SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q x Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the quarterly period ended March 23, 1996 or Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 for the transition period from to --------- ------- Commission file number 1-303 THE KROGER CO. An Ohio Corporation I.R.S. Employer Identification No. 31-0345740 1014 Vine Street, Cincinnati, OH 45202 - ---------------------------------------- ---------- (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code (513) 762-4000 Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . -------- --------- There were 125,130,471 shares of Common Stock ($1 par value) outstanding as of April 19, 1996.
PART I - FINANCIAL INFORMATION Item 1. Financial Statements The unaudited information for the quarters ended March 23, 1996 and March 25, 1995 includes the results of operations of The Kroger Co. for the 12 week periods ended March 23, 1996 and March 25, 1995, and of its wholly owned subsidiary Dillon Companies, Inc. for the 13 week periods ended March 30, 1996 and April 1, 1995. In the opinion of management, the information reflects all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of results of operations for such periods but should not be considered as indicative of results for a full year. <TABLE> CONSOLIDATED STATEMENT OF OPERATIONS (in thousands, except per share amounts) (unaudited) <CAPTION> Quarter Ended ------------------------ March 23, March 25, 1996 1995 ---------- ---------- <S> <C> <C> Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $5,784,254 $5,464,954 ---------- ---------- Costs and expenses Merchandise costs, including warehousing and transportation. . . 4,367,967 4,129,439 Operating, general and administrative. . . . . . . . . . . . . . 1,075,915 1,015,665 Rent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 69,729 69,934 Depreciation and amortization. . . . . . . . . . . . . . . . . . 75,643 68,841 Interest expense, including interest on obligations under capital leases, net . . . . . . . . . . . . . . . . . . . 70,626 75,324 ---------- ---------- Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . 5,659,880 5,359,203 ---------- ---------- </TABLE> <TABLE> <S> <C> <C> Earnings before tax expense and extraordinary loss. . . . . . . . 124,374 105,751 Tax expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 47,884 41,275 ---------- ---------- Earnings before extraordinary loss. . . . . . . . . . . . . . . . 76,490 64,476 Extraordinary loss (net of income tax credit) . . . . . . . . . . (1,084) (5,336) ---------- ---------- Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ 75,406 $ 59,140 ========== ========== </TABLE> <TABLE> <S> <C> <C> Primary earnings per common share: Earnings from operations . . . . . . . . . . . . . . . . . . . . $ .59 $ .56 Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . (.01) (.05) ---------- ---------- Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ .58 $ .51 ========== ========== </TABLE> <TABLE> <S> <C> <C> Average number of common shares used in per share calculations. . 130,197 114,992 </TABLE> <TABLE> <S> <C> <C> Fully diluted earnings per common share: Earnings from operations . . . . . . . . . . . . . . . . . . . . $ .59 $ .53 Extraordinary loss . . . . . . . . . . . . . . . . . . . . . . . (.01) (.04) ------ ------ Net earnings . . . . . . . . . . . . . . . . . . . . . . . . $ .58 $ .49 ====== ====== </TABLE> <TABLE> <S> <C> <C> Average number of common shares used in per share calculations. . 130,611 126,216 </TABLE> - ----------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements. <TABLE> CONSOLIDATED BALANCE SHEET (in thousands of dollars) (unaudited) <CAPTION> March 23, December 30, 1996 1995 ---------- ------------ <S> <C> <C> ASSETS Current assets Receivables . . . . . . . . . . . . . . . . . . . . . . $ 256,256 $ 288,067 Inventories: FIFO cost . . . . . . . . . . . . . . . . . . . . . . 1,976,919 2,034,880 Less LIFO reserve . . . . . . . . . . . . . . . . . . (452,663) (449,163) ---------- ---------- 1,524,256 1,585,717 Property held for sale. . . . . . . . . . . . . . . . . 