Albertsons Companies, Inc.: Form 10-Q for the period ended Dec 3, 2022

FORWARD-LOOKING STATEMENTS AND FACTORS THAT IMPACT OUR OPERATING RESULTS AND TRENDS

This Form 10-Q contains "forward-looking statements" within the meaning of the federal securities laws. The "forward-looking statements" include our current expectations, assumptions, estimates and projections about our business, our industry, the outcome of the Merger and the payment of the Special Dividend. They include statements relating to our future operating or financial performance which the Company believes to be reasonable at this time. You can identify forward-looking statements by the use of words such as "outlook," "may," "should," "could," "estimates," "predicts," "potential," "continue," "anticipates," "believes," "plans," "expects," "future" and "intends" and similar expressions which are intended to identify forward-looking statements.

These statements are not guarantees of future performance and are subject to numerous risks and uncertainties which are beyond our control and difficult to predict and could cause actual results to differ materially from the results expressed or implied by the statements. Risks and uncertainties that could cause actual results to differ materially from such statements include:

• changes in macroeconomic conditions and uncertainty regarding the geopolitical environment;
• rates of food price inflation or deflation, as well as fuel and commodity prices;
• changes in market interest rates and wage rates;
• changes in retail consumer behavior, including in the digital space;
• ability to attract and retain qualified associates and negotiate acceptable contracts with labor unions;
• failure to achieve productivity initiatives, unexpected changes in our objectives and plans, inability to implement our strategies, plans, programs and initiatives, or enter into strategic transactions, investments or partnerships in the future on terms acceptable to us, or at all, or to close the transactions contemplated by the Merger Agreement;
• litigation related to the transactions contemplated by the Merger Agreement;
• litigation related to the payment of the Special Dividend;
• restrictions on our ability to operate as a result of the Merger Agreement;
• challenges in attracting, retaining and motivating our employees until the Closing;
• availability and cost of goods used in our food products;
• challenges with our supply chain;
• cybersecurity events affecting us and related costs and impact to the business; and
• health epidemics and pandemics including the continued impact of the COVID-19 pandemic, about which there are still many unknowns and the extent of their impact on our business and the communities we serve including factors that could cause a reduction in the current levels of revenue from administering vaccines and providing test kits.

All forward-looking statements attributable to us or persons acting on our behalf are expressly qualified in their entirety by these cautionary statements and risk factors. Forward-looking statements contained in this Form 10-Q reflect our view only as of the date of this Form 10-Q. We undertake no obligation, other than as required by law, to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

In evaluating our financial results and forward-looking statements, you should carefully consider the risks and uncertainties more fully described in the "Risk Factors" section or other sections in our reports filed with the SEC including the most recent annual report on Form 10-K and any subsequent periodic reports on Form 10-Q and current reports on Form 8-K.

As used in this Form 10-Q, unless the context otherwise requires, references to "Albertsons," the "Company," "we," "us" and "our" refer to Albertsons Companies, Inc. and, where appropriate, its subsidiaries.

NON-GAAP FINANCIAL MEASURES

We define EBITDA as generally accepted accounting principles ("GAAP") earnings (net loss) before interest, income taxes, depreciation and amortization. We define Adjusted EBITDA as earnings (net loss) before interest, income taxes, depreciation and amortization, further adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income as GAAP Net income adjusted to eliminate the effects of items management does not consider in assessing our ongoing core performance. We define Adjusted net income per Class A common share as Adjusted net income divided by the weighted average diluted Class A common shares outstanding, as adjusted to reflect all restricted stock units ("RSUs") and restricted common stock ("RSAs") outstanding at the end of the period, as well as the conversion of Convertible Preferred Stock when it is antidilutive for GAAP. See "Results of Operations" for further discussion and a reconciliation of Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share.

EBITDA, Adjusted EBITDA, Adjusted net income and Adjusted net income per Class A common share (collectively, the "Non-GAAP Measures") are performance measures that provide supplemental information we believe is useful to analysts and investors to evaluate our ongoing results of operations, when considered alongside other GAAP measures such as net income, operating income, gross margin and net income per Class A common share. These Non-GAAP Measures exclude the financial impact of items management does not consider in assessing our ongoing core operating performance, and thereby provide useful measures to analysts and investors of our operating performance on a period-to-period basis. Other companies may have different definitions of Non-GAAP Measures and provide for different adjustments, and comparability to our results of operations may be impacted by such differences. We also use Adjusted EBITDA for board of director and bank compliance reporting. Our presentation of Non-GAAP Measures should not be construed as an inference that our future results will be unaffected by unusual or non-recurring items.

