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Section 1: 10-Q (10-Q)

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 7, 2019
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____ to _____
Commission File Number: 333-205546
400402983_abscompanieslogoa24.jpg
Albertsons Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware
 
47-4376911
(State or other jurisdiction of incorporation or organization)
 
(I.R.S. Employer Identification No.)

250 Parkcenter Blvd.
Boise, Idaho 83706
(Address of principal executive offices and zip code)

(208395-6200
(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
None
N/A
N/A
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
 
 
 
 
 
Non-accelerated filer
 
 (Do not check if a smaller reporting company)
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 October 16, 2019, the registrant had 277,882,010 shares of common stock, par value $0.01 per share, outstanding.



Albertsons Companies, Inc. and Subsidiaries


 
 
 
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



Table of Contents
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)



 
 
September 7,
2019
 
February 23,
2019
ASSETS
 
 
 
Current assets
 
 
 
 
Cash and cash equivalents
$
435.3

 
$
926.1

 
Receivables, net
518.6

 
586.2

 
Inventories, net
4,340.3

 
4,332.8

 
Other current assets
336.4

 
404.9

 
          Total current assets
5,630.6

 
6,250.0

 
 
 
 
 
Property and equipment, net
9,231.3

 
9,861.3

Operating lease right-of-use assets
5,831.8

 

Intangible assets, net
2,177.9

 
2,834.5

Goodwill
1,183.3

 
1,183.3

Other assets
643.6

 
647.5

TOTAL ASSETS
$
24,698.5

 
$
20,776.6

 
 
 
 
LIABILITIES
 
 
 
Current liabilities
 
 
 
 
Accounts payable
$
2,946.6

 
$
2,918.7

 
Accrued salaries and wages
1,107.8

 
1,054.7

 
Current maturities of long-term debt and finance lease obligations
117.1

 
148.8

 
Current maturities of operating lease obligations
537.0

 

 
Other current liabilities
1,021.2

 
1,030.5

 
          Total current liabilities
5,729.7

 
5,152.7

 
 
 
 
 
Long-term debt and finance lease obligations
8,628.6

 
10,437.6

Long-term operating lease obligations
5,437.4

 

Deferred income taxes
688.1

 
561.4

Other long-term liabilities
1,869.2

 
3,174.2

 
 
 
 
Commitments and contingencies


 


 
 
 
 
STOCKHOLDERS' EQUITY
 
 
 
 
Preferred stock, $0.01 par value; 30,000,000 shares authorized, no shares issued and outstanding as of September 7, 2019 and February 23, 2019, respectively

 

 
Common stock, $0.01 par value; 1,000,000,000 shares authorized and 277,882,010 shares issued and outstanding as of September 7, 2019 and February 23, 2019, respectively
2.8

 
2.8

 
Additional paid-in capital
1,818.7

 
1,814.2

 
Treasury stock, at cost, 1,772,018 shares held as of September 7, 2019 and February 23, 2019, respectively
(25.8
)
 
(25.8
)
 
Accumulated other comprehensive income
80.1

 
91.3

 
Retained earnings (accumulated deficit)
469.7

 
(431.8
)
 
          Total stockholders' equity
2,345.5

 
1,450.7

TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
$
24,698.5

 
$
20,776.6


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

4


Table of Contents


Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Operations and Comprehensive Income (Loss)
(in millions)
(unaudited)

 
12 weeks ended
 
28 weeks ended
 
September 7,
2019
 
September 8,
2018
 
September 7,
2019
 
September 8,
2018
Net sales and other revenue
$
14,176.7

 
$
14,024.1

 
$
32,915.1

 
$
32,677.5

Cost of sales
10,235.2

 
10,211.3

 
23,734.0

 
23,694.0

Gross profit
3,941.5

 
3,812.8

 
9,181.1

 
8,983.5

 
 
 
 
 
 
 
 
Selling and administrative expenses
3,794.6

 
3,817.2

 
8,741.2

 
8,834.8

Gain on property dispositions and impairment losses, net
(435.5
)
 
(135.8
)
 
(464.0
)
 
(175.8
)
Operating income
582.4

 
131.4

 
903.9

 
324.5

 
 
 
 
 
 
 
 
Interest expense, net
177.5

 
194.9

 
402.7

 
449.5

Loss on debt extinguishment
23.1

 

 
65.8

 

Other expense (income)
5.1

 
(19.2
)
 
(6.0
)
 
(60.0
)
Income (loss) before income taxes
376.7

 
(44.3
)
 
441.4

 
(65.0
)
 
 
 
 
 
 
 
 
Income tax expense (benefit)
81.9

 
(11.9
)
 
97.6

 
(14.9
)
Net income (loss)
$
294.8

 
$
(32.4
)
 
$
343.8

 
$
(50.1
)
 
 
 
 
 
 
 
 
Other comprehensive income (loss), net of tax
 
 
 
 
 
 
 
(Loss) gain on interest rate swaps
(11.3
)
 
(4.8
)
 
(38.3
)
 
3.4

Recognition of pension gain (loss)
0.7

 
(0.5
)
 
24.1

 
(1.1
)
Other
1.3

 
0.5

 
3.0

 
(1.2
)
Other comprehensive (loss) income
$
(9.3
)
 
$
(4.8
)
 
(11.2
)
 
1.1

 
 
 
 
 
 
 
 
