10-Q 1 aci-20221203.htm 10-Q aci-20221203
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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 December 3, 2022
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: 001-39350
aci-20221203_g1.jpg
Albertsons Companies, Inc.
(Exact name of registrant as specified in its charter)
Delaware47-4376911
(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)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading Symbol(s)Name of each exchange on which registered
Class A common stock, $0.01 par valueACINew York Stock Exchange
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 filerAccelerated filer
Non-accelerated filerSmaller 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 6, 2023, the registrant had 535,717,480 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 3,
2022
February 26,
2022
ASSETS
Current assets
Cash and cash equivalents$4,412.3 $2,902.0 
Receivables, net704.8 560.6 
Inventories, net5,054.9 4,500.8 
Other current assets513.7 403.0 
Total current assets10,685.7 8,366.4 
Property and equipment, net9,092.9 9,349.6 
Operating lease right-of-use assets5,849.4 5,908.4 
Intangible assets, net2,408.8 2,285.0 
Goodwill1,201.0 1,201.0 
Other assets976.9 1,012.6 
TOTAL ASSETS$30,214.7 $28,123.0 
LIABILITIES
Current liabilities
Accounts payable$3,977.7 $4,236.8 
Accrued salaries and wages1,506.7 1,554.9 
Special dividend payable3,921.3  
Current maturities of long-term debt and finance lease obligations2,025.6 828.8 
Current maturities of operating lease obligations659.3 640.6 
Other current liabilities1,218.4 1,087.4 
Total current liabilities13,309.0 8,348.5 
Long-term debt and finance lease obligations7,091.7 7,136.3 
Long-term operating lease obligations5,435.4 5,419.9 
Deferred income taxes896.9 799.8 
Other long-term liabilities2,083.4 2,115.4 
Commitments and contingencies
Series A convertible preferred stock, $0.01 par value; 1,750,000 shares authorized, 634,000 and 745,410 shares issued and outstanding as of December 3, 2022 and February 26, 2022, respectively
579.3 681.1 
Series A-1 convertible preferred stock, $0.01 par value; 1,410,000 shares authorized, no shares issued and outstanding as of December 3, 2022 and 653,776 shares issued and outstanding as of February 26, 2022
 597.4 
STOCKHOLDERS' EQUITY
Undesignated preferred stock, $0.01 par value; 96,840,000 shares authorized, no shares issued as of December 3, 2022 and February 26, 2022
  
Class A common stock, $0.01 par value; 1,000,000,000 shares authorized, 590,927,798 and 587,904,283 shares issued as of December 3, 2022 and February 26, 2022, respectively
5.9 5.9 
Class A-1 convertible common stock, $0.01 par value; 150,000,000 shares authorized, no shares issued as of December 3, 2022 and February 26, 2022
  
Additional paid-in capital2,077.0 2,032.2 
Treasury stock, at cost, 55,210,318 and 99,640,065 shares held as of December 3, 2022 and February 26, 2022, respectively
(912.8)(1,647.4)
Accumulated other comprehensive income66.1 69.0 
(Accumulated deficit) retained earnings(417.2)2,564.9 
Total stockholders' equity819.0 3,024.6 
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY$30,214.7 $28,123.0 