Non-GAAP Measures should not be considered as measures of discretionary cash available to us to invest in the growth of our business. We compensate for these limitations by relying primarily on our GAAP results and using Non-GAAP Measures only for supplemental purposes.

THIRD QUARTER OF FISCAL 2022 OVERVIEW

As of December 3, 2022, we operated 2,270 retail food and drug stores with 1,720 pharmacies, 402 associated fuel centers, 22 dedicated distribution centers and 19 manufacturing facilities. During the third quarter of fiscal 2022, we executed on our Customer for Life strategy as we continued to invest in our strategic priorities, including deepening our digital connection and engagement with our customers, differentiating our store experience, enhancing what we offer and modernizing our capabilities. Identical sales increased 7.9%, excluding fuel, during the third quarter of fiscal 2022.

Merger Agreement

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

Pursuant to the Merger Agreement, (i) each share of Class A common stock of the Company issued and outstanding immediately prior to the effective time of the Merger (the "Effective Time"), shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash, without interest, and (ii) each share of Series A convertible preferred stock of the Company issued and outstanding immediately prior to the Effective Time shall be converted automatically at the Effective Time into the right to receive from Parent $34.10 per share in cash on an as-converted basis, without interest. The $34.10 per share is subject to certain reductions as described in Note 2 - Merger Agreement and Special Dividend in the unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.

The Company has filed with the Securities and Exchange Commission ("SEC") a preliminary information statement on Schedule 14C with respect to the approval of the Merger, which is subject to SEC comment. Once the SEC has no further comments, the Company will mail the definitive information statement to the Company's stockholders. You may obtain copies of all documents filed by the Company with the SEC regarding this transaction, free of charge, at the SEC's website, www.sec.gov (http://www.sec.gov) or from the Company's website at https://www.albertsonscompanies.com/investors/overview/.

Special Dividend

Separate from the Merger, on October 13, 2022, we declared a special cash dividend of $6.85 per share of Class A common stock (the "Special Dividend"), payable to stockholders of record, including holders of Series A convertible preferred stock on an as-converted basis, as of the close of business on October 24, 2022, and was to be paid on November 7, 2022. As discussed in Note 2 – Merger Agreement and Special Dividend located elsewhere in this Form 10-Q, the payment of the Special Dividend is subject to a temporary restraining order issued by the courts of the State of Washington. The Special Dividend of $3,921.3 million is recorded in Special dividend payable on the Condensed Consolidated Balance Sheets.

Third quarter of fiscal 2022 highlights

In summary, our financial and operating highlights for the third quarter of fiscal 2022 include:

• Identical sales increased 7.9%
• Digital sales increased 33%
• Loyalty members increased 16% to 33 million
• Net income of $376 million, or $0.20 per Class A common share
• Adjusted net income of $505 million, or $0.87 per Class A common share
• Adjusted EBITDA of $1,158 million

Stores

The following table shows stores operating, acquired, opened and closed during the periods presented:

The following table summarizes our stores by size:

(1) In millions, reflects total square footage of retail stores operating at the end of the period.

RESULTS OF OPERATIONS

Comparison of the Third Quarter of Fiscal 2022 and the First 40 weeks of Fiscal 2022 to the Third Quarter of Fiscal 2021 and the First 40 weeks of Fiscal 2021.

The following tables and related discussion set forth certain information and comparisons regarding the components of our Condensed Consolidated Statements of Operations for the 12 and 40 weeks ended December 3, 2022 ("third quarter of fiscal 2022" and "first 40 weeks of fiscal 2022") to the 12 and 40 weeks ended December 4, 2021 ("third quarter of fiscal 2021" and "first 40 weeks of fiscal 2021") (dollars in millions, except per share data).

Net Sales and Other Revenue

Net sales and other revenue increased 8.5% to $18,154.9 million for the third quarter of fiscal 2022 from $16,728.4 million for the third quarter of fiscal 2021. The increase in Net sales and other revenue was driven by our 7.9% increase in identical sales and higher fuel sales, with retail price inflation as the primary driver of the identical sales increase.

Net sales and other revenue increased 9.0% to $59,384.6 million for the first 40 weeks of fiscal 2022 from $54,503.5 million for the first 40 weeks of fiscal 2021. The increase in Net sales and other revenue was driven by our 7.3% increase in identical sales and higher fuel sales, with retail price inflation as the primary driver of the identical sales increase.

