Albertsons Companies, Inc 10-Q for FY2021 Q3
Albertsons Companies, Inc. (ACI)
10-Q
2021-01-13
For: 2020-12-05
View Original
Added on
April 07, 2026
About this 10-Q
Albertsons Companies, Inc filed this 10-Q on January 13, 2021, covering the quarter ended December 5, 2020 (FY2021 Q3).
Headline figures
Quarter ended December 5, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Revenue
- $15.41B
- up 9.3% from $14.1B a year earlier
- Net income
- $123.7M
- up 125.7% from net income of $54.8M a year earlier
- Diluted EPS
- $0.20
- up 122.2% from $0.09 a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
For the quarterly period ended December 5, 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 pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||||||
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
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ 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 is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No
As of January 12, 2021, the registrant had 465,533,258 shares of Class A common stock, par value $0.01 per share, outstanding.
Albertsons Companies, Inc. and Subsidiaries
| Page | ||||||||
PART I - FINANCIAL INFORMATION
Item 1 - Condensed Consolidated Financial Statements (unaudited)
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Balance Sheets
(in millions, except share data)
(unaudited)
| December 5, 2020 | February 29, 2020 | |||||||||||||
| ASSETS | ||||||||||||||
| Current assets | ||||||||||||||
| Cash and cash equivalents | $ | $ | ||||||||||||
| Receivables, net | ||||||||||||||
| Inventories, net | ||||||||||||||
| 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 maturities of operating lease obligations | ||||||||||||||
| Other current liabilities | ||||||||||||||
| Total current liabilities | ||||||||||||||
| Long-term debt and finance lease obligations | ||||||||||||||
| Long-term operating lease obligations | ||||||||||||||
| Deferred income taxes | ||||||||||||||
| Other long-term liabilities | ||||||||||||||
| Commitments and contingencies | ||||||||||||||
Series A convertible preferred stock, $ | ||||||||||||||
Series A-1 convertible preferred stock, $ | ||||||||||||||
| STOCKHOLDERS' EQUITY | ||||||||||||||
Undesignated preferred stock, $ | ||||||||||||||
Class A common stock, $ | ||||||||||||||
Class A-1 convertible common stock, $ | ||||||||||||||
| Additional paid-in capital | ||||||||||||||
Treasury stock, at cost, | ( | ( | ||||||||||||
| Accumulated other comprehensive loss | ( | ( | ||||||||||||
| Retained earnings | ||||||||||||||
| Total stockholders' equity | ||||||||||||||
| TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY | $ | $ | ||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
3
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income
(in millions, except per share data)
(unaudited)
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Net sales and other revenue | $ | $ | $ | $ | |||||||||||||||||||
| Cost of sales | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Selling and administrative expenses | |||||||||||||||||||||||
| Gain on property dispositions and impairment losses, net | ( | ( | ( | ( | |||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense, net | |||||||||||||||||||||||
| Loss on debt extinguishment | |||||||||||||||||||||||
| Other income, net | ( | ( | ( | ( | |||||||||||||||||||
Income before income taxes | |||||||||||||||||||||||
| Income tax expense | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
Other comprehensive income (loss), net of tax | |||||||||||||||||||||||
| Gain (loss) on interest rate swaps | ( | ||||||||||||||||||||||
| Recognition of pension gain | |||||||||||||||||||||||
| Other | ( | ( | |||||||||||||||||||||
| Other comprehensive income (loss) | $ | $ | $ | $ | ( | ||||||||||||||||||
| Comprehensive income | $ | $ | $ | $ | |||||||||||||||||||
| Net income per Class A common share | |||||||||||||||||||||||
| Basic net income per Class A common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per Class A common share | |||||||||||||||||||||||
| Weighted average Class A common shares outstanding | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
4
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)
| 40 weeks ended | |||||||||||
| December 5, 2020 | November 30, 2019 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Gain on property dispositions and impairment losses, net | ( | ( | |||||||||
| Depreciation and amortization | |||||||||||
| Operating lease right-of-use assets amortization | |||||||||||
| LIFO expense | |||||||||||
| Deferred income tax | ( | ( | |||||||||
| Contributions to pension and post-retirement benefit plans, net of (income) expense | ( | ( | |||||||||
| Loss on interest rate swaps and commodity hedges, net | |||||||||||
| Amortization and write-off of deferred financing costs | |||||||||||
| Loss on debt extinguishment | |||||||||||
| Equity-based compensation expense | |||||||||||
| Other | ( | ||||||||||
| Changes in operating assets and liabilities: | |||||||||||
| 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: | |||||||||||
| Payments for property, equipment and intangibles, including payments for lease buyouts | ( | ( | |||||||||
| Proceeds from sale of assets | |||||||||||
| Other | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Proceeds from issuance of long-term debt | |||||||||||
| Payments on long-term borrowings | ( | ( | |||||||||
| Payments of obligations under finance leases | ( | ( | |||||||||
| Payment of redemption premium on debt extinguishment | ( | ||||||||||
| Payments for debt financing costs | ( | ( | |||||||||
| Dividends paid on common stock | ( | ||||||||||
| Dividends paid on convertible preferred stock | ( | ||||||||||
| Proceeds from convertible preferred stock | |||||||||||
| Third party issuance costs on convertible preferred stock | ( | ||||||||||
| Treasury stock purchase, at cost | ( | ||||||||||
| Other | ( | ( | |||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase (decrease) 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 | $ | $ | |||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
5
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in millions, except share data)
(unaudited)
| Class A Common Stock | Additional paid in capital | Treasury Stock | Accumulated other comprehensive loss | Retained earnings | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 29, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
Issuance of common stock to Company's parents | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Employee tax withholding on vesting of phantom units | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
Dividends accrued on convertible preferred stock | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Balance as of June 20, 2020 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Shares issued and employee tax withholding on vesting of restricted stock | — | ( | — | — | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Equity reclassification | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
Dividends accrued on convertible preferred stock | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other activity | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 12, 2020 | ( | ( | |||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Shares issued and employee tax withholding on vesting of restricted stock | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||||
| Repurchase of common stock | — | — | — | ( | — | — | ( | ||||||||||||||||||||||||||||||||||||||||
| Dividends declared on common stock | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Dividends accrued on convertible preferred stock | — | — | — | — | — | — | ( | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other activity | — | — | ( | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Balance as of December 5, 2020 | $ | $ | $ | ( | $ | ( | $ | $ | |||||||||||||||||||||||||||||||||||||||
6
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in millions, except share data)
(unaudited)
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
| Class A Common Stock | Additional paid in capital | Treasury Stock | Accumulated other comprehensive income | Retained earnings (accumulated deficit) | Total stockholders' equity | ||||||||||||||||||||||||||||||||||||||||||
| Shares | Amount | Shares | Amount | ||||||||||||||||||||||||||||||||||||||||||||
| Balance as of February 23, 2019 | $ | $ | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||||||||||||||||||
| 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 June 15, 2019 | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Employee tax withholding on vesting of phantom units | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive loss, net of tax | — | — | — | — | — | ( | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of September 7, 2019 | ( | ||||||||||||||||||||||||||||||||||||||||||||||
| Issuance of common stock to Company's parents | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||||||||
| Equity-based compensation | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Employee tax withholding on vesting of phantom units | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Net income | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other comprehensive income, net of tax | — | — | — | — | — | — | |||||||||||||||||||||||||||||||||||||||||
| Other activity | — | — | ( | — | — | — | — | ( | |||||||||||||||||||||||||||||||||||||||
| Balance as of November 30, 2019 | $ | $ | $ | ( | $ | $ | $ | ||||||||||||||||||||||||||||||||||||||||
The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.
7
Albertsons Companies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)
NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Significant Accounting Policies
8
income tax benefit of $10.1 million and $5.7 million, respectively. As of December 5, 2020, there was $98.0 million of unrecognized costs related to 8.7 million unvested RSUs deemed granted for accounting purposes. That cost is expected to be recognized over a weighted average period of 2.0 years.
Treasury stock: On June 9, 2020, the Company used $1,680.0 million, an amount equal to the proceeds from the sale and issuance of the Company's Series A-1 convertible preferred stock ("Series A-1 preferred stock") and Series A convertible preferred stock ("Series A preferred stock" and together with the Series A-1 preferred stock, the "Convertible Preferred Stock"), to repurchase 101,611,736 shares of Class A common stock from the Company's parents (the "June 2020 Repurchase"). The proceeds received by the Company's parents from the June 2020 Repurchase were distributed to their members, which include the Company's sponsors and current and former members of management.
On September 14, 2020, the Company entered into a stock repurchase agreement with a stockholder pursuant to which the Company repurchased 6,837,970 shares of its Class A common stock held by the stockholder for an aggregate purchase price of $82.0 million. The stockholder was subject to a court-mandated wind-down and a court-appointed receiver was directed to liquidate the stockholder's assets. The price was agreed to between the Company and the receiver (on behalf of the stockholder). In establishing the price, the parties took into account, among many other factors that they each deemed relevant, an applicable discount related to the selling restrictions that a third-party buyer would have had if such third-party buyer purchased the shares, including relevant lock-up agreements.
On October 14, 2020, the Company's Board of Directors authorized a new share repurchase program that allows the Company to repurchase up to $300 million of its Class A common stock. As part of the share repurchase program, during the 12 weeks ended December 5, 2020, the Company, through a series of open-market transactions, repurchased 6,797,962 shares of its Class A common stock for an aggregate purchase price of $102.7 million.
9
10
Disaggregated Revenues
The following table represents sales revenue by type of similar product (dollars in millions):
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||||||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||||||||||||||||||||||||||
| Amount (1) | % of Total | Amount (1) | % of Total | Amount (1) | % of Total | Amount (1) | % of Total | ||||||||||||||||||||||||||||||||||||||||
| Non-perishables (2) | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
| Perishables (3) | |||||||||||||||||||||||||||||||||||||||||||||||
| Pharmacy | |||||||||||||||||||||||||||||||||||||||||||||||
| Fuel | |||||||||||||||||||||||||||||||||||||||||||||||
| Other (4) | |||||||||||||||||||||||||||||||||||||||||||||||
Net sales and other revenue | $ | % | $ | % | $ | % | $ | % | |||||||||||||||||||||||||||||||||||||||
(1) eCommerce related sales are included in the categories to which the revenue pertains.
(2) Consists primarily of general merchandise, grocery and frozen foods.
(3) Consists primarily of produce, dairy, meat, deli, floral and seafood.
(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.
CARES Act: The Coronavirus Aid, Relief and Economic Security Act ("CARES Act") was signed into law on March 27, 2020. The Company analyzed the various income tax and non-income tax provisions of the CARES Act based on currently available technical guidance and determined that aside from an impact to the timing of cash flows, there is no material impact to the Company's Consolidated Financial Statements. Specifically, as it relates to the Company, the CARES Act allows for deferred payment of the employer-paid portion of social security taxes through the end of 2020, with 50% due on December 31, 2021 and the remainder due on December 31, 2022. For the 40 weeks ended December 5, 2020, the Company deferred approximately $396 million of the employer-paid portion of social security taxes, which is included in Other long-term liabilities. The CARES Act also includes a technical correction to permit 100% bonus depreciation of eligible qualified improvement property. The Company will continue to assess the effect of the CARES Act and ongoing other government legislation related to the COVID-19 pandemic that may be issued, including the Consolidated Appropriations Act, 2021 signed into law on December 27, 2020.