37,953 40,527 Prepaid and other current assets. . . . . . . . . . . . 237,832 192,673 ---------- ---------- Total current assets. . . . . . . . . . . . . . . . 2,056,297 2,106,984 Property, plant and equipment, net. . . . . . . . . . . . 2,764,729 2,662,338 Investments and other assets. . . . . . . . . . . . . . . 272,031 275,395 ---------- ---------- Total Assets. . . . . . . . . . . . . . . . . . . . $5,093,057 $5,044,717 ========== ========== </TABLE> <TABLE> <S> <C> <C> LIABILITIES Current liabilities Current portion of long-term debt . . . . . . . . . . . $ 25,171 $ 24,939 Current portion of obligations under capital leases. . . . . . . . . . . . . . . . . . . . 9,071 8,975 Accounts payable. . . . . . . . . . . . . . . . . . . . 1,369,569 1,540,067 Other current liabilities . . . . . . . . . . . . . . . 1,013,562 991,456 ---------- ---------- Total current liabilities . . . . . . . . . . . . . 2,417,373 2,565,437 Long-term debt. . . . . . . . . . . . . . . . . . . . . . 3,425,115 3,318,499 Obligations under capital leases. . . . . . . . . . . . . 173,378 171,229 Deferred income taxes . . . . . . . . . . . . . . . . . . 153,589 153,232 Other long-term liabilities . . . . . . . . . . . . . . . 443,274 439,333 ---------- ---------- Total Liabilities . . . . . . . . . . . . . . . . . 6,612,729 6,647,730 ---------- ---------- </TABLE> <TABLE> <S> <C> <C> SHAREOWNERS' DEFICIT Common capital stock, par $1, at stated value Authorized: 350,000,000 shares Issued: 1996 - 134,180,739 shares 1995 - 133,777,921 shares. . . . . . . . . . . 594,499 586,541 Accumulated deficit . . . . . . . . . . . . . . . . . . . (1,870,517) (1,945,923) Common stock in treasury, at cost 1996 - 9,576,723 shares 1995 - 9,575,950 shares . . . . . . . . . . . (243,654) (243,631) ---------- ---------- Total Shareowners' Deficit (1,519,672) (1,603,013) ---------- ---------- Total Liabilities and Shareowners' Deficit. . . . . . $5,093,057 $5,044,717 ========== ========== </TABLE> - ---------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
<TABLE> CONSOLIDATED STATEMENT OF CASH FLOWS (in thousands of dollars) (unaudited) <CAPTION> Quarter Ended ------------------------------ March 23, March 25, 1996 1995 ----------- ----------- <S> <C> <C> CASH FLOWS FROM OPERATING ACTIVITIES: Net earnings. . . . . . . . . . . . . . . . . . . . . . . . . . $ 75,406 $ 59,140 Adjustments to reconcile net earnings to net cash provided by operating activities: Extraordinary loss . . . . . . . . . . . . . . . . . . . . . 1,084 5,336 Depreciation and amortization. . . . . . . . . . . . . . . . 75,643 68,841 Amortization of deferred financing costs . . . . . . . . . . 3,445 3,367 LIFO charge. . . . . . . . . . . . . . . . . . . . . . . . . 3,500 3,500 Loss on sale of fixed assets . . . . . . . . . . . . . . . . 376 444 Net decrease in cash from changes in operating assets and liabilities, net of effects from sale of subsidiary, detail below . . . . . . . . . . . . . . . . . (124,092) (4,238) Other changes, net . . . . . . . . . . . . . . . . . . . . . (332) (750) ---------- ---------- Net cash provided by operating activities . . . . . . . . 35,030 135,640 ---------- ---------- </TABLE> <TABLE> <S> <C> <C> CASH FLOWS FROM INVESTING ACTIVITIES: Capital expenditures. . . . . . . . . . . . . . . . . . . . . . (173,649) (93,858) Proceeds from sale of assets. . . . . . . . . . . . . . . . . . 1,475 35,784 Decrease (increase) in property held for sale . . . . . . . . . 2,183 (4,412) Decrease (increase) in other investments. . . . . . . . . . . . (986) 396 ---------- ---------- Net cash used by investing activities . . . . . . . . . . (170,977) (62,090) ---------- ---------- </TABLE> <TABLE> <S> <C> <C> CASH FLOWS FROM FINANCING ACTIVITIES: Debt prepayment costs . . . . . . . . . . . . . . . . . . . . . (1,583) (7,340) Financing charges incurred. . . . . . . . . . . . . . . . . . . (127) (1,777) Principal payments under capital lease obligations. . . . . . . (2,272) (2,109) Proceeds from issuance of long-term debt. . . . . . . . . . . . 