Identical Sales, Excluding Fuel

Identical sales include stores operating during the same period in both the current year and the prior year, comparing sales on a daily basis. Direct to consumer digital sales are included in identical sales, and fuel sales are excluded from identical sales. Acquired stores become identical on the one-year anniversary date of the acquisition. Identical sales for the 12 and 40 weeks ended December 3, 2022 and the 12 and 40 weeks ended December 4, 2021, respectively, were:

The following table represents Net sales and other revenue by product type (dollars in millions):

(1) Digital related sales are included in the categories to which the revenue pertains.

(2) Consists primarily of general merchandise, grocery, dairy and frozen foods.

(3) Consists primarily of produce, meat, deli and prepared foods, bakery, floral and seafood.

(4) Consists primarily of wholesale revenue to third parties, commissions and other miscellaneous revenue.

Gross Margin

Gross margin represents the portion of Net sales and other revenue remaining after deducting Cost of sales during the period, including purchase and distribution costs. These costs include, among other things, purchasing and sourcing costs, inbound freight costs, product quality testing costs, warehouse and distribution costs, Own Brands program costs and digital-related delivery and handling costs. Advertising, promotional expenses and vendor allowances are also components of Cost of sales.

Gross margin rate decreased to 28.2% during the third quarter of fiscal 2022 compared to 28.9% during the third quarter of fiscal 2021. Excluding the impact of fuel and LIFO expense, gross margin rate decreased 47 basis points compared to the third quarter of fiscal 2021. The decrease was primarily driven by increases in product, shrink and supply chain costs, fewer COVID-19 vaccines in the third quarter of fiscal 2022, and increases in picking and delivery costs related to the growth in digital sales, partially offset by the benefits of ongoing productivity initiatives and an increase in COVID at-home test kit revenue.

Gross margin rate decreased to 28.1% during the first 40 weeks of fiscal 2022 compared to 28.9% during the first 40 weeks of fiscal 2021. Excluding the impact of fuel and LIFO expense, gross margin rate decreased 38 basis points compared to the first 40 weeks of fiscal 2021. The decrease was primarily driven by increases in product, shrink and supply chain costs, increases in picking and delivery costs related to the growth in digital sales, and fewer COVID-19 vaccines in the first 40 weeks of fiscal 2022, partially offset by the benefits of ongoing productivity initiatives and an increase in COVID at-home test kit revenue. We administered approximately 3.7 million COVID-19 vaccinations during the first 40 weeks of fiscal 2022, compared to approximately 8.7 million during the first 40 weeks of fiscal 2021.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store level costs, including wages, employee benefits, rent, depreciation and utilities, in addition to certain back-office expenses related to our corporate and division offices.

Selling and administrative expenses decreased to 25.0% of Net sales and other revenue during the third quarter of fiscal 2022 compared to 25.4% during the third quarter of fiscal 2021. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 29 basis points. The decrease in Selling and administrative expenses was primarily attributable to the benefit of ongoing productivity initiatives and sales leverage, partially offset by investments related to the acceleration of our digital and omnichannel capabilities, merger-related costs, and market-driven wage rate increases.

Selling and administrative expenses decreased to 25.1% of Net sales and other revenue during the first 40 weeks of fiscal 2022 compared to 25.6% during the first 40 weeks of fiscal 2021. Excluding the impact of fuel, Selling and administrative expenses as a percentage of Net sales and other revenue decreased 24 basis points. The decrease in Selling and administrative expenses was primarily attributable to the benefit of ongoing productivity initiatives, together with lower COVID-19 related expenses and sales leverage, partially offset by investments related to the acceleration of our digital and omnichannel capabilities, market-driven wage rate increases, higher depreciation and amortization, higher equity-based compensation expense and merger-related costs.

Loss (Gain) on Property Dispositions and Impairment Losses, Net

For the third quarter of fiscal 2022, net loss on property dispositions and impairment losses was $7.3 million, driven by $3.9 million of asset impairments and $3.4 million of losses primarily from the disposal of assets. For the third quarter of fiscal 2021, net gain on property dispositions and impairment losses was $13.4 million, primarily driven by $15.8 million of gains from the sale of assets, partially offset by $2.4 million of asset impairments, primarily related to right-of-use assets.

For the first 40 weeks of fiscal 2022, net gain on property dispositions and impairment losses was $86.1 million, driven by $91.2 million of gains primarily from the sale of real estate assets, partially offset by $5.1 million of asset impairments. For the first 40 weeks of fiscal 2021, net gain on property dispositions and impairment losses was $13.3 million, primarily driven by $31.6 million of gains from the sale of assets, partially offset by $18.3 million of asset impairments, primarily related to right-of-use assets and intangible assets.