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 ended40 weeks ended
December 3,
2022
December 4,
2021
December 3,
2022
December 4,
2021
Net sales and other revenue$18,154.9 $16,728.4 $59,384.6 $54,503.5 
Cost of sales13,033.2 11,898.3 42,713.3 38,765.4 
Gross margin5,121.7 4,830.1 16,671.3 15,738.1 
Selling and administrative expenses4,532.0 4,243.9 14,883.9 13,978.8 
Loss (gain) on property dispositions and impairment losses, net7.3 (13.4)(86.1)(13.3)
Operating income 582.4 599.6 1,873.5 1,772.6 
Interest expense, net84.3 111.3 313.0 373.9 
Loss on debt extinguishment 3.7  3.7 
Other expense (income), net1.7 (38.3)(23.5)(100.7)
Income before income taxes
496.4 522.9 1,584.0 1,495.7 
Income tax expense120.9 98.4 381.6 331.2 
Net income $375.5 $424.5 $1,202.4 $1,164.5 
Other comprehensive income (loss), net of tax
Recognition of pension gain0.1 0.1 0.4 15.3 
Other(0.1)(0.2)(3.3)(0.2)
Other comprehensive (loss) income$ $(0.1)$(2.9)$15.1 
Comprehensive income$375.5 $424.4 $1,199.5 $1,179.6 
Net income per Class A common share
Basic net income per Class A common share$0.20 $0.78 $1.74 $1.97 
Diluted net income per Class A common share0.20 0.74 1.72 1.95 
Weighted average Class A common shares outstanding (in millions)
Basic534.6 466.0 525.4 465.4 
Diluted538.6 574.2 529.8 471.2 

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 3,
2022
December 4,
2021
Cash flows from operating activities:
Net income$1,202.4 $1,164.5 
Adjustments to reconcile net income to net cash provided by operating activities:
Gain on property dispositions and impairment losses, net(86.1)(13.3)
Depreciation and amortization1,380.9 1,273.2 
Operating lease right-of-use assets amortization500.7 478.2 
LIFO expense181.4 58.6 
Deferred income tax101.3 99.4 
Contributions to pension and post-retirement benefit plans, net of (income) expense(34.9)(73.6)
Gain on interest rate swaps and energy hedges, net(12.9)(8.8)
Deferred financing costs13.0 16.0 
Loss on debt extinguishment 3.7 
Equity-based compensation expense96.6 75.4 
Other 1.9 (48.7)
Changes in operating assets and liabilities:
Receivables, net(143.8)(69.6)
Inventories, net(735.4)(427.4)
Accounts payable, accrued salaries and wages and other accrued liabilities33.6 627.6 
Operating lease liabilities(412.0)(388.2)
Self-insurance assets and liabilities49.6 34.7 
Other operating assets and liabilities(64.3)(18.9)
Net cash provided by operating activities2,072.0 2,782.8 
Cash flows from investing activities:
Business acquisitions, net of cash acquired (25.4)
Payments for property, equipment and intangibles, including payments for lease buyouts(1,566.9)(1,216.4)
Proceeds from sale of long-lived assets99.4 37.8 
Other investing activities(11.2)26.9 
Net cash used in investing activities(1,478.7)(1,177.1)
Cash flows from financing activities:
Proceeds from issuance of long-term debt, including ABL facility1,400.0  
Payments on long-term borrowings, including ABL facility(200.5)(330.6)
Payments of obligations under finance leases(46.4)(50.6)
Payment of redemption premium on debt extinguishment (2.9)
Dividends paid on common stock(190.9)(149.0)
Dividends paid on convertible preferred stock(50.2)(88.6)
Employee tax withholding on vesting of restricted stock units(42.9)(28.7)
Other financing activities5.3 (11.3)
Net cash provided by (used in) financing activities874.4 (661.7)
Net increase in cash and cash equivalents and restricted cash1,467.7 944.0 
Cash and cash equivalents and restricted cash at beginning of period2,952.6 1,767.6 
Cash and cash equivalents and restricted cash at end of period$4,420.3 $2,711.6 

