UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
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Fellow Shareholders:
Thanks to Krogers
400,000 associates who strive
to provide friendly service and the freshest products to every customer, every
shopping trip 2014 was a
record-breaking year.
● |
Our revenue reached
$108.5 billion an all-time high; |
● |
Our stock price rose
91%, making Kroger one of the top 10 performing stocks in the S&P
500; |
● |
Our positive
identical store sales grew for an unprecedented 45 consecutive quarters;
and |
● |
Our market share
expanded for the 10th year
running. |
In short, 2014 was a
blockbuster year. We added nearly 25,000 new jobs, creating opportunity for our
current and future associates. And we have confidence there is more growth and opportunity ahead
for our company.
Since becoming CEO last
year, the two most common questions I hear from shareholders are Why is Kroger doing so well? and Can you keep it up? It
is my great honor to try and provide answers in this letter.
* * *
Answering why is Kroger
doing so well? is like trying to answer what makes a meal great?
What makes a meal memorable
and enjoyable? It is the combination of food and drink, your companions and the
atmosphere, surprise and delight. It is not any one thing, but the
sum of its parts.
Like a great meal, there is
no single characteristic no one person or thing that makes Kroger great.
Rather, it is a unique and
powerful combination of factors
that helps explain Krogers success.
It all starts with our
friendly associates executing
our powerful Customer
1st
Strategy, which we launched 12
years ago. We put the customer first in every decision we make.
Our store managers
successfully manage multi-million-dollar businesses. But first and foremost,
they are focused on our customers and associates. Our goal is to extend our
friendly hospitality to each one of the eight million customers
who shop in our stores daily.
Our merchandisers are
the best in the industry. Their
depth of experience, combined with our world-class customer science and data
analytics, creates a powerful blend of art and science that is the hallmark of
Krogers fresh and relevant merchandising. We are focused on bringing to each
customer what is most relevant to them to their tastes, budget and lifestyle
and delivering unique offers through personalized coupons, our popular fuel
rewards program, and exclusive digital offers.
Our strong Corporate Brands portfolio continues to gain market share, reaching its
highest level of penetration in seven years during the fourth quarter of 2014,
when it represented 28.2% of total units sold in our stores. These great
products, which can only be found in our family of stores, set us
apart.
We continue to invest in
price every year. Today, we are saving our customers more than $3.5 billion annually through every day lower prices. Our productivity
improvements fuel these price investments.
We continue to improve the
customer shopping experience. And, as I will outline below, we are
accelerating our entry into
eCommerce through our recent
mergers with Harris Teeter and Vitacost.com, and by growing our digital
capabilities.
It is the combination of
these strengths and many more not mentioned here that together delivered our
strong financial results in fiscal 2014.
* * *
Fiscal 2014 Results An
Outstanding Year
Krogers consistently
remarkable performance delivered for shareholders in 2014. The growth plan we
first outlined in October 2012 includes four key performance measures: positive
identical supermarket sales growth, slightly expanding non-fuel FIFO operating
margin, growing return on invested capital and annual market share growth. In
2014, we met or exceeded each of these metrics.
1
At the end of the year, we:
● |
Achieved an
industry-leading 45th consecutive quarter of positive identical
supermarket sales growth, without
fuel; |
● |
Exceeded our goal to
slightly expand FIFO operating margin, without fuel and excluding
adjustment items noted in our annual report, on a rolling four quarters
basis; |
● |
Improved return on
invested capital even as we increased capital investment;
and |
● |
Captured incremental
market share for the 10th consecutive year.
|
As a result, we exceeded our long-term,
net earnings per diluted share growth rate of 8-11% in fiscal
2014, and we increased our dividend for the eighth consecutive
year. In fact, Kroger has delivered double-digit compound growth in our
dividend since we reinstated it in 2006.
Net earnings for 2014
totaled $1.73 billion, or $3.44 per diluted share. Excluding adjustment items
the benefit of certain tax items and adjustments for pension plan agreements
Krogers adjusted net earnings for 2014 totaled $1.77 billion, or $3.52 per
diluted share.
Our strong results during
2014 allowed us to make a strategic and significant contribution to The Kroger Co.
Foundation. We use our foundation
dollars to support causes that our customers and associates consistently tell us
they care about, enhancing our reputation as a locally-connected retailer. We
are very proud that Forbes magazine previously recognized our work by naming us
the most generous company in America. This investment works to support the
communities that we serve.
*
* *
Which brings us to the
second question: Can you keep it
up?
My answer is an unequivocal
YES. Because, as I like to say, our to-do list is longer than our done list.
We are not done growing and differentiating. We are not done innovating to make
our customers lives better. And we are not done investing to grow for today and
the future.
Innovating to
Grow
We are expanding our use
of technology. In February 2014,
Kroger acquired You Technology, LLC, the Silicon Valley-based leader in digital
coupons and promotions. Several months later, our merger with Vitacost.com
accelerated our entry into the eCommerce space by several years. Vitacost
connects us to an amazingly talented team of associates who have created a
substantial platform that includes advanced technology and ship-to-home
fulfillment centers. We are currently testing Harris Teeters successful
ExpressLane concept an order online, pickup at the store
model in Cincinnati, and we plan to expand to other stores and markets in the
coming year. Together, the learnings from our Vitacost and Harris Teeter mergers
are helping us give our customers
the ability to interact with us when, where and how they want. More customers than ever before are engaging
with our digital properties. More than 15 million customers have digital
accounts with Kroger, through which they receive unique benefits and offers on
our suite of digital platforms, including our mobile app, website and social
media sites.
We are entering a new
era in customer engagement with the introduction of 84.51°. Early in 2015, Kroger and our data analytics
partner dunnhumby Ltd announced a new chapter in our relationship to accelerate
innovation in customer science. We replaced our existing exclusive joint venture
called dunnhumbyUSA with a more flexible arrangement and the acquisition of
certain assets from dunnhumbyUSA. Operating with those acquired assets as its
foundation, our new, wholly-owned subsidiary, 84.51°, is starting with 500
talented associates from the former JV and the technology to continue developing
our leading customer loyalty program. In addition, the ability to combine what
we already know with other partners is exciting and will speed up innovation.
2
We are quickly becoming a
top destination for customers looking for affordable, accessible organic and natural
foods. Natural Foods continues to
be the fastest-growing department in our stores on a percentage basis. Our
leading natural and organics store brand, Simple Truth, reached a
milestone $1.2 billion in annual sales in 2014. And this within two years of
launching the brand exclusively in our stores! During the year, more than 20
million households bought one of our more than 2,600 Simple Truth or Simple
Truth Organic items.
Investing to
Grow
Our mergers with Harris
Teeter and Vitacost have also opened new markets that present
meaningful growth opportunities for Kroger. In fact, Vitacost today sells direct
to consumers in all U.S. states and territories, and more than 160 countries
worldwide.
We are currently pursuing
our fill-in markets
strategy, as outlined in 2012,
and are making good progress. Fill-in markets are existing markets where we are
investing capital to grow square footage, primarily through new and expanded
stores and remodels, in order to increase our market share.
*
* *
The Kroger
Difference
Increasingly, shoppers care
about price, product selection and quality, the store experience and
how well companies take care of their associates, communities and the planet.
Taking Care of Our
Associates
I am proud to say that
Kroger is in the food business and the people
business. Our people are our
greatest asset.
We want our workforce to be
the healthiest in America. To improve workplace wellness, we give associates a
variety of tools, including an incentive program with measurable outcomes. Over
the last four years, we have seen a demonstrated improvement in the health of
our workforce through lower cholesterol, blood pressure and blood glucose
scores. And, our workplace well-being program received a Best Employers for
Healthy Lifestyles award from the National Business Group on Health, and the companys commitment to employee health and wellness was
recognized by the American Heart
Association.
Our goal is to provide our
associates a total compensation package that includes solid wages, good quality,
affordable health care, and retirement benefits. In 2014, Kroger invested $1.8
billion in our associates health care.
Kroger is also
one of the safest companies in our
industry. Associate engagement in
innovative safety programs has reduced accident rates in our stores and
manufacturing plants by 77 percent since 1995. In 2014, 649 retail locations and
three manufacturing plants went the entire year without a recordable
injury.
We continue to do our
part to create jobs and opportunity. We employ 25,000 more associates today than we did last year. More than
90 percent of these new jobs are in our supermarket divisions, ranging from
full-time department heads and assistant store managers to part-time courtesy
clerks and cashiers. Over the last seven years, Kroger has created more than
65,000 new jobs in our local communities. We are particularly proud that we
hired more than 6,000 veterans in 2014 and more than 29,000 veterans since 2009.
We pride ourselves on our
opportunity
culture, where all associates
have an opportunity to grow, build new skills and turn a job into a career. More
than two-thirds of our store managers started their Kroger careers as part-time
clerks. I began my own career at Kroger as a part-time stock clerk while earning
my degree at the University of Kentucky, so I know first-hand the opportunities
that are available to our associates.
One of the things that
makes Kroger so special is how we extend our opportunity culture to everyone. We
have a long tradition of hiring people with disabilities, especially on our
front lines serving customers. Last year, Kroger was recognized by the
Marriott Foundation for People
with Disabilities and separately
by the Ohio Governors Council on
People with Disabilities for
significantly contributing to employment opportunities for the disability
community.
3
Taking Care of Our
Communities
We are a locally-connected
retailer that is embedded in the community. When you combine the food and funds
we donate, working together our Company, foundation, customers, associates and
suppliers contributed more than
$280 million to our local communities in 2014.
We strive to be connected
to and responsive to the local communities we serve by:
● |
Delivering the
equivalent of more than 270
million meals to more than
100 local Feeding America food banks in
2014. |
● |
Donating
more than $6 million in 2014
in support of womens health and breast cancer awareness
programs. Fully half of it
was contributed by customers and
associates. |
● |
Contributing
$3.3 million to the
USO in 2014 to help support
the military and their families. Since 2010, Kroger has donated $11.9
million to the USO the largest cumulative gift to the USO in that organizations
history. |
● |
Supporting more than
30,000 schools and local
organizations with $51
million donated in 2014 through our Community Rewards program that
delivers customer-driven donations based on purchases in our
stores. |
We make all of these
strategic investments because they strengthen the communities we call home and
also improve our connection with our customers, who have identified these causes
as the priorities that are most important to them. We see our community
connection the Kroger difference as an important competitive advantage for
our company and as a point of pride for our associates.
We also see engagement with local farmers and
producers as part of our efforts
to make a difference in our communities. We work closely with growers to buy
local and market their seasonally-fresh products in our stores, and we
participate in established programs such as Colorado Proud, Kentucky Proud and
Go Texan to meet the growing demand for fresh, locally-sourced foods.
Kroger is a leader in supplier diversity, spending more than $2 billion annually with
women- and minority-owned businesses. We proudly remain a member of the
Billion Dollar
Roundtable and the United States
Hispanic Chamber of Commerce Million Dollar Club,
received a Top Organization for
Multicultural Business Opportunities award from Diversity
Business, and was named one of
Americas Top Corporations for
Women Business Enterprises by the
Womens Business Enterprise
National Council.
Taking Care of the
Planet
In 2014, we continued our
12-year journey to reduce our energy consumption while expanding square footage
and sales. We have reduced energy
consumption by 35% since 2000.
Kroger was recently honored as a 2015 ENERGY STAR Partner of the Year for our work in energy management.
One of Krogers key
sustainability priorities is moving our retail stores and facilities toward
zero waste. Our stores are sending less waste to landfills and incinerators
through a variety of efforts, including composting and our innovative
Perishable Donations
Program a process to rescue
safe, edible fresh products and donate them quickly to local food banks. This
system has been replicated by many retailers and today fresh products make up
more than half of the food distributed nationwide by Feeding America. Our
manufacturing facilities continue to lead waste reduction. Today,
26 of our 37 manufacturing plants
are designated as zero waste facilities.
Another important area is
sustainable
seafood. Our goal is to source
100% of our fresh and frozen seafood from sustainable sources. We continue to
make strong progress toward this goal, reaching 86% in 2014 and placing Kroger
among market-leaders.
You can learn more about
our sustainability initiatives by reading our annual sustainability report,
available on our website sustainability.kroger.com.
*
* *
4
Retirements
Dave Dillon, who as I said
in last years letter has been called the grocers grocer, retired as Chairman
of the Board in December. We thank him for his ten incredible years as Chairman
and CEO, and wish him, his wife Dee, and his family much happiness as they turn
to the next chapter in their lives.
We also extend our
appreciation to Reuben Anderson, who retired from Krogers Board of Directors in
2014 after 23 years of service; Steven Rogel, who retired from Krogers Board of
Directors in 2014 after 15 years of service; Bruce Macaulay, president of
Krogers Columbus division, who retired in March after 42 years of service with
the Company; and Katy Barclay, senior vice president of human resources, who
retires in the fall after five years developing Krogers human resources
capabilities. On behalf of the entire Kroger family, we thank each of these
individuals for their service and leadership.
It is my great honor to
continue working with one of the strongest management teams in the retail
industry.
*
* *
We are a company
inspired by purpose: To lift up
our customers and each other, to make someones day brighter, whether through a
smile, making dinner easier, or extending a hand to a friend. Our purpose
extends well beyond our store walls, and we strive to be good stewards for our
customers and associates, planet and communities.
I am pleased to say we
fulfilled our commitments to our shareholders, customers and associates in 2014.
While we are proud of the strong year behind us, we are looking ahead. We intend
to continue growing market share and share of loyalty, and growing our top and
bottom lines. There is much more
to come.
On behalf of our entire
team, thank you for your continued confidence in Kroger.
W. Rodney
McMullen
Chairman and Chief
Executive Officer
5
Congratulations to the
winners of The Kroger Co. Community Service Award for 2014:
2014 Community Service
Award Winners
Division |
Recipient |
Atlanta |
LaQuita
Parks |
Central |
Reggie
Henderson |
Cincinnati |
Store
482 |
City
Market |
Stephen
Valdez |
Columbus |
Thomas
Cook |
Delta |
James
Smith |
Dillon
Stores |
Doris
Vogel |
Food 4
Less |
Trent
Smith |
Fred
Meyer |
Kimberly
Keller |
Frys |
Brunilda
Sieber |
Jay C
Stores |
Becky
Johnson |
King
Soopers |
Kevin
Hawkins |
Louisville |
Justin
Gordon |
Michigan |
Monica
Hommerding |
Mid-Atlantic |
Ouita
Gatton |
Nashville |
Deana
Greene |
QFC |
Ron
Buell |
Ralphs |
Deb
Navarro |
Smiths |
Jason
House |
Southwest |
Mike
Medved/Diann Lewis |
_____ |
Crossroad
Farms Dairy |
Judy
Morgan |
Columbus
Bakery |
Don Downs
Jr. |
Anderson
Bakery |
Ruthanne
Aiken |
Winchester
Farms Dairy |
George
Thacker |
Country Oven
Bakery |
Tony
Minnicks |
_____ |
|
C
Stores |
Heather
Nicholas |
_____ |
Corporate |
Ross
Kramer/Mark Mitchell |
Logistics |
Michael
GiaQuinta |
The Little
Clinic |
Phillip
Thomas |
6
Notice of Annual Meeting of Shareholders
Thursday, June 25, 2015
11:00 a.m., eastern time
To All Shareholders of The
Kroger Co.:
You are invited to the
Annual Meeting of Shareholders of The Kroger Co. which will be held at the Music
Hall Ballroom, Music Hall, 1241 Elm Street, Cincinnati, Ohio 45202, on June 25,
2015, at 11:00 a.m., eastern time, for the following purposes:
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1. |
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To elect
eleven directors for the ensuing year; |
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2. |
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To
approve, on an advisory basis, our executive compensation; |
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3. |
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To ratify
the selection of our independent auditor for fiscal year
2015; |
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4. |
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To vote on
three shareholder proposals, if properly presented at the meeting;
and |
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5. |
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To
transact such other business as may properly be brought before the
meeting. |
Holders of common shares of
record at the close of business on April 30, 2015, will be entitled to notice of
and to vote at the meeting.
Attendance
Only shareholders holding
shares at the close of business on the record date, or their duly appointed
proxies, may attend the meeting. If you plan to attend the meeting, you must bring the notice of the
meeting that was separately mailed to you or the top portion of your proxy card,
either of which will serve as your admission ticket.
YOUR MANAGEMENT DESIRES TO
HAVE A LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE MEETING, IN PERSON OR BY
PROXY. PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE.
IF YOU HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THE
PROXY AND MAIL IT IN THE SELF-ADDRESSED ENVELOPE PROVIDED. NO POSTAGE IS
REQUIRED IF MAILED WITHIN THE UNITED STATES.
If you are unable to attend
the annual meeting, you may listen to a live webcast of the meeting, which will
be accessible through our website, ir.kroger.com, at 11:00 a.m., eastern
time.
|
By the order
of the Board of Directors, |
|
Christine S.
Wheatley, Secretary |
May 13, 2015
Cincinnati, OH
7
Proxy Statement
May 13, 2015
This Combined Notice, Proxy
Statement and Annual Report is being furnished to the shareholders of The Kroger
Co. in connection with the solicitation of proxies by the Board of Directors for
use at the Annual Meeting of Shareholders to be held on June 25, 2015, at 11:00
a.m., eastern time, at the Music Hall Ballroom, Music Hall, 1241 Elm Street,
Cincinnati, Ohio 45202 and at any adjournments thereof.
Our principal executive
offices are located at 1014 Vine Street, Cincinnati, Ohio 45202-1100. Our
telephone number is 513-762-4000. This Proxy Statement and Annual Report, and
the accompanying proxy card were first furnished to shareholders on May 13,
2015.
Your proxy is being
solicited by the Board of Directors of The Kroger Co., and the cost of
solicitation will be borne by Kroger. Kroger will reimburse banks, brokers,
nominees, and other fiduciaries for postage and reasonable expenses incurred by
them in forwarding the proxy material to their principals. Kroger has retained
D.F. King & Co., Inc., 48 Wall Street, New York, New York, to assist in the
solicitation of proxies and will pay that firm a fee estimated at present not to
exceed $15,000. Proxies may be solicited personally, by telephone,
electronically via the Internet, or by mail.
Robert D. Beyer, W. Rodney
McMullen, and Ronald L. Sargent, all of whom are Kroger directors, have been
named members of the Proxy Committee for the 2015 Annual Meeting.
As of the close of business
on April 30, 2015, the record date, our outstanding voting securities consisted
of 490,201,501 common shares, the holders of which will be entitled to one vote
per share at the annual meeting. The shares represented by each proxy will be
voted in the manner specified unless the proxy is revoked before it is
exercised. You may change or revoke your proxy by giving us notice in writing
sent to Krogers Secretary, or in person at the meeting, or by executing and
sending us a subsequent proxy. Shareholders may not cumulate votes in the
election of directors.
If you are a registered
shareholder and return your proxy card without instructions, the Proxy Committee
will vote in accordance with the recommendations of the Board of Directors. If
you hold shares in street name and do not provide your broker with specific
voting instructions on proposals 1, 2, 4, 5 and 6, your broker does not have the
authority to vote on those proposals. This is generally referred to as a broker
non-vote. Proposal 3 is considered a routine matter and, therefore, your broker
may vote your shares according to your brokers discretion. The vote required,
including the effect of broker non-votes and abstentions for each of the matters
presented for shareholder vote, is set forth below.
Item No. 1, Election of
Directors An affirmative vote
of the majority of the total number of votes cast for or against a director
nominee is required for the election of a director in an uncontested election.
Accordingly, broker non-votes and abstentions will have no effect on this
proposal. A majority of votes cast means that the number of shares voted for a
director nominee must exceed the number of votes against such
director.
Item No. 2, Advisory
Vote to Approve Executive Compensation Advisory approval by shareholders of executive compensation requires
the affirmative vote of the majority of shares participating in the voting.
Accordingly, broker non-votes and abstentions will have no effect on this
proposal.
Item No. 3, Ratification
of Independent Auditors
Ratification by shareholders of the selection of independent public accountants
requires the affirmative vote of the majority of shares participating in the
voting. Accordingly, abstentions will have no effect on this
proposal.
Item Nos. 4, 5, and 6,
Shareholder Proposals The
affirmative vote of the majority of shares participating in the voting on a
shareholder proposal is required for its adoption. Accordingly, broker non-votes
and abstentions will have no effect on these proposals. Proxies will be voted
AGAINST these proposals unless the Proxy Committee is otherwise instructed on a
proxy properly executed and returned.
8
Important Notice
Regarding the Availability of Proxy Materials for the Shareholder Meeting to be
Held on June 25, 2015.
Under the rules adopted by
the SEC, we are furnishing proxy materials to our shareholders primarily on the
Internet. We believe that this process should expedite shareholders receipt of
proxy materials, lower the cost of our annual meeting and help to conserve
natural resources. On or about May 13, 2015, we mailed to each of our
shareholders (other than those who previously requested electronic or paper
delivery), a Notice of Availability of Proxy Materials containing instructions
on how to access and review the proxy materials on the Internet and instructions
on how to vote your shares. The Notice of Availability of Proxy Materials also
contains instructions on how to receive a paper or e-mail copy of the proxy
materials. If you receive a Notice of Availability of Proxy Materials, you will
not receive a printed copy of the proxy materials unless you request one. If you
receive paper copies of our proxy materials, you may also view these materials
at www.proxyvote.com. If you receive paper copies of our proxy materials and
wish to receive them by electronic delivery in the future, please request
electronic delivery at www.proxyvote.com.
9
Proposals to Shareholders
Election of Directors
(Item no.
1)
Krogers Board of
Directors, as now authorized, consists of eleven members. All members are to be
elected at the annual meeting to serve until the annual meeting in 2016, or
until their successors have been elected by the shareholders or by the Board
pursuant to Krogers Regulations, and qualified. Krogers Articles of
Incorporation provide that the vote required for election of a director nominee
by the shareholders, except in a contested election or when cumulative voting is
in effect, will be the affirmative vote of a majority of the votes cast for or
against the election of a nominee.
The experience,
qualifications, attributes, and skills that led the Corporate Governance
Committee and the Board to conclude that the following individuals should serve
as directors are set forth opposite each individuals name. The committee
memberships stated below are those in effect as of the date of this proxy
statement. It is intended that, except to the extent that authority is withheld,
proxies by the Proxy Committee will be voted for the election of the following
nominees:
Nominees for Director for Terms of Office
Continuing Until 2016
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Professional |
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Director |
Name |
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Occupation(1) |
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Age |
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Since |
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Nora A.
Aufreiter |
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Ms. Aufreiter is a
Director Emeritus of McKinsey & Company, a global management
consulting firm. She retired in June 2014 after more than 30 years as a
director and senior partner. During this time, she worked extensively in
the U.S., Canada, and internationally with major retailers, financial
institutions and other consumer facing companies. Before joining McKinsey,
Ms. Aufreiter spent three years in financial services working in corporate
finance and investment banking. She is a member of the Board of Directors
of The Bank of Nova Scotia and Nieman Marcus Group. Ms. Aufreiter also
serves on the boards of St. Michaels Hospital and the Canadian Opera
Company, and is a member of the Deans Advisory Board for the Ivey
Business School in Ontario, Canada. She is a member of the Financial
Policy Committee and the Public Responsibilities Committee.
Ms. Aufreiter has
over 30 years of broad business experience in a variety of retail sectors.
She brings to Krogers Board her expertise gained while earning her MBA
from the Harvard Business School. Her vast experience in leading
McKinseys North American Retail Practice, North American Branding service
line and the Consumer Digital and Omnichannel service line is of
particular value to the Board. |
|
55 |
|
2014 |
10
|
|
Professional |
|
|
|
Director |
Name |
|
Occupation(1) |
|
Age |
|
Since |
Robert D.
Beyer |
|
Mr. Beyer is Chairman
of Chaparal Investments LLC, a private investment firm and holding company
that he founded in 2009. From 2005 to 2009, Mr. Beyer served as Chief
Executive Officer of The TCW Group, Inc., a global investment management
firm. From 2000 to 2005, he served as President and Chief Investment
Officer of Trust Company of the West, the principal operating subsidiary
of TCW. Mr. Beyer is a member of the Board of Directors of The Allstate
Corporation and Leucadia National Corporation. He is chair of the
Corporate Governance Committee, a member of the Financial Policy
Committee, and our Lead Director.
Mr. Beyer brings to
Kroger his experience as CEO of TCW, a global investment management firm
serving many of the largest institutional investors in the U.S. He has
exceptional insight into Krogers financial strategy, and his experience
qualifies him to serve as a member of the Board. While at TCW, he also
conceived and developed the firms risk management infrastructure, an
experience that is useful to Krogers Board in performing its risk
management oversight functions. His abilities and service as a director
were recognized by his peers, who selected Mr. Beyer as an Outstanding
Director in 2008 as part of the Outstanding Directors Program of the
Financial Times. His strong insights into corporate governance form the
foundation of his leadership role as Lead Director on the
Board. |
|
55 |
|
1999 |
Susan J. Kropf |
|
Ms. Kropf was
President and Chief Operating Officer of Avon Products Inc., a
manufacturer and marketer of beauty care products, from 2001 until her
retirement in January 2007. She joined Avon in 1970. Prior to her most
recent assignment, Ms. Kropf had been Executive Vice President and Chief
Operating Officer, Avon North America and Global Business Operations from
1998 to 2000. From 1997 to 1998 she was President, Avon U.S. Ms. Kropf was
a member of Avons Board of Directors from 1998 to 2006. She currently is
a member of the Board of Directors of Coach, Inc., MeadWestvaco
Corporation, and Sherwin Williams Company. She is a member of the Audit
and Financial Policy Committees.
Ms. Kropf has gained
a unique consumer insight, having led a major beauty care company. She has
extensive experience in manufacturing, marketing, supply chain operations,
customer service, and product development, all of which assist her in her
role as a member of Krogers Board. Ms. Kropf has a strong financial
background, and has served on compensation, audit, and corporate
governance committees of other boards. She was inducted into the YWCA
Academy of Women Achievers. |
|
66 |
|
2007 |
11
|
|
Professional |
|
|
|
Director |
Name |
|
Occupation(1) |
|
Age |
|
Since |
David B.
Lewis |
|
Mr. Lewis is Of Counsel to and a former
shareholder and director of Lewis & Munday, a Detroit based law firm
with offices in Washington, D.C. and New York City. He is a director of
H&R Block, Inc. and STERIS Corporation. Mr. Lewis is a member of the
Corporate Governance and Financial Policy Committees.
In addition to his
background as a practicing attorney and expertise in bond financing, Mr.
Lewis brings to Krogers Board his financial expertise gained while
earning his MBA in Finance as well as his service and leadership on
Krogers audit committee and the board committees of other publicly traded
companies. Mr. Lewis has served on the Board of Directors of Conrail,
Inc., LG&E Energy Corp., M.A. Hanna, TRW, Inc., and Comerica, Inc. He
is a former chairman of the National Association of Securities
Professionals. |
|
70 |
|
2002 |
W. Rodney
McMullen |
|
Mr. McMullen was elected Chief Executive
Officer of Kroger in January 2014 and Chairman of the Board, effective
January 1, 2015. Prior to this, he served as President and Chief Operating
Officer from August 2009 to December 2013. Prior to that, Mr. McMullen was
elected Vice Chairman in 2003, Executive Vice President in 1999, and
Senior Vice President in 1997. Mr. McMullen is a director of Cincinnati
Financial Corporation.
Mr. McMullen has
broad experience in the supermarket business, having spent his career
spanning over 35 years with Kroger. He has a strong financial background,
having served as our CFO, and played a major role as architect of Krogers
strategic plan. His service on the compensation, executive, and investment
committees of Cincinnati Financial Corporation adds depth to his extensive
retail experience. |
|
54 |
|
2003 |
Jorge P. Montoya |
|
Mr. Montoya was
President of The Procter & Gamble Companys Global Snacks &
Beverage division, and President of Procter & Gamble Latin America,
from 1999 until his retirement in 2004. Prior to that, he was an Executive
Vice President of Procter & Gamble, a provider of branded consumer
packaged goods, from 1995 to 1999. Mr. Montoya is a director of The Gap,
Inc. He is chair of the Public Responsibilities Committee and a member of
the Compensation Committee.
Mr. Montoya brings to
Krogers Board over 30 years of leadership experience at a premier
consumer products company. He has a deep knowledge of the Hispanic market,
as well as consumer products and retail operations. Mr. Montoya has vast
experience in marketing and general management, including international
business. He was named among the 50 most important Hispanics in Business
& Technology, in Hispanic Engineer & Information Technology
Magazine. |
|
68 |
|
2007 |
12
|
|
Professional |
|
|
|
Director |
Name |
|
Occupation(1) |
|
Age |
|
Since |
Clyde R.
Moore |
|
Mr.
Moore is the Chairman of First Service Networks, a national provider of
facility and maintenance repair services. Prior to that he was Chairman
and Chief Executive Officer of First Service Networks from 2000 to 2014.
Mr. Moore is chair of the Compensation Committee and a member of the
Corporate Governance Committee.
Mr. Moore has over 30
years of general management experience in public and private companies. He
has sound experience as a corporate leader overseeing all aspects of a
facilities management firm and a manufacturing concern. Mr. Moores
expertise broadens the scope of the Boards experience to provide
oversight to Krogers facilities and manufacturing
businesses. |
|
61 |
|
1997 |
Susan M.
Phillips |
|
Dr.
Phillips is Professor Emeritus of Finance at The George Washington
University School of Business. She joined that university as a Professor
and Dean in 1998. She retired as Dean of the School of Business in 2010
and as Professor the following year. She was a member of the Board of
Governors of the Federal Reserve System from December 1991 through June
1998. Before her Federal Reserve appointment, Dr. Phillips served as Vice
President for Finance and University Services and Professor of Finance in
The College of Business Administration at the University of Iowa from 1987
through 1991. She is a director of CBOE Holdings, Inc., State Farm Mutual
Automobile Insurance Company, State Farm Life Insurance Company, State
Farm Companies Foundation, National Futures Association, the Chicago Board
Options Exchange, and Agnes Scott College. Dr. Phillips also was a trustee
of the Financial Accounting Foundation until the end of 2010. She is a
member of the Audit and Compensation Committees.
Dr. Phillips brings
to the Board strong financial acumen, along with a deep understanding of,
and involvement with, the relationship between corporations and the
government. Her experience in academia brings a unique and diverse
viewpoint to the deliberations of the Board. Dr. Phillips has been
designated an Audit Committee financial
expert. |
|
70 |
|
2003 |
James A. Runde |
|
Mr. Runde is a special advisor and a former
Vice Chairman of Morgan Stanley, a financial services provider, where he
has been employed since 1974. He was a member of the Board of Directors of
Burlington Resources Inc. prior to its acquisition by ConocoPhillips in
2006. Mr. Runde serves as a Trustee Emeritus of Marquette University and
the Pierpont Morgan Library. He is a member of the Compensation Committee
and chair of the Financial Policy Committee.
Mr. Runde brings to
Krogers Board a strong financial background, having led a major financial
services provider. He has served on the compensation committee of a major
corporation. |
|
68 |
|
2006 |
13
|
|
Professional |
|
|
|
Director |
Name |
|
Occupation(1) |
|
Age |
|
Since |
Ronald L.
Sargent |
|
Mr.
Sargent is Chairman and Chief Executive Officer of Staples, Inc., a
consumer products retailer, where he has been employed since 1989. Prior
to joining Staples, Mr. Sargent spent 10 years with Kroger in various
positions. In addition to serving as a director of Staples, Mr. Sargent is
a director of Five Below, Inc. During the past five years, he was a
director of Mattel, Inc. and The Home Depot, Inc. Mr. Sargent is chair of
the Audit Committee and a member of the Public Responsibilities
Committee.
Mr. Sargent has over
35 years of retail experience, first with Kroger and then with increasing
levels of responsibility and leadership at Staples, Inc. His efforts
helped carve out a new market niche for the international retailer that he
leads. His understanding of retail operations and consumer insights are of
particular value to the Board. Mr. Sargent has been designated an Audit
Committee financial expert. |
|
59 |
|
2006 |
Bobby S.
Shackouls |
|
Until the merger of
Burlington Resources Inc. and ConocoPhillips, which became effective in
2006, Mr. Shackouls was Chairman of the Board of Burlington Resources
Inc., a natural resources business, since July 1997 and its President and
Chief Executive Officer since December 1995. He had been a director of
that company since 1995 and President and Chief Executive Officer of
Burlington Resources Oil and Gas Company (formerly known as Meridian Oil
Inc.), a wholly-owned subsidiary of Burlington Resources, since 1994. Mr.
Shackouls is a director of Plains GP Holdings, L.P. and Oasis Petroleum
Inc. During the past five years, Mr. Shackouls was a director of
ConocoPhillips and PNGS GP LLC, the general partner of PAA Natural Gas
Storage, L.P. Mr. Shackouls is a member of the Audit and Corporate
Governance Committees. Mr. Shackouls previously served as Krogers Lead
Director.
Mr. Shackouls brings to the Board the
critical thinking that comes with a chemical engineering background, as
well as his experience leading a major natural resources company, coupled
with his corporate governance expertise. |
|
64 |
|
1999 |
____________________
(1) |
Except as
noted, each of the directors has been employed by his or her present
employer (or a subsidiary) in an executive capacity for at least five
years. |
14
Information Concerning the Board of Directors
Committees of the Board
The Board has five standing
committees including Audit, Compensation and Corporate Governance. All standing
committees are composed exclusively of independent directors. The current
charter of each Board committee is available on our website at ir.kroger.com
under Corporate Governance Committee Composition.
The table below provides
the current membership of our independent directors on each of the standing
Board committees.
|
|
|
|
|
|
Corporate |
|
Financial |
|
Public |
|
|
Audit |
|
Compensation |
|
Governance |
|
Policy |
|
Responsibilities |
Name |
|
Committee |
|
Committee |
|
Committee |
|
Committee |
|
Committee |
Nora
A. Aufreiter |
|
|
|
|
|
|
|
x |
|
x |
Robert D. Beyer |
|
|
|
|
|
Chair |
|
x |
|
|
Susan J. Kropf |
|
x |
|
|
|
|
|
x |
|
|
David B. Lewis |
|
|
|
|
|
x |
|
x |
|
|
Jorge P. Montoya |
|
|
|
x |
|
|
|
|
|
Chair |
Clyde R. Moore |
|
|
|
Chair |
|
x |
|
|
|
|
Susan M. Phillips |
|
x |
|
x |
|
|
|
|
|
|
James A. Runde |
|
|
|
x |
|
|
|
Chair |
|
|
Ronald L. Sargent |
|
Chair |
|
|
|
|
|
|
|
x |
Bobby S. Shackouls |
|
x |
|
|
|
x |
|
|
|
|
During 2014, the Audit
Committee met five times, the Compensation Committee met four times, and the
Corporate Governance Committee met two times. The Audit Committee reviews
financial reporting and accounting matters pursuant to its charter and selects
our independent accountants. The Compensation Committee recommends for
determination by the independent members of the Board the compensation of the
CEO, determines the compensation of our other senior management, and administers
some of our incentive programs. Additional information on the Compensation
Committees processes and procedures for consideration of executive compensation
are addressed in the Compensation Discussion and Analysis section of this proxy
statement. The Corporate Governance Committee develops criteria for selecting
and retaining members of the Board, seeks out qualified candidates for the
Board, and reviews the performance of the Board and, along with the other
independent board members, the CEO.
Director Nominations
The Corporate Governance
Committee will consider shareholder recommendations for nominees for membership
on the Board of Directors. If shareholders wish to nominate a person or persons
for election to the Board at our 2016 annual meeting, written notice must be
submitted to Krogers Secretary, and received at our executive offices not later
than January 13, 2016. Such notice should include the name, age, business
address and residence address of such person, the principal occupation or
employment of such person, the number of Kroger common shares owned of record or
beneficially by such person, and any other information relating to the person
that would be required to be included in a proxy statement relating to the
election of directors. The Secretary will forward the information to the
Corporate Governance Committee for its consideration. The Committee will use the
same criteria in evaluating candidates submitted by shareholders as it uses in
evaluating candidates identified by the Committee. These criteria
are:
● |
Demonstrated ability in fields considered to be of value in
the deliberations of the Board, including business management, public
service, education, science, law, and government; |
● |
Highest standards of personal character and
conduct; |
15
● |
Willingness to fulfill the obligations of directors and to
make the contribution of which he or she is capable, including regular
attendance and participation at Board and committee meetings, and
preparation for all meetings, including review of all meeting materials
provided in advance of the meeting; and |
● |
Ability to understand the perspectives of
Krogers customers, taking into consideration the diversity of our
customers, including regional and geographic
differences. |
The Corporate Governance
Committee considers racial, ethnic, and gender diversity to be important
elements in promoting full, open, and balanced deliberations of issues presented
to the Board. The Committee considers director candidates that help the Board
reflect the diversity of our shareholders, associates, customers and the
communities in which we operate. Some consideration also is given to the
geographic location of director candidates in order to provide a reasonable
distribution of members from Krogers operating areas.
The Corporate Governance
Committee recruits candidates for Board membership through its own efforts and
through suggestions from other directors and shareholders. In addition, the
Committee has retained an independent search firm to assist in identifying and
recruiting director candidates who meet the criteria established by the
Committee.
Corporate Governance
The Board has adopted
Guidelines on Issues of Corporate
Governance. These Guidelines, which include copies of the current charters for the Audit,
Compensation, and Corporate Governance Committees, and the other committees of
the Board, are available on our corporate website at ir.kroger.com. Shareholders
may obtain a copy of the Guidelines by making a
written request to Krogers Secretary at our executive offices.
Independence
The Board has determined
that all of the non-employee directors have no material relationships with
Kroger and, therefore, are independent for purposes of the New York Stock
Exchange listing standards. The Board made its determination based on
information furnished by all members regarding their relationships with Kroger
and its management, and other relevant information. After reviewing the
information, the Board determined that all of the non-employee directors were
independent because (a) they all satisfied the criteria for independence set
forth in Rule 303A.02 of the NYSE Listed Company Manual, (b) any business
transactions between Kroger and entities with which the directors are
affiliated, the value of which falls below the thresholds identified by the NYSE
listing standards, and (c) none had any material relationships with Kroger
except for those arising directly from their performance of services as a
director for Kroger.
Audit Committee Expertise
The Board has determined
that Susan M. Phillips and Ronald L. Sargent, independent directors who are
members of the Audit Committee, are audit committee financial experts as
defined by applicable SEC regulations and that all members of the Audit
Committee are financially literate as that term is used in the NYSE listing
standards and are independent in accordance with Rule 10A-3 of the Securities
Exchange Act of 1934.
Code of Ethics
The Board has adopted
The Kroger Co. Policy on Business
Ethics, applicable to all
officers, employees and directors, including Krogers principal executive,
financial, and accounting officers. The Policy is available on our
corporate website at ir.kroger.com. Shareholders may also obtain a copy of the
Policy by making a written request to Krogers Secretary
at our executive offices. We intend to satisfy the disclosure requirement
regarding any amendment to, or a waiver from, a provision of the Policy for our principal executive, financial and accounting officers by
posting that information on our website at ir.kroger.com.
16
Communications with the Board
The Board has established
two separate mechanisms for shareholders and interested parties to communicate
with the Board. Any shareholder or interested party who has concerns regarding
accounting, improper use of Kroger assets, or ethical improprieties may report
these concerns via the toll-free hotline (800-689-4609) or email address
(helpline@kroger.com) established by the Boards Audit Committee. The concerns
are investigated by Krogers Vice President of Auditing and reported to the
Audit Committee as deemed appropriate by the Vice President of
Auditing.
Shareholders or interested
parties also may communicate with the Board in writing directed to Krogers
Secretary at our executive offices. The Secretary will consider the nature of
the communication and determine whether to forward the communication to the
chair of the Corporate Governance Committee. Communications relating to
personnel issues or our ordinary business operations, or seeking to do business
with us, will be forwarded to the business unit of Kroger that the Secretary
deems appropriate. All other communications will be forwarded to the chair of
the Corporate Governance Committee for further consideration. The chair of the
Corporate Governance Committee will take such action as he or she deems
appropriate, which may include referral to the full Committee or the entire
Board.
Attendance
The Board held five
meetings in fiscal year 2014. During fiscal year 2014, all incumbent directors
attended at least 75% of the aggregate number of meetings of the Board and
committees on which that director served. Members of the Board are expected to
use their best efforts to attend all annual meetings of shareholders. All
thirteen members then serving on the Board attended last years annual
meeting.
Compensation Consultants
The Compensation Committee
directly engages a compensation consultant from Mercer Human Resource Consulting
to advise the Committee in the design of compensation for our executive
officers. In 2014, Kroger paid that consultant $294,868 for work performed for
the Committee. Kroger, on managements recommendation, retained the parent and
affiliated companies of Mercer Human Resource Consulting to provide other
services for Kroger in 2014, for which Kroger paid $4,425,282. These other
services primarily related to insurance claims (for which Kroger was reimbursed
by insurance carriers as claims were adjusted), insurance brokerage and bonding
commissions, and pension consulting. Kroger also made payments to affiliated
companies for insurance premiums that were collected by the affiliated companies
on behalf of insurance carriers, but these amounts are not included in the
totals referenced above, as the amounts were paid over to insurance carriers for
services provided by those carriers. Although neither the Committee nor the
Board expressly approved the other services, after taking into consideration the
NYSEs independence standards and the SEC rules, the Committee determined that
the consultant is independent and his work has not raised any conflict of
interest because (a) the consultant was first engaged by the Committee before he
became associated with Mercer; (b) the consultant works exclusively for the
Committee and not for our management; (c) the consultant does not benefit from
the other work that Mercers parent and affiliated companies perform for Kroger;
and (d) neither the consultant nor the consultants team perform any other
services for Kroger. The Committee may engage an additional compensation
consultant from time to time as it deems advisable.
Compensation Committee Interlocks and Insider
Participation
No member of the
Compensation Committee was an officer or employee of Kroger during fiscal year
2014, and no member of the Compensation Committee is a former officer of the
Company or was a party to any disclosable related person transaction involving
the Company. During fiscal year 2014, none of our executive officers served on
the board of directors or on the compensation committee of any other entity that
has or had executive officers serving as a member of the Board of Directors or
Compensation Committee of the Company.
17
Board Oversight of Enterprise Risk
While risk management is
primarily the responsibility of Krogers management team, the Board is
responsible for the overall supervision of our risk management activities. The
Boards oversight of the material risks faced by Kroger occurs at both the full
Board level and at the committee level.
The Audit Committee has
oversight responsibility not only for financial reporting of Krogers major
financial exposures and the steps management has taken to monitor and control
those exposures, but also for the effectiveness of managements processes that
monitor and manage key business risks facing Kroger, as well as the major areas
of risk exposure and managements efforts to monitor and control that exposure.
The Audit Committee also discusses with management its policies with respect to
risk assessment and risk management.
Management, including our
Chief Ethics and Compliance Officer, provides regular updates throughout the
year to the respective Board committees regarding the management of the risks
they oversee, and each of these committees reports on risk to the full Board at
each regular meeting of the Board.
In addition to the reports
from the committees, the Board receives presentations throughout the year from
various department and business unit leaders that include discussion of
significant risks as necessary. At each Board meeting, the Chairman and CEO
addresses matters of particular importance or concern, including any significant
areas of risk that require Board attention. Additionally, through dedicated
sessions focusing entirely on corporate strategy, the full Board reviews in
detail Krogers short- and long-term strategies, including consideration of
significant risks facing Kroger and their potential impact. The independent
directors, in executive sessions led by the Lead Director, address matters of
particular concern, including significant areas of risk, that warrant further
discussion or consideration outside the presence of Kroger employees.
We believe that our
approach to risk oversight, as described above, optimizes our ability to assess
interrelationships among the various risks, make informed cost-benefit
decisions, and approach emerging risks in a proactive manner for Kroger. We also
believe that our risk structure complements our current Board leadership
structure, as it allows our independent directors, through the five fully
independent Board committees, and in executive sessions of independent directors
led by the Lead Director, to exercise effective oversight of the actions of
management, led by Mr. McMullen as Chairman of the Board and CEO, in identifying
risks and implementing effective risk management policies and
controls.
Board Leadership Structure and Lead
Director
The Board is composed of
ten independent non-employee directors and one management director, Mr.
McMullen, the Chairman and CEO. The Board has established five standing
committees audit, compensation, corporate governance, financial policy, and
public responsibilities. Each committee is composed solely of independent
directors, each with a different independent director serving as committee
chair.
In addition, as provided in
the Guidelines on Issues of
Corporate Governance, the Board
has designated one of the independent directors as Lead Director. The Lead
Director serves a variety of roles, including reviewing and approving Board
meeting agendas, materials and schedules to confirm the appropriate topics are
reviewed and sufficient time is allocated to each; serving as liaison between
the Chairman, management, and the non-management directors; presiding at the
executive sessions of independent directors and at all other meetings of the
Board at which the Chairman is not present; calling an executive session of
independent directors at any time and serving as the Boards representative for
any consultation and direct communication, following a request, with major
shareholders. Unless otherwise determined by the Board, the chair of the
Corporate Governance Committee is designated as the Lead Director. Robert Beyer,
an independent director and the chair of the Corporate Governance Committee, is
currently the Lead Director. Mr. Beyer is an effective Lead Director for Kroger
due to, among other things, his independence, his deep strategic and operational
understanding of Kroger obtained while serving as a Kroger director, his insight
into corporate governance and his experience on other boards.
18
With respect to the roles
of Chairman and CEO, the Guidelines provide that
the Board will determine when it is in the best interests of Kroger and our
shareholders for the roles to be separated or combined, and the Board exercises
its discretion as it deems appropriate in light of prevailing circumstances.
Upon retirement of our former Chairman, David B. Dillon, on December 31, 2014,
the Board determined that it is in the best interests of Kroger and our
shareholders for one person to serve as the Chairman and CEO, as was the case
from 2004 through 2013. The Board believes that this leadership structure
improves the Boards ability to focus on key policy and operational issues and
helps the Company operate in the long-term interests of shareholders.
Additionally, this structure provides an effective balance between strong
Company leadership and appropriate safeguards and oversight by independent
directors. The Board believes that the combination or separation of these
positions should continue to be considered as part of the succession planning
process, as was the case in 2003 and 2014 when the roles were
separated.
The Board and each of its
committees conduct an annual self-evaluation to determine whether they are
functioning effectively. As part of this annual self-evaluation, the Board
assesses whether the current leadership structure continues to be appropriate
for Kroger and its shareholders. The Guidelines provide the
flexibility for the Board to modify our leadership structure in the future as
appropriate. We believe that Kroger, like many U.S. companies, has been
well-served by this flexible leadership structure.
19
Compensation Discussion and Analysis
Executive Compensation Overview
As one of the largest
retailers in the world, our executive compensation philosophy remains to attract
and retain the best management talent and to motivate these employees to achieve
our business and financial goals. We believe our strategy creates value for
shareholders in a manner consistent with our focus on our core values: honesty,
integrity, respect, inclusion, diversity, and safety.
To achieve our objectives,
the Compensation Committee seeks to ensure that compensation is competitive and
that there is a direct link between pay and performance. To do so, it is guided
by the following principles:
● |
A
significant portion of pay should be performance-based, with the
percentage of total pay tied to performance increasing proportionally with
an executives level of responsibility; |
● |
Compensation should include incentive-based pay to drive
performance, providing superior pay for superior performance, including
both a short- and long-term focus; |
● |
Compensation policies should include an opportunity for, and a
requirement of, equity ownership; and |
● |
Components of compensation should be tied to an
evaluation of business and individual performance measured against metrics
that align with our business strategy. |
This Compensation Discussion and Analysis provides
a discussion and analysis of our compensation program for the executive
officers. For the fiscal year ended January 31, 2015, the named executive
officers were:
|
Name |
|
Title |
|
W.
Rodney McMullen |
|
Chairman and Chief Executive
Officer |
|
J.
Michael Schlotman |
|
Senior Vice President and Chief Financial
Officer |
|
Michael L. Ellis |
|
President and Chief Operating
Officer |
|
Kathleen S. Barclay |
|
Senior Vice President of Human
Resources |
|
Michael J. Donnelly |
|
Senior Vice President of
Merchandising |
|
David B. Dillon |
|
Former Chairman |
The compensation of our
named executive officers in fiscal year 2014 reflects the above principles.
Total compensation for the year is an indicator of how well Kroger performed
compared to our business plan, reflecting how our compensation program responds
to business challenges and the marketplace. We continue to deliver sales growth
and positive earnings results.
● |
A key
metric, identical supermarket sales, excluding supermarket fuel, increased
5.2% from 2013. Through fiscal 2014, we have achieved 45 consecutive
quarters of positive identical sales growth. |
● |
Net
earnings per diluted share were $3.44 which exceeded our guidance
range. |
● |
In September 2014, the Board raised the
quarterly cash dividend by 12%, to $0.185 per share. |
The Committee believes our management produced
outstanding results in 2014, measured against increasingly aggressive business
plan objectives for sales, net earnings, operating costs and our strategic plan.
The compensation paid to our named executive officers reflected this fact as the
annual performance-based cash bonus paid out at 121.5% of bonus potentials. The
strong link between pay and performance is illustrated by a comparison of past
years annual cash bonus, such as 2012, 2010 and 2009 with payouts of less than
100%. In those years, we did not achieve all of our business plan objectives. In
2014, all of our business plan goals were exceeded (with the exception of a set
of measures under our strategic plan goal, which fell short), resulting in an
annual bonus payout that exceeded 100% of potentials.
In keeping with our overall
compensation philosophy, we endeavor to ensure that our executive compensation
practices conform to best practices. In particular, over the past several years
we have:
● |
established significant stock ownership
guideline levels to reinforce the link between the interests of our named
executive officers and those of our shareholders; |
20
● |
adopted claw-back policies under which the
repayment of bonuses may be required in certain circumstances; |
● |
eliminated tax gross-ups; |
● |
adopted the recommendation of shareholders that
they be permitted annually, on an advisory basis, to vote on executive compensation;
and |
● |
adopted a policy prohibiting hedging and short
sales, and restricting pledging of Kroger common shares by our officers and
directors. |
In addition, fifty percent
of the equity awards granted to the named executive officers are in the form of
performance units that are earned only to the extent that performance objectives
are achieved. Equity compensation awards continue to play an important role in
rewarding named executive officers for the achievement of long-term business
objectives and providing incentives for the creation of shareholder value.
The following discussion
and analysis addresses the compensation of the named executive officers and the
factors considered by the Committee in setting compensation for the named
executive officers and making recommendations to the independent directors in
the case of the CEOs compensation. Additional detail is provided in the
compensation tables and the accompanying narrative disclosures that follow this
discussion and analysis.
Results of 2014 Advisory Vote to Approve Executive
Compensation
At the 2014 Annual Meeting
of Shareholders, we held our fourth annual advisory vote on executive
compensation. Over 96% of the votes cast were in favor of the advisory proposal
in 2014. The Committee considers this to be an overwhelmingly favorable outcome
and believes it conveys our shareholders support of the Committees decisions
and the existing executive compensation programs. As a result, the Committee
made no material changes in the structure of our compensation programs or pay
for performance philosophy. At the 2015 Annual Meeting of Shareholders, in
keeping with our shareholders request for an annual advisory vote, we will
again hold an advisory vote to approve executive compensation (see page 55). The
Committee will continue to consider the results from this years and future
advisory votes on executive compensation.
Executive Compensation
Objectives
The Committee has several
related objectives regarding compensation. First, the Committee believes that
compensation must be designed to attract and retain those best suited to fulfill
the challenging roles that executive officers play at Kroger. Second, some
elements of compensation should help align the interests of our officers with
the interests of our shareholders. Third, compensation should create strong
incentives for the officers (a) to achieve the annual business plan targets
established by the Board, and (b) to achieve Krogers long-term strategic
objectives. In developing compensation programs and amounts to meet these
objectives, the Committee exercises judgment to ensure that executive officer
compensation is appropriate and competitive in light of Krogers performance and
the needs of the business.
Stock Ownership Guidelines
To more closely align the
interests of our officers and directors with your interests as shareholders, the
Board has adopted stock ownership guidelines. These guidelines require
non-employee directors, officers and some other key executives to acquire and
hold a minimum dollar value of Kroger common shares as set forth below:
Position |
|
Multiple of Base
Salary |
Chief Executive Officer |
|
5
times |
Chief Operating Officer |
|
4
times |
Executive Vice Presidents and Senior Vice
Presidents |
|
3
times |
Other Officers and Key Executives |
|
2
times |
Non-employee Directors |
|
3
times annual base cash retainer |
21
Covered individuals are
expected to achieve the target level within five years of appointment to their
position. If the requirements have not been met, directors, officers and key
executives, including the named executive officers, must hold 100% of shares
received upon the exercise of stock options or upon the vesting of restricted
stock, except those necessary to pay the exercise price of the options and/or
applicable taxes, and must retain all Kroger shares unless the disposition is
approved in advance by the CEO, or by the Board or Compensation Committee for
the CEO.
Role of Compensation Committee
The Compensation Committee
of the Board has the primary responsibility for establishing the compensation of
our executive officers, including the named executive officers, with the
exception of the Chief Executive Officer. The Committees role regarding the
CEOs compensation is to make recommendations to the independent members of the
Board; those members of the Board establish the CEOs compensation.
Establishing Executive
Compensation
The independent members of
the Board have the exclusive authority to determine the amount of the CEOs
salary, the bonus potential for the CEO, the nature and amount of any equity
awards made to the CEO, and any other compensation decisions related to the CEO.
In setting the annual bonus potential for the CEO, the independent directors
determine the dollar amount that will be multiplied by the percentage payout
under the annual bonus plan generally applicable to all corporate management,
including the named executive officers. The independent directors retain
discretion to reduce the percentage payout the CEO would otherwise receive. The
independent directors thus make a separate determination annually concerning
both the CEOs bonus potential and the percentage of bonus paid.
The Committee performs the
same function and exercises the same authority as to the other named executive
officers. The Committees annual review of compensation for the named executive
officers includes the following:
● |
Conducts an annual review of all components of
compensation, quantifying total compensation for the named executive officers on tally sheets.
The review includes a summary for each named executive officer of salary; annual performance-based
cash bonus; long-term performance-based cash and performance unit compensation; equity;
accumulated realized and unrealized stock option gains and restricted stock and performance unit
values; the value of any perquisites; retirement benefits; company
paid health and welfare
benefits; banked vacation; severance benefits available under The Kroger
Co. Employee Protection Plan;
and earnings and payouts available under Krogers nonqualified deferred
compensation
program. |
● |
Considers internal pay equity at Kroger to
ensure that the CEO is not compensated disproportionately. The Committee has determined that the
compensation of the CEO and that of the other named executive officers bears a reasonable relationship to
the compensation levels of other executive positions at Kroger
taking into consideration
performance and differences in responsibilities. |
● |
Reviews a report from the Committees
compensation consultants (described below) comparing named executive officer and other senior executive
compensation with that of other companies, primarily our competitors, to ensure that the Committees
objectives of competitiveness are
met. |
● |
Takes into account a recommendation from the
CEO (except in the case of his own compensation) for salary, bonus potential, and equity awards
for each of the senior officers including the other named executive officers. The CEOs recommendation
takes into consideration the objectives established by and the reports received by the Committee as
well as his assessment of individual job performance and contribution to our management
team. |
● |
Reviews of historical information regarding
salary, bonus, and equity compensation for a three year period. |
In considering each of the
factors above, the Committee does not make use of a formula, but rather
subjectively reviews each in setting compensation.
22
Compensation Policies
as They Relate to Risk Management
As part of the Compensation
Committees review of our compensation practices, the Committee considers and
analyzes the extent to which risks arise from such practices and their impact on
Krogers business. As discussed above in the Compensation Discussion and
Analysis, our policies and practices for compensating employees are designed to,
among other things, attract and retain high quality and engaged employees. In
this process, the Committee also focuses on minimizing risk through the
implementation of certain practices and policies, such as the executive
compensation recoupment policy, which is described in more detail on page 30.
Accordingly, we do not believe that our compensation practices and policies
create risks that are reasonably likely to have a material adverse effect on
Kroger.
The Committees
Compensation Consultants and Benchmarking
As referenced earlier in
this Compensation Discussion and Analysis, the Committee directly engages a
compensation consultant from Mercer Human Resource Consulting to advise the
Committee in the design of compensation for executive officers.
The Mercer consultant
conducts an annual competitive assessment of executive positions at Kroger for
the Committee. The assessment is one of several bases, as described above, on
which the Committee determines compensation. The consultant assesses:
● |
Base salary; |
● |
Target annual performance-based bonus; |
● |
Target annual cash compensation (the sum of salary and
annual bonus); |
● |
Annualized long-term incentive awards, such as
stock options, restricted stock, and performance-based long-term cash bonuses and performance-based
equity awards; and |
● |
Total direct compensation (the sum of all these
elements). |
The consultant compares
these elements against those of other companies in a group of publicly-traded
food and drug retailers. For 2014, our peer group consisted of:
Costco Wholesale |
SuperValu |
CVS
Health, formerly CVS Caremark |
Target |
Rite
Aid |
Wal-Mart |
Safeway |
Walgreen Boots Alliance, formerly
Walgreen |
This peer group is the same
group as was used in 2013. The make-up of the compensation peer group is
reviewed annually and modified as circumstances warrant. Industry consolidation
and other competitive forces will change the peer group used over time. The
consultant also provides the Committee data from companies in general
industry, a representation of major publicly-traded companies of similar size
and scope. These data serve as reference points, particularly for senior staff
positions where competition for talent extends beyond the retail
sector.
