The following discussion and analysis of financial condition and results of operations ofThe Kroger Co. should be read in conjunction with the "Forward-looking Statements" section set forth in Part I and the "Risk Factors" section set forth in Item 1A of Part I. MD&A is provided as a supplement to, and should be read in conjunction with, our Consolidated Financial Statements and the accompanying notes thereto contained in Item 8 of this report, as well as Part II, Item 7 "Management's Discussion and Analysis of Financial Condition and Results of Operations" of our Form 10-K for the year endedFebruary 1, 2020 , which provides additional information on comparisons of fiscal years 2019 and 2018.
EXECUTIVE SUMMARY - OUR PATH TO DELIVERING CONSISTENT AND ATTRACTIVE TOTAL SHAREHOLDER RETURN
We are proud of our results in 2020 and the balance achieved in delivering for all our key stakeholders - our Associates, Customers, Communities and Investors. We gained market share and exceeded guidance that we gave in the second half of 2020. We committed more than$2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including a$1 billion commitment to aUFCW pension fund. Identical sales, without fuel, were 14.1% for 2020, as customers continued to consolidate trips and spend more per transaction. We grew digital sales triple digits in 2020, enabled by our team's ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers' demand for safe, low-touch or touchless shopping modalities. Our strong performance in digital is also a testament to the proactive investments we made over the last several years in our network, which positioned us to respond with agility during this critical time. We were disciplined in balancing investments in our customers and associates with cost savings. For the third year in a row, our operations and sourcing teams delivered over$1 billion in incremental cost savings. These savings continue to be focused in areas that take complexity out of the business and allow our associates to provide a better customer experience. Strong execution by our team and accelerated investments in our competitive moats - Fresh, Our Brands, Data & Personalization and Seamless, during the pandemic allowed us to create significant value for shareholders and strengthen our balance sheet, including accelerated growth in our alternative profit business. The momentum we see in our business, which started pre-pandemic and accelerated during the pandemic, places us in an even better position to grow sales and profitability in the future and deliver on our total shareholder return commitments. Our financial model is underpinned by our leading position in food. We continue to invest in areas of the business that matter most to our customers and deepen our competitive moats, to drive sales growth in our retail supermarket business, including fuel and pharmacy. This in turn generates the data and traffic that enables our fast-growing alternative profit streams. Our financial strategy is to continue to use our free cash flow to invest in the business to drive long-term sustainable net earnings growth, through the identification of high-return projects that support our strategy. Capital allocation is a core element of our value creation model, and we will allocate capital towards driving profitable sales growth, accelerating digital, expanding margin as well as maintaining the business. We will continue to be disciplined in deploying capital towards projects that exceed our hurdle rate of return and prioritize the highest return opportunities to drive 3% to 5% net earnings growth. At the same time, we are committed to maintaining our net debt to adjusted EBITDA range of 2.30 to 2.50 in order to keep our current investment grade debt rating. Our resilient cash flow will allow us to continue to grow our dividend over time and continue to return excess cash to investors via share repurchases, resulting in consistently strong and sustainable total shareholder return of between 8%
and 11%. 21
The following table provides highlights of our financial performance:
Financial Performance Data ($ in millions, except per share amounts) Fiscal Year Percentage 2020 Change 2019 Sales$ 132,498 8.4 %$ 122,286
Sales without fuel 123,012 13.7 %
108,234
Net earnings attributable to
1,659
Adjusted net earnings attributable to TheKroger Co. 2,740 53.4 %
1,786
Net earnings attributable toThe Kroger Co. per diluted common share 3.27 60.3 %
2.04
Adjusted net earnings attributable to TheKroger Co. per diluted common share 3.47 58.4 %
2.19
Operating profit 2,780 23.5 %
2,251
Adjusted FIFO operating profit 4,056 35.4 %
2,995
Dividends paid 534 9.9 %
486
Dividends paid per common share 0.68 13.3 %
0.60
Identical sales excluding fuel 14.1 % N/A 2.0 % FIFO gross margin rate, excluding fuel, bps increase (decrease) 0.14 N/A
(0.23)
OG&A rate, excluding fuel and Adjusted Items, bps decrease 0.06 N/A
0.29
Reduction in total debt, including obligations under finance leases compared to prior fiscal year end 663 N/A 1,153 Share repurchases 1,324 N/A 465 OVERVIEW
Notable items for 2020 are:
Shareholder Return
? Net earnings attributable to
? Adjusted net earnings attributable to
of$3.47 .