Recently issued accounting standards: In December 2019, the Financial Accounting Standards Board ("FASB") issued ASU 2019-12, "Simplifying the Accounting for Income Taxes" ("ASU 2019-12"). ASU 2019-12 eliminates certain exceptions related to the approach for intraperiod tax allocation, the methodology for calculating taxes during the quarters and the recognition of deferred tax liabilities for outside basis differences. ASU 2019-12 also simplifies aspects of the accounting for franchise taxes, enacts changes in tax laws or rates and clarifies the accounting for transactions that result in a step-up in the tax basis of goodwill. ASU 2019-12 will take effect for public entities for annual reporting periods beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The Company is currently evaluating the effect of this standard on its Consolidated Financial Statements.
In June 2020, the FASB issued ASU 2020-06, "Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity's Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity's Own Equity" ("ASU 2020-06"). ASU 2020-06 simplifies the accounting for certain convertible instruments, amends guidance on derivative scope exceptions for contracts in an entity's own equity and modifies the guidance on diluted earnings per share calculations as a result of these changes. ASU 2020-06 will take effect for public entities for annual reporting periods beginning after December 15, 2021, and
11
NOTE 2 - 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; and
Level 3 - Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.
The following table presents assets and liabilities which were measured at fair value on a recurring basis as of December 5, 2020 (in millions):
| Fair Value Measurements | ||||||||||||||||||||||||||
| Total | Quoted prices in active markets for identical assets (Level 1) | Significant observable inputs (Level 2) | Significant unobservable inputs (Level 3) | |||||||||||||||||||||||
| Assets: | ||||||||||||||||||||||||||
| Short-term investments (1) | $ | $ | $ | $ | ||||||||||||||||||||||
| Non-current investments (2) | ||||||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
| Liabilities: | ||||||||||||||||||||||||||
| Derivative contracts (3) | $ | $ | $ | $ | ||||||||||||||||||||||
| Total | $ | $ | $ | $ | ||||||||||||||||||||||
(1) Primarily relates to Mutual Funds (Level 1) and Certificates of Deposit (Level 2). Included in Other current assets.
(2) Primarily relates to investments in publicly traded stock (Level 1) and U.S. Treasury Notes and Corporate Bonds (Level 2). Included in Other assets.
(3) Primarily relates to interest rate swaps. Included in Other current liabilities.
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The following table presents assets and liabilities which were 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.
The estimated fair value of the Company's debt, including current maturities, was based on Level 2 inputs, being market quotes or values for similar instruments, and interest rates currently available to the Company for the issuance of debt with similar terms and remaining maturities as a discount rate for the remaining principal payments. As of December 5, 2020, the fair value of total debt was $8,534.2 million compared to the carrying value of $8,023.5 million, excluding debt discounts and deferred financing costs. As of February 29, 2020, the fair value of total debt was $8,486.2 million compared to the carrying value of $8,162.2 million, excluding debt discounts and deferred financing costs.
Assets Measured at Fair Value on a Non-Recurring Basis
NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
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Activity related to interest rate swaps consisted of the following (in millions):
| 12 weeks ended | ||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | Location of (loss) gain recognized from derivatives | ||||||||||||||||||
| Loss on undesignated portion of interest rate swaps | $ | ( | $ | Other income, net | ||||||||||||||||
| Gain on designated portion of interest rate swaps | $ | $ | Other comprehensive income (loss), net of tax | |||||||||||||||||
| 40 weeks ended | ||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | Location of loss recognized from derivatives | ||||||||||||||||||
| Loss on undesignated portion of interest rate swaps | $ | ( | $ | Other income, net | ||||||||||||||||
| Loss on designated portion of interest rate swaps | $ | $ | ( | Other comprehensive income (loss), net of tax | ||||||||||||||||
NOTE 4 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The Company's long-term debt and finance lease obligations as of December 5, 2020 and February 29, 2020, net of unamortized debt discounts of $39.5 million and $41.3 million, respectively, and deferred financing costs of $71.0 million and $72.9 million, respectively, consisted of the following (in millions):
| December 5, 2020 | February 29, 2020 | ||||||||||
Senior Unsecured Notes due 2023 to 2030, interest rate range of | $ | $ | |||||||||
Safeway Inc. Notes due 2021 to 2031, interest rate range of | |||||||||||
New Albertsons L.P. Notes due 2026 to 2031, interest rate range of | |||||||||||
| Other financing obligations | |||||||||||
| Mortgage notes payable, secured | |||||||||||
| Finance lease obligations | |||||||||||
| Total debt | |||||||||||
| Less current maturities | ( | ( | |||||||||
| Long-term portion | $ | $ | |||||||||
Senior Unsecured Notes
On August 31, 2020, the Company and substantially all of its subsidiaries completed the issuance of $750.0 million in aggregate principal amount of 3.250 % Senior Unsecured Notes which will mature on March 15, 2026 (the "2026 Notes") and $750.0 million in aggregate principal amount of 3.500 % Senior Unsecured Notes which will mature on March 15, 2029 (the "2029 Notes" and together with the 2026 Notes, the "New Notes"). Interest on the New Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The New Notes have not been and will not be registered with the SEC. The New Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's subsidiaries that are not issuers under the indenture governing such New Notes. On September 11, 2020, proceeds from the New Notes, together with approximately $60 million cash on hand, were used to fully redeem the $1,250.0 million in aggregate principal amount outstanding of the Company's 6.625 % Senior Unsecured Notes due 2024 (the "2024 Redemption"). In connection with the 2024 Redemption, the Company paid an associated redemption premium of
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$41.4 million. The Company recorded a $49.1 million loss on debt extinguishment related to the 2024 Redemption, comprised of the $41.4 million redemption premium and $7.7 million write-off of deferred financings costs.
On September 16, 2020, remaining proceeds from the New Notes were used to fund the partial redemption of $250.0 million of the $1,250.0 million in aggregate principal amount outstanding (the "September Partial 2025 Redemption") of the Company's 5.75 % Senior Unsecured Notes due 2025 (the "2025 Notes"). In connection with the September Partial 2025 Redemption, the Company paid an associated redemption premium of $7.2 million. The Company recorded an $8.6 million loss on debt extinguishment related to the September Partial 2025 Redemption, comprised of the $7.2 million redemption premium and a $1.4 million write-off of deferred financing costs.
On December 22, 2020, subsequent to the end of the third quarter of fiscal 2020, the Company and substantially all of its subsidiaries completed the issuance of $600.0 million in aggregate principal amount of additional 2029 Notes (the "Additional 2029 Notes"). The Additional 2029 Notes were issued under the same indenture as the 2029 Notes issued by the Company on August 31, 2020. Interest on the Additional 2029 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The Additional 2029 Notes have not been and will not be registered with the SEC. The Additional 2029 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's subsidiaries that are not issuers under the indenture governing such Additional 2029 Notes. On January 4, 2021, proceeds from the Additional 2029 Notes, together with approximately $230 million of cash on hand, were used to fund another partial redemption of $800.0 million of the $1,000.0 million in aggregate principal amount outstanding of the 2025 Notes (the "January Partial 2025 Redemption").
Safeway Notes
The Company repaid the remaining $136.8 million in aggregate principal amount of Safeway Inc.'s ("Safeway") 3.95 % Notes due 2020 on their maturity date, August 15, 2020.
ABL Facility
On March 12, 2020, the Company provided notice to the lenders to borrow $2.0 billion under the Company's amended and restated senior secured asset-based loan facility (as amended, the "ABL Facility") as a precautionary measure in order to increase its cash position and preserve flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. The Company repaid the $2.0 billion in full on June 19, 2020 and as of December 5, 2020, there were no 354.6 million. There were no 454.5 million.
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NOTE 5 - STOCKHOLDERS' EQUITY AND CONVERTIBLE PREFERRED STOCK
Common Stock
On June 8, 2020, the Company amended and restated its certificate of incorporation to authorize 1,150,000,000 shares of common stock, par value $0.01 per share, of which 1,000,000,000 shares were classified as Class A common stock ("Class A common stock") and 150,000,000 shares were classified as Class A-1 convertible common stock ("Class A-1 common stock" and together with the Class A common stock, the "Common Stock"). As of December 5, 2020, there were 585,530,715 shares of Class A common stock and 466,611,426 shares of Class A common stock issued and outstanding, respectively, and no 582,997,251 shares of Class A common stock and 579,325,630 shares of Class A common stock issued and outstanding, respectively. For all prior periods presented, use of Class A common stock refers to the Company's common stock pre-reclassification.
The terms of the Class A common stock are substantially identical to the terms of the Class A-1 common stock, except that the Class A-1 common stock does not have voting rights. Each holder of Class A common stock is entitled to one vote for each share owned of record on all matters voted upon by stockholders. A majority vote is required for all action to be taken by stockholders, except as otherwise provided for in the Company's amended and restated certificate of incorporation and amended and restated bylaws or as required by law. Subject to preferences that may be applicable to any then outstanding preferred stock, holders of the Company's Common Stock are entitled to receive ratably those dividends, if any, as may be declared from time to time by the board of directors out of legally available funds. In the event of the Company's liquidation, dissolution or winding-up, the holders of Common Stock are entitled to share equally and ratably in the Company's assets, if any, remaining after the payment of all of debts and liabilities and the liquidation preference of any outstanding preferred stock. Shares of Class A-1 common stock would be issued upon the conversion of the Company's outstanding Series A-1 preferred stock. When permitted under the relevant antitrust restrictions, any issued shares of Class A-1 common stock would automatically convert on a one -for-one basis to voting shares of Class A common stock.
In connection with the IPO, the Company established a dividend policy pursuant to which the Company intends to pay a quarterly dividend on its Common Stock in an annual amount equal to $0.400 per common share. On October 14, 2020, the Company announced the first quarterly dividend payment of $0.100 0.100
Stock Split
On June 18, 2020, the Company effected a 2.072 -for-1 stock split of its Common Stock, without any change in the total shares authorized or the par value per share. All information related to the Company's Common Stock and per Class A common share amounts for all periods presented in the accompanying Condensed Consolidated Financial Statements have been retroactively adjusted to give effect to the 2.072 -for-1 stock split.
Initial Public Offering
The Company's Class A common stock began trading on the New York Stock Exchange on June 26, 2020 under the symbol "ACI" and on June 30, 2020, certain selling stockholders completed the sale of a total of 50,000,000 shares of Class A common stock at an initial price to the public of $16.00 per share. The Company did not receive any proceeds from the sale of shares of Class A common stock by the selling stockholders in the IPO.
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Convertible Preferred Stock and Investor Exchange Right
On June 8, 2020, the Company amended and restated its certificate of incorporation to authorize 100,000,000 shares of preferred stock, par value $0.01 per share, of which 1,750,000 shares were designated Series A preferred stock and 1,410,000 shares were designated Series A-1 preferred stock. On June 9, 2020 (the "Preferred Closing Date"), the Company sold and issued (i) an aggregate of 1,410,000 shares of Series A-1 preferred stock and (ii) an aggregate of 340,000 shares of Series A preferred stock. The Company received aggregate proceeds of $1.68 billion from the sale and issuance of the Convertible Preferred Stock which has an aggregate liquidation preference of $1.75 billion.