Interest Expense, Net

Interest expense, net was $84.3 million during the third quarter of fiscal 2022 compared to $111.3 million during the third quarter of fiscal 2021. The decrease in Interest expense, net was primarily attributable to higher interest income, as well as lower average interest rates. The weighted average interest rate during the third quarter of fiscal 2022 was 5.3%, excluding deferred financing costs and original issue discount, compared to 5.4% during the third quarter of fiscal 2021.

Interest expense, net was $313.0 million during the first 40 weeks of fiscal 2022 compared to $373.9 million during the first 40 weeks of fiscal 2021. The decrease in Interest expense, net was primarily attributable to higher interest income, as well as lower average interest rates. The weighted average interest rate during first 40 weeks of fiscal 2022 was 5.3%, excluding amortization and write-off of deferred financing costs and original issue discount, compared to 5.5% during the first 40 weeks of fiscal 2021.

Loss on Debt Extinguishment

There was no Loss on debt extinguishment during both the third quarter of fiscal 2022 and first 40 weeks of fiscal 2022. Loss on debt extinguishment was $3.7 million during both the third quarter of fiscal 2021 and first 40 weeks of fiscal 2021. The loss on debt extinguishment during the third quarter and first 40 weeks of fiscal 2021 primarily consisted of a make-whole premium and write-off of deferred financing costs associated with the redemption of our 5.750% Senior Unsecured Notes due 2025.

Other Expense (Income), Net

For the third quarter of fiscal 2022, other expense, net was $1.7 million compared to other income, net of $38.3 million for the third quarter of fiscal 2021. Other expense, net during the third quarter of fiscal 2022 was primarily driven by unrealized losses from non-operating investments, partially offset by non-service cost components of net pension and post-retirement income and income related to our equity investment. Other income, net during the third quarter of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement income, unrealized gains from non-operating investments and income related to our equity investment.

For the first 40 weeks of fiscal 2022, other income, net was $23.5 million compared to $100.7 million for the first 40 weeks of fiscal 2021. Other income, net during the first 40 weeks of fiscal 2022 was primarily driven by non-service cost components of net pension and post-retirement income and income related to our equity investment, partially offset by unrealized losses from non-operating investments. Other income, net during the first 40 weeks of fiscal 2021 was primarily driven by non-service cost components of net pension and post-retirement income, including pension settlement gain, realized and unrealized gains from non-operating investments and income related to our equity investment, partially offset by unrealized losses from non-operating investments.

Income Taxes

Income tax expense was $120.9 million, representing a 24.4% effective tax rate, for the third quarter of fiscal 2022. Income tax expense was $98.4 million, representing a 18.8% effective tax rate, for the third quarter of fiscal 2021. The favorability in the effective income tax rate in the third quarter of fiscal 2021 was primarily driven by incremental discrete state income tax benefits related to expired statutes and audit settlements.

Income tax expense was $381.6 million, representing a 24.1% effective tax rate, for the first 40 weeks of fiscal 2022. Income tax expense was $331.2 million, representing a 22.1% effective tax rate, for the first 40 weeks of fiscal 2021. The favorability in the effective income tax rate during the first 40 weeks of fiscal 2021 was primarily driven by the recognition of discrete state income tax benefits.

Net Income and Adjusted Net Income

Net income was $375.5 million, or $0.20 per Class A common share, during the third quarter of fiscal 2022 compared to $424.5 million, or $0.74 per Class A common share, during the third quarter of fiscal 2021. Net income per Class A common share during the third quarter of fiscal 2022 includes a $0.45 per share reduction related to the Special Dividend that is attributable to holders of Convertible Preferred Stock on an as-converted basis. Adjusted net income was $505.1 million, or $0.87 per Class A common share, during the third quarter of fiscal 2022 compared to $457.2 million, or $0.79 per Class A common share, during the third quarter of fiscal 2021.

Net income was $1,202.4 million, or $1.72 per Class A common share, during the first 40 weeks of fiscal 2022 compared to $1,164.5 million, or $1.95 per Class A common share, during the first 40 weeks of fiscal 2021. Adjusted net income was $1,505.4 million, or $2.59 per Class A common share, during the first 40 weeks of fiscal 2022 compared to $1,344.2 million, or $2.32 per Class A common share, during the first 40 weeks of fiscal 2021.