? Achieved operating profit of
? Achieved adjusted FIFO operating profit of
? Generated cash from operations of
Increased cash and temporary cash investments by
improved operating performance, significant improvements in working capital and
? the deferral of tax payments as a result of the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act") which was enacted in the first quarter
of 2020.
? Returned
payments.
? Decreased total debt, including obligations under finance leases, by
million. Other Financial Results
? Identical sales, excluding fuel, increased 14.1% in 2020.
? Digital revenue grew 116% in 2020. Digital revenue primarily includes Pickup,
Delivery, Ship and pharmacy e-commerce sales.
Alternative profit streams contributed an incremental
? profit in 2020 fueled by our retail media business -
Marketing. 22
? Cost savings for 2020 exceeded
Significant Events
During the fourth quarter of 2020, certain of the Company's associates ratified
an agreement with certain
withdrawal liability charge of
? obligations for past service for associates and retirees in the
We also made a
variable annuity pension plan. On an after-tax basis, the withdrawal liability
and commitment to the transition reserve total
"National Fund Commitment"). The withdrawal liability will be satisfied by
payments to theNational Fund over the next three years.
During 2020, we invested over
customers and communities during the COVID-19 pandemic. These investments
primarily relate to items within OG&A such as associate appreciation awards,
? expanded sick and emergency leave pay and investments in associate and customer
safety during the pandemic (collectively, the "COVID-19 Investments").
Supported by our strong performance and cash position, we committed more than
shop in and to reward associates, including the National Fund Commitment.
During the first quarter of 2020, in addition to the recurring multi-employer
pension contributions we make in the normal course of business, we contributed
? an incremental
plans, helping stabilize future associate benefits (the "First Quarter 2020
Multi-Employer Pension Contribution"). COVID-19 OnMarch 11, 2020 , theWorld Health Organization announced that infections of COVID-19 had become a pandemic, and onMarch 13 , theU.S. President announced a National Emergency relating to the disease. The impact on our financial condition, results of operations, and cash flows was material in fiscal year 2020. We expect the ultimate significance will be dictated by the length of time that such circumstances continue, which will depend on the currently unknowable extent and duration of the COVID-19 pandemic and any governmental and public actions taken in response. Since the beginning of the pandemic, our most urgent priority has been to safeguard our associates and customers. We've implemented dozens of new safety and cleanliness processes and procedures in our stores and other facilities, including safety partitions and physical distancing floor decals, implementation of customer capacity limits, and providing personal protective equipment like masks for our associates. All of which are described in our Blueprint for Businesses - an open source guide we created to help other companies navigate the complexities of safely operating during a pandemic. As the pandemic has evolved, we have experienced unusually strong sales. We continue to see people eat and work more from home and prioritize health and cleanliness. The change in customer behavior caused by COVID-19 was a major factor in our 2020 results. The pandemic brought to the forefront the importance to the customer of fresh and digital. We continued to invest and grow our capabilities in these areas, leading to gains in both digital and total food at home market share. Identical sales, without fuel, were 14.1% for 2020, as customers continued to consolidate trips and spend more per transaction. Digital revenue grew 116% in 2020, enabled by our team's ability to pivot quickly and effectively in the first stage of the pandemic to ensure that we were meeting our customers' demand for safe, low-touch or touchless shopping modalities. Our OG&A expenses include significant incremental costs related to investments in pay and benefits for our associates and measures to safeguard our associates and customers. Supported by our strong performance and cash position, in 2020 we committed more than$2.5 billion to safeguard the environment our associates and customers work and shop in and to reward associates, including committing nearly$1 billion to better secure pensions for over 30,000 associates. This was in addition to paid emergency leave, financial assistance through ourHelping Hands program and more. As a percentage of sales, these incremental costs were partially offset by sales leverage resulting from strong sales growth due to the COVID-19 pandemic. 23 OnMarch 18, 2020 , we proactively borrowed$1 billion under the revolving credit facility. This was a precautionary measure in order to preserve financial flexibility, reduce reliance on the commercial paper market and maintain liquidity in response to the COVID-19 pandemic. Strong execution by our team and accelerated investments in our competitive moats during the pandemic allowed us to strengthen our balance sheet. During 2020, we fully repaid the$1 billion borrowed under the revolving credit facility and$1.2 billion in outstanding commercial paper obligations, as of year-end 2019, using cash generated by operations. For additional information about our debt activity in 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior note issuances, see Note 6 to the Consolidated Financial Statements. For additional information about our business results, including the impact of the COVID-19 pandemic, see our Results of Operations and Liquidity and Capital Resources sections within MD&A. OUR BUSINESS