From time to time, the
Committee will engage an additional compensation consultant to conduct an
additional review of Krogers executive compensation, as it deems
advisable.
Considering the size of
Kroger in relation to other peer group companies, the Committee believes that
salaries paid to our named executive officers should be at or above the median
paid by competitors for comparable positions. The Committee also aims to provide
an annual bonus potential to our named executive officers that, if the
increasingly more challenging annual business plan objectives are achieved,
would cause total cash compensation to be meaningfully above the
median.
23
Components of Executive Compensation at
Kroger
Compensation for our named
executive officers is comprised of the following:
● |
Salary; |
● |
Performance-Based Annual Cash Bonus (annual,
non-equity incentive pay); |
● |
Performance-Based Long-Term Compensation
(long-term, cash and performance unit incentive compensation);
|
● |
Other Equity (non-qualified stock options and
restricted stock); |
● |
Retirement and other benefits; and
|
● |
Perquisites. |
Salary
We provide our named
executive officers and other employees a fixed amount of cash compensation,
salary, for their work. Salaries for the named executive officers (with the
exception of the CEO) are established each year by the Committee, in
consultation with the CEO. The CEOs salary is established by the independent
directors. Salaries for the named executive officers were reviewed in June
2014.
The amount of each named
executive officers salary is influenced by numerous factors
including:
● |
An assessment of individual contribution in the
judgment of the CEO and the Committee (or, in the case of the CEO, of the Committee and the rest of
the independent directors); |
● |
Benchmarking with comparable
positions at peer group companies; |
● |
Tenure; and
|
● |
Relationship with the salaries of other
executives at Kroger. |
The assessment of
individual contribution is based on a subjective determination, without the use
of performance targets, in the following areas:
● |
Leadership;
|
● |
Contribution to the officer group;
|
● |
Achievement of established objectives, to the
extent applicable; |
● |
Decision-making abilities; |
● |
Performance of the areas or groups directly
reporting to the officer; |
● |
Increased responsibilities;
|
● |
Strategic thinking; and |
● |
Furtherance of Krogers core values. |
The amounts shown below
reflect the salaries of the named executive officers effective August 1,
following the annual review of their compensation in June.
|
|
Salaries |
|
|
2012 |
|
2013 |
|
2014 |
W.
Rodney McMullen* |
|
$ |
939,600 |
|
$ |
968,600 |
|
$ |
1,144,000 |
J.
Michael Schlotman |
|
$ |
671,100 |
|
$ |
704,655 |
|
$ |
760,000 |
Michael L. Ellis** |
|
|
|
|
$ |
527,360 |
|
$ |
800,000 |
Kathleen S. Barclay |
|
$ |
677,300 |
|
$ |
700,000 |
|
$ |
721,000 |
Mike
Donnelly |
|
$ |
550,500 |
|
$ |
567,015 |
|
$ |
662,900 |
David B. Dillon |
|
$ |
1,330,000 |
|
$ |
1,370,000 |
|
$ |
1,370,000 |
____________________
* |
Mr. McMullens salary
increased to $1,200,000 effective upon his appointment as Chairman of the
Board on January 1, 2015. |
|
|
** |
Mr. Ellis first
became a named executive officer in 2013. |
24
Performance-Based Annual
Cash Bonus
A large percentage of our
employees at all levels, including the named executive officers, are eligible to
receive a performance-based annual cash bonus based on the performance of Kroger
(in the case of the named executive officers) or business unit (in the case of
employees in our business units). The Committee establishes bonus potentials for
each named executive officer, other than the CEO, whose bonus potential is
established by the independent directors. Actual payouts, which can exceed 100%
of the potential amounts but may not exceed 200% of the potential amounts,
represent the extent to which performance meets or exceeds the thresholds
established by the Committee. Actual payouts may be as low as zero if
performance does not meet the thresholds established by the
Committee.
The Committee considers
several factors in making its determination or recommendation as to bonus
potentials. First, the individuals level within the organization is a factor in
that the Committee believes that more senior executives should have a
substantial part of their compensation dependent upon Krogers performance.
Second, the individuals salary is a factor so that a substantial portion of a
named executive officers total cash compensation is dependent upon Krogers
performance. Finally, the Committee considers the report of its compensation
consultant to assess the bonus potential of the named executive officers in
light of total compensation paid to comparable executive positions in the
industry.
The annual cash bonus
potential in effect following the annual review of compensation in June for each
named executive officer is shown below. Actual bonus payouts are prorated to
reflect changes, if any, to bonus potentials during the year.
|
|
Annual Bonus
Potential |
|
|
2012 |
|
2013 |
|
2014 |
W.
Rodney McMullen* |
|
$ |
1,000,000 |
|
$ |
1,000,000 |
|
$ |
1,500,000 |
J.
Michael Schlotman |
|
$ |
550,000 |
|
$ |
550,000 |
|
$ |
550,000 |
Michael L. Ellis** |
|
|
|
|
$ |
375,000 |
|
$ |
800,000 |
Kathleen S. Barclay |
|
$ |
550,000 |
|
$ |
550,000 |
|
$ |
550,000 |
Mike
Donnelly |
|
$ |
425,000 |
|
$ |
425,000 |
|
$ |
550,000 |
David B. Dillon |
|
$ |
1,500,000 |
|
$ |
1,500,000 |
|
$ |
1,230,000 |
____________________
* |
Mr. McMullens annual
bonus potential increased to $1,600,000 effective upon his appointment as
Chairman of the Board on January 1, 2015. |
|
|
** |
Mr. Ellis first
became a named executive officer in 2013. |
Over time the Committee and
our independent directors have placed an increased emphasis on our strategic
plan by making the targets more difficult to achieve. The bonus plan allows for
minimal or zero bonus to be earned at relatively low levels of performance to
provide incentive for achieving even higher levels of performance.
The amount of bonus that
the named executive officers earn each year is based upon Krogers performance
compared to targets established by the Committee and the independent directors
based on the business plan adopted by the Board of Directors. In 2014, 30% of
the bonus was based on a target for identical sales without supermarket fuel;
30% was based on a target for EBITDA without supermarket fuel; 30% was based on
implementation and results of a set of measures under our strategic plan, and
10% was based on a target for total operating costs as a percentage of sales,
excluding fuel. An additional 5% would be earned if Kroger achieved three goals
with respect to its supermarket fuel operations: achievement of the targeted
fuel EBITDA of $208.25 million, an increase in total gallons sold of 3%, and
achievement of 1,325 fuel centers placed in service. The fuel bonus of 5% is
only available if all three measures are met. If any of the three fuel goals are
not met, there is no payout under the fuel measurement. Kroger exceeded the
three goals and, as a result, received the 5% fuel bonus.
25
The 2014 targets
established by the Committee, the actual fiscal 2014 results, and the bonus
percentage earned in each of the components of annual cash bonus were as
follows:
|
|
|
|
|
|
|
|
Actual |
|
|
|
|
|
|
|
|
|
|
|
|
|
Performance |
|
|
|
|
|
|
|
Targets |
|
Actual |
|
Compared to |
|
|
|
|
|
Component |
|
Minimum |
|
100% |
|
Performance |
|
100% Target |
|
Amount Earned |
Identical Sales without supermarket |
|
|
|
|
|
|
|
|
|
|
|
|
|
fuel (30%) |
|
1.00% |
|
3.00% |
|
5.17% |
|
172.33% |
|
|
49.01 |
% |
|
EBITDA without supermarket |
|
|
|
|
|
|
|
|
|
|
|
|
|
fuel (30%) |
|
$4.0004 Billion |
|
$4.7064 Billion |
|
$4.7719 Billion |
|
101.39% |
|
|
39.59 |
% |
|
Strategic Plan (30%) |
|
** |
|
** |
|
** |
|
** |
|
|
8.40 |
% |
|
Total Operating Costs as percentage
of sales, excluding fuel (10%)* |
|
Over
budget by 25 basis points |
|
Over
budget by 5 basis points |
|
Under
budget by 14 basis points |
|
19
basis points under target |
|
|
19.50 |
% |
|
Fuel
Bonus (5%) |
|
[As described in the text above] |
|
|
|
|
5.00 |
% |
|
|
|
|
|
|
|
|
|
|
|
Total
Earned |
|
|
|
|
|
|
|
|
|
|
121.50 |
% |
|
____________________
* |
Total Operating Costs
were budgeted at 26.48% as a percentage of sales for fiscal year
2014. |
|
|
** |
The Strategic Plan
component also was established by the Committee at the beginning of the
year, but is not disclosed as it is competitively
sensitive. |
Following the close of the
year, the Committee reviewed Krogers performance against the identical sales
without supermarket fuel, EBITDA without supermarket fuel, strategic plan
objectives, and total operating costs as a percent of sales, excluding fuel, and
determined the extent to which Kroger achieved those objectives. Due to our
performance when compared to the targets established by the Committee, and based
on the business plan adopted by the Board, the named executive officers earned
121.5% of their bonus potentials. This is the same bonus percentage payout
received by all other participants in the corporate annual bonus
plan.
In 2014, as in all years,
the Committee retained discretion to reduce the bonus payout for all executive
officers, including the named executive officers, if the Committee determined
for any reason that the bonus payouts were not appropriate given their
assessment of Company performance. The independent directors retained that
discretion for the CEOs bonus. Those bodies also retained discretion to adjust
the targets under the plan should unanticipated developments arise during the
year. No adjustments were made to the targets in 2014. The Committee, and the
independent directors in the case of the CEO, determined that the bonus payouts
for the named executive officers, that were earned based on 2014 performance,
should not be adjusted.
The percentage paid for
2014 represented excellent performance that exceeded our business plan
objectives. A comparison of bonus percentages for the named executive officers
in prior years demonstrates the variability of annual cash bonus incentive
compensation and its strong links to our performance:
|
|
Annual Cash
Bonus |
Fiscal Year |
|
Percentage |
2014 |
|
|
121.500 |
% |
|
2013 |
|
|
104.949 |
% |
|
2012 |
|
|
85.881 |
% |
|
2011 |
|
|
138.666 |
% |
|
2010 |
|
|
53.868 |
% |
|
2009 |
|
|
38.450 |
% |
|
2008 |
|
|
104.948 |
% |
|
2007 |
|
|
128.104 |
% |
|
2006 |
|
|
141.118 |
% |
|
2005 |
|
|
132.094 |
% |
|
26
The actual amounts of
annual performance-based cash bonuses paid to the named executive officers for
2014 are reported in the Summary Compensation Table in the Non-Equity Incentive
Plan Compensation column and footnote 4 to that table. These amounts represent
the bonus potentials for each named executive officer multiplied by the 121.5%
payout percentage earned in 2014. In no event can any participant receive a
performance-based annual cash bonus in excess of $5,000,000. The maximum amount
that a participant, including each named executive officer, can earn is further
limited to 200% of the participants bonus potential amount.
Long-Term Incentives
The Committee believes in
the importance of providing an incentive to the named executive officers to
achieve the long-term goals established by the Board by conditioning a
significant portion of compensation on the achievement of those goals.
In 2006, the Committee
adopted the first in a series of long-term performance based compensation plans
designed to reward participants for their contribution to the long-term
performance of Kroger. These earlier plans provided for overlapping four year
performance periods that allowed for the earning of a long-term cash bonus. In
2010, Krogers long-term incentive program was redesigned to combine the total
value of our long-term cash bonus and equity programs into a cohesive, strategic
reward for eligible executives at the Vice President level and above.
Approximately fifty percent of the plan value is performance-based, delivered in
cash and performance units, contingent on the achievement of certain strategic
performance measures. The other fifty percent of the value is time-based and
delivered in stock options and restricted stock. Each component is described in
more detail below.
Performance Based Long-Term
Compensation
The long-term incentive
plan originally adopted in 2010 provides the model for our combined plan
structure. Each year we adopt a similar plan with the following
characteristics:
● |
Performance is measured over a three year period.
|
● |
Between 130 and 170 executives, including the named
executive officers, participate in each plan. |
● |
Awards include both cash and performance
units. |
➢ |
The cash bonus base equals the executives
salary at the end of the fiscal year preceding the plan adoption date (or
for those participants entering the plan after the commencement date, as
of the date of commencing participation in the plan). These cash awards
are separate from awards under our performance-based annual cash bonus
plan. |
➢ |
A fixed number of performance units is awarded
to each participant. The awards are paid out in Kroger common shares,
along with a cash amount equal to the dividends paid during the
performance period on the number of issued common
shares. |
● |
Compensation under the plan is earned based on our
performance against metrics established by the Committee (or the independent directors) at
the beginning of the performance period. |
● |
The payout percentage, based on the
extent to which the performance metrics are achieved, is applied
to both the cash bonus base and the
number of performance units awarded. |
● |
Actual payouts cannot exceed 100%
of the cash bonus base or 100% of the number of performance units awarded. |
● |
In no event can a cash bonus award exceed
$5,000,000. |
27
The following table
summarizes each of the long-term performance based plans for the years
shown:
|
|
2012
Plan |
|
2013
Plan |
|
2014
Plan |
|
2015
Plan |
Performance
Period |
|
2012
to 2014 |
|
2013
to 2015 |
|
2014
to 2016 |
|
2015
to 2017 |
|
Payout Date |
|
March 2015 |
|
March 2016 |
|
March 2017 |
|
March 2018 |
|
Cash Bonus
Base |
|
Salary at end of |
|
Salary at end of |
|
Salary at end of fiscal |
|
Salary at end of fiscal |
|
|
fiscal year 2011* |
|
fiscal year 2012* |
|
year
2013* |
|
year
2014* |
|
Performance Metrics |
|
|
|
|
|
|
|
|
|
Strategic
Plan |
|
2%
payout per unit |
|
2%
payout per unit |
|
2%
payout per unit |
|
4%
payout per unit |
|
|
improvement |
|
improvement |
|
improvement |
|
improvement |
|
Reduction
in |
|
0.50% payout per |
|
0.50% payout per |
|
0.50% payout per |
|
0.50% payout per |
Operating Cost as a |
|
0.01% reduction |
|
0.01% reduction |
|
0.01% reduction |
|
0.01% reduction |
Percentage of Sales, |
|
in
operating costs |
|
in
operating costs |
|
in
operating costs |
|
in
operating costs |
Excluding Fuel |
|
Baseline: 27.09% |
|
Baseline: 26.69% |
|
Baseline: 26.68% |
|
Baseline: 26.41% |
|
Improvement in |
|
4%
payout per unit |
|
4%
payout per unit |
|
4%
payout per unit |
|
4%
payout per unit |
Associate Engagement |
|
improvement |
|
improvement |
|
improvement |
|
improvement |
|
Return on Invested |
|
N/A |
|
1%
payout |
|
1%
payout per 0.01% |
|
1%
payout per 0.01% |
Capital |
|
|
|
per
0.01% |
|
improvement in ROIC |
|
improvement in ROIC |
|
|
|
|
improvement |
|
Baseline: 13.27% |
|
Baseline: 13.74% |
|
|
|
|
in
ROIC |
|
|
|
|
|
|
|
|
Baseline: 13.25% |
|
|
|
|
____________________
* |
Or date of plan entry, if
later. |
|
|
At the time of adopting new
long-term plans, the Committee has made adjustments to the percentage payouts
for the components of the long-term plans to account for the increasing
difficulty of achieving compounded improvement.
The Committee anticipates
adopting a new plan each year, measuring improvement over successive three-year
periods.
The long-term performance
based plan adopted in 2012, which measured improvements through fiscal year
2014, paid out in March 2015 and was calculated as follows:
|
|
|
|
|
|
|
|
|
|
Percentage |
Component |
|
Baseline |
|
Result |
|
Improvement |
|
Multiplier |
|
Earned |
Strategic Plan |
|
* |
|
* |
|
9 units of improvement |
|
2.00% |
|
18.00% |
Associate Engagement |
|
* |
|
* |
|
4
units of improvement |
|
4.00% |
|
16.00% |
Total Operating Costs, as a Percentage |
|
|
|
|
|
|
|
|
|
|
of Sales, Excluding
Fuel |
|
27.09% |
|
26.43% |
|
66 basis point
improvement |
|
0.50% |
|
33.00% |
|
|
|
|
|
|
|
|
|
|
|
Total Earned |
|
|
|
|
|
|
|
|
|
67.00% |
____________________
* |
The Strategic Plan and Associate Engagement
components were established by the Committee at the beginning of the
performance period, but are not disclosed as they are competitively
sensitive. |
|
|
Accordingly, each named
executive officer received cash in an amount equal to 67% of that executives
long-term cash bonus base, and was issued the number of Kroger common shares
equal to 67% of the number of performance units awarded to that executive, along
with a cash amount equal to the dividends paid on that number of common shares
during the three year performance period. Payout for the cash components of the
2012 plan are reported in the Non-Equity Incentive Plan Compensation and All
Other Compensation columns of the Summary Compensation Table and footnotes 4
and 6 to that table, and the common shares issued under the plan are reported in
the 2014 Option Exercises and Stock Vested Table and footnote 2 to that table.
28
During 2014, Kroger awarded
446,288 performance units to approximately 178 employees, including the named
executive officers. The Committee considers several factors in determining the
amount of performance units awarded to the named executive officers or, in the
case of the CEO, recommending to the independent directors the amount awarded.
These factors are described in the Equity Awards section below.
Equity Awards
Awards based on Krogers
common shares are granted periodically to the named executive officers and a
large number of other employees. Equity participation aligns the interests of
employees with your interest as shareholders, and Kroger historically has
distributed equity awards widely. The plans include both stock options and
restricted stock. In 2014, Kroger granted 4,226,855 stock options to
approximately 8,514 employees, including the named executive officers. The
options permit the holder to purchase Kroger common shares at an option price
equal to the closing price of Kroger common shares on the date of the grant.
Options are granted only on one of the four dates of Committee meetings
conducted after Krogers public release of its quarterly earnings results.
During 2014, Kroger awarded 3,023,711 shares of restricted stock to
approximately 21,299 employees, including the named executive officers. Under
Krogers long-term incentive plans, the Committee determines the vesting
schedule for stock options and restricted stock. During 2014, the Committee
granted to the named executive officers: (a) stock options with a five year
vesting schedule; and (b) restricted stock with a three or five year vesting
schedule (with the exception of one award, which has a one year vesting
schedule).
As discussed earlier under
Stock Ownership Guidelines, covered individuals, including the named executive
officers, must hold 100% of the shares received upon the exercise of stock
options or upon the vesting of restricted stock, except those necessary to pay
the exercise price of the options and/or applicable taxes, until applicable
stock ownership guidelines are met, unless the disposition is approved in
advance by the CEO, or by the Board or Compensation Committee for the
CEO.
The Committee considers
several factors in determining the amount of options, restricted stock, and
performance units awarded to the named executive officers or, in the case of the
CEO, recommending to the independent directors the amount awarded. These factors
include:
● |
The compensation consultants benchmarking report
regarding equity-based and other long-term compensation awarded by our competitors; |
● |
The officers level in the organization and the internal
relationship of equity-based awards within Kroger; |
● |
Individual performance; and
|
● |
The recommendation of the CEO, for all named executive
officers other than the CEO. |
The Committee has long
recognized that the amount of compensation provided to the named executive
officers through equity-based pay is often below the amount paid by our
competitors. Relatively lower equity-based awards for the named executive
officers and other senior management permit a broader base of Kroger employees
to participate in equity awards and further emphasizes the pay for performance
philosophy.
Amounts of equity awards
issued and outstanding for the named executive officers are set forth in the
tables that follow this discussion and analysis.
Retirement and Other Benefits
Kroger maintains a defined
benefit and several defined contribution retirement plans for its employees. The
named executive officers participate in one or more of these plans, as well as
one or more excess plans designed to make up the shortfall in retirement
benefits created by limitations under the Internal Revenue Code on benefits to
highly compensated individuals under qualified plans. Additional details
regarding retirement benefits available to the named executive officers can be
found in the 2014 Pension Benefits table and the accompanying narrative
description that follows this discussion and analysis.
Kroger also maintains an
executive deferred compensation plan in which some of the named executive
officers participate. This plan is a nonqualified plan under which participants
can elect to defer up to 100% of their cash compensation each year. Compensation
deferred bears interest, until paid out, at the rate
29
representing Krogers cost
of ten-year debt in the year the rate is set, as determined by the CEO, and
reviewed with the Committee, prior to the beginning of each deferral year. In
2014, that rate was 3.25%. Deferred amounts are paid out only in cash, in
accordance with a deferral option selected by the participant at the time the
deferral election is made.
Kroger also maintains The
Kroger Co. Employee Protection Plan, or KEPP, in which all of our management
employees and administrative support personnel whose employment is not covered
by a collective bargaining agreement, with at least one year of service, are
covered. KEPP provides for severance benefits and extended Kroger-paid health
care, as well as the continuation of other benefits as described in the plan,
when an employee is actually or constructively terminated without cause within
two years following a change in control of Kroger (as defined in the plan).
Participants are entitled to severance pay of up to 24 months salary and bonus.
The actual amount is dependent upon pay level and years of service. KEPP can be
amended or terminated by the Board at any time prior to a change in
control.
Stock option, restricted
stock and performance unit agreements with participants in Krogers long-term
incentive plans provide that those awards vest, with options becoming
immediately exercisable, restrictions on restricted stock lapsing, and common
shares equal to 50% of the performance units being awarded, upon a change in
control as described in the agreements.
Upon Mr. Dillons
retirement, the Board of Directors determined that it was in the best interests
of Kroger to amend certain of Mr. Dillons restricted stock agreements to permit
the restrictions on the restricted stock awards to lapse in accordance with the
original vesting schedule, provided Mr. Dillon executed a non-compete agreement,
which he did. If Mr. Dillon were to breach the terms of his non-compete
agreement, the unvested restricted stock would be forfeited.
None of the named executive
officers is party to an employment agreement.
PERQUISITES
The Committee does not
believe that it is necessary for the attraction or retention of management
talent to provide the named executive officers a substantial amount of
compensation in the form of perquisites. In 2014, the only perquisites available
to our named executive officers were:
● |
premiums paid on life insurance policies;
|
● |
premiums paid on accidental death and
dismemberment insurance; and |
● |
premiums paid on long-term disability insurance
policies. |
Currently, 154 active
executives, including the named executive officers, and 98 retired executives,
are eligible for these perquisites.
In addition, the named
executive officers are entitled to the personal use of Kroger aircraft, which
officers may lease from Kroger, making officers more available and allowing for
a more efficient use of their time. This is not considered a perquisite as we
are reimbursed by the executives for the average variable cost of such
use.
The total amount of
perquisites furnished to the named executive officers is shown in the Summary
Compensation Table and described in more detail in footnote 6 to that
table.
Executive Compensation Recoupment
Policy
If a material error of
facts results in the payment to an executive officer at the level of Group Vice
President or higher of an annual bonus or a long-term bonus in an amount higher
than otherwise would have been paid, as determined by the Committee, then the
officer, upon demand from the Committee, will reimburse Kroger for the amounts
that would not have been paid if the error had not occurred. This recoupment
policy applies to those amounts paid by Kroger within 36 months prior to the
detection and public disclosure of the error. In enforcing the policy, the
Committee will take into consideration all factors that it deems appropriate,
including:
● |
The
materiality of the amount of payment involved; |
30
● |
The extent
to which other benefits were reduced in other years as a result of the
achievement of performance levels based on the error; |
|
|
● |
Individual
officer culpability, if any; and |
|
|
● |
Other
factors that should offset the amount of
overpayment. |
Hedging Policy
After considering best
practices related to ownership of company shares, the Board adopted a policy
regarding hedging, pledging, and short sales of Kroger securities. Kroger
directors and officers are prohibited from engaging, directly or indirectly, in
hedging transactions in, or short sales of, Kroger securities. In addition, they
are precluded from pledging Kroger securities as collateral for a loan, except
to the extent that shares so pledged are in excess of the number of shares the
individual is required to maintain in accordance with Krogers share ownership
guidelines more particularly described earlier in this Compensation Discussion
and Analysis.
Section 162(m) of the Internal Revenue Code
Tax laws place a deductibility
limit of $1,000,000 on some types of compensation for the CEO and the next four
most highly compensated officers reported in this proxy because they are among
the four highest compensated officers (covered employees). In Krogers case,
this group of individuals is not identical to the group of named executive
officers. Compensation that is deemed to be performance-based is excluded for
purposes of the calculation and is tax deductible. Awards under Krogers
long-term incentive plans, when payable upon achievement of stated performance
criteria, should be considered performance-based and the compensation paid under
those plans should be tax deductible. Generally, compensation expense related to
stock options awarded to the CEO and the next four most highly compensated
officers should be deductible. On the other hand, Krogers awards of restricted
stock that vest solely upon the passage of time are not performance-based. As a
result, compensation expense for those awards to the covered employees is not
deductible, to the extent that the related compensation expense, plus any other
expense for compensation that is not performance-based, exceeds
$1,000,000.
Krogers bonus plans rely on
performance criteria, which have been approved by shareholders. As a result,
bonuses paid under the plans to the covered employees should be deductible by
Kroger.
Krogers policy is, primarily,
to design and administer compensation plans that support the achievement of
long-term strategic objectives and enhance shareholder value. Where it is
material and supports Krogers compensation philosophy, the Committee also will
attempt to maximize the amount of compensation expense that is deductible by
Kroger.
Compensation Committee Report
|
The Compensation Committee has
reviewed and discussed with management of the Company the Compensation
Discussion and Analysis contained in this proxy statement. Based on its review
and discussions with management, the Compensation Committee has recommended to
the Companys Board that the Compensation Discussion and Analysis be included in
the Companys proxy statement and incorporated by reference into its Annual
Report on Form 10-K.
Compensation
Committee:
Clyde
R. Moore, Chair
Jorge P.
Montoya
Susan M.
Phillips
James A.
Runde
31
Executive Compensation
Summary Compensation Table
The following table and
footnotes provide information regarding the compensation of the named executive
officers for the fiscal years presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Value and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Equity |
|
Deferred |
|
|
|
|
|
|
Name and
Principal |
|
Fiscal |
|
|
|
|
Stock |
|
Option |
|
Incentive Plan |
|
Compensation |
|
All Other |
|
|
|
Position |
|
Year |
|
Salary |
|
Awards |
|
Awards |
|
Compensation |
|
Earnings |
|
Compensation |
|
Total |
(1) |
|
|
|
|
|
|
(2) |
|
(3) |
|
(4) |
|
(5) |
|
(6) |
|
|
|
W.
Rodney McMullen |
|
2014 |
|
$ |
1,123,393 |
|
$ |
3,740,251 |
|
$ |
1,951,394 |
|
|
$ |
2,441,546 |
|
|
|
$ |
3,498,396 |
|
|
|
$ |
232,602 |
|
|
$ |
12,987,582 |
Chairman and |
|
2013 |
|
$ |
962,731 |
|
$ |
5,062,435 |
|
$ |
907,862 |
|
|
$ |
1,722,946 |
|
|
|
$ |
63,518 |
|
|
|
$ |
166,329 |
|
|
$ |
8,885,821 |
Chief Executive
Officer |
|
2012 |
|
$ |
937,732 |
|
$ |
1,087,655 |
|
$ |
437,983 |
|
|
$ |
1,079,085 |
|
|
|
$ |
1,415,003 |
|
|
|
$ |
124,998 |
|
|
$ |
5,082,456 |
|
J.
Michael Schlotman |
|
2014 |
|
$ |
745,313 |
|
$ |
1,490,700 |
|
$ |
520,372 |
|
|
$ |
1,103,750 |
|
|
|
$ |
1,922,821 |
|
|
|
$ |
113,922 |
|
|
$ |
5,896,878 |
Senior Vice
President |
|
2013 |
|
$ |
688,599 |
|
$ |
1,564,689 |
|
$ |
509,088 |
|
|
$ |
1,004,220 |
|
|
|
|
|
|
|
|
$ |
85,176 |
|
|
$ |
3,851,772 |
and Chief
Financial |
|
2012 |
|
$ |
669,787 |
|
$ |
609,908 |
|
$ |
245,602 |
|
|
$ |
602,146 |
|
|
|
$ |
822,669 |
|
|
|
$ |
60,137 |
|
|
$ |
3,010,249 |
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael L. Ellis |
|
2014 |
|
$ |
785,194 |
|
$ |
1,615,375 |
|
$ |
585,418 |
|
|
$ |
1,259,301 |
|
|
|
$ |
27,377 |
|
|
|
$ |
117,305 |
|
|
$ |
4,389,970 |
President and |
|
2013 |
|
$ |
539,576 |
|
$ |
1,484,681 |
|
$ |
236,283 |
|
|
$ |
755,571 |
|
|
|
$ |
1,944 |
|
|
|
$ |
75,120 |
|
|
$ |
3,093,175 |
Chief Operating
Officer |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathleen S. Barclay |
|
2014 |
|
$ |
708,417 |
|
$ |
866,559 |
|
$ |
455,325 |
|
|
$ |
1,107,770 |
|
|
|
|
|
|
|
|
$ |
119,694 |
|
|
$ |
3,257,765 |
Senior Vice
President |
|
2013 |
|
$ |
686,702 |
|
$ |
1,436,930 |
|
$ |
307,838 |
|
|
$ |
1,026,620 |
|
|
|
|
|
|
|
|
$ |
156,169 |
|
|
$ |
3,614,259 |
of Human
Resources |
|
2012 |
|
$ |
675,972 |
|
$ |
491,998 |
|
$ |
148,512 |
|
|
$ |
628,271 |
|
|
|
|
|
|
|
|
$ |
107,167 |
|
|
$ |
2,051,920 |
|
Michael J. Donnelly |
|
2014 |
|
$ |
651,315 |
|
$ |
748,051 |
|
$ |
390,279 |
|
|
$ |
1,024,261 |
|
|
|
$ |
341,775 |
|
|
|
$ |
100,305 |
|
|
$ |
3,255,986 |
Senior Vice
President |
|
2013 |
|
$ |
565,136 |
|
$ |
1,099,201 |
|
$ |
236,283 |
|
|
$ |
803,052 |
|
|
|
$ |
3,744 |
|
|
|
$ |
81,557 |
|
|
$ |
2,778,973 |
of
Merchandising |
|
2012 |
|
$ |
540,930 |
|
$ |
417,576 |
|
$ |
113,991 |
|
|
$ |
483,794 |
|
|
|
$ |
856,477 |
|
|
|
$ |
83,715 |
|
|
$ |
2,496,483 |
|
David B. Dillon |
|
2014 |
|
$ |
1,365,923 |
|
$ |
3,121,392 |
|
$ |
1,951,394 |
|
|
$ |
2,358,750 |
|
|
|
$ |
17,071 |
|
|
|
$ |
529,018 |
|
|
$ |
9,343,548 |
Former
Chairman |
|
2013 |
|
$ |
1,346,161 |
|
$ |
5,709,429 |
|
$ |
2,781,910 |
|
|
$ |
2,456,235 |
|
|
|
$ |
15,376 |
|
|
|
$ |
459,584 |
|
|
$ |
12,768,695 |
|
|
2012 |
|
$ |
1,328,320 |
|
$ |
3,332,852 |
|
$ |
1,342,088 |
|
|
$ |
1,600,065 |
|
|
|
$ |
3,380,527 |
|
|
|
$ |
301,985 |
|
|
$ |
11,285,837 |
____________________
(1) |
Mr.
McMullen was promoted to Chief Executive Officer on January 1, 2014 and
was appointed Chairman of the Board on January 1, 2015. Mr. Ellis first
became a named executive officer in 2013 and became President and Chief
Operating Officer on January 1, 2014. Mr. Dillon retired from his position
as Chairman of the Board on December 31, 2014. On January 1, 2015, Mr.
Dillon began receiving the payout of his accrued and banked vacation,
which will continue through August 15, 2015. During this time, he will
continue to be eligible for certain benefits, which are described further
in this proxy statement where applicable. |
|
|
(2) |
The stock
awards reflected in the table consist of both time-based awards and
performance-based awards granted under the Companys long-term incentive
plans. With respect to time-based awards, or restricted stock, the
aggregate grant date fair value, computed in accordance with FASB ASC
Topic 718 and reflected in the table, is as follows: Mr. McMullen:
$2,774,813; Mr. Schlotman: $1,233,250; Mr. Ellis: $1,325,744; Ms. Barclay:
$641,290; Mr. Donnelly: $554,963; and Mr. Dillon:
$2,774,813. |
32
|
The value
of the performance-based awards, or performance units, reflected in the
table is as follows: Mr. McMullen: $965,438; Mr. Schlotman: $257,450; Mr.
Ellis: $289,631; Ms. Barclay: $225,269; Mr. Donnelly: $193,088; and Mr.
Dillon: $346,579. These amounts reflect the aggregate fair value at the grant date based on the probable outcome of the performance conditions. These amounts are consistent with the estimate of aggregate compensation cost to be recognized by the Company over the three-year performance period of the award determined as of the grant date under FASB ASC Topic 718, excluding the effect of estimated forfeitures. Due to his retirement, Mr. Dillons performance units will be prorated with service credited through February 28, 2015 and that prorated amount is reported in the table. Prior to prorating, the aggregate fair value at the grant date of his performance units was $965,438. |
|
|
Assuming
that the highest level of performance conditions is achieved, the
aggregate fair value of the performance unit awards at the grant date is
as follows: Mr. McMullen: $1,930,875; Mr. Schlotman: $514,900; Mr. Ellis:
$579,263; Ms. Barclay: $450,538; Mr. Donnelly: $386,175; and Mr. Dillon:
$693,158. These amounts are required to be reported in a footnote and are
not reflected in the table. Due to his retirement, Mr. Dillons
performance units will be prorated with service credited through February
28, 2015. Prior to prorating, the aggregate fair value of his performance
units assuming the highest level of performance conditions is achieved was
$1,930,875. |
|
|
The
assumptions used in calculating the valuations are set forth in Note 12 to
the consolidated financial statements in Krogers 10-K for fiscal year
2014 ended January 31, 2015. |
|
(3) |
These
amounts represent the aggregate grant date fair value of option awards
computed in accordance with FASB ASC Topic 718. The assumptions used in
calculating the valuations are set forth in Note 12 to the consolidated
financial statements in Krogers 10-K for fiscal year 2014 ended January
31, 2015. |
|
|
(4) |
Non-equity
incentive plan compensation earned for 2014 consists of amounts earned
under the 2014 performance-based annual cash bonus program and the 2012
performance-based long-term cash bonus plan. |
|
|
In
accordance with the terms of the 2014 performance-based annual cash bonus
program, Kroger paid 121.5% of bonus potentials for the executive
officers, including the named executive officers. Payments were made in
the following amounts: Mr. McMullen: $1,831,846; Mr. Schlotman: $668,250;
Mr. Ellis: $942,793; Ms. Barclay: $668,250; Mr. Donnelly: $668,250; and
Mr. Dillon: $1,494,450. These amounts were earned with respect to
performance in 2014 and paid in March 2015. |
|
|
The 2012
Long-Term Cash Bonus Plan is a performance-based bonus plan designed to
reward participants for improving the long-term performance of the
Company. The plan covered performance during fiscal years 2012, 2013 and
2014 and amounts earned under the plan were paid in March 2015. The cash
bonus potential amount equaled the executives salary in effect on the
last day of fiscal 2011. The following amounts represent payouts at 67% of
the bonus potentials that were earned under the plan: Mr. McMullen:
$609,700; Mr. Schlotman: $435,500; Mr. Ellis: $316,508; Ms. Barclay:
$439,520; Mr. Donnelly: $356,011; and Mr. Dillon: $864,300. |
|
(5) |
Amounts
reported for 2014 and 2012 include the change in the actuarial present
value of accumulated pension benefits and preferential earnings on
nonqualified deferred compensation. Amounts reported for 2013 include only
preferential earnings on nonqualified deferred compensation because the
changes in pension value were negative, which are not required to be
reported in the table in accordance with SEC rules. Ms. Barclay does not
participate in a defined benefit pension plan or nonqualified deferred
compensation plan. Pension values may fluctuate significantly from year to
year depending on a number of factors, including age, years of service,
average annual earnings and the assumptions used to determine the present
value, such as the discount rate. The change in the actuarial present
value of accumulated pension benefits for 2014 was significantly greater
than 2013 and 2012 primarily due to a lower discount rate and revised
mortality assumptions for 2014. Please see the Pension Benefits section
for further information regarding the assumptions used in calculating
pension benefits. |
|
|
Under the Company’s nonqualified deferred compensation plan, deferred compensation earns interest at a rate representing Kroger’s cost of ten-year debt, as determined by the CEO and reviewed by the Compensation Committee prior to the beginning of each deferral year. For each participant, a separate |
33
|
deferral account is created each year and the interest rate established for that year is applied to that deferral account until the deferred compensation is paid out. If the interest rate established by the Company for a particular year exceeds 120% of the applicable federal long-term interest rate that corresponds most closely to the plan rate, the amount by which the plan rate exceeds 120% of the corresponding federal rate is deemed to be above-market or preferential. In thirteen of the twenty-one years in which at least one named executive officer deferred compensation, the rate set under the plan for that year exceeds 120% of the corresponding federal rate. For each of the deferral accounts in which the plan rate is deemed to be above-market, the Company calculates the amount by which the actual annual earnings on the account exceed what the annual earnings would have been if the account earned interest at 120% of the corresponding federal rate, and discloses those amounts as preferential earnings. Amounts deferred in 2014 earn interest at a rate higher than 120% of the corresponding federal rate, accordingly there are preferential earnings on these amounts. |
|
|
The amount reported for Mr. McMullen
includes a change in pension value in the amount of $3,426,477 and
preferential earnings on nonqualified deferred compensation in the amount
of $71,919. The amount reported for Mr. Schlotman includes only a change
in pension value. The amount reported for Mr. Ellis includes a change in
pension value in the amount of $23,444 and preferential earnings on
nonqualified deferred compensation in the amount of $3,933. The amount
reported for Mr. Donnelly includes a change in pension value in the amount
of $337,634 and preferential earnings on nonqualified deferred
compensation in the amount of $4,141. The amount reported for Mr. Dillon
includes only preferential earnings on nonqualified deferred compensation
because the actuarial present value of accumulated pension benefits under
his pension plans decreased by $264,282. |
|
|
|
(6) |
The following table provides the items and
amounts included in the All Other Compensation column for
2014. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment of |
|
Dividends |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-Term |
|
Dividend |
|
Paid on |
|
|
|
|
|
|
|
|
|
|
|
Accidental Death |
|
Disability |
|
Equivalents |
|
Unvested |
|
|
|
|
|
|
Life Insurance |
|
and
Dismemberment |
|
Insurance |
|
on Earned |
|
Restricted |
|
|
|
|
|
|
Premium |
|
Insurance
Premium |
|
Premium |
|
Performance
Units |
|
Stock |
|
Other |
|
Mr.
McMullen |
|
|
$ |
55,221 |
|
|
|
$ |
228 |
|
|
|
$ |
3,489 |
|
|
|
$ |
29,215 |
|
|
$ |
144,449 |
|
|
|
|
Mr.
Schlotman |
|
|
$ |
49,172 |
|
|
|
$ |
228 |
|
|
|
|
|
|
|
|
$ |
16,382 |
|
|
$ |
48,140 |
|
|
|
|
Mr.
Ellis |
|
|
$ |
43,002 |
|
|
|
$ |
228 |
|
|
|
$ |
3,489 |
|
|
|
$ |
6,596 |
|
|
$ |
45,615 |
|
$ |
18,375 |
|
Ms.
Barclay |
|
|
$ |
67,581 |
|
|
|
$ |
228 |
|
|
|
|
|
|
|
|
$ |
9,906 |
|
|
$ |
31,082 |
|
$ |
10,897 |
|
Mr.
Donnelly |
|
|
$ |
55,879 |
|
|
|
$ |
228 |
|
|
|
$ |
3,481 |
|
|
|
$ |
7,604 |
|
|
$ |
33,113 |
|
|
|
|
Mr.
Dillon |
|
|
$ |
242,691 |
|
|
|
$ |
228 |
|
|
|
|
|
|
|
|
$ |
89,521 |
|
|
$ |
196,253 |
|
$ |
325 |
The amounts reported in
Other column for Mr. Ellis and Ms. Barclay represent the Companys matching
contribution to the their 401(k) savings plan accounts. The amount reported in
the Other column for Mr. Dillon represents the value of a retirement gift.
34
2014 Grants of Plan-Based Awards
The following table provides
information about equity and non-equity incentive awards granted to the named
executive officers in fiscal 2014.
|
|
|
|
Estimated
Future Payouts Under Non-Equity Incentive Plan
Awards |
|
Estimated
Future Payouts Under Equity Incentive Plan
Awards |
|
All
Other Stock Awards: Number of Shares of Stock
or |
|
All Other Option
Awards: Number of Securities Underlying |
|
Exercise or
Base Price of Option |
|
Grant Date
Fair Value of Stock and |
|
|
Grant |
|
Target |
|
Maximum |
|
Target |
|
Maximum |
|
Units |
|
Options |
|
Awards |
|
Option |
Name |
|
Date |
|
($) |
|
($) |
|
(#) |
|
(#) |
|
(#) |
|
(#) |
|
($/Sh) |
|
Awards |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(4) |
|
(5) |
|
|
|
|
W.
Rodney McMullen |
|
|
|
$ |
1,507,692 |
(1) |
|
$ |
3,015,384 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
687,500 |
(2) |
|
$ |
1,100,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,250 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,774,813 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
1,951,394 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
23,438 |
(3) |
|
|
|
37,500 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
965,438 |
|
|
|
J.
Michael Schlotman |
|
|
|
$ |
550,000 |
(1) |
|
$ |
1,100,000 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
459,375 |
(2) |
|
$ |
735,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
739,950 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
493,300 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
520,372 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
6,250 |
(3) |
|
|
|
10,000 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
257,450 |
|
|
|
Michael L. Ellis |
|
|
|
$ |
775,962 |
(1) |
|
$ |
1,551,924 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
484,375 |
(2) |
|
$ |
775,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,875 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
832,444 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
493,300 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
585,418 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
7,031 |
(3) |
|
|
|
11,250 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
289,631 |
|
|
|
Kathleen S. Barclay |
|
|
|
$ |
550,000 |
(1) |
|
$ |
1,100,000 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
437,500 |
(2) |
|
$ |
700,000 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,000 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
641,290 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
455,325 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
5,469 |
(3) |
|
|
|
8,750 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
225,269 |
|
|
|
Michael J. Donnelly |
|
|
|
$ |
550,000 |
(1) |
|
$ |
1,100,000 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
402,225 |
(2) |
|
$ |
643,560 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,250 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
554,963 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
390,279 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
4,688 |
(3) |
|
|
|
7,500 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
193,088 |
|
|
|
David B. Dillon |
|
|
|
$ |
1,230,000 |
(1) |
|
$ |
2,460,000 |
(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
307,368 |
(2) |
|
$ |
491,789 |
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,250 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,774,813 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
|
|
|
$ |
49.33 |
|
|
|
$ |
1,951,394 |
|
|
|
7/15/2014 |
|
|
|
|
|
|
|
|
|
|
8,414 |
(3) |
|
|
|
13,462 |
(3) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
346,579 |
|
____________________
|
|
(1) |
These
amounts relate to the 2014 performance-based annual cash bonus plan. The
amount listed under Target represents the bonus potential of the named
executive officer. By the terms of the plan, payouts are limited to no
more than 200% of a participants bonus potential; accordingly, the amount
listed under Maximum equals two times that officers bonus potential
amount. In the event that a
participants bonus
potential is increased during the year following the annual compensation
review, the target and |
35
|
maximum amounts are prorated to reflect the
increase. Accordingly, the amounts reported for Messrs. McMullen and Ellis reflect the prorated
targets and maximums. The amounts actually earned under this plan were
paid in March 2015 and are included in the Summary Compensation Table for
2014 in the Non-Equity Incentive Plan Compensation column and are
described in footnote 4 to that table. |
|
|
(2) |
These
amounts relate to the 2014 Long-Term Cash Bonus Plan, which covers
performance during fiscal years 2014, 2015 and 2016. The cash bonus
potential amount equals the annual base salary of the named executive
officers as of the last day of fiscal 2013. By the terms of the plan,
payouts are limited to no more than 100% of a participants bonus
potential; accordingly, the amount listed under Maximum equals the
participants bonus potential. Because the actual payout is based on the
level of performance achieved, the target amount is not determinable and
therefore the amount listed under Target is a representative amount based on the
probable outcome of the performance conditions. Due to his retirement, Mr. Dillons award was prorated
with service accruing through February 28, 2015. |
|
|
(3) |
These
amounts represent performance units awarded under the Companys 2014
Long-Term Incentive Plan, which covers performance during fiscal years
2014, 2015 and 2016. The amount listed under Maximum represents the
maximum number of common shares that can be earned by the named executive
officer under the award. Because the actual payout is based on the level
of performance achieved, the target amount is not determinable and
therefore the amount listed under Target reflects a representative amount based on the
probable outcome of the performance conditions. The grant date
fair value reported in the last
column is based on the probable outcome of the performance conditions as
of the grant date. This amount is consistent with the estimate of
aggregate compensation cost to be recognized by the Company over the
three-year performance period of the award determined as of the grant date
under FASB ASC Topic 718, excluding the effect of estimated forfeitures.
Due to his retirement, Mr. Dillons award was prorated with service
accruing through February 28, 2015. The aggregate grant date fair value of
these awards is included in the Summary Compensation Table for 2014 in the
Stock Awards column and described in footnote 2 to that
table. |
|
(4) |
These amounts represent the number of shares
of restricted stock granted under one of the Companys long-term incentive
plans. The aggregate grant date fair value reported in the last column is
calculated in accordance with FASB ASC Topic 718. The aggregate grant date
fair value of these awards is included in the Summary Compensation Table
for 2014 in the Stock Awards column and described in footnote 2 to that
table. |
|
(5) |
These amounts represent the number of stock
options granted under one of the Companys long-term incentive plans.
Options are granted with an exercise price equal to the closing price of
Kroger common shares on the grant date. The aggregate grant date fair
value reported in the last column is calculated in accordance with FASB
ASC Topic 718. The aggregate grant date fair value of these awards is
included in the Summary Compensation Table for 2014 in the Option Awards
column. |
The Compensation Committee,
and the independent members of the Board in the case of the CEO, established the
bonus potentials shown in this table as Target amounts for the
performance-based annual awards, and established the amounts shown in this table
as Maximum amounts for the long-term cash bonus awards. Amounts are payable to
the extent that performance meets specific objectives established at the
beginning of the performance period. As described in the Compensation Discussion
and Analysis, actual earnings under the annual cash bonus plan may exceed the
target amount if the Companys performance exceeds the performance objectives,
but are limited to 200% of the target amount. The Compensation Committee, and
the independent members of the Board in the case of the CEO, also determined the
number of performance units to be awarded to each named executive officer, under
which common shares are earned to the extent
performance meets specific objectives established at the beginning of the
performance period. The performance units and the long-term cash bonus awards
are more particularly described in the Compensation Discussion and
Analysis.
36
Restrictions on restricted
stock awards made to the named executive officers normally lapse, so long as the
officer is then in our employ, in equal amounts on each of the five
anniversaries of the grant date, except that: 10,000 shares of restricted stock
granted to each of Messrs. Schlotman and Ellis in 2014 vest as follows: 2,000
shares on 7/15/2015, 2,000 shares on 7/15/2016, and 6,000 shares on 7/15/2017;
and the 13,000 shares of restricted stock granted to Ms. Barclay vests on
7/15/2015. Any dividends declared on Kroger common shares are payable on
restricted stock. Nonqualified stock options granted to the named executive
officers normally vest, so long as the officer is then in our employ, in equal
amounts on each of the five anniversaries of the grant date.
2014 Outstanding Equity Awards at Fiscal Year-End
The following table provides
information about outstanding equity-based incentive compensation awards for the
named executive officers as of the end of fiscal 2014. Each outstanding award is
shown separately. The vesting schedule for each award is described in the
footnotes to this table. The market value of unvested restricted stock and
unearned performance units is based on the closing price of Krogers common
shares of $69.05 on January 30, 2015, the last trading day of fiscal 2014.
|
|
Option
Awards |
|
Stock
Awards |
Name |
|
Number
of Securities Underlying Unexercised Options Exercisable (#) |
|
Number
of Securities Underlying Unexercised Options Unexercisable (#) |
|
Option Exercise
Price ($) |
|
Option Expiration Date |
|
Number of Shares
or Units of Stock That Have Not Vested (#) |
|
Market Value
of Shares or Units of Stock That Have Not Vested ($) |
|
Equity Incentive Plan Awards: Number
of Unearned Shares, Units or Other Rights That Have Not
Vested (#) |
|
Equity Incentive Plan Awards: Market or Payout
Value of Unearned Shares, Units or Other Rights That
Have Not Vested ($) |
W. Rodney McMullen |
|
|
75,000 |
|
|
|
|
|
|
|
|
$ |
16.39 |
|
|
|
5/5/2015 |
|
|
|
5,250 |
(6) |
|
|
|
$ |
362,513 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
|
|
|
|
|
$ |
19.94 |
|
|
|
5/4/2016 |
|
|
|
13,716 |
(7) |
|
|
|
$ |
947,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
60,000 |
|
|
|
|
|
|
|
|
$ |
28.27 |
|
|
|
6/28/2017 |
|
|
|
21,924 |
(8) |
|
|
|
$ |
1,513,852 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
|
$ |
28.61 |
|
|
|
6/26/2018 |
|
|
|
29,232 |
(9) |
|
|
|
$ |
2,018,470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
65,000 |
|
|
|
|
|
|
|
|
$ |
22.34 |
|
|
|
6/25/2019 |
|
|
|
64,000 |
(10) |
|
|
|
$ |
4,419,200 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56,000 |
|
|
|
14,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
56,250 |
(11) |
|
|
|
$ |
3,884,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
54,864 |
|
|
|
36,576 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
20,219 |
(19) |
|
|
|
$ |
1,437,253 |
|
|
|
|
38,976 |
|
|
|
58,464 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
23,438 |
(20) |
|
|
|
$ |
1,668,984 |
|
|
|
|
19,488 |
|
|
|
77,952 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
J.
Michael Schlotman |
|
|
20,000 |
|
|
|
5,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
1,875 |
(6) |
|
|
|
$ |
129,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
27,384 |
|
|
|
18,256 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
6,846 |
(7) |
|
|
|
$ |
472,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,856 |
|
|
|
32,784 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
12,294 |
(8) |
|
|
|
$ |
848,901 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,928 |
|
|
|
43,712 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
16,392 |
(9) |
|
|
|
$ |
1,131,868 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
40,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
9,750 |
(12) |
|
|
|
$ |
673,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,000 |
(13) |
|
|
|
$ |
690,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15,000 |
(11) |
|
|
|
$ |
1,035,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,338 |
(19) |
|
|
|
$ |
805,948 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,250 |
(20) |
|
|
|
$ |
445,063 |
|
37
|
Option
Awards |
|
Stock
Awards |
Name |
|
Number
of Securities Underlying Unexercised Options Exercisable (#) |
|
Number
of Securities Underlying Unexercised Options Unexercisable (#) |
|
Option Exercise Price ($) |
|
Option Expiration Date |
|
Number of Shares
or Units of Stock That Have Not Vested (#) |
|
Market Value
of Shares or Units of Stock That Have
Not Vested ($) |
|
Equity Incentive Plan
Awards: Number
of Unearned Shares, Units or Other Rights
That Have Not Vested (#) |
|
Equity Incentive Plan Awards: Market or Payout Value of
Unearned Shares, Units or Other Rights That Have Not
Vested ($) |
Michael L. Ellis |
|
|
15,000 |
|
|
|
|
|
|
|
|
$ |
19.94 |
|
|
|
5/4/2016 |
|
|
|
1,500 |
(6) |
|
|
|
$ |
103,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
28.27 |
|
|
|
6/28/2017 |
|
|
|
3,300 |
(7) |
|
|
|
$ |
227,865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
28.61 |
|
|
|
6/26/2018 |
|
|
|
4,950 |
(8) |
|
|
|
$ |
341,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
22.34 |
|
|
|
6/25/2019 |
|
|
|
3,334 |
(14) |
|
|
|
$ |
230,213 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000 |
|
|
|
4,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
7,608 |
(9) |
|
|
|
$ |
525,332 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,200 |
|
|
|
8,800 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
20,000 |
(10) |
|
|
|
$ |
1,381,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,800 |
|
|
|
13,200 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
16,875 |
(11) |
|
|
|
$ |
1,165,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,072 |
|
|
|
20,288 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
10,000 |
(13) |
|
|
|
$ |
690,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
45,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,262 |
(19) |
|
|
|
$ |
374,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,031 |
(20) |
|
|
|
$ |
500,695 |
|
|
|
Kathleen S. Barclay |
|
|
25,000 |
|
|
|
|
|
|
|
|
$ |
20.06 |
|
|
|
12/10/2019 |
|
|
|
1,875 |
(6) |
|
|
|
$ |
129,469 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
5,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
4,956 |
(7) |
|
|
|
$ |
342,212 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,824 |
|
|
|
13,216 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
6,000 |
(15) |
|
|
|
$ |
414,300 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,216 |
|
|
|
19,824 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
10,000 |
(16) |
|
|
|
$ |
690,500 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,608 |
|
|
|
26,432 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
9,750 |
(17) |
|
|
|
$ |
673,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
13,000 |
(16) |
|
|
|
$ |
897,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,856 |
(19) |
|
|
|
$ |
487,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,469 |
(20) |
|
|
|
$ |
389,430 |
|
|
|
Michael J. Donnelly |
|
|
18,000 |
|
|
|
|
|
|
|
|
$ |
19.94 |
|
|
|
5/4/2016 |
|
|
|
1,500 |
(6) |
|
|
|
$ |
103,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
28.27 |
|
|
|
6/28/2017 |
|
|
|
4,804 |
(7) |
|
|
|
$ |
331,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
28.61 |
|
|
|
6/26/2018 |
|
|
|
5,706 |
(8) |
|
|
|
$ |
393,999 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,000 |
|
|
|
|
|
|
|
|
$ |
22.34 |
|
|
|
6/25/2019 |
|
|
|
1,667 |
(14) |
|
|
|
$ |
115,106 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,000 |
|
|
|
4,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
9,608 |
(9) |
|
|
|
$ |
663,432 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,216 |
|
|
|
14,144 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
9,750 |
(12) |
|
|
|
$ |
673,238 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10,144 |
|
|
|
15,216 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
11,250 |
(11) |
|
|
|
$ |
776,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,072 |
|
|
|
20,288 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
5,262 |
(19) |
|
|
|
$ |
374,063 |
|
|
|
|
|
|
|
|
30,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4,688 |
(20) |
|
|
|
$ |
333,797 |
|
|
|
David B. Dillon(21) |
|
|
240,000 |
|
|
|
|
|
|
|
|
$ |
19.94 |
|
|
|
5/4/2016 |
|
|
|
17,250 |
(6) |
|
|
|
$ |
1,191,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
220,000 |
|
|
|
|
|
|
|
|
$ |
28.27 |
|
|
|
6/28/2017 |
|
|
|
42,540 |
(7) |
|
|
|
$ |
2,937,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,000 |
|
|
|
|
|
|
|
|
$ |
28.61 |
|
|
|
6/26/2018 |
|
|
|
55,984 |
(18) |
|
|
|
$ |
3,865,695 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
225,000 |
|
|
|
|
|
|
|
|
$ |
22.34 |
|
|
|
6/25/2019 |
|
|
|
89,575 |
(9) |
|
|
|
$ |
6,185,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
184,000 |
|
|
|
46,000 |
(1) |
|
|
|
$ |
20.16 |
|
|
|
6/24/2020 |
|
|
|
56,250 |
(11) |
|
|
|
$ |
3,884,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,160 |
|
|
|
113,440 |
(2) |
|
|
|
$ |
24.74 |
|
|
|
6/23/2021 |
|
|
|
|
|
|
|
|
|
|
|
|
|
42,892 |
(19) |
|
|
|
$ |
3,048,971 |
|
|
|
|
119,432 |
|
|
|
179,148 |
(3) |
|
|
|
$ |
21.96 |
|
|
|
7/12/2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
8,414 |
(20) |
|
|
|
$ |
599,143 |
|
|
|
|
59,716 |
|
|
|
238,864 |
(4) |
|
|
|
$ |
37.76 |
|
|
|
7/15/2023 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,000 |
(5) |
|
|
|
$ |
49.33 |
|
|
|
7/15/2024 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
____________________
(1) |
Stock options vest on
6/24/2015. |
|
|
(2) |
Stock options vest in equal amounts on
6/23/2015 and 6/23/2016. |
|
(3) |
Stock options vest in equal amounts on
7/12/2015, 7/12/2016 and 7/12/2017. |
38
(4) |
Stock options vest in equal amounts on
7/15/2015, 7/15/2016, 7/15/2017 and 7/15/2018. |
|
|
(5) |
Stock options vest in equal amounts on
7/15/2015, 7/15/2016, 7/15/2017, 7/15/2018 and 7/15/2019. |
|
(6) |
Restricted stock vests on
6/24/2015. |
|
(7) |
Restricted stock vests in equal amounts on
6/23/2015 and 6/23/2016. |
|
(8) |
Restricted stock vests in equal amounts on
7/12/2015, 7/12/2016 and 7/12/2017. |
|
(9) |
Restricted stock vests in equal amounts on
7/15/2015, 7/15/2016, 7/15/2017 and 7/15/2018. |
|
(10) |
Restricted stock vests in equal amounts on
12/12/2015, 12/12/2016, 12/12/2017 and 12/12/2018. |
|
(11) |
Restricted stock vests in equal amounts on
7/15/2015, 7/15/2016, 7/15/2017, 7/15/2018 and 7/15/2019. |
|
(12) |
Restricted stock vests as follows: 3,250
shares on 12/12/2015 and 6,500 shares on 12/12/2016. |
|
(13) |
Restricted stock vests as follows: 2,000
shares on 7/15/2015, 2,000 shares on 7/15/2016 and 6,000 shares on
7/15/2017. |
|
(14) |
Restricted stock vests on
12/6/15. |
|
(15) |
Restricted stock vests on
7/12/2015. |
|
(16) |
Restricted stock vests on
7/15/2015. |
|
(17) |
Restricted stock vests as follows: 3,250
shares on 12/17/2015 and 6,500 shares on 12/17/2016. |
|
(18) |
Restricted stock vests in equal amounts on
7/12/2015 and 7/12/2016. |
|
(19) |
Performance units granted under the 2013
Long-Term Incentive Plan are earned as of the last day of fiscal year
2015, to the extent performance conditions are achieved. Because the
awards earned are not currently determinable, the number of units and the
corresponding market value, including cash payments equal to projected
dividend equivalent payments, reflect the probable outcome of performance
conditions as of fiscal year-end. Assuming that the highest level of
performance conditions is achieved, the number of units payable and the
market value, including cash payments equal to projected dividend
equivalent payments, are as follows: Mr. McMullen: 24,360 units,
$1,731,631; Mr. Schlotman: 13,660 units, $971,021; Mr. Ellis: 6,340 units,
$450,679; Ms. Barclay: 8,260 units, $587,162; Mr. Donnelly: 6,340 units,
$450,679; and Mr. Dillon: 51,677 units, $3,673,460. Due to his retirement,
Mr. Dillons performance units are prorated for service credited through
February 28, 2015 and that prorated amount is reflected in the
table. |
|
(20) |
Performance units granted under the 2014
Long-Term Incentive Plan are earned as of the last day of fiscal year
2016, to the extent performance conditions are achieved. Because the
awards earned are not currently determinable, the number of units and the
corresponding market value, including cash payments equal to projected
dividend equivalent payments, reflect the probable outcome of performance
conditions as of fiscal year-end. Assuming that the highest level of
performance conditions is achieved, the number of units payable and the
market value, including cash payments equal to projected dividend
equivalent payments, are as follows: Mr. McMullen: 37,500 units,
$2,670,375; Mr. Schlotman: 10,000 units, $712,100; Mr. Ellis: 11,250
units, $801,113; Ms. Barclay: 8,750 units, $623,088; Mr. Donnelly: 7,500
units, $534,075; and Mr. Dillon: 13,462 units, $958,629. Due to his
retirement, Mr. Dillons performance units are prorated for service
credited through February 28, 2015 and that prorated amount is reflected
in the table. |
|
(21) |
By the terms of our stock option award
agreements and 2013 and 2014 restricted stock award agreements, if a
participant retires after reaching age 62 with at least 5 years of
service, vesting of the awards will continue on the regular schedule and
stock options will remain exercisable through the original
term, provided the participant does
not provide services to a competitor of ours. Mr. Dillon has met the age and
service requirements and accordingly, his stock options and his 2013 and 2014
restricted awards will continue to vest according to their original schedule and
the options will remain exercisable through their original term. As described in
the Compensation Discussion and Analysis section, Mr. Dillons |
39
restricted stock
awards granted in 2011 and 2012 will also continue to vest according to the
original schedule. By the terms of the performance unit award agreements, if a
participant retires after reaching age 55 with at least 5 years of service, the
participant is eligible to receive a prorated number of the performance units
earned at the end of the performance period, based on the number of weeks of
active employment during the performance period, provided the participant does
not provide services to a competitor of ours. Mr. Dillons prorated performance
units are described in footnotes 19 and 20 above.