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 StockAdditional paid-in capitalTreasury StockAccumulated other comprehensive income(Accumulated deficit)
retained earnings
Total stockholders' equity
SharesAmountSharesAmount
Balance as of February 26, 2022587,904,283 $5.9 $2,032.2 99,640,065 $(1,647.4)$69.0 $2,564.9 $3,024.6 
Equity-based compensation— — 35.3 — — — — 35.3 
Shares issued and employee tax withholding on vesting of restricted stock units2,479,845 — (37.3)— — — — (37.3)
Convertible preferred stock conversions— — (32.5)(40,863,977)675.6 — — 643.1 
Cash dividends declared on common stock ($0.12 per common share)
— — — — — — (63.0)(63.0)
Dividends accrued on convertible preferred stock— — — — — — (13.7)(13.7)
Net income— — — — — — 484.2 484.2 
Other comprehensive loss, net of tax— — — — — (2.8)— (2.8)
Other activity— — 0.5 — — — (0.3)0.2 
Balance as of June 18, 2022590,384,128 $5.9 $1,998.2 58,776,088 $(971.8)$66.2 $2,972.1 $4,070.6 
Equity-based compensation— — 27.9 — — — — 27.9 
Shares issued and employee tax withholding on vesting of restricted stock units179,020 — (3.0)— — — — (3.0)
Convertible preferred stock conversions— — (1.2)(1,475,483)24.4 — — 23.2 
Cash dividends declared on common stock ($0.12 per common share)
— — — — — — (63.7)(63.7)
Dividends accrued on convertible preferred stock— — — — — — (10.4)(10.4)
Net income— — — — — — 342.7 342.7 
Other comprehensive loss, net of tax— — — — — (0.1)— (0.1)
Other activity— — 0.6 — — — (0.8)(0.2)
Balance as of September 10, 2022590,563,148 $5.9 $2,022.5 57,300,605 $(947.4)$66.1 $3,239.9 $4,387.0 
Equity-based compensation— — 27.3 — — — — 27.3 
Shares issued and employee tax withholding on vesting of restricted stock units364,650 — (2.6)— — — — (2.6)
Convertible preferred stock conversions— — (1.7)(2,090,287)34.6 — — 32.9 
Special dividend declared ($6.85 per share)
— — 31.3 — — — (3,952.6)(3,921.3)
Cash dividends declared on common stock ($0.12 per common share)
— — — — — — (64.2)(64.2)
Dividends accrued on convertible preferred stock— — — — — — (14.3)(14.3)
Net income— — — — — — 375.5 375.5 
Other activity— — 0.2 — — — (1.5)(1.3)
Balance as of December 3, 2022590,927,798 $5.9 $2,077.0 55,210,318 $(912.8)$66.1 $(417.2)$819.0 

6


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

Class A Common StockAdditional paid-in capitalTreasury StockAccumulated other comprehensive incomeRetained earnings Total stockholders' equity
SharesAmountSharesAmount
Balance as of February 27, 2021585,574,666 $5.9 $1,898.9 120,009,647 $(1,907.0)$63.5 $1,263.0 $1,324.3 
Equity-based compensation— — 22.2 — — — — 22.2 
Shares issued and employee tax withholding on vesting of restricted stock units945,942 — (10.0)— — — — (10.0)
Cash dividends declared on common stock ($0.10 per common share)
— — — — — — (46.5)(46.5)
Dividends accrued on convertible preferred stock— — — — — — (36.4)(36.4)
Net income— — — — — — 444.8 444.8 
Other comprehensive income, net of tax— — — — — 0.1 — 0.1 
Other activity— — — — — — (0.1)(0.1)
Balance as of June 19, 2021586,520,608 $5.9 $1,911.1 120,009,647 $(1,907.0)$63.6 $1,624.8 $1,698.4 
Equity-based compensation— — 26.8 — — — — 26.8 
Shares issued and employee tax withholding on vesting of restricted stock units147,495 — (1.8)— — — — (1.8)
Cash dividends declared on common stock ($0.10 per common share)
— — — — — — (46.5)(46.5)
Dividends accrued on convertible preferred stock— — — — — — (27.3)(27.3)
Net income— — — — — — 295.2 295.2 
Other comprehensive income, net of tax— — — — — 15.1 — 15.1 
Balance as of September 11, 2021586,668,103 $5.9 $1,936.1 120,009,647 $(1,907.0)$78.7 $1,846.2 $1,959.9 
Equity-based compensation— — 26.4 — — — — 26.4 
Shares issued and employee tax withholding on vesting of restricted stock units1,187,837  (16.9)— — — — (16.9)
Cash dividends declared on common stock ($0.12 per common share)
— — — — — — (56.0)(56.0)
Dividends accrued on convertible preferred stock— — — — — — (27.2)(27.2)
Net income— — — — — — 424.5 424.5 
Other comprehensive loss, net of tax— — — — — (0.1)— (0.1)
Other activity— — 0.5 — — — (0.4)0.1 
Balance as of December 4, 2021587,855,940 $5.9 $1,946.1 120,009,647 $(1,907.0)$78.6 $2,187.1 $2,310.7 