The Kroger Co. was founded in 1883 and incorporated in 1902. As ofJanuary 30, 2021 ,Kroger is one of the world's largest retailers, as measured by revenue, operating 2,742 supermarkets under a variety of local banner names in 35 states and theDistrict of Columbia . Of these stores, 2,255 have pharmacies and 1,596 have fuel centers. We offer Pickup (also referred to as ClickList®) and Harris Teeter ExpressLane™ - personalized, order online, pick up at the store services - at 2,223 of our supermarkets and provide home delivery service to substantially all ofKroger households. We also operate an online retailer.
We operate 35 food production plants, primarily bakeries and dairies, which supply approximately 29% of Our Brands units and 40% of the grocery category Our Brands units sold in our supermarkets; the remaining Our Brands items are produced to our strict specifications by outside manufacturers.
Our revenues are predominately earned and cash is generated as consumer products are sold to customers in our stores, fuel centers and via our online platforms. 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 97% of our consolidated sales, is our only reportable segment. OnJanuary 27, 2020 , Lucky's Market filed a voluntary petition in theBankruptcy Court seeking relief under the Bankruptcy Code. Lucky's Market is included in our Consolidated Statements of Operations in all periods in 2018 and throughJanuary 26, 2020 . Refer to Note 17 to the Consolidated Financial Statements
for additional information.
OnApril 26, 2019 , we completed the sale of ourTurkey Hill Dairy business for total proceeds of$225 million .Turkey Hill Dairy is included in our Consolidated Statements of Operations in all periods in 2018 and throughApril 25, 2019 .
OnMarch 13, 2019 , we completed the sale of our You Technology business toInmar for total consideration of$565 million , including$396 million of cash and$64 million of preferred equity received upon closing. We are also entitled to receive other cash payments of$105 million over five years. The transaction includes a long-term service agreement forInmar to provide us digital coupon services. You Technology is included in our Consolidated Statements of Operations in all periods in 2018 and throughMarch 12, 2019 . OnJune 22, 2018 , we closed our merger with Home Chef by purchasing 100% of the ownership interest in Home Chef, for$197 million net of cash and cash equivalents of$30 million , in addition to future earnout payments of up to$500 million over five years that are contingent on achieving certain milestones. Home Chef is included in our ending Consolidated Balance Sheet for 2019 and 2020 and in our Consolidated Statements of Operations fromJune 22, 2018 throughFebruary 2, 2019 and all periods in 2019 and 2020. See Note 2 to the Consolidated Financial Statements for more information related to our merger with Home Chef.
OnApril 20, 2018 , we completed the sale of our convenience store business unit for$2.2 billion . The convenience store business is included in our Consolidated Statements of Operations throughApril 19, 2018 . 24
USE OF NON-GAAP FINANCIAL MEASURES
The accompanying Consolidated Financial Statements, including the related notes, are presented in accordance with generally accepted accounting principles ("GAAP"). We provide non-GAAP measures, including First-In, First-Out ("FIFO") gross margin, FIFO operating profit, adjusted net earnings and adjusted net earnings per diluted share because management believes these metrics are useful to investors and analysts. These non-GAAP financial measures should not be considered as an alternative to gross margin, operating profit, net earnings and net earnings per diluted share or any other GAAP measure of performance. These measures should not be reviewed in isolation or considered as a substitute for our financial results as reported in accordance with GAAP. We calculate FIFO gross margin as FIFO gross profit divided by sales. FIFO gross profit is calculated as sales less merchandise costs, including advertising, warehousing, and transportation expenses, but excluding the Last-In, First-Out ("LIFO") charge. Merchandise costs exclude depreciation and rent expenses. FIFO gross margin is an important measure used by management as management believes FIFO gross margin is a useful metric to investors and analysts because it measures our day-to-day merchandising and operational effectiveness.