2014 Option Exercises and Stock Vested
The following table provides
information for fiscal 2014 regarding stock options exercised, restricted stock
vested, and common shares issued to the named executive officers pursuant to
performance units earned under the 2012 long-term incentive plan.
|
|
Option
Awards(1) |
|
Stock
Awards(2) |
|
|
Number
of |
|
|
|
|
|
|
Number
of |
|
|
|
|
|
|
|
Shares
Acquired |
|
Value
Realized |
|
Shares
Acquired |
|
Value
Realized |
|
|
on
Exercise |
|
on
Exercise |
|
on
Vesting |
|
on
Vesting |
Name |
|
(#) |
|
($) |
|
(#) |
|
($) |
W.
Rodney McMullen |
|
|
75,000 |
|
|
|
$ |
2,079,019 |
|
|
|
101,045 |
|
|
|
$ |
5,611,392 |
|
J.
Michael Schlotman |
|
|
80,000 |
|
|
|
$ |
2,157,424 |
|
|
|
27,896 |
|
|
|
$ |
1,660,207 |
|
Michael L. Ellis |
|
|
|
|
|
|
|
|
|
|
|
20,720 |
|
|
|
$ |
1,220,209 |
|
Kathleen S. Barclay |
|
|
|
|
|
|
|
|
|
|
|
29,137 |
|
|
|
$ |
1,626,026 |
|
Michael J. Donnelly |
|
|
30,000 |
|
|
|
$ |
1,109,153 |
|
|
|
19,371 |
|
|
|
$ |
1,127,956 |
|
David B. Dillon |
|
|
300,000 |
|
|
|
$ |
9,716,250 |
|
|
|
161,917 |
|
|
|
$ |
9,317,612 |
|
____________________
(1) |
Stock
options granted under our long-term incentive plans have a ten-year life
and expire if not exercised within that ten-year period. The value
realized on exercise is the difference between the exercise price of the
option and the closing price of Krogers common shares on the respective
date(s) of exercise. |
|
|
(2) |
The Stock
Awards columns include the following two components: |
|
|
In 2012,
executives were awarded performance units that are earned based on
performance criteria established by the Compensation Committee at the
beginning of the three-year performance period. Actual payouts are based
on the level of performance achieved, and are paid in common shares. The
number of common shares issued and the value realized based on the closing
price of Kroger common shares of $76.29 on March 12, 2015, the date of
deemed delivery of the shares, are as follows: Mr. McMullen: 16,321
shares, $1,245,129; Mr. Schlotman: 9,152 shares, $698,206; Mr. Ellis:
3,685 shares, $281,129; Ms. Barclay: 5,534 shares, $422,189; Mr. Donnelly:
4,248 shares, $324,080; and Mr. Dillon: 50,012 shares,
$3,815,415. |
|
|
The table
also includes the number of shares acquired upon vesting of restricted
stock and the value realized on the vesting of restricted stock as
follows: Mr. McMullen: 84,724 shares, $4,366,248; Mr. Schlotman: 18,744
shares, $961,986; Mr. Ellis: 17,035 shares, $939,080; Ms. Barclay: 23,603
shares, $1,203,822; Mr. Donnelly: 15,123 shares, $803,891; and Mr. Dillon:
111,905 shares, $5,502,197. |
40
Pension Benefits
The following table
provides information regarding pension benefits as of the last day of fiscal
2014 for Messrs. McMullen, Schlotman, Ellis, Donnelly and Dillon. Ms. Barclay
does not participate in a defined benefit pension plan.
2014 PENSION BENEFITS
TABLE |
|
|
|
|
Number |
|
Present |
|
Payments |
|
|
|
|
of Years |
|
Value of |
|
During |
|
|
|
|
Credited |
|
Accumulated |
|
Last Fiscal |
|
|
|
|
Service |
|
Benefit |
|
Year |
Name |
|
Plan Name |
|
(#) |
|
($) |
|
($) |
|
|
|
|
|
|
(1) |
|
|
W.
Rodney McMullen |
|
The
Kroger Consolidated Retirement Benefit Plan |
|
29 |
|
$ |
1,122,749 |
|
|
|
|
The
Kroger Co. Excess Benefit Plan |
|
29 |
|
$ |
9,686,214 |
|
|
|
J.
Michael Schlotman |
|
The
Kroger Consolidated Retirement Benefit Plan |
|
29 |
|
$ |
1,202,046 |
|
|
|
|
The
Kroger Co. Excess Benefit Plan |
|
29 |
|
$ |
5,380,629 |
|
|
|
Michael L. Ellis |
|
The
Kroger Consolidated Retirement Benefit Plan |
|
(2) |
|
$ |
103,400 |
|
|
|
|
The
Kroger Co. Excess Benefit Plan |
|
(2) |
|
$ |
81,662 |
|
|
|
Michael J. Donnelly |
|
The
Kroger Consolidated Retirement Benefit Plan |
|
35 |
|
$ |
168,844 |
|
|
|
|
The
Kroger Co. Excess Benefit Plan |
|
35 |
|
$ |
2,999,752 |
|
|
|
David B. Dillon |
|
The
Kroger Consolidated Retirement Benefit Plan |
|
19 |
|
$ |
893,750 |
|
|
|
|
The
Kroger Co. Excess Benefit Plan |
|
19 |
|
$ |
11,913,067 |
|
|
|
|
Dillon Companies, Inc. Excess Benefit Pension
Plan |
|
20 |
|
$ |
5,629,722 |
|
|
____________________
(1) |
The
discount rate used to determine the present values was 3.87%, which is the
same rate used at the measurement date for financial reporting purposes.
Additional assumptions used in calculating the present values are set
forth in Note 15 to the consolidated financial statements in Krogers 10-K
for fiscal year 2014 ended January 31, 2015. |
|
|
(2) |
The
benefits for cash balance participants, including Mr. Ellis, are not based
on years of credited service. Please see the narrative discussion
following this table for a description of how plan benefits are
determined. |
Messrs. McMullen,
Schlotman, Ellis, Donnelly and Dillon participate in The Kroger Consolidated
Retirement Benefit Plan (the Consolidated Plan), which is a qualified defined
benefit pension plan. The Consolidated Plan generally determines accrued
benefits using a cash balance formula, but retains benefit formulas applicable
under prior plans for certain grandfathered participants who were employed by
Kroger on December 31, 2000. Each of the above listed named executive officers,
except for Mr. Ellis, is eligible for these grandfathered benefits under the
Consolidated Plan. Their benefits, therefore, are determined using formulas
applicable under prior plans, including the Kroger formula covering service to
The Kroger Co. and the Dillon Companies, Inc. formula covering service to Dillon
Companies, Inc. Mr. Ellis is not a grandfathered participant, and therefore, his
benefits are determined using the cash balance formula.
Messrs. McMullen,
Schlotman, Ellis, Donnelly and Dillon also are eligible to receive benefits
under The Kroger Co. Excess Benefit Plan (the Kroger Excess Plan), and Mr.
Dillon also is eligible to receive benefits under the Dillon Companies, Inc.
Excess Benefit Pension Plan (the Dillon Excess Plan). These plans are
collectively referred to as the Excess Plans. The Excess Plans are each
considered to be nonqualified deferred compensation plans as defined in Section
409A of the Internal Revenue Code. The purpose of the Excess Plans is to make up
the shortfall in retirement benefits caused by the limitations on benefits to
highly compensated individuals under the qualified defined benefit pension plans
in accordance with the Internal Revenue Code.
41
As grandfathered
participants, Messrs. McMullen, Schlotman, Donnelly and Dillon will receive
benefits under the Consolidated Plan and the Excess Plans, determined as
follows:
● |
1½% times years of
credited service multiplied by the average of the highest five years of
total earnings (base salary and annual bonus) during the last ten calendar
years of employment, reduced by 1¼% times years of credited service
multiplied by the primary social security benefit;
|
● |
normal retirement age
is 65; |
● |
unreduced benefits
are payable beginning at age 62; and |
● |
benefits payable
between ages 55 and 62 will be reduced by ⅓ of one percent for each of the
first 24 months and by ½ of one percent for each of the next 60 months by
which the commencement of benefits precedes age 62.
|
Although participants
generally receive credited service beginning at age 21, certain participants in
the Consolidated Plan and the Kroger Excess Plan who commenced employment prior
to 1986, including Messrs. McMullen, Schlotman and Dillon, began to accrue
credited service after attaining age 25 and one year of service. In the event of
a termination of employment other than death or disability, Messrs. Schlotman
and Donnelly currently are eligible for a reduced early retirement benefit, as
each has attained age 55, and Mr. Dillon is eligible for the full retirement
benefit, as he has attained age 62. If a grandfathered participant becomes
disabled while employed by Kroger and after attaining age 55, the participant
will receive the full retirement benefit. If a married grandfathered
participant dies while employed by Kroger, the surviving spouse will receive
benefits as though a retirement occurred on such date, based on the greater of:
actual benefits payable to the participant if he was over age 55, or the
benefits that would have been payable to the participant assuming he was age 55
on the date of death.
Mr. Ellis began
participating in the Consolidated Plan and the Kroger Excess Plan in April 1999
as a cash balance participant. Until those plans were frozen on December 31,
2006, cash balance participants received an annual pay credit equal to 5% of
that years eligible earnings plus an annual interest credit equal to the
account balance at the beginning of the plan year multiplied by the annual rate
of interest on 30-year Treasury Securities in effect prior to the plan year.
Beginning on January 1, 2007, cash balance participants receive an annual
interest credit but no longer receive an annual pay credit. Upon retirement,
cash balance participants generally are eligible to receive a life annuity which
is the actuarial equivalent of his account balance, but may elect in some
circumstances to receive a lump sum distribution equal to his account balance.
Normal retirement age is 65 and participants are eligible for reduced benefits
beginning at age 55. In the event of a termination of employment other than
disability or death, Mr. Ellis currently is eligible for the reduced retirement
benefit as he has attained age 55. If a cash balance participant becomes
disabled while still employed by Kroger, he or she will receive the full
retirement benefit. If a cash balance participant dies while employed by Kroger,
his or her beneficiary will receive a death benefit equal to the benefit the
participant was eligible to receive if a retirement occurred on such
date.
Messrs. Donnelly and Dillon
also participate in the Dillon Employees Profit Sharing Plan, which is a
qualified defined contribution plan (the Dillon Profit Sharing Plan) under
which Dillon Companies, Inc. and its participating subsidiaries may choose to
make discretionary contributions each year that are allocated to each
participants account. Participation in Dillon Profit Sharing Plan was frozen
effective January 1, 2001. Mr. Dillon is no longer eligible for employer
contributions under the Dillon Profit Sharing Plan. Participants in the Dillon
Profit Sharing Plan elect from among a number of investment options and the
amounts in their accounts are invested and credited with investment earnings in
accordance with their elections. Prior to July 1, 2000, participants could elect
to make voluntary contributions under the Dillon Profit Sharing Plan, but that
option was discontinued effective as of July 1, 2000. Participants can elect to
receive their Dillon Profit Sharing Plan benefit in the form of either a lump
sum payment or installment payments.
Due to offset formulas
contained in the Consolidated Plan and the Dillon Excess Plan, the accrued
benefits under the Dillon Profit Sharing Plan for each of Messrs. Donnelly and
Dillon offset a portion of the benefit that would otherwise accrue for them
under those plans for their service with Dillon Companies, Inc. Although
benefits that accrue under defined contribution plans are not reportable under
the accompanying table, we have added narrative disclosure of the Dillon Profit
Sharing Plan because of the offsetting effect that benefits under that plan has
on benefits accruing under the Consolidated Plan and the Dillon Excess
Plan.
42
Nonqualified Deferred Compensation
The following table
provides information on nonqualified deferred compensation for the named
executive officers for 2014.
2014 NONQUALIFIED
DEFERRED COMPENSATION TABLE |
|
|
Executive |
|
Registrant |
|
Aggregate |
|
Aggregate |
|
Aggregate |
|
|
Contributions |
|
Contributions |
|
Earnings |
|
Withdrawals |
|
Balance at |
Name |
|
in Last
FY |
|
in Last
FY |
|
in Last
FY(4) |
|
Distributions |
|
Last
FYE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
W.
Rodney McMullen |
|
$ |
344,589 |
(1) |
|
|
|
$ |
496,003 |
|
|
|
$ |
7,838,774 |
J.
Michael Schlotman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael L. Ellis |
|
$ |
604,457 |
(2) |
|
|
|
$ |
53,360 |
|
|
|
$ |
1,242,576 |
Kathleen S. Barclay |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Michael J. Donnelly |
|
|
|
|
|
|
|
$ |
22,793 |
|
|
|
$ |
348,220 |
David B. Dillon |
|
$ |
75,000 |
(3) |
|
|
|
$ |
84,397 |
|
|
|
$ |
1,333,129 |
____________________
(1) |
|
This
amount represents the deferral of a portion of the 2013 performance-based
annual cash bonus earned in fiscal 2013 and paid in March 2014 in the
amount of $219,989 and the deferral of a portion of the 2011 long-term
cash bonus, which was earned during the 2011 through 2013 performance
period and paid in March 2014 in the amount of $124,600. This amount is
included in the Summary Compensation Table for 2013 under the Non-Equity
Incentive Plan Compensation column. |
|
|
|
(2) |
|
This
amount represents the deferral of a portion of the 2013 performance-based
annual cash bonus earned in fiscal 2013 and paid in March 2014 in the
amount of $345,121 and the deferral of a portion of the 2011 long-term
cash bonus, which was earned during the 2011 through 2013 performance
period and paid in March 2014 in the amount of $259,336. This amount is
included in the Summary Compensation Table for 2013 under the Non-Equity
Incentive Plan Compensation column. |
|
(3) |
|
This
amount represents the deferral of a portion of the 2013 performance-based
annual cash bonus earned in fiscal 2013 and paid in March 2014 in the
amount of $75,000. This amount is included in the Summary Compensation
Table for 2013 under the Non-Equity Incentive Plan Compensation
column. |
|
(4) |
|
These
amounts include the aggregate earnings on all accounts for each named
executive officer, including any above-market or preferential earnings.
The following amounts earned in 2014 are deemed to be preferential
earnings and are included in the Change in Pension Value and Nonqualified
Deferred Compensation Earnings column of the Summary Compensation Table
for 2014: Mr. McMullen, $71,919; Mr. Ellis, $3,933; Mr. Donnelly, $4,141;
and Mr. Dillon, $17,071. |
Eligible participants may
elect to defer up to 100% of the amount of their salary that exceeds the sum of
the FICA wage base and pre-tax insurance and other Internal Revenue Code Section
125 plan deductions, as well as up to 100% of their annual and long-term bonus
compensation. The Company does not match any deferral. Deferral account amounts
are credited with interest at the rate representing Krogers cost of ten-year
debt as determined by Krogers CEO and reviewed by the Compensation Committee
prior to the beginning of each deferral year. The interest rate established for
deferral amounts for each deferral year will be applied to those deferral
amounts for all subsequent years until the deferred compensation is paid out.
Participants can elect to receive lump sum distributions or quarterly
installments for periods up to ten years. Participants also can elect between
lump sum distributions and quarterly installments to be received by designated
beneficiaries if the participant dies before distribution of deferred
compensation is completed.
Participants may not
withdraw amounts from their accounts until they leave the Company, except that
the Company has discretion to approve an early distribution to a participant
upon the occurrence of an unforeseen emergency. Participants who are specified
employees under Section 409A of the Internal Revenue Code, which includes the
named executive officers, may not receive a post-termination distribution for at
least six months following separation. If the employee dies prior to or during
the distribution period, the remainder of the account will be distribution to
his designated beneficiary in lump sum or quarterly installments, according to
the participants prior election.
43
Potential Payments upon Termination or Change in
Control
Kroger does not have
employment agreements or other contracts, agreements, plans or arrangements that
provide for payments to the named executive officers in connection with a
termination of employment or a change in control of Kroger. However, The Kroger
Co. Employee Protection Plan, or KEPP, our award agreements for stock options,
restricted stock and performance units, and our long-term cash bonus plans
provide for certain payments and benefits to participants, including the named
executive officers, in the event of a termination of employment or a change in
control of Kroger, as described below. Our pension plans and nonqualified
deferred compensation plan also provide for certain payments and benefits to
participants in the event of a termination of employment, as described above in
the Pension Benefits section and the Nonqualified Deferred Compensation section,
respectively. For purposes of KEPP, and our equity and non-equity incentive
awards, a change in control occurs if:
● |
any person or entity
(excluding Krogers employee benefit plans) acquires 20% or more of the
voting power of Kroger; |
● |
a merger,
consolidation, share exchange, division, or other reorganization or
transaction with Kroger results in Krogers voting securities existing
prior to that event representing less than 60% of the combined voting
power immediately after the event; |
● |
Krogers shareholders
approve a plan of complete liquidation or winding up of Kroger or an
agreement for the sale or disposition of all or substantially all of
Krogers assets; or |
● |
during any period of
24 consecutive months, individuals at the beginning of the period who
constituted Krogers Board of Directors cease for any reason to constitute
at least a majority of the Board of Directors.
|
The Kroger Co.
Employee Protection Plan
The Kroger Co. Employee
Protection Plan, or KEPP, applies to all management employees and administrative
support personnel who are not covered by a collective bargaining agreement, with
at least one year of service, and provides severance benefits when a
participants employment is terminated actually or constructively within two
years following a change in control of Kroger. The actual amount is dependent on
pay level and years of service. The named executive officers are eligible for
the following benefits:
● |
a lump sum severance
payment equal to up to two times the sum of the participants annual base
salary and 70% of the greater of the current annual bonus potential or the
average of the actual annual bonus payments for the prior three years;
|
● |
a lump sum payment
equal to the participants accrued and unpaid vacation, including banked
vacation; |
● |
a lump sum payment
equal to 1/12th of the sum of the participants annual vacation
pay plus 70% of the greater of the current years annual cash bonus
potential or the average of the actual annual bonus payments for the prior
three years, multiplied by the number of months elapsed in the current
calendar year; |
● |
continued medical and
dental benefits for up to 24 months and continued life insurance coverage
for up to 6 months; and |
● |
up to $5,000 as
reimbursement for eligible tuition expenses and up to $10,000 as
reimbursement for eligible outplacement expenses.
|
Payments to executive
officers under KEPP will be reduced, to the extent necessary, so that payments
will not exceed 2.99 times the officers average W-2 earnings over the preceding
five years.
44
Equity and Non-equity
Incentive Awards
The following table
describes the treatment of equity and non-equity incentive awards following a
termination of employment or change in control of Kroger. In each case, the
continued vesting, exercisability or eligibility for the incentive awards will
end if the participant provides services to a competitor of Kroger.
Triggering
Event |
|
|
Stock
Options |
|
Restricted
Stock |
|
Performance Units(1) |
|
Long-Term Cash Bonus(1) |
Involuntary Termination |
|
|
Forfeit all unvested
options. Previously vested options remain exercisable for the shorter of
one year after termination or the remainder of the 10-year term. |
|
Forfeit all unvested
shares |
|
Forfeit all rights to
performance units for which the three year performance period has not
ended |
|
Forfeit all rights to
bonuses for which the three year performance period has not
ended |
Voluntary
Termination/ Retirement
- Prior to minimum age and
years of service(2) |
|
|
Forfeit all unvested
options. Vested options remain exercisable for the shorter of one year
after termination or the remainder of the 10-year term. |
|
Forfeit all unvested
shares |
|
Forfeit all rights to
performance units for which the three year performance period has not
ended |
|
Forfeit all rights to
bonuses for which the three year performance period has not
ended |
Voluntary
Termination/ Retirement
- After minimum age and years
of service(2) |
|
|
Unvested options continue
vesting on the original schedule. All options are exercisable for
remainder of the original 10-year term. |
|
Forfeit all unvested
shares granted prior to 2013. Vesting continues on the original schedule
for awards granted during or after 2013. |
|
Pro rata portion of units
earned based on performance results over the full three-year
period |
|
Pro rata portion of bonus
earned based on performance results over the full three-year
period |
Death |
|
|
Unvested options are
immediately vested and exercisable. All options are exercisable for
remainder of the original 10-year term. |
|
Unvested shares
immediately vest |
|
Pro rata portion of units
earned based on performance results through the end of the fiscal year in
which death occurs. The performance period is shortened to end on the last
day of such fiscal year. |
|
Pro rata portion of bonus
earned based on performance results through the end of the fiscal year in
which death occurs. The performance period is shortened to end on the last
day of such fiscal year. |
Disability |
|
|
Unvested options are
immediately vested and exercisable. All options are exercisable for
remainder of the original 10-year term. |
|
Unvested shares
immediately vest |
|
Pro rata portion of units
earned based on performance results over the full three-year
period |
|
Pro rata portion of bonus
earned based on performance results over the full three-year
period |
Change in Control(3) |
|
|
Unvested options are
immediately vested and exercisable in full. |
|
Unvested shares
immediately vest |
|
50% of the maximum award
granted at the beginning of the performance period |
|
50% of the maximum award
granted at the beginning of the performance
period |
____________________
(1) |
|
The
prorated amount is equal to the number of weeks of active employment
during the performance period divided by the total number of weeks in the
performance period. |
|
(2) |
|
The
minimum service requirement for all awards is 5 years. The minimum age
requirement is age 62 for stock options and restricted stock and age 55
for performance units and the long-term cash bonus. |
|
(3) |
|
These
benefits are payable upon a change in control of Kroger with or without a
termination of employment. |
45
Quantification of
Payments upon Termination or Change in Control
The following table
provides information regarding certain potential payments that would have been
made to the named executive officers if the triggering event occurred on January
31, 2015, given compensation, age and service levels as of that date and, where
applicable, based on the closing price per Kroger common share on the last
trading day of the fiscal year ($69.05 on January 30, 2015). Amounts actually
received upon the occurrence of a triggering event will vary based on factors
such as the timing during the year of such event, the price of Kroger common
shares, and the officers age, length of service and compensation
levels.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
Voluntary |
|
|
|
|
|
|
|
Control |
|
Change in |
|
|
Involuntary |
|
Termination/ |
|
|
|
|
|
|
|
without |
|
Control with |
Name |
|
Termination |
|
Retirement |
|
Death |
|
Disability |
|
Termination
|
|
Termination |
W. Rodney McMullen |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
and Banked Vacation |
|
|
$738,464 |
|
|
$ |
738,464 |
|
$ |
738,464 |
|
$ |
738,464 |
|
$ |
738,464 |
|
$ |
738,464 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,640,016 |
Additional Vacation and Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
104,872 |
Continued Health and Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
86,963 |
Stock
Options(2) |
|
|
|
|
|
|
|
|
$ |
10,455,330 |
|
$ |
10,455,330 |
|
$ |
10,455,330 |
|
$ |
10,455,330 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
13,145,188 |
|
$ |
13,145,188 |
|
$ |
13,145,188 |
|
$ |
13,145,188 |
Performance Units(4) |
|
|
|
|
|
|
|
|
$ |
1,470,213 |
|
$ |
1,470,213 |
|
$ |
2,135,717 |
|
$ |
2,135,717 |
Long-Term Cash Bonus(5) |
|
|
|
|
|
|
|
|
$ |
749,079 |
|
$ |
749,079 |
|
$ |
1,019,800 |
|
$ |
1,019,800 |
Executive Group Life Insurance |
|
|
|
|
|
|
|
|
$ |
5,670,000 |
|
|
|
|
|
|
|
|
|
|
J. Michael Schlotman |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued and Banked
Vacation |
|
|
$467,680 |
|
|
$ |
467,680 |
|
$ |
467,680 |
|
$ |
467,680 |
|
$ |
467,680 |
|
$ |
467,680 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,316,744 |
Additional Vacation and
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
40,505 |
Continued Health and
Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
64,739 |
Stock Options(2) |
|
|
|
|
|
|
|
|
$ |
4,753,720 |
|
$ |
4,753,720 |
|
$ |
4,753,720 |
|
$ |
4,753,720 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
4,982,442 |
|
$ |
4,982,442 |
|
$ |
4,982,442 |
|
$ |
4,982,442 |
Performance Units(4) |
|
|
|
|
|
$ |
665,780 |
|
$ |
665,780 |
|
$ |
665,780 |
|
$ |
816,862 |
|
$ |
816,862 |
Long-Term Cash
Bonus(5) |
|
|
|
|
|
$ |
524,467 |
|
$ |
524,467 |
|
$ |
524,467 |
|
$ |
703,050 |
|
$ |
703,050 |
Executive Group Life
Insurance |
|
|
|
|
|
|
|
|
$ |
2,934,606 |
|
|
|
|
|
|
|
|
|
|
Michael L. Ellis |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
and Banked Vacation |
|
|
$138,465 |
|
|
$ |
138,465 |
|
$ |
138,465 |
|
$ |
138,465 |
|
$ |
138,465 |
|
$ |
138,465 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,720,016 |
Additional Vacation and Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,359 |
Continued Health and Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
59,828 |
Stock
Options(2) |
|
|
|
|
|
|
|
|
$ |
2,729,288 |
|
$ |
2,729,288 |
|
$ |
2,729,288 |
|
$ |
2,729,288 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
4,665,502 |
|
$ |
4,665,502 |
|
$ |
4,665,502 |
|
$ |
4,665,502 |
Performance Units(4) |
|
|
|
|
|
$ |
404,058 |
|
$ |
404,058 |
|
$ |
404,058 |
|
$ |
607,295 |
|
$ |
607,295 |
Long-Term Cash Bonus(5) |
|
|
|
|
|
$ |
444,765 |
|
$ |
444,765 |
|
$ |
444,765 |
|
$ |
643,500 |
|
$ |
643,500 |
Executive Group Life Insurance |
|
|
|
|
|
|
|
|
$ |
2,170,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Kathleen S. Barclay |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued and Banked
Vacation |
|
|
$69,325 |
|
|
$ |
69,325 |
|
$ |
69,325 |
|
$ |
69,325 |
|
$ |
69,325 |
|
$ |
69,325 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,589,262 |
Additional Vacation and
Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
39,179 |
Continued Health and
Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
52,226 |
Stock
Options(2) |
|
|
|
|
|
|
|
|
$ |
3,280,820 |
|
$ |
3,280,820 |
|
$ |
3,280,820 |
|
$ |
3,280,820 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
3,147,369 |
|
$ |
3,147,369 |
|
$ |
3,147,369 |
|
$ |
3,147,369 |
Performance Units(4) |
|
|
|
|
|
$ |
441,483 |
|
$ |
441,483 |
|
$ |
441,483 |
|
$ |
587,270 |
|
$ |
587,270 |
Long-Term Cash Bonus(5) |
|
|
|
|
|
$ |
520,606 |
|
$ |
520,606 |
|
$ |
520,606 |
|
$ |
688,650 |
|
$ |
688,650 |
Executive Group Life Insurance |
|
|
|
|
|
|
|
|
$ |
2,834,000 |
|
|
|
|
|
|
|
|
|
46
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
Voluntary |
|
|
|
|
|
|
|
Control |
|
Change in |
|
|
Involuntary |
|
Termination/ |
|
|
|
|
|
|
|
without |
|
Control with |
Name |
|
Termination |
|
Retirement |
|
Death |
|
Disability |
|
Termination
|
|
Termination |
Michael J. Donnelly |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
and Banked Vacation |
|
|
$216,716 |
|
|
$ |
216,716 |
|
$ |
216,716 |
|
$ |
216,716 |
|
$ |
216,716 |
|
$ |
216,716 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,095,800 |
Additional Vacation and Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
38,457 |
Continued Health and Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
51,566 |
Stock
Options(2) |
|
|
|
|
|
|
|
|
$ |
2,765,214 |
|
$ |
2,765,214 |
|
$ |
2,765,214 |
|
$ |
2,765,214 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
3,057,879 |
|
$ |
3,057,879 |
|
$ |
3,057,879 |
|
$ |
3,057,879 |
Performance Units(4) |
|
|
|
|
|
$ |
350,130 |
|
$ |
350,130 |
|
$ |
350,130 |
|
$ |
477,826 |
|
$ |
477,826 |
Long-Term Cash Bonus(5) |
|
|
|
|
|
$ |
438,685 |
|
$ |
438,685 |
|
$ |
438,685 |
|
$ |
597,030 |
|
$ |
597,030 |
Executive Group Life Insurance |
|
|
|
|
|
|
|
|
$ |
2,601,600 |
|
|
|
|
|
|
|
|
|
|
David B. Dillon(6) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued
and Banked Vacation |
|
|
|
|
|
$ |
790,380 |
|
$ |
790,380 |
|
$ |
790,380 |
|
$ |
790,380 |
|
$ |
790,380 |
Severance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
4,773,240 |
Additional Vacation and Bonus |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
97,891 |
Continued Health and Welfare |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefits(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
175,898 |
Stock
Options(2) |
|
|
|
|
|
|
|
|
$ |
26,143,600 |
|
$ |
26,143,600 |
|
$ |
26,143,600 |
|
$ |
26,143,600 |
Restricted Stock(3) |
|
|
|
|
|
|
|
|
$ |
18,063,412 |
|
$ |
18,063,412 |
|
$ |
18,063,412 |
|
$ |
18,063,412 |
Performance Units(4) |
|
|
|
|
|
$ |
2,168,124 |
|
$ |
2,168,124 |
|
$ |
2,168,124 |
|
$ |
3,871,806 |
|
$ |
3,871,806 |
Long-Term Cash Bonus(5) |
|
|
|
|
|
$ |
611,950 |
|
$ |
611,950 |
|
$ |
611,950 |
|
$ |
1,350,000 |
|
$ |
1,350,000 |
Executive Group Life Insurance |
|
|
|
|
|
|
|
|
$ |
4,745,000 |
|
|
|
|
|
|
|
|
|
____________________
(1) |
|
Represents the
aggregate present value of continued participation in the Companys
medical, dental and executive term life insurance plans, based on the
premiums paid by the Company during the eligible period. The eligible
period for continued medical and dental benefits is based on the length of
service and is 17 months for Ms. Barclay and 24 months for the other named
executive officers. The eligible period for continued executive term life
insurance coverage is six months for all named executive officers. The
amounts reported may ultimately be lower if the executive is no longer
eligible to receive benefits, which could occur upon obtaining other
employment and becoming eligible for substantially equivalent benefits
through the new employer. |
|
(2) |
|
Amounts reported in
the death, disability and change in control columns represent the
intrinsic value of the accelerated vesting of unvested stock options,
calculated as the difference between the exercise price of the stock
option and the closing price per Kroger common share on January 30, 2015.
In accordance with SEC rules, no amount is reported in the voluntary
termination/retirement column because vesting is not accelerated, but the
awards may continue to vest on the original schedule if the conditions
described above are met. |
|
(3) |
|
Amounts
reported in the death, disability and change in control columns represent
the aggregate value of the accelerated vesting of restricted stock. In
accordance with SEC rules, no amount is reported in the voluntary
termination/retirement column because vesting is not accelerated, but the
awards may continue to vest on the original schedule if the conditions
described above are met. |
|
(4) |
|
Amounts
reported in the voluntary termination/retirement, death, and disability
columns represent the aggregate value of the performance units granted in
2013 and 2014, based on the probable outcome of the performance conditions
as of January 31, 2015 and prorated for the portion of the performance
period completed. Amounts reported in the change in control column
represent the aggregate value of 50% of the maximum number of performance
units granted in 2013 and 2014 at the beginning of the performance
period. |
47
(5) |
|
Amounts
reported in the voluntary termination/retirement, death, and disability
columns represent the aggregate value of the long-term cash bonuses
granted in 2013 and 2014, based on the probable outcome of the performance
conditions as of January 31, 2015 and prorated for the portion of the
performance period completed. Amounts reported in the change in control
column represent the aggregate value of 50% of the maximum award granted
in 2013 and 2014 at the beginning of the performance period. |
|
(6) |
|
Mr. Dillon
retired as Chairman of the Board on December 31, 2014. On January 1, 2015,
he began receiving accrued and banked vacation, which will continue
through August 15, 2015. During this time, he remains eligible for
benefits in the event of death, disability or a change in control. The
amounts reported in the voluntary termination/retirement column represent
the amounts for which he is eligible as a result of his
retirement. |
DIRECTOR COMPENSATION
The following table
describes the fiscal 2014 compensation for non-employee directors. Mr. McMullen
does not receive compensation for his Board service.
2014 DIRECTOR
COMPENSATION TABLE |
|
|
|
|
|
|
|
|
|
|
|
Change in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and |
|
|
|
|
|
|
|
Fees |
|
|
|
|
|
|
|
Nonqualified |
|
|
|
|
|
|
|
Earned |
|
|
|
|
|
|
|
Deferred |
|
All |
|
|
|
|
|
or Paid |
|
Stock |
|
Option |
|
Compensation |
|
Other |
|
|
|
Name |
|
in
Cash |
|
Awards |
|
Awards |
|
Earnings |
|
Compensation |
|
Total |
|
|
|
|
|
(1) |
|
(1) |
|
|
|
|
(2) |
|
|
|
Reuben V. Anderson(3) |
|
$ |
77,689 |
|
$ |
67,434 |
|
|
(4) |
|
$2,000 |
(10) |
|
$514 |
|
$ |
147,637 |
Nora
A. Aufreiter(3) |
|
$ |
11,881 |
|
$ |
97,662 |
|
|
|
|
|
|
|
$189 |
|
$ |
109,732 |
Robert D. Beyer |
|
$ |
124,664 |
|
$ |
165,256 |
|
|
(5) |
|
$7,425 |
(11) |
|
$189 |
|
$ |
297,534 |
Susan J. Kropf |
|
$ |
94,745 |
|
$ |
165,256 |
|
|
(6) |
|
|
|
|
$189 |
|
$ |
260,190 |
David B. Lewis |
|
$ |
84,772 |
|
$ |
165,256 |
|
|
(6) |
|
|
|
|
$189 |
|
$ |
250,217 |
Jorge P. Montoya |
|
$ |
99,731 |
|
$ |
165,256 |
|
|
(6) |
|
|
|
|
$189 |
|
$ |
265,176 |
Clyde R. Moore |
|
$ |
104,718 |
|
$ |
165,256 |
|
|
(5) |
|
$6,000 |
(10) |
|
$189 |
|
$ |
276,163 |
Susan M. Phillips |
|
$ |
94,745 |
|
$ |
165,256 |
|
|
(7) |
|
$2,446 |
(11) |
|
$189 |
|
$ |
262,636 |
Steven R. Rogel(3) |
|
$ |
77,689 |
|
$ |
67,434 |
|
|
(5) |
|
|
|
|
$514 |
|
$ |
145,637 |
James A. Runde |
|
$ |
99,731 |
|
$ |
165,256 |
|
|
(8) |
|
|
|
|
$189 |
|
$ |
265,176 |
Ronald L. Sargent |
|
$ |
114,692 |
|
$ |
165,256 |
|
|
(8) |
|
$2,518 |
(11) |
|
$189 |
|
$ |
282,655 |
Bobby S. Shackouls |
|
$ |
94,745 |
|
$ |
165,256 |
|
|
(9) |
|
|
|
|
$189 |
|
$ |
260,190 |
____________________
(1) |
|
These amounts
represent the aggregate grant date fair value of the annual incentive
stock award, computed in accordance with FASB ASC Topic 718. Options are
no longer granted to non-employee directors. The footnotes in the Option
Awards column represent previously granted stock options that remain
unexercised. |
|
(2) |
|
This
amount reflects the value of gift cards in the amount of $75 and the cost
to the Company per director for providing accidental death and
dismemberment insurance coverage for non-employee directors in the amount
of $114. The amounts reported for Messrs. Anderson and Rogel also include
a retirement gift valued at $325. |
|
(3) |
|
Messrs.
Anderson and Rogel retired from the Board in December 2014. Ms. Aufreiter
joined the Board in December 2014. The fees and stock awards for each of
these directors were prorated accordingly. |
|
(4) |
|
Aggregate
number of stock options outstanding at fiscal year end was 10,400
shares. |
|
(5) |
|
Aggregate
number of stock options outstanding at fiscal year end was 47,500
shares. |
48
(6) |
|
Aggregate
number of stock options outstanding at fiscal year end was 37,500
shares. |
|
(7) |
|
Aggregate
number of stock options outstanding at fiscal year end was 46,500
shares. |
|
(8) |
|
Aggregate
number of stock options outstanding at fiscal year end was 42,500
shares. |
|
(9) |
|
Aggregate
number of stock options outstanding at fiscal year end was 19,500
shares. |
|
(10) |
|
This
amount reflects the change in pension value for Messrs. Anderson and
Moore. Only those directors elected to the Board prior to July 17, 1997
are eligible to participate in the outside director retirement
plan. |
|
(11) |
|
This
amount reflects preferential earnings on nonqualified deferred
compensation. For a complete explanation of preferential earnings, please
refer to footnote 5 to the Summary Compensation
Table. |
Each non-employee director
receives an annual retainer of $85,000. The chairs of each of the Audit
Committee and the Compensation Committee receive an additional annual retainer
of $20,000. The chair of each of the other committees receives an additional
annual retainer of $15,000. Each member of the Audit Committee receives an
additional annual retainer of $10,000. The director designated as the Lead
Director receives an additional annual retainer of $25,000. Beginning in 2013,
incentive shares were issued to non-employee directors in lieu of options and
restricted stock, as a portion of the directors overall compensation. On July
15, 2014, each non-employee director, except for Ms. Aufreiter and Messrs.
Anderson and Rogel, received 3,350 common shares. On July 15, 2014, Messrs.
Anderson and Rogel received 1,367 common shares, which represents a prorated
portion of the annual grant as a result of their planned retirement. Ms.
Aufreiter received 1,578 common shares on December 11, 2014 upon joining the
Board.
Non-employee directors
first elected prior to July 17, 1997 receive an unfunded retirement benefit
equal to the average cash compensation for the five calendar years preceding
retirement. Only Messrs. Anderson and Moore are eligible for this benefit.
Participants who retire from the Board prior to age 70 will be credited with 50%
vesting after five years of service, and 10% for each additional year up to a
maximum of 100%. Benefits for participants who retire prior to age 70 begin at
the later of actual retirement or age 65. Because Mr. Anderson retired after
reaching age 70, he will receive the full annual benefit of $75,833, which will
be paid on a monthly basis.
We also maintain a deferred
compensation plan, in which all non-employee directors are eligible to
participate. Participants may defer up to 100% of their cash compensation. They
may elect from either or both of the following two alternative methods of
determining benefits:
● |
interest accrues
until paid out at the rate of interest determined prior to the beginning
of the deferral year to represent Krogers cost of ten-year debt; and/or
|
● |
amounts are credited
in phantom stock accounts and the amounts in those accounts fluctuate
with the price of Kroger common shares. |
In both cases, deferred
amounts are paid out only in cash, based on deferral options selected by the
participant at the time the deferral elections are made. Participants can elect
to have distributions made in a lump sum or in quarterly installments, and may
make comparable elections for designated beneficiaries who receive benefits in
the event that deferred compensation is not completely paid out upon the death
of the participant.
The Board has determined
that compensation of non-employee directors must be competitive on an on-going
basis to attract and retain directors who meet the qualifications for service on
the Board. Non-employee director compensation will be reviewed from time to time
as the Corporate Governance Committee deems appropriate.
49
BENEFICIAL OWNERSHIP
OF COMMON
STOCK
The following table sets
forth the common shares beneficially owned as of February 13, 2015 by Krogers
directors, the named executive officers, and the directors and executive
officers as a group. The percentage of ownership is based on 491,597,775 of
Kroger common shares outstanding on February 13, 2015. Except as otherwise
noted, each beneficial owner listed in the table has sole voting and investment
power with regard to the common shares beneficially owned by such owner.
|
Amount and Nature of |
Name |
Beneficial
Ownership* |
Nora A. Aufreiter |
1,578 |
|
Kathleen S. Barclay |
139,633 |
(1) |
Robert D. Beyer |
153,692 |
(2) |
David B. Dillon |
2,674,553 |
(1)(3)(4)(5) |
Michael J. Donnelly |
225,042 |
(1)(5) |
Michael L. Ellis |
283,108 |
(1)(5) |
Susan J. Kropf |
62,670 |
(6) |
David B. Lewis |
70,822 |
(6) |
W. Rodney McMullen |
1,525,093 |
(1)(6) |
Jorge P. Montoya |
52,269 |
(6)(7) |
Clyde R. Moore |
93,870 |
(2) |
Susan M. Phillips |
86,260 |
(8) |
James A. Runde |
71,170 |
(9) |
Ronald L. Sargent |
74,620 |
(10) |
J. Michael Schlotman |
270,848 |
(1)(3)(5) |
Bobby S. Shackouls |
51,320 |
(11)(12) |
Directors and executive officers as a group
(29 persons, |
|
|
including those named
above) |
7,049,179 |
(1)(5) |
____________________
* |
No director or
officer owned as much as 1% of Kroger common shares. The directors and
executive officers as a group beneficially owned 1% of Kroger common
shares. |
|
|
(1) |
This amount includes
shares underlying options that are or become exercisable on or before
April 14, 2015, in the following amounts: Ms. Barclay, 84,648; Mr. Dillon,
1,443,308; Mr. Donnelly, 130,432; Mr. Ellis, 118,072; Mr. McMullen,
494,328; Mr. Schlotman, 80,168; and all directors and executive officers
as a group, 3,061,909. |
|
(2) |
This amount includes
39,700 shares underlying options that are or become exercisable on or
before April 14, 2015. |
|
(3) |
This amount includes
Kroger common shares that are pledged as security for bank loans in the
following amounts: Mr. Dillon, 398,787 shares; and Mr. Schlotman, 25,000
shares. Both Mr. Dillons and Mr. Schlotmans ownership of Kroger common
shares far exceeds our stock ownership guidelines as described in the
Compensation Discussion and Analysis. As such, they were permitted to
pledge shares in excess of their required stock
ownership. |
|
(4) |
This amount includes
307,392 shares held in trusts by Mr. Dillons wife. Mr. Dillon disclaims
beneficial ownership of these shares. |
|
|
(5) |
The
fractional interest resulting from allocations under Krogers defined
contribution plans has been rounded to the nearest whole
number. |
|
(6) |
This amount
includes 29,700 shares underlying options that are or become exercisable
on or before April 14, 2015. |
|
(7) |
This amount
includes 11,000 shares held in Mr. Montoyas trust. Mr. Montoya disclaims
beneficial ownership of these shares. |
50
(8) |
This amount
includes 38,700 shares underlying options that are or become exercisable
on or before April 14, 2015. |
|
|
(9) |
This amount
includes 34,700 shares underlying options that are or become exercisable
on or before April 14, 2015. |
|
(10) |
This amount
includes 42,500 shares underlying options that are or become exercisable
on or before April 14, 2015. |
|
(11) |
This amount
includes 11,700 shares underlying options that are or become exercisable
on or before April 14, 2015. |
|
(12) |
This amount
includes 18,435 shares held by Mr. Shackouls wife. Mr. Shackouls
disclaims beneficial ownership of these
shares. |
The following table sets
forth information regarding the beneficial owners of more than five percent of
Kroger common shares as of February 13, 2015 based on reports on Schedule 13G
filed with the SEC or other reliable information.
|
|
|
|
Amount and |
|
|
|
|
|
|
|
|
|
Nature of |
|
Percentage |
Name |
|
Address of Beneficial
Owner |
|
Ownership |
|
of
Class |
BlackRock, Inc. (1) |
|
55
East 52nd Street |
|
38,970,033 |
|
|
7.90 |
% |
|
|
|
New
York, NY 10055 |
|
|
|
|
|
|
|
|
|
FMR
LLC (2) |
|
245
Summer Street |
|
26,480,687 |
|
|
5.40 |
% |
|
|
|
Boston, MA 02210 |
|
|
|
|
|
|
|
|
|
Vanguard Group Inc. (3) |
|
100
Vanguard Blvd |
|
25,406,163 |
|
|
5.17 |
% |
|
|
|
Malvern, PA 19355 |
|
|
|
|
|
|
|
____________________
(1) |
|
Reflects
beneficial ownership by BlackRock Inc., as of December 31, 2014, as
reported on Amendment No. 5 to the Schedule 13G filed with the SEC on
January 23, 2015, and reports sole voting power with respect to 33,588,424
common shares and sole dispositive power with respect to 38,970,033 common
shares. |
|
(2) |
|
Reflects
beneficial ownership by FMR LLC, as of December 31, 2014, as reported on
Schedule 13G filed with the SEC on February 13, 2015, and reports sole
voting power with respect to 2,286,153 common shares and sole dispositive
power with respect to 26,480,687 common shares. |
|
(3) |
|
Reflects
beneficial ownership by Vanguard Group Inc. as of December 31, 2014, as
reported on Schedule 13G filed with the SEC on February 10, 2015, and
reports sole voting power with respect to 846,345 common shares, sole
dispositive power of 24,605,819 common shares, and shared dispositive
power of 800,344 common shares. |
Section 16(A) Beneficial Ownership Reporting
Compliance
Section 16(a) of the
Securities Exchange Act of 1934 requires our officers and directors, and persons
who own more than 10% of a registered class of our equity securities, to file
reports of ownership and changes in ownership with the SEC. Those officers,
directors and shareholders are required by SEC regulation to furnish us with
copies of all Section 16(a) forms they file.
Based solely on our review
of the copies of Forms 3 and 4 received by Kroger, and any written
representations from certain reporting persons that no Forms 5 were required for
those persons, we believe that during fiscal 2014 all filing requirements
applicable to our executive officers, directors and 10% beneficial owners were
timely satisfied, with the following exception. In September 2014, Kevin M.
Dougherty was 11 days late in the filing of a Form 4 to report restricted stock
awarded under a Company long-term incentive plan due to an administrative error
by the Company.
51
Related Person Transactions
In accordance with our
Statement of Policy with Respect
to Related Person Transactions
and the rules of the SEC, the Audit Committee approved the following related
person transaction:
● |
During fiscal year 2014, Kroger made purchases
from Staples, Inc., totaling approximately $8.7 million. This amount
represents substantially less than 1% of Staples annual consolidated
gross revenue. Kroger periodically employs a bidding process or
negotiations following a benchmarking of costs of products from various
vendors for the items purchased from Staples and awards the business based
on the results of that process. Ronald L. Sargent, a member of Krogers
Board, is Chairman and Chief Executive Officer of
Staples. |
Director independence is
discussed above under the heading Information Concerning the Board. Krogers
policy on related person transactions is as follows:
Statement of Policy
with Respect to
Related Person
Transactions
A . Introduction
It is the policy of
Krogers Board that any Related Person Transaction may be consummated or may
continue only if the Committee approves or ratifies the transaction in
accordance with the guidelines set forth in this policy. The Board has
determined that the Audit Committee of the Board is best suited to review and
approve Related Person Transactions.
For the purposes of this
policy, a Related Person is:
|
1. |
|
any person who is, or
at any time since the beginning of Krogers last fiscal year was, a
director or executive officer of Kroger or a nominee to become a director
of Kroger; |
|
|
|
2. |
|
any person who is
known to be the beneficial owner of more than 5% of any class of Krogers
voting securities; and |
|
|
|
3. |
|
any immediate family
member of any of the foregoing persons, which means any child, stepchild,
parent, stepparent, spouse, sibling, mother-in-law, father-in-law,
son-in-law, daughter-in-law, brother-in-law, or sister-in-law of the
director, executive officer, nominee or more than 5% beneficial owner, and
any person (other than a tenant or employee) sharing the household of such
director, executive officer, nominee or more than 5% beneficial
owner. |
For the purposes of this
policy, a Related Person Transaction is a transaction, arrangement or
relationship (or any series of similar transactions, arrangements or
relationships) since the beginning of Krogers last fiscal year in which Kroger
(including any of its subsidiaries) was, is or will be a participant and the
amount involved exceeds $120,000, and in which any Related Person had, has or
will have a direct or indirect material interest (other than solely as a result
of being a director or a less than 10 percent beneficial owner of another
entity).
Notwithstanding the
foregoing, the Audit Committee has reviewed the following types of transactions
and has determined that each type of transaction is deemed to be pre-approved,
even if the amount involved exceeds $120,000.
|
1. |
|
Certain
Transactions with Other Companies. Any transaction for property or
services in the ordinary course of business involving payments to or from
another company at which a Related Persons only relationship is as an
employee (including an executive officer), director, or beneficial owner
of less than 10% of that companys shares, if the aggregate amount
involved in any fiscal year does not exceed the greater of $1,000,000 or 2
percent of that companys annual consolidated gross
revenues. |
52
|
2. |
|
Certain
Company Charitable Contributions. Any charitable contribution, grant
or endowment by Kroger (or one of its foundations) to a charitable
organization, foundation, university or other not for profit organization
at which a Related Persons only relationship is as an employee (including
an executive officer) or as a director, if the aggregate amount involved
does not exceed $250,000 or 5 percent, whichever is lesser, of the
charitable organizations latest publicly available annual consolidated
gross revenues. |
|
|
|
3. |
|
Transactions where all Shareholders Receive Proportional
Benefits. Any transaction where the Related Persons interest arises
solely from the ownership of Kroger common stock and all holders of Kroger
common stock received the same benefit on a pro rata basis. |
|
|
|
4. |
|
Executive Officer and Director Compensation. (a) Any
employment by Kroger of an executive officer if the executive officers
compensation is required to be reported in Krogers proxy statement, (b)
any employment by Kroger of an executive officer if the executive officer
is not an immediate family member of a Related Person and the Compensation
Committee approved (or recommended that the Board approve) the executive
officers compensation, and (c) any compensation paid to a director if the
compensation is required to be reported in Krogers proxy
statement. |
|
|
|
5. |
|
Other
Transactions. (a) Any transaction involving a Related Person where the
rates or charges involved are determined by competitive bids, (b) any
transaction with a Related Person involving the rendering of services as a
common or contract carrier, or public utility, at rates or charges fixed
in conformity with law or governmental authority, or (c) any transaction
with a Related Person involving services as a bank depositary of funds,
transfer agent, registrar, trustee under a trust indenture or similar
services. |
B. Audit Committee Approval
In the event management
becomes aware of any Related Person Transactions that are not deemed
pre-approved under paragraph A of this policy, those transactions will be
presented to the Committee for approval at the next regular Committee meeting,
or where it is not practicable or desirable to wait until the next regular
Committee meeting, to the Chair of the Committee (who will possess delegated
authority to act between Committee meetings) subject to ratification by the
Committee at its next regular meeting. If advance approval of a Related Person
Transaction is not feasible, then the Related Person Transaction will be
presented to the Committee for ratification at the next regular Committee
meeting, or where it is not practicable or desirable to wait until the next
regular Committee meeting, to the Chair of the Committee for ratification,
subject to further ratification by the Committee at its next regular
meeting.
In connection with each
regular Committee meeting, a summary of each new Related Person Transaction
deemed pre-approved pursuant to paragraphs A(1) and A(2) above will be provided
to the Committee for its review.
If a Related Person
Transaction will be ongoing, the Committee may establish guidelines for
management to follow in its ongoing dealings with the Related Person.
Thereafter, the Committee, on at least an annual basis, will review and assess
ongoing relationships with the Related Person to see that they are in compliance
with the Committees guidelines and that the Related Person Transaction remains
appropriate.
The Committee (or the
Chair) will approve only those Related Person Transactions that are in, or are
not inconsistent with, the best interests of Kroger and its shareholders, as the
Committee (or the Chair) determines in good faith in accordance with its
business judgment.
No director will
participate in any discussion or approval of a Related Person Transaction for
which he or she, or an immediate family member (as defined above), is a Related
Person except that the director will provide all material information about the
Related Person Transaction to the Committee.
C. Disclosure
Kroger will disclose all
Related Person Transactions in Krogers applicable filings as required by the
Securities Act of 1933, the Securities Exchange Act of 1934 and related
rules.
