||||||||
Common and preferred stock: (3) | ||||||||||||||||||||
Domestic common and preferred stock | ||||||||||||||||||||
International common stock | ||||||||||||||||||||
Collective trust funds (2) | ||||||||||||||||||||
Corporate bonds (4) | ||||||||||||||||||||
Mortgage- and other asset-backed securities (5) | ||||||||||||||||||||
Mutual funds (6) | ||||||||||||||||||||
U.S. government securities (7) | ||||||||||||||||||||
Other securities (8) | ||||||||||||||||||||
Total | $ | $ | $ | $ | $ | |||||||||||||||
(1) | The carrying value of these items approximates fair value. |
(2) | These investments are valued based on the NAV of the underlying investments and are provided by the fund issuers. There are no unfunded commitments or redemption restrictions for these funds. Funds meeting the practical expedient are included in the Assets Measured at NAV column. |
(3) | The fair value of common stock is based on the exchange quoted market prices. When quoted prices are not available for identical stock, an industry valuation model is used which maximizes observable inputs. |
(4) | The fair value of corporate bonds is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs. |
(5) | The fair value of mortgage- and other asset-backed securities is generally based on yields currently available on comparable securities of the same or similar issuers with similar credit ratings and maturities. When quoted prices are not available for comparable securities, the fair value is based upon an industry valuation model which maximizes observable inputs. |
(6) | These investments are open-ended mutual funds that are registered with the SEC which are valued using the NAV. The NAV of the mutual funds is a published price in an active market. The NAV is determined once a day after the closing of the exchange based upon the underlying assets in the fund, less the fund's liabilities, expressed on a per-share basis. There are no unfunded commitments, or redemption restrictions for these funds, and the funds are required to transact at the published price. |
(7) | The fair value of U.S. government securities is based on quoted market prices when available. When quoted prices are not available, the fair value of U.S. government securities is based on yields currently available on comparable securities or on an industry valuation model which maximizes observable inputs. |
(8) | Level 2 Other securities, which consist primarily of U.S. municipal bonds, foreign government bonds and foreign agency securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings. Also included in Other securities is a commingled fund valued based on the NAV of the underlying investments and is provided by the issuer and exchange-traded derivatives that are valued based on quoted prices in an active market for identical derivatives, assets and liabilities. Funds meeting the practical expedient are included in the Assets Measured at NAV column. Exchange-traded derivatives are valued based on quoted prices in an active market for identical derivatives assets and liabilities. Non-exchange-traded derivatives are valued using industry valuation models, which maximize observable inputs, such as interest-rate yield curve data, foreign exchange rates and applicable spot and forward rates. |
45
In fiscal 2019, fiscal 2018 and fiscal 2017, the Company contributed $11.0 million, $199.3 million and $21.9 million, respectively, to its pension and post-retirement plans. The Company's funding policy for the defined benefit pension plan is to contribute the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, and other applicable laws as determined by the Company's external actuarial consultant. At the Company's discretion, additional funds may be contributed to the defined benefit pension plans. The Company's fiscal 2018 contributions include $150.0 million of additional discretionary contributions to reduce the Pension Benefit Guaranty Corporation ("PBGC") premium costs and improve the overall funded status of the plans. The Company expects to contribute $69.5 million to its pension and post-retirement plans in fiscal 2020. The Company will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
Estimated Future Benefit Payments
The following benefit payments, which reflect expected future service as appropriate, are expected to be paid (in millions):
Pension Benefits | Other Benefits | ||||||
2020 | $ | $ | |||||
2021 | |||||||
2022 | |||||||
2023 | |||||||
2024 | |||||||
2025 – 2029 | |||||||
Multiemployer Pension Plans
The Company contributes to various multiemployer pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants, the investment of the assets and plan administration. Expense is recognized in connection with these plans as contributions are funded.