The terms of the Series A preferred stock are substantially identical to the terms of the Series A-1 preferred stock, except that the Series A preferred stock will vote together with Class A common stock on an as-converted basis, but the Series A-1 preferred stock cannot vote with Class A common stock on an as converted basis. When permitted under the relevant antitrust restrictions, shares of the Company's Series A-1 preferred stock will convert on a one -for-one basis to shares of voting Series A preferred stock. On June 29, 2020, holders of 584,000 shares of Series A-1 preferred stock were relieved from the relevant antitrust restrictions resulting in the automatic conversion into 584,000 shares of voting Series A preferred stock. The Convertible Preferred Stock, with respect to dividend rights and/or distribution rights upon the liquidation, winding-up or dissolution, as applicable, ranks senior to each class of Common Stock and junior to existing and future indebtedness and other liabilities.
The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75 % of the liquidation preference per share of the Convertible Preferred Stock. In the event that the Company does not declare and pay any dividends in cash, the Company may instead, only for two quarters, pay such dividends by increasing the liquidation preference of the Convertible Preferred Stock at a rate equal to the applicable cash dividend rate plus 2.25 % on such dividend payment date. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that the Company pays on its Common Stock to the extent that such cash dividends exceed $206.25 million per fiscal year. On September 15, 2020, the Company declared a quarterly cash dividend of $36.4 29.5
The Series A-1 preferred stock is convertible at the option of the holders thereof at any time into shares of Class A-1 common stock (which are identical to the Class A common stock, except that the Class A-1 common stock does not include voting rights) and the Series A preferred stock is convertible at the option of the holders thereof at any time into shares of Class A common stock, each at an initial conversion price of $17.22 per share and an initial conversion rate of 58.064 shares of Common Stock per share of Convertible Preferred Stock, subject to certain anti-dilution adjustments. At any time after June 30, 2023, if the last reported sale price of the Class A common stock has equaled or exceeded $20.50 per share (or 119 % of the initial conversion price), as may be adjusted, for at least 20 trading days in any period of 30 consecutive trading days, the Company will have the right to cause all, or any portion, of the outstanding Series A-1 preferred stock or Series A preferred stock to convert into the relevant number of shares of Class A-1 common stock or Class A common stock, as applicable; provided that the Company will not be permitted to effect a mandatory conversion with respect to more than one-third of the aggregate outstanding shares, as of the date of the first notice date, of Series A-1 preferred stock and Series A preferred stock in any 12 -month period unless the last reported sale price of the Class A common stock has equaled or exceeded $23.42 (or 136 % of the initial conversion price), as may be adjusted, for at least 20 trading days in any period of 30 consecutive trading days.
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At any time following June 9, 2026, the Company may redeem all, but not less than all, of the Convertible Preferred Stock then outstanding at a redemption price equal to the product of the liquidation preference of the Convertible Preferred Stock then outstanding and 105 %, plus accrued and unpaid dividends. In the event that the Company receives a notice of an intention to exchange the shares of Convertible Preferred Stock for equity interests in certain of the Company's subsidiaries pursuant to the real estate agreement (as discussed below), the Company will have the right to redeem all, but not less than all, of its Convertible Preferred Stock then outstanding at a redemption price equal to the product of the aggregate liquidation preference of the Convertible Preferred Stock of such holder then outstanding and 110 %, plus accrued and unpaid dividends. The Convertible Preferred Stock is also convertible, at the option of the holder, upon the occurrence of certain fundamental change events, including a change in control or delisting of the Company at the applicable conversion rate plus an additional number of shares determined by reference to the price paid for the Company's Common Stock upon such change in control, plus in certain conditions accrued and unpaid dividends through June 30, 2023 or June 30, 2024, as applicable.
Concurrent with the issuance and sale of the Convertible Preferred Stock, a newly formed consolidated real estate subsidiary of the Company entered into a real estate agreement with an affiliate of the holders ("RE Investor") of the Convertible Preferred Stock. Under the terms of the real estate agreement, prior to the closing of the Convertible Preferred Stock, the Company was to place into its real estate subsidiary fee owned real estate properties with an appraised value of 165 % of the liquidation preference of the Convertible Preferred Stock or a combination of real estate properties and cash. This resulted in the Company contributing approximately $36.5 million of cash into a restricted escrow account to make up for the shortfall on the appraised value of owned properties placed into the real estate subsidiary. The real estate agreement provides the RE Investor with the unilateral right, upon the occurrence of specified trigger events, to exercise an investor exchange right to exchange all of the outstanding Convertible Preferred Stock for certain real estate assets or the real estate subsidiary's equity interests in its subsidiary special purpose entities holding such real estate assets, subject to certain provisions as further defined in the real estate agreement (the "Investor Exchange Right"). The Investor Exchange Right may be exercised if any of the following were to occur: (i) the Convertible Preferred Stock remains outstanding as of June 9, 2027, (ii) if a fundamental change occurs after June 30, 2024 and the related fundamental change stock price is less than the conversion price, (iii) a downgrade by one or more gradations or withdrawal of the Company's credit rating by certain rating agencies, as a result of which the Company's credit rating is B- (or its equivalent) or lower, (iv) the failure by the Company to pay a dividend on the Convertible Preferred Stock, which failure continues for 30 days after such dividend's due date, or (v) a bankruptcy filing. The target amount of real estate assets (net of taxes and fees) to be received in exchange for the Convertible Preferred Stock will be the product of the liquidation preference and 110 %, plus an amount equal to any accrued and unpaid dividends. The Investor Exchange Right may be exercised unless the Company redeems all of the outstanding Convertible Preferred Stock at a redemption price, if such redemption occurs after the Company receives a notice of intent to exercise the Investor Exchange Right, equal to the product of the aggregate liquidation preference of the Convertible Preferred Stock then outstanding and 110 %, plus accrued and unpaid dividends. Upon completion of the Investor Exchange Right, subsidiaries of the Company, as the applicable tenant, will enter into a master lease agreement with the RE Investor or designated affiliate as the landlord, solely with respect to the real estate properties that have been transferred directly or indirectly to the RE Investor, substantially the same as the current master lease agreements between the Company's consolidated real estate subsidiaries and the Company's consolidated operating subsidiaries.
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NOTE 6 - EMPLOYEE BENEFIT PLANS
Pension and Other Post-Retirement Benefits
The following tables provide the components of net pension and post-retirement (income) expense (in millions):
| 12 weeks ended | |||||||||||||||||||||||
| Pension | Other post-retirement benefits | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Estimated return on plan assets | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Service cost | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization of prior service cost | |||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | ( | ||||||||||||||||||||||
| (Income) expense, net | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| 40 weeks ended | |||||||||||||||||||||||
| Pension | Other post-retirement benefits | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Estimated return on plan assets | $ | ( | $ | ( | $ | $ | |||||||||||||||||
| Service cost | |||||||||||||||||||||||
| Interest cost | |||||||||||||||||||||||
| Amortization of prior service cost | |||||||||||||||||||||||
| Amortization of net actuarial loss (gain) | ( | ( | |||||||||||||||||||||
| Settlement charge | |||||||||||||||||||||||
| (Income) expense, net | $ | ( | $ | ( | $ | $ | |||||||||||||||||
The Company contributed $1.7 million and $58.0 million to its defined pension plans and post-retirement benefit plans during the 12 and 40 weeks ended December 5, 2020, respectively. For the 12 and 40 weeks ended November 30, 2019, the Company contributed $2.0 million and $9.0 million, respectively. At the Company's discretion, additional funds may be contributed to the defined benefit pension plans. The Company currently anticipates contributing an additional $4.4 million to these plans for the remainder of fiscal 2020.
Defined Contribution Plans and Supplemental Retirement Plans
Total contributions expensed for defined contribution plans (401(k) plans) were $15.3 million and $12.7 million for the 12 weeks ended December 5, 2020 and November 30, 2019, respectively. For the 40 weeks ended December 5, 2020 and November 30, 2019, total contributions expensed were $53.4 million and $45.3 million, respectively.
Multiemployer Pension Plans
The Company was the second largest contributing employer to the Food Employers Labor Relations Association and United Food and Commercial Workers Pension Fund ("FELRA") which was projected by FELRA to become insolvent in the first quarter of 2021, and to the Mid-Atlantic UFCW and Participating Pension Fund ("MAP"). The Company continued to fund all of its required contributions to FELRA and MAP.
On March 5, 2020, the Company agreed with the two applicable local unions to new collective bargaining agreements pursuant to which the Company contributes to FELRA and MAP. These agreements were subject to
19
final approval by the Pension Benefit Guaranty Corporation ("PBGC"), the local unions and the largest contributing employer, which was reached on December 31, 2020. In connection with these final agreements, to address the pending insolvency of FELRA, the Company and the two local unions, along with the largest contributing employer, agreed to combine MAP into FELRA (the "Combined Plan") on December 31, 2020. Immediately upon the combination, the Combined Plan terminated and commencing February 2021, the Company is required to annually pay $23.2 million to the Combined Plan for the next 25 years. This payment replaces the Company's previous annual contribution to both FELRA and MAP, which was a combined $26.2 million in fiscal 2019. Immediately after the combination, the Company received a release of all withdrawal liability and mass withdrawal liability from FELRA, MAP, the Combined Plan, and the PBGC. In addition to the $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. These contributions are expected to commence in June 2022 and are currently estimated to be between approximately $10 to $12 million annually for 10 years. The Company preliminarily expects to record a non-cash pre-tax charge of approximately $595 million ($445 million, net of tax) in the fourth quarter of fiscal 2020 to record the pension obligation for these benefits earned for prior service. The evaluation of the accounting charge is ongoing, and the estimated impact is preliminary and subject to change. Furthermore, the Company will establish and contribute to a new Variable Annuity Pension Plan (the "Combined VAPP") that will provide benefits to participants for future services, effective January 1, 2021. The Company will also contribute approximately $4 million to the Combined VAPP to fund certain administrative expenses and establish a stabilization reserve for the Combined VAPP.
On July 21, 2020, the Company announced that it had entered into a tentative agreement with the trustees of the United Food and Commercial Workers International Union ("UFCW") Union-Industry Pension Fund ("National Fund"), providing that the Company will permanently cease to have any obligation to contribute to the National Fund, a multiemployer pension plan, and will completely withdraw from the National Fund, effective as of June 30, 2020. The Company and nine UFCW local unions entered into a Memorandum of Understanding ("MOU") that permitted the withdrawal and required the establishment of a new Variable Annuity Pension Plan (the "National VAPP") that will provide benefits to participants for future services, effective as of July 1, 2020. On November 30, 2020, these agreements became effective upon ratification by the membership of each of these nine local unions and the related agreements with the local unions whose members participate in the National Fund and are employed by the two largest contributors to the National Fund. As a result, the Company will pay, by June 2023, an aggregate of approximately $286 million to the National Fund, in full satisfaction of the Company's withdrawal liability amount and mass withdrawal liability amount. The Company has paid $147.3 million as of the end of the third quarter of fiscal 2020 and will pay the remaining amount in two installments over the next 30 months, any portion of which may be prepaid, in whole or in part. The Company will also pre-fund a transition reserve in the National VAPP to support certain grandfathered participants by making a payment in the fourth quarter of 2020 of approximately $8 to $9 million to the National VAPP. The Company recorded a pre-tax charge of approximately $286 million ($213 million, net of tax) in the third quarter of fiscal 2020 to record the withdrawal liability for these benefits earned for prior service.