127,496 78,408 Reductions in long-term debt. . . . . . . . . . . . . . . . . . (20,648) (124,716) Increase in book overdrafts . . . . . . . . . . . . . . . . . . 25,528 Proceeds from sale of treasury stock. . . . . . . . . . . . . . 20 Proceeds from issuance of capital stock . . . . . . . . . . . . 7,553 5,162 ---------- ---------- Net cash provided (used) by financing activities . . . . 135,947 (52,352) ---------- ---------- Net increase in cash and temporary cash investments . . . . . . . 0 21,198 Cash and temporary cash investments: Beginning of year . . . . . . . . . . . . . . . . . . . . . . 0 27,223 ---------- ---------- End of quarter. . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 48,421 ========== ========== </TABLE> <TABLE> INCREASE (DECREASE) IN CASH FROM CHANGES IN OPERATING ASSETS AND LIABILITIES, NET OF EFFECTS FROM SALE OF SUBSIDIARY: <S> <C> <C> Inventories . . . . . . . . . . . . . . . . . . . . . . . . . $ 57,961 $ 111,606 Receivables . . . . . . . . . . . . . . . . . . . . . . . . . 31,811 25,871 Prepaid and other current assets. . . . . . . . . . . . . . . (45,272) (38,625) Accounts payable. . . . . . . . . . . . . . . . . . . . . . . (196,025) (125,531) Deferred income taxes . . . . . . . . . . . . . . . . . . . . 357 (13,067) Other liabilities . . . . . . . . . . . . . . . . . . . . . . 27,076 35,508 ---------- ---------- $ (124,092) $ (4,238) ========== ========== </TABLE> - ---------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
<TABLE> Supplemental disclosures of cash flow information: <CAPTION> Quarter Ended -------------------------- March 23, March 25, 1996 1995 ---------- ---------- <S> <S> <S> Cash paid during the period for: Interest (net of amount capitalized) $ 51,240 $ 69,267 Income taxes 30,610 29,311 </TABLE> - ---------------------------------------------------------------- The accompanying notes are an integral part of the consolidated financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ------------------------------------------ 1. BASIS OF PRESENTATION --------------------- The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by generally accepted accounting principles. 2. INCOME TAXES ------------ The effective income tax rate differs from the expected statutory rate primarily due to the effect of certain state taxes. 3. EXTRAORDINARY LOSS ------------------ The extraordinary loss for the quarters ended March 23, 1996 and March 25, 1995 of $1.1 million and $5.3 million, respectively (net of income taxes of $.7 million and $3.4 million, respectively) is related to the early retirement of long-term debt. During the first quarter of 1996 the Company repurchased $16.8 million of its senior debt issues. Purchases of debt were funded by excess cash from operations, proceeds from miscellaneous asset sales, and funds borrowed under the Company's Credit Agreement. 4. EARNINGS PER COMMON SHARE ------------------------- Primary earnings per common share equals net earnings divided by the weighted average number of common shares outstanding, after giving effect to dilutive stock options. Fully diluted earnings per common share for the first quarter 1995 are computed by adjusting both net earnings and shares outstanding for the effect of the assumed conversion of the Convertible Junior Subordinated Notes issued in December 1992 as of the beginning of the year. The Convertible Junior Subordinated Notes were converted into common stock on or before the redemption date of September 5, 1995. 5. SUBSEQUENT EVENTS ----------------- On April 29, 1996, the Company notified its lenders under the Credit Agreement of the Company's election to release the collateral securing the Company's obligations under the Credit Agreement. The collateral also secures the Company's obligations under its two issues of Senior Secured Debentures. This election was permitted because the Company's consolidated ratio of net total debt to EBITD for the most recently ended fiscal quarter was 3.15 to 1 or lower. The Company's ratio at March 23, 1996, was 3.05 to 1. Upon release of the collateral, the Credit Agreement and the Senior Secured Debentures become unsecured.