Comprehensive income (loss)
$
285.5

 
$
(37.2
)
 
$
332.6

 
$
(49.0
)

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Cash Flows
(in millions)
(unaudited)


 
28 weeks ended
 
September 7,
2019

September 8,
2018
Cash flows from operating activities:
 
 
 
  Net income (loss)
$
343.8

 
$
(50.1
)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
 
 
 
Gain on property dispositions and impairment losses, net
(464.0
)
 
(175.8
)
Depreciation and amortization
897.6

 
939.2

Operating lease right-of-use assets amortization
288.4

 

LIFO expense
16.3

 
12.9

Deferred income tax
(14.4
)
 
(66.2
)
Amortization and write-off of deferred financing costs
26.1

 
17.7

Loss on debt extinguishment
65.8

 

Equity-based compensation expense
17.6

 
25.6

Other
7.9

 
(29.6
)
Changes in operating assets and liabilities:
 
 
 
Receivables, net
67.4

 
87.4

Inventories, net
(23.8
)
 
100.1

Accounts payable, accrued salaries and wages and other accrued liabilities
86.8

 
213.0

Operating lease liabilities
(267.9
)
 

Other operating assets and liabilities
37.2

 
117.1

Net cash provided by operating activities
1,084.8

 
1,191.3

 
 
 
 
Cash flows from investing activities:
 
 
 
Payments for property, equipment and intangibles, including payments for lease buyouts
(716.3
)
 
(631.2
)
Proceeds from sale of assets
1,029.5

 
509.4

Other
(5.5
)
 
33.6

Net cash provided by (used in) investing activities
307.7

 
(88.2
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
750.0

 
750.0

Payments on long-term borrowings
(2,558.4
)
 
(780.1
)
Payments of obligations under finance leases
(56.1
)
 
(51.6
)
Other
(31.0
)
 
(32.4
)
Net cash used in financing activities
(1,895.5
)
 
(114.1
)
 
 
 
 
Net (decrease) increase in cash and cash equivalents and restricted cash
(503.0
)
 
989.0

Cash and cash equivalents and restricted cash at beginning of period
967.7

 
680.8

Cash and cash equivalents and restricted cash at end of period
$
464.7

 
$
1,669.8


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

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Table of Contents
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in millions, except share data)
(unaudited)


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid in capital
 
Treasury stock
 
Accumulated other comprehensive income
 
Retained earnings (accumulated deficit)
 
Total stockholders' equity
Balance as of February 23, 2019
277,882,010

 
$
2.8

 
$
1,814.2

 
$
(25.8
)
 
$
91.3

 
$
(431.8
)
 
$
1,450.7

Equity-based compensation

 

 
11.1

 

 

 

 
11.1

Employee tax withholding on vesting of phantom units

 

 
(12.1
)
 

 

 

 
(12.1
)
Adoption of new accounting standards, net of tax

 

 

 

 
16.6

 
558.0

 
574.6

Net income

 

 

 

 

 
49.0

 
49.0

Other comprehensive loss, net of tax

 

 

 

 
(18.5
)
 

 
(18.5
)
Other activity

 

 
(0.1
)
 

 

 
(0.3
)
 
(0.4
)
Balance as of June 15, 2019
277,882,010

 
2.8

 
1,813.1

 
(25.8
)
 
89.4

 
174.9

 
2,054.4

Equity-based compensation

 

 
6.5

 

 

 

 
6.5

Employee tax withholding on vesting of phantom units

 

 
(0.9
)
 

 

 

 
(0.9
)
Net income

 

 

 

 

 
294.8

 
294.8

Other comprehensive loss, net of tax

 

 

 

 
(9.3
)
 

 
(9.3
)
Balance as of September 7, 2019
277,882,010

 
$
2.8

 
$
1,818.7

 
$
(25.8
)
 
$
80.1

 
$
469.7

 
$
2,345.5


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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Table of Contents
Albertsons Companies, Inc. and Subsidiaries
Condensed Consolidated Statements of Stockholders' Equity
(in millions, except share data)
(unaudited)


 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
Shares
 
Amount
 
Additional paid in capital
 
Treasury stock
 
Accumulated other comprehensive income
 
Accumulated deficit
 
Total stockholders' equity
Balance as of February 24, 2018
279,654,028

 
$
2.8

 
$
1,773.3

 
$

 
$
191.1

 
$
(569.0
)
 
$
1,398.2

Equity-based compensation

 

 
13.4

 

 

 

 
13.4

Employee tax withholding on vesting of phantom units

 

 
(14.3
)
 

 

 

 
(14.3
)
Net loss

 

 

 

 

 
(17.7
)
 
(17.7
)
Other comprehensive income, net of tax

 

 

 

 
5.9

 

 
5.9

Other activity

 

 

 

 

 
5.8

 
5.8

Balance as of June 16, 2018
279,654,028

 
2.8

 
1,772.4

 

 
197.0

 
(580.9
)
 
1,391.3

Equity-based compensation

 

 
12.2

 

 

 

 
12.2

Employee tax withholding on vesting of phantom units

 

 
(0.5
)
 

 

 

 
(0.5
)
Net loss

 

 

 

 

 
(32.4
)
 
(32.4
)
Other comprehensive loss, net of tax

 

 

 

 
(4.8
)
 

 
(4.8
)
Other activity

 

 
(3.2
)
 

 

 

 
(3.2
)
Balance as of September 8, 2018
279,654,028

 
$
2.8

 
$
1,780.9

 
$

 
$
192.2

 
$
(613.3
)
 
$
1,362.6


The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.