NOTE 7 - 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 INC. ("SuperValu"), which was then the owner of New Albertsons L.P., a wholly-owned subsidiary of the Company, that additional collateral was required to be posted in connection with the Company's, and certain other subsidiaries', California self-insured workers' compensation obligations pursuant to applicable regulations. The notice from the DIR stated that the additional collateral was required as a result of an increase in estimated future liabilities, as determined by the DIR pursuant to a review of the self-insured California workers'
20
compensation claims with respect to the applicable businesses. On January 21, 2014, the Company entered into a Collateral Substitution Agreement with the California Self-Insurers' Security Fund to provide collateral. The collateral not covered by the California Self-Insurers' Security Fund is covered by an irrevocable LOC for the benefit of the State of California Office of Self-Insurance Plans. The amount of the LOC is adjusted annually based on semi-annual filings of an actuarial study reflecting liabilities as of December 31 of each year reduced by claim closures and settlements. The related LOC was $40.1 million as of December 5, 2020 and $90.3 million as of February 29, 2020, respectively.
Lease Guarantees: The Company may have liability under certain operating leases that were assigned to third parties. If any of these third parties fail to perform their obligations under the leases, the Company could be responsible for the lease obligation, including as a result of the economic dislocation caused by the response to the COVID-19 pandemic. Because of the wide dispersion among third parties and the variety of remedies available, the Company believes that if an assignee became insolvent, it would not have a material effect on the Company's financial condition, results of operations or cash flows.
The Company also provides guarantees, indemnifications and assurances to others in the ordinary course of its business.
Legal Proceedings
The Company is subject from time to time to various claims and lawsuits arising in the ordinary course of business, including lawsuits involving trade practices, lawsuits alleging violations of state and/or federal wage and hour laws (including alleged violations of meal and rest period laws and alleged misclassification issues), real estate disputes as well as other matters. Some of these suits purport or may be determined to be class actions and/or seek substantial damages. It is the opinion of the Company's management that although the amount of liability with respect to certain of the matters described herein cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on the Company's business or financial condition.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where the loss contingency can be reasonably estimated and an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for the Company's exposure in excess of the amount accrued is expected to be immaterial to the Company. It remains possible that despite management's current belief, material differences in actual outcomes or changes in management's evaluation or predictions could arise that could have a material effect on the Company's financial condition, results of operations or cash flows.
Office of Inspector General: In January 2016, the Company received a subpoena from the Office of the Inspector General of the Department of Health and Human Services (the "OIG") pertaining to the pricing of drugs offered under the Company's MyRxCare discount program and the impact on reimbursements to Medicare, Medicaid and TRICARE (the "Government Health Programs"). In particular, the OIG requested information on the relationship between the prices charged for drugs under the MyRxCare program and the "usual and customary" prices reported by the Company in claims for reimbursements to the Government Health Programs or other third-party payors. The Company cooperated with the OIG in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of reasonably possible loss, if any.
Civil Investigative Demands: On December 16, 2016, the Company received a civil investigative demand from the United States Attorney for the District of Rhode Island in connection with a False Claims Act ("FCA") investigation relating to the Company's influenza vaccination programs. The investigation concerns whether the Company's provision of store coupons to its customers who received influenza vaccinations in its store pharmacies constituted
21
an improper benefit to those customers under the federal Medicare and Medicaid programs. The Company believes that its provision of the store coupons to its customers is an allowable incentive to encourage vaccinations. The Company cooperated with the U.S. Attorney in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.
The Company has received a civil investigative demand dated February 28, 2020 from the United States Attorney for the Southern District of New York in connection with an FCA investigation relating to the Company's dispensing practices regarding insulin pen products. The investigation seeks documents regarding the Company's policies, practices and procedures, as well as dispensing data, among other things. The Company will cooperate with the U.S. Attorney in the investigation. The Company is currently unable to determine the probability of the outcome of this matter or the range of possible loss, if any.
Terraza/Lorenz: 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 issued an order on March 30, 2020 requesting some minor changes to the notice procedures, and plaintiffs submitted an amended motion for preliminary approval. On September 8, 2020, the Court granted plaintiffs' amended motion, and the matter has been set for a final approval hearing on April 26, 2021. The Company has recorded an estimated liability for these matters.
False Claims Act: Two qui tam actions alleging violations of the FCA have been filed against the Company and its subsidiaries. Violations of the FCA are subject to treble damages and penalties of up to a specified dollar amount per false claim.
In United States ex rel. Proctor v. Safeway, filed in the U.S. District Court for the Central District of Illinois, the relator alleges that Safeway overcharged government healthcare programs by not providing the government, as part of its usual and customary prices, the benefit of discounts given to customers in pharmacy membership discount and price-matching programs. The relator filed his complaint under seal on November 11, 2011, and the complaint was unsealed on August 26, 2015. The relator amended the complaint on March 31, 2016. On June 12, 2020, the Court granted Safeway's motion for summary judgment, holding that the relator could not prove that Safeway acted with the intent required under the FCA, and judgment was issued on June 15, 2020. On July 10, 2020, the relator filed a motion to alter or amend the judgment and to supplement the record, which Safeway opposed. On November 13, 2020, the Court denied relator's motion, and on December 11, 2020, relator filed a notice of appeal.
In United States ex rel. Schutte and Yarberry v. SuperValu, New Albertson's, Inc., et al., also filed in the Central District of Illinois, the relators allege that defendants (including various subsidiaries of the Company) overcharged
22
government healthcare programs by not providing the government, as a part of usual and customary prices, the benefit of discounts given to customers who requested that defendants match competitor prices. The complaint was originally filed under seal and amended on November 30, 2015. On August 5, 2019, the Court granted relators' motion for partial summary judgment, holding that price-matched prices are the usual and customary prices for those drugs. On July 1, 2020, the Court granted the defendants' motions for summary judgment and dismissed the case, holding that the relator could not prove that defendants acted with the intent required under the FCA. Judgment was issued on July 2, 2020. On July 9, 2020, the relators filed a notice of appeal. The appeal is now pending in the Seventh Circuit Court of Appeals. Oral argument is scheduled for January 19, 2021.
In both of the above cases, the government previously investigated the relators' allegations and declined to intervene. The relators elected to pursue their respective cases on their own and in each case have alleged FCA damages in excess of $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.
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. CARB has made an opening demand regarding potential fines and
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penalties. The parties are in negotiations to reach a settlement. The Company has recorded an estimated liability for this matter.
FACTA: On May 31, 2019, a putative class action complaint entitled Martin v. Safeway was filed in the California Superior Court for the County of Alameda, alleging the Company failed to comply with the Fair and Accurate Credit Transactions Act ("FACTA") by printing receipts that failed to adequately mask payment card numbers as required by FACTA. The plaintiff claims the violation was "willful" and exposes the Company to statutory damages provided for in FACTA. The Company has answered the complaint and is vigorously defending the matter. On January 8, 2020, the Company commenced mediation discussions with plaintiff's counsel and reached a settlement in principle on February 24, 2020. The parties will seek court approval of the settlement. The Company has recorded an estimated liability for this matter.
Other Commitments
NOTE 8 - 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 the stockholders. Generally, for the Company, total comprehensive income or loss equals net income plus or minus adjustments for pension and other post-retirement liabilities and interest rate swaps. Total comprehensive earnings represent the activity for a period net of tax.
While total comprehensive earnings are the activity in a period and are largely driven by net earnings in that period, accumulated other comprehensive income or loss ("AOCI") represents the cumulative balance of other comprehensive income, net of tax, as of the balance sheet date. Changes in the AOCI balance by component are shown below (in millions):
| 40 weeks ended December 5, 2020 | |||||||||||||||||||||||||||||
| Total | Interest rate swaps | Pension and Post-retirement benefit plans | Other | ||||||||||||||||||||||||||
| Beginning balance | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
| Other comprehensive income before reclassifications | |||||||||||||||||||||||||||||
| Amounts reclassified from accumulated other comprehensive income | |||||||||||||||||||||||||||||
| Tax expense | ( | ( | ( | ||||||||||||||||||||||||||
| Current-period other comprehensive income, net of tax | |||||||||||||||||||||||||||||
| Ending balance | $ | ( | $ | $ | ( | $ | |||||||||||||||||||||||
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| 40 weeks ended November 30, 2019 | |||||||||||||||||||||||||||||
| Total | Interest rate swaps | Pension and Post-retirement benefit plans | Other | ||||||||||||||||||||||||||
| Beginning balance | $ | $ | $ | $ | ( | ||||||||||||||||||||||||
Cumulative effect of accounting change (1) | |||||||||||||||||||||||||||||
Other comprehensive (loss) income before reclassifications | ( | ( | |||||||||||||||||||||||||||
Amounts reclassified from accumulated other comprehensive income | ( | ||||||||||||||||||||||||||||
| Tax benefit (expense) | ( | ( | |||||||||||||||||||||||||||
Current-period other comprehensive (loss) income, net of tax | ( | ( | |||||||||||||||||||||||||||
| Ending balance | $ | $ | ( | $ | $ | ||||||||||||||||||||||||
(1) Related to the fiscal 2019 adoption of , "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income".
NOTE 9 - NET INCOME PER CLASS A COMMON SHARE
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The components of basic and diluted net income per Class A common share were as follows (in millions, except per share data):
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Basic net income per Class A common share | |||||||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Accrued dividends on Convertible Preferred Stock | ( | ( | |||||||||||||||||||||
| Earnings allocated to Convertible Preferred Stock | ( | ||||||||||||||||||||||
| Net income allocated to Class A common stockholders - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average Class A common shares outstanding - Basic (1) | |||||||||||||||||||||||
| Basic net income per Class A common share | $ | $ | $ | $ | |||||||||||||||||||
| Diluted net income per Class A common share | |||||||||||||||||||||||
| Net income allocated to Class A common stockholders - Basic | $ | $ | $ | $ | |||||||||||||||||||
| Accrued dividends on Convertible Preferred Stock | |||||||||||||||||||||||
| Earnings allocated to Convertible Preferred Stock | |||||||||||||||||||||||
| Net income allocated to Class A common stockholders - Diluted | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average Class A common shares outstanding - Basic (1) | |||||||||||||||||||||||
| Dilutive effect of: | |||||||||||||||||||||||
| Restricted stock units and awards | |||||||||||||||||||||||
| Convertible preferred stock (2) | |||||||||||||||||||||||
| Weighted average Class A common shares outstanding - Diluted (3) | |||||||||||||||||||||||
| Diluted net income per Class A common share | $ | $ | $ | $ | |||||||||||||||||||
(1) There were no 0.1
(2) Reflects the number of shares of Convertible Preferred Stock issued, if converted into Common Stock for the period outstanding.