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

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 26, 2022 is derived from the Company's annual audited Consolidated Financial Statements, 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 for the fiscal year ended February 26, 2022, filed with the Securities and Exchange Commission (the "SEC") on April 26, 2022. 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 40 weeks ended December 3, 2022 and December 4, 2021.

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 surety bonds and funds held in escrow. The Company had $8.0 million and $50.6 million of restricted cash as of December 3, 2022 and February 26, 2022, 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 primarily uses the retail inventory or item-cost method to determine inventory cost before application of any last-in, first-out ("LIFO") adjustment. 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 $64.5 million and $29.5 million for the 12 weeks ended December 3, 2022 and December 4, 2021, respectively, and $181.4 million and $58.6 million for the 40 weeks ended December 3, 2022 and December 4, 2021, respectively.

Convertible Preferred Stock: During the 12 and 40 weeks ended December 3, 2022, certain holders 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") converted approximately 36,001 and 765,186 shares, respectively, of Convertible Preferred Stock into 2,090,287 and 44,429,747 shares, respectively, of the Company's Class A common stock, which were issued from treasury stock. As of December 3, 2022, the Company has issued in the aggregate 64,799,329 shares of Class A common stock to holders of Convertible Preferred Stock with the conversion of the Series A-1 preferred stock being completed during the first quarter of fiscal 2022 as previously reported. These non-cash conversions represent approximately 64% of the originally issued Convertible Preferred Stock.

Concurrent with the issuance and sale of the Convertible Preferred Stock during the first quarter of fiscal 2020, a 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, the Company placed fee owned real estate properties into its real estate subsidiary and contributed $36.5 million of cash into a restricted escrow account, with a total value of $2.9 billion (165% of the liquidation preference of the Convertible Preferred Stock at the time of issue). The real estate agreement provides that the Company may release properties and/or cash from the escrow account if the holders of Convertible Preferred Stock convert their shares into Class A Common Stock, provided that certain conversion thresholds are met. During the second quarter of fiscal 2022, due to the non-cash conversions of Convertible Preferred Stock to Class A common stock discussed
8


above, real estate properties and cash of $36.5 million, representing approximately 60% of the original $2.9 billion, were released from the restricted escrow account, and the real estate properties were transferred from the real estate subsidiary to operating subsidiaries. For additional information related to the Convertible Preferred Stock and the Investor Exchange Right, see "Part II—Item 8. Financial Statements and Supplementary Data—Note 9" of the Company's Annual Report on Form 10-K for the fiscal year ended February 26, 2022.

On October 19, 2022, the Company filed an amendment with the State of Delaware (the "Series A Amendment") to the Certificate of Designations of the Series A preferred stock (as amended, the "Certificate of Designations"), such that the transactions contemplated by the Merger Agreement (as defined in Note 2 - Merger Agreement and Special Dividend) do not constitute a "Fundamental Change" as defined under the Certificate of Designations. Furthermore, under the Series A Amendment, the ability of the Company to deliver a mandatory conversion notice under the Certificate of Designations is temporarily suspended so long as the Merger Agreement has not been terminated. The Series A Amendment also provides that holders of Series A preferred stock will participate in and receive shares of SpinCo (as defined and further described in Note 2 - Merger Agreement and Special Dividend), and no adjustment to the then-applicable conversion rate will occur as a result of such participation. The Company concluded that the Series A Amendment did not result in substantial changes to terms of the Convertible Preferred Stock and as a result, applied modification accounting where it was determined that holders of the Convertible Preferred Stock did not receive any incremental fair value. Furthermore, the Convertible Preferred Stock continues to be classified outside of permanent equity on the Condensed Consolidated Balance Sheets.