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Table of Contents
Albertsons Companies, Inc. and Subsidiaries
Notes to Condensed Consolidated Financial Statements
(unaudited)


NOTE 1 - BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation

The accompanying interim Condensed Consolidated Financial Statements include the accounts of Albertsons Companies, Inc. and its subsidiaries (the "Company"). All significant intercompany balances and transactions were eliminated. The Condensed Consolidated Balance Sheet as of February 23, 2019 is derived from the Company's annual audited Consolidated Financial Statements for the fiscal year ended February 23, 2019, which should be read in conjunction with these Condensed Consolidated Financial Statements and which are included in the Company's Annual Report on Form 10-K. Certain information in footnote disclosures normally included in annual financial statements was condensed or omitted for the interim periods presented in accordance with accounting principles generally accepted in the United States of America ("GAAP"). In the opinion of management, the interim data includes all adjustments, consisting of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The interim results of operations and cash flows are not necessarily indicative of those results and cash flows expected for the year. The Company's results of operations are for the 12 and 28 weeks ended September 7, 2019 and September 8, 2018.
Prior Period Reclassifications

Certain prior period amounts have been reclassified to conform to the current period presentation, specifically the reclassification of gains and losses from property dispositions and impairment losses from Selling and administrative expenses to Gain on property dispositions and impairment losses, net on the Condensed Consolidated Statements of Operations and Comprehensive Income (Loss).
Significant Accounting Policies
Restricted cash: Restricted cash is included in Other current assets or Other assets depending on the remaining term of the restriction and primarily relates to funds held in escrow. The Company had $29.4 million and $41.6 million of restricted cash as of September 7, 2019 and February 23, 2019, respectively.
Inventories, net: Substantially all of the Company's inventories consist of finished goods valued at the lower of cost or market and net of vendor allowances. The Company uses either item-cost or the retail inventory method to value inventory at the lower of cost or market before application of any last-in, first-out ("LIFO") reserve. Interim LIFO inventory costs are based on management's estimates of expected year-end inventory levels and inflation rates. The Company recorded LIFO expense of $5.8 million and $3.4 million for the 12 weeks ended September 7, 2019 and September 8, 2018, respectively, and $16.3 million and $12.9 million for the 28 weeks ended September 7, 2019 and September 8, 2018, respectively.

Equity-based compensation: The Company maintains the Albertsons Companies, Inc. Phantom Unit Plan, an equity-based incentive plan, which provides for grants of phantom units (the "Phantom Units") to certain employees, directors and consultants. Each Phantom Unit provides the participant with a contractual right to receive, upon vesting, one management incentive unit in each of the Company's parents, Albertsons Investor Holdings LLC ("Albertsons Investor") and KIM ACI, LLC ("KIM ACI"), that collectively own all of the outstanding shares of the Company. The Phantom Units vest over a service period, or upon a combination of both a service period and achievement of certain performance-based thresholds. The fair value of the Phantom Units is determined using an option pricing model, adjusted for lack of marketability and using an expected term or time to liquidity based on judgments made by management.

Equity-based compensation expense recognized by the Company related to Phantom Units was $5.6 million and $12.2 million for the 12 weeks ended September 7, 2019 and September 8, 2018, respectively. For the 28 weeks ended September 7, 2019 and September 8, 2018, equity-based compensation expense recognized by the Company related to Phantom Units was $15.5 million and $25.6 million, respectively. The Company recorded an income tax benefit

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related to Phantom Units of $1.5 million and $3.3 million for the 12 weeks ended September 7, 2019 and September 8, 2018, respectively. For the 28 weeks ended September 7, 2019 and September 8, 2018, the Company recorded an income tax benefit related to Phantom Units of $4.1 million and $6.9 million, respectively. As of September 7, 2019, there was $35.8 million of unrecognized costs related to 1.5 million unvested Phantom Units. That cost is expected to be recognized over a weighted average period of 1.9 years.

On April 25, 2019, upon the commencement of employment, the Company's Chief Executive Officer was granted direct equity interests in each of the Company's parents, Albertsons Investor and KIM ACI. These equity interests vest over a service period, or upon a service period and achievement of certain performance-based thresholds. The fair value of the equity interests is determined using an option pricing model, adjusted for lack of marketability and using an expected term or time to liquidity based on judgments made by management. The fair value of the equity interests deemed granted was approximately $10.8 million. For the 12 and 28 weeks ended September 7, 2019, equity-based compensation expense recognized by the Company related to these equity interests was $0.9 million and $2.1 million, respectively. As of September 7, 2019, there was $8.7 million of unrecognized costs related to the equity interests deemed granted. That cost is expected to be recognized over a weighted average period of 4.0 years.

Treasury stock: During fiscal 2018, the Company repurchased 1,772,018 shares of common stock allocable to certain current and former members of management (the "Management Holders") for $25.8 million in cash. The shares are classified as treasury stock on the Condensed Consolidated Balance Sheets. The shares repurchased represented a portion of the shares allocable to management. Proceeds from the repurchase were used by the Management Holders to repay outstanding loans of the Management Holders with a third-party financial institution. As there is no current active market for shares of the Company's common stock, the shares were repurchased at a negotiated price between the Company and the Management Holders.