The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
• | Assets contributed to the multiemployer plan by one employer may be used to provide benefits to employees of other participating employers. |
• | If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers. |
• | With respect to some multiemployer plans, if the Company chooses to stop participating, or makes market exits or store closures or otherwise has participation in the plan fall below certain levels, the Company may be required to pay the plan an amount based on the underfunded status of the plan, referred to as withdrawal liability. The Company records the actuarially determined liability at an undiscounted amount. |
The Company's participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employer Identification Number ("EIN") and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act of 2006 ("PPA") zone status available for fiscal 2019 and fiscal 2018 is for the plan's year ending at December 31, 2018 and December 31, 2017, respectively. The zone status is based on information received from the plans and is certified by each plan's actuary. The FIP/RP Status Pending/Implemented
46
column indicates plans for which a funding improvement plan ("FIP") or a rehabilitation plan ("RP") is either pending or has been implemented by the plan trustees.
The following tables contain information about the Company's multiemployer plans. Certain plans have been aggregated in the Other funds line in the following table, as the contributions to each of these plans are not individually material.
EIN - PN | Pension Protection Act zone status (1) | Company's 5% of total plan contributions | FIP/RP status pending/implemented | |||
Pension fund | 2019 | 2018 | 2018 | 2017 | ||
UFCW-Northern California Employers Joint Pension Trust Fund | 946313554 - 001 | Red | Red | Yes | Yes | Implemented |
Western Conference of Teamsters Pension Plan | 916145047 - 001 | Green | Green | No | No | No |
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan (4) | 951939092 - 001 | Red | Red | Yes | Yes | Implemented |
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund | 526128473 - 001 | Red | Red | Yes | Yes | Implemented |
Sound Retirement Trust (6) | 916069306 - 001 | Red | Green | Yes | Yes | Implemented |
Bakery and Confectionery Union and Industry International Pension Fund | 526118572 - 001 | Red | Red | Yes | Yes | Implemented |
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund | 236396097 - 001 | Red | Red | Yes | Yes | Implemented |
Rocky Mountain UFCW Unions & Employers Pension Plan | 846045986 - 001 | Green | Green | Yes | Yes | No |
UFCW Local 152 Retail Meat Pension Fund (5) | 236209656 - 001 | Red | Red | Yes | Yes | Implemented |
Desert States Employers & UFCW Unions Pension Plan | 846277982 - 001 | Green | Green | Yes | Yes | No |
UFCW International Union - Industry Pension Fund (5) | 516055922 - 001 | Green | Green | Yes | Yes | No |
Mid Atlantic Pension Fund | 461000515 - 001 | Green | Green | Yes | Yes | No |
Retail Food Employers and UFCW Local 711 Pension Trust Fund | 516031512 - 001 | Red | Yellow | Yes | Yes | Implemented |
Oregon Retail Employees Pension Trust | 936074377 - 001 | Green | Green | Yes | Yes | No |
Intermountain Retail Store Employees Pension Trust (7) | 916187192 - 001 | Red | Red | Yes | Yes | Implemented |
47
Contributions of Company (in millions) | Surcharge imposed (2) | Expiration date of collective bargaining agreements | Total collective bargaining agreements | Most significant collective bargaining agreement(s)(3) | ||||||||||
Pension fund | 2019 | 2018 | 2017 | Count | Expiration | |||||||||
UFCW-Northern California Employers Joint Pension Trust Fund | $ | $ | $ | No | 10/13/2018 to 10/9/2021 | 10/13/2018 | ||||||||
Western Conference of Teamsters Pension Plan | No | 9/14/2019 to 10/7/2023 | 9/20/2020 | |||||||||||
Southern California United Food & Commercial Workers Unions and Food Employers Joint Pension Plan (4) | No | 3/11/2018 to 3/6/2022 | 3/6/2022 | |||||||||||
Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund | No | 10/26/2019 to 4/15/2020 | 10/26/2019 | |||||||||||
Sound Retirement Trust (6) | No | 10/13/2018 to 3/18/2023 | 5/8/2022 | |||||||||||
Bakery and Confectionery Union and Industry International Pension Fund | No | 9/3/2011 to 5/6/2023 | 9/6/2020 | |||||||||||
UFCW Union and Participating Food Industry Employers Tri-State Pension Fund | No | 2/1/2020 to 1/31/2022 | 3/28/2020 | |||||||||||
Rocky Mountain UFCW Unions & Employers Pension Plan | No | 11/23/2019 to 11/26/2022 | 2/19/2022 | |||||||||||