Income taxes: Income tax expense was $120.9 million, representing a 24.4% effective tax rate, for the 12 weeks ended December 3, 2022. The Company's effective tax rate for the 12 weeks ended December 3, 2022 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, reduced by federal tax credits. Income tax expense was $98.4 million, representing a 18.8% effective tax rate for the 12 weeks ended December 4, 2021. The Company's effective tax rate for the 12 weeks ended December 4, 2021 differs from the federal income tax statutory rate of 21% primarily due to incremental discrete state income tax benefits related to expired statutes and audit settlements.

Income tax expense was $381.6 million, representing a 24.1% effective tax rate, for the 40 weeks ended December 3, 2022. The Company's effective tax rate for the 40 weeks ended December 3, 2022 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, reduced by federal tax credits. Income tax expense was $331.2 million, representing a 22.1% effective tax rate, for the 40 weeks ended December 4, 2021. The Company's effective tax rate for the 40 weeks ended December 4, 2021 differs from the federal income tax statutory rate of 21% primarily due to state income taxes, largely reduced by the recognition of discrete state income tax benefits related to expired statutes and audit settlements.

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 digital 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 12 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 digital 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 or delivery to the customer, net of returns and sales tax. Pharmacy sales are recorded upon the customer receiving the product. Third-party receivables from pharmacy sales were $304.4 million and $247.5 million as of December 3, 2022 and February 26, 2022, respectively, and are recorded in Receivables, net. For digital related sales, which primarily
9


include home delivery and Drive Up & Go curbside pickup, revenues are recognized upon either pickup in store or delivery to the customer and may include revenue for separately charged delivery services. 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 December 3, 2022 and February 26, 2022.

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 $123.4 million and $104.3 million as of December 3, 2022 and February 26, 2022, respectively.

Disaggregated Revenues

The following table represents Net sales and other revenue by product type (dollars in millions):
12 weeks ended40 weeks ended
December 3,
2022
December 4,
2021
December 3,
2022
December 4,
2021
Amount (1)% of TotalAmount (1)% of TotalAmount (1)% of TotalAmount (1)% of Total
Non-perishables (2)$9,255.2 51.0 %$8,519.0 50.9 %$29,705.7 50.0 %$27,650.5 50.7 %
Fresh (3)5,762.6 31.7 5,583.8 33.4 19,588.6 33.0 18,675.6 34.3 
Pharmacy1,724.4 9.5 1,436.7 8.6 5,124.2 8.6 4,418.7 8.1 
Fuel1,111.1 6.1 906.6 5.4 3,968.6 6.7 2,874.4 5.3 
Other (4)301.6 1.7 282.3 1.7 997.5 1.7 884.3 1.6 
Net sales and other revenue
$18,154.9 100.0 %$16,728.4 100.0 %$59,384.6 100.0 %$54,503.5 100.0 %
(1) Digital related sales are included in the categories to which the revenue pertains.
(2) Consists primarily of general merchandise, grocery, dairy and frozen foods.
(3) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.
(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.

Recently issued accounting standards: In June 2022, the Financial Accounting Standards Board ("FASB") issued Accounting Standards Update ("ASU") 2022-03, "Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions" ("ASU 2022-03"). ASU 2022-03 clarifies the guidance on the fair value measurement of an equity security that is subject to a contractual sale restriction and requires specific disclosures related to such an equity security. ASU 2022-03 is effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. Early adoption is permitted. The Company currently does not expect the adoption of this standard to have a material impact on its Consolidated Financial Statements and related disclosures, but evaluation is continuing.