Income taxes: Income tax expense was $81.9 million, representing a 21.7% effective tax rate, for the 12 weeks ended September 7, 2019. Income tax benefit was $11.9 million, representing a 26.8% effective tax rate, for the 12 weeks ended September 8, 2018. Income tax expense was $97.6 million, representing a 22.1% effective tax rate, for the 28 weeks ended September 7, 2019. Income tax benefit was $14.9 million, representing a 22.9% effective tax rate, for the 28 weeks ended September 8, 2018. The Company's effective tax rate for the 12 and 28 weeks ended September 7, 2019 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, partially offset by income tax credits and charitable donation benefit.

Segments: The Company and its subsidiaries offer grocery products, general merchandise, health and beauty care products, pharmacy, fuel and other items and services in its stores or through eCommerce channels. The Company's operating divisions are geographically based, have similar economic characteristics and similar expected long-term financial performance. The Company's operating segments and reporting units are its 13 operating divisions, which are reported in one reportable segment. Each reporting unit constitutes a business for which discrete financial information is available and for which management regularly reviews the operating results. Across all operating segments, the Company operates primarily one store format. Each division offers through its stores and eCommerce channels the same general mix of products with similar pricing to similar categories of customers, has similar distribution methods, operates in similar regulatory environments and purchases merchandise from similar or the same vendors.

Revenue Recognition: Revenues from the retail sale of products are recognized at the point of sale to the customer, net of returns and sales tax. Pharmacy sales are recorded upon the customer receiving the prescription. Third-party receivables from pharmacy sales were $259.3 million and $252.2 million as of September 7, 2019 and February 23, 2019, respectively, and are recorded in Receivables, net. For eCommerce related sales, which primarily include home delivery, "Drive Up and Go" curbside pickup and meal kit subscription and delivery, revenues are recognized upon either pickup in store or delivery to the customer and may include revenue for separately charged delivery services. Discounts provided to customers by the Company at the time of sale are recognized as a reduction in sales as the products are sold. Discounts provided to customers by vendors, usually in the form of coupons, are not recognized as a reduction in sales, provided the coupons are redeemable at any retailer that accepts coupons. The Company recognizes

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revenue and records a corresponding receivable from the vendor for the difference between the sales prices and the cash received from the customer. The Company records a contract liability when rewards are earned by customers in connection with the Company's loyalty programs. As rewards are redeemed or expire, the Company reduces the contract liability and recognizes revenue. The contract liability balance was immaterial as of September 7, 2019 and February 23, 2019.

The Company records a contract liability when it sells its own proprietary gift cards. The Company records a sale when the customer redeems the gift card. The Company's gift cards do not expire. The Company reduces the contract liability and records revenue for the unused portion of gift cards ("breakage") in proportion to its customers' pattern of redemption, which the Company determined to be the historical redemption rate. The Company's contract liability related to gift cards was $45.3 million as of September 7, 2019 and $55.9 million as of February 23, 2019. Breakage amounts were immaterial for the 12 and 28 weeks ended September 7, 2019 and September 8, 2018, respectively.

Disaggregated Revenues

The following table represents sales revenue by type of similar product (dollars in millions):
 
12 weeks ended
 
28 weeks ended
 
September 7,
2019
 
September 8,
2018
 
September 7,
2019
 
September 8,
2018
 
Amount (1)
 
% of Total
 
Amount (1)
 
% of Total
 
Amount (1)
 
% of Total
 
Amount (1)
 
% of Total
Non-perishables (2)
$
6,172.0

 
43.5
%
 
$
6,089.8

 
43.4
%
 
$
14,194.2

 
43.1
%
 
$
14,153.1

 
43.3
%
Perishables (3)
5,844.6

 
41.2
%
 
5,775.5

 
41.2
%
 
13,656.2

 
41.5
%
 
13,502.6

 
41.3
%
Pharmacy
1,156.5

 
8.2
%
 
1,125.3

 
8.0
%
 
2,729.7

 
8.3
%
 
2,652.5

 
8.1
%
Fuel
793.2

 
5.6
%
 
856.0

 
6.1
%
 
1,869.7

 
5.7
%
 
1,954.1

 
6.0
%
Other (4)
210.4

 
1.5
%
 
177.5

 
1.3
%
 
465.3

 
1.4
%
 
415.2

 
1.3
%
Net sales and other revenue
$
14,176.7

 
100.0
%
 
$
14,024.1

 
100.0
%
 
$
32,915.1

 
100.0
%
 
$
32,677.5

 
100.0
%

(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 lottery and various other commissions and other miscellaneous income.