53
Audit Committee
Report
The primary function of the
Audit Committee is to represent and assist the Board of Directors in fulfilling
its oversight responsibilities regarding the Companys financial reporting and
accounting practices including the integrity of the Companys financial
statements; the Companys compliance with legal and regulatory requirements; the
independent public accountants qualifications and independence; the performance
of the Companys internal audit function and independent public accountants; and
the preparation of this report that SEC rules require be included in the
Companys annual proxy statement. The Audit Committee performs this work
pursuant to a written charter approved by the Board of Directors. The Audit
Committee charter most recently was revised during fiscal 2012 and is available
on the Companys website at ir.kroger.com. The Audit Committee has implemented
procedures to assist it during the course of each fiscal year in devoting the
attention that is necessary and appropriate to each of the matters assigned to
it under the Committees charter. The Audit Committee held five meetings during
fiscal year 2014. The Audit Committee meets separately with the Companys
internal auditor and PricewaterhouseCoopers LLP, the Companys independent
public accountants, without management present, to discuss the results of their
audits, their evaluations of the Companys internal controls over financial
reporting, and the overall quality of the Companys financial reporting. The
Audit Committee also meets separately with the Companys Chief Financial Officer
and General Counsel when needed. Following these separate discussions, the Audit
Committee meets in executive session.
Management of the Company
is responsible for the preparation and presentation of the Companys financial
statements, the Companys accounting and financial reporting principles and
internal controls, and procedures that are designed to provide reasonable
assurance regarding compliance with accounting standards and applicable laws and
regulations. The independent public accountants are responsible for auditing the
Companys financial statements and expressing opinions as to the financial
statements conformity with generally accepted accounting principles and the
effectiveness of the Companys internal control over financial
reporting.
In the performance of its
oversight function, the Audit Committee has reviewed and discussed with
management and PricewaterhouseCoopers LLP the audited financial statements for
the year ended January 31, 2015, managements assessment of the effectiveness of
the Companys internal control over financial reporting as of January 31, 2015,
and PricewaterhouseCoopers LLPs evaluation of the Companys internal control
over financial reporting as of that date. The Audit Committee has also discussed
with the independent public accountants the matters that the independent public
accountants must communicate to the Audit Committee under applicable
requirements of the Public Company Accounting Oversight Board.
With respect to the
Companys independent public accountants, the Audit Committee, among other
things, discussed with PricewaterhouseCoopers LLP matters relating to its
independence and has received the written disclosures and the letter from the
independent public accountants required by applicable requirements of the Public
Company Accounting Oversight Board regarding the independent public accountants
communications with the Audit Committee concerning independence. The Audit
Committee has reviewed and approved in advance all services provided to the
Company by PricewaterhouseCoopers LLP.
The Audit Committee
annually reviews PricewaterhouseCoopers LLPs independence and performance in
connection with the Audit Committees responsibility for the appointment and
oversight of the Companys
independent public accountants. The Audit Committee considers, among other things, PricewaterhouseCoopers
LLPs historical and recent performance on the Companys audit, including an
internal survey of their service quality by members
of management and the Audit Committee. The Audit Committee reviews recent Public
Company Accounting Oversight Board reports on PricewaterhouseCoopers LLP and its
peer firms, and considers PricewaterhouseCoopers LLPs tenure as the Companys
independent public accountants and their familiarity with our operations,
businesses, accounting policies and practices and internal control over
financial reporting. Further, in conjunction with the mandated rotation of the
public accountants lead engagement partner, the Audit Committee is directly
involved in the selection of PricewaterhouseCoopers LLPs lead engagement
partner every five years. The Audit Committee believes that the continued
retention of PricewaterhouseCoopers LLP to serve as the Companys independent
public accountants is in the best interests of the Company and its
shareholders.
54
Based upon the review and
discussions described in this report, the Audit Committee recommended to the
Board of Directors that the audited consolidated financial statements be
included in the Companys Annual Report on Form 10-K for the year ended January
31, 2015, as filed with the SEC.
This report is submitted by
the Audit Committee.
Ronald L. Sargent, Chair
Susan J. Kropf
Susan M. Phillips
Bobby S. Shackouls
Advisory Vote on Executive Compensation
(Item No.
2)
The Dodd-Frank Wall Street
Reform and Consumer Protection Act, enacted in July 2010, requires that we give
our shareholders the right to approve, on a nonbinding, advisory basis, the
compensation of our named executive officers as disclosed earlier in this proxy
statement in accordance with the SECs rules.
As discussed earlier in the
Compensation Discussion and Analysis, our compensation philosophy is:
● |
A significant portion of pay should be
performance-based, increasing proportionally with an executives level of
responsibility; |
|
|
● |
Compensation should include incentive-based pay
to drive performance, providing superior pay for superior performance,
including both a short- and long-term focus; |
|
|
● |
Compensation policies should include an
opportunity for, and a requirement of, equity ownership; and |
|
|
● |
Components of compensation should be tied to an
evaluation of business and individual performance measured against metrics
that align with our business strategy. |
Furthermore, as previously
disclosed, an increased percentage of total potential compensation is
performance-based as opposed to time-based as half of the compensation
previously awarded to the named executive officers as restricted stock (and
earned based on the passage of time) is now only earned to the extent that
performance goals are achieved. In addition, annual and long-term cash bonuses
are performance-based and earned only to the extent that performance goals are
achieved. In tying a large portion of executive compensation to achievement of
short-term and long-term strategic and operational goals, we seek to closely
align the interests of our named executive officers with the interests of our
shareholders.
The vote on this resolution
is not intended to address any specific element of compensation. Rather, the
vote relates to the compensation of our named executive officers as described in
this proxy statement. The vote is advisory. This means that the vote is not
binding on Kroger. The Compensation Committee of the Board is responsible for
establishing executive compensation. In so doing that Committee will consider,
along with all other relevant factors, the results of this vote.
We ask our shareholders to
vote on the following resolution:
RESOLVED, that the compensation paid to the Companys named executive
officers, as disclosed pursuant to Item 402 of Regulation S-K, including the
Compensation Discussion and Analysis, compensation tables, and the related
narrative discussion, is hereby APPROVED.
The Board of Directors Recommends a Vote For This
Proposal.
55
Selection of Auditors
(Item No.
3)
The Audit Committee of the
Board of Directors is responsible for the appointment, compensation and
retention of Krogers independent auditor, as required by law and by applicable
NYSE rules. On March 11, 2015, the Audit Committee appointed
PricewaterhouseCoopers LLP as Krogers independent auditor for the fiscal year
ending January 30, 2016. While shareholder ratification of the selection of
PricewaterhouseCoopers LLP as our independent auditor is not required by
Krogers Regulations or otherwise, the Board of Directors is submitting the
selection of PricewaterhouseCoopers LLP to shareholders for ratification, as it
has in past years, as a good corporate governance practice. If the shareholders
fail to ratify the selection, the Audit Committee may, but is not required to,
reconsider whether to retain that firm. Even if the selection is ratified, the
Audit Committee in its discretion may direct the appointment of a different
auditor at any time during the year if it determines that such a change would be
in the best interests of Kroger and our shareholders.
A representative of
PricewaterhouseCoopers LLP is expected to be present at the meeting to respond
to appropriate questions and to make a statement if he or she desires to do
so.
The Board of Directors Recommends a Vote
For This Proposal.
Disclosure of Auditor Fees
The following describes the
fees billed to Kroger by PricewaterhouseCoopers LLP related to the fiscal years
ended January 31, 2015 and February 1, 2014.
|
|
Fiscal Year
2014 |
|
Fiscal Year
2013 |
Audit Fees |
|
|
$ |
5,250,203 |
|
|
|
$ |
5,151,390 |
|
Audit-Related Fees |
|
|
$ |
441,704 |
|
|
|
$ |
151,878 |
|
Tax
Fees |
|
|
$ |
360,498 |
|
|
|
$ |
188,021 |
|
All
Other Fees |
|
|
$ |
85,000 |
|
|
|
|
|
|
Total |
|
|
$ |
6,137,405 |
|
|
|
$ |
5,491,289 |
|
Audit
Fees. Audit fees for fiscal 2014
and fiscal 2013 were for professional services rendered for the audits of
Krogers consolidated financial statements, the issuance of comfort letters to
underwriters, consents, and assistance with the review of documents filed with
the SEC.
Audit-Related
Fees. Audit-related fees for
fiscal 2014 and fiscal 2013 were for assurance and related services pertaining
to accounting consultation in connection with attest services that are not
required by statute or regulation, and consultations concerning financial
accounting and reporting standards. These services are considered approved under
the Companys existing Audit and Non-Audit Service Pre-Approval Policy. These
fees also included services related to acquisition related due
diligence.
Tax
Fees. Tax fees for fiscal 2014
and fiscal 2013 were for state tax compliance, tax audit support and debt
restructuring.
All Other
Fees. Other fees for fiscal 2014
were for advisory services pertaining to retiree healthcare benefits. We did not
engage PricewaterhouseCoopers LLP for other services in fiscal 2013.
The Audit Committee
requires that it approve in advance all audit and non-audit work performed by
PricewaterhouseCoopers LLP. On March 11, 2015, the Audit Committee approved
services to be performed by PricewaterhouseCoopers LLP for the remainder of
fiscal year 2014 that are related to the audit of Kroger or involve the audit
itself. In 2007, the Audit Committee adopted an audit and non-audit service
pre-approval policy. Pursuant to the terms of that policy, the Committee will
annually pre-approve certain defined services that are expected to be provided
by the independent auditors. If it becomes appropriate during the year to engage
the independent accountant for additional services, the Audit Committee must
first approve the specific services before the independent accountant may
perform the additional work.
56
PricewaterhouseCoopers LLP
has advised the Audit Committee that neither the firm, nor any member of the
firm, has any financial interest, direct or indirect, in any capacity in Kroger
or its subsidiaries.
Shareholder Proposal
(Item No.
4)
We have been notified by
eleven shareholders, the names and shareholdings of which will be furnished
promptly to any shareholder upon written or oral request to Krogers Secretary
at our executive offices, that they intend to propose the following resolution
at the annual meeting:
The Kroger Company
Human Rights Risk Assessment-
2015
RESOLVED, that shareholders
of The Kroger Company (Kroger) urge the Board to report to shareholders, at
reasonable cost and omitting proprietary information, on Krogers process for
identifying and analyzing potential and actual human rights risks of Krogers
operations and supply chain (referred to herein as a human rights risk
assessment) addressing the following:
● |
Human rights principles used to frame the
assessment |
|
|
● |
Frequency of assessment |
|
|
● |
Methodology used to track and measure
performance |
|
|
● |
Nature and extent of consultation with relevant
stakeholders in connection with the assessment |
|
|
● |
How the results of the assessment are
incorporated into company policies and decision making |
The report should be made
available to shareholders on Krogers website no later than October 31,
2015.
Supporting Statement
As long-term shareholders,
we favor policies and practices that protect and enhance the value of our
investments. There is increasing recognition that company risks related to human
rights violations, such as litigation, reputational damage, and project delays
and disruptions, can adversely affect shareholder value.
Kroger, like many other
companies, has adopted a supplier code of conduct (See The Kroger Company
Standard Vendor Agreement) but has yet to publish a company-wide Human Rights
Policy, addressing human rights issues and a separate human rights code that
applies to its suppliers. Adoption of these principles would be an important
first step in effectively managing human rights risks. Companies must then
assess risks to shareholder value of human rights practices in their operations
and supply chains to translate principles into protective practices.
The importance of human
rights risk assessment is reflected in the United Nations Guiding Principles on
Business and Human Rights (the Ruggie Principles) approved by the UN Human
Rights Council in 2011. The Ruggie Principles urge that business enterprises
should carry out human rights due diligence
accessing actual and potential human
rights impacts, integrating and acting upon the findings, tracking responses,
and communicating how impacts are addressed.
(http://www.business-humanrights.org/media/documents/
ruggie/ruggie-guiding-principles-21-mar-201l.pdf)
Krogers business exposes
it to significant human rights risks. As of year-end 2012, Kroger operations,
including supermarkets, convenience and jewelry stores, are located in over 40
states, with suppliers in countries around the world, including Iran, China and
Malaysia. The companys supply chain is complex and global and unsuccessful
labor negotiations, supply chain interruptions and civil unrest could adversely
affect the companys ability to execute its strategic plan.
We urge shareholders to
vote for this proposal.
57
The Board of Directors Recommends a Vote Against This Proposal for
the Following Reasons:
Kroger recognizes the
importance of ensuring basic human rights are recognized by those seeking to do
business with us. In the past 12 months, we have undertaken a number of steps to
improve our social responsibility and compliance programs. An internal team of
Kroger leaders has been working in the past year to evaluate and assess our
current and future efforts with regard to social responsibility and compliance.
We looked at our supply chain and identified key areas where we believe
additional supply chain audits, especially with regard to social responsibility,
would be beneficial. The specific items we have undertaken are:
● |
We have revised and updated our Vendor Code of
Conduct. It will be published in our 2015 Sustainability Report. |
|
|
● |
We have updated our existing social audit
protocol to better align with industry best practices and recommended
standards. This audit will be required for Kroger suppliers that are being
audited. We will choose which suppliers to audit based on various risk
variables such as country, product and industry. |
|
|
● |
We are significantly increasing the number of
social compliance audits that we will conduct in future years, beginning
with 2015. Our strategy includes adding new compliance audit managers to
our team. This team will be responsible for reviewing social compliance
audits, assessing risks as described above, and developing a reporting
structure that informs our business decisions. |
|
|
● |
Our 2015 Sustainability Report will include a
more in-depth report on our social compliance activities. This will
include our revised Vendor Code of Conduct, a description of our 2015 and
beyond social compliance audit strategy, and our approach to identifying
risks. |
These are the initial steps
that we will be taking and we expect our program to continue to evolve and
develop based on new trends, input from suppliers, customers, government, and
non-governmental organizations. We believe that these efforts represent
significant and positive steps forward for our companys social compliance
program.
As such, we do not believe
that the requested report would serve to benefit our shareholders and that
preparation of a report different from what will be included in our
sustainability report would divert resources that otherwise could be more
appropriately used in the best interest of our shareholders.
This proposal covers the
same subject matter as one submitted to a vote at the last four years annual
meetings and was defeated by our shareholders.
Shareholder Proposal
(Item No. 5)
We have been notified by
four shareholders, the name and shareholdings of which will be furnished
promptly to any shareholder upon written or oral request to Krogers Secretary
at our executive offices, that they intend to propose the following resolution
at the annual meeting:
WHEREAS: A portion of
Kroger house brand product packaging is unrecyclable, including plastics, which
are a growing component of marine litter. Authorities say that marine litter
kills and injures marine life, spreads toxics, and poses a potential threat to
human health.
Plastic is the fastest
growing form of packaging; U.S. flexible plastic sales are estimated at $26
billion. Dried fruit, frozen meat, cheese, and dog food are some of the Kroger
house brand items packaged in unrecyclable plastic pouches. Private label items
account for a quarter of all sales- nearly $20 billion annually. Using
unrecyclable packaging when recyclable alternatives are available wastes
valuable resources. William McDonough, a leading green design advisor, calls
pouch packaging a monstrous hybrid designed to end up either in a landfill or
incinerator.
Recyclability of household
packaging is a growing area of focus as consumers become more environmentally
conscious, yet recycling rates stagnate. Only 14% of plastic packaging is
recycled, according to the. Environmental Protection Agency (EPA). Billions of
pouches and similar plastic laminates, representing
58
significant amounts of
embedded value, lie buried in landfills. Unrecyclable packaging is more likely
to be littered and swept into waterways. A recent assessment of marine debris by
a panel of the Global Environment Facility concluded that one cause of debris
entering oceans is design and marketing of products internationally without
appropriate regard to their environmental fate or ability to be
recycled
In the marine environment,
plastics break down into indigestible particles that marine life mistake for
food. Studies by the EPA suggest a synergistic effect between plastic debris and
persistent, bioaccumulative, toxic chemicals. Plastics absorb toxics such as
polychlorinated biphenyls and dioxins from water or sediment and transfer them
to the marine food web and potentially to human diets. One study of fish from
the North Pacific found one or more plastic chemicals in all fish tested,
independent of location and species.
California spends nearly
$500 million annually preventing trash, much of it packaging, from polluting
beaches, rivers and oceanfront. Making all packaging recyclable, if possible, is
the first step needed to reduce the threat posed by ocean debris.
Companies who aspire to
corporate sustainability yet use these risky materials need to explain why they
use unrecyclable packaging. Other companies who manufacture and sell food and
household goods are moving towards recyclability. Procter & Gamble and
Colgate-Palmolive agreed to make most of their packaging recyclable by 2020.
Keurig Green Mountain will K-cup coffee pods recyclable; and McDonalds and
Dunkin Donuts shifted away from foam plastic cups, which cannot be readily
recycled.
RESOLVED: Shareowners of
Kroger request that the board of directors issue a report, at reasonable cost,
omitting confidential information, assessing the environmental impacts of
continuing to use unrecyclable brand packaging.
Supporting
Statement: Proponents believe
that the report should include an assessment of the reputational, financial and
operational risks associated with continuing to use unrecyclable brand packaging
and, if possible, goals and a timeline to phase out unrecyclable
packaging.
The Board of Directors Recommends a Vote Against This Proposal for
the Following Reasons:
Kroger shares the
proponents concerns regarding plastic recyclability and recognizes the
important role we play as a good steward of the environment.
We continue to improve the
recyclability of our corporate branded products. We follow a balanced,
multi-pronged approach to optimize packaging designs that consider attributes
including but not limited to food safety, shelf life, availability, quality,
material type, function, recyclability and cost.
Kroger is increasingly
labeling corporate branded products that can be recycled, per the Federal Trade
Commissions Green
Guides, prompting our customers
to PLEASE RECYCLE. Examples include banner brand water bottles, which are made
from polyethylene terephthalate (PETE), one of the most widely recycled plastics
available. Our banner branded bread bags are made from low-density polyethylene
(LDPE), which can be recycled at most of our stores, as part of the plastic bag
recycling program.
Kroger also works with
various industry experts and forums to advocate for expanded recycling
infrastructure to support multiple forms of plastic packaging and to support
diversion from landfills. For example, polypropylene (PP) has many properties
and desirable traits for our banner brand ice cream such as easy opening and
reclosing and longer shelf life. It allows us to use less material by weight,
due to its strength, than other polymers. While not yet widespread, it is
increasingly being accepted at curbside programs.
For each of the past
several years we have published online our annual Sustainability Report that highlights our sustainability initiatives
and waste reduction efforts in greater detail. We will continue to support
efforts to reduce waste, find optimized solutions and advocate for expanded
recycling infrastructure. We believe these efforts are significant and
meaningful.
This proposal requests that
Kroger take additional steps to report on an assessment of the environmental
impact of unrecyclable packaging. We believe that the requested report would
serve little benefit to our shareholders, and preparation of a report would
divert resources that otherwise could be more appropriately used in the best
interests of our shareholders.
59
Shareholder Proposal
(Item No.
6)
We have been notified by
one shareholder, the name and shareholdings of which will be furnished promptly
to any shareholder upon written or oral request to Krogers Secretary at our
executive offices, that it intends to propose the following resolution at the
annual meeting:
Whereas: Antibiotic resistance has become a public health crisis. Superbugs -
bacteria immune or resistant to one or more antibiotics - infect over 2 million
people in the U.S. and kill over 23,000 annually, according to the Centers for
Disease Control and Prevention. As resistance increases, medications used to
treat human infections lose their effectiveness, leading the World Health
Organization to warn of a post-antibiotic era.
An important cause of
antibiotic resistant bacteria is the overuse of antibiotics in food-animal
production, for the routine, non-therapeutic purposes of promoting faster growth
or preventing (instead of treating) illness. In the U.S., more than 70% of
medically important antibiotics are sold for use on food-animals.
Calls to restrict or ban
the routine use of medically important antibiotics for food-animals have been
endorsed by the American Medical Association, American Public Health
Association, and other leading health organizations:
Eating food contaminated
with antibiotic resistant bacteria is one way in which superbugs can be
transmitted from a farm to human population. Government testing of raw
supermarket meat detected superbug versions of salmonella, E. coli, or other
bacteria in 81% of ground turkey, 55% of ground beef, and 39% of chicken
sampled.
An outbreak of
antibiotic-resistant Salmonella from chicken last year resulted in more than 600
known illnesses. Several Kroger private brand chicken products were recalled by
Foster Farms as part of this outbreak.
A 2012 Consumer Reports
survey concluded that the majority of consumers surveyed were extremely or very
concerned about the use of antibiotics in animal feed and would spend more for
meat produced without these drugs.
Companies including Whole
Foods, Panera Bread, Chipotle, and Chik-fil-A have policies against purchasing
meat produced with antibiotics, heightening the risks to companies not acting on
this issue. Perdue Foods announced that it has phased out routine antibiotic use
in the production of its chicken meat, demonstrating that meat can be produced
on a large scale without overusing antibiotics.
Kroger is one of the
largest supermarket chains in the nation, with perishable food including meat
and deli items accounting for around 21% of the companys revenue in 2013.
Consequently, food quality and safety trends should be of top priority to the
company. Kroger faces reputational risk and liability concerns if it sells meat
containing antibiotic resistant bacteria.
Resolved: Shareholders
request that the Board undertake and publish a study of policy options that
could reduce or eliminate routine antibiotic use in the production of its
private label brand meats.
Supporting
Statement:
Proponents
suggest that the Board explore policy options such as the
following: adopt a time-bound
plan to phase out purchases of meat produced with routine antibiotic use;
establish a new procurement policy that gives preference to suppliers that meet
these standards; public declaration of such preferences. Routine antibiotic
use means using antibiotics, on food animals, that belong to the same classes
of drugs administered to humans, for the non-therapeutic purposes of growth
promotion or disease prevention.
60
The Board of Directors Recommends a Vote
Against This Proposal for the Following Reasons:
As one of the largest
retailers of natural and organic food, Kroger offers a wide variety of private
label and national brand antibiotic free meat items in our stores. In 2012, we
introduced our private label Simple Truth® and Simple Truth
Organic® brands of natural and organic products. All of the meat
items with the Simple Truth and Simple Truth Organic label are antibiotic free
and are available in our stores. This includes beef, pork, and poultry.
Many of our customers have
indicated a preference for antibiotic free meat items. In fact, sales of Simple
Truth and Simple Truth Organic and other antibiotic free items have increased
significantly in the past several years and we expect to see continued growth in
these items. Thats why we are continuing to offer new antibiotic free items and
working with suppliers as they transition their products to antibiotic free. We
will continue to monitor the purchasing practices of our customers and will
continue to meet their demand to the extent our suppliers are able to do so. We
do not believe, however, that given current customer preferences and
availability of product it is appropriate to immediately phase out all
non-antibiotic-free meats or set a date-certain for when a transition should be
complete.
As such, we believe that
the requested report would serve little benefit to our shareholders, and
preparation of a report would divert resources that otherwise could be more
appropriately used in the best interests of our shareholders.
____________________
SHAREHOLDER PROPOSALS AND
DIRECTOR NOMINATIONS 2016 ANNUAL MEETING. Shareholder proposals and director
nominations intended for inclusion in the proxy material relating to Krogers
annual meeting of shareholders in June 2016 should be addressed to Krogers
Secretary and must be received at our executive offices not later than January
13, 2016. These proposals must comply with Rule 14a-8 and the SECs proxy rules.
In addition, Krogers
Regulations contain an advance notice of shareholder business and nominations
requirement, which generally prescribes the procedures that a shareholder of
Kroger must follow if the shareholder intends, at an annual meeting, to nominate
a person for election to Krogers Board of Directors or to propose other
business to be considered by shareholders. These procedures include, among other
things, that the shareholder give timely notice to Krogers Secretary of the
nomination or other proposed business, that the notice contain specified
information, and that the shareholder comply with certain other requirements. In
order to be timely, this notice must be delivered in writing to Krogers
Secretary, at our principal executive offices, not later 45 calendar days prior
to the date on which our proxy statement for the prior years annual meeting of
shareholders was mailed to shareholders. If a shareholders nomination or
proposal is not in compliance with the procedures set forth in the Regulations,
we may disregard such nomination or proposal. Accordingly, if a shareholder
intends, at the 2016 annual meeting, to nominate a person for election to the
Board of Directors or to propose other business, the shareholder must deliver a
notice of such nomination or proposal to Krogers Secretary not later March 29,
2016, and comply with the requirements of the Regulations. If a shareholder
submits a proposal outside of Rule 14a-8 for the 2015 Annual Meeting and such
proposal is not delivered within the time frame specified in the Regulations,
Krogers proxy may confer discretionary authority on persons being appointed as
proxies on behalf of Kroger to vote on such proposal. Shareholder proposals,
director nominations and advance notices should be addressed in writing to:
Secretary, The Kroger Co., 1014 Vine Street, Cincinnati, Ohio
45202-1100.
____________________
Attached to this Proxy
Statement is our 2014 Annual Report which includes a brief description of our
business, including the general scope and nature thereof during fiscal year
2014, together with the audited financial information contained in our 2014
Annual Report on Form 10-K filed with the SEC. A copy of that report is available to shareholders
on request without charge by writing to: Todd A. Foley, Treasurer, The Kroger
Co., 1014 Vine Street, Cincinnati, Ohio 45202-1100 or by calling
513-762-1220. Our SEC filings are
available to the public on the SECs website at www.sec.gov.
61
Householding of Proxy Materials
We have adopted a procedure
approved by the SEC called householding. Under this procedure, shareholders of
record who have the same address and last name will receive only one copy of the
Notice of Availability of Proxy Materials (or proxy materials in the case of
shareholders who receive paper copies of such materials) unless one or more of
these shareholders notifies us that they wish to continue receiving individual
copies. This procedure will reduce our printing costs and postage fees.
Householding will not in any way affect dividend check mailings.
If you are eligible for
householding, but you and other shareholders of record with whom you share an
address currently receive multiple copies of our Notice of Availability of Proxy
Materials (or proxy materials in the case of shareholders who receive paper
copies of such materials), or if you hold in more than one account, and in
either case you wish to receive only a single copy for your household or if you
prefer to receive separate copies of our documents in the future, please contact
your bank or broker, or contact Krogers Secretary at 1014 Vine Street,
Cincinnati, Ohio 45202-1100 or via telephone at 513-762-4000.
Beneficial shareholders can
request information about householding from their banks, brokers or other
holders of record.
The management knows of no
other matters that are to be presented at the meeting but, if any should be
presented, the Proxy Committee expects to vote thereon according to its best
judgment.
By order of the Board
of Directors, |
Christine S.
Wheatley, Secretary |
62
_____________
2014 Annual
Report
_____________
Financial Report
2014
Managements
Responsibility for Financial Reporting
The management of The
Kroger Co. has the responsibility for preparing the accompanying financial
statements and for their integrity and objectivity. The statements were prepared
in accordance with generally accepted accounting principles applied on a
consistent basis and are not misstated due to material error or fraud. The
financial statements include amounts that are based on managements best
estimates and judgments. Management also prepared the other information in the
report and is responsible for its accuracy and consistency with the financial
statements.
Krogers financial
statements have been audited by PricewaterhouseCoopers LLP, an independent
registered public accounting firm, whose selection has been ratified by the
shareholders. Management has made available to PricewaterhouseCoopers LLP all of
Krogers financial records and related data, as well as the minutes of the
shareholders and directors meetings. Furthermore, management believes that all
representations made to PricewaterhouseCoopers LLP during its audit were valid
and appropriate.
Management also recognizes
its responsibility for fostering a strong ethical climate so that Krogers
affairs are conducted according to the highest standards of personal and
corporate conduct. This responsibility is characterized and reflected in
The Kroger Co. Policy on Business
Ethics, which is publicized
throughout Kroger and available on Krogers website at ir.kroger.com.
The Kroger Co. Policy on Business
Ethics addresses, among other
things, the necessity of ensuring open communication within Kroger; potential
conflicts of interests; compliance with all domestic and foreign laws, including
those related to financial disclosure; and the confidentiality of proprietary
information. Kroger maintains a systematic program to assess compliance with
these policies.
Managements Report on
Internal Control Over Financial Reporting
Management is responsible
for establishing and maintaining adequate internal control over financial
reporting for Kroger. With the participation of the Chief Executive Officer and
the Chief Financial Officer, management conducted an evaluation of the
effectiveness of Krogers internal control over financial reporting based on the
framework and criteria established in Internal Control Integrated Framework, issued by the Committee of Sponsoring
Organizations of the Treadway Commission. Based on this evaluation, management
has concluded that Krogers internal control over financial reporting was
effective as of January 31, 2015.
W. Rodney McMullen |
J. Michael Schlotman |
Chairman of the Board and |
Senior Vice President and |
Chief Executive Officer |
Chief Financial Officer |
A-1
Selected Financial
Data
|
|
Fiscal Years
Ended |
|
|
January
31, |
|
February
1, |
|
February
2, |
|
January
28, |
|
January
29, |
|
|
2015 |
|
2014 |
|
2013 |
|
2012 |
|
2011 |
|
|
(52 weeks)
(1)(2) |
|
(52 weeks)
(1) |
|
(53
weeks) |
|
(52
weeks) |
|
(52
weeks) |
|
|
(In millions, except
per share amounts) |
|
Sales |
|
|
$ |
108,465 |
|
|
|
$ |
98,375 |
|
|
|
$ |
96,619 |
|
|
|
$ |
90,269 |
|
|
|
$ |
81,967 |
|
Net
earnings including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interests |
|
|
|
1,747 |
|
|
|
|
1,531 |
|
|
|
|
1,508 |
|
|
|
|
596 |
|
|
|
|
1,133 |
|
Net
earnings attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Kroger Co. |
|
|
|
1,728 |
|
|
|
|
1,519 |
|
|
|
|
1,497 |
|
|
|
|
602 |
|
|
|
|
1,116 |
|
Net
earnings attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
Kroger Co. per diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share |
|
|
|
3.44 |
|
|
|
|
2.90 |
|
|
|
|
2.77 |
|
|
|
|
1.01 |
|
|
|
|
1.74 |
|
Total assets |
|
|
|
30,556 |
|
|
|
|
29,281 |
|
|
|
|
24,634 |
|
|
|
|
23,454 |
|
|
|
|
23,505 |
|
Long-term liabilities, including |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
obligations under
capital leases and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
financing
obligations |
|
|
|
13,711 |
|
|
|
|
13,181 |
|
|
|
|
9,359 |
|
|
|
|
10,405 |
|
|
|
|
10,137 |
|
Total shareholders equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Kroger
Co. |
|
|
|
5,412 |
|
|
|
|
5,384 |
|
|
|
|
4,207 |
|
|
|
|
3,981 |
|
|
|
|
5,296 |
|
Cash
dividends per common share |
|
|
|
0.680 |
|
|
|
|
0.615 |
|
|
|
|
0.495 |
|
|
|
|
0.430 |
|
|
|
|
0.390 |
|
____________________
(1) |
Harris Teeter
Supermarkets, Inc. (Harris Teeter) is included in our ending
Consolidated Balance Sheets for 2013 and 2014 and in our Consolidated
Statements of Operations for 2014. Due to the timing of the merger closing
late in fiscal year 2013, its results of operations were not material to
our consolidated results of operations for 2013. |
|
|
(2) |
Vitacost.com, Inc.
(Vitacost.com) is included in our ending Consolidated Balance Sheets and
Consolidated Statements of Operations for 2014. |
Common Share Price
Range
|
|
2014 |
|
2013 |
Quarter |
|
High |
|
Low |
|
High |
|
Low |
1st |
|
$ |
47.90 |
|
$ |
35.13 |
|
$ |
35.44 |
|
$ |
27.53 |
2nd |
|
$ |
51.49 |
|
$ |
46.50 |
|
$ |
39.98 |
|
$ |
32.77 |
3rd |
|
$ |
58.15 |
|
$ |
49.98 |
|
$ |
43.85 |
|
$ |
35.91 |
4th |
|
$ |
70.06 |
|
$ |
57.27 |
|
$ |
42.73 |
|
$ |
35.71 |
Main trading market:
New York Stock Exchange (Symbol KR) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shareholders of record at year-end 2014: 29,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
shareholders of record at March 27, 2015:
29,502 |
During 2013, we paid three
quarterly cash dividends of $0.15 per share and one quarterly cash dividend of
$0.165 per share. During 2014, we paid three quarterly cash dividends of $0.165
per share and one quarterly cash dividend of $0.185 per share. On March 1, 2015,
we paid a quarterly cash dividend of $0.185 per share. On March 12, 2015, we
announced that our Board of Directors have declared a quarterly cash dividend of
$0.185 per share, payable on June 1, 2015, to shareholders of record at the
close of business on May 15, 2015. We currently expect to continue to pay
comparable cash dividends on a quarterly basis depending on our earnings and
other factors.
A-2
Performance
Graph
Set forth below is a line
graph comparing the five-year cumulative total shareholder return on our common
shares, based on the market price of the common shares and assuming reinvestment
of dividends, with the cumulative total return of companies in the Standard
& Poors 500 Stock Index and a peer group composed of food and drug
companies.
COMPARISON OF CUMULATIVE
FIVE-YEAR TOTAL RETURN*
Among The Kroger Co., the S&P 500, and Peer
Group**
|
|
Base |
|
INDEXED RETURNS |
|
|
Period |
|
Years
Ending |
Company
Name/Index |
|
2009 |
|
2010 |
|
2011 |
|
2012 |
|
2013 |
|
2014 |
The
Kroger Co. |
|
100 |
|
101.12 |
|
117.57 |
|
137.80 |
|
181.50 |
|
352.22 |
S&P 500 Index |
|
100 |
|
122.19 |
|
128.70 |
|
151.35 |
|
182.08 |
|
207.98 |
Peer
Group |
|
100 |
|
108.56 |
|
114.10 |
|
137.81 |
|
155.93 |
|
188.85 |
|
Krogers fiscal year
ends on the Saturday closest to January
31. |
____________________
* |
Total assumes $100
invested on January 30, 2010, in The Kroger Co., S&P 500 Index, and
the Peer Group, with reinvestment of dividends. |
|
** |
The Peer Group
consists of Costco Wholesale Corp., CVS Caremark Corp, Etablissements
Delhaize Freres Et Cie Le Lion (Groupe Delhaize), Great Atlantic &
Pacific Tea Company, Inc. (included through March 13, 2012 when it became
private after emerging from bankruptcy), Koninklijke Ahold NV, Safeway,
Inc. (included through January 29, 2015 when it was acquired by AB
Acquisition LLC), Supervalu Inc., Target Corp., Tesco plc, Wal-Mart Stores
Inc., Walgreens Boots Alliance Inc. (formerly, Walgreen Co.), Whole Foods
Market Inc. and Winn-Dixie Stores, Inc. (included through March 9, 2012
when it became a wholly-owned subsidiary of Bi-Lo Holdings). |
|
|
Data supplied by
Standard & Poors. |
The foregoing Performance
Graph will not be deemed incorporated by reference into any other filing, absent
an express reference thereto.
A-3
Issuer Purchases of Equity
Securities
|
|
|
|
|
|
|
|
Total Number
of |
|
Maximum Dollar |
|
|
|
|
|
|
|
|
Shares |
|
Value of Shares |
|
|
|
|
|
|
|
|
Purchased
as |
|
that May Yet Be |
|
|
|
|
|
|
|
|
Part of
Publicly |
|
Purchased Under |
|
|
Total
Number |
|
Average |
|
Announced |
|
the Plans or |
|
|
of
Shares |
|
Price Paid |
|
Plans
or |
|
Programs (4) |
Period
(1) |
|
Purchased
(2) |
|
Per
Share |
|
Programs
(3) |
|
(in
millions) |
First period - four weeks |
|
|
|
|
|
|
|
|
|
|
|
|
November 9, 2014 to
December 6, 2014 |
|
|
87,884 |
|
|
$58.72 |
|
|
78,700 |
|
|
$500 |
Second period - four weeks |
|
|
|
|
|
|
|
|
|
|
|
|
December 7, 2014 to
January 3, 2015 |
|
|
223,024 |
|
|
$62.33 |
|
|
182,731 |
|
|
$500 |
Third period four weeks |
|
|
|
|
|
|
|
|
|
|
|
|
January 4, 2015 to
January 31, 2015 |
|
|
290,348 |
|
|
$66.08 |
|
|
259,725 |
|
|
$500 |
Total |
|
|
601,256 |
|
|
$63.61 |
|
|
521,156 |
|
|
$500 |
____________________
(1) |
The reported periods conform to our fiscal
calendar composed of thirteen 28-day periods. The fourth quarter of 2014
contained three 28-day periods. |
|
|
(2) |
Includes (i) shares repurchased under a
program announced on December 6, 1999 to repurchase common shares to
reduce dilution resulting from our employee stock option and long-term
incentive plans, under which repurchases are limited to proceeds received
from exercises of stock options and the tax benefits associated therewith
(the 1999 Repurchase Program), and (ii) 80,100 shares that were
surrendered to the Company by participants under our long-term incentive
plans to pay for taxes on restricted stock awards. |
|
(3) |
Represents shares repurchased under the 1999
Repurchase Program. |
|
(4) |
The amounts shown in this column reflect the
amount remaining under the $500 million share repurchase program
authorized by the Board of Directors and announced on June 26, 2014.
Amounts available under the 1999 Repurchase Program are dependent upon
option exercise activity. The repurchase programs do not have an
expiration date but may be terminated by the Board of Directors at any
time. |
Business
The Kroger Co. (the
Company or Kroger) was founded in 1883 and incorporated in 1902. As of
January 31, 2015, we are one of the largest retailers in the nation based on
annual sales. We also manufacture and process some of the food for sale in our
supermarkets. Our principal executive offices are located at 1014 Vine Street,
Cincinnati, Ohio 45202, and our telephone number is (513) 762-4000. We maintain
a web site (www.thekrogerco.com) that includes additional information about the
Company. We make available through our web site, free of charge, our annual
reports on Form 10-K, our quarterly reports on Form 10-Q, our current reports on
Form 8-K and our interactive data files, including amendments. These forms are
available as soon as reasonably practicable after we have filed them with, or
furnished them electronically to, the SEC.
Our revenues are
predominately earned and cash is generated as consumer products are sold to
customers in our stores. We earn income predominantly by selling products at
price levels that produce revenues in excess of the costs to make these products
available to our customers. Such costs include procurement and distribution
costs, facility occupancy and operational costs, and overhead expenses. Our
fiscal year ends on the Saturday closest to January 31. All references to 2014,
2013 and 2012 are to the fiscal years ended January 31, 2015, February 1, 2014
and February 2, 2013, respectively, unless specifically indicated
otherwise.
Employees
As of January 31, 2015,
Kroger employed approximately 400,000 full- and part-time employees. A majority
of our employees are covered by collective bargaining agreements negotiated with
local unions affiliated with one of several different international unions.
There are approximately 300 such agreements, usually with terms of three to five
years.
A-4
Stores
As of January 31, 2015,
Kroger operated, either directly or through its subsidiaries, 2,625 supermarkets
and multi-department stores, 1,330 of which had fuel centers. Approximately 48%
of these supermarkets were operated in Company-owned facilities, including some
Company-owned buildings on leased land. Our current strategy emphasizes
self-development and ownership of store real estate. Our stores operate under
several banners that have strong local ties and brand recognition. Supermarkets
are generally operated under one of the following formats: combination food and
drug stores (combo stores); multi-department stores; marketplace stores; or
price impact warehouses.
The combo store is the
primary food store format. They typically draw customers from a 2 2½ mile
radius. We believe this format is successful because the stores are large enough
to offer the specialty departments that customers desire for one-stop shopping,
including natural food and organic sections, pharmacies, general merchandise,
pet centers and high-quality perishables such as fresh seafood and organic
produce.
Multi-department stores are
significantly larger in size than combo stores. In addition to the departments
offered at a typical combo store, multi-department stores sell a wide selection
of general merchandise items such as apparel, home fashion and furnishings,
outdoor living, electronics, automotive products, toys and fine
jewelry.
Marketplace stores are
smaller in size than multi-department stores. They offer full-service grocery,
pharmacy and health and beauty care departments as well as an expanded
perishable offering and general merchandise area that includes apparel, home
goods and toys.
Price impact warehouse
stores offer a no-frills, low cost warehouse format and feature everyday low
prices plus promotions for a wide selection of grocery and health and beauty
care items. Quality meat, dairy, baked goods and fresh produce items provide a
competitive advantage. The average size of a price impact warehouse store is
similar to that of a combo store.
In addition to the
supermarkets, as of January 31, 2015, we operated through subsidiaries 782
convenience stores, 326 fine jewelry stores and an online retailer. All 132 of
our fine jewelry stores located in malls are operated in leased locations. In
addition, 78 convenience stores were operated by franchisees through franchise
agreements. Approximately 54% of the convenience stores operated by subsidiaries
were operated in Company-owned facilities. The convenience stores offer a
limited assortment of staple food items and general merchandise and, in most
cases, sell gasoline.
Segments
We operate retail food and
drug stores, multi-department stores, jewelry stores, and convenience stores
throughout the United States. Our retail operations, which represent over 99% of
our consolidated sales and earnings before interest, taxes and depreciation and
amortization (EBITDA), is our only reportable segment. Our retail operating
divisions have been aggregated into one reportable segment due to the operating
divisions having similar economic characteristics with similar long-term
financial performance. In addition, our operating divisions offer customers
similar products, have similar distribution methods, operate in similar
regulatory environments, purchase the majority of the merchandise for retail
sale from similar (and in many cases identical) vendors on a coordinated basis
from a centralized location, serve similar types of customers, and are allocated
capital from a centralized location. Our operating divisions reflect the manner
in which the business is managed and how our Chief Executive Officer and Chief
Operating Officer, who act as our chief operating decision makers, assess
performance internally. All of our operations are domestic. Revenues, profits
and losses and total assets are shown in our Consolidated Financial Statements
set forth below beginning on page A-30.
Merchandising and
Manufacturing
Corporate brand products
play an important role in our merchandising strategy. Our supermarkets, on
average, stock approximately 13,000 private label items. Our corporate brand
products are primarily produced and sold in three tiers. Private Selection® is
the premium quality brand designed to be a unique item in a category or to meet
or beat the gourmet or upscale brands. The banner brand (Kroger®, Ralphs®,
Fred
A-5
Meyer®, King Soopers®,
etc.), which represents the majority of our private label items, is designed to
satisfy customers with quality products. Before we will carry a banner brand
product we must be satisfied that the product quality meets our customers
expectations in taste and efficacy, and we guarantee it. P$$T
®, Check This Out
and Heritage Farm are the three value brands, designed to deliver good quality
at a very affordable price. In addition, we continue to grow our other brands,
including Simple Truth® and Simple Truth Organic®. Both Simple Truth and Simple
Truth Organic are Free From 101 artificial preservatives and ingredients that
customers have told us they do not want in their food, and the Simple Truth
Organic products are USDA certified organic.
Approximately 40% of the
corporate brand units sold in our supermarkets are produced in our manufacturing
plants; the remaining corporate brand items are produced to our strict
specifications by outside manufacturers. We perform a make or buy analysis on
corporate brand products and decisions are based upon a comparison of
market-based transfer prices versus open market purchases. As of January 31,
2015, we operated 37 manufacturing plants. These plants consisted of 17 dairies,
nine deli or bakery plants, five grocery product plants, two beverage plants,
two meat plants and two cheese plants.
Seasonality
The majority of our
revenues are generally not seasonal in nature. However, revenues tend to be
higher during the major holidays throughout the year.
Executive Officers of
the Registrant
The disclosure regarding
executive officers is set forth in Item 10 of Part III of the Companys Annual
Report on Form 10-K for fiscal year 2014 under the heading Executive Officers
of the Company, and is incorporated herein by reference.
Competitive
Environment
For the disclosure related
to our competitive environment, see Item 1A of the Companys Annual Report on
Form 10-K for fiscal year 2014 under the heading Competitive
Environment.
A-6
Managements Discussion and Analysis of
Financial Condition and
Results of Operations
Our Business
The Kroger Co. was founded
in 1883 and incorporated in 1902. Kroger is one of the nations largest
retailers, as measured by revenue, operating 2,625 supermarket and
multi-department stores under two dozen banners including Kroger, City Market,
Dillons, Food 4 Less, Fred Meyer, Frys, Harris Teeter, Jay C, King Soopers,
QFC, Ralphs and Smiths. Of these stores, 1,330 have fuel centers. We also
operate 782 convenience stores, either directly or through franchisees, 326 fine
jewelry stores and an online retailer.
We operate 37 manufacturing
plants, primarily bakeries and dairies, which supply approximately 40% of the
corporate brand units sold in our supermarkets.
Our revenues are earned and
cash is generated as consumer products are sold to customers in our stores. We
earn income predominately by selling products at price levels that produce
revenues in excess of the costs we incur to make these products available to our
customers. Such costs include procurement and distribution costs, facility
occupancy and operational costs, and overhead expenses. Our retail operations,
which represent over 99% of our consolidated sales and EBITDA, is our only
reportable segment.
On January 28, 2014, we
closed our merger with Harris Teeter by purchasing 100% of the Harris Teeter
outstanding common stock for approximately $2.4 billion. The merger allows us to
expand into the fast-growing southeastern and mid-Atlantic markets and into
Washington, D.C. Harris Teeter is included in our ending Consolidated Balance
Sheets for 2013 and 2014 and in our Consolidated Statements of Operations for
2014. Due to the timing of the merger closing late in fiscal year 2013, its
results of operations were not material to our consolidated results of
operations for 2013. Year-over-year comparisons will be affected as a result.
See Note 2 to the Consolidated Financial Statements for more information related
to our merger with Harris Teeter.
On August 18, 2014, we
closed our merger with Vitacost.com by purchasing 100% of the Vitacost.com
outstanding common stock for $8.00 per share or $287 million. Vitacost.com is a
leading online retailer in health and wellness products, which are sold directly
to consumers through the website vitacost.com. The merger affords us access to
Vitacost.coms extensive e-commerce platform, which can be combined with our
customer insights and loyal customer base, to create new levels of
personalization and convenience for our customers. Vitacost.com is included in
our ending Consolidated Balance Sheets and Consolidated Statements of Operations
for 2014. See Note 2 to the Consolidated Financial Statements for more
information related to our merger with Vitacost.com.
Our 2014 Performance
We achieved outstanding
results in 2014. Our business strategy continues to resonate with a full range
of customers and our results reflect the balance we seek to achieve across our
business including positive identical sales growth, increases in loyal household
count, and good cost control, as well as growth in net earnings and net earnings
per diluted share. Our 2014 net earnings were $1.7 billion or $3.44 per diluted
share, compared to $1.5 billion, or $2.90 per diluted share for the same period
of 2013.
Our net earnings for 2014
include a net $39 million after-tax charge for an $87 million ($56 million
after-tax) charge to operating, general and administrative (OG&A) expenses
due to the commitments and withdrawal liabilities arising from restructuring of
certain pension plan agreements to help stabilize associates future pension
benefits, offset partially by the benefits from certain tax items ($17 million)
(2014 Adjusted Items). In addition, our net earnings for 2014 included
unusually high fuel margins, partially offset by a last-in, first-out (LIFO)
charge that was significantly higher than 2013 and $140 million in contributions
charged to OG&A expenses for the United Food and Commercial Workers
International Union (UFCW) Consolidated Pension Plan ($55 million) and our
charitable foundation ($85 million) (2014 Contributions). Fuel margin per
gallon was $0.19 per gallon in 2014, compared to $0.14 per gallon in 2013. The
$55 million contribution to the UFCW Consolidated Pension Plan was to further
fund the plan. The $85 million contribution
A-7
to Krogers charitable
foundation will enable it to continue to support causes such as hunger relief,
breast cancer awareness, the military and their families and local community
organizations. Our net earnings for 2013 include a net benefit of $23 million,
which includes benefits from certain tax items of $40 million, offset partially
by costs of $11 million in interest and $16 million in OG&A expenses ($17
million after-tax) related to our merger with Harris Teeter (2013 Adjusted
Items).
Excluding the 2014 Adjusted
Items, net earnings for 2014 totaled $1.8 billion, or $3.52 per diluted share,
compared to net earnings in 2013 of $1.5 billion, or $2.85 per diluted share,
excluding the 2013 Adjusted Items. We believe adjusted net earnings and adjusted
net earnings per diluted share present a more accurate year-over-year comparison
of our financial results because the Adjusted Items were not the result of our
normal operations. Our adjusted net earnings per diluted share for 2014
represent a 24% increase, compared to 2013. Please refer to the Net Earnings
section of MD&A for more information.
Our identical supermarket
sales increased 5.2%, excluding fuel, in 2014, compared to 2013. We have
achieved 45 consecutive quarters of positive identical supermarket sales growth,
excluding fuel. As we continue to outpace many of our competitors on identical
supermarket sales growth, we continue to gain market share. We focus on
identical supermarket sales growth, excluding fuel, as it is a key performance
target for our long-term growth strategy.
Increasing market share is
an important part of our long-term strategy as it best reflects how our products
and services resonate with customers. Market share growth allows us to spread
the fixed costs in our business over a wider revenue base. Our fundamental
operating philosophy is to maintain and increase market share by offering
customers good prices and superior products and service. Based on Nielsen POS+
data, our overall market share of the products we sell in markets in which we
operate increased by approximately 60 basis points in 2014. This data also
indicates that our market share increased in 18 markets and declined slightly in
two. Wal-Mart is one of our top two competitors in 15 of the 20 markets outlined
in the Nielson report. Our market share increased in all 15 of these markets.
These market share results reflect our long-term strategy of market share
growth.
Results of Operations
The following discussion
summarizes our operating results for 2014 compared to 2013 and for 2013 compared
to 2012. Comparability is affected by income and expense items that fluctuated
significantly between and among the periods, our merger with Harris Teeter in
late 2013 and an extra week in 2012.
Net
Earnings
Net earnings totaled $1.7
billion in 2014 and $1.5 billion in 2013 and 2012. Net earnings improved in
2014, compared to net earnings in 2013, due to an increase in operating profit,
partially offset by increases in interest and tax expense. Operating profit
increased in 2014, compared to 2013, primarily due to an increase in first-in,
first-out (FIFO) non-fuel gross profit, excluding Harris Teeter, the effect of
our merger with Harris Teeter and an increase in fuel operating profit,
partially offset by continued investments in lower prices for our customers, the
2014 Contributions, an $87 million ($56 million after-tax) charge due to the
restructuring of certain pension plan agreements and a higher LIFO charge which
was $147 million (pre-tax), compared to a LIFO charge of $52 million (pre-tax)
in 2013. Net earnings improved in 2013, compared to net earnings of 2012, due to
a decrease in tax and interest expense, partially offset by a decrease in
operating profit. Operating profit decreased in 2013, compared to 2012,
primarily due to a 53rd week in fiscal year 2012 (the Extra Week),
continued investments in lower prices for our customers, the 2012 settlement
with Visa and MasterCard and the reduction in our obligation to fund the UFCW
Consolidated Pension Plan created in 2012, partially offset by an increase in
FIFO non-fuel gross profit.
The net earnings for 2014
include a net charge of $39 million, after tax, related to the 2014 Adjusted
Items. The net earnings for 2013 include a net benefit of $23 million, after
tax, related to the 2013 Adjusted Items. The net earnings for 2012 include a
benefit from net earnings of approximately $58 million, after-tax, due to the
Extra Week and a net $115 million ($74 million after-tax) benefit in OG&A
expenses for the settlement with Visa and MasterCard and a reduction in our
obligation to fund the UFCW Consolidated Pension Plan
A-8
created in January 2012
(2012 Adjusted Items). Excluding these benefits and charges for Adjusted Items
for 2014, 2013 and 2012, adjusted net earnings were $1.8 billion in 2014, $1.5
billion in 2013 and $1.4 billion in 2012. 2014 adjusted net earnings improved,
compared to adjusted net earnings in 2013, due to an increase in FIFO non-fuel
operating profit, excluding Harris Teeter, the effect of our merger with Harris
Teeter and an increase in fuel operating profit, partially offset by continued
investments in lower prices for our customers, increases in interest and tax
expense and a higher LIFO charge which was $147 million (pre-tax), compared to a
LIFO charge of $52 million (pre-tax) in 2013. 2013 adjusted net earnings
improved, compared to adjusted net earnings in 2012, due to an increase in FIFO
non-fuel operating profit and decreased interest, partially offset by continued
investments in lower prices for our customers and increased tax
expense.
Net earnings per diluted
share totaled $3.44 in 2014, $2.90 in 2013 and $2.77 in 2012. Net earnings per
diluted share in 2014, compared to 2013, increased primarily due to fewer shares
outstanding as a result of the repurchase of Kroger common shares and an
increase in net earnings. Net earnings per diluted share in 2013, compared to
2012, increased primarily due to fewer shares outstanding as a result of the
repurchase of Kroger common shares and an increase in net earnings.
Excluding the 2014, 2013
and 2012 Adjusted Items, adjusted net earnings per diluted share totaled $3.52
in 2014, $2.85 in 2013 and $2.52 in 2012. Adjusted net earnings per diluted
share in 2014, compared to adjusted net earnings per diluted share in 2013,
increased primarily due to fewer shares outstanding as a result of the
repurchase of Kroger common shares and an increase in adjusted net earnings.
Adjusted net earnings per diluted share in 2013, compared to adjusted net
earnings per diluted share in 2012, increased primarily due to fewer shares
outstanding as a result of the repurchase of Kroger common shares and an
increase in adjusted net earnings.
Management believes
adjusted net earnings (and adjusted net earnings per diluted share) are useful
metrics to investors and analysts because they more accurately reflect our
day-to-day business operations than do the generally accepted accounting
principle (GAAP) measures of net earnings and net earnings per diluted share.
Adjusted net earnings (and adjusted net earnings per diluted share) are
non-generally accepted accounting principle (non-GAAP) financial measures and
should not be considered alternatives to net earnings (and net earnings per
diluted share) or any other GAAP measure of performance. Adjusted net earnings
(and adjusted net earnings per diluted share) should not be viewed in isolation
or considered substitutes for our financial results as reported in accordance
with GAAP. Management uses adjusted net earnings (and adjusted net earnings per
diluted share) in evaluating our results of operations as it believes these
measures are more meaningful indicators of operating performance since, as
adjusted, those earnings relate more directly to our day-to-day operations.
Management also uses adjusted net earnings (and adjusted net earnings per
diluted share) as a performance metric for management incentive programs, and to
measure our progress against internal budgets and targets.
A-9
The following table provides a reconciliation of net earnings
attributable to The Kroger Co. to net earnings attributable to The Kroger Co.
excluding the Adjusted Items for 2014, 2013 and 2012 and a reconciliation of net
earnings attributable to The Kroger Co. per diluted common share to the net
earnings attributable to The Kroger Co. per diluted common share excluding the
Adjusted Items for 2014, 2013 and 2012:
Net Earnings per Diluted
Share excluding the Adjusted Items
(in millions, except per share amounts)
|
|
2014 |
|
2013 |
|
2012 |
Net
earnings attributable to The Kroger Co. |
|
$ |
1,728 |
|
$ |
1,519 |
|
|
$ |
1,497 |
|
2014
Adjusted Items |
|
|
39 |
|
|
|
|
|
|
|
|
2013
Adjusted Items |
|
|
|
|
|
(23 |
) |
|
|
|
|
2012
Adjusted Items |
|
|
|
|
|
|
|
|
|
(132 |
) |
Net
earnings attributable to The Kroger Co. excluding the |
|
|
|
|
|
|
|
|
|
|
|
adjustment items
above |
|
$ |
1,767 |
|
$ |
1,496 |
|
|
$ |
1,365 |
|
Net
earnings attributable to The Kroger Co. per diluted common share |
|
$ |
3.44 |
|
$ |
2.90 |
|
|
$ |
2.77 |
|
2014
Adjusted Items (1) |
|
|
0.08 |
|
|
|
|
|
|
|
|
2013
Adjusted Items (1) |
|
|
|
|
|
(0.05 |
) |
|
|
|
|
2012
Adjusted Items (1) |
|
|
|
|
|
|
|
|
|
(0.25 |
) |
Net
earnings attributable to The Kroger Co. per diluted common share |
|
|
|
|
|
|
|
|
|
|
|
excluding the adjustment
items above |
|
$ |
3.52 |
|
$ |
2.85 |
|
|
$ |
2.52 |
|
Average numbers of common shares used in diluted
calculation |
|
|
497 |
|
|
520 |
|
|
|
537 |
|
____________________
(1) |
The amounts presented
represent the net earnings per diluted common share effect of each
adjusted item. |
Sales
Total Sales
(in
millions)
|
|
|
|
Percentage |
|
|
|
|
Percentage |
|
|
|
|
2012 |
|
|
2014 |
|
Increase
(2) |
|
2013 |
|
Increase
(3) |
|
2012 |
|
Adjusted
(4) |
Total supermarket sales |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
without fuel |
|
$ |
86,281 |
|
|
12.5 |
% |
|
|
$ |
76,666 |
|
4.0% |
|
$ |
75,179 |
|
|
$ |
73,733 |
|
Fuel
sales |
|
|
18,850 |
|
|
(0.6 |
% |
) |
|
|
18,962 |
|
3.0% |
|
|
18,896 |
|
|
|
18,413 |
|
Other sales (1) |
|
|
3,334 |
|
|
21.4 |
% |
|
|
|
2,747 |
|
9.2% |
|
|
2,544 |
|
|
|
2,515 |
|
Total sales |
|
$ |
108,465 |
|
|
10.3 |
% |
|
|
$ |
98,375 |
|
3.9% |
|
$ |
96,619 |
|
|
$ |
94,661 |
|
____________________
(1) |
Other sales primarily
relate to sales at convenience stores, excluding fuel; jewelry stores;
manufacturing plants to outside customers; variable interest entities; a
specialty pharmacy; in-store health clinics; and online sales by
Vitacost.com. |
(2) |
This column
represents the sales percentage increases in 2014, compared to
2013. |
(3) |
This column
represents the sales percentage increases in 2013, compared to 2012
Adjusted. |
(4) |
The 2012 Adjusted
column represents the items presented in the 2012 column as adjusted to
remove the Extra Week. |
Total sales increased in 2014, compared to 2013, by 10.3%. This increase
in 2014 total sales, compared to 2013, was primarily due to our merger with
Harris Teeter, which closed on January 28, 2014, and an increase in identical
supermarket sales, excluding fuel, of 5.2%. Identical supermarket sales,
excluding fuel for 2014, compared to 2013, increased primarily due to an
increase in the number of households shopping with us, an increase in visits per
household and product cost inflation. Total fuel sales decreased in 2014,
compared to 2013, primarily due to a 6.8% decrease in the average retail fuel
price, partially offset by an increase in fuel gallons sold of 6.6%.