NOTE 2 - MERGER AGREEMENT AND SPECIAL DIVIDEND

Merger Agreement

On October 13, 2022, the Company, The Kroger Co. ("Parent") and Kettle Merger Sub, Inc., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as the surviving corporation and a direct, wholly owned subsidiary of Parent.
10



Pursuant to the Merger Agreement, (i) each share of Class A common stock, par value $0.01 per share, of the Company ("Company Common Stock") issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time"), shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash, without interest, and (ii) each share of Convertible Preferred Stock issued and outstanding immediately prior to the Effective Time shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash on an as-converted basis, without interest. The $34.10 per share consideration to be paid by Parent is subject to certain reductions described below.

In connection with obtaining the requisite regulatory clearance necessary to consummate the transaction, the Company and Parent expect to make divestitures of stores owned by the Company and Parent. As described in the Merger Agreement and subject to the outcome of the divestiture process and negotiations with applicable government authorities, the Company is prepared to establish a Company subsidiary ("SpinCo") as part of this process. The common stock or interests in SpinCo would be distributed to Company stockholders not later than as of the closing of the Merger (the "Closing"), if utilized, and SpinCo would operate as a standalone public company or the equity of SpinCo would be contributed to a trust for later distribution to Company stockholders. The Company and Parent have agreed to work together to determine which stores and other assets, liabilities and employees would comprise SpinCo if required for regulatory clearance, as well as the pro forma capitalization of SpinCo. The $34.10 per share cash purchase price payable to Company stockholders in the Merger would be reduced by an amount equal to (i) three times four-wall EBITDA (as defined in the Merger Agreement) for the stores contributed to SpinCo divided by the number of shares of Company Common Stock (including shares of Company Common Stock issuable upon conversion of Convertible Preferred Stock) outstanding as of the record date for the spin-off plus (ii) the Special Dividend (as defined below).

At the Effective Time, each outstanding equity award denominated in shares of Company Common Stock will be converted into a corresponding award with respect to shares of Parent common stock (the "Converted Awards"). The Converted Awards will remain outstanding and subject to the same terms and conditions (including vesting and forfeiture terms) as were applied to the corresponding Company equity award immediately prior to the Effective Time; provided that any Company equity award with a performance-based vesting condition will have such vesting condition deemed satisfied at (i) the greater of target performance and actual performance (for such awards subject to an open performance period at the Effective Time) and (ii) target performance (for such awards subject to a performance period that begins after the Effective Time). For purposes of the conversion described above, the number of shares of Parent common stock subject to a Converted Award will be based upon the number of shares of Company Common Stock subject to such Company equity award immediately prior to the Effective Time multiplied by an exchange ratio equal to (i) $34.10 less the Special Dividend (as defined below) divided by (ii) the average closing price of shares of Parent common stock for five trading days preceding the Closing.

The Merger Agreement provides for certain termination rights for the Company and Parent, including by mutual written consent and if the closing does not occur on or prior to January 13, 2024 (the "Outside Date"), provided that the Outside Date may be extended by either party for up to 270 days in the aggregate. The Parent will be obligated to pay a termination fee of $600 million if the Merger Agreement is terminated by either party in connection with the occurrence of the Outside Date, and, at the time of such termination, all closing conditions other than regulatory approval have been satisfied. The Merger is expected to close in early 2024, subject to the receipt of required regulatory clearance and other customary closing conditions.