Adjusted EBITDA

For the third quarter of fiscal 2022, Adjusted EBITDA was $1,158.0 million, or 6.4% of Net sales and other revenue, compared to $1,051.2 million, or 6.3% of Net sales and other revenue, for the third quarter of fiscal 2021. For the first 40 weeks of fiscal 2022, Adjusted EBITDA was $3,626.8 million, or 6.1% of Net sales and other revenue, compared to $3,324.7 million, or 6.1% of Net sales and other revenue for the first 40 weeks of fiscal 2021.

Reconciliation of Non-GAAP Measures

The following tables reconcile Net income to Adjusted net income, and Net income per Class A common share to Adjusted net income per Class A common share (in millions, except per share data):

32

The following table is a reconciliation of Adjusted net income to Adjusted EBITDA:

(1) Includes costs associated with third-party consulting fees related to our operational priorities and associated business transformation, as well as closures of operating facilities.

(2) Represents incremental pay that is legislatively required in certain municipalities in which we operate.

(3) Primarily relates to third-party advisor fees related to the proposed Merger with Parent and costs in connection with our previously-announced Board-led review of potential strategic alternatives.

(4) Miscellaneous adjustments include the following (see table below):

(i) Primarily includes adjustments for unconsolidated equity investments and other costs not considered in our core performance.

(5) Represents the conversion of Convertible Preferred Stock to the fully outstanding as-converted Class A common shares as of the end of each respective period, for periods in which the Convertible Preferred Stock is antidilutive under GAAP. The third quarter of fiscal 2022 and first 40 weeks of fiscal 2022 reflect the impact of the Special Dividend that is attributable to the holders of Convertible Preferred Stock on an as-converted basis.

(6) Represents incremental unvested RSUs and unvested RSAs to adjust the diluted weighted average Class A common shares outstanding during each respective period to the fully outstanding RSUs and RSAs as of the end of each respective period.

(7) Reflects the per share impact of Non-GAAP adjustments for each period. See the reconciliation of Net income to Adjusted net income above for further details.

(8) See the reconciliation of Net income to Adjusted net income above for further details.

Non-GAAP adjustment classifications within the Condensed Consolidated Statements of Operations:

(a) Cost of sales

(b) Selling and administrative expenses

(c) Interest expense, net

(d) Loss (gain) on interest rate swaps and energy hedges, net:

(e) Depreciation and amortization:

(f) Miscellaneous adjustments:

LIQUIDITY AND CAPITAL RESOURCES

The following table sets forth the major sources and uses of cash and cash equivalents and restricted cash for each period (in millions):

Net Cash Provided by Operating Activities

Net cash provided by operating activities was $2,072.0 million for the first 40 weeks of fiscal 2022 compared to $2,782.8 million for the third quarter of fiscal 2021. The decrease in cash flow from operations compared to the first 40 weeks of fiscal 2021 was due to changes in working capital primarily related to inventory and accounts payable.

These decreases were partially offset by an increase in Adjusted EBITDA and less cash paid for interest during the first 40 weeks of fiscal 2022.

Net Cash Used in Investing Activities

Net cash used in investing activities was $1,478.7 million for the first 40 weeks of fiscal 2022 compared to $1,177.1 million for the first 40 weeks of fiscal 2021.

For the first 40 weeks of fiscal 2022, cash used in investing activities consisted primarily of payments for property, equipment and intangibles of $1,566.9 million partially offset by proceeds from the sale of long-lived assets of $99.4 million. Payments for property, equipment and intangibles in the first 40 weeks of fiscal 2022 included continued investment in our digital and technology platforms, the completion of 135 remodels and the opening of two new stores. For the first 40 weeks of fiscal 2021, cash used in investing activities consisted primarily of payments for property, equipment and intangibles of $1,216.4 million and payments for business acquisitions of $25.4 million, partially offset by proceeds from the sale of long-lived assets of $37.8 million. Payments for property, equipment and intangibles in the first 40 weeks of fiscal 2021 included the completion of 146 remodels, the opening of nine new stores and continued investment in our digital and technology platforms.

Net Cash Provided by (Used in) Financing Activities

Net cash provided by financing activities was $874.4 million during the first 40 weeks of fiscal 2022 compared to net cash used in financing activities of $661.7 million during the first 40 weeks of fiscal 2021.

Net cash provided by financing activities during the first 40 weeks of fiscal 2022 consisted primarily of the $1.4 billion borrowing and $200.0 million subsequent partial repayment of the ABL Facility, partially offset by dividends paid on our Class A common stock and Convertible Preferred Stock, as well as tax withholding payments on vesting of restricted stock units. Net cash used in financing activities during the first 40 weeks of fiscal 2021 consisted primarily of $330.6 million payments on long-term borrowings and dividends paid on our Class A common stock and Convertible Preferred Stock.