We calculate FIFO operating profit as operating profit excluding the LIFO charge. FIFO operating profit is an important measure used by management as management believes FIFO operating profit is a useful metric to investors and analysts because it measures our day-to-day operational effectiveness.
The adjusted net earnings and adjusted net earnings per diluted share metrics are important measures used by management to compare the performance of core operating results between periods. We believe adjusted net earnings and adjusted net earnings per diluted share are useful metrics to investors and analysts because they present more accurate year-over-year comparisons for our net earnings and net earnings per diluted share because adjusted items are not the result of our normal operations. Net earnings for 2020 include the following, which we define as the "2020 Adjusted Items:"
Charges to OG&A of
? certain multi-employer pension funds,
for the revaluation of Home Chef contingent consideration and
million net of tax, for transformation costs (the "2020 OG&A Adjusted Items").
? Gains in other income (expense) of
the gain on investments (the "2020 Other Income (Expense) Adjusted Item").
Net earnings for 2019 include the following, which we define as the "2019 Adjusted Items:"
Charges to OG&A of
related to withdrawal liabilities for certain multi-employer pension funds;
million,
? million net of tax, for impairment of Lucky's Market;
net of tax, for transformation costs, primarily including 35 planned store
closures; and a reduction to OG&A of
the revaluation of Home Chef contingent consideration (the "2019 OG&A Adjusted
Items"). Gains in other income (expense) of$106 million ,$80 million net of tax,
related to the sale of
? related to the sale of You Technology; and
tax, for the mark to market gain on Ocado Group plc ("Ocado") securities (the
"2019 Other Income (Expense) Adjusted Items").
Net earnings for 2018 include the following, which we define as the "2018 Adjusted Items:"
Charges to OG&A of
related to withdrawal liabilities for certain local unions of the Central
States multi-employer pension fund;
? the revaluation of Home Chef contingent consideration; and
million net of tax, for an impairment of financial instrument (the "2018 OG&A
Adjusted Items"). We had initially received the financial instrument in 2016
with no cash outlay as part of the consideration for entering into agreements
with a third party. 25
A reduction to depreciation and amortization expenses of
? million net of tax, related to held for sale assets (the "2018 Depreciation
Adjusted Item").
Gains in other income (expense) of
? related to the sale of our convenience store business unit and
The following table provides a reconciliation of net earnings attributable toThe Kroger Co. to adjusted net earnings attributable toThe Kroger Co. and a reconciliation of net earnings attributable toThe Kroger Co. per diluted common share to adjusted net earnings attributable toThe Kroger Co. per diluted common share, excluding the 2020, 2019 and 2018 Adjusted Items. 26 Net Earnings per Diluted Share excluding the Adjusted Items ($ in millions, except per share amounts) 2020 2019 2018
Net earnings attributable to TheKroger Co. $ 2,585 $ 1,659 $ 3,110 (Income) expense adjustments Adjustments for pension plan withdrawal liabilities(1)(2) 754 104 121 Adjustment for gain on sale of convenience store business(1)(3) - - (1,360) Adjustment for gain on sale of Turkey Hill Dairy(1)(4) - (80) - Adjustment for gain on sale of You Technology(1)(5) - (52) - Adjustment for gain on investments(1)(6) (821)
(119) (174) Adjustment for depreciation related to held for sale assets(1)(7)
- - (11) Adjustment for severance charge and related benefits(1)(8) - 61 -
Adjustment for deconsolidation and impairment of Lucky's
Market attributable to