Recently adopted accounting standards: On February 25, 2016, the FASB issued ASU 2016-02, "Leases (Topic 842)." ASC Topic 842 supersedes existing lease guidance, including ASC 840 - Leases. Among other things, ASU 2016-02 requires recognition of a Right-of-use ("ROU") asset and liability for future lease payments for contracts that meet the definition of a lease and requires disclosure of certain information about leasing arrangements. On July 30, 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Targeted Improvements," which, among other things, allows companies to elect an optional transition method to apply the new lease standard through a cumulative effect adjustment in the period of adoption. The new guidance requires both classifications of leases, operating and finance, to be recognized on the balance sheet. The new guidance also results in a change in naming convention for leases historically classified as capital leases. Under the new guidance, these leases are now referred to as finance leases. Consistent with prior GAAP, the recognition, measurement and presentation of expenses and cash flows arising from a lease will depend on its classification.
The Company adopted the guidance effective February 24, 2019 by recognizing and measuring leases at the adoption date with a cumulative effect of initially applying the guidance recognized at the date of initial application and as a result did not restate the prior periods presented in the Condensed Consolidated Financial Statements. The Company elected certain practical expedients permitted under the transitional guidance, including retaining historical lease classification, evaluating whether any expired contracts are or contain leases, and not applying hindsight in determining

11


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the lease term. The Company also elected the practical expedient to not separate lease and non-lease components within the lessee lease transaction for all classes of assets. Lastly, the Company elected the short-term lease exception for all classes of assets, and therefore does not apply the recognition requirements for leases of 12 months or less.

The adoption of the standard resulted in the recognition of an operating lease ROU asset of $5.3 billion and an operating lease liability of $5.4 billion. Included in the measurement of the new operating lease ROU asset is the reclassification of certain balances, including those historically recorded as lease exit cost liabilities, deferred rent and favorable and unfavorable lease interests. The adoption also resulted in a cumulative effect transitional adjustment of $776.0 million ($574.6 million, net of tax) to retained earnings related to the elimination of $865.8 million deferred gains on sale-leaseback transactions, partially offset by the recognition of $87.3 million in impairment losses on operating lease ROU assets and the removal of $17.2 million and $14.7 million, respectively, of assets and liabilities related to finance lease obligations under previously existing build-to-suit accounting arrangements. Several other immaterial reclassifications of historical asset and liability line items were also recorded in the Company's Condensed Consolidated Balance Sheets upon adoption.

In February 2018, the FASB issued ASU 2018-02, "Income Statement - Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income." This ASU allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. The Company adopted this guidance in the first quarter of fiscal 2019 and applied the amendments in the period of adoption. The adoption of this standard resulted in a $16.6 million adjustment to both Retained earnings (accumulated deficit) and Accumulated other comprehensive income. The standard did not have a material impact on the Company's Condensed Consolidated Statements of Operations and the Condensed Consolidated Statements of Cash Flows.

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;
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.


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The following table presents assets and liabilities which were measured at fair value on a recurring basis as of September 7, 2019 (in millions):
 
 
Fair Value Measurements
 
 
Total
 
Quoted prices in active markets
 for identical assets
(Level 1)
 
Significant
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Short-term investments (1)
 
$
16.2

 
$
13.8

 
$
2.4

 
$

Non-current investments (2)
 
78.2

 
22.2

 
56.0

 

Total
 
$
94.4

 
$
36.0

 
$
58.4

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts (3)
 
$
67.2

 
$

 
$
67.2

 
$

Total
 
$
67.2

 
$

 
$
67.2

 
$

(1) Primarily relates to Mutual Funds. Included in Other current assets.
(2) Primarily relates to investments in publicly traded stock classified as available for sale (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 following table presents assets and liabilities which were measured at fair value on a recurring basis as of February 23, 2019 (in millions):
 
 
Fair Value Measurements
 
 
Total
 
Quoted prices in active markets
 for identical assets
(Level 1)
 
Significant
observable
inputs
(Level 2)
 
Significant
unobservable
inputs
(Level 3)
Assets:
 
 
 
 
 
 
 
 
Cash equivalents:
 
 
 
 
 
 
 
 
Money market
 
$
489.0

 
$
489.0

 
$

 
$

Short-term investments (1)
 
23.1

 
21.0

 
2.1

 

Non-current investments (2)
 
84.2

 
30.5

 
53.7

 

Total
 
$
596.3

 
$
540.5

 
$
55.8

 
$

 
 
 
 
 
 
 
 
 
Liabilities:
 
 
 
 
 
 
 
 
Derivative contracts (3)
 
$
21.1

 
$

 
$
21.1

 
$

Total
 
$
21.1

 
$

 
$
21.1

 
$


(1) Primarily relates to Mutual Funds. Included in Other current assets.
(2) Primarily relates to investments in publicly traded stock classified as available for sale (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 September 7, 2019, the fair value of total debt was $8,425.3 million compared to the carrying value of $8,173.1 million, excluding debt discounts and deferred financing costs. As of February 23, 2019, the fair value of total debt was $9,801.2 million compared to the carrying value of $10,086.3 million, excluding debt discounts and deferred financing costs.

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Assets Measured at Fair Value on a Non-Recurring Basis

The Company measures certain assets at fair value on a non-recurring basis, including long-lived assets and goodwill, which are evaluated for impairment. Long-lived assets include store-related assets such as property and equipment and certain intangible assets. The inputs used to determine the fair value of long-lived assets and a reporting unit are considered Level 3 measurements due to their subjective nature.

During the second quarter of fiscal 2019, due to continued under performance of the Plated meal kit subscription and delivery operations, the Company recognized an impairment loss of $38.6 million to reduce the related asset group to its fair value. The impairment loss is included as a component of Gain on property dispositions and impairment losses, net. The impairment loss primarily relates to the Plated tradename, and to a lesser extent, certain other Plated intangible assets, leasehold interests and equipment. The fair value was determined using an income approach which included a relief-from-royalty method and relied on inputs with unobservable market prices including the assumed revenue growth rate, royalty rate, discount rate and estimated tax rate.