UFCW Local 152 Retail Meat Pension Fund (5) | No | 5/2/2020 | 5/2/2020 | |||||||||||
Desert States Employers & UFCW Unions Pension Plan | No | 10/24/2020 to 11/5/2022 | 10/24/2020 | |||||||||||
UFCW International Union - Industry Pension Fund (5) | No | 8/3/2019 to 12/16/2023 | 5/1/2021 | |||||||||||
Mid Atlantic Pension Fund | No | 10/26/2019 to 2/22/2020 | 10/26/2019 | |||||||||||
Retail Food Employers and UFCW Local 711 Pension Trust Fund | No | 5/19/2018 to 12/13/2020 | 3/2/2019 | |||||||||||
Oregon Retail Employees Pension Trust | No | 7/31/2021 to 11/12/2022 | 1/29/2022 | |||||||||||
Intermountain Retail Store Employees Pension Trust (7) | No | 5/19/2013 to 12/10/2022 | 4/4/2020 | |||||||||||
Other funds | ||||||||||||||
Total Company contributions to U.S. multiemployer pension plans | $ | $ | $ | |||||||||||
(1) PPA established three categories (or "zones") of plans: (1) "Green Zone" for healthy; (2) "Yellow Zone" for endangered; and (3) "Red Zone" for critical. These categories are based upon the funding ratio of the plan assets to plan liabilities. In general, Green Zone plans have a funding ratio greater than 80%, Yellow Zone plans have a funding ratio between 65% - 79%, and Red Zone plans have a funding ratio less than 65%.
(2) | Under the PPA, a surcharge may be imposed when employers make contributions under a collective bargaining agreement that is not in compliance with a rehabilitation plan. As of February 29, 2020, the collective bargaining agreements under which the Company was making contributions were in compliance with rehabilitation plans adopted by the applicable pension fund. |
(3) | These columns represent the number of most significant collective bargaining agreements aggregated by common expiration dates for each of the Company's pension funds listed above. |
(4) | The information for this fund was obtained from the Form 5500 filed for the plan's year-end at March 31, 2019 and March 31, 2018. |
(5) | The information for this fund was obtained from the Form 5500 filed for the plan's year-end at June 30, 2018 and June 30, 2017. |
(6) The information for this fund was obtained from the Form 5500 filed for the plan's year-end at September 30, 2018 and September 30, 2017.
(7) | The information for this fund was obtained from the Form 5500 filed for the plan's year-end at August 31, 2018 and August 31, 2017. |
The Company is the second largest contributing employer to the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund ("FELRA") which is currently 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 continues to fund all of its required contributions to FELRA and MAP.
48
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. In connection with these 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 ("Combined Plan"). Upon the formation of the Combined Plan, the Combined Plan will be frozen and the Company will be required to annually pay $23.2 million to the Combined Plan for the next 25 years. After making all 25 years of payments, the Company will receive a release of all withdrawal liability and mass withdrawal liability from FELRA, MAP, the Combined Plan and the Pension Benefit Guaranty Corporation ("PBGC"). This payment will replace the Company's current annual contribution to both MAP and FELRA, which was a combined $26.2 million in fiscal 2019. In addition to the $23.2 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.
Furthermore, upon formation of the Combined Plan, the Company will establish and contribute to a new variable defined benefit plan that will provide benefits to participants for future services. These agreements are subject to approval by the PBGC and the Company is in discussions with the local unions, the largest contributing employer, and negotiations with the PBGC with respect to these other plans and the Combined Plan. It is possible some provisions of our agreements with local unions may change as a result of negotiations with the PBGC. The Company expects to reach final agreements on formation of the Combined Plan by no later than December 31, 2020. Under the terms of the new collective bargaining agreements, the Company will continue to contribute to FELRA and MAP under the same terms of the previous collective bargaining agreements until approval by the PBGC and formation of the Combined Plan. The Company is currently evaluating the effect of these new agreements to its consolidated financial statements and preliminarily expects to record a material increase to its pension-related liabilities with a corresponding non-cash charge to pension expense upon approval by the PBGC.