- 225 - Adjustment for Home Chef contingent consideration(1)(10) 141 (49) 26 Adjustment for impairment of financial instrument(1)(11) - - 33 Adjustment for transformation costs(1)(12) 81 37 - Total Adjusted Items 155
127 (1,365)
Net earnings attributable toThe Kroger Co. excluding the Adjusted Items$ 2,740 $
1,786
Net earnings attributable toThe Kroger Co. per diluted common share$ 3.27 $ 2.04 $ 3.76 (Income) expense adjustments Adjustments for pension plan withdrawal liabilities(13) 0.95 0.13 0.15 Adjustment for gain on sale of convenience store business(13) - - (1.65) Adjustment for gain on sale of Turkey Hill Dairy(13) - (0.10) - Adjustment for gain on sale of You Technology(13) - (0.06) - Adjustment for gain on investments(13) (1.05)
(0.15) (0.21) Adjustment for depreciation related to held for sale assets(13)
- - (0.01) Adjustment for severance charge and related benefits(13) - 0.08 -
Adjustment for deconsolidation and impairment of Lucky's
Market attributable to
- 0.28 - Adjustment for Home Chef contingent consideration(13) 0.18 (0.07) 0.03 Adjustment for impairment of financial instrument(13) - - 0.04 Adjustment for transformation costs(13) 0.12 0.04 - Total Adjusted Items 0.20
0.15 (1.65)
Net earnings attributable to
$ 3.47 $
2.19
Average numbers of common shares used in diluted calculation 781
805 818
(1) The amounts presented represent the after-tax effect of each adjustment,
which was calculated using discrete tax rates.
(2) The pre-tax adjustment for pension plan withdrawal liabilities was
2020,
(3) The pre-tax adjustment for gain on sale of convenience store business was
(
(4) The pre-tax adjustment for gain on sale of
(5) The pre-tax adjustment for gain on sale of You Technology was (
(6) The pre-tax adjustment for gain on investments was (
in 2019 and (
(7) The pre-tax adjustment for depreciation related to held for sale assets was
(
(8) The pre-tax adjustment for severance charge and related benefits was
(9) The pre-tax adjustment for deconsolidation and impairment of Lucky's Market
was
(10) The pre-tax adjustment for Home Chef contingent consideration was
2020, (
(11) The pre-tax adjustment for impairment of financial instrument was
The pre-tax adjustment for transformation costs was
business closures and third-party professional consulting fees associated
with business transformation and cost saving initiatives.
(13) The amount presented represents the net earnings per diluted common share
effect of each adjustment. 27 RESULTS OF OPERATIONS Sales Total Sales ($ in millions) Percentage Percentage 2020 Change(1) 2019 Change(2) 2018 Total sales to retail customers without fuel(3)$ 122,134 13.6 %$ 107,487 2.2 %$ 105,123 Supermarket fuel sales 9,486 (32.5) % 14,052 (5.7) % 14,903 Convenience stores(4) - - % - - % 944 Other sales(5) 878 17.5 % 747 (15.3) % 882 Total sales$ 132,498 8.4 %$ 122,286 0.4 %$ 121,852
(1) This column represents the percentage change in 2020 compared to 2019. (2) This column represents the percentage change in 2019 compared to 2018.
Digital sales, primarily including Pickup, Delivery, Ship and pharmacy (3) e-commerce sales, grew approximately 116% in 2020, 29% in 2019 and 58% in
2018. These sales are included in the "total sales to retail customers
without fuel" line above.
(4) We completed the sale of our convenience store business unit during the first
quarter of 2018.
Other sales primarily relate to external sales at food production plants,
data analytic services and third-party media revenue. The increase in 2020,
compared to 2019, is primarily due to growth in third-party media revenue,
(5) partially offset by decreased sales due to the disposal of
and You Technology in the first quarter of 2019. The decrease in 2019,
compared to 2018, is primarily due to the disposal of
You Technology in the first quarter of 2019, partially offset by an increase
in data analytic services and third-party media revenue.