Dividends

The holders of Convertible Preferred Stock are entitled to a quarterly dividend at a rate per annum of 6.75% of the liquidation preference per share of the Convertible Preferred Stock. In addition, the holders of Convertible Preferred Stock will participate in cash dividends that we pay on our common stock to the extent that such cash dividends exceed $206.25 million per fiscal year. Cash dividends paid to holders of the Convertible Preferred Stock were $50.2 million and $88.6 million during the first 40 weeks of fiscal 2022 and first 40 weeks of fiscal 2021, respectively. On December 15, 2022, we declared a quarterly cash dividend of $10.7 million to holders of Convertible Preferred Stock, which was paid on December 30, 2022.

We have established a dividend policy pursuant to which we intend to pay a quarterly dividend on our Class A common stock. Cash dividends paid on our Class A common stock were $190.9 million ($0.36 per common share) and $149.0 million ($0.32 per common share) during the first 40 weeks of fiscal 2022 and first 40 weeks of fiscal 2021, respectively. On January 10, 2023, we announced the next quarterly dividend payment of $0.12 per share of Class A common stock to be paid on February 10, 2023 to stockholders of record as of the close of business on January 26, 2023.

On October 13, 2022, we declared the Special Dividend, payable to stockholders of record, including holders of Series A convertible preferred stock on an as-converted basis, as of the close of business on October 24, 2022, and was to be paid on November 7, 2022. As discussed in Note 2 – Merger Agreement and Special Dividend located elsewhere in this Form 10-Q, the payment of the Special Dividend is subject to a temporary restraining order issued by the courts of the State of Washington. The Special Dividend of $3,921.3 million is recorded in Special dividend payable on the Condensed Consolidated Balance Sheets.

Debt Management

On November 2, 2022, we provided notice to the lenders to borrow $1,400.0 million under our amended and restated senior secured asset-based loan facility (as amended, the "ABL Facility"), which was to be used with cash on hand to fund the payment of the Special Dividend. On December 2, 2022, we repaid $200.0 million of the $1,400.0 million borrowing.

As of December 3, 2022, we had $1,200.0 million borrowings outstanding under our ABL Facility and total availability of $2,743.9 million (net of letter of credit usage). See Note 4 – Long-Term Debt and Finance Lease Obligations located elsewhere in this Form 10-Q for further discussion.

Liquidity

Based on current operating trends, we believe that we have significant sources of cash to meet our liquidity needs for the next 12 months and for the foreseeable future, including cash on hand, cash flows from operating activities and other sources of liquidity, including borrowings under our ABL Facility. We estimate our liquidity needs over the next 12 months to be in the range of $9.9 billion to $11.1 billion. This includes $3,921.3 million related to the Special Dividend; $1,200.0 million related to outstanding borrowings under our ABL Facility for which we may, at our discretion, elect to pay all or a portion of the outstanding balance within the next 12 months; $750.0 million related to our 3.50% senior unsecured notes maturing on February 15, 2023 which we intend to fund either through issuing new long-term debt or using existing capacity under our ABL Facility; and $5.2 billion consisting of anticipated requirements for incremental working capital, capital expenditures, pension obligations, interest payments, quarterly dividends on Class A common stock and Convertible Preferred Stock, operating leases and finance leases. In addition, we may enter into refinancing and sale leaseback transactions from time to time. We believe we have adequate cash flow to continue to maintain our current debt ratings and to respond effectively to competitive conditions.

CRITICAL ACCOUNTING POLICIES

The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. 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 fair and consistent manner. See the Critical Accounting Policies section included in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022, filed with the SEC on April 26, 2022, for a discussion of our significant accounting policies.

RECENTLY ISSUED AND RECENTLY ADOPTED ACCOUNTING STANDARDS

See Note 1 - Basis of Presentation and Summary of Significant Accounting Policies of our unaudited interim Condensed Consolidated Financial Statements located elsewhere in this Form 10-Q.

There have been no material changes in our exposure to market risk from the information provided in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022, filed with the SEC on April 26, 2022.