NOTE 3 - DERIVATIVE FINANCIAL INSTRUMENTS
Interest Rate Risk Management

The Company is exposed to market risk from fluctuations in interest rates. The Company manages its exposure to interest rate fluctuations through the use of interest rate swaps ("Cash Flow Hedges"). The Company's risk management objective and strategy with respect to interest rate swaps is to protect the Company against adverse fluctuations in interest rates by reducing its exposure to variability in cash flows relating to interest payments on a portion of its outstanding debt. The Company is meeting its objective by hedging the risk of changes in its cash flows (interest payments) attributable to changes in the London Inter-Bank Offering Rate ("LIBOR"), the designated benchmark interest rate being hedged, on an amount of the Company's debt principal equal to the then-outstanding swap notional amount.
Cash Flow Interest Rate Swaps

For derivative instruments that are designated and qualify as Cash Flow Hedges of forecasted interest payments, the Company reports the gain or loss as a component of Other comprehensive income (loss) until the interest payments being hedged are recorded as Interest expense, net, at which time the amounts in Other comprehensive income (loss) are reclassified as an adjustment to Interest expense, net. Gains or losses on any ineffective portion of derivative instruments in cash flow hedging relationships are recorded in the period in which they occur as a component of Other expense (income) in the Condensed Consolidated Statement of Operations and Comprehensive Income (Loss). The Company has entered into several swaps with maturity dates in 2019, 2021 and 2023 to hedge against variability in cash flows relating to interest payments on a portion of the Company's outstanding variable rate term debt. The aggregate notional amounts of all swaps as of September 7, 2019 and February 23, 2019 were $2,716.2 million and $2,123.2 million, of which $2,716.2 million and $2,065.2 million are designated as Cash Flow Hedges, respectively, as defined by GAAP. The undesignated portion of the Company's interest rate swaps is attributable to principal payments expected to be made through the loan's maturity. In connection with the refinancing of the Albertsons Term Loans (as described in Note 4 - Long-term debt and finance lease obligations), the Company dedesignated and redesignated a certain Cash Flow Hedge, resulting in an immaterial amount remaining in Accumulated other comprehensive income.

As of September 7, 2019 and February 23, 2019, the fair value of the cash flow interest rate swap liability was $67.2 million and $21.6 million respectively, and was recorded in Other current liabilities.


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Table of Contents

Activity related to the Company's derivative instruments designated as Cash Flow Hedges consisted of the following (in millions):
 
 
Amount of loss recognized from derivatives
 
 
Derivatives designated as hedging instruments
 
12 weeks ended September 7, 2019

12 weeks ended September 8, 2018
 
Location of loss recognized from derivatives
Designated interest rate swaps
 
$
(11.3
)
 
$
(4.8
)
 
Other comprehensive income (loss), net of tax

 
 
Amount of (loss) income recognized from derivatives
 
 
Derivatives designated as hedging instruments
 
28 weeks ended September 7,
2019
 
28 weeks ended September 8, 2018
 
Location of (loss) income recognized from derivatives
Designated interest rate swaps
 
$
(38.3
)
 
$
3.4

 
Other
comprehensive income (loss), net of tax


Activity related to the Company's derivative instruments not designated as hedging instruments was immaterial during the 12 and 28 weeks ended September 7, 2019 and September 8, 2018, respectively.

NOTE 4 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS
The Company's long-term debt as of September 7, 2019 and February 23, 2019, net of unamortized debt discounts of $94.7 million and $197.0 million, respectively, and deferred financing costs of $59.2 million and $65.2 million, respectively, consisted of the following (in millions):
 
September 7,
2019
 
February 23,
2019
Albertsons Term Loans due 2025 to 2026, interest rate range of 4.95% to 5.69%
$
3,032.5

 
$
4,610.7

Senior Unsecured Notes due 2024, 2025, 2026 and 2028, interest rate of 6.625%, 5.750%, 7.5% and 5.875%, respectively
3,813.7

 
3,071.6

New Albertsons L.P. Notes due 2026 to 2031, interest rate range of 6.52% to 8.70%
464.8

 
1,322.3

Safeway Inc. Notes due 2020 to 2031, interest rate range of 3.95% to 7.45%
642.0

 
675.3

Other Notes Payable, unsecured
47.7

 
125.4

Mortgage Notes Payable, secured
18.5

 
18.8

Finance lease obligations (see Note 5)
726.5

 
762.3

Total debt
8,745.7

 
10,586.4

Less current maturities
(117.1
)
 
(148.8
)
Long-term portion
$
8,628.6

 
$
10,437.6


The Company's term loans (the "Albertsons Term Loans"), asset-based loan facility (the "ABL Facility") and certain of the outstanding notes and debentures have restrictive covenants, subject to the right to cure in certain circumstances, calling for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain debt arrangements. There are no restrictions on the Company's ability to receive distributions from its subsidiaries to fund interest and principal payments due under the ABL Facility, the Albertsons Term Loans and the Company's senior unsecured notes (the "Senior Unsecured Notes"). Each of the