As a part of the Safeway acquisition, the Company assumed withdrawal liabilities related to Safeway's 2013 closure of its Dominick's division. The Company recorded a $221.8 million multiemployer pension withdrawal liability related to Safeway's withdrawal from these plans. One of the plans, the UFCW & Employers Midwest Pension Fund (the "Midwest Plan"), had asserted the Company may be liable for mass withdrawal liability, if the plan has a mass withdrawal, in addition to the liability the Midwest Plan already had assessed. The Company disputed that the Midwest Plan would have the right to assess mass withdrawal liability on the Company and the Company also disputed in arbitration the amount of the withdrawal liability the Midwest Plan had assessed. On March 12, 2020, the Company agreed to a settlement of these matters with the Midwest Plan's Board of Trustees. As a result of the settlement, the Company agreed to pay $75.0 million, in a lump sum, which is expected to be paid in the first quarter of fiscal 2020, and forego any amounts already paid to the Midwest Plan. The Company had previously recorded an estimated withdrawal liability and as a result of the settlement, the Company recorded a gain of $43.3 million to reduce the previously recorded estimated withdrawal liability to the settlement amount. The total amount of the withdrawal liability recorded with respect to the Dominick's division as of February 29, 2020 was $80.0 million, which includes the $75.0 million settlement amount.
Collective Bargaining Agreements
As of February 29, 2020, the Company had approximately 270,000 employees, of which approximately 185,000 were covered by collective bargaining agreements. During fiscal 2019, collective bargaining agreements covering approximately 57,000 employees were renegotiated. Collective bargaining agreements covering approximately 45,000 employees have expired or are scheduled to expire in fiscal 2020.
Multiemployer Health and Welfare Plans
The Company makes contributions to multiemployer health and welfare plans in amounts specified in the applicable collective bargaining agreements. These plans provide medical, dental, pharmacy, vision, and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The majority of the Company's contributions
49
cover active employees and as such, may not constitute contributions to a postretirement benefit plan. However, the Company is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to active employee plans. Total contributions to multiemployer health and welfare plans were $1.2 billion, $1.3 billion and $1.2 billion for fiscal 2019, fiscal 2018 and fiscal 2017, respectively.
Defined Contribution Plans and Supplemental Retirement Plans
NOTE 12 - RELATED PARTIES
Cerberus
In connection with the Safeway acquisition, the Company entered into a four-year management agreement with Cerberus Capital Management, L.P. and the consortium of investors, which commenced on January 30, 2015, requiring an annual management fee of $13.75 million. The Company made the final payment under the initial management agreement in the fourth quarter of fiscal 2017. The agreement was extended to cover both fiscal 2018 and fiscal 2019, requiring the payment of annual management fees of $13.75 million in each year.
The Company paid Cerberus Operations and Advisory Company, LLC ("COAC"), an affiliate of Cerberus, fees totaling approximately $0.3 million, $0.5 million and $0.5 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively, for consulting services provided in connection with improving the Company's operations.
NOTE 13 - COMMITMENTS 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, which was then the owner of NALP, 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
50
year reduced by claim closures and settlements. The related LOC was $90.3 million as of February 29, 2020 and $143.0 million as of February 23, 2019.
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 coronavirus (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 is requesting 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 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 a False Claims Act investigation relating to the Company's dispensing practices regarding insulin pen products. The investigation seeks documents regarding the Company's
51
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: Two 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 ultimately issued an order on March 30, 2020 requesting some minor changes to the notice procedures, and the matter will be set for a second preliminary approval hearing shortly. The Company has recorded an estimated liability for these matters.