A-10
Total sales increased in 2013, compared to 2012, by 1.82%. The increase
in 2013 total sales, compared to 2012, was primarily due to our identical
supermarket sales increase, excluding fuel, of 3.6%, partially offset by the
Extra Week in fiscal 2012. Total sales increased in 2013, compared to 2012
adjusted total sales, by 3.9%. The increase in 2013 total sales, compared to
2012 adjusted total sales, was primarily due to our identical supermarket sales
increase, excluding fuel, of 3.6%. Identical supermarket sales, excluding fuel,
increased in 2013, compared to 2012, primarily due to an increase in number of
households shopping with us, an increase in visits per household and product
cost inflation. Total fuel sales increased in 2013, compared to 2012 adjusted
total sales, primarily due to an increase in fuel gallons sold of 5.2% partially
offset by a decrease in the average retail fuel price of 2.9%.
We define a supermarket as identical when it has been in operation
without expansion or relocation for five full quarters. Although identical
supermarket sales is a relatively standard term, numerous methods exist for
calculating identical supermarket sales growth. As a result, the method used by
our management to calculate identical supermarket sales may differ from methods
other companies use to calculate identical supermarket sales. We urge you to
understand the methods used by other companies to calculate identical
supermarket sales before comparing our identical supermarket sales to those of
other such companies. Fuel discounts received at our fuel centers and earned
based on in-store purchases are included in all of the supermarket identical
sales results calculations illustrated below and reduce our identical
supermarket sales results. Differences between total supermarket sales and
identical supermarket sales primarily relate to changes in supermarket square
footage. Identical supermarket sales include sales from all departments at
identical Fred Meyer multi-department stores and include Harris Teeter sales for
stores that are identical as if they were part of the Company in our prior year.
We calculate annualized identical supermarket sales by adding together four
quarters of identical supermarket sales. Our identical supermarket sales results
are summarized in the table below.
Identical Supermarket
Sales
(dollars in millions)
|
|
2014 |
|
2013 |
Including supermarket fuel centers |
|
$ |
97,323 |
|
|
$ |
93,435 |
|
Excluding supermarket fuel centers |
|
$ |
82,987 |
|
|
$ |
78,878 |
|
Including supermarket fuel centers |
|
|
4.2 |
% |
|
|
3.3 |
%
(1) |
Excluding supermarket fuel centers |
|
|
5.2 |
% |
|
|
3.6 |
%
(1) |
____________________
(1) |
Identical supermarket
sales for 2013 were calculated on a 52 week basis by excluding week 1 of
fiscal 2012 in our 2012 identical supermarket sales
base. |
Gross Margin and FIFO
Gross Margin
We calculate gross margin as sales less merchandise costs, including
advertising, warehousing, and transportation expenses. Merchandise costs exclude
depreciation and rent expenses. Our gross margin rates, as a percentage of
sales, were 21.16% in 2014, 20.57% in 2013 and 20.59% in 2012. The increase in
2014, compared to 2013, resulted primarily from the effect of our merger with
Harris Teeter, an increase in fuel gross margin rate and a reduction in
warehouse and transportation costs, as a percentage of sales, partially offset
by continued investments in lower prices for our customers and an increase in
our LIFO charge, as a percentage of sales. The merger with Harris Teeter, which
closed late in fiscal year 2013, had a positive effect on our gross margin rate
in 2014 since Harris Teeter has a higher gross margin rate as compared to total
Company without Harris Teeter. The increase in fuel gross margin rate for 2014,
compared to 2013, resulted primarily from an increase in fuel margin per gallon
sold of $0.19 in 2014, compared to $0.14 in 2013. The decrease in 2013, compared
to 2012, resulted primarily from continued investments in lower prices for our
customers and increased shrink and advertising costs, as a percentage of sales,
offset partially by a growth rate in retail fuel sales that was lower than the
total Company sales growth rate. Our retail fuel operations lower our gross
margin rate, as a percentage of sales, due to the very low gross margin on
retail fuel sales as compared to non-fuel sales. A lower growth rate in retail
fuel sales, as compared to the growth rate for the total Company, increases the
gross margin rates, as a percentage of sales, when compared to the prior
year.
A-11
We calculate FIFO gross margin as sales less merchandise costs, including
advertising, warehousing, and transportation expenses, but excluding the LIFO
charge. Merchandise costs exclude depreciation and rent expenses. Our LIFO
charge was $147 million in 2014, $52 million in 2013 and $55 million in 2012.
FIFO gross margin is a non-GAAP financial measure and should not be considered
as an alternative to gross margin or any other GAAP measure of performance. FIFO
gross margin should not be reviewed in isolation or considered as a substitute
for our financial results as reported in accordance with GAAP. FIFO gross margin
is an important measure used by management to evaluate merchandising and
operational effectiveness. Management believes FIFO gross margin is a useful
metric to investors and analysts because it measures our day-to-day
merchandising and operational effectiveness.
Our FIFO gross margin rates, as a percentage of sales, were 21.30% in
2014, 20.62% in 2013 and 20.65% in 2012. Our retail fuel operations lower our
FIFO gross margin rate, as a percentage of sales, due to the very low FIFO gross
margin rate on retail fuel as compared to non-fuel sales. Excluding the effect
of retail fuel, our FIFO gross margin rate decreased three basis points in 2014,
as a percentage of sales, compared to 2013. The decrease in FIFO gross margin
rates, excluding retail fuel, in 2014, compared to 2013, resulted primarily from
continued investments in lower prices for our customers, offset partially by the
effect of our merger with Harris Teeter and a reduction of warehouse and
transportation costs, as a percentage of sales. Excluding the effect of retail
fuel operations, our FIFO gross margin rate decreased 14 basis points in 2013,
as a percentage of sales, compared to 2012. The decrease in FIFO gross margin
rates, excluding retail fuel, in 2013, compared to 2012, resulted primarily from
continued investments in lower prices for our customers and increased shrink and
advertising costs, as a percentage of sales.
LIFO Charge
The LIFO charge was $147 million in 2014, $52 million in 2013 and $55
million in 2012. In 2014, we experienced higher levels of product cost
inflation, compared to 2013. In 2014, our LIFO charge primarily resulted from
annualized product cost inflation related to pharmacy, grocery, deli, meat and
seafood. We experienced relatively consistent levels of product cost inflation
in 2013, compared to 2012. In 2013, our LIFO charge resulted primarily from an
annualized product cost inflation related to meat, seafood and pharmacy. In
2012, our LIFO charge resulted primarily from an annualized product cost
inflation related to grocery, natural foods, meat, deli and bakery, general
merchandise and grocery, partially offset by deflation in seafood and
manufactured product.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as
wages, health care benefits and retirement plan costs, utilities and credit card
fees. Rent expense, depreciation and amortization expense and interest expense
are not included in OG&A.
OG&A expenses, as a percentage of sales, were 15.82% in 2014, 15.45%
in 2013 and 15.37% in 2012. The increase in OG&A expenses, as a percentage
of sales, in 2014, compared to 2013, resulted primarily from the 2014
Contributions, expenses related to commitments and withdrawal liabilities
arising from restructuring of certain pension plan agreements to help stabilize
associates future pension benefits, the effect of fuel, the effect of our merger
with Harris Teeter and increases in credit card fees and incentive plan costs,
as a percentage of sales, partially offset by increased supermarket sales
growth, productivity improvements and effective cost controls at the store
level. Retail fuel sales lower our OG&A rate due to the very low OG&A
rate, as a percentage of sales, of retail fuel sales compared to non-fuel sales.
The merger with Harris Teeter, which closed late in fiscal year 2013, increased
our OG&A rate, as a percentage of sales, since Harris Teeter has a higher
OG&A rate as compared to the total Company without Harris Teeter. The
increase in OG&A rate in 2013, compared to 2012, resulted primarily from the
2012 settlement with Visa and MasterCard and a reduction in our obligation to
fund the UFCW Consolidated Pension Plan created in January 2012, the effect of
fuel and increased incentive plan costs, as a percentage of sales, offset
partially by increased identical supermarket sales growth, productivity
improvements and effective cost controls at the store level.
A-12
Our retail fuel operations reduce our overall OG&A rate, as a
percentage of sales, due to the very low OG&A rate on retail fuel sales as
compared to non-fuel sales. OG&A expenses, as a percentage of sales
excluding fuel, the 2014 Contributions and the 2014 Adjusted Items, decreased 19
basis points in 2014, compared to 2013, adjusted for the 2013 Adjusted Items.
The decrease in our adjusted OG&A rate in 2014, compared to 2013, resulted
primarily from increased supermarket sales growth, productivity improvements and
effective cost controls at the store level, offset partially by the effect of
our merger with Harris Teeter and increases in credit card fees and incentive
plan costs, as a percentage of sales. OG&A expenses, as a percentage of
sales excluding fuel and the 2013 Adjusted Items, decreased 17 basis points in
2013, compared to 2012, adjusted for the 2012 Adjusted Items. The decrease in
our adjusted OG&A rate in 2013, compared to 2012, resulted primarily from
increased identical supermarket sales growth, productivity improvements and
effective cost controls at the store level, offset partially by increased
incentive plan costs, as a percentage of sales.
Rent Expense
Rent expense was $707 million in 2014, compared to $613 million in 2013
and $628 million in 2012. Rent expense, as a percentage of sales, was 0.65% in
2014, compared to 0.62% in 2013 and 0.65% in 2012. The increase in rent expense,
as a percentage of sales, in 2014, compared to 2013, is due to the effect of our
merger with Harris Teeter, partially offset by our continued emphasis to own
rather than lease, whenever possible, and the benefit of increased sales. The
merger with Harris Teeter, which closed late in fiscal year 2013, increased rent
expense, as a percentage of sales, since Harris Teeter has a higher rent expense
rate compared to the total Company without Harris Teeter. The decrease in rent
expense, as a percentage of sales, in 2013, compared to 2012, is due to our
continued emphasis to own rather than lease, whenever possible, and the benefit
of increased sales.
Depreciation and Amortization Expense
Depreciation and amortization expense was $1.9 billion, compared to $1.7
billion in 2013 and 2012. Depreciation and amortization expense, as a percentage
of sales, was 1.80% in 2014, 1.73% in 2013 and 1.71% in 2012. The increase in
depreciation and amortization expense for 2014, compared to 2013, in total
dollars, was due to the effect of our merger with Harris Teeter and our
increased spending in capital investments, including acquisitions and lease
buyouts, of $3.1 billion in 2014. The increase in depreciation and amortization
expense, as a percentage of sales, from 2014, compared to 2013, is primarily due
to the effect of our merger with Harris Teeter and our increased spending in
capital investments, partially offset by increased supermarket sales. The merger
with Harris Teeter, which closed late in fiscal year 2013, increased our
depreciation and amortization expense, as a percentage of sales, since Harris
Teeter has a higher depreciation expense rate as compared to the total Company
without Harris Teeter. The increase in depreciation and amortization expense, as
a percentage of sales, from 2013, compared to 2012, is primarily the result of
increased spending in capital investments, partially offset by increases in
supermarket sales and the Extra Week.
Operating Profit and Adjusted FIFO Operating Profit
Operating profit was $3.1 billion in 2014, $2.7 billion in 2013 and $2.8
billion in 2012. Operating profit, as a percentage of sales, was 2.89% in 2014,
2.77% in 2013 and 2.86% in 2012. Operating profit, as a percentage of sales,
increased 12 basis points in 2014, compared to 2013, primarily from the effect
of our merger with Harris Teeter, an increase in fuel gross margin rate and a
reduction in warehouse and transportation costs, rent and depreciation and
amortization expenses, as a percentage of sales, partially offset by continued
investments in lower prices for our customers and an increase in the LIFO
charge, as a percentage of sales. Operating profit, as a percentage of sales,
decreased 9 basis points in 2013, compared to 2012, primarily from continued
investments in lower prices for our customers, the 2012 settlement with Visa and
MasterCard and the reduction in our obligation to fund the UFCW Consolidated
Pension Plan created in January 2012 and increased shrink and advertising costs,
as a percentage of sales, partially offset by productivity improvements,
effective cost controls at store level and a reduction in rent expense, as a
percentage of sales.
We calculate FIFO operating profit as operating profit excluding the LIFO
charge. FIFO operating profit is a non-GAAP financial measure and should not be
considered as an alternative to operating profit or any other GAAP measure of
performance. FIFO operating profit should not be reviewed in isolation or
considered as a
A-13
substitute for our
financial results as reported in accordance with GAAP. FIFO operating profit is
an important measure used by management to evaluate operational effectiveness.
Management believes FIFO operating profit is a useful metric to investors and
analysts because it measures our day-to-day merchandising and operational
effectiveness. Since fuel discounts are earned based on in-store purchases, fuel
operating profit does not include fuel discounts, which are allocated to our
in-store supermarket location departments. We also derive OG&A, rent and
depreciation and amortization expenses through the use of estimated allocations
in the calculation of fuel operating profit.
FIFO operating profit was $3.3 billion in 2014 and $2.8 billion in 2013
and 2012. Excluding the Extra Week in 2012, FIFO operating profit was $2.7
billion. FIFO operating profit, as a percentage of sales, was 3.03% in 2014,
2.82% in 2013 and 2.92% in 2012. FIFO operating profit, as a percentage of sales
excluding the Extra Week in 2012, was 2.87%. FIFO operating profit, excluding
the 2014, 2013 and 2012 Adjusted Items and the 2014 Contributions, was $3.5
billion in 2014, $2.8 billion in 2013 and $2.6 billion in 2012. FIFO operating
profit, as a percentage of sales excluding the 2014, 2013 and 2012 Adjusted
Items and the 2014 Contributions, was 3.24% in 2014, 2.84% in 2013 and 2.75% in
2012.
Retail fuel sales lower our overall FIFO operating profit rate due to the
very low FIFO operating profit rate, as a percentage of sales, of retail fuel
sales compared to non-fuel sales. FIFO operating profit, as a percentage of
sales excluding fuel, the 2014 Contributions and the 2014 Adjusted Items,
increased 10 basis points in 2014, compared to 2013, adjusted for the 2013
Adjusted Items. The increase in our adjusted FIFO operating profit rate in 2014,
compared to 2013, was primarily due to the effect of our merger with Harris
Teeter and a reduction in warehouse and transportation costs, improvements in
OG&A, rent and depreciation and amortization expense, as a percentage of
sales, partially offset by continued investments in lower prices for our
customers. FIFO operating profit, as a percentage of sales excluding fuel and
the 2013 Adjusted Items, increased 11 basis points in 2013, compared to 2012,
adjusted for the 2012 Adjusted Items. The increase in our adjusted FIFO
operating profit rate in 2013, compared to 2012, was primarily due to
improvements in OG&A and rent expenses, as a percentage of sales, offset
partially by continued investments in lower prices for our customers and
increased shrink and advertising costs, as a percentage of sales.
Interest Expense
Interest expense totaled $488 million in 2014, $443 million in 2013 and
$462 million in 2012. The increase in interest expense in 2014, compared to
2013, resulted primarily from an increase in net total debt, primarily due to
financing the merger with Harris Teeter and repurchases of our outstanding
common shares. The decrease in interest expense in 2013, compared to 2012,
resulted primarily from a lower weighted average interest rate, offset partially
by a decrease in the net benefit from interest rate swaps and the Extra
Week.
Income Taxes
Our effective income tax rate was 34.1% in 2014, 32.9% in 2013 and 34.5%
in 2012. The 2014 and 2013 tax rates differed from the federal statutory rate
primarily as a result of the utilization of tax credits, the Domestic
Manufacturing Deduction and other changes, partially offset by the effect of
state income taxes. The 2013 benefit from the Domestic Manufacturing deduction
was greater than 2014 and 2012 due to the amendment of prior years tax returns
to claim additional benefit available in years still under review by the
Internal Revenue Service. The 2012 tax rate differed from the federal statutory
rate primarily as a result of the utilization of tax credits, the favorable
resolution of certain tax issues and other changes, partially offset by the
effect of state income taxes.
COMMON SHARE
REPURCHASE PROGRAMS
We maintain share repurchase programs that comply with Rule 10b5-1 of the
Securities Exchange Act of 1934 and allow for the orderly repurchase of our
common shares, from time to time. We made open market purchases of our common
shares totaling $1.1 billion in 2014, $338 million in 2013 and $1.2 billion in
2012 under these repurchase programs. In addition to these repurchase programs,
we also repurchase common shares to reduce dilution resulting from our employee
stock option plans. This program is solely funded by proceeds from stock option
exercises, and the tax benefit from these exercises. We repurchased
approximately $155 million in 2014, $271 million in 2013 and $96 million in 2012
of our common shares under the stock option program.
A-14
The shares repurchased in 2014 were acquired under three separate share
repurchase programs. The first is a $500 million repurchase program that was
authorized by our Board of Directors on October 16, 2012. The second is a $1
billion repurchase program that was authorized by our Board of Directors on
March 13, 2014, that replaced the first referenced program. The third is a
program that uses the cash proceeds from the exercises of stock options by
participants in our stock option and long-term incentive plans as well as the
associated tax benefits. On June 26, 2014, we announced a new $500 million share
repurchase program that was authorized by our Board of Directors, replacing the
$1 billion repurchase program that was authorized by our Board of Directors on
March 13, 2014. As of January 31, 2015, we have not repurchased any shares
utilizing the June 26, 2014 repurchase program.
CAPITAL INVESTMENTS
Capital investments, including changes in construction-in-progress
payables and excluding acquisitions and the purchase of leased facilities,
totaled $2.8 billion in 2014, $2.3 billion in 2013 and $2.0 billion in 2012.
Capital investments for acquisitions totaled $252 million in 2014, $2.3 billion
in 2013 and $122 million in 2012. Payments for acquisitions of $2.3 billion in
2013 relate to our merger with Harris Teeter. Refer to Note 2 to the
Consolidated Financial Statements for more information on the merger with Harris
Teeter. Capital investments for the purchase of leased facilities totaled $135
million in 2014, $108 million in 2013 and $73 million in 2012. The table below
shows our supermarket storing activity and our total food store square
footage:
Supermarket Storing
Activity
|
|
2014 |
|
2013 |
|
2012 |
Beginning of year |
|
2,640 |
|
|
2,424 |
|
|
2,435 |
|
Opened |
|
33 |
|
|
17 |
|
|
18 |
|
Opened (relocation) |
|
13 |
|
|
7 |
|
|
7 |
|
Acquired |
|
|
|
|
227 |
|
|
|
|
Closed (operational) |
|
(48 |
) |
|
(28 |
) |
|
(29 |
) |
Closed (relocation) |
|
(13 |
) |
|
(7 |
) |
|
(7 |
) |
End
of year |
|
2,625 |
|
|
2,640 |
|
|
2,424 |
|
Total food store square footage
(in millions) |
|
162 |
|
|
161 |
|
|
149 |
|
RETURN ON INVESTED
CAPITAL
We calculate return on invested capital (ROIC) by dividing adjusted
operating profit for the prior four quarters by the average invested capital.
Adjusted operating profit is calculated by excluding certain items included in
operating profit, and adding our LIFO charge, depreciation and amortization and
rent. Average invested capital is calculated as the sum of (i) the average of
our total assets, (ii) the average LIFO reserve, (iii) the average accumulated
depreciation and amortization and (iv) a rent factor equal to total rent for the
last four quarters multiplied by a factor of eight; minus (i) the average taxes
receivable, (ii) the average trade accounts payable, (iii) the average accrued
salaries and wages and (iv) the average other current liabilities. Averages are
calculated for return on invested capital by adding the beginning balance of the
first quarter and the ending balance of the fourth quarter, of the last four
quarters, and dividing by two. We use a factor of eight for our total rent as we
believe this is a common factor used by our investors and analysts. ROIC is a
non-GAAP financial measure of performance. ROIC should not be reviewed in
isolation or considered as a substitute for our financial results as reported in
accordance with GAAP. ROIC is an important measure used by management to
evaluate our investment returns on capital. Management believes ROIC is a useful
metric to investors and analysts because it measures how effectively we are
deploying our assets. All items included in the calculation of ROIC are GAAP
measures, excluding certain adjustments to operating profit.
A-15
Although ROIC is a relatively standard financial term, numerous methods
exist for calculating a companys ROIC. As a result, the method used by our
management to calculate ROIC may differ from methods other companies use to
calculate their ROIC. We urge you to understand the methods used by other
companies to calculate their ROIC before comparing our ROIC to that of such
other companies.
The following table provides a calculation of ROIC for 2014 and 2013. The
calculation of the numerator in the table below only includes Harris Teeter in
2014. The calculation of the denominator excludes the assets and liabilities
recorded as of February 1, 2014 for Harris Teeter due to the merger being
completed at the end of 2013 ($ in millions):
|
|
January
31, |
|
February
1, |
|
|
2015 |
|
2014 |
Return on Invested Capital |
|
|
|
|
|
|
|
|
|
|
Numerator |
|
|
|
|
|
|
|
|
|
|
Operating
profit |
|
|
$ |
3,137 |
|
|
|
$ |
2,725 |
|
LIFO charge |
|
|
|
147 |
|
|
|
|
52 |
|
Depreciation and
amortization |
|
|
|
1,948 |
|
|
|
|
1,703 |
|
Rent |
|
|
|
707 |
|
|
|
|
613 |
|
Adjustments for pension
plan agreements |
|
|
|
87 |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
16 |
|
Adjusted operating
profit |
|
|
$ |
6,026 |
|
|
|
$ |
5,109 |
|
|
|
|
|
|
|
|
|
|
|
|
Denominator |
|
|
|
|
|
|
|
|
|
|
Average total
assets |
|
|
$ |
29,919 |
|
|
|
$ |
26,958 |
|
Average taxes receivable
(1) |
|
|
|
(19 |
) |
|
|
|
(10 |
) |
Average LIFO
reserve |
|
|
|
1,197 |
|
|
|
|
1,124 |
|
Average accumulated
depreciation and amortization |
|
|
|
16,057 |
|
|
|
|
14,991 |
|
Average trade accounts
payable |
|
|
|
(4,967 |
) |
|
|
|
(4,683 |
) |
Average accrued salaries
and wages |
|
|
|
(1,221 |
) |
|
|
|
(1,084 |
) |
Average other current
liabilities (2) |
|
|
|
(2,780 |
) |
|
|
|
(2,544 |
) |
Adjustment for Harris
Teeter (3) |
|
|
|
|
|
|
|
|
(1,618 |
) |
Rent x 8 |
|
|
|
5,656 |
|
|
|
|
4,904 |
|
Average invested
capital |
|
|
$ |
43,842 |
|
|
|
$ |
38,038 |
|
Return on Invested Capital |
|
|
|
13.74 |
% |
|
|
|
13.43 |
% |
____________________
(1) |
Taxes receivable were
$20 as of January 31, 2015, $18 as of February 1, 2014 and $2 as of
February 2, 2013. |
(2) |
Other current
liabilities included accrued income taxes of $5 as of January 31, 2015,
$92 as of February 1, 2014 and $128 as of February 2, 2013. Accrued income
taxes are removed from other current liabilities in the calculation of
average invested capital. |
(3) |
Harris Teeters
invested capital has been excluded from the calculation for 2013 due to
the merger being completed at the end of 2013. |
A-16
CRITICAL ACCOUNTING
POLICIES
We have chosen accounting
policies that we believe are appropriate to report accurately and fairly our
operating results and financial position, and we apply those accounting policies
in a consistent manner. Our significant accounting policies are summarized in
Note 1 to the Consolidated Financial Statements.
The preparation of
financial statements in conformity with GAAP requires us to make estimates and
assumptions that affect the reported amounts of assets, liabilities, revenues,
and expenses, and related disclosures of contingent assets and liabilities. We
base our estimates on historical experience and other factors we believe to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results could differ from those
estimates.
We believe that the
following accounting policies are the most critical in the preparation of our
financial statements because they involve the most difficult, subjective or
complex judgments about the effect of matters that are inherently
uncertain.
Self-Insurance
Costs
We primarily are
self-insured for costs related to workers compensation and general liability
claims. The liabilities represent our best estimate, using generally accepted
actuarial reserving methods, of the ultimate obligations for reported claims
plus those incurred but not reported for all claims incurred through January 31,
2015. We establish case reserves for reported claims using case-basis evaluation
of the underlying claim data and we update as information becomes
known.
For both workers
compensation and general liability claims, we have purchased stop-loss coverage
to limit our exposure to any significant exposure on a per claim basis. We are
insured for covered costs in excess of these per claim limits. We account for
the liabilities for workers compensation claims on a present value basis
utilizing a risk-adjusted discount rate. A 25 basis point decrease in our
discount rate would increase our liability by approximately $2 million. General
liability claims are not discounted.
The assumptions underlying
the ultimate costs of existing claim losses are subject to a high degree of
unpredictability, which can affect the liability recorded for such claims. For
example, variability in inflation rates of health care costs inherent in these
claims can affect the amounts realized. Similarly, changes in legal trends and
interpretations, as well as a change in the nature and method of how claims are
settled can affect ultimate costs. Our estimates of liabilities incurred do not
anticipate significant changes in historical trends for these variables, and any
changes could have a considerable effect on future claim costs and currently
recorded liabilities.
Impairments of
Long-Lived Assets
We monitor the carrying
value of long-lived assets for potential impairment each quarter based on
whether certain triggering events have occurred. These events include current
period losses combined with a history of losses or a projection of continuing
losses or a significant decrease in the market value of an asset. When a
triggering event occurs, we perform an impairment calculation, comparing
projected undiscounted cash flows, utilizing current cash flow information and
expected growth rates related to specific stores, to the carrying value for
those stores. If we identify impairment for long-lived assets to be held and
used, we compare the assets current carrying value to the assets fair value.
Fair value is determined based on market values or discounted future cash flows.
We record impairment when the carrying value exceeds fair market value. With
respect to owned property and equipment held for disposal, we adjust the value
of the property and equipment to reflect recoverable values based on our
previous efforts to dispose of similar assets and current economic conditions.
We recognize impairment for the excess of the carrying value over the estimated
fair market value, reduced by estimated direct costs of disposal. We recorded
asset impairments in the normal course of business totaling $37 million in 2014,
$39 million in 2013 and $18 million in 2012. We record costs to reduce the
carrying value of long-lived assets in the Consolidated Statements of Operations
as Operating, general and administrative expense.
A-17
The factors that most significantly affect the impairment calculation are
our estimates of future cash flows. Our cash flow projections look several years
into the future and include assumptions on variables such as inflation, the
economy and market competition. Application of alternative assumptions and
definitions, such as reviewing long-lived assets for impairment at a different
level, could produce significantly different results.
Goodwill
Our goodwill totaled $2.3 billion as of January 31, 2015. We review
goodwill for impairment in the fourth quarter of each year, and also upon the
occurrence of triggering events. We perform reviews of each of our operating
divisions and variable interest entities (collectively, reporting units) that
have goodwill balances. Fair value is determined using a multiple of earnings,
or discounted projected future cash flows, and we compare fair value to the
carrying value of a reporting unit for purposes of identifying potential
impairment. We base projected future cash flows on managements knowledge of the
current operating environment and expectations for the future. If we identify
potential for impairment, we measure the fair value of a reporting unit against
the fair value of its underlying assets and liabilities, excluding goodwill, to
estimate an implied fair value of the reporting units goodwill. We recognize
goodwill impairment for any excess of the carrying value of the reporting units
goodwill over the implied fair value.
In 2014, goodwill increased $160 million due to our merger with
Vitacost.com which closed on August 18, 2014. In addition, goodwill increased $9
million in 2014 and $901 million in 2013 due to our merger with Harris Teeter
which closed on January 28, 2014. For additional information related to the
allocation of the purchase price for Vitacost.com and Harris Teeter, refer to
Note 2 to the Consolidated Financial Statements.
The annual evaluation of goodwill performed for our other reporting units
during the fourth quarter of 2014, 2013 and 2012 did not result in impairment.
Based on current and future expected cash flows, we believe goodwill impairments
are not reasonably likely. A 10% reduction in fair value of our reporting units
would not indicate a potential for impairment of our goodwill
balance.
For additional information relating to our results of the goodwill
impairment reviews performed during 2014, 2013 and 2012 see Note 3 to the
Consolidated Financial Statements.
The impairment review requires the extensive use of management judgment
and financial estimates. Application of alternative estimates and assumptions,
such as reviewing goodwill for impairment at a different level, could produce
significantly different results. The cash flow projections embedded in our
goodwill impairment reviews can be affected by several factors such as
inflation, business valuations in the market, the economy and market
competition.
Store Closing Costs
We provide for closed store liabilities on the basis of the present value
of the estimated remaining non-cancellable lease payments after the closing
date, net of estimated subtenant income. We estimate the net lease liabilities
using a discount rate to calculate the present value of the remaining net rent
payments on closed stores. We usually pay closed store lease liabilities over
the lease terms associated with the closed stores, which generally have
remaining terms ranging from one to 20 years. Adjustments to closed store
liabilities primarily relate to changes in subtenant income and actual exit
costs differing from original estimates. We make adjustments for changes in
estimates in the period in which the change becomes known. We review store
closing liabilities quarterly to ensure that any accrued amount that is not a
sufficient estimate of future costs is adjusted to earnings in the proper
period.
We estimate subtenant income, future cash flows and asset recovery values
based on our experience and knowledge of the market in which the closed store is
located, our previous efforts to dispose of similar assets and current economic
conditions. The ultimate cost of the disposition of the leases and the related
assets is affected by current real estate markets, inflation rates and general
economic conditions.
A-18
We reduce owned stores held for disposal to their estimated net
realizable value. We account for costs to reduce the carrying values of
property, equipment and leasehold improvements in accordance with our policy on
impairment of long-lived assets. We classify inventory write-downs in connection
with store closings, if any, in Merchandise costs. We expense costs to
transfer inventory and equipment from closed stores as they are
incurred.
Post-Retirement Benefit Plans
We account for our defined benefit pension plans using the recognition
and disclosure provisions of GAAP, which require the recognition of the funded
status of retirement plans on the Consolidated Balance Sheet. We record, as a
component of Accumulated Other Comprehensive Income (AOCI), actuarial gains or
losses, prior service costs or credits and transition obligations that have not
yet been recognized.
The determination of our obligation and expense for Company-sponsored
pension plans and other post-retirement benefits is dependent upon our selection
of assumptions used by actuaries in calculating those amounts. Those assumptions
are described in Note 15 to the Consolidated Financial Statements and include,
among others, the discount rate, the expected long-term rate of return on plan
assets, mortality and the rate of increases in compensation and health care
costs. Actual results that differ from our assumptions are accumulated and
amortized over future periods and, therefore, generally affect our recognized
expense and recorded obligation in future periods. While we believe that our
assumptions are appropriate, significant differences in our actual experience or
significant changes in our assumptions, including the discount rate used and the
expected return on plan assets, may materially affect our pension and other
post-retirement obligations and our future expense. Note 15 to the Consolidated
Financial Statements discusses the effect of a 1% change in the assumed health
care cost trend rate on other post-retirement benefit costs and the related
liability.
The objective of our discount rate assumptions was intended to reflect
the rates at which the pension benefits could be effectively settled. In making
this determination, we take into account the timing and amount of benefits that
would be available under the plans. Our methodology for selecting the discount
rates was to match the plans cash flows to that of a hypothetical bond
portfolio whose cash flow from coupons and maturities match the plans projected
benefit cash flows. The discount rates are the single rates that produce the
same present value of cash flows. The selection of the 3.87% and 3.74% discount
rates as of year-end 2014 for pension and other benefits, respectively,
represents the hypothetical bond portfolio using bonds with an AA or better
rating constructed with the assistance of an outside consultant. We utilized a
discount rate of 4.99% and 4.68% as of year-end 2013 for pension and other
benefits, respectively. A 100 basis point increase in the discount rate would
decrease the projected pension benefit obligation as of January 31, 2015, by
approximately $500 million.
To determine the expected rate of return on pension plan assets held by
Kroger for 2014, we considered current and forecasted plan asset allocations as
well as historical and forecasted rates of return on various asset categories.
In 2014, we decreased our assumed pension plan investment return rate to 7.44%,
compared to 8.50% in 2013 and 2012. Our pension plans average rate of return
was 7.58% for the 10 calendar years ended December 31, 2014, net of all
investment management fees and expenses. The value of all investments in our
Company-sponsored defined benefit pension plans during the calendar year ending
December 31, 2014, net of investment management fees and expenses, increased
5.65%. For the past 20 years, our average annual rate of return has been 9.58%. Based on the above information and forward looking assumptions for investments
made in a manner consistent with our target allocations, we believe a 7.44% rate
of return assumption is reasonable for 2014. See Note 15 to the Consolidated
Financial Statements for more information on the asset allocations of pension
plan assets.
On January 31, 2015, we adopted new mortality tables based on mortality
experience and assumptions for generational mortality improvement in calculating
our 2014 year end pension obligation. The tables assume an improvement in life
expectancy and increase our benefit obligation and future expenses. We used the
RP-2000 projected 2021 mortality table in calculating our 2013 year end pension
obligation and 2014, 2013 and 2012 pension expense.
A-19
Sensitivity to changes in the major assumptions used in the calculation
of Krogers pension plan liabilities is illustrated below (in millions).
|
|
|
|
Projected
Benefit |
|
|
|
|
Percentage |
|
Obligation |
|
Expense |
|
|
Point
Change |
|
Decrease/(Increase) |
|
Decrease/(Increase) |
Discount Rate |
|
+/-
1.0% |
|
|
$ |
500/(613 |
) |
|
$30/($40) |
Expected Return on Assets |
|
+/-
1.0% |
|
|
|
|
|
|
$31/($31) |
In 2014, we did not contribute to our Company-sponsored defined benefit
plans and do not expect to make any contributions to this plan in 2015. We
contributed $100 million in 2013 and $71 million in 2012 to our
Company-sponsored defined benefit pension plans. Among other things, investment
performance of plan assets, the interest rates required to be used to calculate
the pension obligations, and future changes in legislation, will determine the
amounts of contributions.
We contributed and expensed $177 million in 2014, $148 million in 2013
and $140 million in 2012 to employee 401(k) retirement savings accounts. The
increase in 2014 is due to the effect of our merger with Harris Teeter. The
401(k) retirement savings account plans provide to eligible employees both
matching contributions and automatic contributions from the Company based on
participant contributions, plan compensation, and length of service.
Multi-Employer Pension Plans
We contribute to various multi-employer pension plans, including the UFCW
Consolidated Pension Plan, based on obligations arising from collective
bargaining agreements. We are designated as the named fiduciary of the UFCW
Consolidated Pension Plan and have sole investment authority over these assets.
These multi-employer pension plans provide retirement benefits to participants
based on their service to contributing employers. The benefits are paid from
assets held in trust for that purpose. Trustees are appointed in equal number by
employers and unions. The trustees typically are responsible for determining the
level of benefits to be provided to participants as well as for such matters as
the investment of the assets and the administration of the plans.
In the first quarter of 2014, we incurred a charge of $56 million
(after-tax) related to commitments and withdrawal liabilities associated with
the restructuring of pension plan agreements, of which $15 million was
contributed to the UFCW Consolidated Pension Plan in 2014. We are required to
contribute an additional $75 million over the next four years related to the
restructuring of these pension plan agreements.
We recognize expense in connection with these plans as contributions are
funded or, in the case of the UFCW Consolidated Pension Plan, when commitments
are made, in accordance with GAAP. We made cash contributions to these plans of
$297 million in 2014, $228 million in 2013 and $492 million in 2012. The cash
contributions for 2012 include our $258 million contribution to the UFCW
Consolidated Pension Plan in the fourth quarter of 2012.
Based on the most recent information available to us, we believe that the
present value of actuarially accrued liabilities in most of the multi-employer
plans to which we contribute substantially exceeds the value of the assets held
in trust to pay benefits. We have attempted to estimate the amount by which
these liabilities exceed the assets, (i.e., the amount of underfunding), as of
December 31, 2014. Because we are only one of a number of employers contributing
to these plans, we also have attempted to estimate the ratio of our
contributions to the total of all contributions to these plans in a year as a
way of assessing our share of the underfunding. Nonetheless, the underfunding
is not a direct obligation or liability of ours or of any employer except as
noted above. As of December 31, 2014, we estimate that our share of the
underfunding of multi-employer plans to which we contribute was $1.8 billion,
pre-tax, or $1.2 billion, after-tax. This represents an increase in the
estimated amount of underfunding of approximately $200 million, pre-tax, or $130
million, after-tax, as of December 31, 2014, compared to December 31, 2013. The
increase in the amount of underfunding is attributable to lower than expected
returns on the assets held in the multi-employer plans during 2014. Our estimate
is based on the most current information available to us including actuarial
evaluations and other data (that include the estimates of others), and such
information may be outdated or otherwise unreliable.
A-20
We have made and disclosed
this estimate not because, except as noted above, this underfunding is a direct
liability of ours. Rather, we believe the underfunding is likely to have
important consequences. In 2015, we expect to contribute approximately $250
million to multi-employer pension plans, subject to collective bargaining and
capital market conditions. We expect increases in expense as a result of
increases in multi-employer pension plan contributions over the next few years.
Finally, underfunding means that, in the event we were to exit certain markets
or otherwise cease making contributions to these funds, we could trigger a
substantial withdrawal liability. Any adjustment for withdrawal liability will
be recorded when it is probable that a liability exists and can be reasonably
estimated, in accordance with GAAP.
The amount of underfunding
described above is an estimate and could change based on contract negotiations,
returns on the assets held in the multi-employer plans and benefit payments. The
amount could decline, and our future expense would be favorably affected, if the
values of the assets held in the trust significantly increase or if further
changes occur through collective bargaining, trustee action or favorable
legislation. On the other hand, our share of the underfunding could increase and
our future expense could be adversely affected if the asset values decline, if
employers currently contributing to these funds cease participation or if
changes occur through collective bargaining, trustee action or adverse
legislation. We continue to evaluate our potential exposure to under-funded
multi-employer pension plans. Although these liabilities are not a direct
obligation or liability of ours, any commitments to fund certain multi-employer
plans will be expensed when our commitment is probable and an estimate can be
made.
See Note 16 to the
Consolidated Financial Statements for more information relating to our
participation in these multi-employer pension plans.
Uncertain Tax
Positions
We review the tax positions
taken or expected to be taken on tax returns to determine whether and to what
extent a benefit can be recognized in our Consolidated Financial Statements.
Refer to Note 5 to the Consolidated Financial Statements for the amount of
unrecognized tax benefits and other disclosures related to uncertain tax
positions.
Various taxing authorities
periodically audit our income tax returns. These audits include questions
regarding our tax filing positions, including the timing and amount of
deductions and the allocation of income to various tax jurisdictions. In
evaluating the exposures connected with these various tax filing positions,
including state and local taxes, we record allowances for probable exposures. A
number of years may elapse before a particular matter, for which an allowance
has been established, is audited and fully resolved. As of January 31, 2015, the
Internal Revenue Service had concluded its examination of our 2008 and 2009
federal tax returns. Tax years 2010 through 2013 remain under
examination.
The assessment of our tax
position relies on the judgment of management to estimate the exposures
associated with our various filing positions.
Share-Based Compensation
Expense
We account for stock
options under the fair value recognition provisions of GAAP. Under this method,
we recognize compensation expense for all share-based payments granted. We
recognize share-based compensation expense, net of an estimated forfeiture rate,
over the requisite service period of the award. In addition, we record expense
for restricted stock awards in an amount equal to the fair market value of the
underlying stock on the grant date of the award, over the period the award
restrictions lapse.
Inventories
Inventories are stated at
the lower of cost (principally on a LIFO basis) or market. In total,
approximately 95% of inventories in 2014 and 2013 were valued using the LIFO
method. Cost for the balance of the inventories, including substantially all
fuel inventories, was determined using the FIFO method. Replacement cost was
higher than the carrying amount by $1.2 billion at January 31, 2015 and February
1, 2014. We follow the Link-Chain, Dollar-Value LIFO method for purposes of
calculating our LIFO charge or credit.
A-21
We follow the item-cost
method of accounting to determine inventory cost before the LIFO adjustment for
substantially all store inventories at our supermarket divisions. This method
involves counting each item in inventory, assigning costs to each of these items
based on the actual purchase costs (net of vendor allowances and cash discounts)
of each item and recording the cost of items sold. The item-cost method of
accounting allows for more accurate reporting of periodic inventory balances and
enables management to more precisely manage inventory. In addition,
substantially all of our inventory consists of finished goods and is recorded at
actual purchase costs (net of vendor allowances and cash discounts).
We evaluate inventory
shortages throughout the year based on actual physical counts in our facilities.
We record allowances for inventory shortages based on the results of recent
physical counts to provide for estimated shortages from the last physical count
to the financial statement date.
Vendor
Allowances
We recognize all vendor
allowances as a reduction in merchandise costs when the related product is sold.
In most cases, vendor allowances are applied to the related product cost by
item, and therefore reduce the carrying value of inventory by item. When it is
not practicable to allocate vendor allowances to the product by item, we
recognize vendor allowances as a reduction in merchandise costs based on
inventory turns and as the product is sold. We recognized approximately $6.9
billion in 2014 and $6.2 billion in 2013 and 2012 of vendor allowances as a
reduction in merchandise costs. We recognized approximately 93% of all vendor
allowances in the item cost with the remainder being based on inventory
turns.
Recently Adopted Accounting Standards
In February 2013, the
Financial Accounting Standards Board (FASB) amended its standards on
comprehensive income by requiring disclosure of information about amounts
reclassified out of AOCI by component. Specifically, the amendment requires
disclosure of the effect of significant reclassifications out of AOCI on the
respective line items in net income in which the item was reclassified if the
amount being reclassified is required to be reclassified to net income in its
entirety in the same reporting period. It requires cross reference to other
disclosures that provide additional detail for amounts that are not required to
be reclassified in their entirety in the same reporting period. This new
disclosure became effective for us beginning February 3, 2013, and was adopted
prospectively in accordance with the standard. See Note 9 to the Consolidated
Financial Statements for our disclosures related to this amended
standard.
In July 2013, the FASB
amended Accounting Standards Codification 740, Income Taxes. The amendment
provides guidance on the financial statement presentation of an unrecognized tax
benefit, as either a reduction of a deferred tax asset or as a liability, when a
net operating loss carryforward, similar tax loss, or a tax credit carryforward
exists. This amendment became effective for us beginning February 2, 2014, and
was adopted prospectively in accordance with the standard. The adoption of this
amendment did not have an effect on net income and did not have a significant
effect on the Consolidated Balance Sheets.
Recently Issued Accounting Standards
In May 2014, FASB issued
Accounting Standards Update (ASU) 2014-09, Revenue from Contracts with
Customers, which provides guidance for revenue recognition. The standards core
principle is that a company will recognize revenue when it transfers promised
goods or services to customers in an amount that reflects the consideration to
which the company expects to be entitled in exchange for those goods or
services. This guidance will be effective for us in the first quarter of its
fiscal year ending January 27, 2018. Early adoption is not permitted. We are
currently in the process of evaluating the effect of adoption of this ASU on the
Consolidated Financial Statements.
A-22
Liquidity and Capital Resources
Cash Flow
Information
Net cash provided by
operating activities
We generated $4.2 billion
of cash from operations in 2014, compared to $3.6 billion in 2013 and $3.0
billion in 2012. The cash provided by operating activities came from net
earnings including non-controlling interests adjusted primarily for non-cash
expenses of depreciation and amortization, the LIFO charge and changes in
working capital. The increase in net cash provided by operating activities in
2014, compared to 2013, resulted primarily due to an increase in net earnings
including non-controlling interests, which include the results of Harris Teeter,
an increase in non-cash items, a reduction in contributions to Company-sponsored
pension plans and changes in working capital. The increase in non-cash items in
2014, as compared to 2013, was primarily due to increases in depreciation and
amortization expense and the LIFO charge.
Cash provided (used) by
operating activities for changes in working capital was ($49) million in 2014,
compared to $63 million in 2013 and ($211) million in 2012. The increase in cash
used by operating activities for changes in working capital in 2014, compared to
2013, was primarily due to an increase in cash used for receivables and a
decrease in cash provided by trade accounts payables, partially offset by an
increase in cash provided by accrued expenses.
The increase in net cash
provided by operating activities in 2013, compared to 2012, resulted primarily
due to changes in working capital and long-term liabilities. The increase in
cash provided by operating activities for changes in working capital in 2013,
compared to 2012, was primarily due to a decrease in cash used for deposits
in-transit, prepaid expenses and receivables. The use of cash for the payment of
long-term liabilities decreased in 2013, as compared to 2012, primarily due to
our funding of the remaining unfunded actuarial accrued liability for the UFCW
Consolidated Pension Plan in 2012.
The amount of cash paid for
income taxes increased in 2014, compared to 2013, primarily due to an increase
in net earnings including non-controlling interests. The amount of cash paid for
income taxes increased in 2013, compared to 2012, primarily due to additional
deductions taken in 2012 related to the funding of our pension contributions and
union health benefits.
Net cash used by
investing activities
Cash used by investing
activities was $3.1 billion in 2014, compared to $4.8 billion in 2013 and $2.2
billion in 2012. The amount of cash used by investing activities decreased in
2014, compared to 2013, due to decreased payments for acquisitions, offset
primarily by increased payments for capital investments. The amount of cash used
by investing activities increased in 2013, compared to 2012, due to increased
payments for capital investments and acquisitions. Capital investments,
including payments for lease buyouts and excluding acquisitions, were $2.8
billion in 2014, $2.3 billion in 2013 and $2.1 billion in 2012. Acquisitions
were $252 million in 2014, $2.3 billion in 2013 and $122 million in 2012. The
decrease in payments for acquisitions in 2014, compared to 2013, and the
increase in payments for acquisitions in 2013, compared to 2012, was primarily
due to our merger with Harris Teeter in 2013. Refer to the Capital Investments
section for an overview of our supermarket storing activity during the last
three years.
Net cash provided (used)
by financing activities
Financing activities
provided (used) cash of ($1.2) billion in 2014, $1.4 billion in 2013 and ($721)
million in 2012. The increase in the amount of cash used for financing
activities in 2014, compared to 2013, was primarily related to decreased
proceeds from the issuance of long-term debt and increased treasury stock
purchases, offset partially by decreased payments on long-term debt. The
increase in cash provided by financing activities in 2013, compared to 2012, was
primarily related to increased proceeds from the issuance of long-term debt,
primarily to finance our merger with Harris Teeter, and a reduction in payments
on long-term debt and treasury stock purchases, offset partially by net payments
on our commercial paper program. Proceeds from the issuance of long-term debt
were $576 million in 2014, $3.5 billion in 2013 and $863 million in 2012. Net
borrowings (payments) provided from our commercial paper program were $25
million in 2014,
A-23
($395) million in 2013 and
$1.3 billion in 2012. Please refer to the Debt Management section of MD&A
for additional information. We repurchased $1.3 billion of Kroger common shares
in 2014, compared to $609 million in 2013 and $1.3 billion in 2012. We paid
dividends totaling $338 million in 2014, $319 million in 2013 and $267 million
in 2012.
Debt
Management
Total debt, including both
the current and long-term portions of capital lease and lease-financing
obligations increased $346 million to $11.7 billion as of year-end 2014,
compared to 2013. The increase in 2014, compared to 2013, resulted primarily
from the issuance of (i) $500 million of senior notes bearing an interest rate
of 2.95% and (ii) an increase in commercial paper of $25 million, partially
offset by payments at maturity of $300 million of senior notes bearing an
interest rate of 4.95%. The increase in financing obligations was due to
partially funding our outstanding common share repurchases.
Total debt, including both
the current and long-term portions of capital lease and lease-financing
obligations increased $2.4 billion to $11.3 billion as of year-end 2013,
compared to 2012. The increase in 2013, compared to 2012, resulted from the
issuance of (i) $600 million of senior notes bearing an interest rate of 3.85%,
(ii) $400 million of senior notes bearing an interest rate of 5.15%, (iii) $500
million of senior notes bearing an interest rate of 3-month London Inter-Bank
Offering Rate (LIBOR) plus 53 basis points, (iv) $300 million of senior notes
bearing an interest rate of 1.2%, (v) $500 million of senior notes bearing an
interest rate of 2.3%, (vi) $700 million of senior notes bearing an interest
rate of 3.3%, and (vii) $500 million of senior notes bearing an interest rate of
4.0%, offset partially by a reduction in commercial paper of $395 million and
payments at maturity of $400 million of senior notes bearing an interest rate of
5.0% and $600 million of senior notes bearing an interest rate of 7.5%. This
increase in financing obligations was due to partially funding our merger with
Harris Teeter, refinancing our debt maturities in 2013 and replacing the senior
notes that matured in the fourth quarter of 2012, offset partially by the
payment at maturity of our $400 million of senior notes bearing an interest rate
of 5.0%, $600 million of senior notes bearing an interest rate of 7.5% and a
reduction in commercial paper of $395 million.
Liquidity
Needs
We estimate our liquidity
needs over the next twelve-month period to be approximately $5.2 billion, which
includes anticipated requirements for working capital, capital expenditures,
interest payments and scheduled principal payments of debt and commercial paper,
offset by cash and temporary cash investments on hand at the end of 2014. Based
on current operating trends, we believe that cash flows from operating
activities and other sources of liquidity, including borrowings under our
commercial paper program and bank credit facility, will be adequate to meet our
liquidity needs for the next twelve months and for the foreseeable future beyond
the next twelve months. We have approximately $1.3 billion of commercial paper
and $500 million of senior notes maturing in the next twelve months, which is
included in the $5.2 billion in estimated liquidity needs. We expect to
refinance this debt, in 2015, by issuing additional senior notes or commercial
paper on favorable terms based on our past experience. We also currently plan to
continue repurchases of common shares under the Companys share repurchase
programs. We believe we have adequate coverage of our debt covenants to continue
to maintain our current debt ratings and to respond effectively to competitive
conditions.
Factors Affecting
Liquidity
We can currently borrow on
a daily basis approximately $2.75 billion under our commercial paper (CP)
program. At January 31, 2015, we had $1.3 billion of CP borrowings outstanding.
CP borrowings are backed by our credit facility, and reduce the amount we can
borrow under the credit facility. If our short-term credit ratings fall, the
ability to borrow under our current CP program could be adversely affected for a
period of time and increase our interest cost on daily borrowings under our CP
program. This could require us to borrow additional funds under the credit
facility, under which we believe we have sufficient capacity. However, in the
event of a ratings decline, we do not anticipate that our borrowing capacity
under our CP program would be any lower than $500 million on a daily basis.
Although our ability to borrow under the credit facility is not affected by our
credit rating, the interest cost on borrowings under the credit
A-24
facility could be affected
by an increase in our Leverage Ratio. As of March 27, 2015, we had $1.0 billion
of CP borrowings outstanding. The decrease as of March 27, 2015, compared to
year-end 2014, was due to applying cash from operations against our year-end CP
outstanding borrowings.
Our credit facility
requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio
(our financial covenants). A failure to maintain our financial covenants would
impair our ability to borrow under the credit facility. These financial
covenants and ratios are described below:
● |
Our Leverage Ratio (the ratio of
Net Debt to Consolidated EBITDA, as defined in the credit facility) was
2.06 to 1 as of January 31, 2015. If this ratio were to exceed 3.50 to 1,
we would be in default of our credit facility and our ability to borrow
under the facility would be impaired. In addition, our Applicable Margin
on borrowings is determined by our Leverage Ratio. |
|
|
● |
Our Fixed Charge Coverage Ratio
(the ratio of Consolidated EBITDA plus Consolidated Rental Expense to
Consolidated Cash Interest Expense plus Consolidated Rental Expense, as
defined in the credit facility) was 4.99 to 1 as of January 31, 2015. If
this ratio fell below 1.70 to 1, we would be in default of our credit
facility and our ability to borrow under the facility would be
impaired. |
Our credit agreement is
more fully described in Note 6 to the Consolidated Financial Statements. We were
in compliance with our financial covenants at year-end 2014.
The tables below illustrate
our significant contractual obligations and other commercial commitments, based
on year of maturity or settlement, as of January 31, 2015 (in millions of
dollars):
|
|
2015 |
|
2016 |
|
2017 |
|
2018 |
|
2019 |
|
Thereafter |
|
Total |
Contractual Obligations (1)
(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt (3) |
|
$ |
1,844 |
|
$ |
1,299 |
|
$ |
736 |
|
$ |
1,008 |
|
$ |
773 |
|
|
$ |
5,425 |
|
|
$ |
11,085 |
Interest on long-term debt (4) |
|
|
431 |
|
|
405 |
|
|
371 |
|
|
335 |
|
|
299 |
|
|
|
2,700 |
|
|
|
4,541 |
Capital lease
obligations |
|
|
63 |
|
|
60 |
|
|
58 |
|
|
49 |
|
|
45 |
|
|
|
409 |
|
|
|
684 |
Operating lease obligations |
|
|
837 |
|
|
773 |
|
|
699 |
|
|
629 |
|
|
554 |
|
|
|
2,877 |
|
|
|
6,369 |
Low-income housing
obligations |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Financed lease obligations |
|
|
14 |
|
|
14 |
|
|
14 |
|
|
14 |
|
|
14 |
|
|
|
104 |
|
|
|
174 |
Self-insurance liability
(5) |
|
|
216 |
|
|
123 |
|
|
88 |
|
|
58 |
|
|
35 |
|
|
|
79 |
|
|
|
599 |
Construction commitments (6) |
|
|
366 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
366 |
Purchase obligations (7) |
|
|
509 |
|
|
116 |
|
|
84 |
|
|
45 |
|
|
37 |
|
|
|
44 |
|
|
|
835 |
Total |
|
$ |
4,281 |
|
$ |
2,790 |
|
$ |
2,050 |
|
$ |
2,138 |
|
$ |
1,757 |
|
|
$ |
11,638 |
|
|
$ |
24,654 |
Other Commercial
Commitments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Standby letters of credit |
|
$ |
233 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
233 |
Surety bonds |
|
|
314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
310 |
Total |
|
$ |
547 |
|
$ |
|
|
$ |
|
|
$ |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
547 |
____________________
(1) |
The
contractual obligations table excludes funding of pension and other
postretirement benefit obligations, which totaled approximately $25
million in 2014. This table also excludes contributions under various
multi-employer pension plans, which totaled $297 million in
2014. |
|
|
(2) |
The
liability related to unrecognized tax benefits has been excluded from the
contractual obligations table because a reasonable estimate of the timing
of future tax settlements cannot be determined. |
|
(3) |
As of
January 31, 2015, we had $1.3 billion of borrowings of commercial paper
and no borrowings under our credit agreement. |
|
(4) |
Amounts
include contractual interest payments using the interest rate as of
January 31, 2015, and stated fixed and swapped interest rates, if
applicable, for all other debt instruments. |
|
(5) |
The
amounts included in the contractual obligations table for self-insurance
liability related to workers compensation claims have been stated on a
present value basis. |
A-25
(6) |
Amounts
include funds owed to third parties for projects currently under
construction. These amounts are reflected in other current liabilities in
our Consolidated Balance Sheets. |
|
|
(7) |
Amounts
include commitments, many of which are short-term in nature, to be
utilized in the normal course of business, such as several contracts to
purchase raw materials utilized in our manufacturing plants and several
contracts to purchase energy to be used in our stores and manufacturing
facilities. Our obligations also include management fees for facilities
operated by third parties and outside service contracts. Any upfront
vendor allowances or incentives associated with outstanding purchase
commitments are recorded as either current or long-term liabilities in our
Consolidated Balance Sheets. |
As of January 31, 2015, we
maintained a $2.75 billion (with the ability to increase by $750 million),
unsecured revolving credit facility that, unless extended, terminates on June
30, 2019. Outstanding borrowings under the credit agreement and commercial paper
borrowings, and some outstanding letters of credit, reduce funds available under
the credit agreement. As of January 31, 2015, we had $1.3 billion of borrowings
of commercial paper and no borrowings under our credit agreement. The
outstanding letters of credit that reduce funds available under our credit
agreement totaled $10 million as of January 31, 2015.