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS RESULTS OF OPERATIONS SALES - ----- Total sales for the first quarter of 1996 increased 5.8% from the first quarter 1995 to a record $5.78 billion. Food store sales increased 5.5% over the 1995 first quarter. Solid sales in the Company's existing units were coupled with sales from 89 stores opened or expanded subsequent to the first quarter of 1995. Square footage increased 4.8% during this same time period. Sales in identical food stores, units that have been in operation for one full year and have not been expanded during that period, increased 2.0% versus a 1.1% increase in 1995. These results were achieved despite increased competitive openings in several major markets such as Phoenix, Atlanta, Colorado Springs, and Raleigh/Durham. Identical store sales are in line with the 1% to 2% increase expected by the Company for the entire year. A review of sales trends by lines of business includes: <TABLE> <CAPTION> (in thousands of dollars) % of 1996 1st Quarter ----------------------- Lines of Business Sales 1996 1995 Change --------------------- --------- ---------- ---------- ------- <S> <C> <C> <C> <C> Food Stores ........ 93.9% $5,432,754 $5,149,145 +5.5% Convenience Stores .. 3.5% 203,275 187,053 +8.7% Other sales ........ 2.6% 148,225 128,756 +15.1% --------- ---------- ---------- Total sales ........ 100.0% $5,784,254 $5,464,954 +5.8% </TABLE> Convenience stores' identical grocery sales increased 1.5%, identical gasoline sales increased 4.3%, and identical gas gallons increased 1.8%. Sales for the six company convenience store group were strengthened by strong in-store sales and gasoline gallons sold, combined with a 2.5% increase in the average retail price per gallon of gasoline as compared to the first quarter of 1995. Other sales primarily consist of outside sales by the Company's manufacturing divisions. The Company's strategy in an environment of low food price inflation continues to be to obtain sales growth from new square footage, as well as increased productivity from existing locations. The Company currently expects to increase square footage by 6% to 7% in 1996. The Company expects to continue to realize savings from technology and logistics improvements, some of which may be reinvested in retail price reductions to increase sales. EBITD - ----- The Company's Credit Agreement and the indentures underlying approximately $1.2 billion of publicly issued debt contain various restrictive covenants, many of which are based on earnings before interest, taxes, depreciation, LIFO charge, and unusual and extraordinary items ("EBITD"). All EBITD based covenants are based, among other things, upon generally accepted accounting principles ("GAAP") as applied on a date prior to January 3, 1993. The ability to generate EBITD at levels sufficient to satisfy the requirements of these agreements is a key measure of the Company's financial strength. The presentation of EBITD is not intended to be an alternative to any GAAP measure of performance but rather to facilitate an understanding of the Company's performance compared to its debt covenants. At March 23, 1996 the Company was in compliance with all covenants of its Credit Agreement and publicly issued debt. The Company believes it has adequate coverage of its debt covenants to continue to respond effectively to competitive conditions. During the first quarter 1996, EBITD, which does not include the effect of Statement of Financial Accounting Standards ("SFAS") No. 106, "Employers' Accounting for Postretirement Benefits Other Than Pensions", increased 8.3% to $278.1 million from $256.9 million. The increase in EBITD was the result of many factors, including increases in food store sales from existing and new stores, improvements in gross profit rates from productivity gains and cost reductions, and the controlling of operating, general and administrative costs. MERCHANDISE COSTS - ----------------- Merchandise costs, including warehousing and transportation expense and LIFO charges, for the first quarter 1996 declined to 75.5% of sales compared to 75.6% in the first quarter 1995. Merchandise costs were once again positively affected by the Company's efforts in consolidated distribution and coordinated purchasing. The decrease in merchandise costs was achieved in spite of some logistics and manufacturing projects being in the start-up phase and producing temporary increased costs. There has been virtually no net inflation in the cost of product. Inflation in some commodities such as milk, wheat and corn are being offset by cost reductions in other items, such as coffee, paper and plastics. OPERATING, GENERAL AND ADMINISTRATIVE EXPENSES - ---------------------------------------------- Operating, general and administrative expenses as a percent of sales in the first quarter 1996 remained at the 1995 level of 18.6%. Operating, general and administrative expenses were adversely affected by store opening costs from the opening of 25 new or expanded stores in 1996 as compared to 15 in 1995's first quarter. Operating, general and administrative costs improved from declines in total employee costs, including health benefits and incentive pay for both store and management employees, as well as decreases in utility costs. NET INTEREST EXPENSE - -------------------- Net interest expense declined to $70.6 million in the first quarter 1996 as compared to $75.3 million in last year's first quarter. The decline was due in large part to the conversion into common stock of the Company's $200 million 6-3/8% Convertible Junior Subordinated Notes in the third quarter of 1995. The Company expects 1996 net interest expense to total approximately $300 million. In an effort to effectively further reduce the Company's interest expense, the Company has purchased a portion of the debt issued by the lenders of certain of its structured financings, which cannot be retired early. Excluding the debt incurred to make these purchases, which are classified as investments, the Company's long- term debt at the end of the first quarter was $3.57 billion, down from $3.79 billion at the end of the 1995 first quarter. The Company