(3) There were 101.6 million potential common shares outstanding related to convertible preferred stock that were antidilutive for the 12 weeks ended December 5, 2020 and no potential common shares outstanding that were antidilutive for the 40 weeks ended December 5, 2020. There were no
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Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Quarterly Report contains forward-looking statements. All statements other than statements of historical facts contained in this Quarterly Report, including statements regarding our future operating results and financial position, business strategy and plans and objectives of management for future operations, are forward-looking statements. In many cases, you can identify forward-looking statements by terms such as "may," "should," "expects," "plans," "anticipates," "could," "intends," "target," "projects," "contemplates," "believes," "estimates," "predicts," "potential," or "continue" or the negative of these terms or other similar expressions. Forward-looking statements are based on our current expectations and assumptions and involve risks and uncertainties that could cause actual results or events to be materially different from those anticipated. These risks and uncertainties that could cause actual results to differ materially from those expressed or implied in the forward-looking statements include those related to the COVID-19 pandemic, about which there are still many unknowns, including the duration of the pandemic and the extent of its impact. The Company undertakes no obligation to update or revise any such statements as a result of new information, future events or otherwise. We may not actually achieve the plans, intentions or expectations disclosed in our forward-looking statements, and you should not place undue reliance on our forward-looking statements. Our forward-looking statements do not reflect the potential impact of any future acquisitions, mergers, dispositions, joint ventures or investments we may make. As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries.
NON-GAAP FINANCIAL MEASURES
We define EBITDA as generally accepted accounting principles ("GAAP") earnings (net loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as earnings (net loss) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted Net Income as GAAP net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted Net Income Per Class A Common Share as Adjusted Net Income divided by the weighted average diluted Class A common shares outstanding, as adjusted to reflect all restricted stock units and awards outstanding at the end of the period. We define Adjusted Free Cash Flow as Adjusted EBITDA less capital expenditures. See "Results of Operations" for further discussion and a reconciliation of Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow.
EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow (collectively, the "Non-GAAP Measures") are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income and gross profit. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing core operating performance, and thereby facilitate review of our operating performance on a period-to-period basis. Other companies may have different capital structures or different lease terms, and comparability to our results of operations may be impacted by the effects of acquisition accounting on our depreciation and amortization. As a result of the effects of these factors and factors specific to other companies, we believe EBITDA, Adjusted EBITDA, Adjusted Net Income, Adjusted Net Income Per Class A Common Share and Adjusted Free Cash Flow provide helpful information to analysts and investors to facilitate a comparison of our operating performance to that of other companies. We also use Adjusted EBITDA, as further adjusted for additional items defined in our debt instruments, for board of director and bank compliance reporting. Our presentation of
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Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.
Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.
COVID-19
We continue to experience significant increases in demand in stores as people have adjusted to the new circumstances resulting from the COVID-19 pandemic. There also continues to be a substantial increase in customer demand and engagement with our eCommerce offerings as a result of the pandemic, including both home delivery and our Drive Up & Go curbside pickup. We have responded to this increased demand for our eCommerce offerings by hiring additional associates, retaining additional third-party service providers and expanding our Drive Up & Go offerings.
Responding to the pandemic has also significantly increased our expenses. We continue to clean and disinfect all departments, restrooms, and other high-touch points of our stores often, including check stands and service counters, and hourly disinfecting of high-touch areas. This is in addition to our rigorous food safety and sanitation programs that were already in place. We have also provided additional wages and benefits to our associates with appreciation and bonus pay, as well as expanded sick pay.
Most of the states in which we operate have anti-price gouging statutes, which place limits on our ability to increase prices after an officially declared emergency. Certain state governors declared an emergency near the outset of the COVID-19 pandemic, thus triggering the application of anti-price gouging statutes. As the COVID-19 pandemic began, we implemented procedures to assure compliance with anti-price gouging laws, including instruction and guidance to our retail operators on the price restrictions to which we needed to adhere, all of which remain in place.
We believe that some of the changes that have been implemented, in our stores and the country as a whole, will be permanent. However, the ultimate significance of the pandemic on our financial condition, results of operations, or cash flows will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and the nature and effectiveness of governmental and public actions taken in response.
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OVERVIEW
As of December 5, 2020, we operated 2,253 retail food and drug stores with 1,727 pharmacies, 400 associated fuel centers, 22 dedicated distribution centers and 20 manufacturing facilities. In addition to our retail footprint, we strive to differentiate through our best in class Own Brands and rapidly expanding eCommerce options, which primarily include home delivery sales and Drive Up & Go curbside pickup. The following table shows stores operating, opened and closed during the periods presented:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Stores, beginning of period | 2,252 | 2,262 | 2,252 | 2,269 | |||||||||||||||||||
| Opened | 5 | 5 | 7 | 12 | |||||||||||||||||||
| Closed | (4) | (7) | (6) | (21) | |||||||||||||||||||
| Stores, end of period | 2,253 | 2,260 | 2,253 | 2,260 | |||||||||||||||||||
The following table summarizes our stores by size:
| Number of stores | Percent of Total | Retail Square Feet (1) | ||||||||||||||||||||||||||||||||||||
| Square Footage | December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||||||||||||||
| Less than 30,000 | 202 | 204 | 9.0 | % | 9.0 | % | 4.7 | 4.7 | ||||||||||||||||||||||||||||||
| 30,000 to 50,000 | 784 | 787 | 34.8 | % | 34.8 | % | 32.9 | 33.0 | ||||||||||||||||||||||||||||||
| More than 50,000 | 1,267 | 1,269 | 56.2 | % | 56.2 | % | 74.8 | 75.0 | ||||||||||||||||||||||||||||||
| Total Stores | 2,253 | 2,260 | 100.0 | % | 100.0 | % | 112.4 | 112.7 | ||||||||||||||||||||||||||||||
(1) In millions, reflects total square footage of retail stores operating at the end of the period.
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RESULTS OF OPERATIONS
Comparison of 12 and 40 weeks ended December 5, 2020 to 12 and 40 weeks ended November 30, 2019:
The following table and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 12 and 40 weeks ended December 5, 2020 ("third quarter of fiscal 2020" and "first 40 weeks of fiscal 2020") and 12 and 40 weeks ended November 30, 2019 ("third quarter of fiscal 2019" and "first 40 weeks of fiscal 2019").
| 12 weeks ended | |||||||||||||||||||||||
| December 5, 2020 | % of Sales | November 30, 2019 | % of Sales | ||||||||||||||||||||
Net sales and other revenue | $ | 15,408.9 | 100.0 | % | $ | 14,103.2 | 100.0 | % | |||||||||||||||
Cost of sales | 10,900.3 | 70.7 | 10,108.1 | 71.7 | |||||||||||||||||||
Gross profit | 4,508.6 | 29.3 | 3,995.1 | 28.3 | |||||||||||||||||||
Selling and administrative expenses | 4,309.1 | 28.0 | 3,807.2 | 27.0 | |||||||||||||||||||
| Gain on property dispositions and impairment losses, net | (59.0) | (0.4) | (18.7) | (0.1) | |||||||||||||||||||
| Operating income | 258.5 | 1.7 | 206.6 | 1.4 | |||||||||||||||||||
| Interest expense, net | 115.9 | 0.8 | 154.8 | 1.1 | |||||||||||||||||||
| Loss on debt extinguishment | 8.6 | 0.1 | — | — | |||||||||||||||||||
| Other income, net | (19.2) | (0.1) | (15.9) | (0.1) | |||||||||||||||||||
Income before income taxes | 153.2 | 0.9 | 67.7 | 0.4 | |||||||||||||||||||
Income tax expense | 29.5 | 0.2 | 12.9 | 0.1 | |||||||||||||||||||
Net income | $ | 123.7 | 0.7 | % | $ | 54.8 | 0.3 | % | |||||||||||||||
| 40 weeks ended | |||||||||||||||||||||||
| December 5, 2020 | % of Sales | November 30, 2019 | % of Sales | ||||||||||||||||||||
Net sales and other revenue | $ | 53,918.1 | 100.0 | % | $ | 47,018.3 | 100.0 | % | |||||||||||||||
Cost of sales | 38,063.1 | 70.6 | 33,842.1 | 72.0 | |||||||||||||||||||
Gross profit | 15,855.0 | 29.4 | 13,176.2 | 28.0 | |||||||||||||||||||
Selling and administrative expenses | 14,109.7 | 26.2 | 12,548.4 | 26.7 | |||||||||||||||||||
| Gain on property dispositions and impairment losses, net | (47.0) | (0.1) | (482.7) | (1.0) | |||||||||||||||||||
| Operating income | 1,792.3 | 3.3 | 1,110.5 | 2.3 | |||||||||||||||||||
| Interest expense, net | 425.1 | 0.8 | 557.5 | 1.2 | |||||||||||||||||||
Loss on debt extinguishment | 57.7 | 0.1 | 65.8 | 0.1 | |||||||||||||||||||
Other income, net | (27.5) | (0.1) | (21.9) | — | |||||||||||||||||||
| Income before income taxes | 1,337.0 | 2.5 | 509.1 | 1.0 | |||||||||||||||||||
| Income tax expense | 342.6 | 0.6 | 110.5 | 0.2 | |||||||||||||||||||
| Net income | $ | 994.4 | 1.9 | % | $ | 398.6 | 0.8 | % | |||||||||||||||
Net Sales and Other Revenue
Net sales and other revenue increased 9.3% to $15,408.9 million for the third quarter of fiscal 2020 from $14,103.2 million for the third quarter of fiscal 2019. The increase in Net sales and other revenue was primarily driven by our 12.3% increase in identical sales, partially offset by a reduction in sales related to the stores closed since the third quarter of fiscal 2019 and $265.4 million in lower fuel sales.
Net sales and other revenue increased 14.7% to $53,918.1 million for the first 40 weeks of fiscal 2020 from $47,018.3 million for the first 40 weeks of fiscal 2019. The increase in Net sales and other revenue was primarily driven by our 18.4% increase in identical sales, partially offset by a reduction in sales related to the stores closed since the third quarter of fiscal 2019 and $975.1 million in lower fuel sales.
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Identical Sales, Excluding Fuel
Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer internet sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 12 and 40 weeks ended December 5, 2020 and the 12 and 40 weeks ended November 30, 2019, respectively, were:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Identical sales, excluding fuel | 12.3% | 2.7% | 18.4% | 2.1% | |||||||||||||||||||
The increase in identical sales for the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 was a direct result of significant demand due to the COVID-19 pandemic, including 225% growth in our digital sales during the third quarter of fiscal 2020 as more customers shifted to online home delivery and Drive Up & Go.
Gross Profit
Gross profit represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include inbound freight charges, purchasing and receiving costs, warehouse inspection costs, warehousing costs and other costs associated with our distribution network. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.
Gross profit margin increased to 29.3% during the third quarter of fiscal 2020 compared to 28.3% during the third quarter of fiscal 2019. Excluding the impact of fuel, gross profit margin increased 25 basis points compared to the third quarter of fiscal 2019. The increase in gross profit margin was driven by improvements in shrink expense and leveraging of our distribution, warehousing and supplies costs, partially offset by expenses related to our growth in digital sales and select investments in promotions and price. The increase was also partially offset by $19.1 million of costs related to the COVID-19 pandemic, including expanded sick pay, incremental labor for enhanced cleaning and health screening to support and protect our supply chain employees and other warehousing and inventory costs.
| Third quarter of fiscal 2020 vs. Third quarter of fiscal 2019 | Basis point increase (decrease) | ||||
| Shrink | 55 | ||||
| Distribution, warehousing and supplies | 7 | ||||
| Depreciation and rent expense | 2 | ||||
| Advertising and sales and product mix | (20) | ||||
| COVID-19 pandemic related costs | (13) | ||||
| Other | (6) | ||||
| Total | 25 | ||||
Gross profit margin increased to 29.4% during the first 40 weeks of fiscal 2020 compared to 28.0% during the first 40 weeks of fiscal 2019. Excluding the impact of fuel, gross profit margin increased 65 basis points compared to the first 40 weeks of fiscal 2019. The increase in gross profit margin was driven by improvements in shrink expense and leveraging of our distribution, warehousing and supplies costs. Gross profit margin was also favorably impacted from leveraging of advertising costs and shifts in sales mix which was partially offset by expenses related to our growth in digital sales and select investments in promotions and price. The increase was also partially offset by $97.0 million of costs related to the COVID-19 pandemic, including employee appreciation pay, expanded sick pay, incremental labor for enhanced cleaning and health screening to support and protect our supply chain employees and other warehousing and inventory costs.