In addition to the
available credit mentioned above, as of January 31, 2015, we had authorized for
issuance $2 billion of securities under a shelf registration statement filed
with the SEC and effective on December 13, 2013.
We also maintain surety
bonds related primarily to our self-insured workers compensation claims. These
bonds are required by most states in which we are self-insured for workers
compensation and are placed with predominately third-party insurance providers
to insure payment of our obligations in the event we are unable to meet our
claim payment obligations up to our self-insured retention levels. These bonds
do not represent liabilities of ours, as we already have reserves on our books
for the claims costs. Market changes may make the surety bonds more costly and,
in some instances, availability of these bonds may become more limited, which
could affect our costs of, or access to, such bonds. Although we do not believe
increased costs or decreased availability would significantly affect our ability
to access these surety bonds, if this does become an issue, we would issue
letters of credit, in states where allowed, against our credit facility to meet
the state bonding requirements. This could increase our cost and decrease the
funds available under our credit facility.
We also are contingently
liable for leases that have been assigned to various third parties in connection
with facility closings and dispositions. We could be required to satisfy
obligations under the leases if any of the assignees are unable to fulfill their
lease obligations. Due to the wide distribution of our assignments among third
parties, and various other remedies available to us, we believe the likelihood
that we will be required to assume a material amount of these obligations is
remote. We have agreed to indemnify certain third-party logistics operators for
certain expenses, including pension trust fund contribution obligations and
withdrawal liabilities.
In addition to the above,
we enter into various indemnification agreements and take on indemnification
obligations in the ordinary course of business. Such arrangements include
indemnities against third party claims arising out of agreements to provide
services to us; indemnities related to the sale of our securities; indemnities
of directors, officers and employees in connection with the performance of their
work; and indemnities of individuals serving as fiduciaries on benefit plans.
While our aggregate indemnification obligation could result in a material
liability, we are not aware of any current matter that could result in a
material liability.
Outlook
This discussion and
analysis contains certain forward-looking statements about our future
performance. These statements are based on managements assumptions and beliefs
in light of the information currently available to it. Such statements are
indicated by words such as comfortable, committed, will, expect, goal,
should, intend, target, believe, anticipate, plan, and similar words
or phrases. These forward-looking statements are subject to uncertainties and
other factors that could cause actual results to differ materially.
A-26
Statements elsewhere in
this report and below regarding our expectations, projections, beliefs,
intentions or strategies are forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934. While we believe that the
statements are accurate, uncertainties about the general economy, our labor
relations, our ability to execute our plans on a timely basis and other
uncertainties described below could cause actual results to differ
materially.
● |
We expect net
earnings per diluted share in the range of $3.80-$3.90 for fiscal year
2015, which is consistent with our long-term net earnings per diluted
share growth rate of 8 11%, growing off of 2014 adjusted net earnings of
$3.52 per diluted share. |
|
|
● |
We expect identical
supermarket sales growth, excluding fuel sales, of 3.0% -4.0% in fiscal
year 2015. |
|
|
● |
We expect full-year
FIFO non-fuel operating margin for 2015 to expand slightly compared to
2014, excluding the 2014 Adjusted Items. |
|
|
● |
For 2015, we expect
our annualized LIFO charge to be approximately $75
million. |
|
|
● |
For 2015, we expect
interest expense to be approximately $480 million. |
|
|
● |
We plan to use cash
flow primarily to maintain our current investment grade debt rating, fund
capital investments, fund our cash dividend and repurchase shares of
common stock. |
|
|
● |
We expect to obtain
sales growth from new square footage, as well as from increased
productivity from existing locations. |
|
|
● |
We expect capital
investments, excluding mergers, acquisitions and purchases of leased
facilities, to be $3.0 - $3.3 billion. We expect total food store square
footage for 2015 to grow approximately 2.0% - 2.5% before mergers,
acquisitions and operational closings. |
|
|
● |
For 2015, we expect
our effective tax rate to be approximately 35.0%, excluding the resolution
of certain tax items and potential changes to tax
legislation. |
|
|
● |
We do not anticipate
goodwill impairments in 2015. |
|
|
● |
For 2015, we expect
to contribute approximately $250 million to multi-employer pension funds.
We continue to evaluate and address our potential exposure to under-funded
multi-employer pension plans. Although these liabilities are not a direct
obligation or liability of Kroger, any new agreements that would commit us
to fund certain multi-employer plans will be expensed when our commitment
is probable and an estimate can be made. |
|
|
● |
In 2015, we will
negotiate agreements with the UFCW for store associates in Columbus,
Denver, Las Vegas, Louisville, Memphis and Portland, and agreements with
the Teamsters covering several distribution and manufacturing facilities.
Negotiations this year will be challenging as we must have competitive
cost structures in each market while meeting our associates needs for
solid wages and good quality, affordable health care and retirement
benefits. |
Various uncertainties and
other factors could cause actual results to differ materially from those
contained in the forward-looking statements. These include:
● |
The extent to which
our sources of liquidity are sufficient to meet our requirements may be
affected by the state of the financial markets and the effect that such
condition has on our ability to issue commercial paper at acceptable
rates. Our ability to borrow under our committed lines of credit,
including our bank credit facilities, could be impaired if one or more of
our lenders under those lines is unwilling or unable to honor its
contractual obligation to lend to us, or in the event that natural
disasters or weather conditions interfere with the ability of our lenders
to lend to us. Our ability to refinance maturing debt may be affected by
the state of the financial markets. |
|
|
● |
Our ability to use
cash flow to continue to maintain our investment grade debt rating and
repurchase shares, fund dividends and increase capital investments, could
be affected by unanticipated increases in net total debt, our inability to
generate cash flow at the levels anticipated, and our failure to generate
expected earnings. |
A-27
● |
Our ability to
achieve sales, earnings and cash flow goals may be affected by: labor
negotiations or disputes; changes in the types and numbers of businesses
that compete with us; pricing and promotional activities of existing and
new competitors, including non-traditional competitors, and the
aggressiveness of that competition; our response to these actions; the
state of the economy, including interest rates, the inflationary and
deflationary trends in certain commodities, and the unemployment rate; the
effect that fuel costs have on consumer spending; volatility of fuel
margins; changes in government-funded benefit programs; manufacturing
commodity costs; diesel fuel costs related to our logistics operations;
trends in consumer spending; the extent to which our customers exercise
caution in their purchasing in response to economic conditions; the
inconsistent pace of the economic recovery; changes in inflation or
deflation in product and operating costs; stock repurchases; our ability
to retain pharmacy sales from third party payors; consolidation in the
health care industry, including pharmacy benefit managers; our ability to
negotiate modifications to multi-employer pension plans; natural disasters
or adverse weather conditions; the potential costs and risks associated
with potential cyber-attacks or data security breaches; the success of our
future growth plans; and the successful integration of Harris Teeter. Our
ability to achieve sales and earnings goals may also be affected by our
ability to manage the factors identified above. |
|
|
● |
Our capital
investments could differ from our estimate if we are unsuccessful in
acquiring suitable sites for new stores, if development costs vary from
those budgeted, if our logistics and technology or store projects are not
completed on budget or within the time frame projected, or if economic
conditions fail to improve, or worsen. |
|
|
● |
During the first
three quarters of each fiscal year, our LIFO charge and the recognition of
LIFO expense is affected primarily by estimated year-end changes in
product costs. Our fiscal year LIFO charge is affected primarily by
changes in product costs at year-end. |
|
|
● |
If actual results
differ significantly from anticipated future results for certain reporting
units including variable interest entities, an impairment loss for any
excess of the carrying value of the reporting units goodwill over the
implied fair value would have to be recognized. |
|
|
● |
Our effective tax
rate may differ from the expected rate due to changes in laws, the status
of pending items with various taxing authorities, and the deductibility of
certain expenses. |
|
|
● |
Changes in our
product mix may negatively affect certain financial indicators. For
example, we continue to add supermarket fuel centers to our store base.
Since gasoline generates low profit margins, we expect to see our FIFO
gross profit margins decline as gasoline sales
increase. |
We cannot fully foresee the
effects of changes in economic conditions on Krogers business. We have assumed
economic and competitive situations will not change significantly in
2015.
Other factors and
assumptions not identified above could also cause actual results to differ
materially from those set forth in the forward-looking information. Accordingly,
actual events and results may vary significantly from those included in,
contemplated or implied by forward-looking statements made by us or our
representatives. We undertake no obligation to update the forward-looking
information contained in this filing.
A-28
Report of Independent Registered Public Accounting Firm
To the Shareholders and
Board of Directors of
The Kroger Co.
In our opinion, the
accompanying consolidated balance sheets and the related consolidated statements
of operations, comprehensive income, cash flows and changes in shareholders
equity present fairly, in all material respects, the financial position of The
Kroger Co. and its subsidiaries at January 31, 2015 and February 1, 2014, and
the results of their operations and their cash flows for each of the three years
in the period ended January 31, 2015 in conformity with accounting principles
generally accepted in the United States of America. Also in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of January 31, 2015, based on criteria established in
Internal Control - Integrated
Framework (2013) issued by the
Committee of Sponsoring Organizations of the Treadway Commission (COSO). The
Companys management is responsible for these financial statements, for
maintaining effective internal control over financial reporting and for its
assessment of the effectiveness of internal control over financial reporting,
included in Managements Report on Internal Control over Financial Reporting
appearing on page A-1. Our responsibility is to express opinions on these
financial statements and on the Companys internal control over financial
reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement and whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial statements
included examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. Our audit of internal control over financial
reporting included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk. Our audits also included performing such other procedures as
we considered necessary in the circumstances. We believe that our audits provide
a reasonable basis for our opinions.
A companys internal
control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with generally
accepted accounting principles. A companys internal control over financial
reporting includes those policies and procedures that (i) pertain to the
maintenance of records that, in reasonable detail, accurately and fairly reflect
the transactions and dispositions of the assets of the company; (ii) provide
reasonable assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (iii) provide reasonable assurance regarding prevention or
timely detection of unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the financial
statements.
Because of its inherent
limitations, internal control over financial reporting may not prevent or detect
misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of
changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate.
Cincinnati, Ohio
March
31, 2015
A-29
THE KROGER CO.
Consolidated Balance Sheets
|
|
January 31, |
|
February 1, |
(In millions, except
par values) |
|
2015 |
|
2014 |
ASSETS |
|
|
|
|
|
|
|
|
Current assets |
|
|
|
|
|
|
|
|
Cash
and temporary cash investments |
|
$ |
268 |
|
|
$ |
401 |
|
Store deposits
in-transit |
|
|
988 |
|
|
|
958 |
|
Receivables |
|
|
1,266 |
|
|
|
1,116 |
|
FIFO inventory |
|
|
6,933 |
|
|
|
6,801 |
|
LIFO
reserve |
|
|
(1,245 |
) |
|
|
(1,150 |
) |
Prepaid and other current
assets |
|
|
701 |
|
|
|
704 |
|
Total current assets |
|
|
8,911 |
|
|
|
8,830 |
|
Property, plant and equipment, net |
|
|
17,912 |
|
|
|
16,893 |
|
Intangibles, net |
|
|
757 |
|
|
|
702 |
|
Goodwill |
|
|
2,304 |
|
|
|
2,135 |
|
Other assets |
|
|
672 |
|
|
|
721 |
|
Total Assets |
|
$ |
30,556 |
|
|
$ |
29,281 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
|
|
|
Current liabilities |
|
|
|
|
|
|
|
|
Current
portion of long-term debt including obligations under capital leases
and |
|
|
|
|
|
|
|
|
financing obligations |
|
$ |
1,885 |
|
|
$ |
1,657 |
|
Trade accounts
payable |
|
|
5,052 |
|
|
|
4,881 |
|
Accrued
salaries and wages |
|
|
1,291 |
|
|
|
1,150 |
|
Deferred income
taxes |
|
|
287 |
|
|
|
248 |
|
Other
current liabilities |
|
|
2,888 |
|
|
|
2,769 |
|
Total current liabilities |
|
|
11,403 |
|
|
|
10,705 |
|
Long-term debt including obligations under
capital leases and financing obligations |
|
|
|
|
|
|
|
|
Face-value of long-term debt
including obligations under capital leases and |
|
|
|
|
|
|
|
|
financing obligations |
|
|
9,771 |
|
|
|
9,654 |
|
Adjustment to reflect fair-value interest rate hedges |
|
|
|
|
|
|
(1 |
) |
Long-term debt including obligations under capital leases and financing
obligations |
|
|
9,771 |
|
|
|
9,653 |
|
Deferred income taxes |
|
|
1,209 |
|
|
|
1,381 |
|
Pension and postretirement benefit
obligations |
|
|
1,463 |
|
|
|
901 |
|
Other long-term liabilities |
|
|
1,268 |
|
|
|
1,246 |
|
Total Liabilities |
|
|
25,114 |
|
|
|
23,886 |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (see Note
13) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
Preferred shares, $100 par per share, 5
shares authorized and unissued |
|
|
|
|
|
|
|
|
Common shares, $1 par per share, 1,000
shares authorized; |
|
|
|
|
|
|
|
|
959
shares issued in 2014 and 2013 |
|
|
959 |
|
|
|
959 |
|
Additional paid-in capital |
|
|
3,707 |
|
|
|
3,549 |
|
Accumulated other comprehensive
loss |
|
|
(812 |
) |
|
|
(464 |
) |
Accumulated earnings |
|
|
12,367 |
|
|
|
10,981 |
|
Common stock in treasury, at cost, 472
shares in 2014 and 451 shares in 2013 |
|
|
(10,809 |
) |
|
|
(9,641 |
) |
Total
Shareholders Equity - The Kroger Co. |
|
|
5,412 |
|
|
|
5,384 |
|
Noncontrolling interests |
|
|
30 |
|
|
|
11 |
|
Total
Equity |
|
|
5,442 |
|
|
|
5,395 |
|
Total
Liabilities and Equity |
|
$ |
30,556 |
|
|
$ |
29,281 |
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
A-30
THE KROGER CO.
Consolidated Statements of Operations
Years Ended January 31,
2015, February 1, 2014 and February 2, 2013
|
|
2014 |
|
2013 |
|
2012 |
(In millions, except per share
amounts) |
|
(52
weeks) |
|
(52 weeks) |
|
(53 weeks) |
Sales |
|
|
$ |
108,465 |
|
|
|
$ |
98,375 |
|
|
|
$ |
96,619 |
|
Merchandise costs, including advertising,
warehousing, and |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
transportation,
excluding items shown separately below |
|
|
|
85,512 |
|
|
|
|
78,138 |
|
|
|
|
76,726 |
|
Operating, general and administrative |
|
|
|
17,161 |
|
|
|
|
15,196 |
|
|
|
|
14,849 |
|
Rent |
|
|
|
707 |
|
|
|
|
613 |
|
|
|
|
628 |
|
Depreciation and amortization |
|
|
|
1,948 |
|
|
|
|
1,703 |
|
|
|
|
1,652 |
|
Operating
Profit |
|
|
|
3,137 |
|
|
|
|
2,725 |
|
|
|
|
2,764 |
|
Interest expense |
|
|
|
488 |
|
|
|
|
443 |
|
|
|
|
462 |
|
Earnings before income
tax expense |
|
|
|
2,649 |
|
|
|
|
2,282 |
|
|
|
|
2,302 |
|
Income tax expense |
|
|
|
902 |
|
|
|
|
751 |
|
|
|
|
794 |
|
Net earnings including
noncontrolling interests |
|
|
|
1,747 |
|
|
|
|
1,531 |
|
|
|
|
1,508 |
|
Net earnings
attributable to noncontrolling interests |
|
|
|
19 |
|
|
|
|
12 |
|
|
|
|
11 |
|
Net earnings
attributable to The Kroger Co. |
|
|
$ |
1,728 |
|
|
|
$ |
1,519 |
|
|
|
$ |
1,497 |
|
Net earnings
attributable to The Kroger Co. per basic common share |
|
|
$ |
3.49 |
|
|
|
$ |
2.93 |
|
|
|
$ |
2.78 |
|
Average number of
common shares used in basic calculation |
|
|
|
490 |
|
|
|
|
514 |
|
|
|
|
533 |
|
Net earnings
attributable to The Kroger Co. per diluted common share |
|
|
$ |
3.44 |
|
|
|
$ |
2.90 |
|
|
|
$ |
2.77 |
|
Average number of
common shares used in diluted calculation |
|
|
|
497 |
|
|
|
|
520 |
|
|
|
|
537 |
|
Dividends declared per common share |
|
|
$ |
0.70 |
|
|
|
$ |
0.63 |
|
|
|
$ |
0.53 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
A-31
THE KROGER
CO.
Consolidated Statements of Comprehensive Income
Years Ended January 31,
2015, February 1, 2014 and February 2, 2013
|
|
2014 |
|
2013 |
|
2012 |
(In
millions) |
|
(52
weeks) |
|
(52 weeks) |
|
(53 weeks) |
Net
earnings including noncontrolling interests |
|
|
$ |
1,747 |
|
|
|
|
$ |
1,531 |
|
|
|
|
$ |
1,508 |
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized gain on
available for sale securities, net of income tax (1) |
|
|
|
5 |
|
|
|
|
|
5 |
|
|
|
|
|
|
|
Change in pension and
other postretirement defined benefit plans, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax (2) |
|
|
|
(329 |
) |
|
|
|
|
295 |
|
|
|
|
|
75 |
|
Unrealized gains and
losses on cash flow hedging activities, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
net of income tax (3) |
|
|
|
(25 |
) |
|
|
|
|
(12 |
) |
|
|
|
|
13 |
|
Amortization of
unrealized gains and losses on cash flow hedging |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
activities, net of income tax (4) |
|
|
|
1 |
|
|
|
|
|
1 |
|
|
|
|
|
3 |
|
Total other comprehensive income (loss) |
|
|
|
(348 |
) |
|
|
|
|
289 |
|
|
|
|
|
91 |
|
Comprehensive income |
|
|
|
1,399 |
|
|
|
|
|
1,820 |
|
|
|
|
|
1,599 |
|
Comprehensive income attributable to noncontrolling
interests |
|
|
|
19 |
|
|
|
|
|
12 |
|
|
|
|
|
11 |
|
Comprehensive income
attributable to The Kroger Co. |
|
|
$ |
1,380 |
|
|
|
|
$ |
1,808 |
|
|
|
|
$ |
1,588 |
|
(1) |
Amount is net of tax of $3 in 2014 and
2013. |
(2) |
Amount is net of tax of $(193) in 2014, $173
in 2013 and $45 in 2012. |
(3) |
Amount is net of tax of $(14) in 2014, $(8)
in 2013 and $7 in 2012. |
(4) |
Amount is net of tax
of $1 in 2013 and $2 in 2012. |
|
The accompanying notes are an
integral part of the consolidated financial
statements. |
A-32
THE KROGER
CO.
Consolidated Statements of Cash Flows
Years Ended January 31,
2015, February 1, 2014 and February 2, 2013
|
|
2014 |
|
2013 |
|
2012 |
(In millions) |
|
(52
weeks) |
|
(52 weeks) |
|
(53 weeks) |
Cash
Flows From Operating Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
earnings including noncontrolling interests |
|
|
$ |
1,747 |
|
|
|
$ |
1,531 |
|
|
|
$ |
1,508 |
|
Adjustments to reconcile net earnings to net cash provided by operating
activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
|
1,948 |
|
|
|
|
1,703 |
|
|
|
|
1,652 |
|
Asset impairment charge |
|
|
|
37 |
|
|
|
|
39 |
|
|
|
|
18 |
|
LIFO charge |
|
|
|
147 |
|
|
|
|
52 |
|
|
|
|
55 |
|
Stock-based employee compensation |
|
|
|
155 |
|
|
|
|
107 |
|
|
|
|
82 |
|
Expense for Company-sponsored pension plans |
|
|
|
55 |
|
|
|
|
74 |
|
|
|
|
89 |
|
Deferred income taxes |
|
|
|
73 |
|
|
|
|
72 |
|
|
|
|
176 |
|
Other |
|
|
|
72 |
|
|
|
|
47 |
|
|
|
|
23 |
|
Changes in operating assets and liabilities net of effects from
acquisitions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of businesses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Store deposits in-transit |
|
|
|
(27 |
) |
|
|
|
25 |
|
|
|
|
(169 |
) |
Inventories |
|
|
|
(147 |
) |
|
|
|
(131 |
) |
|
|
|
(78 |
) |
Receivables |
|
|
|
(141 |
) |
|
|
|
(8 |
) |
|
|
|
(126 |
) |
Prepaid and other current assets |
|
|
|
2 |
|
|
|
|
(49 |
) |
|
|
|
(257 |
) |
Trade accounts payable |
|
|
|
135 |
|
|
|
|
196 |
|
|
|
|
188 |
|
Accrued expenses |
|
|
|
197 |
|
|
|
|
77 |
|
|
|
|
67 |
|
Income taxes receivable and payable |
|
|
|
(68 |
) |
|
|
|
(47 |
) |
|
|
|
164 |
|
Contribution to Company-sponsored pension plans |
|
|
|
|
|
|
|
|
(100 |
) |
|
|
|
(71 |
) |
Other |
|
|
|
(22 |
) |
|
|
|
(15 |
) |
|
|
|
(367 |
) |
Net cash provided by operating activities |
|
|
|
4,163 |
|
|
|
|
3,573 |
|
|
|
|
2,954 |
|
Cash
Flows From Investing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments for property and equipment, including payments for lease
buyouts |
|
|
|
(2,831 |
) |
|
|
|
(2,330 |
) |
|
|
|
(2,062 |
) |
Proceeds from sale of assets |
|
|
|
37 |
|
|
|
|
24 |
|
|
|
|
49 |
|
Payments for acquisitions |
|
|
|
(252 |
) |
|
|
|
(2,344 |
) |
|
|
|
(122 |
) |
Other |
|
|
|
(14 |
) |
|
|
|
(121 |
) |
|
|
|
(48 |
) |
Net cash used by investing activities |
|
|
|
(3,060 |
) |
|
|
|
(4,771 |
) |
|
|
|
(2,183 |
) |
Cash
Flows From Financing Activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from issuance of long-term debt |
|
|
|
576 |
|
|
|
|
3,548 |
|
|
|
|
863 |
|
Payments on long-term debt |
|
|
|
(375 |
) |
|
|
|
(1,060 |
) |
|
|
|
(1,445 |
) |
Net borrowings (payments) of commercial paper |
|
|
|
25 |
|
|
|
|
(395 |
) |
|
|
|
1,275 |
|
Proceeds from issuance of capital stock |
|
|
|
110 |
|
|
|
|
196 |
|
|
|
|
110 |
|
Treasury stock purchases |
|
|
|
(1,283 |
) |
|
|
|
(609 |
) |
|
|
|
(1,261 |
) |
Dividends paid |
|
|
|
(338 |
) |
|
|
|
(319 |
) |
|
|
|
(267 |
) |
Other |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
4 |
|
Net cash provided (used) by financing activities |
|
|
|
(1,236 |
) |
|
|
|
1,361 |
|
|
|
|
(721 |
) |
Net
increase (decrease) in cash and temporary cash investments |
|
|
|
(133 |
) |
|
|
|
163 |
|
|
|
|
50 |
|
Cash
and temporary cash investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Beginning of year |
|
|
|
401 |
|
|
|
|
238 |
|
|
|
|
188 |
|
End of year |
|
|
$ |
268 |
|
|
|
$ |
401 |
|
|
|
$ |
238 |
|
Reconciliation of capital
investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments
for property and equipment, including payments for lease buyouts |
|
|
$ |
(2,831 |
) |
|
|
$ |
(2,330 |
) |
|
|
$ |
(2,062 |
) |
Payments
for lease buyouts |
|
|
|
135 |
|
|
|
|
108 |
|
|
|
|
73 |
|
Changes in
construction-in-progress payables |
|
|
|
(56 |
) |
|
|
|
(83 |
) |
|
|
|
(1 |
) |
Total capital investments, excluding lease buyouts |
|
|
$ |
(2,752 |
) |
|
|
$ |
(2,305 |
) |
|
|
$ |
(1,990 |
) |
Disclosure of cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid during the year for interest |
|
|
$ |
477 |
|
|
|
$ |
401 |
|
|
|
$ |
438 |
|
Cash paid during the year for income taxes |
|
|
$ |
941 |
|
|
|
$ |
679 |
|
|
|
$ |
468 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
A-33
THE KROGER
CO.
Consolidated Statement of Changes in Shareholders Equity
Years Ended January 31,
2015, February 1, 2014 and February 2, 2013
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additional |
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
Stock |
|
Paid-In |
|
Treasury
Stock |
|
Comprehensive |
|
Accumulated |
|
Noncontrolling |
|
|
|
|
|
(In millions, except per share
amounts) |
|
Shares |
|
Amount |
|
Capital |
|
Shares |
|
Amount |
|
Gain (Loss) |
|
Earnings |
|
Interest |
|
Total |
Balances
at January 28, 2012 |
|
|
959 |
|
|
|
$ |
959 |
|
|
|
$ |
3,427 |
|
|
|
398 |
|
|
$ |
(8,132 |
) |
|
|
$ |
(844 |
) |
|
|
$ |
8,571 |
|
|
|
|
$ |
(15 |
) |
|
|
$ |
3,966 |
|
Issuance of common
stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
Restricted stock
issued |
|
|
|
|
|
|
|
|
|
|
|
|
(59 |
) |
|
|
(2 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(19 |
) |
Treasury
stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
(1,165 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,165 |
) |
Stock options
exchanged |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5 |
|
|
|
(96 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(96 |
) |
Share-based employee
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
82 |
|
Other
comprehensive gain net of income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
tax of $54 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
18 |
|
Cash
dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.53 per common
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(281 |
) |
|
|
|
|
|
|
|
|
|
(281 |
) |
Net earnings including
non-controlling |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,497 |
|
|
|
|
|
11 |
|
|
|
|
1,508 |
|
Balances
at February 2, 2013 |
|
|
959 |
|
|
|
$ |
959 |
|
|
|
$ |
3,451 |
|
|
|
445 |
|
|
$ |
(9,237 |
) |
|
|
$ |
(753 |
) |
|
|
$ |
9,787 |
|
|
|
|
$ |
7 |
|
|
|
$ |
4,214 |
|
Issuance of common
stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9 |
) |
|
|
196 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
196 |
|
Restricted stock
issued |
|
|
|
|
|
|
|
|
|
|
|
|
(60 |
) |
|
|
(2 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(34 |
) |
Treasury
stock activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9 |
|
|
|
(338 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(338 |
) |
Stock options
exchanged |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8 |
|
|
|
(271 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(271 |
) |
Share-based employee
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107 |
|
Other
comprehensive gain net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $169 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
289 |
|
Other |
|
|
|
|
|
|
|
|
|
|
|
|
51 |
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
26 |
|
Cash
dividends declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.63 per common
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(325 |
) |
|
|
|
|
|
|
|
|
|
(325 |
) |
Net earnings including
non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,519 |
|
|
|
|
|
12 |
|
|
|
|
1,531 |
|
Balances
at February 1, 2014 |
|
|
959 |
|
|
|
$ |
959 |
|
|
|
$ |
3,549 |
|
|
|
451 |
|
|
$ |
(9,641 |
) |
|
|
$ |
(464 |
) |
|
|
$ |
10,981 |
|
|
|
|
$ |
11 |
|
|
|
$ |
5,395 |
|
Issuance of common
stock: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
110 |
|
Restricted stock
issued |
|
|
|
|
|
|
|
|
|
|
|
|
(91 |
) |
|
|
(2 |
) |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(51 |
) |
Treasury stock
activity: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Treasury stock purchases, at
cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
(1,129 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,129 |
) |
Stock options
exchanged |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3 |
|
|
|
(154 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(154 |
) |
Share-based employee
compensation |
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
155 |
|
Other comprehensive loss
net of income tax |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
of $(204) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(348 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
(35 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
59 |
|
Cash dividends
declared |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($0.70 per common
share) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(342 |
) |
|
|
|
|
|
|
|
|
|
(342 |
) |
Net earnings including
non-controlling interests |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,728 |
|
|
|
|
|
19 |
|
|
|
|
1,747 |
|
Balances at January 31,
2015 |
|
|
959 |
|
|
|
$ |
959 |
|
|
|
$ |
3,707 |
|
|
|
472 |
|
|
$ |
(10,809 |
) |
|
|
$ |
(812 |
) |
|
|
$ |
12,367 |
|
|
|
|
$ |
30 |
|
|
|
$ |
5,442 |
|
|
The accompanying notes are
an integral part of the consolidated financial statements.
A-34
Notes to Consolidated Financial Statements
All amounts in the Notes to
Consolidated Financial Statements are in millions except share and per share
amounts.
1. Accounting Policies
The following is a summary
of the significant accounting policies followed in preparing these financial
statements.
Description of Business,
Basis of Presentation and Principles of Consolidation
The Kroger Co. (the
Company) was founded in 1883 and incorporated in 1902. As of January 31, 2015,
the Company was one of the largest retailers in the nation based on annual
sales. The Company also manufactures and processes food for sale by its
supermarkets. The accompanying financial statements include the consolidated
accounts of the Company, its wholly-owned subsidiaries and the variable interest
entities in which the Company is the primary beneficiary. Significant
intercompany transactions and balances have been eliminated.
Fiscal
Year
The Companys fiscal year
ends on the Saturday nearest January 31. The last three fiscal years consist of
the 52-week periods ended January 31, 2015 and February 1, 2014 and the 53-week
period ended February 2, 2013.
Pervasiveness of
Estimates
The preparation of
financial statements in conformity with generally accepted accounting principles
(GAAP) requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities. Disclosure of contingent assets and
liabilities as of the date of the consolidated financial statements and the
reported amounts of consolidated revenues and expenses during the reporting
period is also required. Actual results could differ from those
estimates.
Inventories
Inventories are stated at
the lower of cost (principally on a last-in, first-out LIFO basis) or market.
In total, approximately 95% of inventories in 2014 and 2013 were valued using
the LIFO method. Cost for the balance of the inventories, including
substantially all fuel inventories, was determined using the first-in, first-out
(FIFO) method. Replacement cost was higher than the carrying amount by $1,245
at January 31, 2015 and $1,150 at February 1, 2014. The Company follows the
Link-Chain, Dollar-Value LIFO method for purposes of calculating its LIFO charge
or credit.
The item-cost method of
accounting to determine inventory cost before the LIFO adjustment is followed
for substantially all store inventories at the Companys supermarket divisions.
This method involves counting each item in inventory, assigning costs to each of
these items based on the actual purchase costs (net of vendor allowances and
cash discounts) of each item and recording the cost of items sold. The item-cost
method of accounting allows for more accurate reporting of periodic inventory
balances and enables management to more precisely manage inventory. In addition,
substantially all of the Companys inventory consists of finished goods and is
recorded at actual purchase costs (net of vendor allowances and cash
discounts).
The Company evaluates
inventory shortages throughout the year based on actual physical counts in its
facilities. Allowances for inventory shortages are recorded based on the results
of these counts to provide for estimated shortages as of the financial statement
date.
A-35
Notes to Consolidated Financial Statements, Continued
Property, Plant and
Equipment
Property, plant and
equipment are recorded at cost or, in the case of assets acquired in a business
combination, at fair value. Depreciation and amortization expense, which
includes the amortization of assets recorded under capital leases, is computed
principally using the straight-line method over the estimated useful lives of
individual assets. Buildings and land improvements are depreciated based on
lives varying from 10 to 40 years. All new purchases of store equipment are
assigned lives varying from three to nine years. Leasehold improvements are
amortized over the shorter of the lease term to which they relate, which varies
from four to 25 years, or the useful life of the asset. Manufacturing plant and
distribution center equipment is depreciated over lives varying from three to 15
years. Information technology assets are generally depreciated over five years.
Depreciation and amortization expense was $1,948 in 2014, $1,703 in 2013 and
$1,652 in 2012.
Interest costs on
significant projects constructed for the Companys own use are capitalized as
part of the costs of the newly constructed facilities. Upon retirement or
disposal of assets, the cost and related accumulated depreciation and
amortization are removed from the balance sheet and any gain or loss is
reflected in net earnings. Refer to Note 4 for further information regarding the
Companys property, plant and equipment.
Deferred
Rent
The Company recognizes rent
holidays, including the time period during which the Company has access to the
property for construction of buildings or improvements and escalating rent
provisions on a straight-line basis over the term of the lease. The deferred
amount is included in Other current liabilities and Other long-term
liabilities on the Companys Consolidated Balance Sheets.
Goodwill
The Company reviews
goodwill for impairment during the fourth quarter of each year, and also upon
the occurrence of a triggering event. The Company performs reviews of each of
its operating divisions and variable interest entities (collectively, reporting
units) that have goodwill balances. Generally, fair value is determined using a
multiple of earnings, or discounted projected future cash flows, and is compared
to the carrying value of a reporting unit for purposes of identifying potential
impairment. Projected future cash flows are based on managements knowledge of
the current operating environment and expectations for the future. If potential
for impairment is identified, the fair value of a reporting unit is measured
against the fair value of its underlying assets and liabilities, excluding
goodwill, to estimate an implied fair value of the reporting units goodwill.
Goodwill impairment is recognized for any excess of the carrying value of the
reporting units goodwill over the implied fair value. Results of the goodwill
impairment reviews performed during 2014, 2013 and 2012 are summarized in Note
3.
Impairment of Long-Lived
Assets
The Company monitors the
carrying value of long-lived assets for potential impairment each quarter based
on whether certain triggering events have occurred. These events include current
period losses combined with a history of losses or a projection of continuing
losses or a significant decrease in the market value of an asset. When a
triggering event occurs, an impairment calculation is performed, comparing
projected undiscounted future cash flows, utilizing current cash flow
information and expected growth rates related to specific stores, to the
carrying value for those stores. If the Company identifies impairment for
long-lived assets to be held and used, the Company compares the assets current
carrying value to the assets fair value. Fair value is based on current market
values or discounted future cash flows. The Company records impairment when the
carrying value exceeds fair market value. With respect to owned property and
equipment held for disposal, the value of the property and equipment is adjusted
to reflect recoverable values based on previous efforts to dispose of similar
assets and current economic conditions. Impairment is recognized for the excess
of the carrying value over the estimated fair market value, reduced by estimated
direct costs of disposal. The Company recorded asset impairments in the normal
course of business totaling $37, $39 and
A-36
Notes to Consolidated Financial Statements, Continued
$18 in 2014, 2013 and 2012,
respectively. Costs to reduce the carrying value of long-lived assets for each
of the years presented have been included in the Consolidated Statements of
Operations as Operating, general and administrative expense.
Store Closing
Costs
The Company provides for
closed store liabilities relating to the present value of the estimated
remaining non-cancellable lease payments after the closing date, net of
estimated subtenant income. The Company estimates the net lease liabilities
using a discount rate to calculate the present value of the remaining net rent
payments on closed stores. The closed store lease liabilities usually are paid
over the lease terms associated with the closed stores, which generally have
remaining terms ranging from one to 20 years. Adjustments to closed store
liabilities primarily relate to changes in subtenant income and actual exit
costs differing from original estimates. Adjustments are made for changes in
estimates in the period in which the change becomes known. Store closing
liabilities are reviewed quarterly to ensure that any accrued amount that is not
a sufficient estimate of future costs is adjusted to income in the proper
period.
Owned stores held for
disposal are reduced to their estimated net realizable value. Costs to reduce
the carrying values of property, equipment and leasehold improvements are
accounted for in accordance with the Companys policy on impairment of
long-lived assets. Inventory write-downs, if any, in connection with store
closings, are classified in the Consolidated Statements of Operations as
Merchandise costs. Costs to transfer inventory and equipment from closed
stores are expensed as incurred.
The following table
summarizes accrual activity for future lease obligations of stores that were
closed in the normal course of business and assumed in the merger with Harris
Teeter Supermarkets, Inc. (Harris Teeter):
|
|
Future Lease |
|
|
Obligations |
Balance at February 2, 2013 |
|
|
$ |
44 |
|
Additions |
|
|
|
7 |
|
Payments |
|
|
|
(9 |
) |
Other |
|
|
|
(2 |
) |
Assumed from Harris Teeter |
|
|
|
18 |
|
Balance at February 1, 2014 |
|
|
|
58 |
|
Additions |
|
|
|
12 |
|
Payments |
|
|
|
(11 |
) |
Other |
|
|
|
(6 |
) |
Balance at January 31, 2015 |
|
|
$ |
53 |
|
The current portion of the
future lease obligations of stores is included in Other current liabilities,
and the long-term portion is included in Other long-term liabilities in the
Consolidated Balance Sheets.
Interest Rate Risk
Management
The Company uses derivative
instruments primarily to manage its exposure to changes in interest rates. The
Companys current program relative to interest rate protection and the methods
by which the Company accounts for its derivative instruments are described in
Note 7.
A-37
Notes to Consolidated Financial Statements, Continued
Commodity Price
Protection
The Company enters into
purchase commitments for various resources, including raw materials utilized in
its manufacturing facilities and energy to be used in its stores, manufacturing
facilities and administrative offices. The Company enters into commitments
expecting to take delivery of and to utilize those resources in the conduct of
the normal course of business. The Companys current program relative to
commodity price protection and the methods by which the Company accounts for its
purchase commitments are described in Note 7.
Benefit Plans and
Multi-Employer Pension Plans
The Company recognizes the
funded status of its retirement plans on the Consolidated Balance Sheets.
Actuarial gains or losses, prior service costs or credits and transition
obligations that have not yet been recognized as part of net periodic benefit
cost are required to be recorded as a component of Accumulated Other
Comprehensive Income (AOCI). All plans are measured as of the Companys fiscal
year end.
The determination of the
obligation and expense for Company-sponsored pension plans and other
post-retirement benefits is dependent on the selection of assumptions used by
actuaries and the Company in calculating those amounts. Those assumptions are
described in Note 15 and include, among others, the discount rate, the expected
long-term rate of return on plan assets, mortality and the rates of increase in
compensation and health care costs. Actual results that differ from the
assumptions are accumulated and amortized over future periods and, therefore,
generally affect the recognized expense and recorded obligation in future
periods. While the Company believes that the assumptions are appropriate,
significant differences in actual experience or significant changes in
assumptions may materially affect the pension and other post-retirement
obligations and future expense.
The Company also
participates in various multi-employer plans for substantially all union
employees. Pension expense for these plans is recognized as contributions are
funded. Refer to Note 16 for additional information regarding the Companys
participation in these various multi-employer plans and the United Food and
Commercial Workers International Union (UFCW) Consolidated Pension Plan.
The Company administers and
makes contributions to the employee 401(k) retirement savings accounts.
Contributions to the employee 401(k) retirement savings accounts are expensed
when contributed. Refer to Note 15 for additional information regarding the
Companys benefit plans.
Share Based
Compensation
The Company accounts for
stock options under fair value recognition provisions. Under this method, the
Company recognizes compensation expense for all share-based payments granted.
The Company recognizes share-based compensation expense, net of an estimated
forfeiture rate, over the requisite service period of the award. In addition,
the Company records expense for restricted stock awards in an amount equal to
the fair market value of the underlying stock on the grant date of the award,
over the period the awards lapse. Refer to Note 12 for additional information
regarding the Companys stock based compensation.
Deferred Income
Taxes
Deferred income taxes are
recorded to reflect the tax consequences of differences between the tax basis of
assets and liabilities and their financial reporting basis. Refer to Note 5 for
the types of differences that give rise to significant portions of deferred
income tax assets and liabilities. Deferred income taxes are classified as a net
current or noncurrent asset or liability based on the classification of the
related asset or liability for financial reporting purposes. A deferred tax
asset or liability that is not related to an asset or liability for financial
reporting is classified according to the expected reversal date.
A-38
Notes to Consolidated Financial Statements, Continued
Uncertain Tax
Positions
The Company reviews the tax
positions taken or expected to be taken on tax returns to determine whether and
to what extent a benefit can be recognized in its consolidated financial
statements. Refer to Note 5 for the amount of unrecognized tax benefits and
other related disclosures related to uncertain tax positions.
Various taxing authorities
periodically audit the Companys income tax returns. These audits include
questions regarding the Companys tax filing positions, including the timing and
amount of deductions and the allocation of income to various tax jurisdictions.
In evaluating the exposures connected with these various tax filing positions,
including state and local taxes, the Company records allowances for probable
exposures. A number of years may elapse before a particular matter, for which an
allowance has been established, is audited and fully resolved. As of January 31,
2015, the Internal Revenue Service had concluded its examination of the
Companys 2008 and 2009 federal tax returns. Tax years 2010 through 2013 remain
under examination.
The assessment of the
Companys tax position relies on the judgment of management to estimate the
exposures associated with the Companys various filing positions.
Self-Insurance
Costs
The Company is primarily
self-insured for costs related to workers compensation and general liability
claims. Liabilities are actuarially determined and are recognized based on
claims filed and an estimate of claims incurred but not reported. The
liabilities for workers compensation claims are accounted for on a present
value basis. The Company has purchased stop-loss coverage to limit its exposure
to any significant exposure on a per claim basis. The Company is insured for
covered costs in excess of these per claim limits.
The following table
summarizes the changes in the Companys self-insurance liability through January
31, 2015.
|
|
2014 |
|
2013 |
|
2012 |
Beginning balance |
|
$ |
569 |
|
|
$ |
537 |
|
|
$ |
529 |
|
Expense |
|
|
246 |
|
|
|
220 |
|
|
|
215 |
|
Claim payments |
|
|
(216 |
) |
|
|
(215 |
) |
|
|
(207 |
) |
Assumed from Harris Teeter |
|
|
|
|
|
|
27 |
|
|
|
|
|
Ending balance |
|
|
599 |
|
|
|
569 |
|
|
|
537 |
|
Less: Current portion |
|
|
(213 |
) |
|
|
(224 |
) |
|
|
(205 |
) |
Long-term portion |
|
$ |
386 |
|
|
$ |
345 |
|
|
$ |
332 |
|
The current portion of the
self-insured liability is included in Other current liabilities, and the
long-term portion is included in Other long-term liabilities in the
Consolidated Balance Sheets.
The Company maintains
surety bonds related to self-insured workers compensation claims. These bonds
are required by most states in which the Company is self-insured for workers
compensation and are placed with third-party insurance providers to insure
payment of the Companys obligations in the event the Company is unable to meet
its claim payment obligations up to its self-insured retention levels. These
bonds do not represent liabilities of the Company, as the Company has recorded
reserves for the claim costs.
The Company is similarly
self-insured for property-related losses. The Company maintains stop loss
coverage to limit its property loss exposures including coverage for earthquake,
wind, flood and other catastrophic events.
Revenue
Recognition
Revenues from the sale of
products are recognized at the point of sale. Discounts provided to customers by
the Company at the time of sale, including those provided in connection with
loyalty cards, are recognized as a reduction in sales as the products are sold.
Discounts provided by vendors, usually in the form of paper
A-39
Notes to Consolidated Financial Statements, Continued
coupons, are not recognized
as a reduction in sales provided the coupons are redeemable at any retailer that
accepts coupons. The Company records a receivable from the vendor for the
difference in sales price and cash received. Pharmacy sales are recorded when
product is provided to the customer. Sales taxes are recorded as other accrued
liabilities and not as a component of sales. The Company does not recognize a
sale when it sells its own gift cards and gift certificates. Rather, it records
a deferred liability equal to the amount received. A sale is then recognized
when the gift card or gift certificate is redeemed to purchase the Companys
products. Gift card and certificate breakage is recognized when redemption is
deemed remote and there is no legal obligation to remit the value of the
unredeemed gift card. The amount of breakage has not been material for 2014,
2013 and 2012.
Merchandise
Costs
The Merchandise costs
line item of the Consolidated Statements of Operations includes product costs,
net of discounts and allowances; advertising costs (see separate discussion
below); inbound freight charges; warehousing costs, including receiving and
inspection costs; transportation costs; and manufacturing production and
operational costs. Warehousing, transportation and manufacturing management
salaries are also included in the Merchandise costs line item; however,
purchasing management salaries and administration costs are included in the
Operating, general and administrative line item along with most of the
Companys other managerial and administrative costs. Rent expense and
depreciation and amortization expense are shown separately in the Consolidated
Statements of Operations.
Warehousing and
transportation costs include distribution center direct wages, transportation
direct wages, repairs and maintenance, utilities, inbound freight and, where
applicable, third party warehouse management fees. These costs are recognized in
the periods the related expenses are incurred.
The Company believes the
classification of costs included in merchandise costs could vary widely
throughout the industry. The Companys approach is to include in the
Merchandise costs line item the direct, net costs of acquiring products and
making them available to customers in its stores. The Company believes this
approach most accurately presents the actual costs of products sold.
The Company recognizes all
vendor allowances as a reduction in merchandise costs when the related product
is sold. When possible, vendor allowances are applied to the related product
cost by item and, therefore, reduce the carrying value of inventory by item.
When the items are sold, the vendor allowance is recognized. When it is not
possible, due to systems constraints, to allocate vendor allowances to the
product by item, vendor allowances are recognized as a reduction in merchandise
costs based on inventory turns and, therefore, recognized as the product is
sold.
Advertising
Costs
The Companys advertising
costs are recognized in the periods the related expenses are incurred and are
included in the Merchandise costs line item of the Consolidated Statements of
Operations. The Companys pre-tax advertising costs totaled $648 in 2014, $587
in 2013 and $553 in 2012. The Company does not record vendor allowances for
co-operative advertising as a reduction of advertising expense.
Cash, Temporary Cash
Investments and Book Overdrafts
Cash and temporary cash
investments represent store cash and short-term investments with original
maturities of less than three months. Book overdrafts are included in Trade
accounts payable and Accrued salaries and wages in the Consolidated Balance
Sheets.
Deposits
In-Transit
Deposits in-transit
generally represent funds deposited to the Companys bank accounts at the end of
the year related to sales, a majority of which were paid for with debit cards,
credit cards and checks, to which the Company does not have immediate access but
settle within a few days of the sales transaction.
A-40
Notes to Consolidated Financial Statements, Continued
Consolidated Statements
of Cash Flows
For purposes of the
Consolidated Statements of Cash Flows, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be temporary cash investments.
The net increase (decrease)
in book overdrafts previously reported in financing activities in the
Consolidated Statements of Cash Flows are now reported within operating
activities. Prior year amounts have been revised to the current year
presentation. These revisions were not material to the prior periods.
Segments
The Company operates retail
food and drug stores, multi-department stores, jewelry stores, and convenience
stores throughout the United States. The Companys retail operations, which
represent over 99% of the Companys consolidated sales and EBITDA, are its only
reportable segment. The Companys retail operating divisions have been
aggregated into one reportable segment due to the operating divisions having
similar economic characteristics with similar long-term financial performance.
In addition, the Companys operating divisions offer to its customers similar
products, have similar distribution methods, operate in similar regulatory
environments, purchase the majority of the Companys merchandise for retail sale
from similar (and in many cases identical) vendors on a coordinated basis from a
centralized location, serve similar types of customers, and are allocated
capital from a centralized location. The Companys operating divisions reflect
the manner in which the business is managed and how the Companys Chief
Executive Officer and Chief Operating Officer, who act as the Companys chief
operating decision makers, assess performance internally. All of the Companys
operations are domestic.
The following table
presents sales revenue by type of product for 2014, 2013 and 2012.
|
|
2014 |
|
2013 |
|
2012 |
|
|
Amount |
|
% of
total |
|
Amount |
|
% of
total |
|
Amount |
|
% of
total |
Non
Perishable (1) |
|
$ |
54,392 |
|
50.1 |
% |
|
$ |
49,229 |
|
50.0 |
% |
|
$ |
48,663 |
|
50.4 |
% |
Perishable (2) |
|
|
24,178 |
|
22.3 |
% |
|
|
20,625 |
|
21.0 |
% |
|
|
19,761 |
|
20.5 |
% |
Fuel |
|
|
18,850 |
|
17.4 |
% |
|
|
18,962 |
|
19.3 |
% |
|
|
18,896 |
|
19.5 |
% |
Pharmacy |
|
|
9,032 |
|
8.3 |
% |
|
|
8,073 |
|
8.2 |
% |
|
|
8,018 |
|
8.3 |
% |
Other (3) |
|
|
2,014 |
|
1.9 |
% |
|
|
1,486 |
|
1.5 |
% |
|
|
1,281 |
|
1.3 |
% |
Total Sales and other revenue |
|
$ |
108,465 |
|
100.0 |
% |
|
$ |
98,375 |
|
100.0 |
% |
|
$ |
96,619 |
|
100.0 |
% |
____________________
(1)
|
Consists primarily of grocery, general
merchandise, health and beauty care and natural foods. |
(2) |
Consists primarily of produce, floral, meat,
seafood, deli and bakery. |
(3) |
Consists primarily of
sales related to jewelry stores, manufacturing plants to outside
customers, variable interest entities, a specialty pharmacy, in-store
health clinics and online sales by
Vitacost.com. |
2. Mergers
On August 18, 2014, the
Company closed its merger with Vitacost.com, Inc. (Vitacost.com) by purchasing
100% of the Vitacost.com outstanding common stock for $8.00 per share or $287.
Vitacost.com is a leading online retailer of health and wellness products, which
are sold directly to consumers through the website vitacost.com. This merger
affords the Company access to Vitacost.coms extensive e-commerce platform,
which can be combined with the Companys customer insights and loyal customer
base, to create new levels of personalization and convenience for customers. The
merger was accounted for under the purchase method of accounting and was
financed through the issuance of commercial paper (see Note 6). In a business
combination, the purchase price is allocated to assets acquired and liabilities
assumed based on their fair values, with any excess of purchase price over fair
value recognized as goodwill. In addition to recognizing the assets and
liabilities on the acquired companys balance sheet, the Company reviews supply
contracts, leases, financial instruments, employment agreements and other
significant agreements to identify potential
A-41
Notes to Consolidated Financial Statements, Continued
assets or liabilities that
require recognition in connection with the application of acquisition accounting
under Accounting Standards Codification (ASC) 805. Intangible assets are
recognized apart from goodwill when the asset arises from contractual or other
legal rights, or are separable from the acquired entity such that they may be
sold, transferred, licensed, rented or exchanged either on a standalone basis or
in combination with a related contract, asset or liability.
Pending finalization of the
Companys valuation and other items, the following table summarizes the
preliminary fair values of the assets acquired and liabilities assumed as part
of the merger with Vitacost.com:
|
|
August
18, |
|
|
2014 |
ASSETS |
|
|
|
|
|
Total current assets |
|
|
$ |
79 |
|
|
|
|
|
|
|
Property, plant and equipment |
|
|
|
28 |
|
Intangibles |
|
|
|
81 |
|
Total Assets, excluding
Goodwill |
|
|
|
188 |
|
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
|
Total current liabilities |
|
|
|
(54 |
) |
|
|
|
|
|
|
Deferred income taxes |
|
|
|
(7 |
) |
Total
Liabilities |
|
|
|
(61 |
) |
Total Identifiable Net
Assets |
|
|
|
127 |
|
Goodwill |
|
|
|
160 |
|
Total Purchase
Price |
|
|
$ |
287 |
|
Of the $81 allocated to
intangible assets, the Company recorded $49, $26 and $6 related to customer
relationships, technology and the trade name, respectively. The Company will
amortize the technology and the trade name, using the straight line method, over
10 and three years, respectively, while the customer relationships will be
amortized over five years using the declining balance method. The goodwill
recorded as part of the merger was attributable to the assembled workforce of
Vitacost.com and operational synergies expected from the merger, as well as any
intangible assets that did not qualify for separate recognition. The transaction
was treated as a stock purchase for income tax purposes. The assets acquired and
liabilities assumed as part of the merger did not result in a step up of the tax
basis and goodwill is not expected to be deductible for tax purposes. The above
amounts represent the preliminary allocation of the purchase price, and are
subject to revision when the resulting valuations of property and intangible
assets are finalized, which will occur prior to August 18, 2015. The results of
operations of Vitacost.com were not material in 2014.
On January 28, 2014, the
Company closed its merger with Harris Teeter by purchasing 100% of the Harris
Teeter outstanding common stock for $2,436. The merger allows us to expand into
the fast-growing southeastern and mid-Atlantic markets and into Washington, D.C.
The merger was accounted for under the purchase method of accounting and was
financed through a combination of commercial paper and long-term debt (see Note
6).
The fair value step up
adjustment to Harris Teeter inventory as of the merger date is recorded in the
LIFO reserve. This resulted in a $52 decrease in LIFO reserve.
A-42
Notes to Consolidated Financial Statements, Continued
The Companys purchase
price allocation was finalized in the fourth quarter of 2014. The changes in the
fair values assumed from the preliminary amounts determined as of February 1,
2014 were an increase in goodwill of $9, an increase in accrued salaries and
wages of $13, a decrease in current deferred income tax liabilities of $4, an
increase in other current liabilities of $5 and a decrease in long-term deferred
income tax liabilities of $5. The table below summarizes the final fair values
of the assets acquired and liabilities assumed:
|
January 28, |
|
2014 |
ASSETS |
|
|
|
|
Cash
and temporary cash investments |
|
$ |
92 |
|
Store deposits in-transit |
|
|
28 |
|
Receivables |
|
|
41 |
|
FIFO
inventory |
|
|
426 |
|
Prepaid and other current assets |
|
|
31 |
|
Total
current assets |
|
|
618 |
|
Property, plant and equipment |
|
|
1,328 |
|
Intangibles |
|
|
558 |
|
Other assets |
|
|
238 |
|
Total
Assets, excluding Goodwill |
|
|
2,742 |
|
|
|
|
|
|
LIABILITIES |
|
|
|
|
Current portion of long-term debt including
obligations under |
|
|
|
|
capital
leases and financing obligations |
|
|
(7 |
) |
Trade accounts payable |
|
|
(202 |
) |
Accrued salaries and wages |
|
|
(60 |
) |
Deferred income taxes |
|
|
(16 |
) |
Other current liabilities |
|
|
(164 |
) |
Total
current liabilities |
|
|
(449 |
) |
Fair-value of long-term debt including
obligations under |
|
|
|
|
capital
leases and financing obligations |
|
|
(252 |
) |
Deferred income taxes |
|
|
(280 |
) |
Pension and postretirement benefit
obligations |
|
|
(98 |
) |
Other long-term liabilities |
|
|
(137 |
) |
Total
Liabilities |
|
|
(1,216 |
) |
Total
Identifiable Net Assets |
|
|
1,526 |
|
Goodwill |
|
|
910 |
|
Total
Purchase Price |
|
$ |
2,436 |
|
Of the $558 allocated to
intangible assets, $430 relates to the Harris Teeter trade name, to which we
assigned an indefinite life and, therefore, will not be amortized. The Company
also recorded $53 and $75 related to pharmacy prescription files and favorable
leasehold interests, respectively. The Company will amortize the pharmacy
prescription files and favorable leasehold interests over seven and 24 years,
respectively. The goodwill recorded as part of the merger was attributable to
the assembled workforce of Harris Teeter and operational synergies expected from
the merger, as well as any intangible assets that do not qualify for separate
recognition. The transaction was treated as a stock purchase for income tax
purposes. The assets acquired and liabilities assumed as part of the merger did
not result in a step up of the tax basis and goodwill is not expected to be
deductible for tax purposes.
A-43
Notes to Consolidated Financial Statements, Continued
Pro forma results of
operations, assuming the Harris Teeter transaction had taken place at the
beginning of 2012 and the Vitacost.com transaction had taken place at the
beginning of 2013, are included in the following table. The pro forma
information includes historical results of operations of Harris Teeter and
Vitacost.com and adjustments for interest expense that would have been incurred
due to financing the mergers, depreciation and amortization of the assets
acquired and excludes the pre-merger transaction related expenses incurred by
Harris Teeter, Vitacost.com and the Company. The pro forma information does not
include efficiencies, cost reductions, synergies or investments in lower prices
for our customers expected to result from the mergers. The unaudited pro forma
financial information is not necessarily indicative of the results that actually
would have occurred had the Harris Teeter merger been completed at the beginning
of 2012 or the Vitacost.com merger completed at the beginning of
2013.
|
Fiscal year
ended |
|
Fiscal year
ended |
|
January 31,
2015 |
|
February 1,
2014 |
Sales |
|
$ |
108,687 |
|
|
|
$ |
103,584 |
|
Net
earnings including noncontrolling interests |
|
|
1,736 |
|
|
|
|
1,624 |
|
Net
earnings attributable to noncontrolling interests |
|
|
19 |
|
|
|
|
12 |
|
Net
earnings attributable to The Kroger Co. |
|
$ |
1,717 |
|
|
|
$ |
1,612 |
|
3. Goodwill and Intangible
Assets
The following table
summarizes the changes in the Companys net goodwill balance through January 31,
2015.
|
|
2014 |
|
2013 |
|
Balance beginning of year |
|
|
|
|
|
|
|
|
Goodwill |
$ |
4,667 |
|
|
$ |
3,766 |
|
|
Accumulated impairment
losses |
|
(2,532 |
) |
|
|
(2,532 |
) |
|
|
|
2,135 |
|
|
|
1,234 |
|
|
Activity during the year |
|
|
|
|
|
|
|
|
Acquisitions |
|
169 |
|
|
|
901 |
|
|
Balance end of year |
|
|
|
|
|
|
|
|
Goodwill |
|
4,836 |
|
|
|
4,667 |
|
|
Accumulated impairment
losses |
|
(2,532 |
) |
|
|
(2,532 |
) |
|
|
$ |
2,304 |
|
|
$ |
2,135 |
|
In 2014, the Company
acquired all the outstanding shares of Vitacost.com, an online retailer,
resulting in additional goodwill of $160.