does not expect a material change in its debt balance during 1996 from the year end 1995 balance. NET EARNINGS - ------------ The Company's net earnings in the first quarter 1996 were $75.4 million or $.58 per share on a fully diluted basis as compared to net earnings in the first quarter 1995 of $59.1 million or $.49 per share. Net earnings in 1996 were negatively affected by an extraordinary loss of $1.1 million or $.01 per share as compared to an extraordinary loss of $5.3 million or $.04 per share in 1995. The extraordinary loss in both years resulted from the early retirement of long term debt. The Company expects to incur an extraordinary loss in each quarter of 1996 as it continues to retire high-cost debt. Earnings before the extraordinary loss totalled $76.5 million or $.59 per share fully diluted in 1996 as compared to $64.5 million in 1995 or $.53 per fully diluted share. LIQUIDITY AND CAPITAL RESOURCES - ------------------------------- During the first quarter 1996 the Company purchased $16.8 million of its various long-term debt issues. At the end of the first quarter 1996 the Company had $438.1 million available under its Credit Agreement to meet short-term liquidity needs. Capital expenditures for the first quarter 1996 totaled $173.6 million as compared to $93.9 million for the first quarter 1995. Capital expenditures for the year are expected to total approximately $850 million as compared to $726.1 million during all of 1995. The increase reflects the Company's strategy of growth through expansion as well as the Company's emphasis, whenever possible, on self-development and ownership of store real estate. The planned capital expenditures will allow the Company to open or expand approximately 115 stores and remodel 50 to 60 additional stores. Capital expenditures will also be made in the areas of logistics and technology projects. During the first quarter of 1996 the Company's only new debt issues consisted of 7.5% First Mortgage Bonds in the amount of $9.1 million due in the year 2016. CONSOLIDATED STATEMENT OF CASH FLOWS - ------------------------------------ The Company generated $35.0 million of cash from operating activities during the first quarter 1996 compared to $135.6 million in last year's first quarter. The decrease was due primarily to an investment in working capital during the first quarter of 1996, partially offset by higher net earnings. Investing activities used $171.0 million in cash during the first quarter of 1996 as compared to $62.1 million last year. Cash generated by operating and financing activities is being used for additional capital expenditures. The Company's capital investment in the first quarter of 1996 increased $79.8 million from the first quarter of 1995. Also contributing to the net increase in the use of cash for investment activities was the decline of $34.3 million in the cash proceeds from the sale of assets. Financing activities provided $135.9 million in cash as compared to a use of cash of $52.4 million last year. The Company borrowed an additional $109.2 million under its bank Credit Agreement during the first quarter of 1996 and obtained an additional $18.3 million from other debt issues and commercial paper offerings while repurchasing only $20.6 million of other long term debt. This compared to a net debt reduction in the first quarter of 1995 of $46.3 million. Additionally, cash used for debt prepayment costs and new financing charges used only $1.7 million as compared to $9.1 million in 1995 and book overdrafts provided an additional $25.5 million in 1996. SUBSEQUENT EVENTS - ----------------- On April 29, 1996, the Company notified its lenders under the Credit Agreement of the Company's election to release the collateral securing the Company's obligations under the Credit Agreement. The collateral also secures the Company's obligations under its two issues of Senior Secured Debentures. This election was permitted because the Company's consolidated ratio of net total debt to EBITD for the most recently ended fiscal quarter was 3.15 to 1 or lower. The Company's ratio at March 23, 1996, was 3.05 to 1. Upon release of the collateral, the Credit Agreement and the Senior Secured Debentures become unsecured.
PART II - OTHER INFORMATION Item 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibit 3.1 - Amended Articles of Incorporation and Regulations of the Company are hereby incorporated by reference to Exhibits 4.1 and 4.2 of the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33- 57552. Exhibit 4.1 - Instruments defining the rights of holders of long-term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request. Exhibit 11.1 - Statement of Computation of Consolidated Earnings (Loss) Per Share. Exhibit 27.1 - Financial Data Schedule Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges. (b) The Company disclosed and filed its fourth quarter and fiscal year 1995 earnings release in its Current Report on Form 8-K dated January 25, 1996. SIGNATURES ---------- Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. THE KROGER CO. Dated: May 6, 1996 By: (Paul W. Heldman) Paul W. Heldman Vice President, Secretary and General Counsel Dated: May 6, 1996 By: (J. Michael Schlotman) J. Michael Schlotman Vice President and Corporate Controller
Exhibit Index ------------- Exhibit - ------- Exhibit 3.1 - Amended Articles of Incorporation and Regulations of the Company are hereby incorporated by reference to Exhibits 4.1 and 4.2 of the Company's Registration Statement on Form S-3 as filed with the Securities and Exchange Commission on January 28, 1993, and bearing Registration No. 33-57552. Exhibit 4.1 - Instruments defining the rights of holders of long- term debt of the Company and its subsidiaries are not filed as Exhibits because the amount of debt under each instrument is less than 10% of the consolidated assets of the Company. The Company undertakes to file these instruments with the Commission upon request. Exhibit 11.1 - Statement of Computation of Consolidated Earnings (Loss) Per Share. Exhibit 27.1 - Financial Data Schedule Exhibit 99.1 - Additional Exhibits - Statement of Computation of Ratio of Earnings to Fixed Charges.