Based on their evaluation of our disclosure controls and procedures (as defined in Rules 13a-15 and 15d-15 under the Securities Exchange Act of 1934 (the "Exchange Act")) as of the end of the period covered by this Form 10-Q, our Principal Executive Officer and Principal Financial Officer concluded our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and is accumulated and communicated to management, including our Principal Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There were no changes in our internal control over financial reporting during the third quarter of fiscal 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

The statements in this section describe known material risks and should be considered carefully. They include and supplement the risk factors previously disclosed in Part I, "Item 1A - Risk Factors" of our Annual Report on Form 10-K for the fiscal year ended February 26, 2022. The following discussion of risk factors contains forward-looking statements. These risk factors may be important to understanding any statement in this Quarterly Report on Form 10-Q or elsewhere. The following information should be read in conjunction with the consolidated financial statements and related notes in Part I, "Item 1 - Condensed Consolidated Financial Statements (unaudited)" and Part I, "Item 2 - Management's Discussion and Analysis of Financial Condition and Results of Operations." All capitalized terms used, but not defined, herein are as defined in our Annual Report on Form 10-K for the fiscal year ended February 26, 2022 filed with the SEC on April 26, 2022.

Risks Related to Owning Our Common Stock

The timing of our Special Dividend payment is uncertain.

On October 13, 2022, the Board of Directors of the Company declared the Special Dividend, payable on November 7, 2022 to holders of our Common Stock on October 24, 2022. On November 3, 2022, the Superior Court of the State of Washington temporarily restrained the payment of the Special Dividend until further review. On December 9, 2022, the Superior Court for the State of Washington ruled in favor of the Company, denying the Attorney General of the State of Washington's request for a preliminary injunction. The Attorney General for the State of Washington appealed to the Supreme Court of the State of Washington and the temporary restraining order remains in place until the Supreme Court of the State of Washington, sitting en banc, reviews the case, which is scheduled for January 17, 2023.

On November 8, 2022, the Attorneys General of the States of California and Illinois and the Attorney General for the District of Columbia were denied a temporary restraining order seeking to restrain the Company from paying the Special Dividend from the U.S. District Court of the District of Columbia. On December 12, 2022, the U.S. District Court of the District of Columbia rejected a motion from the Attorneys General to grant a preliminary injunction enjoining the payment of the Special Dividend and on December 20, 2022, the U.S. Court of Appeals for the District of Columbia Circuit, in a per curiam statement, rejected an injunction pending appeal by the Attorneys General.

While the Company thus far has generally prevailed with respect to legal challenges to the payment of the Special Dividend, the timing of the payment of the Special Dividend is uncertain in light of the existing temporary restraining order and other potential future legal challenges. We may be subject to further legal challenges regarding the payment of the Special Dividend that may seek to restrain or enjoin the payment of the Special Dividend. If the courts of the State of Washington further restrain or enjoin the Special Dividend or other courts of competent jurisdiction similarly restrain or enjoin the payment of the Special Dividend, our ability to pay the Special Dividend could be significantly delayed. If we are unable to pay the Special Dividend or the payment of the Special Dividend is further delayed, we may be subject to claims by our stockholders.

Risks Related to the Merger

The Merger Agreement and the pendency of the Merger could have a material adverse effect on our business, results of operations, financial condition and stock price.

On October 13, 2022 the Company, The Kroger Co. ("Kroger" or "Parent") and Kettle Merger Sub, Inc., a wholly owned subsidiary of Parent ("Merger Sub"), entered into an Agreement and Plan of Merger (the "Merger Agreement"), pursuant to which Merger Sub will be merged with and into the Company (the "Merger"), with the Company surviving the Merger as the surviving corporation and a direct, wholly owned subsidiary of Parent. The Merger Agreement contains customary representations and warranties of the parties and is subject to the satisfaction of various covenants and agreements, including, among others the expiration of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended ("HSR Act") and certain other approvals and clearances.

During the period between the date of signing of the Merger Agreement and the closing of the Merger (the "Closing"), our business is exposed to certain inherent risks due to the effect of the announcement or pendency of the Merger which may impact our business relationships, financial condition and operating results. Some of these risk factors include:

• difficulties maintaining relationships with customers, distributors, vendors, suppliers, service providers and other business partners, who may defer decision about working with us, move to our competitors, seek to delay or change existing business relationships with us;
• uncertainties caused by negative sentiment in the marketplace with respect to the Merger, which could adversely impact investor confidence in the Company;
• distraction of our current employees as a result of the announced Merger Agreement which could result in a decline in their productivity or cause distractions in the workplace;
• our inability to attract new employees or retain current employees may be exacerbated due to uncertainties related to the Merger;
• the impact of litigation in respect of the Merger Agreement and the Merger;
• diversion of significant management time and resources towards the completion of the Merger and transactions related to the Merger;
• our inability to solicit other acquisition proposals, pursue alternative business opportunities, make strategic changes to our business and other restrictions on our ability to conduct our business pursuant to the Merger Agreement; and
• other developments beyond our control, including, but not limited to, changes in domestic or global economic conditions that may affect the timing or success of the Merger.