11


Special Dividend

Separate from the Merger, in connection with the Company's previously-announced Board-led review of potential strategic alternatives to enhance the Company's growth and maximize stockholder value, on October 13, 2022, the Company declared a special cash dividend of $6.85 per share of Class A common stock (the "Special Dividend"). The Special Dividend is payable to stockholders of record, including holders of Series A convertible preferred stock on an as-converted basis, as of the close of business on October 24, 2022, and was to be paid on November 7, 2022. On November 1, 2022, the Attorney General for the State of Washington ("Washington Attorney General") filed a motion for a temporary restraining order to prevent the payment of the Special Dividend. On November 3, 2022, a commissioner for the Superior Court of King County (the "Superior Court") issued a temporary restraining order against the payment of the Special Dividend. On December 9, 2022, the Superior Court ruled in favor of the Company and denied the Washington Attorney General's request for a preliminary injunction, but extended the temporary restraining order in order for the Washington Attorney General to seek review from the Washington Supreme Court. That same day, on December 9, 2022, the Washington Attorney General sought review from the Washington Supreme Court, asking that Court to review the denial of the preliminary injunction. On December 19, 2022, the commissioner of the Washington Supreme Court announced that the Court will, sitting en banc, consider the Washington Attorney General's application for review. The commissioner's order also extended the temporary restraining order against the payment of the Special Dividend. On December 28, 2022, the Court scheduled the en banc conference to take place on January 17, 2023. The Company is vigorously defending itself in the lawsuit and believes that the case is without merit. The Special Dividend of $3,921.3 million is recorded in Special dividend payable on the Condensed Consolidated Balance Sheets.

Separately, on November 2, 2022, the Attorneys General for the District of Columbia, California, and Illinois (collectively, the "Attorneys General") filed a motion for a temporary restraining order against the payment of the Special Dividend in federal district court in the District of Columbia. On November 8, 2022, that federal district court denied the motion. On December 1, 2022, the Attorneys General filed a motion for a preliminary injunction to prevent payment of the Special Dividend. On December 12, 2022, the federal district court denied the motion for a preliminary injunction. On that same day, December 12, 2022, the Attorneys General filed a motion with the federal district court for an emergency injunction pending appeal. On December 13, 2022, the Attorneys General filed a notice of appeal to the federal court of appeals for the District of Columbia, and also sought an emergency injunction pending appeal from that court. On December 14, 2022, the federal district court denied the motion for an injunction pending appeal. On December 20, 2022, the federal court of appeals for the District of Columbia also denied the motion of the Attorneys General for an injunction pending appeal.

NOTE 3 - 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.

12


The following table presents certain assets which were measured at fair value on a recurring basis as of December 3, 2022 (in millions):
Fair Value Measurements
TotalQuoted prices in active markets
 for identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets:
Short-term investments (1)$20.8 $4.6 $16.2 $ 
Non-current investments (2)95.2  95.2  
Derivative contracts (3)11.3  11.3  
Total$127.3 $4.6 $122.7 $ 
(1) Primarily relates to Mutual Funds (Level 1) and Certificates of Deposit (Level 2). Included in Other current assets.
(2) Primarily relates to certain equity investments, U.S. Treasury Notes and Corporate Bonds (Level 2). Included in Other assets.
(3) Primarily relates to energy derivative contracts and interest rate swaps. Included in Other assets.
The following table presents certain assets and liabilities which were measured at fair value on a recurring basis as of February 26, 2022 (in millions):
 Fair Value Measurements
TotalQuoted prices in active markets
 for identical assets
(Level 1)
Significant
observable
inputs
(Level 2)
Significant
unobservable
inputs
(Level 3)
Assets:
Short-term investments (1)$14.4 $4.9 $9.5 $ 
Non-current investments (2)114.7 10.9 103.8  
Derivative contracts (3)18.6  18.6  
Total$147.7 $15.8 $131.9 $ 
Liabilities:
Derivative contracts (4)$10.4 $ $10.4 $ 
Total$10.4 $ $10.4 $ 
(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 certain equity investments, U.S. Treasury Notes and Corporate Bonds (Level 2). Included in Other assets.
(3) Primarily relates to energy derivative contracts. Included in Other assets.
(4) Primarily relates to interest rate swaps. Included in Other current liabilities.