False Claims Act: The Company is currently subject to two qui tam actions alleging violations of the False Claims Act ("FCA"). 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. Schutte and Yarberry v. SuperValu, New Albertson's, Inc., et al, which is pending in the U.S. District Court for 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 relator's motion for partial summary judgment, holding that price matched prices are the usual and customary prices for those drugs. Additional summary judgment motions by both parties are pending. Trial will be set after the Court rules on the pending summary judgment motions. In United States ex rel. Proctor v. Safeway, also pending in 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 discount programs. On August 26, 2015, the underlying complaint was unsealed. Trial is set for October 27, 2020. In both of the above cases, the government previously investigated the relators' allegations and declined to intervene. Relators elected to pursue their respective cases on their own and in each case have alleged FCA damages in excess of $100 million before trebling and excluding penalties. The Company is vigorously defending each of these matters and believes each of these cases is without merit. The Company has recorded an estimated liability for these matters.
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.
52
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 70 suits pending in various state courts as well as in the United States District Court for the Northern District of Ohio, where over 2,000 cases have been consolidated as Multi-District Litigation ("MDL") pursuant to 28 U.S.C. §1407. 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. Although no monetary amount has been assessed by CARB, the Company could be subject to certain fines and penalties. 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
NOTE 14 - OTHER COMPREHENSIVE INCOME OR LOSS
Total comprehensive earnings are defined as all changes in stockholders' equity during a period, other than those from investments by or distributions to stockholders/members. Generally, for the Company, total comprehensive income
53
equals net income plus or minus adjustments for interest rate swaps, pension and other post-retirement liabilities and foreign currency translation adjustments.
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. AOCI is primarily the cumulative balance related to interest rate swaps, pension and other post-retirement benefit adjustments and foreign currency translation adjustments. Changes in the AOCI balance by component are shown below (in millions):
Fiscal 2019 | |||||||||||||||||||
Total | Interest rate swaps | Pension and Post-retirement benefit plan items | Foreign currency translation adjustments | Other | |||||||||||||||
Beginning AOCI balance | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Cumulative effect of accounting change (1) | |||||||||||||||||||
Other comprehensive (loss) income before reclassifications | ( | ) | ( | ) | ( | ) | |||||||||||||
Amounts reclassified from Accumulated other comprehensive (loss) income | |||||||||||||||||||
Tax benefit (expense) | ( | ) | |||||||||||||||||
Current-period other comprehensive (loss) income, net | ( | ) | ( | ) | ( | ) | |||||||||||||
Ending AOCI balance | $ | ( | ) | $ | $ | ( | ) | $ | ( | ) | $ | ||||||||
(1) Related to the adoption of ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." See Note 1 - Description of business, basis of presentation and summary of significant accounting policies for additional information.
Fiscal 2018 | |||||||||||||||||||
Total | Interest rate swaps | Pension and Post-retirement benefit plan items | Foreign currency translation adjustments | Other | |||||||||||||||
Beginning AOCI balance | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
Other comprehensive loss before reclassifications | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Amounts reclassified from Accumulated other comprehensive (loss) income | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||||
Tax benefit | |||||||||||||||||||
Current-period other comprehensive loss, net | ( | ) | ( | ) | ( | ) | ( | ) | ( | ) | |||||||||
Ending AOCI balance | $ | $ | $ | $ | ( | ) | $ | ||||||||||||
54
NOTE 15 - NET INCOME PER COMMON SHARE
Basic net income per common share is computed by dividing net income by the weighted average number of common shares outstanding for the period, including common shares to be issued with no prior remaining contingencies prior to issuance. The computation of diluted net income per share reflects the dilutive effects of potentially issuable common shares related to outstanding Phantom Units. Performance-based Phantom Units are considered dilutive when the related performance criterion has been met.
The components of basic and diluted net income per common share were as follows (in millions, except per share data):
Fiscal 2019 | Fiscal 2018 | Fiscal 2017 | |||||||||
Net Income | $ | $ | $ | ||||||||
Weighted average common shares outstanding (1) | |||||||||||
Dilutive effect of potential common shares (2) | |||||||||||
Weighted average common shares and potential dilutive common shares outstanding | |||||||||||
Basic net income per common share | $ | $ | $ | ||||||||
Diluted net income per common share | |||||||||||
(1) Fiscal 2019 and fiscal 2018 include 1.3 million and 1.9 million common shares remaining to be issued, respectively. For fiscal 2017, there were no common shares remaining to be issued.