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| First 40 weeks of fiscal 2020 vs. First 40 weeks of fiscal 2019 | Basis point increase (decrease) | ||||
| Shrink | 67 | ||||
| Distribution, warehousing and supplies | 7 | ||||
| Advertising and sales and product mix | 7 | ||||
| Depreciation and rent expense | 3 | ||||
| COVID-19 pandemic related costs | (19) | ||||
| Total | 65 | ||||
Selling and Administrative Expenses
Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.
Selling and administrative expenses increased to 28.0% of Net sales and other revenue during the third quarter of fiscal 2020 compared to 27.0% of Net sales and other revenue for the third quarter of fiscal 2019. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue increased 40 basis points during the third quarter of fiscal 2020 compared to the third quarter of fiscal 2019. The increase in Selling and administrative expenses as a percentage of Net sales and other revenue was primarily driven by the $285.7 million charge related to the previously announced withdrawal from the UFCW National Fund, partially offset by rent and occupancy costs, depreciation and amortization and employee wage and benefit costs, attributable to sales leverage driven by significantly higher identical sales. Selling and administrative expenses were also favorably impacted by lower third-party fees and services, partially driven by cost reduction initiatives. Employee wage and benefit costs included $117.0 million of COVID-19 pandemic related incremental labor, which includes $44.7 million in bonus pay to front-line associates and $72.3 million for enhanced cleaning and health screening and expanded sick pay to front-line associates. In addition, we also incurred $13.7 million in additional COVID-19 pandemic costs related to supplies and outside services, which included personal protective equipment for our stores and employees.
| Third quarter of fiscal 2020 vs. Third quarter of fiscal 2019 | Basis point increase (decrease) | ||||
| Rent and occupancy costs | (50) | ||||
| Depreciation and amortization | (41) | ||||
| Third-party fees and services | (21) | ||||
| Employee wage and benefit costs | (12) | ||||
| COVID-19 pandemic related costs, excluding incremental employee wages and benefits | 9 | ||||
| Other (1) | 155 | ||||
| Total | 40 | ||||
(1) Includes the $285.7 million charge related to the UFCW National Fund withdrawal. See Note 6 - Employee benefit plans, included elsewhere in this document, for more information.
Selling and administrative expenses decreased to 26.2% of Net sales and other revenue during the first 40 weeks of fiscal 2020 compared to 26.7% of Net sales and other revenue for the first 40 weeks of fiscal 2019. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 120 basis points during the first 40 weeks of fiscal 2020 compared to the first 40 weeks of fiscal 2019. The decrease in Selling and administrative expenses as a percentage of Net sales and other revenue was driven by employee wage and benefit costs, depreciation and amortization and rent and occupancy costs, attributable to sales leverage driven by significantly higher identical sales. The decrease was also attributable to lower third-party fees and services, partially driven by cost reduction initiatives. The decrease was partially offset by the $285.7 million charge related to the previously announced withdrawal from the UFCW National Fund. Employee wage and benefit costs included
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$354.5 million of COVID-19 pandemic related employee appreciation and bonus pay, which includes expanded sick pay, to front-line associates and $275.0 million of incremental labor for enhanced cleaning and health screening. In addition, we also incurred $104.1 million in additional COVID-19 pandemic costs related to supplies and outside services, which included personal protective equipment for our stores and employees. We also contributed $53.0 million to hunger relief in our communities during the first 40 weeks of fiscal 2020.
| First 40 weeks of fiscal 2020 vs. First 40 weeks of fiscal 2019 | Basis point increase (decrease) | ||||
| Employee wage and benefit costs | (60) | ||||
| Depreciation and amortization | (60) | ||||
| Rent and occupancy costs | (60) | ||||
| Third-party fees and services | (13) | ||||
| COVID-19 pandemic related costs, excluding incremental employee wages and benefits | 30 | ||||
| Other (1) | 43 | ||||
| Total | (120) | ||||
(1) Includes the $285.7 million charge related to the UFCW National Fund withdrawal. See Note 6 - Employee benefit plans, included elsewhere in this document, for more information.
Gain on Property Dispositions and Impairment Losses, Net
For the third quarter of fiscal 2020, net gain on property dispositions and impairment losses was $59.0 million, primarily driven by $62.9 million of gains from the sale of assets, partially offset by $3.9 million of asset impairments. For the third quarter of fiscal 2019, net gain on property dispositions and impairment losses was $18.7 million, primarily driven by $20.9 million of gains from the sale of assets, partially offset by $2.2 million of asset impairments.
For the first 40 weeks of fiscal 2020, net gain on property dispositions and impairment losses was $47.0 million, primarily driven by $73.6 million of gains from the sale of assets, partially offset by $26.6 million of asset impairments, primarily related to right-of-use assets. For the first 40 weeks of fiscal 2019, net gain on property dispositions and impairment losses was $482.7 million, primarily driven by $539.0 million of gains from the sale of assets including $463.6 million of gains related to sale leaseback transactions during the second quarter of fiscal 2019, partially offset by $56.3 million of asset impairments including an impairment loss of $38.6 million related to certain assets of our meal kit operations.
Interest Expense, Net
Interest expense, net was $115.9 million during the third quarter of fiscal 2020 compared to $154.8 million during the third quarter of fiscal 2019. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during the third quarter of fiscal 2020 was 5.5%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.3% during the third quarter of fiscal 2019.
Interest expense, net was $425.1 million during the first 40 weeks of fiscal 2020 compared to $557.5 million during the first 40 weeks of fiscal 2019. The decrease in interest expense was primarily attributable to lower average outstanding borrowings and lower average interest rates. The weighted average interest rate during first 40 weeks of fiscal 2020 was 5.9%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 6.4% during the first 40 weeks of fiscal 2019.
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Loss on Debt Extinguishment
Loss on debt extinguishment was $8.6 million during third quarter of fiscal 2020 and $57.7 million during the first 40 weeks of fiscal 2020, compared to no loss on debt extinguishment during the third quarter of fiscal 2019 and $65.8 million during the first 40 weeks of fiscal 2019. The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2020 primarily consisted of a redemption premium payment and write-off of debt discounts associated with the 2024 Redemption and the September Partial 2025 Redemption. The loss on debt extinguishment during the first 40 weeks of fiscal 2019 primarily consisted of the write-off of debt discounts associated with the tender offer and various repurchases of notes.
Other Income, Net
For the third quarter of fiscal 2020, Other income, net was $19.2 million compared to $15.9 million for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Other income, net was $27.5 million compared to $21.9 million for the first 40 weeks of fiscal 2019. Other income, net during both the third quarter of fiscal 2020 and the first 40 weeks of fiscal 2020 was primarily driven by non-service cost components of net pension and post-retirement expense and income related to our equity investment, partially offset by recognized losses on interest rate swaps. Other income, net during both the third quarter of fiscal 2019 and the first 40 weeks of fiscal 2019 was primarily driven by non-service cost components of net pension and post-retirement expense and unrealized gains from non-operating investments.
Income Taxes
Income tax expense was $29.5 million, representing a 19.3% effective tax rate, for the third quarter of fiscal 2020. Income tax expense was $12.9 million, representing a 19.1% effective tax rate, for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Income tax expense was $342.6 million, representing a 25.6% effective tax rate. Income tax expense was $110.5 million, representing a 21.7% effective tax rate, for the first 40 weeks of fiscal 2019. The increase in income tax expense for both the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 was primarily driven by the increase in income before income taxes. The effective income tax rate for the third quarter of fiscal 2020 was favorably impacted by discrete benefits related to income tax credits and equity-based compensation deductions. The effective income tax rate for the first 40 weeks of fiscal 2020 was favorably impacted by income tax credits and equity-based compensation, offset by certain nondeductible transaction-related costs. The effective income tax rate for both the third quarter of fiscal 2019 and first 40 weeks of fiscal 2019 was favorably impacted by income tax credits.
Adjusted EBITDA, Adjusted Net Income and Adjusted Net Income Per Class A Common Share
For the third quarter of fiscal 2020, Adjusted EBITDA was $967.7 million, or 6.3% of Net sales and other revenue, compared to $634.4 million, or 4.5% of Net sales and other revenue, for the third quarter of fiscal 2019. For the first 40 weeks of fiscal 2020, Adjusted EBITDA was $3,607.1 million, or 6.7% of Net sales and other revenue, compared to $2,078.8 million, or 4.4% of Net sales and other revenue for the first 40 weeks of fiscal 2019. The increase in Adjusted EBITDA for the third quarter of fiscal 2020 and first 40 weeks of fiscal 2020 primarily relates to the 12.3% and 18.4% increase in identical sales, respectively, and the improved sales leverage experienced in gross margin and selling and administrative expenses as a percent of sales.