The Company records cash and cash equivalents, restricted cash, accounts receivable and accounts payable at cost. The recorded values of these financial instruments approximate fair value based on their short-term nature.

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 3, 2022, the fair value of total debt was $8,204.3 million compared to the carrying value of $8,684.0 million, excluding debt discounts and deferred financing costs. As of February 26, 2022, the fair value of total debt was $7,531.5 million compared to the carrying value of $7,484.6 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, operating lease assets 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.

NOTE 4 - LONG-TERM DEBT AND FINANCE LEASE OBLIGATIONS

The Company's long-term debt and finance lease obligations as of December 3, 2022 and February 26, 2022, net of unamortized debt discounts of $38.4 million and $41.4 million, respectively, and deferred financing costs of $48.4 million and $57.5 million, respectively, consisted of the following (in millions):
December 3,
2022
February 26,
2022
Senior Unsecured Notes due 2023 to 2030, interest rate range of 3.25% to 7.50%
$6,501.2 $6,492.5 
Safeway Inc. Notes due 2027 to 2031, interest rate range of 7.25% to 7.45%
374.8 374.4 
New Albertsons L.P. Notes due 2026 to 2031, interest rate range of 6.52% to 8.70%
475.4 472.6 
ABL Facility1,200.0  
Other financing obligations28.9 29.1 
Mortgage notes payable, secured16.9 17.1 
Finance lease obligations 520.1 579.4 
Total debt9,117.3 7,965.1 
Less current maturities(2,025.6)(828.8)
Long-term portion$7,091.7 $7,136.3 

ABL Facility

On November 2, 2022, the Company provided notice to the lenders to borrow $1,400.0 million under the Company's amended and restated senior secured asset-based loan facility (as amended, the "ABL Facility"), which together with cash on hand was to be used to fund the payment of the Special Dividend. During the 12 weeks ended December 3, 2022, the average interest rate on the ABL Facility was approximately 5.6%.

As of December 3, 2022, $1,200.0 million remained outstanding under the ABL Facility as the Company repaid $200.0 million on December 2, 2022. Though the Special Dividend has not yet been paid, the remaining outstanding balance will be used to facilitate the immediate payment of the Special Dividend once the Company is no longer enjoined from making the payment that is lawfully due to its stockholders (see Note 2 – Merger Agreement and Special Dividend). The outstanding balance is recorded in Current maturities of long-term debt and finance lease obligations as the $1,200.0 million was borrowed with initial interest rate maturity period of 90 days, which can be extended and reset through the maturity date of the ABL Facility of December 20, 2026. Though the Company has the ability to extend the payment on a long-term basis, the Company, at its own discretion, may pay all or a portion of the outstanding balance within the next 12 months with any future surplus cash flows.

There was $56.1 million of letters of credit ("LOC") issued under the LOC sub-facility as of December 3, 2022. As of February 26, 2022, there were no amounts outstanding under the ABL Facility and LOC issued under the LOC sub-facility were $249.4 million.

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NOTE 5 - EMPLOYEE BENEFIT PLANS

Pension and Other Post-Retirement Benefits

The following table provides the components of net pension and post-retirement (income) expense (in millions):
12 weeks ended
PensionOther post-retirement benefits
December 3,
2022
December 4,
2021
December 3,
2022
December 4,
2021
Estimated return on plan assets$(21.5)$(22.1)$ $ 
Service cost4.6 4.5   
Interest cost11.9 8.1 0.1  
Amortization of prior service cost0.1 0.1   
Amortization of net actuarial loss (gain)0.2 0.1 (0.1) 
Income, net$(4.7)$(9.3)$ $ 
40 weeks ended
PensionOther post-retirement benefits
December 3,
2022
December 4,
2021
December 3,
2022
December 4,
2021
Estimated return on plan assets$(71.5)$(79.3)$ $