Albertsons Companies, Inc. — Form 10-Q Summary
Period clarification: Although the request identifies “2017 Q3,” this filing covers the 12 and 40 weeks ended December 1, 2018 (fiscal 2018), compared with periods ended December 2, 2017. The filing is unaudited.
Business context and reporting period
Albertsons operated 2,277 food and drug stores at quarter-end, including 1,743 pharmacies and 395 fuel centers. The company also reported eCommerce operations, distribution centers and manufacturing facilities. It closed 44 stores during the first 40 weeks of fiscal 2018; 506 stores were converted during that period.
Financial performance
| Metric | 12 weeks ended Dec. 1, 2018 | Prior-year 12 weeks | 40 weeks ended Dec. 1, 2018 | Prior-year 40 weeks |
|---|---|---|---|---|
| Net sales and other revenue | $13,840.4 million | $13,599.2 million | $46,517.9 million | $45,890.9 million |
| Gross margin | 27.8% | 26.7% | 27.6% | 27.0% |
| Operating income (loss) | $174.4 million | $(101.1) million | $498.9 million | $(238.5) million |
| Net income (loss) | $45.6 million | $218.1 million | $(4.5) million | $(342.0) million |
| Adjusted EBITDA | $649.7 million | $429.0 million | $2,014.1 million | $1,685.9 million |
Quarterly sales grew 1.8%; identical sales excluding fuel increased 1.9%, versus a 1.8% decline in the prior-year quarter. For the 40-week period, sales rose 1.4% and identical sales grew 0.9%, compared with a 1.9% decline a year earlier. Management attributed stronger gross margins to lower shrink and advertising costs, improved Own Brands sales mix and cost-reduction initiatives. Adjusted EBITDA margin was 4.7% for the quarter and 4.3% for the 40 weeks, compared with 3.2% and 3.7%, respectively, a year earlier.
Quarterly net income was lower than the prior year despite the operating improvement, in part because the prior-year period included a much larger income-tax benefit. Fiscal 2018’s 40-week net loss narrowed substantially; the prior-year period included $142.3 million of goodwill impairment. Fiscal 2018 tax benefits included a $60.3 million provisional Tax Act adjustment; prior-year benefits were largely related to corporate reorganization and reversal of a deferred-tax valuation allowance.
Cash flow, debt and liquidity
- For the first 40 weeks, operating cash flow was $1,069.1 million, up from $710.6 million. Investing cash outflow was $360.6 million and financing cash outflow was $903.2 million. Cash and restricted cash ended at $486.1 million.
- Capital expenditures, including lease buyouts, were $916.9 million. Free Cash Flow, as defined by the company, was $1,097.2 million versus $623.2 million; this non-GAAP measure should not be treated as discretionary cash available for investment.
- At December 1, 2018, total debt was $10,193.5 million, excluding capitalized lease obligations of $784.4 million. Cash and cash equivalents were $462.6 million. The company reported that it had reduced principal debt by approximately $1 billion over the preceding 12 months.
- Current assets were $6,112.6 million and current liabilities were $5,540.7 million. The company reported $610 million outstanding on its ABL facility at quarter-end. After quarter-end it repaid that borrowing; as of the filing date, it reported no ABL borrowings and approximately $3.4 billion of availability, net of letters of credit.
- Management estimated next-12-month liquidity needs of $3.75–$4.25 billion and believed operating cash flows and other liquidity sources would be adequate, while cautioning that cash generation and borrowing access were not assured.
Material changes, outlook and notable items
- The company refinanced its term loan and asset-based facility in November 2018, repaid approximately $976 million of term loans, and extended the ABL facility maturity to November 2023. Quarter-end borrowing under the ABL was subsequently repaid.
- After quarter-end, the company completed sale-leasebacks of five distribution centers for approximately $660 million net proceeds, agreeing to initial terms of 15–20 years and approximately $38 million in aggregate initial annual rent. In August 2018, it had completed a separate sale-leaseback of two distribution centers for approximately $290 million.
- Fiscal 2018 capital expenditure guidance was approximately $1.4 billion. The company expected an effective tax rate of approximately 29%–30% for fiscal 2018, excluding one-time asset sales and discrete items. No specific sales or earnings guidance was provided in the supplied filing text.
- The Rite Aid merger agreement was mutually terminated on August 8, 2018, with no termination payment due. Related $750 million floating-rate notes issued for the proposed merger were redeemed.
- The company made $196.9 million of pension and post-retirement plan contributions during the first 40 weeks, including a $150 million discretionary pension contribution. It anticipated another $2.5 million contribution for the remainder of fiscal 2018.
Risks and contingencies
- The filing estimates the company’s share of multiemployer pension plan underfunding at $4.1 billion as of February 24, 2018; this is an estimate, not a direct recorded liability. Market, plan, employer and legislative developments could change exposure. The company also disclosed a recorded $160.1 million withdrawal liability associated with the Dominick’s division as of that date, which it was disputing in arbitration.
- Two False Claims Act cases involving pharmacy pricing alleged damages exceeding $100 million each; the company said it could not estimate outcome or reasonably possible loss. Other disclosed matters include government inquiries concerning pharmacy discount pricing and vaccinations, ERISA fiduciary-duty litigation, and opioid-related investigation and litigation.
- Management stated that reasonably possible litigation losses beyond accrued amounts were expected to be immaterial, but acknowledged actual outcomes could differ materially. The company reported compliance with debt covenants at quarter-end; debt agreements restrict dividends and distributions.
- Adoption of the new lease accounting standard in fiscal 2019 was expected to recognize significant right-of-use assets and lease liabilities on the balance sheet.
Most important facts for investors to verify
- Confirm the requested period: this filing is for fiscal 2018 Q3, not 2017 Q3.
- Review the sustainability and composition of improved margins and Adjusted EBITDA, including the impact of store closures, conversions, and non-GAAP adjustments.
- Verify post-quarter debt, ABL availability and sale-leaseback proceeds, and assess the long-term rent obligations created by those transactions.
- Assess pension funding and potential multiemployer-plan or withdrawal-liability exposure, along with the outcomes of the pharmacy, ERISA and opioid matters.
- The filing cover marks “No” to whether all required Exchange Act reports were filed during the preceding 12 months; investors should verify the reason and any compliance implications.