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Table of Contents

ABL Facility, Albertsons Term Loans and the Senior Unsecured Notes restrict the ability of the Company to pay dividends and distribute property to the Company's stockholders. As a result, all of the Company's consolidated net assets are effectively restricted with respect to their ability to be transferred to the Company's stockholders. Notwithstanding the foregoing, the ABL Facility, Albertsons Term Loans and the Senior Unsecured Notes each contain customary exceptions for certain dividends and distributions, including the ability to make cumulative distributions under the Albertsons Term Loans and Senior Unsecured Notes of up to the greater of $1.0 billion or 4.0% of the Company's total assets (which is measured at the time of such distribution) and the ability to make distributions if certain payment conditions are satisfied under the ABL Facility. The Company was in compliance with all such covenants and provisions as of and for the 28 weeks ended September 7, 2019.
Albertsons Term Loans
On August 15, 2019, the Company repaid $1,570.6 million of aggregate principal amount outstanding under its term loan facilities, along with accrued and unpaid interest and fees and expenses, for which the Company used approximately $864 million of cash on hand and proceeds from the issuance of the 2028 Notes (as defined below) (such repayment, the "Term Loan Repayment"). Contemporaneously with the Term Loan Repayment, the Company refinanced the remaining amounts outstanding with new term loan tranches. The new tranches consist of $3,100.0 million in aggregate principal, of which $1,500.0 million matures on November 17, 2025 and $1,600.0 million matures on August 17, 2026 (the "Term Loan Refinancing"). For newly incurred financing costs and original issue discount, the Company expensed $4.2 million of financing costs and recorded $4.4 million of financing costs and $15.5 million of original issue discount as a reduction of the principal amount. For previously deferred financing costs and original issue discount, the Company expensed $15.5 million of financing costs and $13.3 million of original issue discount. The amounts expensed were included as a component of Interest expense, net.
The new loans amortize, on a quarterly basis, at a rate of 1.0% per annum of the original principal amount (which payments will be reduced as a result of the application of prepayments in accordance with the terms therewith). The new loans bear interest, at the borrower's option, at a rate per annum equal to either (a) the base rate plus 1.75% or (b) LIBOR, subject to a 0.75% floor, plus 2.75%.
Senior Unsecured Notes
On August 15, 2019, the Company and substantially all of its subsidiaries completed the sale of $750.0 million of principal amount of 5.875% Senior Unsecured Notes which will mature on February 15, 2028 (the "2028 Notes"). Interest on the 2028 Notes is payable semi-annually in arrears on February 15 and August 15 of each year, commencing on February 15, 2020. The 2028 Notes have not been and will not be registered with the Securities and Exchange Commission (the "SEC"). The 2028 Notes are also fully and unconditionally guaranteed, jointly and severally, by substantially all of the Company's subsidiaries that are not issuers under the indenture governing such notes. Proceeds from the 2028 Notes were used to partially fund the Term Loan Repayment.
Safeway Notes
On May 24, 2019, the Company completed a cash tender offer and early redemption of Safeway Inc.'s ("Safeway") notes with a par value of $34.1 million and a book value of $33.3 million for $32.6 million, plus accrued and unpaid interest of $0.7 million (the "Safeway Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the Safeway Tender of $0.5 million.
NALP Notes
On May 24, 2019, the Company completed a cash tender offer and early redemption of New Albertsons L.P.'s notes (the "NALP Notes") with a par value of $402.9 million and a book value of $363.7 million for $382.7 million, plus

16


Table of Contents

accrued and unpaid interest of $8.2 million (the "NALP Notes Tender"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Tender of $19.1 million.
During the 28 weeks ended September 7, 2019, the Company repurchased NALP Notes on the open market with an aggregate par value of $553.9 million and a book value of $502.0 million for $547.5 million plus accrued and unpaid interest of $11.3 million (the "NALP Notes Repurchase"). Including related fees, the Company recognized a loss on debt extinguishment related to the NALP Notes Repurchase of $46.2 million.
ABL Facility

As of September 7, 2019 and February 23, 2019, there were no loans outstanding under the Company's ABL Facility, and letters of credit ("LOC") issued under the LOC sub-facility were $504.6 million and $520.8 million respectively.

NOTE 5 - LEASES

The Company leases certain retail stores, distribution centers, office facilities and equipment from third parties. The Company determines whether a contract is or contains a lease at contract inception. ROU assets represent the Company's right to use an underlying asset for the lease term, and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Lease liabilities are recognized at commencement date based on the present value of remaining lease payments over the lease term. As the rate implicit in the Company's leases is not easily determinable, the Company's applicable incremental borrowing rate is used in calculating the present value of the sum of the lease payments. ROU assets are recognized at commencement date at the value of the lease liability, adjusted for any prepayments, lease incentives and initial direct costs incurred. The typical real estate lease period is 15 to 20 years with renewal options for varying terms and, to a limited extent, options to purchase. The Company includes renewal options that are reasonably certain to be exercised as part of the lease term.
The Company has lease agreements with non-lease components that relate to the lease components. Certain leases contain percent rent based on sales, escalation clauses or payment of executory costs such as property taxes, utilities, insurance and maintenance. Non-lease components primarily relate to common area maintenance. Non-lease components and the lease components to which they relate are accounted for together as a single lease component for all asset classes. The Company recognizes lease payments for short-term leases as expense either straight-line over the lease term or as incurred depending on whether lease payments are fixed or variable.