(2) There were no potential common shares outstanding that were antidilutive for fiscal 2019 and fiscal 2018. For fiscal 2017, there were 2.6 million potential common shares excluded from the diluted net income per share calculations because they would have been antidilutive.
NOTE 16 - QUARTERLY INFORMATION (unaudited)
The summarized quarterly financial data presented below reflects all adjustments, which in the opinion of management, are of a normal and recurring nature and are necessary for a fair statement of the results for the interim periods presented (in millions):
Fiscal 2019 | ||||||||||||||||||||
53 Weeks | Last 13 Weeks | Third 12 Weeks | Second 12 Weeks | First 16 Weeks | ||||||||||||||||
Net sales and other revenue | $ | $ | $ | $ | $ | |||||||||||||||
Gross profit | ||||||||||||||||||||
Operating income | ||||||||||||||||||||
Income before income taxes | ||||||||||||||||||||
Income tax expense | ||||||||||||||||||||
Net income | $ | $ | $ | $ | $ | |||||||||||||||
Basic and diluted net income per common share | $ | $ | $ | $ | $ | |||||||||||||||
Net income for the second quarter of fiscal 2019 includes the Company's $463.6 million net gain related to three separate sale leaseback transactions, which is included as a component of (Gain) loss on property dispositions and impairment losses, net.
55
Fiscal 2018 | ||||||||||||||||||||
52 Weeks | Last 12 Weeks | Third 12 Weeks | Second 12 Weeks | First 16 Weeks | ||||||||||||||||
Net sales and other revenue | $ | $ | $ | $ | $ | |||||||||||||||
Gross profit | ||||||||||||||||||||
Operating income | ||||||||||||||||||||
Income (loss) before income taxes | ( | ) | ( | ) | ( | ) | ||||||||||||||
Income tax (benefit) expense | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||||||
Net income (loss) | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
Basic and diluted net income (loss) per common share | $ | $ | $ | $ | ( | ) | $ | ( | ) | |||||||||||
NOTE 17 - STOCK SPLIT
PART III
Item 12 - Security Ownership of Certain Beneficial Owners and Management, and Related Member Matters
The following table sets forth certain information, as of May 13, 2020, by (i) all persons who are known by us to beneficially own more than 5% of our outstanding shares of common stock, (ii) each director and NEO; and (iii) all executive officers and directors as a group. Beneficial ownership is calculated based on 580,638,489 shares of common stock issued and outstanding as of May 13, 2020. Unless otherwise stated below, each such person has sole voting and investment power with respect to all such shares. Under Rule 13d-3(d) of the Exchange Act, shares not outstanding which are subject to options, warrants, rights or conversion privileges exercisable within 60 days of May 13, 2020 are deemed outstanding for the purpose of calculating the number and percentage owned by such person, but are not deemed outstanding for the purpose of calculating the percentage owned by each other person listed.
