Why did Kroger restate its financial statements?

Kroger corrected errors in its deferred income tax accounts. These involved differences between tax and financial reporting bases for assets and liabilities acquired in business combinations, which affected recorded goodwill, and differences for long-lived assets that were not reconciled to deferred tax balances. The corrections reduced net earnings mainly through higher goodwill impairment charges, and had no effect on cash flow from operations or on the income tax returns filed.

Why did Kroger report a net loss in fiscal 2004?

The company recorded a $904 million (as restated) non-cash goodwill impairment charge at its Ralphs and Food 4 Less divisions. The charge followed a decline in operating performance after the 2003 southern California labor dispute. Lower gross margins from price investments and higher operating and administrative costs, especially health care and pension costs, also contributed.

What is Kroger's outlook for 2005?

Management expects net earnings in 2005 to exceed $1.21 per diluted share and identical food store sales growth, including southern California and excluding fuel, to exceed 2.0%. It expects capital investment of $1.6 to $1.8 billion, an effective tax rate of approximately 37.5%, and a 20% increase in multi-employer pension contributions over the $180 million contributed in 2004.

What risks did the filing identify for investors?

Key risks include the material weakness in internal control, the goodwill impairments, and the underfunding of multi-employer pension plans, estimated at $1.0 to $1.3 billion, pre-tax. The filing also flags intense price competition from supercenters and other formats, potential prolonged work stoppages (including UFCW and Teamsters contracts expiring in 2005), and a pending Sherman Act lawsuit over payments under the Mutual Strike Assistance Agreement.

How strong is Kroger's balance sheet and liquidity?

Total debt decreased to $8.0 billion at year-end 2004 from $8.4 billion a year earlier. Kroger had a $1.8 billion five-year revolving credit facility maturing in 2009 and a $700 million facility maturing in 2007, with $694 million of credit agreement and commercial paper borrowings outstanding. Its credit ratings were BBB/Baa2/BBB, and Standard & Poor's placed them on CreditWatch with negative implications on March 16, 2005. The company was in compliance with its financial covenants at year-end 2004.

KR 10-K Filed Mar 6, 2006

01—Abstract

Summary

Summary of the 10-K/A filed March 6, 2006. Cited figures are marked; the original filing is the authoritative source.

This Amendment No. 2 on Form 10-K/A restates The Kroger Co.'s consolidated financial statements as of January 29, 2005 and January 31, 2004 and for the three years ended January 29, 2005, to correct errors in deferred income tax accounts tied to business combinations and to long-lived assets.

The corrections reduced 2004 and 2003 net earnings by $4 million^a and $27 million, respectively, mainly through higher goodwill impairment charges, and increased accumulated earnings by $79 million as of January 29, 2005. Management and the auditor concluded the company did not maintain effective internal control over financial reporting as of January 29, 2005, due to a material weakness in determining deferred income tax balances related to a business combination. Fiscal 2004 was a difficult year.

Kroger reported a net loss of $104 million^b, or $0.14 per share, as restated, compared with net earnings of $285 million, or $0.38 per diluted share, in 2003. Sales rose to $56.434 billion from $53.791 billion, but the company recorded a $904 million non-cash goodwill impairment charge (as restated) at its Ralphs and Food 4 Less divisions, following the 2003 southern California labor dispute. Management said gross margin pressure from price investment and rising health care and pension costs also weighed on earnings.

Operating cash flow was $2.330 billion^c, and capital expenditures were $1.6 billion. For 2005, management expects net earnings to exceed $1.21 per diluted share, identical food store sales growth to exceed 2.0%, and capital investment of $1.6 to $1.8 billion. The company also disclosed required pension contributions of $142 million for fiscal 2005, and estimated its share of multi-employer pension underfunding at $1.0 to $1.3 billion, pre-tax.

02—Key points

Key Highlights

Restatement: Consolidated financial statements for fiscal 2004, 2003 and 2002 restated to correct deferred income tax errors; net earnings reduced by $4 million (2004) and $27 million (2003), and accumulated earnings increased by $79 million as of January 29, 2005.
Net loss of $104 million, or $0.14 per diluted share, in fiscal 2004 (as restated), versus net earnings of $285 million, or $0.38 per diluted share, in fiscal 2003.
Goodwill impairment charge of $904 million (as restated) in 2004 at the Ralphs and Food 4 Less divisions, versus $471 million at Smith's in 2003.
Sales of $56.434 billion in 2004, up from $53.791 billion in 2003; FIFO gross margin rate declined to 25.41% from 26.38%.
Material weakness in internal control over deferred income tax balances related to a business combination; PricewaterhouseCoopers issued an adverse opinion on internal control effectiveness.
Operating cash flow of $2.330 billion; total debt reduced to $8.0 billion at year-end 2004; $142 million in required pension contributions for fiscal 2005.
2005 guidance: net earnings above $1.21 per diluted share, identical food store sales growth above 2.0%, and capital investment of $1.6 to $1.8 billion.

03—Questions

Frequently Asked Questions

Why did Kroger restate its financial statements?
Kroger corrected errors in its deferred income tax accounts. These involved differences between tax and financial reporting bases for assets and liabilities acquired in business combinations, which affected recorded goodwill, and differences for long-lived assets that were not reconciled to deferred tax balances. The corrections reduced net earnings mainly through higher goodwill impairment charges, and had no effect on cash flow from operations or on the income tax returns filed.
Why did Kroger report a net loss in fiscal 2004?
The company recorded a $904 million (as restated) non-cash goodwill impairment charge at its Ralphs and Food 4 Less divisions. The charge followed a decline in operating performance after the 2003 southern California labor dispute. Lower gross margins from price investments and higher operating and administrative costs, especially health care and pension costs, also contributed.
What is Kroger's outlook for 2005?
Management expects net earnings in 2005 to exceed $1.21 per diluted share and identical food store sales growth, including southern California and excluding fuel, to exceed 2.0%. It expects capital investment of $1.6 to $1.8 billion, an effective tax rate of approximately 37.5%, and a 20% increase in multi-employer pension contributions over the $180 million contributed in 2004.
What risks did the filing identify for investors?
Key risks include the material weakness in internal control, the goodwill impairments, and the underfunding of multi-employer pension plans, estimated at $1.0 to $1.3 billion, pre-tax. The filing also flags intense price competition from supercenters and other formats, potential prolonged work stoppages (including UFCW and Teamsters contracts expiring in 2005), and a pending Sherman Act lawsuit over payments under the Mutual Strike Assistance Agreement.
How strong is Kroger's balance sheet and liquidity?
Total debt decreased to $8.0 billion at year-end 2004 from $8.4 billion a year earlier. Kroger had a $1.8 billion five-year revolving credit facility maturing in 2009 and a $700 million facility maturing in 2007, with $694 million of credit agreement and commercial paper borrowings outstanding. Its credit ratings were BBB/Baa2/BBB, and Standard & Poor's placed them on CreditWatch with negative implications on March 16, 2005. The company was in compliance with its financial covenants at year-end 2004.

04—Continue

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