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Table of Contents

The components of total lease cost, net consisted of the following (in millions):
 
 
Classification
 
12 weeks ended
September 7, 2019
 
28 weeks ended
September 7, 2019
Operating lease cost (1)
 
Cost of sales and Selling and administrative expenses (3)
 
$
227.8

 
$
515.0

Finance lease cost
 
 
 
 
 
 
Amortization of lease assets
 
Cost of sales and Selling and administrative expenses (3)
 
20.9

 
49.5

Interest on lease liabilities
 
Interest expense, net
 
18.5

 
44.0

Variable lease cost (2)
 
Cost of sales and Selling and administrative expenses (3)
 
90.4

 
209.3

Sublease income
 
Net sales and other revenue
 
(24.7
)
 
(57.1
)
Total lease cost, net
 
 
 
$
332.9

 
$
760.7


(1) Includes short-term lease cost, which is immaterial.
(2) Represents variable lease costs for both operating and finance leases. Includes contingent rent expense and other non-fixed lease related costs, including property taxes, common area maintenance and property insurance.
(3) Supply chain-related amounts are included in Cost of sales.

Balance sheet information related to leases as of September 7, 2019 consisted of the following (in millions):
 
 
Classification
 
September 7, 2019
Assets
 
 
 
 
Operating
 
Operating lease right-of-use assets
 
$
5,831.8

Finance
 
Property and equipment, net
 
480.3

Total lease assets
 
 
 
$
6,312.1

Liabilities
 
 
 
 
Current
 
 
 
 
Operating
 
Current maturities of operating lease obligations
 
$
537.0

Finance
 
Current maturities of long-term debt and finance lease obligations
 
92.4

Long-term
 
 
 
 
Operating
 
Long-term operating lease obligations
 
5,437.4

Finance
 
Long-term debt and finance lease obligations
 
634.1

Total lease liabilities
 
 
 
$
6,700.9



The following table presents cash flow information and the weighted average lease term and discount rate for leases (dollars in millions):
 
28 weeks ended
September 7, 2019
Cash paid for amounts included in the measurement of lease liabilities
 
Operating cash flows from operating leases
482.6

Operating cash flows from finance leases
44.0

Financing cash flows from finance leases
56.1

ROU assets obtained in exchange for operating lease obligations
868.3

ROU assets obtained in exchange for finance lease obligations

Weighted average remaining lease term - operating leases (in years)
12.4

Weighted average remaining lease term - finance leases (in years)
9.2

Weighted average discount rate - operating leases
7.1
%
Weighted average discount rate - finance leases
13.8
%


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Table of Contents

Future minimum lease payments for operating and finance lease obligations as of September 7, 2019 consisted of the following (in millions):
 
Lease Obligations
Fiscal year
Operating Leases
 
Finance Leases
Remainder of 2019
$
433.7

 
$
78.9

2020
932.2

 
149.9

2021
881.2

 
137.5

2022
822.4

 
125.8

2023
751.5

 
116.2

Thereafter
5,400.7

 
519.7

Total future minimum obligations
9,221.7

 
1,128.0

Less interest
(3,247.3
)
 
(401.5
)
Present value of net future minimum lease obligations
5,974.4

 
726.5

Less current portion
(537.0
)
 
(92.4
)
Long-term obligations
$
5,437.4

 
$
634.1


Future minimum lease payments for operating and capital lease obligations as of February 23, 2019 under the previous lease accounting standard consisted of the following (in millions):
 
Lease Obligations
Fiscal year
Operating Leases
 
Capital Leases
2019
$
879.7

 
$
170.5

2020
840.5

 
151.3

2021
783.2

 
134.9

2022
723.6

 
123.1

2023
651.0

 
114.1

Thereafter
4,338.6

 
509.1

Total future minimum obligations
$
8,216.6

 
1,203.0

Less interest
 
 
(440.7
)
Present value of net future minimum lease obligations


 
762.3

Less current portion
 
 
(97.3
)
Long-term obligations


 
$
665.0


The Company subleases certain properties to third parties. Future minimum sublease income under these non-cancelable operating leases as of September 7, 2019 was $355.5 million.
Sale-Leaseback Transactions

During the second quarter of fiscal 2019, the Company, through three separate transactions, completed the sale and leaseback of 53 store properties and one distribution center for an aggregate purchase price, net of closing costs, of $931.3 million. In connection with the sale and leaseback transactions, the Company entered into lease agreements for each of the properties for initial terms ranging from 15 to 20 years. The aggregate initial annual rent payment for the properties are approximately $53 million and includes 1.50% to 1.75% annual rent increases over the initial lease terms. All of the properties qualified for sale-leaseback and operating lease accounting and the Company recorded total gains of $463.6 million, which is included as a component of Gain on property dispositions and impairment losses, net. The Company also recorded operating lease ROU assets and corresponding operating lease liabilities of $602.5 million.


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Table of Contents

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
 
September 7,
2019
 
September 8,
2018
 
September 7,
2019
 
September 8,
2018
Estimated return on plan assets
$
(25.3
)
 
$
(26.0
)
 
$

 
$

Service cost
3.4

 
12.1

 
0.1

 
0.2

Interest cost
18.6

 
19.8

 
0.2

 
0.1

Amortization of prior service cost
0.1

 

 
0.9

 
0.9

Amortization of net actuarial loss (gain)
0.1

 
(1.5
)
 
(0.2
)
 

Net (income) expense
$
(3.1
)