In 2013, the Company
acquired all the outstanding shares of Harris Teeter, a supermarket retailer in
southeastern and mid-Atlantic markets and Washington, D.C., resulting in
additional goodwill totaling $910. Goodwill of $9 and $901 was recorded in 2014
and 2013, respectively.
See Note 2 for additional
information regarding the Harris Teeter and Vitacost.com mergers.
Testing for impairment must
be performed annually, or on an interim basis upon the occurrence of a
triggering event or a change in circumstances that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. The annual
evaluations of goodwill performed during the fourth quarter of 2014, 2013 and
2012 did not result in impairment.
Based on current and future
expected cash flows, the Company believes goodwill impairments are not
reasonably likely. A 10% reduction in fair value of the Companys reporting
units would not indicate a potential for impairment of the Companys remaining
goodwill balance.
A-44
Notes to Consolidated Financial Statements, Continued
In 2014, the
Company acquired definite and indefinite lived intangible assets totaling
approximately $81 as a result of the merger with Vitacost.com.
In 2013, the Company
acquired definite and indefinite lived intangible assets totaling approximately
$558 as a result of the merger with Harris Teeter.
The following table
summarizes the Companys intangible assets balance through January 31,
2015.
|
2014 |
|
2013 |
|
Gross carrying |
|
Accumulated |
|
Gross carrying |
|
Accumulated |
|
amount |
|
amortization
(1) |
|
amount |
|
amortization
(1) |
Definite-lived favorable leasehold
interests |
|
$ |
101 |
|
|
|
$ |
(26 |
)
|
|
|
$ |
144 |
|
|
|
$ |
(61 |
)
|
Definite-lived pharmacy prescription
files |
|
|
98 |
|
|
|
|
(41 |
) |
|
|
|
95 |
|
|
|
|
(28 |
) |
Definite-lived customer relationships |
|
|
87 |
|
|
|
|
(17 |
) |
|
|
|
38 |
|
|
|
|
(4 |
) |
Definite-lived other |
|
|
74 |
|
|
|
|
(13 |
) |
|
|
|
40 |
|
|
|
|
(6 |
) |
Indefinite-lived trade name |
|
|
430 |
|
|
|
|
|
|
|
|
|
430 |
|
|
|
|
|
|
Indefinite-lived liquor licenses |
|
|
64 |
|
|
|
|
|
|
|
|
|
54 |
|
|
|
|
|
|
Total |
|
$ |
854 |
|
|
|
$ |
(97 |
) |
|
|
$ |
801 |
|
|
|
$ |
(99 |
) |
____________________
(1) |
|
Favorable leasehold
interests are amortized to rent expense, pharmacy prescription files are
amortized to merchandise costs, customer relationships are amortized to
depreciation and amortization expense and other intangibles are amortized
to operating, general and administrative (OG&A) expense and
depreciation and amortization expense. |
Amortization expense
associated with intangible assets totaled approximately $41, $18 and $13, during
fiscal years 2014, 2013 and 2012, respectively. Future amortization expense
associated with the net carrying amount of definite-lived intangible assets for
the years subsequent to 2014 is estimated to be approximately:
2015 |
$ |
47 |
2016 |
|
38 |
2017 |
|
31 |
2018 |
|
28 |
2019 |
|
26 |
Thereafter |
|
93 |
Total future estimated amortization
associated |
|
|
with
definite-lived intangible assets |
$ |
263 |
4. |
Property, Plant and
Equipment, Net |
|
|
|
Property, plant and equipment, net consists
of: |
|
|
2014 |
|
2013 |
|
Land |
$ |
2,819 |
|
|
$ |
2,639 |
|
|
Buildings and land improvements |
|
9,639 |
|
|
|
8,848 |
|
|
Equipment |
|
11,587 |
|
|
|
11,037 |
|
|
Leasehold improvements |
|
8,068 |
|
|
|
7,644 |
|
|
Construction-in-progress |
|
1,690 |
|
|
|
1,520 |
|
|
Leased property under capital leases and
financing obligations |
|
737 |
|
|
|
691 |
|
|
Total
property, plant and equipment |
|
34,540 |
|
|
|
32,379 |
|
|
Accumulated depreciation and
amortization |
|
(16,628 |
) |
|
|
(15,486 |
) |
|
Property,
plant and equipment, net |
$ |
17,912 |
|
|
$ |
16,893 |
|
A-45
Notes to Consolidated Financial Statements, Continued
Accumulated
depreciation and amortization for leased property under capital leases was $332
at January 31, 2015 and $339 at February 1, 2014.
Approximately $260 and
$175, net book value, of property, plant and equipment collateralized certain
mortgages at January 31, 2015 and February 1, 2014, respectively.
5. |
Taxes Based on Income |
|
|
|
The provision for
taxes based on income consists
of: |
|
|
2014 |
|
2013 |
|
2012 |
|
Federal |
|
|
|
|
|
|
|
|
|
|
|
Current |
$ |
847 |
|
|
$ |
638 |
|
|
$ |
563 |
|
Deferred |
|
(15 |
) |
|
|
81 |
|
|
|
154 |
|
Subtotal federal |
|
832 |
|
|
|
719 |
|
|
|
717 |
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local |
|
|
|
|
|
|
|
|
|
|
|
Current |
|
59 |
|
|
|
42 |
|
|
|
46 |
|
Deferred |
|
11 |
|
|
|
(10 |
) |
|
|
31 |
|
Subtotal state and local |
|
70 |
|
|
|
32 |
|
|
|
77 |
|
Total |
$ |
902 |
|
|
$ |
751 |
|
|
$ |
794 |
A reconciliation of the
statutory federal rate and the effective rate follows:
|
|
2014 |
|
2013 |
|
2012 |
|
Statutory rate |
35.0 |
% |
|
35.0 |
% |
|
35.0 |
% |
|
State income taxes, net of federal tax benefit |
1.7 |
% |
|
0.9 |
% |
|
2.2 |
% |
|
Credits |
(1.2 |
)% |
|
(1.3 |
)% |
|
(1.4 |
)% |
|
Favorable resolution of issues |
(0.4 |
)% |
|
|
|
|
(0.5 |
)% |
|
Domestic manufacturing deduction |
(0.7 |
)% |
|
(1.1 |
)% |
|
(0.5 |
)% |
|
Other changes, net |
(0.3 |
)% |
|
(0.6 |
)% |
|
(0.3 |
)% |
|
|
34.1 |
% |
|
32.9 |
% |
|
34.5 |
% |
The 2014 effective tax rate
differed from the federal statutory rate primarily as a result of the
utilization of tax credits, the Domestic Manufacturing Deduction and other
changes, partially offset by the effect of state income taxes. The 2013 rate for
state income taxes is lower than 2014 and 2012 due to an increase in state tax
credits, including the benefit from filing amended returns to claim additional
credits. The 2013 benefit from the Domestic Manufacturing Deduction differed
from 2014 and 2012 due to additional deductions taken in 2013, as well as the
amendment of prior years tax returns to claim the additional benefit available
in years still under review by the Internal Revenue Service.
A-46
Notes to Consolidated Financial Statements, Continued
The tax effects
of significant temporary differences that comprise tax balances were as
follows:
|
2014 |
|
2013 |
Current deferred tax assets: |
|
|
|
|
|
|
|
Net operating loss and credit
carryforwards |
$ |
5 |
|
|
$ |
4 |
|
Compensation related costs |
|
88 |
|
|
|
103 |
|
Other |
|
14 |
|
|
|
15 |
|
Subtotal |
|
107 |
|
|
|
122 |
|
Valuation allowance |
|
(7 |
) |
|
|
(9 |
) |
Total current deferred tax assets |
|
100 |
|
|
|
113 |
|
|
|
|
|
|
|
|
|
Current deferred tax liabilities: |
|
|
|
|
|
|
|
Insurance related costs |
|
(99 |
) |
|
|
(96 |
) |
Inventory related costs |
|
(288 |
) |
|
|
(265 |
) |
Total current deferred tax liabilities |
|
(387 |
) |
|
|
(361 |
) |
Current deferred taxes |
$ |
(287 |
) |
|
$ |
(248 |
) |
|
|
|
|
|
|
|
|
Long-term deferred tax assets: |
|
|
|
|
|
|
|
Compensation related costs |
$ |
721 |
|
|
$ |
464 |
|
Lease
accounting |
|
129 |
|
|
|
115 |
|
Closed
store reserves |
|
50 |
|
|
|
54 |
|
Insurance related costs |
|
77 |
|
|
|
66 |
|
Net
operating loss and credit carryforwards |
|
115 |
|
|
|
103 |
|
Other |
|
2 |
|
|
|
|
|
Subtotal |
|
1,094 |
|
|
|
802 |
|
Valuation allowance |
|
(42 |
) |
|
|
(38 |
) |
Total long-term deferred tax assets |
|
1,052 |
|
|
|
764 |
|
|
|
|
|
|
|
|
|
Long-term deferred tax
liabilities: |
|
|
|
|
|
|
|
Depreciation and amortization |
|
(2,261 |
) |
|
|
(2,128 |
) |
Other |
|
|
|
|
|
(17 |
) |
Total long-term deferred tax liabilities |
|
(2,261 |
) |
|
|
(2,145 |
) |
Long-term deferred taxes |
$ |
(1,209 |
) |
|
$ |
(1,381 |
) |
At January 31, 2015, the
Company had net operating loss carryforwards for state income tax purposes of
$1,286. These net operating loss carryforwards expire from 2015 through 2033.
The utilization of certain of the Companys state net operating loss
carryforwards may be limited in a given year. Further, based on the analysis
described below, the Company has recorded a valuation allowance against some of
the deferred tax assets resulting from its state net operating
losses.
At January 31, 2015, the
Company had state credit carryforwards of $48, most of which expire from 2015
through 2027. The utilization of certain of the Companys credits may be limited
in a given year. Further, based on the analysis described below, the Company has
recorded a valuation allowance against some of the deferred tax assets resulting
from its state credits.
At January 31, 2015, the
Company had federal net operating loss carryforwards of $54. The net operating
loss carryforwards expire from 2030 through 2033. The utilization of certain of
the Companys federal net operating loss carryforwards may be limited in a given
year. Further, based on the analysis described below, the Company has not
recorded a valuation allowance against the deferred tax assets resulting from
its federal net operating losses.
A-47
Notes to Consolidated Financial Statements, Continued
At January 31,
2015, the Company had federal capital loss carryforwards of $25. These capital
loss carryforwards expire at the end of 2015. The utilization of certain of the
Companys capital loss carryforwards may be limited in a given year. Further,
based on the analysis described below, the Company has recorded a valuation
allowance against substantially all of the deferred tax assets resulting from
its capital losses.
The Company regularly
reviews all deferred tax assets on a tax filer and jurisdictional basis to
estimate whether these assets are more likely than not to be realized based on
all available evidence. This evidence includes historical taxable income,
projected future taxable income, the expected timing of the reversal of existing
temporary differences and the implementation of tax planning strategies.
Projected future taxable income is based on expected results and assumptions as
to the jurisdiction in which the income will be earned. The expected timing of
the reversals of existing temporary differences is based on current tax law and
the Companys tax methods of accounting. Unless deferred tax assets are more
likely than not to be realized, a valuation allowance is established to reduce
the carrying value of the deferred tax asset until such time that realization
becomes more likely than not. Increases and decreases in these valuation
allowances are included in Income tax expense in the Consolidated Statements
of Operations.
A reconciliation of the
beginning and ending amount of unrecognized tax benefits, including positions
impacting only the timing of tax benefits, is as follows:
|
2014 |
|
2013 |
|
2012 |
Beginning balance |
$ |
325 |
|
|
$ |
299 |
|
|
$ |
310 |
|
Additions based on tax positions related to the current
year |
|
17 |
|
|
|
23 |
|
|
|
45 |
|
Reductions based on tax positions related to the current
year |
|
(6 |
) |
|
|
(10 |
) |
|
|
(9 |
) |
Additions for tax positions of prior years |
|
9 |
|
|
|
17 |
|
|
|
1 |
|
Reductions for tax positions of prior years |
|
(36 |
) |
|
|
(4 |
) |
|
|
(27 |
) |
Settlements |
|
(63 |
) |
|
|
|
|
|
|
(21 |
) |
Ending balance |
$ |
246 |
|
|
$ |
325 |
|
|
$ |
299 |
|
The Company does not
anticipate that changes in the amount of unrecognized tax benefits over the next
twelve months will have a significant impact on its results of operations or
financial position.
As of January 31, 2015,
February 1, 2014 and February 2, 2013, the amount of unrecognized tax benefits
that, if recognized, would impact the effective tax rate was $90, $98 and $70
respectively.
To the extent interest and
penalties would be assessed by taxing authorities on any underpayment of income
tax, such amounts have been accrued and classified as a component of income tax
expense. During the years ended January 31, 2015, February 1, 2014 and February
2, 2013, the Company recognized approximately $3, $10 and $(8), respectively, in
interest and penalties (recoveries). The Company recorded charges for interest
and penalties of approximately $30, $41 and $33 as of January 31, 2015, February
1, 2014 and February 2, 2013, respectively.
As of January 31, 2015, the
Internal Revenue Service had concluded its examination of our 2008 and 2009
federal tax returns and is currently auditing tax years 2010 through 2013. The
2010 and 2011 audits are expected to be completed in 2015.
On September 13, 2013, the
U.S. Department of the Treasury and Internal Revenue Service released final
tangible property regulations that provide guidance on the tax treatment
regarding the deduction and capitalization of expenditures related to tangible
property. These regulations are effective for tax years beginning on or after
January 1, 2014 and will be implemented by the Company on its 2014 tax return to
be filed no later than October 15, 2015. The Company believes adoption of these
regulations will not have an effect on net income and will not have a material
effect on the reclassification between long-term deferred tax liabilities and
current income tax liabilities.
A-48
Notes to Consolidated Financial Statements, Continued
6. |
Debt Obligations |
|
|
|
Long-term debt
consists of: |
|
|
2014 |
|
2013 |
|
0.76% to 8.00% Senior notes due through 2043 |
$ |
9,283 |
|
|
$ |
9,083 |
|
|
5.00% to 12.75% Mortgages due in varying amounts through
2027 |
|
73 |
|
|
|
64 |
|
|
0.27% to 0.37% Commercial paper due through February
2015 |
|
1,275 |
|
|
|
1,250 |
|
|
Other |
|
454 |
|
|
|
383 |
|
|
Total debt |
|
11,085 |
|
|
|
10,780 |
|
|
Less
current portion |
|
(1,844 |
) |
|
|
(1,616 |
) |
|
Total long-term debt |
$ |
9,241 |
|
|
$ |
9,164 |
|
In 2014, the Company issued
$500 of senior notes due in fiscal year 2021 bearing an interest rate of 2.95%
and repaid $300 of senior notes bearing an interest rate of 4.95% upon
maturity.
In 2013, the Company issued
$600 of senior notes due in fiscal year 2023 bearing an interest rate of 3.85%,
$400 of senior notes due in fiscal year 2043 bearing an interest rate of 5.15%,
$500 of senior notes due in fiscal year 2016 bearing an interest rate of 3-month
London Inter-Bank Offering Rate (LIBOR) plus 53 basis points, $300 of senior
notes due in fiscal year 2016 bearing an interest rate of 1.20%, $500 of senior
notes due in fiscal year 2019 bearing an interest rate of 2.30%, $700 of senior
notes due in fiscal year 2021 bearing an interest rate of 3.30% and $500 in
senior notes due in fiscal year 2024 bearing an interest rate of 4.00%. In
2013, the Company repaid $400 of senior notes bearing an interest rate of 5.00%
and $600 of senior notes bearing an interest rate of 7.50% upon their maturity.
On June 30, 2014, the
Company amended, extended and restated its $2,000 unsecured revolving credit
facility. The Company entered into the amended credit facility to amend, extend
and restate the Companys existing credit facility that would have terminated on
January 25, 2017. The amended credit facility provides for a $2,750 unsecured
revolving credit facility (the Credit Agreement), with a termination date of
June 30, 2019, unless extended as permitted under the Credit Agreement. The
Company has the ability to increase the size of the Credit Agreement by up to an
additional $750, subject to certain conditions.
Borrowings under the Credit
Agreement bear interest at the Companys option, at either (i) LIBOR plus a
market rate spread, based on the Companys Leverage Ratio or (ii) the base rate,
defined as the highest of (a) the Federal Funds Rate plus 0.5%, (b) the Bank of
America prime rate, and (c) one-month LIBOR plus 1.0%, plus a market rate spread
based on the Companys Leverage Ratio. The Company will also pay a Commitment
Fee based on the Leverage Ratio and Letter of Credit fees equal to a market rate
spread based on the Companys Leverage Ratio. The Credit Agreement contains
covenants, which, among other things, require the maintenance of a Leverage
Ratio of not greater than 3.50:1.00 and a Fixed Charge Coverage Ratio of not
less than 1.70:1.00. The Company may repay the Credit Agreement in whole or in
part at any time without premium or penalty. The Credit Agreement is not
guaranteed by the Companys subsidiaries.
As of January 31, 2015, the
Company had $1,275 of borrowings of commercial paper, with a weighted average
interest rate of 0.37%, and no borrowings under its Credit Agreement. In
addition to the Credit Agreement, the Company maintained two uncommitted money
market lines totaling $75 in the aggregate as of February 1, 2014. The money
market lines allowed the Company to borrow from banks at mutually agreed upon
rates, usually at rates below the rates offered under the credit agreement. As
of February 1, 2014, the Company had $1,250 of borrowings of commercial paper,
with a weighted average interest rate of 0.27%, and no borrowings under its
Credit Agreement and money market lines.
As of January 31, 2015, the
Company had outstanding letters of credit in the amount of $233, of which $10
reduces funds available under the Companys Credit Agreement. The letters of
credit are maintained primarily to support performance, payment, deposit or
surety obligations of the Company.
A-49
Notes to Consolidated Financial Statements, Continued
Most of the
Companys outstanding public debt is subject to early redemption at varying
times and premiums, at the option of the Company. In addition, subject to
certain conditions, some of the Companys publicly issued debt will be subject
to redemption, in whole or in part, at the option of the holder upon the
occurrence of a redemption event, upon not less than five days notice prior to
the date of redemption, at a redemption price equal to the default amount, plus
a specified premium. Redemption Event is defined in the indentures as the
occurrence of (i) any person or group, together with any affiliate thereof,
beneficially owning 50% or more of the voting power of the Company, (ii) any one
person or group, or affiliate thereof, succeeding in having a majority of its
nominees elected to the Companys Board of Directors, in each case, without the
consent of a majority of the continuing directors of the Company or (iii) both a
change of control and a below investment grade rating.
The aggregate annual
maturities and scheduled payments of long-term debt, as of year-end 2014, and
for the years subsequent to 2014 are:
|
2015 |
|
$ |
1,844 |
|
2016 |
|
|
1,299 |
|
2017 |
|
|
736 |
|
2018 |
|
|
1,008 |
|
2019 |
|
|
773 |
|
Thereafter |
|
|
5,425 |
|
Total debt |
|
$ |
11,085 |
7. Derivative Financial
Instruments
GAAP defines derivatives,
requires that derivatives be carried at fair value on the balance sheet, and
provides for hedge accounting when certain conditions are met. The Companys
derivative financial instruments are recognized on the balance sheet at fair
value. Changes in the fair value of derivative instruments designated as cash
flow hedges, to the extent the hedges are highly effective, are recorded in
other comprehensive income, net of tax effects. Ineffective portions of cash
flow hedges, if any, are recognized in current period earnings. Other
comprehensive income or loss is reclassified into current period earnings when
the hedged transaction affects earnings. Changes in the fair value of derivative
instruments designated as fair value hedges, along with corresponding changes
in the fair values of the hedged assets or liabilities, are recorded in current
period earnings. Ineffective portions of fair value hedges, if any, are
recognized in current period earnings.
The Company assesses, both
at the inception of the hedge and on an ongoing basis, whether derivatives used
as hedging instruments are highly effective in offsetting the changes in the
fair value or cash flow of the hedged items. If it is determined that a
derivative is not highly effective as a hedge or ceases to be highly effective,
the Company discontinues hedge accounting prospectively.
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 a commercial paper
program, interest rate swaps (fair value hedges) and forward-starting interest
rate swaps (cash flow hedges). The Companys current program relative to
interest rate protection contemplates hedging the exposure to changes in the
fair value of fixed-rate debt attributable to changes in interest rates. To do
this, the Company uses the following guidelines: (i) use average daily
outstanding borrowings to determine annual debt amounts subject to interest rate
exposure, (ii) limit the average annual amount subject to interest rate reset
and the amount of floating rate debt to a combined total of $2,500 or less,
(iii) include no leveraged products, and (iv) hedge without regard to profit
motive or sensitivity to current mark-to-market status.
The Company reviews
compliance with these guidelines annually with the Financial Policy Committee of
the Board of Directors. These guidelines may change as the Companys needs
dictate.
A-50
Notes to Consolidated Financial Statements, Continued
Fair Value
Interest Rate Swaps
The table below summarizes
the outstanding interest rate swaps designated as fair value hedges as of
January 31, 2015 and February 1, 2014.
|
2014 |
|
2013 |
|
Pay |
|
Pay |
|
Pay |
|
Pay |
|
Floating |
|
Fixed |
|
Floating |
|
Fixed |
Notional amount |
$ |
100 |
|
|
$ |
|
|
$ |
100 |
|
|
$ |
|
Number of contracts |
|
2 |
|
|
|
|
|
|
2 |
|
|
|
|
Duration in years |
|
3.94 |
|
|
|
|
|
|
4.94 |
|
|
|
|
Average variable rate |
|
5.83 |
% |
|
|
|
|
|
5.83 |
% |
|
|
|
Average fixed rate |
|
6.80 |
% |
|
|
|
|
|
6.80 |
% |
|
|
|
Maturity |
|
December 2018 |
|
|
|
December 2018 |
|
The gain or loss on these
derivative instruments as well as the offsetting gain or loss on the hedged
items attributable to the hedged risk is recognized in current earnings as
Interest expense. These gains and losses for 2014 and 2013 were as
follows:
|
|
Year-To-Date |
|
|
January 31,
2015 |
|
February 1,
2014 |
Consolidated Statements of
Operations |
|
Gain/(Loss) |
|
Gain/(Loss) on |
|
Gain/(Loss) |
|
Gain/(Loss) on |
Classification |
|
on Swaps |
|
Borrowings |
|
on Swaps |
|
Borrowings |
Interest Expense |
|
$2 |
|
$(2) |
|
$(3) |
|
$4 |
The following table
summarizes the location and fair value of derivative instruments designated as
fair value hedges on the Companys Consolidated Balance Sheets:
|
|
Asset
Derivatives |
|
|
Fair
Value |
|
|
|
|
January 31, |
|
February 1, |
|
Balance Sheet |
Derivatives Designated as Fair
Value Hedging Instruments |
|
2015 |
|
2014 |
|
Location |
Interest Rate Hedges |
|
$ |
|
$(2) |
|
(Other long-term |
|
|
|
|
|
|
liabilities)/Other |
|
|
|
|
|
|
assets |
Cash Flow
Forward-Starting Interest Rate Swaps
As of January 31, 2015, the
Company had four forward-starting interest rate swap agreements with maturity
dates of October 2015 with an aggregate notional amount totaling $300 and seven
forward-starting interest rate swap agreements with maturity dates of August
2017 with an aggregate notional amount totaling $400. A forward-starting
interest rate swap is an agreement that effectively hedges the variability in
future benchmark interest payments attributable to changes in interest rates on
the forecasted issuance of fixed-rate debt. The Company entered into these
forward-starting interest rate swaps in order to lock in fixed interest rates on
its forecasted issuances of debt in October 2015 and August 2017. Accordingly,
the forward-starting interest rate swaps were designated as cash-flow hedges as
defined by GAAP. As of January 31, 2015, the fair value of the interest rate
swaps was recorded in other long-term liabilities for $39 and accumulated other
comprehensive loss for $25 net of tax.
As of February 1, 2014, the
Company did not maintain any forward-starting interest rate swap agreements.
A-51
Notes to Consolidated Financial Statements, Continued
The following
table summarizes the effect of the Companys derivative instruments designated
as cash flow hedges for 2014 and 2013:
|
|
Year-To-Date |
|
|
|
|
|
|
|
|
Amount of Gain/ |
|
|
|
|
Amount of Gain/(Loss) |
|
(Loss) Reclassified |
|
|
|
|
in AOCI on Derivative |
|
from AOCI into Income |
|
Location of Gain/(Loss) |
Derivatives in Cash Flow Hedging |
|
(Effective
Portion) |
|
(Effective
Portion) |
|
Reclassified into Income |
Relationships |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
(Effective
Portion) |
Forward-Starting Interest Rate |
|
|
|
|
|
|
|
|
|
|
Swaps, net
of tax* |
|
$(49) |
|
$(25) |
|
$(1) |
|
$(1) |
|
Interest
expense |
____________________
* |
|
The
amounts of Gain/(Loss) in AOCI on derivatives include unamortized proceeds
and payments from forward-starting interest rate swaps once classified as
cash flow hedges that were terminated prior to end of
2014. |
For the above fair value
and cash flow interest rate swaps, the Company has entered into International
Swaps and Derivatives Association master netting agreements that permit the net
settlement of amounts owed under their respective derivative contracts. Under
these master netting agreements, net settlement generally permits the Company or
the counterparty to determine the net amount payable for contracts due on the
same date and in the same currency for similar types of derivative transactions.
These master netting agreements generally also provide for net settlement of all
outstanding contracts with a counterparty in the case of an event of default or
a termination event.
Collateral is generally not
required of the counterparties or of the Company under these master netting
agreements. As of January 31, 2015 and February 1, 2014, no cash collateral was
received or pledged under the master netting agreements.
The effect of the net
settlement provisions of these master netting agreements on the Companys
derivative balances upon an event of default or termination event is as follows
as of January 31, 2015 and February 1, 2014:
January 31, 2015 |
|
|
|
Gross |
|
Net |
|
Gross Amounts Not Offset |
|
|
|
|
|
|
Amounts |
|
Amount |
|
in the Balance
Sheet |
|
|
|
|
Gross |
|
Offset in |
|
Presented in |
|
|
|
|
|
|
|
|
Amount |
|
the Balance |
|
the Balance |
|
Financial |
|
Cash |
|
Net |
|
|
Recognized |
|
Sheet |
|
Sheet |
|
Instruments |
|
Collateral |
|
Amount |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Cash
Flow Forward-Starting |
|
|
|
|
|
|
|
|
|
|
|
|
Interest
Rate Swaps |
|
$39 |
|
$ |
|
$39 |
|
$ |
|
$ |
|
$39 |
|
February 1, 2014 |
|
|
|
Gross |
|
Net |
|
Gross Amounts Not Offset |
|
|
|
|
|
|
Amounts |
|
Amount |
|
in the Balance
Sheet |
|
|
|
|
Gross |
|
Offset in |
|
Presented in |
|
|
|
|
|
|
|
|
Amount |
|
the Balance |
|
the Balance |
|
Financial |
|
Cash |
|
Net |
|
|
Recognized |
|
Sheet |
|
Sheet |
|
Instruments |
|
Collateral |
|
Amount |
Liabilities |
|
|
|
|
|
|
|
|
|
|
|
|
Fair
Value Interest Rate Swaps |
|
$2 |
|
$ |
|
$2 |
|
$ |
|
$ |
|
$2 |
Commodity Price
Protection
The Company enters into
purchase commitments for various resources, including raw materials utilized in
its manufacturing facilities and energy to be used in its stores, warehouses,
manufacturing facilities and administrative offices. The Company enters into
commitments expecting to take delivery of and to utilize those resources in the
conduct of normal business. Those commitments for which the Company expects to
utilize or take delivery in a reasonable amount of time in the normal course of
business qualify as normal purchases and normal sales.
A-52
Notes to Consolidated Financial Statements, Continued
8. Fair Value
Measurements
GAAP establishes a fair
value hierarchy that prioritizes the inputs used to measure fair value. The
three levels of the fair value hierarchy defined in the standards are as
follows:
Level 1 Quoted prices are
available in active markets for identical assets or liabilities;
Level 2 Pricing inputs
are other than quoted prices in active markets included in Level 1, which are
either directly or indirectly observable;
Level 3 Unobservable
pricing inputs in which little or no market activity exists, therefore requiring
an entity to develop its own assumptions about the assumptions that market
participants would use in pricing an asset or liability.
For items carried at (or
adjusted to) fair value in the consolidated financial statements, the following
tables summarize the fair value of these instruments at January 31, 2015 and
February 1, 2014:
January 31, 2015 Fair
Value Measurements Using
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets |
|
|
|
|
|
|
Significant |
|
|
|
|
|
for
Identical |
|
Significant
Other |
|
Unobservable |
|
|
|
|
|
Assets |
|
Observable
Inputs |
|
Inputs |
|
|
|
|
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
Total |
Trading Securities |
|
$ |
47 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
47 |
|
Available-for-Sale Securities |
|
|
36 |
|
|
|
|
|
|
|
|
|
|
|
|
|
36 |
|
Warrants |
|
|
|
|
|
|
|
26 |
|
|
|
|
|
|
|
|
26 |
|
Long-Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
22 |
|
Interest Rate Hedges |
|
|
|
|
|
|
|
(39 |
) |
|
|
|
|
|
|
|
(39 |
) |
Total |
|
$ |
83 |
|
|
|
$ |
(13 |
) |
|
|
$ |
22 |
|
|
$ |
92 |
|
The table above includes
Harris Teeter assets at fair value as of January 31, 2015.
February 1, 2014 Fair
Value Measurements Using
|
Quoted Prices in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Active
Markets |
|
|
|
|
|
|
Significant |
|
|
|
|
|
for
Identical |
|
Significant
Other |
|
Unobservable |
|
|
|
|
|
Assets |
|
Observable
Inputs |
|
Inputs |
|
|
|
|
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
Total |
Available-for-Sale Securities |
|
$ |
36 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
36 |
|
Warrants |
|
|
|
|
|
|
|
16 |
|
|
|
|
|
|
|
|
16 |
|
Long-Lived Assets |
|
|
|
|
|
|
|
|
|
|
|
|
29 |
|
|
|
29 |
|
Interest Rate Hedges |
|
|
|
|
|
|
|
(2 |
) |
|
|
|
|
|
|
|
(2 |
) |
Total |
|
$ |
36 |
|
|
|
$ |
14 |
|
|
|
$ |
29 |
|
|
$ |
79 |
|
In 2014 and 2013,
unrealized gains on the Level 1 available-for-sale securities totaled
$8.
The Company values warrants
using the Black-Scholes option-pricing model. The Black-Scholes option-pricing
model is classified as a Level 2 input.
The Company values interest
rate hedges using observable forward yield curves. These forward yield curves
are classified as Level 2 inputs.
Fair value measurements of
non-financial assets and non-financial liabilities are primarily used in the
impairment analysis of goodwill, other intangible assets, long-lived assets and
in the valuation of store lease exit costs. The Company reviews goodwill and
other intangible assets for impairment annually, during the fourth quarter of
each fiscal year, and as circumstances indicate the possibility of impairment.
See Note 3 for
A-53
Notes to Consolidated Financial Statements, Continued
further discussion related
to the Companys carrying value of goodwill. Long-lived assets and store lease
exit costs were measured at fair value on a nonrecurring basis using Level 3
inputs as defined in the fair value hierarchy. See Note 1 for further discussion
of the Companys policies and recorded amounts for impairments of long-lived
assets and valuation of store lease exit costs. In 2014, long-lived assets with
a carrying amount of $59 were written down to their fair value of $22, resulting
in an impairment charge of $37. In 2013, long-lived assets with a carrying
amount of $68 were written down to their fair value of $29, resulting in an
impairment charge of $39.
Mergers are accounted for
using the acquisition method of accounting, which requires that the purchase
price paid for an acquisition be allocated to the assets and liabilities
acquired based on their estimated fair values as of the effective date of the
acquisition, with the excess of the purchase price over the net assets being
recorded as goodwill. Harris Teeter assets and liabilities were valued as of
January 28, 2014 and Vitacost. com assets and liabilities were valued as of
August 18, 2014. Harris Teeter was excluded in the above table for February 1,
2014 due to all acquired assets and assumed liabilities in the Harris Teeter
merger being recorded at fair value as of January 28, 2014. See Note 2 for
further discussion related to the mergers with Harris Teeter and
Vitacost.com.
Fair Value of Other Financial
Instruments
Current and Long-term
Debt
The fair value of the
Companys long-term debt, including current maturities, was estimated based on
the quoted market prices for the same or similar issues adjusted for illiquidity
based on available market evidence. If quoted market prices were not available,
the fair value was based upon the net present value of the future cash flow
using the forward interest rate yield curve in effect at respective year-ends.
At January 31, 2015, the fair value of total debt was $12,378 compared to a
carrying value of $11,085. At February 1, 2014, the fair value of total debt was
$11,547 compared to a carrying value of $10,780.
Cash and Temporary Cash
Investments, Store Deposits In-Transit, Receivables, Prepaid and Other Current
Assets, Trade Accounts Payable, Accrued Salaries and Wages and Other Current
Liabilities
The carrying amounts of
these items approximated fair value.
Other
Assets
The fair values of these
investments were estimated based on quoted market prices for those or similar
investments, or estimated cash flows, if appropriate. At January 31, 2015 and
February 1, 2014, the carrying and fair value of long-term investments for which
fair value is determinable was $133 and $51, respectively. The increase in fair
value of long-term investments for which fair value is determinable is mainly
due to the Companys merger with Harris Teeter. At January 31, 2015 and February
1, 2014, the carrying value of notes receivable for which fair value is
determinable was $98 and $87, respectively.
A-54
Notes to Consolidated Financial Statements, Continued
9. Accumulated Other Comprehensive Income
(Loss)
The following table
represents the changes in AOCI by component for the years ended February 1, 2014
and January 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
and |
|
|
|
|
|
|
|
|
Cash
Flow |
|
Available |
|
Postretirement |
|
|
|
|
|
|
|
|
Hedging |
|
for
sale |
|
Defined
Benefit |
|
|
|
|
|
|
|
|
Activities
(1) |
|
Securities
(1) |
|
Plans
(1) |
|
Total
(1) |
Balance at February 2, 2013 |
|
|
$ |
(14 |
) |
|
|
|
$ |
7 |
|
|
|
$ |
(746 |
) |
|
|
|
$ |
(753 |
) |
|
OCI
before reclassifications (2) |
|
|
|
(12 |
) |
|
|
|
|
5 |
|
|
|
|
233 |
|
|
|
|
|
226 |
|
|
Amounts reclassified out of AOCI (3) |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
62 |
|
|
|
|
|
63 |
|
|
Net
current-period OCI |
|
|
|
(11 |
) |
|
|
|
|
5 |
|
|
|
|
295 |
|
|
|
|
|
289 |
|
|
Balance at February 1, 2014 |
|
|
|
(25 |
) |
|
|
|
|
12 |
|
|
|
|
(451 |
) |
|
|
|
|
(464 |
) |
|
OCI
before reclassifications (2) |
|
|
|
(25 |
) |
|
|
|
|
5 |
|
|
|
|
(351 |
) |
|
|
|
|
(371 |
) |
|
Amounts reclassified out of AOCI (3) |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
22 |
|
|
|
|
|
23 |
|
|
Net
current-period OCI |
|
|
|
(24 |
) |
|
|
|
|
5 |
|
|
|
|
(329 |
) |
|
|
|
|
(348 |
) |
|
Balance at January 31, 2015 |
|
|
$ |
(49 |
) |
|
|
|
$ |
17 |
|
|
|
$ |
(780 |
) |
|
|
|
$ |
(812 |
) |
|
____________________
(1) |
|
All
amounts are net of tax. |
|
(2) |
|
Net of tax
of $(8), $3 and $137 for cash flow hedging activities, available for sale
securities and pension and postretirement defined benefit plans,
respectively, as of February 1, 2014. Net of tax of $(14), $3 and $(206)
for cash flow hedging activities, available for sale securities and
pension and postretirement defined benefit plans, respectively, as of
January 31, 2015. |
|
(3) |
|
Net of tax
of $1 and $36 for cash flow hedging activities and pension and
postretirement defined benefit plans, respectively, as of February 1,
2014. Net of tax of $13 for pension and postretirement defined benefit
plans, as of January 31, 2015. |
The following table
represents the items reclassified out of AOCI and the related tax effects for
the year ended January 31, 2015 and February 1, 2014:
|
|
For the year ended |
|
For the year ended |
|
|
January 31,
2015 |
|
February 1,
2014 |
Gains on cash flow hedging activities |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
unrealized gains and losses on |
|
|
|
|
|
|
|
|
|
|
|
|
cash
flow hedging activities (1) |
|
|
$ |
1 |
|
|
|
|
$ |
2 |
|
|
Tax
expense |
|
|
|
|
|
|
|
|
|
(1 |
) |
|
Net of
tax |
|
|
|
1 |
|
|
|
|
|
1 |
|
|
Pension and postretirement defined benefit plan
items |
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of
amounts included in net periodic |
|
|
|
|
|
|
|
|
|
|
|
|
pension
expense (2) |
|
|
|
35 |
|
|
|
|
|
98 |
|
|
Tax
expense |
|
|
|
(13 |
) |
|
|
|
|
(36 |
) |
|
Net of
tax |
|
|
|
22 |
|
|
|
|
|
62 |
|
|
Total reclassifications, net of tax |
|
|
$ |
23 |
|
|
|
|
$ |
63 |
|
|
____________________
(1) |
|
Reclassified from AOCI into interest expense. |
|
(2) |
|
Reclassified from AOCI into merchandise costs and OG&A expense.
These components are included in the computation of net periodic pension
costs (see Note 15 for additional details). |
A-55
Notes to Consolidated Financial Statements, Continued
10. Leases and
Lease-Financed Transactions
While the Companys current
strategy emphasizes ownership of store real estate, the Company operates
primarily in leased facilities. Lease terms generally range from 10 to 20 years
with options to renew for varying terms. Terms of certain leases include
escalation clauses, percentage rent based on sales or payment of executory costs
such as property taxes, utilities or insurance and maintenance. Rent expense for
leases with escalation clauses or other lease concessions are accounted for on a
straight-line basis beginning with the earlier of the lease commencement date or
the date the Company takes possession. Portions of certain properties are
subleased to others for periods generally ranging from one to 20
years.
Rent expense (under
operating leases) consists of:
|
|
2014 |
|
2013 |
|
2012 |
Minimum rentals |
|
$ |
795 |
|
|
$ |
706 |
|
|
$ |
727 |
|
Contingent payments |
|
|
16 |
|
|
|
13 |
|
|
|
13 |
|
Tenant income |
|
|
(104 |
) |
|
|
(106 |
) |
|
|
(112 |
) |
Total rent
expense |
|
$ |
707 |
|
|
$ |
613 |
|
|
$ |
628 |
|
Minimum annual rentals and
payments under capital leases and lease-financed transactions for the five years
subsequent to 2014 and in the aggregate are:
|
|
|
|
|
|
|
|
|
|
|
|
Lease- |
|
|
Capital |
|
Operating |
|
Financed |
|
|
Leases |
|
Leases |
|
Transactions |
2015 |
|
|
$ |
63 |
|
|
|
$ |
837 |
|
|
|
$ |
7 |
|
2016 |
|
|
|
60 |
|
|
|
|
773 |
|
|
|
|
7 |
|
2017 |
|
|
|
58 |
|
|
|
|
699 |
|
|
|
|
8 |
|
2018 |
|
|
|
49 |
|
|
|
|
629 |
|
|
|
|
8 |
|
2019 |
|
|
|
45 |
|
|
|
|
554 |
|
|
|
|
9 |
|
Thereafter |
|
|
|
409 |
|
|
|
|
2,877 |
|
|
|
|
79 |
|
Total |
|
|
|
684 |
|
|
|
$ |
6,369 |
|
|
|
$ |
118 |
|
Less
estimated executory costs included in capital leases |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
minimum lease payments under capital leases |
|
|
|
684 |
|
|
|
|
|
|
|
|
|
|
|
Less
amount representing interest |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
Present value of net minimum lease payments under capital
leases |
|
|
$ |
453 |
|
|
|
|
|
|
|
|
|
|
|
Total future minimum
rentals under noncancellable subleases at January 31, 2015 were $219.
A-56
Notes to Consolidated Financial Statements, Continued
11. Earnings Per Common Share
Net earnings attributable
to The Kroger Co. per basic common share equals net earnings attributable to The
Kroger Co. less income allocated to participating securities divided by the
weighted average number of common shares outstanding. Net earnings attributable
to The Kroger Co. per diluted common share equals net earnings attributable to
The Kroger Co. less income allocated to participating securities divided by the
weighted average number of common shares outstanding, after giving effect to
dilutive stock options. The following table provides a reconciliation of net
earnings attributable to The Kroger Co. and shares used in calculating net
earnings attributable to The Kroger Co. per basic common share to those used in
calculating net earnings attributable to The Kroger Co. per diluted common
share:
|
|
For the year
ended |
|
For the year
ended |
|
For the year
ended |
|
|
January 31,
2015 |
|
February 1, 2014 |
|
February 2, 2013 |
|
|
Earnings |
|
Shares |
|
Per |
|
Earnings |
|
Shares |
|
Per |
|
Earnings |
|
Shares |
|
Per |
(in millions, except |
|
(Numer- |
|
(Denomi- |
|
Share |
|
(Numer- |
|
(Denomi- |
|
Share |
|
(Numer- |
|
(Denomi- |
|
Share |
per share
amounts) |
|
ator) |
|
nator) |
|
Amount |
|
ator) |
|
nator) |
|
Amount |
|
ator) |
|
nator) |
|
Amount |
Net
earnings attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to The Kroger
Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per basic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share |
|
|
$ |
1,711 |
|
|
|
490 |
|
|
|
$ |
3.49 |
|
|
|
$ |
1,507 |
|
|
|
514 |
|
|
|
$ |
2.93 |
|
|
|
$ |
1,485 |
|
|
|
533 |
|
|
|
$ |
2.78 |
|
Dilutive effect of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
stock
options |
|
|
|
|
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
Net
earnings attributable |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
to The Kroger
Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per
diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share |
|
|
$ |
1,711 |
|
|
|
497 |
|
|
|
$ |
3.44 |
|
|
|
$ |
1,507 |
|
|
|
520 |
|
|
|
$ |
2.90 |
|
|
|
$ |
1,485 |
|
|
|
537 |
|
|
|
$ |
2.77 |
|
The Company had combined
undistributed and distributed earnings to participating securities totaling $17,
$12 and $12 in 2014, 2013 and 2012, respectively.
The Company had options
outstanding for approximately 2.3 million, 2.3 million and 12.2 million shares,
respectively, for the years ended January 31, 2015, February 1, 2014 and
February 2, 2013, which were excluded from the computations of net earnings per
diluted common share because their inclusion would have had an anti-dilutive
effect on net earnings per diluted share.
12 . Stock Option Plans
The Company grants options
for common shares (stock options) to employees under various plans at an
option price equal to the fair market value of the stock at the date of grant.
The Company accounts for stock options under the fair value recognition
provisions. Under this method, the Company recognizes compensation expense for
all share-based payments granted. The Company recognizes share-based
compensation expense, net of an estimated forfeiture rate, over the requisite
service period of the award. Equity awards may be made at one of four meetings
of its Board of Directors occurring shortly after the Companys release of
quarterly earnings. The 2014 primary grant was made in conjunction with the June
meeting of the Companys Board of Directors.
Stock options typically
expire 10 years from the date of grant. Stock options vest between one and five
years from the date of grant. At January 31, 2015, approximately 22 million
common shares were available for future option grants under these
plans.
In addition to the stock
options described above, the Company awards restricted stock to employees and
non-employee directors under various plans. The restrictions on these awards
generally lapse between one and five years from the date of the awards. The
Company records expense for restricted stock awards in an amount equal to the
fair market value of the underlying shares on the grant date of the award, over
the period the awards lapse. As of January 31, 2015, approximately 12 million
common shares were available under
A-57
Notes to Consolidated Financial Statements, Continued
the 2005, 2008, 2011 and
2014 Long-Term Incentive Plans (the Plans) for future restricted stock awards
or shares issued to the extent performance criteria are achieved. The Company
has the ability to convert shares available for stock options under the Plans to
shares available for restricted stock awards. Under the Plans, four shares
available for option awards can be converted into one share available for
restricted stock awards.
All awards become
immediately exercisable upon certain changes of control of the
Company.
Stock
Options
Changes in options
outstanding under the stock option plans are summarized below:
|
|
Shares |
|
Weighted- |
|
|
subject |
|
average |
|
|
to option |
|
exercise |
|
|
(in
millions) |
|
price |
Outstanding, year-end 2011 |
|
|
31.0 |
|
|
|
|
$ |
21.80 |
|
Granted |
|
|
4.1 |
|
|
|
|
$ |
22.04 |
|
Exercised |
|
|
(6.7 |
) |
|
|
|
$ |
18.35 |
|
Canceled or
Expired |
|
|
(1.9 |
) |
|
|
|
$ |
23.28 |
|
Outstanding, year-end 2012 |
|
|
26.5 |
|
|
|
|
$ |
22.61 |
|
Granted |
|
|
4.2 |
|
|
|
|
$ |
37.68 |
|
Exercised |
|
|
(8.8 |
) |
|
|
|
$ |
22.22 |
|
Canceled or
Expired |
|
|
(0.2 |
) |
|
|
|
$ |
25.47 |
|
Outstanding, year-end 2013 |
|
|
21.7 |
|
|
|
|
$ |
25.66 |
|
Granted |
|
|
4.2 |
|
|
|
|
$ |
49.42 |
|
Exercised |
|
|
(5.2 |
) |
|
|
|
$ |
23.13 |
|
Canceled or
Expired |
|
|
(0.3 |
) |
|
|
|
$ |
31.05 |
|
Outstanding, year-end 2014 |
|
|
20.4 |
|
|
|
|
$ |
31.13 |
|
A summary of options
outstanding and exercisable at January 31, 2015 follows:
|
|
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
average |
|
Weighted- |
|
|
|
|
|
Weighted- |
Range of Exercise |
|
Number |
|
remaining |
|
average |
|
Options |
|
average |
Prices |
|
outstanding |
|
contractual
life |
|
exercise
price |
|
exercisable |
|
exercise
price |
|
|
(in
millions) |
|
(in
years) |
|
|
|
|
|
|
(in
millions) |
|
|
|
|
|
15.92 21.95 |
|
|
3.2 |
|
|
|
3.47 |
|
|
|
$ |
19.53 |
|
|
|
3.0 |
|
|
|
$ |
19.46 |
|
21.96 22.60 |
|
|
4.2 |
|
|
|
6.40 |
|
|
|
$ |
22.09 |
|
|
|
2.7 |
|
|
|
$ |
22.16 |
|
22.61 28.26 |
|
|
2.6 |
|
|
|
6.15 |
|
|
|
$ |
24.77 |
|
|
|
1.8 |
|
|
|
$ |
24.79 |
|
28.27 37.75 |
|
|
2.8 |
|
|
|
3.04 |
|
|
|
$ |
28.52 |
|
|
|
2.7 |
|
|
|
$ |
28.47 |
|
37.76 49.32 |
|
|
3.5 |
|
|
|
8.46 |
|
|
|
$ |
37.96 |
|
|
|
1.1 |
|
|
|
$ |
37.82 |
|
49.33 61.89 |
|
|
4.1 |
|
|
|
9.46 |
|
|
|
$ |
49.55 |
|
|
|
|
|
|
|
$ |
49.33 |
|
|
|
|
20.4 |
|
|
|
6.41 |
|
|
|
$ |
31.13 |
|
|
|
11.3 |
|
|
|
$ |
24.92 |
|
The weighted-average
remaining contractual life for options exercisable at January 31, 2015, was
approximately 4.7 years. The intrinsic value of options outstanding and
exercisable at January 31, 2015 was $775 and $500, respectively.
A-58
Notes to Consolidated Financial Statements, Continued
Restricted
stock
Changes in restricted stock
outstanding under the restricted stock plans are summarized below:
|
|
Restricted |
|
Weighted- |
|
|
shares |
|
average |
|
|
outstanding |
|
grant-date |
|
|
(in
millions) |
|
fair
value |
Outstanding, year-end 2011 |
|
|
4.2 |
|
|
|
|
$ |
23.92 |
|
Granted |
|
|
2.6 |
|
|
|
|
$ |
22.23 |
|
Lapsed |
|
|
(2.4 |
) |
|
|
|
$ |
24.34 |
|
Canceled or
Expired |
|
|
(0.1 |
) |
|
|
|
$ |
23.28 |
|
Outstanding, year-end 2012 |
|
|
4.3 |
|
|
|
|
$ |
22.67 |
|
Granted |
|
|
3.2 |
|
|
|
|
$ |
37.69 |
|
Lapsed |
|
|
(2.5 |
) |
|
|
|
$ |
22.97 |
|
Canceled or
Expired |
|
|
(0.1 |
) |
|
|
|
$ |
27.31 |
|
Outstanding, year-end 2013 |
|
|
4.8 |
|
|
|
|
$ |
32.31 |
|
Granted |
|
|
3.1 |
|
|
|
|
$ |
49.51 |
|
Lapsed |
|
|
(2.6 |
) |
|
|
|
$ |
33.05 |
|
Canceled or
Expired |
|
|
(0.2 |
) |
|
|
|
$ |
37.33 |
|
Outstanding, year-end 2014 |
|
|
5.1 |
|
|
|
|
$ |
42.08 |
|
The weighted-average grant
date fair value of stock options granted during 2014, 2013 and 2012 was $11.96,
$8.98 and $4.39, respectively. The fair value of each stock option grant was
estimated on the date of grant using the Black-Scholes option-pricing model,
based on the assumptions shown in the table below. The Black-Scholes model
utilizes accounting judgment and financial estimates, including the term option
holders are expected to retain their stock options before exercising them, the
volatility of the Companys share price over that expected term, the dividend
yield over the term and the number of awards expected to be forfeited before
they vest. Using alternative assumptions in the calculation of fair value would
produce fair values for stock option grants that could be different than those
used to record stock-based compensation expense in the Consolidated Statements
of Operations. The increase in the fair value of the stock options granted
during 2014, compared to 2013, resulted primarily from an increase in the
Companys share price, which decreased the expected dividend yield, and an
increase in the weighted average risk-free interest rate. The increase in the
fair value of the stock options granted during 2013, compared to 2012, resulted
primarily from an increase in the Companys share price, an increase in the
weighted average risk-free interest rate and a decrease in the expected dividend
yield.
The following table
reflects the weighted-average assumptions used for grants awarded to option
holders:
|
|
2014 |
|
2013 |
|
2012 |
Weighted average expected volatility |
|
25.29 |
% |
|
26.34 |
% |
|
26.49 |
% |
Weighted average risk-free
interest rate |
|
2.06 |
% |
|
1.87 |
% |
|
0.97 |
% |
Expected dividend yield |
|
1.51 |
% |
|
1.82 |
% |
|
2.49 |
% |
Expected term (based on historical
results) |
|
6.6
years |
|
|
6.8 years |
|
|
6.9 years |
|
The weighted-average
risk-free interest rate was based on the yield of a treasury note as of the
grant date, continuously compounded, which matures at a date that approximates
the expected term of the options. The dividend yield was based on our history
and expectation of dividend payouts. Expected volatility was determined based
upon historical stock volatilities; however, implied volatility was also
considered. Expected term was determined based upon a combination of historical
exercise and cancellation experience as well as estimates of expected future
exercise and cancellation experience.
A-59
Notes to Consolidated Financial Statements, Continued
Total stock compensation
recognized in 2014, 2013 and 2012 was $155, $107 and $82, respectively. Stock
option compensation recognized in 2014, 2013 and 2012 was $32, $24 and $22,
respectively. Restricted shares compensation recognized in 2014, 2013 and 2012
was $123, $83 and $60, respectively.
The total intrinsic value
of options exercised was $142, $115 and $44 in 2014, 2013 and 2012,
respectively. The total amount of cash received in 2014 by the Company from the
exercise of options granted under share-based payment arrangements was $110. As
of January 31, 2015, there was $205 of total unrecognized compensation expense
remaining related to non-vested share-based compensation arrangements granted
under the Companys equity award plans. This cost is expected to be recognized
over a weighted-average period of approximately two years. The total fair value
of options that vested was $26, $20 and $23 in 2014, 2013 and 2012,
respectively.
Shares issued as a result
of stock option exercises may be newly issued shares or reissued treasury
shares. Proceeds received from the exercise of options, and the related tax
benefit, may be utilized to repurchase the Companys common shares under a stock
repurchase program adopted by the Companys Board of Directors. During 2014, the
Company repurchased approximately three million common shares in such a
manner.
13. Commitments and Contingencies
The Company continuously
evaluates contingencies based upon the best available evidence.
The Company believes that
allowances for loss have been provided to the extent necessary and that its
assessment of contingencies is reasonable. To the extent that resolution of
contingencies results in amounts that vary from the Companys estimates, future
earnings will be charged or credited.
The principal contingencies
are described below:
Insurance The Companys
workers compensation risks are self-insured in most states. In addition, other
workers compensation risks and certain levels of insured general liability
risks are based on retrospective premium plans, deductible plans, and
self-insured retention plans. The liability for workers compensation risks is
accounted for on a present value basis. Actual claim settlements and expenses
incident thereto may differ from the provisions for loss. Property risks have
been underwritten by a subsidiary and are all reinsured with unrelated insurance
companies. Operating divisions and subsidiaries have paid premiums, and the
insurance subsidiary has provided loss allowances, based upon actuarially
determined estimates.
Litigation Various
claims and lawsuits arising in the normal course of business, including suits
charging violations of certain antitrust, wage and hour, or civil rights laws,
as well as product liability cases, are pending against the Company. Some of
these suits purport or have been determined to be class actions and/or seek
substantial damages. Any damages that may be awarded in antitrust cases will be
automatically trebled. Although it is not possible at this time to evaluate the
merits of all of these claims and lawsuits, nor their likelihood of success, the
Company is of the belief that any resulting liability will not have a material
effect on the Companys financial position, results of operations, or cash
flows.
The Company continually
evaluates its exposure to loss contingencies arising from pending or threatened
litigation and believes it has made provisions where it is reasonably possible
to estimate and when an adverse outcome is probable. Nonetheless, assessing and
predicting the outcomes of these matters involves substantial uncertainties.
Management currently believes that the aggregate range of loss for the Companys
exposure is not material to the Company. It remains possible that despite
managements current belief, material differences in actual outcomes or changes
in managements evaluation or predictions could arise that could have a material
adverse effect on the Companys financial condition, results of operations, or
cash flows.
Assignments The Company
is contingently liable for leases that have been assigned to various third
parties in connection with facility closings and dispositions. The Company could
be required to satisfy the obligations under the leases if any of the assignees
is unable to fulfill its lease obligations. Due to the wide distribution of the
Companys assignments among third parties, and various other remedies available,
the Company believes the likelihood that it will be required to assume a
material amount of these obligations is remote.
A-60
Notes to Consolidated Financial Statements, Continued
14 . Stock
Preferred
Shares
The Company has authorized
five million shares of voting cumulative preferred shares; two million shares
were available for issuance at January 31, 2015. The shares have a par value of
$100 per share and are issuable in series.
Common
Shares
The Company has authorized
one billion common shares, $1 par value per share. On May 20, 1999, the
shareholders authorized an amendment to the Amended Articles of Incorporation to
increase the number of authorized common shares from one billion to two billion
when the Board of Directors determines it to be in the best interest of the
Company.
Common Stock Repurchase
Program
The Company maintains stock
repurchase programs that comply with Rule 10b5-1 of the Securities Exchange Act
of 1934 to allow for the orderly repurchase of The Kroger Co. common shares,
from time to time. The Company made open market purchases totaling $1,129, $338
and $1,165 under these repurchase programs in 2014, 2013 and 2012, respectively.
In addition to these repurchase programs, in December 1999, the Company began a
program to repurchase common shares to reduce dilution resulting from its
employee stock option plans. This program is solely funded by proceeds from
stock option exercises and the related tax benefit. The Company repurchased
approximately $154, $271 and $96 under the stock option program during 2014,
2013 and 2012, respectively.