56
Shares of Common Stock Beneficially Owned | ||||
Name of Beneficial Owner | Number of Shares | Percentage | ||
5% Shareholders: | ||||
Albertsons Investor Holdings LLC (1) | 523,720,498 | 90.2% | ||
KIM ACI, LLC (2) | 56,917,991 | 9.8% | ||
Directors: | ||||
Robert G. Miller | — | —% | ||
Dean S. Adler | — | —% | ||
Sharon L. Allen | — | —% | ||
Steven A. Davis | — | —% | ||
Kim Fennebresque | — | —% | ||
Allen M. Gibson | — | —% | ||
Hersch Klaff | — | —% | ||
Leonard Laufer | — | —% | ||
Alan H. Schumacher | — | —% | ||
Jay L. Schottenstein | — | —% | ||
Lenard B. Tessler | — | —% | ||
B. Kevin Turner | — | —% | ||
Scott Wille | — | —% | ||
Named Executive Officers: | ||||
Vivek Sankaran | — | —% | ||
James L. Donald | — | —% | ||
Robert B. Dimond | — | —% | ||
Susan Morris | — | —% | ||
Christine Rupp | — | —% | ||
Michael Theilmann | — | —% | ||
Shane Sampson | — | —% | ||
All directors and executive officers as a group (23 Persons) | — | —% | ||
(1) | Albertsons Investor is held by a private investor group, including affiliates of Cerberus, Klaff Realty, L.P., Schottenstein Stores Corp., Lubert-Adler Partners, L.P., Kimco Realty Corporation (collectively, the "Sponsors") and certain members of management. The address for Albertsons Investor is c/o Cerberus Capital Management, L.P., Attention: Lenard B. Tessler, Mark Neporent and Lisa Gray, 875 Third Avenue, New York, New York 10022. |
(2) | KIM ACI is controlled indirectly by Kimco Realty Corporation. The address for KIM ACI is c/o Kimco Realty Corporation, Attention: Ray Edwards and Bruce Rubenstein, 3333 New Hyde Park Road, Suite 100, New Hyde Park, New York 11042. |
Item 13 - Certain Relationships and Related Transactions, and Director Independence
The following discussion is a brief summary of certain material arrangements, agreements and transactions we have with related parties. It does not include all of the provisions of our material arrangements, agreements and transactions with related parties, does not purport to be complete and is qualified in its entirety by reference to the arrangements, agreements and transactions described. We enter into transactions with our stockholders and other entities owned by, or affiliated with, our direct and indirect stockholders in the ordinary course of business. These transactions include, amongst others, professional advisory, consulting and other corporate services.
57
We paid COAC, an affiliate of Cerberus, fees totaling approximately $0.3 million, $0.5 million and $0.5 million for fiscal 2019, fiscal 2018 and fiscal 2017, respectively, for consulting services provided in connection with improving our operations.
We paid CTS, an affiliate of Cerberus, fees totaling approximately $4.4 million for fiscal 2019 for information technology advisory and implementation services in connection with modernizing our information systems. We paid no fees to CTS in fiscal 2018 and fiscal 2017.
Several of our board members are employees of our Sponsors (excluding Kimco Realty Corporation), and funds managed by one or more affiliates of our Sponsors indirectly own a substantial portion of our equity through their respective ownership of Albertsons Investor and KIM ACI.
On August 19, 2019, Shane Sampson, who served as our Executive Vice President and Chief Marketing & Merchandising Officer, voluntarily resigned from the Company, effective September 7, 2019, and, on August 21, 2019, entered into the Sampson Separation Agreement. Pursuant to the Sampson Separation Agreement, in consideration for Mr. Sampson's release of claims, we agreed to treat Mr. Sampson's resignation in the same manner as if he were terminated without cause and to provide Mr. Sampson with the severance payments and benefits under his employment agreement. Pursuant to the Sampson Separation Agreement, Mr. Sampson acknowledged and agreed that he remains subject to the 24-month post-termination non-competition and non-solicitation provisions set forth in his employment agreement.
On July 2, 2019, we closed a sale and leaseback transaction for a distribution center with a counterparty which is also an investor in certain funds managed by Cerberus, including funds that are indirect equityholders of the Company. We received gross sales proceeds of approximately $278 million and entered into a lease agreement for the distribution center for an initial term of 15 years with an initial annual rent payment for the property of approximately $12 million.
On January 3, 2019, we closed a three-store sale and leaseback transaction with entities affiliated with Kimco Realty Corporation. We received gross sales proceeds of approximately $31 million and entered into lease agreements for each of the three stores for initial terms of 20 years with an initial annual rent payment for the properties of approximately $2 million.
On January 1, 2019, we terminated a store lease with an entity affiliated with Kimco Realty Corporation. We received a termination fee of $5.5 million and entered into a use restriction agreement that restricts use of the premises for a supermarket or grocery store until the earlier of August 31, 2027 or the date we no longer operate a supermarket or grocery store at two benefited properties for at least two years (excluding force majeure).
