01—Abstract
Summary
Summary of the 10-K/A filed April 13, 2005. Cited figures are marked; the original filing is the authoritative source.
This Amendment No. 2 to Form 10-K restates The Kroger Co.'s consolidated financial statements for fiscal years 2003, 2002 and 2001 to correct errors in lease accounting.
The corrections cover owned buildings on leased properties, the lease term for land leases (now including renewal periods reasonably assured of exercise), and the start of straight-line rent expense (now from possession rather than the store opening date). The restatement increased rent expense and deferred rent liability and reduced net earnings by $3 milliona in each year presented and accumulated earnings as of January 31, 2004 by $26 million. As restated, fiscal 2003 net earnings were $312 million, or $0.41 per diluted share, on sales of $53.79 billion, down from $1.52 per diluted share in fiscal 2002.
Fiscal 2003 results were hurt by labor disputes in southern California and West Virginia, a $444 millionb non-cash goodwill impairment charge at the Smith's division, and $120 million in asset impairment charges. The company estimated the labor disputes' effect at $177 million in gross margin and $216 million in OG&A. Operating cash flow fell to $2.215 billion from $3.183 billion in 2002.
Management said it expects 2004 earnings to be lower than 2003, excluding the labor dispute and unusual items. The balance sheet shows total assets of $20.76 billionc, long-term obligations of $10.61 billion including capital leases, and shareowners' equity of $3.99 billion at January 31, 2004. Management reported that the company was in compliance with its financial covenants at year-end 2003.
02—Key points
Key Highlights
- Restated fiscal 2003 net earnings of $312 million ($0.41 per diluted share), versus $1.52 per diluted share in fiscal 2002 as restated
- Lease accounting restatement reduced net earnings by $3 million in each of fiscal 2003, 2002 and 2001 and reduced accumulated earnings by $26 million at January 31, 2004
- $444 million non-cash goodwill impairment charge related to the Smith's division, which is non-deductible for tax purposes
- Labor disputes in southern California and West Virginia; estimated effects of $177 million in FIFO gross margin and $216 million in OG&A
- Net cash provided by operating activities of $2,215 million in 2003, compared with $3,183 million in 2002
- Management expects 2004 earnings to be lower than 2003, excluding the labor dispute and unusual items
- Total debt of $8.4 billion at year-end 2003, including capital leases; company reported compliance with financial covenants
03—Questions
Frequently Asked Questions
Why did Kroger restate its financial statements?
The company reviewed its leasing accounting and determined that its treatment of owned buildings on leased properties did not follow SFAS No. 13 and related FASB Technical Bulletins 88-1 and 85-3. It also corrected lease terms for land leases to include renewal periods reasonably assured of exercise, and began recording straight-line rent from the date it took possession of leased property rather than the store opening date. The corrections increased rent expense and deferred rent liability and had no effect on cash flows or lease payment timing.
How did the labor disputes affect Kroger's fiscal 2003 results?
The filing states that labor disputes in southern California and West Virginia adversely affected sales, FIFO gross margin and OG&A expenses. The estimated effect was $177 million in FIFO gross margin and $216 million in OG&A. The company also recorded about $116 million in pre-tax expenses under an agreement among the Retailers and a $62 million settlement of an energy contract dispute, which is a separate item.
What was the impact of the goodwill and asset impairment charges?
Kroger recorded a $444 million non-cash goodwill impairment charge tied to its Smith's division, reflecting a substantial decline in operating performance and forecasted further declines. It also recorded asset impairment charges of $120 million in 2003 related to under-performing store locations. The goodwill charge is non-deductible for income tax purposes, which contributed to an effective income tax rate of 59.3% in 2003.
What does management expect for future earnings?
Management expects 2004 earnings to be lower than in 2003, excluding the effect of the labor dispute and unusual items. It said it is not possible to provide a more precise earnings estimate because of uncertainties about the cost of the southern California labor dispute, the time and investment needed to rebuild affected businesses, and the investment needed to drive sales growth. Management also expects to achieve additional operating cost savings in 2004 and plans to use one-third of cash flow for debt reduction and two-thirds for stock repurchases or a cash dividend.
04—Continue