15. Company-Sponsored Benefit Plans
The Company administers
non-contributory defined benefit retirement plans for some non-union employees
and union-represented employees as determined by the terms and conditions of
collective bargaining agreements. These include several qualified pension plans
(the Qualified Plans) and non-qualified pension plans (the Non-Qualified
Plans). The Non-Qualified Plans pay benefits to any employee that earns in
excess of the maximum allowed for the Qualified Plans by Section 415 of the
Internal Revenue Code. The Company only funds obligations under the Qualified
Plans. Funding for the Company-sponsored pension plans is based on a review of
the specific requirements and on evaluation of the assets and liabilities of
each plan.
In addition to providing
pension benefits, the Company provides certain health care benefits for retired
employees. The majority of the Companys employees may become eligible for these
benefits if they reach normal retirement age while employed by the Company.
Funding of retiree health care benefits occurs as claims or premiums are
paid.
The Company recognizes the
funded status of its retirement plans on the Consolidated Balance Sheets.
Actuarial gains or losses, prior service costs or credits and transition
obligations that have not yet been recognized as part of net periodic benefit
cost are required to be recorded as a component of AOCI. All plans are measured
as of the Companys fiscal year end.
Amounts recognized in AOCI
as of January 31, 2015 and February 1, 2014 consists of the following
(pre-tax):
|
|
|
Pension
Benefits |
|
Other
Benefits |
|
Total |
|
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
Net actuarial loss (gain) |
|
$ |
1,398 |
|
$ |
857 |
|
$ |
(89 |
) |
|
$ |
(111 |
) |
|
$ |
1,309 |
|
|
$ |
746 |
|
|
Prior service cost (credit) |
|
|
1 |
|
|
2 |
|
|
(75 |
) |
|
|
(35 |
) |
|
|
(74 |
) |
|
|
(33 |
) |
|
Total |
|
$ |
1,399 |
|
$ |
859 |
|
$ |
(164 |
) |
|
$ |
(146 |
) |
|
$ |
1,235 |
|
|
$ |
713 |
|
A-61
Notes to Consolidated Financial Statements, Continued
Amounts in AOCI expected to
be recognized as components of net periodic pension or postretirement benefit
costs in the next fiscal year are as follows (pre-tax):
|
|
Pension |
|
Other |
|
|
|
|
|
|
Benefits |
|
Benefits |
|
Total |
|
|
2015 |
|
2015 |
|
2015 |
Net
actuarial loss (gain) |
|
|
$ |
99 |
|
|
|
$ |
(6 |
) |
|
|
$ |
93 |
|
Prior service credit |
|
|
|
|
|
|
|
|
(11 |
) |
|
|
|
(11 |
) |
Total |
|
|
$ |
99 |
|
|
|
$ |
(17 |
) |
|
|
$ |
82 |
|
Other changes recognized in
other comprehensive income in 2014, 2013 and 2012 were as follows
(pre-tax):
|
|
Pension
Benefits |
|
Other
Benefits |
|
Total |
|
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
Incurred net actuarial loss (gain) |
|
$ |
590 |
|
|
$ |
(243 |
) |
|
$ |
(33 |
) |
|
$ |
14 |
|
|
$ |
(97 |
) |
|
|
$ |
6 |
|
|
$ |
604 |
|
|
$ |
(340 |
) |
|
$ |
(27 |
) |
Amortization of prior service |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
credit
(cost) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7 |
|
|
|
4 |
|
|
|
|
4 |
|
|
|
7 |
|
|
|
4 |
|
|
|
4 |
|
Amortization of net actuarial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
gain
(loss) |
|
|
(50 |
) |
|
|
(102 |
) |
|
|
(97 |
) |
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
(42 |
) |
|
|
(102 |
) |
|
|
(97 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
(30 |
) |
|
|
|
|
|
|
|
(47 |
) |
|
|
(30 |
) |
|
|
|
|
Total recognized in other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income (loss) |
|
|
540 |
|
|
|
(345 |
) |
|
|
(130 |
) |
|
|
(18 |
) |
|
|
(123 |
) |
|
|
|
10 |
|
|
|
522 |
|
|
|
(468 |
) |
|
|
(120 |
) |
Total recognized in net periodic |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
benefit cost and
other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
comprehensive
income |
|
$ |
595 |
|
|
$ |
(271 |
) |
|
$ |
(41 |
) |
|
$ |
(9 |
) |
|
$ |
(95 |
) |
|
|
$ |
38 |
|
|
$ |
586 |
|
|
$ |
(366 |
) |
|
$ |
(3 |
) |
A-62
Notes to Consolidated Financial Statements, Continued
Information with respect to
change in benefit obligation, change in plan assets, the funded status of the
plans recorded in the Consolidated Balance Sheets, net amounts recognized at the
end of fiscal years, weighted average assumptions and components of net periodic
benefit cost follow:
|
|
Pension
Benefits |
|
|
|
|
|
|
|
|
|
|
Qualified
Plans |
|
Non-Qualified
Plans |
|
Other
Benefits |
|
|
2014 |
|
2013 |
|
2014 |
|
2013 |
|
2014 |
|
2013 |
Change in benefit obligation: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit obligation at beginning of fiscal year |
|
$ |
3,509 |
|
|
$ |
3,443 |
|
|
$ |
263 |
|
|
$ |
221 |
|
|
$ |
294 |
|
|
$ |
402 |
|
Service
cost |
|
|
48 |
|
|
|
40 |
|
|
|
3 |
|
|
|
3 |
|
|
|
11 |
|
|
|
17 |
|
Interest
cost |
|
|
169 |
|
|
|
144 |
|
|
|
13 |
|
|
|
9 |
|
|
|
13 |
|
|
|
15 |
|
Plan participants
contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
10 |
|
Actuarial (gain)
loss |
|
|
539 |
|
|
|
(308 |
) |
|
|
40 |
|
|
|
(20 |
) |
|
|
14 |
|
|
|
(97 |
) |
Benefits
paid |
|
|
(163 |
) |
|
|
(136 |
) |
|
|
(15 |
) |
|
|
(10 |
) |
|
|
(21 |
) |
|
|
(25 |
) |
Other |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(47 |
) |
|
|
(30 |
) |
Assumption of Harris Teeter benefit obligation |
|
|
|
|
|
|
326 |
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
2 |
|
Benefit obligation at end of fiscal year |
|
$ |
4,102 |
|
|
$ |
3,509 |
|
|
$ |
304 |
|
|
$ |
263 |
|
|
$ |
275 |
|
|
$ |
294 |
|
Change in plan assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at beginning of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
fiscal
year |
|
$ |
3,135 |
|
|
$ |
2,746 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Actual return on
plan assets |
|
|
217 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employer
contributions |
|
|
|
|
|
|
100 |
|
|
|
15 |
|
|
|
10 |
|
|
|
10 |
|
|
|
15 |
|
Plan participants
contributions |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
10 |
|
Benefits
paid |
|
|
(163 |
) |
|
|
(136 |
) |
|
|
(15 |
) |
|
|
(10 |
) |
|
|
(21 |
) |
|
|
(25 |
) |
Assumption of
Harris Teeter plan assets |
|
|
|
|
|
|
286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair
value of plan assets at end of fiscal year |
|
$ |
3,189 |
|
|
$ |
3,135 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Funded status at end of fiscal year |
|
$ |
(912 |
) |
|
$ |
(374 |
) |
|
$ |
(304 |
) |
|
$ |
(263 |
) |
|
$ |
(275 |
) |
|
$ |
(294 |
) |
Net
liability recognized at end of fiscal year |
|
$ |
(912 |
) |
|
$ |
(374 |
) |
|
$ |
(304 |
) |
|
$ |
(263 |
) |
|
$ |
(275 |
) |
|
$ |
(294 |
) |
As of January 31, 2015 and
February 1, 2014, other current liabilities include $28 and $30, respectively,
of net liability recognized for the above benefit plans.
The pension plan assets
acquired and liabilities assumed in the Harris Teeter merger did not affect the
Companys net periodic benefit costs in 2013 due to the merger occurring close
to year end.
As of January 31, 2015 and
February 1, 2014, pension plan assets do not include common shares of The Kroger
Co.
|
|
Pension
Benefits |
|
Other
Benefits |
Weighted average
assumptions |
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
Discount rate Benefit obligation |
|
3.87 |
% |
|
4.99 |
% |
|
4.29 |
% |
|
3.74 |
% |
|
4.68 |
% |
|
4.11 |
% |
Discount rate Net periodic benefit cost |
|
4.99 |
% |
|
4.29 |
% |
|
4.55 |
% |
|
4.68 |
% |
|
4.11 |
% |
|
4.40 |
% |
Expected long-term rate of return on plan assets |
|
7.44 |
% |
|
8.50 |
% |
|
8.50 |
% |
|
|
|
|
|
|
|
|
|
Rate
of compensation increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net periodic
benefit cost |
|
2.86 |
% |
|
2.77 |
% |
|
2.82 |
% |
|
|
|
|
|
|
|
|
|
Rate
of compensation increase |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit
obligation |
|
2.85 |
% |
|
2.86 |
% |
|
2.77 |
% |
|
|
|
|
|
|
|
|
|
A-63
Notes to Consolidated Financial Statements, Continued
The Companys discount rate
assumptions were intended to reflect the rates at which the pension benefits
could be effectively settled. They take into account the timing and amount of
benefits that would be available under the plans. The Companys policy is to
match the plans cash flows to that of a hypothetical bond portfolio whose cash
flow from coupons and maturities match the plans projected benefit cash flows.
The discount rates are the single rates that produce the same present value of
cash flows. The selection of the 3.87% and 3.74% discount rates as of year-end
2014 for pension and other benefits, respectively, represents the hypothetical
bond portfolio using bonds with an AA or better rating constructed with the
assistance of an outside consultant. A 100 basis point increase in the discount
rate would decrease the projected pension benefit obligation as of February 1,
2015, by approximately $500.
To determine the expected
rate of return on pension plan assets held by the Company for 2014, the Company
considered current and forecasted plan asset allocations as well as historical
and forecasted rates of return on various asset categories. In 2014, the Company
decreased the assumed pension plan investment return rate to 7.44% compared to
8.50% in 2013 and 2012. The Company pension plans average rate of return was
7.58% for the 10 calendar years ended December 31, 2014, net of all investment
management fees and expenses. The value of all investments in the Qualified
Plans during the calendar year ending December 31, 2014 increased 5.65%, net of
investment management fees and expenses. For the past 20 years, the Companys
average annual rate of return has been 9.58%. Based on the above information
and forward looking assumptions for investments made in a manner consistent with
the Companys target allocations, the Company believes a 7.44% rate of return
assumption is reasonable.
The Company calculates its
expected return on plan assets by using the market-related value of plan assets.
The market-related value of plan assets is determined by adjusting the actual
fair value of plan assets for gains or losses on plan assets. Gains or losses
represent the difference between actual and expected returns on plan investments
for each plan year. Gains or losses on plan assets are recognized evenly over a
five year period. Using a different method to calculate the market-related value
of plan assets would provide a different expected return on plan
assets.
On January 31, 2015, the
Company adopted new mortality tables based on mortality experience and
assumptions for generational mortality improvement in calculating the Companys
2014 year end Company sponsored benefit plans obligations. The tables assume an
improvement in life expectancy and increase our current year benefit obligation
and future expenses. The Company used the RP-2000 projected 2021 mortality table
in calculating the Companys 2013 year end Company sponsored benefit plans
obligations and 2014, 2013 and 2012 Company-sponsored benefit plans
expenses.
The funded status decreased
in 2014, compared to 2013, due primarily to the decrease in the discount rate, a
change in the mortality assumptions and the return on plan assets.
The following table
provides the components of the Companys net periodic benefit costs for 2014,
2013 and 2012:
|
|
Pension
Benefits |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Qualified
Plans |
|
Non-Qualified
Plans |
|
Other
Benefits |
|
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
|
2014 |
|
2013 |
|
2012 |
Components of net periodic benefit cost: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service
cost |
|
$ |
48 |
|
|
$ |
40 |
|
|
$ |
44 |
|
|
$ |
3 |
|
|
$ |
3 |
|
|
|
$ |
3 |
|
|
$ |
11 |
|
|
$ |
17 |
|
|
$ |
16 |
|
Interest
cost |
|
|
169 |
|
|
|
144 |
|
|
|
146 |
|
|
|
13 |
|
|
|
9 |
|
|
|
|
9 |
|
|
|
13 |
|
|
|
15 |
|
|
|
16 |
|
Expected return on
plan assets |
|
|
(228 |
) |
|
|
(224 |
) |
|
|
(210 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization
of: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior
service cost (credit) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7 |
) |
|
|
(4 |
) |
|
|
(4 |
) |
Actuarial
(gain) loss |
|
|
46 |
|
|
|
93 |
|
|
|
88 |
|
|
|
4 |
|
|
|
9 |
|
|
|
|
9 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
Net
periodic benefit cost |
|
$ |
35 |
|
|
$ |
53 |
|
|
$ |
68 |
|
|
$ |
20 |
|
|
$ |
21 |
|
|
|
$ |
21 |
|
|
$ |
9 |
|
|
$ |
28 |
|
|
$ |
28 |
|
A-64
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
The following table provides the projected benefit obligation (PBO),
accumulated benefit obligation (ABO) and the fair value of plan assets for all
Company-sponsored pension plans.
|
|
Qualified
Plans |
|
Non-Qualified
Plans |
|
|
2014 |
|
2013 |
|
|
2014 |
|
|
|
2013 |
|
PBO
at end of fiscal year |
|
$ |
4,102 |
|
$ |
3,509 |
|
|
$ |
304 |
|
|
|
$ |
263 |
|
ABO
at end of fiscal year |
|
$ |
3,947 |
|
$ |
3,360 |
|
|
$ |
297 |
|
|
|
$ |
256 |
|
Fair
value of plan assets at end of year |
|
$ |
3,189 |
|
$ |
3,135 |
|
|
$ |
|
|
|
|
$ |
|
|
The following table provides information about the Companys estimated
future benefit payments.
|
|
Pension |
|
Other |
|
|
Benefits |
|
Benefits |
2015 |
|
|
$ |
205 |
|
|
|
$ |
14 |
|
2016 |
|
|
$ |
203 |
|
|
|
$ |
15 |
|
2017 |
|
|
$ |
211 |
|
|
|
$ |
16 |
|
2018 |
|
|
$ |
221 |
|
|
|
$ |
18 |
|
2019 |
|
|
$ |
229 |
|
|
|
$ |
19 |
|
2020
2024 |
|
|
$ |
1,268 |
|
|
|
$ |
110 |
|
The following table provides information about the weighted average
target and actual pension plan asset allocations.
|
|
Target |
|
Actual |
|
|
allocations |
|
Allocations |
|
|
2014 |
|
2014 |
|
2013 |
Pension plan asset allocation |
|
|
|
|
|
|
|
|
|
|
|
Global equity
securities |
|
|
14.6 |
% |
|
|
13.4 |
% |
|
15.0 |
% |
Emerging market equity
securities |
|
|
5.6 |
|
|
|
5.8 |
|
|
6.2 |
|
Investment grade debt
securities |
|
|
11.6 |
|
|
|
11.2 |
|
|
10.4 |
|
High yield debt
securities |
|
|
12.7 |
|
|
|
12.5 |
|
|
12.5 |
|
Private equity |
|
|
5.4 |
|
|
|
6.6 |
|
|
7.7 |
|
Hedge funds |
|
|
36.5 |
|
|
|
37.5 |
|
|
34.2 |
|
Real estate |
|
|
3.3 |
|
|
|
3.5 |
|
|
3.3 |
|
Other |
|
|
10.3 |
|
|
|
9.5 |
|
|
10.7 |
|
Total |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
100.0 |
% |
Investment objectives, policies and strategies are set by the Pension
Investment Committees (the Committees) appointed by the CEO. The primary
objectives include holding and investing the assets and distributing benefits to
participants and beneficiaries of the pension plans. Investment objectives have
been established based on a comprehensive review of the capital markets and each
underlying plans current and projected financial requirements. The time horizon
of the investment objectives is long-term in nature and plan assets are managed
on a going-concern basis.
Investment objectives and guidelines specifically applicable to each
manager of assets are established and reviewed annually. Derivative instruments
may be used for specified purposes, including rebalancing exposures to certain
asset classes. Any use of derivative instruments for a purpose or in a manner
not specifically authorized is prohibited, unless approved in advance by the
Committees.
The current target allocations shown represent the 2014 targets that were
established in 2013. The Company will rebalance by liquidating assets whose
allocation materially exceeds target, if possible, and investing in assets whose
allocation is materially below target. If markets are illiquid, the Company may
not be able to rebalance to target quickly. To maintain actual asset allocations
consistent with target allocations,
A-65
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
assets are reallocated or
rebalanced periodically. In addition, cash flow from employer contributions and
participant benefit payments can be used to fund underweight asset classes and
divest overweight asset classes, as appropriate. The Company expects that cash
flow will be sufficient to meet most rebalancing needs.
The Company is not required and does not expect to make any contributions
to the Qualified Plans in 2015. If the Company does make any contributions in
2015, the Company expects these contributions will decrease its required
contributions in future years. Among other things, investment performance of
plan assets, the interest rates required to be used to calculate the pension
obligations, and future changes in legislation, will determine the amounts of
any contributions. The Company expects 2015 expense for Company-sponsored
pension plans to be approximately $90. In addition, the Company expects 401(k)
retirement savings account plans cash contributions and expense from automatic
and matching contributions to participants to be approximately $180 in
2015.
Assumed health care cost trend rates have a significant effect on the
amounts reported for the health care plans. The Company used a 7.00% initial
health care cost trend rate, which is assumed to decrease on a linear basis to a
4.50% ultimate health care cost trend rate in 2028, to determine its expense. A
one-percentage-point change in the assumed health care cost trend rates would
have the following effects:
|
|
1%
Point |
|
1%
Point |
|
|
Increase |
|
Decrease |
Effect on total of service and interest cost
components |
|
|
$ |
3 |
|
|
|
$ |
(3 |
) |
|
Effect on postretirement benefit obligation |
|
|
$ |
30 |
|
|
|
$ |
(26 |
) |
|
The following tables set
forth by level, within the fair value hierarchy, the Qualified Plans assets at
fair value as of January 31, 2015 and February 1, 2014:
ASSETS AT FAIR VALUE AS OF JANUARY 31, 2015
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
Total |
Cash
and cash equivalents |
|
|
$ |
73 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
73 |
Corporate Stocks |
|
|
|
294 |
|
|
|
|
|
|
|
|
|
|
|
|
|
294 |
Corporate Bonds |
|
|
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
80 |
U.S. Government
Securities |
|
|
|
|
|
|
|
|
78 |
|
|
|
|
|
|
|
|
78 |
Mutual Funds/Collective Trusts |
|
|
|
123 |
|
|
|
|
503 |
|
|
|
|
40 |
|
|
|
666 |
Partnerships/Joint
Ventures |
|
|
|
|
|
|
|
|
468 |
|
|
|
|
|
|
|
|
468 |
Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,158 |
|
|
|
1,158 |
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
210 |
|
|
|
210 |
Real
Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
|
|
|
105 |
Other |
|
|
|
|
|
|
|
|
57 |
|
|
|
|
|
|
|
|
57 |
Total |
|
|
$ |
490 |
|
|
|
$ |
1,186 |
|
|
|
$ |
1,513 |
|
|
$ |
3,189 |
A-66
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
ASSETS AT FAIR
VALUE AS OF FEBRUARY 1,
2014
|
|
Quoted Prices in |
|
Significant |
|
|
|
|
|
|
|
|
|
|
Active Markets |
|
Other |
|
Significant |
|
|
|
|
|
for Identical |
|
Observable |
|
Unobservable |
|
|
|
|
|
Assets |
|
Inputs |
|
Inputs |
|
|
|
|
|
(Level
1) |
|
(Level
2) |
|
(Level
3) |
|
Total |
Cash
and cash equivalents |
|
|
$ |
26 |
|
|
|
$ |
|
|
|
|
$ |
|
|
|
$ |
26 |
Corporate Stocks |
|
|
|
326 |
|
|
|
|
|
|
|
|
|
|
|
|
|
326 |
Corporate Bonds |
|
|
|
|
|
|
|
|
94 |
|
|
|
|
|
|
|
|
94 |
U.S.
Government Securities |
|
|
|
|
|
|
|
|
60 |
|
|
|
|
|
|
|
|
60 |
Mutual Funds/Collective Trusts |
|
|
|
303 |
|
|
|
|
419 |
|
|
|
|
39 |
|
|
|
761 |
Partnerships/Joint Ventures |
|
|
|
|
|
|
|
|
317 |
|
|
|
|
|
|
|
|
317 |
Hedge Funds |
|
|
|
|
|
|
|
|
|
|
|
|
|
1,073 |
|
|
|
1,073 |
Private Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
243 |
|
|
|
243 |
Real
Estate |
|
|
|
|
|
|
|
|
|
|
|
|
|
96 |
|
|
|
96 |
Other |
|
|
|
|
|
|
|
|
139 |
|
|
|
|
|
|
|
|
139 |
Total |
|
|
$ |
655 |
|
|
|
$ |
1,029 |
|
|
|
$ |
1,451 |
|
|
$ |
3,135 |
For measurements using significant unobservable inputs (Level 3) during
2014 and 2013, a reconciliation of the beginning and ending balances is as
follows:
|
|
Hedge
Funds |
|
Private
Equity |
|
Real
Estate |
|
Collective
Trusts |
Ending balance, February 2, 2013 |
|
|
|
739 |
|
|
|
|
|
180 |
|
|
|
|
|
91 |
|
|
|
|
|
|
|
Contributions into Fund |
|
|
|
297 |
|
|
|
|
|
74 |
|
|
|
|
|
22 |
|
|
|
|
|
|
|
Realized gains |
|
|
|
7 |
|
|
|
|
|
12 |
|
|
|
|
|
11 |
|
|
|
|
|
|
|
Unrealized gains |
|
|
|
71 |
|
|
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Distributions |
|
|
|
(88 |
) |
|
|
|
|
(47 |
) |
|
|
|
|
(27 |
) |
|
|
|
|
|
|
Other |
|
|
|
|
|
|
|
|
|
7 |
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
Assumption of Harris Teeter plan
assets |
|
|
|
47 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
39 |
|
Ending balance, February 1, 2014 |
|
|
|
1,073 |
|
|
|
|
|
243 |
|
|
|
|
|
96 |
|
|
|
|
|
39 |
|
Contributions into Fund |
|
|
|
220 |
|
|
|
|
|
47 |
|
|
|
|
|
17 |
|
|
|
|
|
|
|
Realized gains |
|
|
|
47 |
|
|
|
|
|
35 |
|
|
|
|
|
14 |
|
|
|
|
|
1 |
|
Unrealized gains |
|
|
|
18 |
|
|
|
|
|
(1 |
) |
|
|
|
|
4 |
|
|
|
|
|
|
|
Distributions |
|
|
|
(257 |
) |
|
|
|
|
(54 |
) |
|
|
|
|
(25 |
) |
|
|
|
|
|
|
Reclass (1) |
|
|
|
58 |
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
(1 |
) |
|
|
|
|
(2 |
) |
|
|
|
|
(1 |
) |
|
|
|
|
|
|
Ending balance, January 31, 2015 |
|
|
$ |
1,158 |
|
|
|
|
$ |
210 |
|
|
|
|
$ |
105 |
|
|
|
|
$ |
40 |
|
____________________
(1) |
In 2014, the Company
reclassified $58 of Level 3 assets from Private Equity to Hedge
Funds. |
See Note 8 for a discussion of the levels of the fair value hierarchy.
The assets fair value measurement level above is based on the lowest level of
any input that is significant to the fair value measurement.
The following is a description of the valuation methods used for the
Qualified Plans assets measured at fair value in the above tables:
● |
Cash and cash equivalents: The carrying value approximates fair
value. |
● |
Corporate Stocks: The fair values of these securities are based on observable
market quotations for identical assets and are valued at the closing price
reported on the active market on which the individual securities are
traded. |
A-67
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
● |
Corporate Bonds: The
fair values of these securities are primarily based on observable market
quotations for similar bonds, valued at the closing price reported on the
active market on which the individual securities are traded. When such
quoted prices are not available, the bonds are valued using a discounted
cash flow approach using current yields on similar instruments of issuers
with similar credit ratings, including adjustments for certain risks that
may not be observable, such as credit and liquidity
risks. |
● |
U.S. Government
Securities: Certain U.S. Government securities are valued at the closing
price reported in the active market in which the security is traded. Other
U.S. government securities are valued based on yields currently available
on comparable securities of issuers with similar credit ratings. When
quoted prices are not available for similar securities, the security is
valued under a discounted cash flow approach that maximizes observable
inputs, such as current yields of similar instruments, but includes
adjustments for certain risks that may not be observable, such as credit
and liquidity risks. |
● |
Mutual
Funds/Collective Trusts: The mutual funds/collective trust funds are
public investment vehicles valued using a Net Asset Value (NAV) provided
by the manager of each fund. The NAV is based on the underlying net assets
owned by the fund, divided by the number of shares outstanding. The NAVs
unit price is quoted on a private market that is not active. However, the
NAV is based on the fair value of the underlying securities within the
fund, which are traded on an active market, and valued at the closing
price reported on the active market on which those individual securities
are traded. |
● |
Partnerships/Joint
Ventures: These funds consist primarily of U.S. government securities,
Corporate Bonds, Corporate Stocks, and derivatives, which are valued in a
manner consistent with these types of investments, noted
above. |
● |
Hedge Funds: Hedge
funds are private investment vehicles valued using a Net Asset Value (NAV)
provided by the manager of each fund. The NAV is based on the underlying
net assets owned by the fund, divided by the number of shares outstanding.
The NAVs unit price is quoted on a private market that is not active. The
NAV is based on the fair value of the underlying securities within the
funds, which may be traded on an active market, and valued at the closing
price reported on the active market on which those individual securities
are traded. For investments not traded on an active market, or for which a
quoted price is not publicly available, a variety of unobservable
valuation methodologies, including discounted cash flow, market multiple
and cost valuation approaches, are employed by the fund manager to value
investments. Fair values of all investments are adjusted annually, if
necessary, based on audits of the Hedge Fund financial statements; such
adjustments are reflected in the fair value of the plans
assets. |
● |
Private Equity:
Private Equity investments are valued based on the fair value of the
underlying securities within the fund, which include investments both
traded on an active market and not traded on an active market. For those
investments that are traded on an active market, the values are based on
the closing price reported on the active market on which those individual
securities are traded. For investments not traded on an active market, or
for which a quoted price is not publicly available, a variety of
unobservable valuation methodologies, including discounted cash flow,
market multiple and cost valuation approaches, are employed by the fund
manager to value investments. Fair values of all investments are adjusted
annually, if necessary, based on audits of the private equity fund
financial statements; such adjustments are reflected in the fair value of
the plans assets. |
● |
Real Estate: Real
estate investments include investments in real estate funds managed by a
fund manager. These investments are valued using a variety of unobservable
valuation methodologies, including discounted cash flow, market multiple
and cost valuation approaches. |
The methods described above may produce a fair value calculation that may
not be indicative of net realizable value or reflective of future fair values.
Furthermore, while the Company believes its valuation methods are appropriate
and consistent with other market participants, the use of different
methodologies or assumptions to determine the fair value of certain financial
instruments could result in a different fair value measurement.
A-68
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
The Company contributed and expensed $177, $148 and $140 to employee
401(k) retirement savings accounts in 2014, 2013 and 2012, respectively. The
401(k) retirement savings account plans provide to eligible employees both
matching contributions and automatic contributions from the Company based on
participant contributions, compensation as defined by the plan, and length of
service.
The Company also administers other defined contribution plans for
eligible employees. The cost of these plans was $5, $5 and $7 for 2014, 2013 and
2012, respectively.
16.
MULTI
- EMPLOYER PENSION
PLANS
The Company contributes to various multi-employer pension plans,
including the UFCW Consolidated Pension Plan, based on obligations arising from
collective bargaining agreements. The Company is designated as the named
fiduciary of the UFCW Consolidated Pension Plan and has sole investment
authority over these assets. These plans provide retirement benefits to
participants based on their service to contributing employers. The benefits are
paid from assets held in trust for that purpose. Trustees are appointed in equal
number by employers and unions. The trustees typically are responsible for
determining the level of benefits to be provided to participants as well as for
such matters as the investment of the assets and the administration of the
plans.
In the first quarter of 2014, the Company incurred a charge of $56
(after-tax) related to commitments and withdrawal liabilities associated with
the restructuring of pension plan agreements, of which $15 was contributed to
the UFCW Consolidated Pension Plan in 2014. The Company is required to
contribute an additional $75 over the next four years related to the
restructuring of these pension plan agreements.
The Company recognizes expense in connection with its multi-employer
pension plans as contributions are funded, or in the case of the UFCW
Consolidated Pension Plan, when commitments are made. The Company made
contributions to multi-employer funds of $297 in 2014, $228 in 2013 and $492 in
2012. The cash contribution for 2012 includes the Companys $258 contribution to
the UFCW Consolidated Pension Plan in the fourth quarter of 2012.
The risks of participating in multi-employer pension plans are different
from the risks of participating in single-employer pension plans in the
following respects:
a. |
Assets contributed to
the multi-employer plan by one employer may be used to provide benefits to
employees of other participating employers. |
b. |
If a participating
employer stops contributing to the plan, the unfunded obligations of the
plan allocable to such withdrawing employer may be borne by the remaining
participating employers. |
c. |
If the Company stops
participating in some of its multi-employer pension plans, the Company may
be required to pay those plans an amount based on its allocable share of
the unfunded vested benefits of the plan, referred to as a withdrawal
liability. |
The Companys participation in multi-employer plans is outlined in the
following tables. The EIN / Pension Plan Number column provides the Employer
Identification Number (EIN) and the three-digit pension plan number. The most
recent Pension Protection Act Zone Status available in 2014 and 2013 is for the
plans year-end at December 31, 2013 and December 31, 2012, respectively. Among
other factors, generally, plans in the red zone are less than 65 percent funded,
plans in the yellow zone are less than 80 percent funded and plans in the green
zone are at least 80 percent funded. The FIP/RP Status Pending / Implemented
Column indicates plans for which a funding improvement plan (FIP) or a
rehabilitation plan (RP) is either pending or has been implemented. Unless
otherwise noted, the information for these tables was obtained from the Forms
5500 filed for each plans year-end at December 31, 2013 and December 31, 2012.
The multi-employer contributions listed in the table below are the Companys
multi-employer contributions made in fiscal years 2014, 2013 and 2012.
A-69
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
The following table contains information about the Companys
multi-employer pension plans:
|
|
|
|
Pension |
|
FIP/RP |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Protection |
|
Status |
|
|
Multi-Employer |
|
|
|
|
EIN / Pension |
|
Act Zone
Status |
|
Pending/ |
|
|
Contributions |
|
Surcharge |
Pension
Fund |
|
Plan
Number |
|
2014 |
|
2013 |
|
Implemented |
|
2014 |
|
2013 |
|
2012 |
|
Imposed
(6) |
SO
CA UFCW Unions & Food |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employers
Joint Pension |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust Fund
(1) (2) |
|
95-1939092 - 001 |
|
Red |
|
Red |
|
Implemented |
|
$ |
48 |
|
$ |
45 |
|
$ |
43 |
|
No |
Desert States Employers & UFCW |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unions
Pension Plan (1) |
|
84-6277982 - 001 |
|
Green |
|
Green |
|
No |
|
|
21 |
|
|
23 |
|
|
22 |
|
No |
Sound Retirement Trust |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(formerly
Retail Clerks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan) (1) (3) |
|
91-6069306 001 |
|
Red |
|
Red |
|
Implemented |
|
|
15 |
|
|
13 |
|
|
12 |
|
No |
Rocky Mountain UFCW |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unions and
Employers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan (1) |
|
84-6045986 - 001 |
|
Green |
|
Green |
|
No |
|
|
17 |
|
|
17 |
|
|
17 |
|
No |
Oregon Retail Employees |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan (1) |
|
93-6074377 - 001 |
|
Red |
|
Red |
|
Implemented |
|
|
7 |
|
|
7 |
|
|
7 |
|
No |
Bakery and Confectionary Union |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
&
Industry International |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Fund (1) |
|
52-6118572 - 001 |
|
Red |
|
Red |
|
Implemented |
|
|
11 |
|
|
12 |
|
|
10 |
|
No |
Washington Meat Industry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Trust (1) (4) (5) |
|
91-6134141 - 001 |
|
Red |
|
Red |
|
Implemented |
|
|
1 |
|
|
3 |
|
|
3 |
|
No |
Retail Food Employers & UFCW |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Local 711
Pension (1) |
|
51-6031512 - 001 |
|
Red |
|
Red |
|
Implemented |
|
|
9 |
|
|
8 |
|
|
8 |
|
No |
Denver Area Meat Cutters |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
and
Employers |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan (1) |
|
84-6097461 - 001 |
|
Green |
|
Green |
|
No |
|
|
8 |
|
|
8 |
|
|
8 |
|
No |
United Food & Commercial |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Workers
Intl Union Industry |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Fund (1) (4) |
|
51-6055922 - 001 |
|
Green |
|
Green |
|
No |
|
|
33 |
|
|
33 |
|
|
33 |
|
No |
Western Conference of |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Teamsters
Pension Plan |
|
91-6145047 - 001 |
|
Green |
|
Green |
|
No |
|
|
30 |
|
|
31 |
|
|
30 |
|
No |
Central States, Southeast & |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Southwest
Areas |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan |
|
36-6044243 - 001 |
|
Red |
|
Red |
|
Implemented |
|
|
15 |
|
|
15 |
|
|
12 |
|
No |
UFCW
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension
Plan (1) |
|
58-6101602 001 |
|
Green |
|
Green |
|
No |
|
|
70 |
|
|
|
|
|
275 |
|
No |
Other |
|
|
|
|
|
|
|
|
|
|
12 |
|
|
13 |
|
|
12 |
|
|
Total Contributions |
|
|
|
|
|
|
|
|
|
$ |
297 |
|
$ |
228 |
|
$ |
492 |
|
|
____________________
(1) |
The Companys
multi-employer contributions to these respective funds represent more than
5% of the total contributions received by the pension funds. |
(2) |
The information for
this fund was obtained from the Form 5500 filed for the plans year-end at
March 31, 2014 and March 31, 2013. |
(3) |
The information for
this fund was obtained from the Form 5500 filed for the plans year-end at
September 30, 2013 and September 30, 2012. |
(4) |
The information for
this fund was obtained from the Form 5500 filed for the plans year-end at
June 30, 2013 and June 30, 2012. |
A-70
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
(5) |
As of June
30, 2014, this pension fund was merged into the Sound Retirement Trust.
After the completion of the merger, on July 1, 2014, certain assets and
liabilities related to the Washington Meat Industry Pension Trust were
transferred from the Sound Retirement Trust to the UFCW Consolidated
Pension Plan. See the above information regarding the restructuring of
certain pension plan agreements. |
(6) |
Under the
Pension Protection Act, a surcharge may be imposed when employers make
contributions under a collective bargaining agreement that is not in
compliance with a rehabilitation plan. As of January 31, 2015, the
collective bargaining agreements under which the Company was making
contributions were in compliance with rehabilitation plans adopted by the
applicable pension fund. |
The following table describes (a) the expiration date of the Companys
collective bargaining agreements and (b) the expiration date of the Companys
most significant collective bargaining agreements for each of the material
multi-employer funds in which the Company participates.
|
|
Expiration Date |
|
Most Significant Collective |
|
|
of Collective |
|
Bargaining Agreements (1) |
|
|
Bargaining |
|
(not in
millions) |
Pension Fund |
|
Agreements |
|
Count |
|
Expiration |
SO
CA UFCW Unions & Food Employers Joint |
|
March 2016 to |
|
|
|
March 2016 to |
Pension
Trust Fund |
|
June 2017 |
|
2 |
|
June 2017 |
|
|
February 2015 to |
|
|
|
February 2015 |
UFCW
Consolidated Pension Plan |
|
March 2019 |
|
8 |
|
to
June 2018 |
Desert States Employers & UFCW |
|
October 2016 to |
|
|
|
|
Unions
Pension Plan |
|
June 2018 |
|
1 |
|
October 2016 |
Sound Retirement Trust (formerly
Retail |
|
January 2015 (2) to |
|
|
|
May
2016 to |
Clerks
Pension Plan) (3) |
|
December 2016 |
|
2 |
|
August 2016 |
Rocky Mountain UFCW Unions and |
|
September 2015 to |
|
|
|
|
Employers
Pension Plan |
|
October 2015 |
|
1 |
|
September 2015 |
|
|
February 2015 to |
|
|
|
August 2015 to |
Oregon Retail Employees Pension Plan |
|
April 2017 |
|
3 |
|
June
2016 |
Bakery and Confectionary Union &
Industry |
|
May 2011 (2) to |
|
|
|
July 2015 to |
International Pension Fund |
|
September 2017 |
|
4 |
|
May 2017 |
|
|
April 2013 (2) to |
|
|
|
|
Retail Food Employers & UFCW Local 711
Pension |
|
March 2015 |
|
2 |
|
March 2015 |
|
|
September 2015 to |
|
|
|
|
Denver Area Meat Cutters and Employers Pension
Plan |
|
October 2015 |
|
1 |
|
September 2015 |
United Food & Commercial Workers Intl Union
|
|
March 2014 (2) to |
|
|
|
April 2015 to |
Industry
Pension Fund |
|
August 2018 |
|
2 |
|
March 2017 |
|
|
April 2014 (2) to |
|
|
|
April 2015 to |
Western Conference of Teamsters Pension
Plan |
|
April 2018 |
|
5 |
|
July 2017 |
Central States, Southeast &
Southwest |
|
|
|
|
|
|
Areas
Pension Plan |
|
September 2014 (2) |
|
2 |
|
|
____________________
(1) |
This column
represents the number of significant collective bargaining agreements and
their expiration date for each of the Companys pension funds listed
above. For purposes of this table, the significant collective bargaining
agreements are the largest based on covered employees that, when
aggregated, cover the majority of the employees for which we make
multi-employer contributions for the referenced pension fund. |
(2) |
Certain collective
bargaining agreements for each of these pension funds are operating under
an extension. |
(3) |
As of June 30, 2014,
the Washington Meat Industry Pension Trust was merged into the Sound
Retirement Trust. |
A-71
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
Based on the most recent information available to it, the Company
believes the present value of actuarial accrued liabilities in most of these
multi-employer plans substantially exceeds the value of the assets held in trust
to pay benefits. Moreover, if the Company were to exit certain markets or
otherwise cease making contributions to these funds, the Company could trigger a
substantial withdrawal liability. Any adjustment for withdrawal liability will
be recorded when it is probable that a liability exists and can be reasonably
estimated.
The Company also contributes to various other multi-employer benefit
plans that provide health and welfare benefits to active and retired
participants. Total contributions made by the Company to these other
multi-employer health and welfare plans were approximately $1,200 in 2014,
$1,100 in 2013 and $1,100 in 2012.
17.
RECENTLY
ADOPTED ACCOUNTING
STANDARDS
In February 2013, the Financial Accounting Standards Board (FASB)
amended its standards on comprehensive income by requiring disclosure of
information about amounts reclassified out of AOCI by component. Specifically,
the amendment requires disclosure of the effect of significant reclassifications
out of AOCI on the respective line items in net income in which the item was
reclassified if the amount being reclassified is required to be reclassified to
net income in its entirety in the same reporting period. It requires cross
reference to other disclosures that provide additional detail for amounts that
are not required to be reclassified in their entirety in the same reporting
period. This new disclosure became effective for the Company beginning February
3, 2013, and was adopted prospectively in accordance with the standard. See Note
9 to the Consolidated Financial Statements for the Companys disclosures related
to this amended standard.
In July 2013, the FASB amended ASC 740, Income Taxes. The amendment
provides guidance on the financial statement presentation of an unrecognized tax
benefit, as either a reduction of a deferred tax asset or as a liability, when a
net operating loss carryforward, similar tax loss, or a tax credit carryforward
exists. This amendment became effective for the Company beginning February 2,
2014, and was adopted prospectively in accordance with the standard. The
adoption of this amendment did not have an effect on net income and did not have
a significant effect on the Consolidated Balance Sheets.
18.
RECENTLY
ISSUED ACCOUNTING
STANDARDS
In May 2014, FASB issued Accounting Standards Update (ASU) 2014-09,
Revenue from Contracts with Customers, which provides guidance for revenue
recognition. The standards core principle is that a company will recognize
revenue when it transfers promised goods or services to customers in an amount
that reflects the consideration to which the company expects to be entitled in
exchange for those goods or services. This guidance will be effective for the
Company in the first quarter of its fiscal year ending January 27, 2018. Early
adoption is not permitted. The Company is currently in the process of evaluating
the effect of adoption of this ASU on the Consolidated Financial
Statements.
A-72
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
19. QUARTERLY DATA
(UNAUDITED)
The two tables that follow reflect the unaudited results of operations
for 2014 and 2013.
|
|
Quarter |
|
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total Year |
2014 |
|
(16
Weeks) |
|
(12
Weeks) |
|
(12
Weeks) |
|
(12
Weeks) |
|
(52
Weeks) |
Sales |
|
|
$ |
32,961 |
|
|
|
$ |
25,310 |
|
|
|
$ |
24,987 |
|
|
|
$ |
25,207 |
|
|
$ |
108,465 |
Merchandise costs, including advertising, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warehousing, and
transportation, excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
items shown separately
below |
|
|
|
26,065 |
|
|
|
|
20,136 |
|
|
|
|
19,764 |
|
|
|
|
19,547 |
|
|
|
85,512 |
Operating, general
and administrative |
|
|
|
5,168 |
|
|
|
|
3,920 |
|
|
|
|
3,954 |
|
|
|
|
4,119 |
|
|
|
17,161 |
Rent |
|
|
|
217 |
|
|
|
|
166 |
|
|
|
|
162 |
|
|
|
|
162 |
|
|
|
707 |
Depreciation and
amortization |
|
|
|
581 |
|
|
|
|
444 |
|
|
|
|
456 |
|
|
|
|
467 |
|
|
|
1,948 |
Operating
profit |
|
|
|
930 |
|
|
|
|
644 |
|
|
|
|
651 |
|
|
|
|
912 |
|
|
|
3,137 |
Interest
expense |
|
|
|
147 |
|
|
|
|
112 |
|
|
|
|
114 |
|
|
|
|
115 |
|
|
|
488 |
Earnings before income
tax expense |
|
|
|
783 |
|
|
|
|
532 |
|
|
|
|
537 |
|
|
|
|
797 |
|
|
|
2,649 |
Income tax
expense |
|
|
|
274 |
|
|
|
|
182 |
|
|
|
|
172 |
|
|
|
|
274 |
|
|
|
902 |
Net earnings including noncontrolling interests |
|
|
|
509 |
|
|
|
|
350 |
|
|
|
|
365 |
|
|
|
|
523 |
|
|
|
1,747 |
Net earnings
attributable to |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
noncontrolling
interests |
|
|
|
8 |
|
|
|
|
3 |
|
|
|
|
3 |
|
|
|
|
5 |
|
|
|
19 |
Net earnings attributable to The Kroger Co. |
|
|
$ |
501 |
|
|
|
$ |
347 |
|
|
|
$ |
362 |
|
|
|
$ |
518 |
|
|
$ |
1,728 |
Net earnings
attributable to The Kroger Co. per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic common
share |
|
|
$ |
0.99 |
|
|
|
$ |
0.71 |
|
|
|
$ |
0.74 |
|
|
|
$ |
1.06 |
|
|
$ |
3.49 |
Average number of shares used in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
basic
calculation |
|
|
|
501 |
|
|
|
|
485 |
|
|
|
|
486 |
|
|
|
|
486 |
|
|
|
490 |
Net earnings
attributable to The Kroger Co. per |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted common
share |
|
|
$ |
0.98 |
|
|
|
$ |
0.70 |
|
|
|
$ |
0.73 |
|
|
|
$ |
1.04 |
|
|
$ |
3.44 |
Average number of shares used in |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
calculation |
|
|
|
507 |
|
|
|
|
491 |
|
|
|
|
492 |
|
|
|
|
493 |
|
|
|
497 |
Dividends declared
per common share |
|
|
$ |
0.165 |
|
|
|
$ |
0.165 |
|
|
|
$ |
0.185 |
|
|
|
$ |
0.185 |
|
|
$ |
0.700 |
Annual amounts may not sum due to rounding.
In the first quarter of 2014, the Company incurred a $87 charge to
OG&A expenses due to commitments and withdrawal liabilities arising from
restructuring of certain pension plan agreements to help stabilize associates
future benefits.
In the third quarter of 2014, the Company incurred a $25 charge to
OG&A expenses due to contributions to the Companys charitable foundation
and a $17 benefit to income tax expense due to certain tax items.
In the fourth quarter of 2014, the Company incurred a $60 charge to
OG&A expenses due to contributions to the Companys charitable foundation
and a $55 charge to OG&A expenses for contributions to the UFCW Consolidated
Pension Plan.
A-73
NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS,
CONTINUED
|
|
Quarter |
|
|
|
|
First |
|
Second |
|
Third |
|
Fourth |
|
Total Year |
2013 |
|
(16
Weeks) |
|
(12
Weeks) |
|
(12
Weeks) |
|
(12
Weeks) |
|
(52
Weeks) |
Sales |
|
|
$ |
29,997 |
|
|
|
$ |
22,686 |
|
|
|
$ |
22,470 |
|
|
|
$ |
23,222 |
|
|
|
$ |
98,375 |
|
Merchandise costs, including
advertising, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
warehousing, and transportation, excluding |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
items
shown separately below |
|
|
|
23,817 |
|
|
|
|
18,059 |
|
|
|
|
17,866 |
|
|
|
|
18,397 |
|
|
|
|
78,138 |
|
Operating, general and administrative |
|
|
|
4,593 |
|
|
|
|
3,506 |
|
|
|
|
3,537 |
|
|
|
|
3,558 |
|
|
|
|
15,196 |
|
Rent |
|
|
|
189 |
|
|
|
|
139 |
|
|
|
|
138 |
|
|
|
|
147 |
|
|
|
|
613 |
|
Depreciation and amortization |
|
|
|
519 |
|
|
|
|
387 |
|
|
|
|
395 |
|
|
|
|
402 |
|
|
|
|
1,703 |
|
Operating
profit |
|
|
|
879 |
|
|
|
|
595 |
|
|
|
|
534 |
|
|
|
|
718 |
|
|
|
|
2,725 |
|
Interest expense |
|
|
|
129 |
|
|
|
|
99 |
|
|
|
|
108 |
|
|
|
|
107 |
|
|
|
|
443 |
|
Earnings
before income tax expense |
|
|
|
750 |
|
|
|
|
496 |
|
|
|
|
426 |
|
|
|
|
611 |
|
|
|
|
2,282 |
|
Income tax expense |
|
|
|
266 |
|
|
|
|
176 |
|
|
|
|
125 |
|
|
|
|
184 |
|
|
|
|
751 |
|
Net
earnings including noncontrolling interests |
|
|
|
484 |
|
|
|
|
320 |
|
|
|
|
301 |
|
|
|
|
427 |
|
|
|
|
1,531 |
|
Net
earnings attributable to noncontrolling interests |
|
|
|
3 |
|
|
|
|
3 |
|
|
|
|
2 |
|
|
|
|
5 |
|
|
|
|
12 |
|
Net
earnings attributable to The Kroger Co. |
|
|
$ |
481 |
|
|
|
$ |
317 |
|
|
|
$ |
299 |
|
|
|
$ |
422 |
|
|
|
$ |
1,519 |
|
Net
earnings attributable to The Kroger Co. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
per basic
common share |
|
|
$ |
0.93 |
|
|
|
$ |
0.61 |
|
|
|
$ |
0.58 |
|
|
|
$ |
0.82 |
|
|
|
$ |
2.93 |
|
Average number of shares used in basic
calculation |
|
|
|
514 |
|
|
|
|
515 |
|
|
|
|
515 |
|
|
|
|
511 |
|
|
|
|
514 |
|
Net
earnings attributable to The Kroger Co. per diluted |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
common
share |
|
|
$ |
0.92 |
|
|
|
$ |
0.60 |
|
|
|
$ |
0.57 |
|
|
|
$ |
0.81 |
|
|
|
$ |
2.90 |
|
Average number of shares used in diluted
calculation |
|
|
|
520 |
|
|
|
|
521 |
|
|
|
|
521 |
|
|
|
|
517 |
|
|
|
|
520 |
|
Dividends declared per common share |
|
|
$ |
0.150 |
|
|
|
$ |
0.150 |
|
|
|
$ |
0.165 |
|
|
|
$ |
0.165 |
|
|
|
$ |
0.630 |
|
Annual amounts may not sum due to rounding.
In the second quarter of 2013, the Company incurred a $3 charge to
interest expense and a $2 charge to OG&A expense due to the merger with
Harris Teeter.
In the third quarter of 2013, the Company incurred a $2 charge to
interest expense and a $2 charge to OG&A expense due to the merger with
Harris Teeter and a $19 benefit to income tax expense due to certain tax
items.
In the fourth quarter of 2013, the Company incurred a $6 charge to
interest expense and a $12 charge to OG&A expense due to the merger with
Harris Teeter and a $21 benefit to income tax expense due to certain tax
items.
A-74
Kroger has a variety of plans under which employees may acquire common
shares of Kroger. Employees of Kroger and its subsidiaries own shares through a
profit sharing plan, as well as 401(k) plans and a payroll deduction plan called
the Kroger Stock Exchange. If employees have questions concerning their shares
in the Kroger Stock Exchange, or if they wish to sell shares they have purchased
through this plan, they should contact:
|
Computershare Plan
Managers P.O. Box 43021 Providence, RI 02940 Phone
800-872-3307 |
|
Questions regarding
Krogers 401(k) plans should be directed to the employees Human Resources
Department or 1-800-2KROGER. Questions concerning any of the other plans should
be directed to the employees Human Resources Department.
SHAREHOLDERS: Wells Fargo
Shareowner Services, a division of Wells Fargo Bank, N.A., is Registrar and
Transfer Agent for Krogers common shares. For questions concerning payment of
dividends, changes of address, etc., individual shareholders should
contact:
|
Wells Fargo
Shareowner Services P. O. Box 64854 Saint Paul, MN
55164-0854 Toll Free 1-855-854-1369 |
|
Shareholder questions and
requests for forms available on the Internet should be directed to:
www.shareowneronline.com.
FINANCIAL INFORMATION: Call
(513) 762-1220 to request printed financial information, including Krogers most
recent report on Form 10-Q or 10-K, or press release. Written inquiries should
be addressed to Shareholder Relations, The Kroger Co., 1014 Vine Street,
Cincinnati, Ohio 45202-1100. Information also is available on Krogers corporate
website at ir.kroger.com.
THE KROGER CO.
1014 VINE
STREET
CINCINNATI, OH 45202
VOTE BY INTERNET -
www.proxyvote.com
Use the Internet to transmit your
voting instructions and for electronic delivery of information up until 11:59
P.M. Eastern Time the day before the meeting date. Have your proxy card in hand
when you access the web site and follow the instructions to obtain your records
and to create an electronic voting instruction form.
ELECTRONIC DELIVERY OF FUTURE PROXY
MATERIALS
If you would like to reduce the costs
incurred by our company in mailing proxy materials, you can consent to receiving all future proxy
statements, proxy cards and annual reports electronically via e-mail or the
Internet. To sign up for electronic delivery, please follow the instructions
above to vote using the Internet and, when prompted, indicate that you agree to
receive or access proxy materials electronically in future years.
VOTE BY PHONE -
1-800-690-6903
Use any touch-tone telephone to
transmit your voting instructions up until 11:59 P.M. Eastern Time the day
before the meeting date. Have your proxy card in hand when you call and then
follow the instructions.
VOTE BY MAIL
Mark, sign and date your proxy card and
return it in the postage-paid envelope we have provided or return it to Vote
Processing, c/o Broadridge, 51 Mercedes Way, Edgewood, NY 11717. If you vote
your proxy by Internet or by telephone, you do NOT need to mail back your proxy
card.
TO VOTE, MARK BLOCKS
BELOW IN BLUE OR BLACK INK AS FOLLOWS: |
M93307-P65267 |
KEEP THIS PORTION FOR YOUR RECORDS |
|
DETACH AND RETURN THIS PORTION
ONLY |
THIS PROXY CARD IS VALID ONLY WHEN
SIGNED AND DATED. |
THE KROGER CO. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Board of Directors recommends you vote FOR the
following: |
|
1. |
Election of Directors |
|
|
|
|
|
|
|
|
Nominees: |
|
For |
|
Against |
|
Abstain |
|
|
|
|
|
|
|
|
|
|
|
|
1a. |
Nora A. Aufreiter |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1b. |
Robert D. Beyer |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1c. |
Susan J. Kropf |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1d. |
David B. Lewis |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1e. |
W. Rodney McMullen |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1f. |
Jorge P. Montoya |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1g. |
Clyde R. Moore |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1h. |
Susan M. Phillips |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1i. |
James A. Runde |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1j. |
Ronald L. Sargent |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
1k. |
Bobby S. Shackouls |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Board of
Directors recommends that you vote FOR proposals 2 and 3. |
|
For |
|
Against |
|
Abstain |
|
2.
|
Advisory vote to approve executive compensation. |
|
☐ |
|
☐ |
|
☐ |
|
3. |
Ratification of PricewaterhouseCoopers LLP, as auditors. |
|
☐ |
|
☐ |
|
☐ |
|
The Board of Directors recommends that you vote
AGAINST proposals 4, 5 and 6. |
|
For |
|
Against |
|
Abstain |
|
4. |
A shareholder proposal, if properly presented, to publish a
report on human rights risks of operations and supply chain. |
|
☐ |
|
☐ |
|
☐ |
|
5. |
A shareholder proposal, if properly presented, to issue
a report assessing the environmental impacts of using
unrecyclable packaging for private label brands. |
|
☐ |
|
☐ |
|
☐ |
|
6. |
A shareholder proposal, if properly presented, to issue a
report regarding options to reduce or eliminate antibiotic
use in the production of private label meats. |
|
☐ |
|
☐ |
|
☐ |
|
|
|
|
|
|
|
|
NOTE:
Holders of common shares of record at the close of
business on April 30, 2015, will be entitled to vote at
the meeting. |
|
|
|
|
|
|
|
Please sign exactly as your
name(s) appear(s) hereon. When signing as attorney, executor,
administrator, or other fiduciary, please give full title as such. Joint
owners should each sign personally. All holders must sign. If a
corporation or partnership, please sign in full corporate or partnership
name by authorized officer. |
|
|
|
|
|
|
|
|
Signature [PLEASE SIGN WITHIN
BOX] |
Date |
|
Signature (Joint Owners) |
Date |
|
Important Notice Regarding the
Availability of Proxy Materials for the Annual Meeting:
The Combined Notice, Proxy Statement, and Annual Report are
available at www.proxyvote.com.
THE KROGER CO.
Annual Meeting of
Shareholders
June 25, 2015 11:00 AM Eastern Time
This proxy is solicited by the Board of Directors
The undersigned hereby appoints each of ROBERT D. BEYER, W. RODNEY McMULLEN, and RONALD L. SARGENT, or if more than one is present and acting then a majority thereof, proxies, with full power of substitution and revocation, to vote the common shares of The Kroger Co. that the undersigned is entitled to vote at the annual meeting of shareholders, and at any adjournment thereof, with all the powers the undersigned would possess if personally present, including authority to vote on the matters shown on the reverse in the manner directed, and upon any other matter that properly may come before the meeting. The undersigned hereby revokes any proxy previously given to vote those shares at the meeting or at any adjournment.
The proxies are directed to vote as specified on the reverse hereof and in their discretion on all other matters coming before the meeting. Except as specified to the contrary on the reverse, the shares represented by this proxy will be voted FOR each nominee listed in Proposal 1, FOR Proposals 2 and 3, and AGAINST Proposals 4, 5 and 6.
If you wish to vote in accordance with the recommendations of the Board of Directors, all you need to do is sign and return this card. The above
named proxies cannot vote the shares unless you vote your proxy by Internet or telephone, or sign and return this card.
Only shareholders and persons holding
proxies from shareholders may attend the meeting. If you are attending the meeting, please bring the notice of the meeting
that was separately mailed to you or the top portion of your proxy card, either
of which will serve as your admission ticket.
YOUR MANAGEMENT DESIRES TO HAVE A
LARGE NUMBER OF SHAREHOLDERS REPRESENTED AT THE MEETING, IN PERSON OR BY PROXY.
PLEASE VOTE YOUR PROXY ELECTRONICALLY VIA THE INTERNET OR BY TELEPHONE. IF YOU
HAVE ELECTED TO RECEIVE PRINTED MATERIALS, YOU MAY SIGN AND DATE THE PROXY AND
MAIL IT IN THE SELF-ADDRESSED ENVELOPE PROVIDED. NO POSTAGE IS REQUIRED IF
MAILED WITHIN THE UNITED STATES. If you are unable to attend the annual meeting,
you may listen to a live webcast of the meeting, which will be accessible
through our website, ir.kroger.com, at 11:00 AM Eastern Time.
Continued and to be signed on reverse
side
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