During fiscal 2018, the Company repurchased 3,671,621 shares of common stock allocable to certain current and former members of management (the "management holders") for $25.8 million in cash. The shares are classified as treasury stock on the Consolidated Balance Sheet. The shares repurchased represented a portion of the shares allocable to management. Proceeds from the repurchase were used by the management holders to repay outstanding loans of the management holders with a third-party financial institution. As there is no current active market for shares of the Company's common stock, the shares were repurchased at a negotiated price between the Company and the management holders.
Effective April 14, 2017, Justin Dye, who served as our Chief Administrative Officer voluntarily resigned from the Company and, on April 19, 2017, entered into a separation agreement with NALP, AB Management Services Corp. and the Company (the "Dye Separation Agreement"). Pursuant to the Dye Separation Agreement, in consideration for Mr. Dye's release of claims, ACI agreed to treat Mr. Dye's resignation in the same manner as if he were terminated without Cause and to provide Mr. Dye with the severance payments and benefits under his Executive Employment Agreement. Pursuant to the Dye Separation Agreement, Mr. Dye acknowledged and agreed that he remains subject to
58
the 24-month post-termination non-competition and non-solicitation provisions set forth in his Executive Employment Agreement.
The fourth amended and restated limited liability company agreement of AB Acquisition LLC (the "4th A&R AB LLC Agreement") dated January 2015, provided for the Cerberus-led consortium to receive annual management fees of $13.75 million from our Company over a 48-month period beginning on January 30, 2015. In exchange for the management fees, the Cerberus-led consortium has provided strategic advice to management, including with respect to acquisitions and financings. We paid management fees to the Cerberus-led consortium in an annual amount of $13.75 million for fiscal 2017, fiscal 2016 and fiscal 2015. The 4th A&R AB LLC Agreement was extended to cover both fiscal 2018 and fiscal 2019, requiring the payment of annual management fees of $13.75 million in each year.
Our board of directors has adopted a written policy (the "Related Party Policy") and procedures for the review, approval or ratification of "Related Party Transactions" by the independent members of the audit and risk committee of our board of directors. For purposes of the Related Party Policy, a "Related Party Transaction" is any transaction, arrangement or relationship or series of similar transactions, arrangements or relationships (including the incurrence or issuance of any indebtedness or the guarantee of indebtedness) in which (1) the aggregate amount involved will or may be reasonably expected to exceed $120,000 in any fiscal year, (2) the Company or any of its subsidiaries is a participant and (3) any related party has or will have a direct or indirect material interest.
PART IV
Item 15 - Exhibits, Financial Statement Schedules
Page | ||
(a)1. | Financial Statements: | |
(a)2. | Financial Statement Schedules: | |
No financial statement schedules are filed with this Amendment | ||
(a)3.&(b) | Exhibits: | ||||
59
Exhibit No. | Description | Filer | Date Filed | Form | Exhibit No. |
31.3 | Albertsons Companies, Inc. | * | * | * | |
31.4 | Albertsons Companies, Inc. | * | * | * | |
32.2 | Albertsons Companies, Inc. | * | * | * | |
101.INS | Inline XBRL Instance Document | Albertsons Companies, Inc. | * | * | * |
101.SCH | Inline XBRL Taxonomy Extension Schema Document | Albertsons Companies, Inc. | * | * | * |
101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document | Albertsons Companies, Inc. | * | * | * |
101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document | Albertsons Companies, Inc. | * | * | * |
101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document | Albertsons Companies, Inc. | * | * | * |
101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document | Albertsons Companies, Inc. | * | * | * |
104 | The cover page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101) | Albertsons Companies, Inc. | * | * | * |
*Filed herewith
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this Amendment No. 1 to the Annual Report on Form 10-K to be signed on its behalf by the undersigned, thereunto duly authorized.
Albertsons Companies, Inc. | |||
Date: | August 7, 2020 | By: | /s/ Vivek Sankaran |
Name: | Vivek Sankaran | ||
Title: | President, Chief Executive Officer and Director (Principal Executive Officer) | ||
61