The ability to complete the Merger is subject to the receipt of consents and approvals from government entities, which may impose conditions that could cause us or Kroger to abandon the Merger.

Completion of the Merger is conditioned upon, among other things, the expiration or termination of the required waiting period (and any extension thereof) applicable to the Merger under the HSR Act, and any voluntary agreement with the United States Federal Trade Commission ("FTC"), or the Department of Justice Antitrust Division ("DOJ"). In deciding whether to grant antitrust approvals, the FTC or DOJ, and other state regulatory agencies will consider the effect of the Merger on competition and will likely condition their approval of the Merger on our and/or Kroger's agreement to various requirements, limitations, divestitures or impose restrictions on the conduct of the combined entity's business following the Merger. We cannot provide any assurance that we or Kroger will obtain the necessary approvals to complete the Merger. In addition, these requirements, limitations, divestitures, or restrictions may result in the delay or abandonment of the Merger.

At any time before or after completion of the Merger, notwithstanding the termination or expiration of the waiting period under the HSR Act, the FTC or DOJ or any other state regulatory agency could take such action under the antitrust laws as it deems necessary or desirable in the public interest, including seeking to enjoin the completion of the Merger, seeking divestiture of substantial assets of us and/or Kroger, or requiring us or Kroger to agree to other remedies or requirements. We cannot be certain that a legal challenge to the Merger will not be made or that, if a legal challenge is made, we or Kroger will prevail. Failure to prevail in any legal challenge to the Merger may result in the delay or abandonment of the Merger.

While the Merger Agreement is in effect, we are subject to restrictions on our business activities.

While the Merger Agreement is in effect, we are generally required to conduct our business in the ordinary course consistent with past practices but are restricted from taking certain actions without Kroger's prior consent, which is not to be unreasonably withheld, conditioned or delayed. These limitations include, among other things, certain restrictions on our ability to amend our organizational documents, acquire other businesses and assets, dispose of our assets, make investments, repurchase, reclassify or issue securities, make loans, pay dividends, incur indebtedness, make capital expenditures, enter into, amend or terminate certain contracts, change accounting policies or procedures, initiate or settle certain litigation, change tax classifications and elections, or take certain actions relating to intellectual property. These restrictions could prevent us from pursuing strategic business opportunities and taking extraordinary actions with respect to our business during this period.

Litigation related to the Merger could prevent or delay completion of the Merger or otherwise negatively affect our businesses and operations.

Putative stockholder complaints, including stockholder class action complaints, demands for books and records and other complaints or actions may be filed against us, our board of directors, Kroger, Kroger's board of directors, and others in connection with the transactions contemplated by the Merger Agreement. The outcome of litigation is uncertain, and we may not be successful in defending against any such future claims. Lawsuits that may be filed against us, our board of directors, Kroger, or Kroger's board of directors could delay or prevent the Merger and otherwise adversely affect our business, results of operations, and financial condition.

The Merger may not be completed within the expected timeframe, or at all, and significant delay or the failure to complete the Merger could adversely affect our business.

We cannot assure that our business, our relationships or our financial condition will not be adversely affected if the Merger is not consummated within the expected timeframe, or at all. Failure to complete the Merger within the expected timeframe, or at all, could adversely affect our business and the market price of our Common Stock in several ways, including the following:

• to the extent that the current market price of our Common Stock reflects an assumption that the Merger will be completed, it may be negatively impacted because of a failure to complete the Merger within the expected timeframe or at all;
• investor and consumer confidence in our business could decline, litigation could be brought against us, relationships with vendors, service providers, investors and other business partners may be adversely impacted, and we may be unable to retain key personnel;
• we have incurred, and will continue to incur, significant costs, expenses and fees for professional services and other costs in connection with the Merger, for which we may receive little or no benefit if the Merger is not completed. Many of these fees and costs will be payable by us even if the Merger is not completed and may relate to activities that we would not have undertaken other than to complete the Merger; and
• failure to complete the Merger, may result in negative publicity and a negative impression of us in the investment community.

The occurrence of any of these events individually or in combination could materially and adversely affect our business, results of operations, financial condition, and our stock price. If the Merger is not completed, there can be no assurance that these risks will not materialize and will not materially adversely affect our stock price, business, financial conditions, results of operations or cash flows.