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The following tables reconcile Net income to Adjusted net income, and Net income per Class A common share to Adjusted net income per Class A common share (in millions, except per share data):
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Numerator: | |||||||||||||||||||||||
| Net income | $ | 123.7 | $ | 54.8 | $ | 994.4 | $ | 398.6 | |||||||||||||||
| Adjustments: | |||||||||||||||||||||||
(Gain) loss on interest rate and commodity hedges, net (d) | (1.9) | 0.1 | 24.0 | 0.4 | |||||||||||||||||||
| Facility closures and transformation (1)(b) | 18.6 | 11.0 | 34.5 | 11.0 | |||||||||||||||||||
| Acquisition and integration costs (2)(b) | 2.0 | 17.4 | 10.5 | 51.0 | |||||||||||||||||||
| Equity-based compensation expense (b) | 15.1 | 7.2 | 43.4 | 24.8 | |||||||||||||||||||
| Gain on property dispositions and impairment losses, net | (59.0) | (18.7) | (47.0) | (482.7) | |||||||||||||||||||
| LIFO expense (a) | 14.3 | 2.6 | 37.5 | 18.9 | |||||||||||||||||||
Discretionary COVID-19 pandemic related costs (3)(b) | 44.7 | — | 134.6 | — | |||||||||||||||||||
| Civil disruption related costs (4)(b) | — | — | 13.0 | — | |||||||||||||||||||
| Transaction and reorganization costs related to convertible preferred stock issuance and initial public offering (b) | (1.0) | 3.4 | 23.4 | 3.4 | |||||||||||||||||||
| Amortization of debt discount and deferred financing costs (c) | 4.9 | 25.1 | 16.1 | 68.9 | |||||||||||||||||||
| Loss on debt extinguishment | 8.6 | — | 57.7 | 65.8 | |||||||||||||||||||
| Amortization of intangible assets resulting from acquisitions (b) | 12.9 | 65.3 | 43.5 | 227.0 | |||||||||||||||||||
| UFCW National Fund withdrawal (5)(b) | 285.7 | — | 285.7 | — | |||||||||||||||||||
| Miscellaneous adjustments (6)(f) | 8.6 | 4.6 | 56.0 | 37.7 | |||||||||||||||||||
| Tax impact of adjustments to Adjusted net income | (90.6) | (30.6) | (183.1) | (6.9) | |||||||||||||||||||
| Adjusted net income | $ | 386.6 | $ | 142.2 | $ | 1,544.2 | $ | 417.9 | |||||||||||||||
| Denominator: | |||||||||||||||||||||||
| Weighted average Class A common shares outstanding - diluted | 472.1 | 580.9 | 580.3 | 579.8 | |||||||||||||||||||
| Adjustments: | |||||||||||||||||||||||
| Convertible preferred stock (7) | 101.6 | — | — | — | |||||||||||||||||||
| Restricted stock units and awards (8) | 8.9 | 6.6 | 8.3 | 7.6 | |||||||||||||||||||
| Adjusted weighted average Class A common shares outstanding - diluted | 582.6 | 587.5 | 588.6 | 587.4 | |||||||||||||||||||
| Adjusted net income per Class A common share - diluted | $ | 0.66 | $ | 0.24 | $ | 2.62 | $ | 0.71 | |||||||||||||||
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| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Net income per Class A common share - diluted | $ | 0.20 | $ | 0.09 | $ | 1.71 | $ | 0.69 | |||||||||||||||
| Convertible preferred stock (7) | 0.01 | — | — | — | |||||||||||||||||||
| Non-GAAP adjustments (9) | 0.46 | 0.15 | 0.95 | 0.03 | |||||||||||||||||||
| Restricted stock units and awards (8) | (0.01) | — | (0.04) | (0.01) | |||||||||||||||||||
| Adjusted net income per Class A common share - diluted | $ | 0.66 | $ | 0.24 | $ | 2.62 | $ | 0.71 | |||||||||||||||
The following table is a reconciliation of Adjusted net income to Adjusted EBITDA:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Adjusted net income (10) | $ | 386.6 | $ | 142.2 | $ | 1,544.2 | $ | 417.9 | |||||||||||||||
| Tax impact of adjustments to Adjusted net income | 90.6 | 30.6 | 183.1 | 6.9 | |||||||||||||||||||
| Income tax expense | 29.5 | 12.9 | 342.6 | 110.5 | |||||||||||||||||||
| Amortization of debt discount and deferred financing costs (c) | (4.9) | (25.1) | (16.1) | (68.9) | |||||||||||||||||||
| Interest expense, net | 115.9 | 154.8 | 425.1 | 557.5 | |||||||||||||||||||
| Amortization of intangible assets resulting from acquisitions (b) | (12.9) | (65.3) | (43.5) | (227.0) | |||||||||||||||||||
| Depreciation and amortization (e) | 362.9 | 384.3 | 1,171.7 | 1,281.9 | |||||||||||||||||||
| Adjusted EBITDA | $ | 967.7 | $ | 634.4 | $ | 3,607.1 | $ | 2,078.8 | |||||||||||||||
(1) Includes costs related to closures of operating facilities and third-party consulting fees related to our strategic priorities and associated business transformation.
(2) Related to conversion activities and related costs associated with integrating acquired businesses, primarily the Safeway acquisition. Also includes expenses related to management fees paid in connection with acquisition and financing activities.
(3) Includes $44.7 million in bonus payments related to front-line associates during the third quarter of fiscal 2020. Also includes $53 million of charitable contributions to our communities and hunger relief and $36.9 million in final reward payments to front-line associates at the end of the first quarter of fiscal 2020.
(4) Primarily includes costs related to store damage, inventory losses and community support as a result of the civil disruption during late May and early June in certain markets.
(5) Related to the previously announced withdrawal from the UFCW National Fund.
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(6) Miscellaneous adjustments include the following (see table below):
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Non-cash lease-related adjustments | $ | 1.2 | $ | 7.0 | $ | 3.1 | $ | 13.3 | |||||||||||||||
| Lease and lease-related costs for surplus and closed stores | 8.8 | 4.5 | 38.3 | 16.5 | |||||||||||||||||||
| Net realized and unrealized (gain) loss on non-operating investments | (3.5) | (10.0) | 1.2 | (2.5) | |||||||||||||||||||
| Certain legal and regulatory accruals and settlements, net | — | 0.1 | — | (1.8) | |||||||||||||||||||
| Other (a) | 2.1 | 3.0 | 13.4 | 12.2 | |||||||||||||||||||
| Total miscellaneous adjustments | $ | 8.6 | $ | 4.6 | $ | 56.0 | $ | 37.7 | |||||||||||||||
(a) Primarily includes adjustments for unconsolidated equity investments and certain contract termination costs.
(7) Represents the conversion of convertible preferred stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the convertible preferred stock is antidilutive under GAAP.
(8) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.
(9) Reflects the per share impact of Non-GAAP adjustments for each period presented. See the reconciliation of Net income to Adjusted net income above for further details.
(10)Reflects the impact of Non-GAAP adjustments for each period presented. See the reconciliation of Net income to Adjusted net income above for further details.
Non-GAAP adjustment classifications within the Consolidated Statement of Operations:
(a) Cost of sales
(b) Selling and administrative expenses
(c) Interest expense, net
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(d) (Gain) loss on interest rate and commodity hedges, net:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Cost of sales | $ | (2.2) | $ | 0.1 | $ | 4.3 | $ | 0.4 | |||||||||||||||
| Other income, net | 0.3 | — | 19.7 | — | |||||||||||||||||||
| Total (Gain) loss on interest rate and commodity hedges, net | $ | (1.9) | $ | 0.1 | $ | 24.0 | $ | 0.4 | |||||||||||||||
(e) Depreciation and amortization:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Cost of sales | $ | 37.8 | $ | 38.3 | $ | 131.9 | $ | 128.3 | |||||||||||||||
| Selling and administrative expenses | 325.1 | 346.0 | 1,039.8 | 1,153.6 | |||||||||||||||||||
| Total Depreciation and amortization | $ | 362.9 | $ | 384.3 | $ | 1,171.7 | $ | 1,281.9 | |||||||||||||||
(f) Miscellaneous adjustments:
| 12 weeks ended | 40 weeks ended | ||||||||||||||||||||||
| December 5, 2020 | November 30, 2019 | December 5, 2020 | November 30, 2019 | ||||||||||||||||||||
| Selling and administrative expenses | $ | 10.0 | $ | 11.9 | $ | 44.7 | $ | 28.6 | |||||||||||||||
| Other income, net | (1.4) | (7.3) | 11.3 | 9.1 | |||||||||||||||||||
| Total Miscellaneous adjustments | $ | 8.6 | $ | 4.6 | $ | 56.0 | $ | 37.7 | |||||||||||||||
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Adjusted Free Cash Flow
The following is a reconciliation of Net cash provided by operating activities to Adjusted Free Cash Flow (in millions):
| 40 weeks ended | ||||||||||||||
| December 5, 2020 | November 30, 2019 | |||||||||||||
| Net cash provided by operating activities | $ | 2,996.0 | $ | 1,387.0 | ||||||||||
| Income tax expense | 342.6 | 110.5 | ||||||||||||
| Deferred income taxes | 16.8 | 40.6 | ||||||||||||
| Interest expense, net | 425.1 | 557.5 | ||||||||||||
| Operating lease right-of-use assets amortization | (443.9) | (418.3) | ||||||||||||
| Changes in operating assets and liabilities | (397.7) | 326.1 | ||||||||||||
| Amortization and write-off of deferred financing costs | (16.1) | (35.4) | ||||||||||||
Contributions to pension and post-retirement benefit plans, net of (income) expense | 80.6 | 16.2 | ||||||||||||
| Facility closures and transformation | 34.5 | 11.0 | ||||||||||||
| Acquisition and integration costs | 10.5 | 51.0 | ||||||||||||
| Discretionary COVID-19 pandemic related costs | 134.6 | — | ||||||||||||
| Civil disruption related costs | 13.0 | — | ||||||||||||
Transaction and reorganization costs related to convertible preferred stock issuance and initial public offering | 23.4 | 3.4 | ||||||||||||
| UFCW National Fund withdrawal | 285.7 | — | ||||||||||||
| Other adjustments | 102.0 | 29.2 | ||||||||||||
| Adjusted EBITDA | 3,607.1 | 2,078.8 | ||||||||||||
| Less: capital expenditures | (1,083.0) | (1,083.7) | ||||||||||||
| Adjusted Free Cash Flow | $ | 2,524.1 | $ | 995.1 | ||||||||||
LIQUIDITY AND CAPITAL RESOURCES
The following table sets forth the major sources and uses of cash and cash equivalents and restricted cash for each period (in millions):
| 40 weeks ended | |||||||||||
| December 5, 2020 | November 30, 2019 | ||||||||||
| Cash and cash equivalents and restricted cash at end of period | $ | 1,886.7 | $ | 416.6 | |||||||
| Cash flows provided by operating activities | 2,996.0 | 1,387.0 | |||||||||
| Cash flows used in investing activities | (944.3) | (25.4) | |||||||||
| Cash flows used in financing activities | (643.9) | (1,912.7) | |||||||||
Net Cash Provided by Operating Activities
Net cash provided by operating activities was $2,996.0 million for the first 40 weeks of fiscal 2020 compared to $1,387.0 million for the first 40 weeks of fiscal 2019. The increase in cash flow from operations compared to the first 40 weeks of fiscal 2019 was due to improvements in operating performance and changes in working capital primarily related to accounts payable as our business adjusted for the significant increase in sales volume during the first 40 weeks of fiscal 2020, deferral of the employer-paid portion of social security taxes and a decrease in cash paid for interest. These increases were partially offset by the $147.3 million payment to the UFCW National Fund, an increase in cash paid for income taxes, the $75.0 million payment to the UFCW & Employers Midwest Pension Fund pension settlement and additional contributions to our defined benefit pension plans and post-retirement benefit plans.
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Net Cash Used by Investing Activities
Net cash used in investing activities was $944.3 million for the first 40 weeks of fiscal 2020 compared to $25.4 million for the first 40 weeks of fiscal 2019.
For the first 40 weeks of fiscal 2020, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $1,083.0 million, partially offset by proceeds from the sale of assets of $143.9 million. Payments for property and equipment included the opening of seven new stores, completion of 225 remodels and continued investment in our digital and eCommerce technology. For the full fiscal year of 2020, we expect capital expenditures to be in the range of $1.65 billion to $1.75 billion. For the first 40 weeks of fiscal 2019, cash used in investing activities consisted primarily of payments for property and equipment, including lease buyouts, of $1,083.7 million, offset by proceeds from the sale of assets of $1,061.0 million. Payments for property and equipment included the opening of 12 new stores, completion of 153 remodels and continued investment in our digital and eCommerce technology. Proceeds from the sale of assets primarily includes the sale and leaseback of 53 store properties and one distribution center for $931.3 million, net of closing costs, during the second quarter of fiscal 2019 and certain other property dispositions during the first 40 weeks of fiscal 2019.
Net Cash Used in Financing Activities
Net cash used in financing activities was $643.9 million during the third quarter of fiscal 2020 compared to $1,912.7 million during the third quarter of fiscal 2019.
Net cash used in financing activities during the first 40 weeks of fiscal 2020 consisted primarily of the $1.5 billion issuance and subsequent $1.5 billion redemption of Senior Unsecured Notes (as further discussed below), the $2.0 billion borrowing and subsequent repayment of the ABL Facility, the repurchase of outstanding Class A common stock, the issuance of the Convertible Preferred Stock and dividends paid on our Class A common stock and Convertible Preferred Stock.
Debt Management
On August 31, 2020, we completed the issuance of $750.0 million in aggregate principal amount of 2026 Notes and $750.0 million in aggregate principal amount of 2029 Notes. Proceeds from the New Notes, together with approximately $60 million cash on hand, were used to fund the 2024 Redemption. In connection with the 2024 Redemption, we paid an associated redemption premium of $41.4 million and recorded a $49.1 million loss on debt extinguishment, comprised of the $41.4 million redemption premium and $7.7 million write-off of deferred financings costs.
On September 16, 2020, remaining proceeds from the New Notes were used to fund the September Partial 2025 Redemption. In connection with the September Partial 2025 Redemption, we paid an associated redemption premium of $7.2 million. We recorded an $8.6 million loss on debt extinguishment related to the September Partial 2025 Redemption, comprised of the $7.2 million redemption premium and a $1.4 million write-off of deferred financing costs.
On December 22, 2020, subsequent to the end of the third quarter of fiscal 2020, we completed the issuance of $600.0 million in aggregate principal amount of Additional 2029 Notes. The Additional 2029 Notes were issued under the same indenture as the 2029 Notes issued by us on August 31, 2020. Interest on the Additional 2029 Notes is payable semi-annually in arrears on March 15 and September 15 of each year, commencing on March 15, 2021. The Additional 2029 Notes have not been and will not be registered with the SEC. The Additional 2029 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the our subsidiaries that are not issuers under the indenture governing such Additional 2029 Notes. On January 4, 2021, proceeds from the
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Additional 2029 Notes, together with approximately $230 million of cash on hand, were used to fund the January Partial 2025 Redemption.
On March 12, 2020, we provided notice to the lenders of our ABL Facility to borrow $2.0 billion as a precautionary measure in order to increase our cash position and preserve flexibility in light of the uncertainty in the global markets resulting from the COVID-19 pandemic. We repaid the $2.0 billion in full on June 19, 2020 and as of December 5, 2020, we had no borrowings outstanding under our $4.0 billion ABL Facility and total availability of approximately $3.6 billion (net of letter of credit usage).
Liquidity Needs
We estimate our liquidity needs over the next 12 months to be in the range of $4.75 billion to $5.25 billion, which includes anticipated requirements for working capital, capital expenditures, including pending acquisitions, pension obligations, interest payments and scheduled principal payments of debt, dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. Based on current operating trends, we believe that cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility, will be adequate to meet our liquidity needs for the next 12 months and for the foreseeable future. We believe we have adequate cash flow to continue to respond effectively to competitive conditions. In addition, we may enter into refinancing and sale leaseback transactions from time to time. There can be no assurance, however, that our business will continue to generate cash flow at or above current levels or that we will maintain our ability to borrow under our ABL Facility.
The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75% of the liquidation preference per share of the Convertible Preferred Stock. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that we pay on our Common Stock to the extent that such cash dividends exceed $206.25 million per fiscal year. On September 15, 2020 and December 15, 2020, we declared a quarterly cash dividend of $36.4 million and $29.5 million, respectively, to holders of the Convertible Preferred Stock, which was paid on September 30, 2020 and December 30, 2020, respectively.
In connection with the IPO, we established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Common Stock in an annual amount equal to $0.400 per common share. On October 14, 2020, we announced the first quarterly dividend payment of $0.100 per common share which was paid on November 10, 2020 to stockholders of record as of the close of business on October 26, 2020. On January 12, 2021, we announced the next quarterly dividend payment of $0.100 per common share to be paid on February 10, 2021 to stockholders of record as of the close of business on January 26, 2021.
Common Stock Repurchase Program
On October 14, 2020, our Board of Directors authorized a new share repurchase program that allows us to repurchase up to $300 million of our Common Stock. Purchases under the Common Stock repurchase program are made opportunistically at management's discretion. During the third quarter of fiscal 2020, as part of the share repurchase program, we repurchased 6,797,962 shares of our Class A common stock for an aggregate purchase price of $102.7 million.
CRITICAL ACCOUNTING POLICIES
The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. We have chosen accounting policies that we believe are appropriate to report accurately and fairly our operating results and financial position,
41
and we apply those accounting policies in a fair and consistent manner. See the Critical Accounting Policies section included in our Prospectus dated June 25, 2020 filed with the SEC pursuant to Rule 424(b) of the Securities Act of 1933, as amended, relating to our Registration Statement on Form S-1 (File No. 333-236956) for a discussion of our significant accounting policies.
RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDS
See Note 1 - Basis of presentation and summary of significant accounting policies of our unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.
Item 3 - Quantitative and Qualitative Disclosures About Market Risk
There have been no material changes in our exposure to market risk from the information provided in our Annual Report on Form 10-K for the fiscal year ended February 29, 2020.
Item 4 - Controls and Procedures
Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Quarterly Report on Form 10-Q, our Principal Executive Officer and Principal Financial Officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial reporting during the third quarter ended December 5, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II - OTHER INFORMATION
Item 1 - 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 in this Form 10-Q cannot be ascertained at this time, any resulting liability of these and other matters, including any punitive damages, will not have a material adverse effect on the Company's business or financial condition. See the matters under the caption Legal Proceedings in Note 7 - Commitments and contingencies and off balance sheet arrangements in the unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.
The Company continually evaluates its exposure to loss contingencies arising from pending or threatened litigation and believes it has made provisions where the loss contingency can be reasonably estimated and an adverse outcome is probable. Nonetheless, assessing and predicting the outcomes of these matters involves substantial uncertainties. Management currently believes that the aggregate range of reasonably possible loss for the Company's exposure in excess of the amount accrued is expected to be immaterial to the Company. It remains possible that despite management's current belief, material differences in actual outcomes or changes in management's evaluation or predictions could arise that could have a material effect on the Company's financial condition, results of operations or cash flows.
Item 1A - Risk Factors
The risk factors contained in Part II, "Item 1A. Risk Factors" of our Quarterly Report on Form 10-Q for the quarter ended June 20, 2020, filed with the SEC on August 4, 2020, amended and supplemented the risk factors previously disclosed in Part I, "Item 1A. Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended February 29, 2020, filed with the SEC on May 13, 2020, and are incorporated by reference herein.
Item 2 - Unregistered Sales of Equity Securities and Use of Proceeds
(a) Unregistered Sales of Equity Securities
None.
(b) Use of Proceeds
None.
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(c) Purchases of Equity Securities
| Issuer Purchases of Equity Securities | ||||||||||||||||||||||||||
| Period | Total Number of Shares Purchased | Average Price Paid per Share | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs(2) | Dollar Value of Shares that May Yet be Purchased Under the Plans or Programs (in millions)(2) | ||||||||||||||||||||||
| September 13, 2020 through September 30, 2020 | 6,837,970 | (1) | $ | 12.00 | — | $ | — | |||||||||||||||||||
| October 1, 2020 through October 31, 2020 | 1,703,200 | 15.09 | 1,703,200 | 274.3 | ||||||||||||||||||||||
| November 1, 2020 through November 30, 2020 | 5,060,003 | 15.11 | 5,060,003 | 197.8 | ||||||||||||||||||||||
| December 1, 2020 through December 5, 2020 | 34,759 | 15.50 | 34,759 | 197.3 | ||||||||||||||||||||||
| Total | 13,635,932 | $ | 13.55 | 6,797,962 | $ | 197.3 | ||||||||||||||||||||
(1) On September 14, 2020, the Company repurchased 6,837,970 shares of its outstanding common stock from a stockholder at a price of $12.00 per share.
(2) On October 14, 2020, the Company's Board of Directors authorized a new share repurchase program that allows the Company to repurchase up to $300.0 million of the Company's common stock. Purchases under the common stock repurchase program are made opportunistically at management's discretion.
Item 3 - Defaults Upon Senior Securities
None.
Item 4 - Mine Safety Disclosures
Not Applicable.
Item 5 - Other Information
None.
Item 6 - Exhibits
10.1 Share Repurchase Agreement, dated as of September 14, 2020, by and between Albertsons Companies, Inc. and Gabriel Assets, LLC (incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed with the SEC on September 15, 2020)
EXHIBIT 101.INS - Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
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EXHIBIT 101.SCH - Inline XBRL Taxonomy Extension Schema Document
EXHIBIT 101.CAL - Inline XBRL Taxonomy Extension Calculation Linkbase Document
EXHIBIT 101.DEF - Inline XBRL Taxonomy Extension Definition Linkbase Document
EXHIBIT 101.LAB - Inline XBRL Taxonomy Extension Label Linkbase Document
EXHIBIT 101.PRE - Inline XBRL Taxonomy Extension Presentation Linkbase Document
EXHIBIT 104 - Cover Page Interactive Data File (embedded within the Inline XBRL document)
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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.
Albertsons Companies, Inc. (Registrant) | |||||||||||
| Date: | January 13, 2021 | By: | /s/ Vivek Sankaran | ||||||||
| Vivek Sankaran | |||||||||||
| President, Chief Executive Officer and Director (Principal Executive Officer) | |||||||||||
| Date: | January 13, 2021 | By: | /s/ Robert B. Dimond | ||||||||
| Robert B. Dimond | |||||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||
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Exhibit 31.1
Certification of the Principal Executive Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
| I, Vivek Sankaran, certify that: | |||||
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Albertsons Companies, Inc.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |||||||
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
| Date: | January 13, 2021 | /s/ Vivek Sankaran | |||||||||
| Vivek Sankaran | |||||||||||
| President, Chief Executive Officer and Director (Principal Executive Officer) | |||||||||||
Exhibit 31.2
Certification of the Principal Financial Officer pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
I, Robert B. Dimond, certify that: | |||||
| 1. | I have reviewed this Quarterly Report on Form 10-Q of Albertsons Companies, Inc.; | ||||
| 2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | ||||
| 3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; | ||||
| 4. | The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: | ||||
| a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |||||||
| b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |||||||
| c) | Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |||||||
| d) | Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and | |||||||
| 5. | The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): | ||||
| a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting, which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and | |||||||
| b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting. | |||||||
| Date: | January 13, 2021 | /s/ Robert B. Dimond | |||||||||
| Robert B. Dimond | |||||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | |||||||||||
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Quarterly Report of Albertsons Companies, Inc. (the “Company”) on Form 10-Q for the period ended December 5, 2020 as filed with the Securities and Exchange Commission on the date hereof (the “Report”), each of the undersigned certifies, pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002, that:
| 1. | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and | ||||
| 2. | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. | ||||
| Date: | January 13, 2021 | /s/ Vivek Sankaran | |||||||||
| Vivek Sankaran | |||||||||||
| President, Chief Executive Officer and Director (Principal Executive Officer) | |||||||||||
| /s/ Robert B. Dimond | ||||||||
| Robert B. Dimond | ||||||||
| Executive Vice President and Chief Financial Officer (Principal Financial Officer) | ||||||||