Total sales increased in 2020, compared to 2019, by 8.4%. The increase was due to an increase in total sales to retail customers without fuel, partially offset by a reduction in supermarket fuel sales and decreased sales due to the disposal ofTurkey Hill Dairy and You Technology in the first quarter of 2019. Total sales to retail customers without fuel increased 13.6% in 2020, compared to 2019. The increase was primarily due to our identical sales increase, excluding fuel, of 14.1%, partially offset by decreased sales due to the deconsolidation of Lucky's Market in the fourth quarter of 2019. Total sales excluding fuel and dispositions increased 14.2% in 2020 compared to 2019. The significant increase in identical sales, excluding fuel, was caused by unprecedented demand due to the COVID-19 pandemic, digital sales growth and growth in market share. Market share growth contributed to our identical sales increase, excluding fuel, as our sales outpaced the general growth in the food retail industry during 2020. The increase in identical sales, excluding fuel, was broad based across all supermarket divisions and remained heightened throughout 2020. During the pandemic, customers reduced trips while significantly increasing basket value. Total supermarket fuel sales decreased 32.5% in 2020, compared to 2019, primarily due to a decrease in fuel gallons sold of 17.5% and a decrease in the average retail fuel price of 18.2%. The decrease in fuel gallons sold was reflective of the national trend, which decreased due to the COVID-19 pandemic. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel.
Total sales increased in 2019, compared to 2018, by 0.4%. The increase was due to an increase in total sales to retail customers without fuel, partially offset by decreased supermarket fuel sales, a reduction in convenience store sales due to the sale of our convenience store business unit in the first quarter of 2018 and decreased sales due to the disposal ofTurkey Hill Dairy and You Technology in the first quarter of 2019. Total sales, excluding fuel, dispositions and the merger with Home Chef increased 2.3% in 2019, compared to 2018. The increase in total sales to retail customers without fuel for 2019, compared to 2018, was primarily due to our merger with Home Chef and our identical sales increase, excluding fuel, of 2.0%. Identical sales, excluding fuel, for 2019, compared to 2018, increased primarily due to growth of loyal households, a higher customer basket value including retail inflation andKroger Specialty Pharmacy sales growth, partially offset by continued investments in lower prices for our customers. Total supermarket fuel sales decreased 5.7% in 2019, compared to 2018, primarily due to a decrease in fuel gallons sold of 4.8% and a decrease in the average retail fuel price of 1.0%. The decrease in the average retail fuel price was caused by a decrease in the product cost of fuel. 28 We calculate identical sales, excluding fuel, as sales to retail customers, including sales from all departments at identical supermarket locations,Kroger Specialty Pharmacy businesses and ship-to-home solutions. We define a supermarket as identical when it has been in operation without expansion or relocation for five full quarters. Although identical sales is a relatively standard term, numerous methods exist for calculating identical sales growth. As a result, the method used by our management to calculate identical sales may differ from methods other companies use to calculate identical sales. We urge you to understand the methods used by other companies to calculate identical sales before comparing our identical sales to those of other such companies. Our identical sales, excluding fuel, results are summarized in the following table. We used the identical sales, excluding fuel, dollar figures presented below to calculate percentage changes for 2020 and 2019. Identical Sales ($ in millions) 2020 2019 Excluding fuel$ 120,762 $ 105,806 Excluding fuel 14.1 % 2.0 %
Gross Margin, LIFO and FIFO Gross Margin
We define gross margin as sales minus merchandise costs, including advertising, warehousing, and transportation. Rent expense, depreciation and amortization expense, and interest expense are not included in gross margin. Our gross margin rates, as a percentage of sales, were 23.32% in 2020 and 22.07% in 2019. The increase in 2020, compared to 2019, resulted primarily from decreased fuel sales, which have a lower gross margin rate, an increase in our fuel gross margin, growth in our alternative profit stream portfolio, effective negotiations to achieve savings on the cost of products sold and decreased shrink, transportation and advertising costs, as a percentage of sales, reflecting the significant increase in sales volumes, partially offset by continued investments in lower prices for our customers and a change in our product sales mix, including lower relative sales in higher gross margin categories such as deli/bakery. Our LIFO credit was$7 million in 2020 compared to a LIFO charge of$105 million in 2019. Our LIFO credit was primarily driven by fourth quarter 2020 working capital improvements in pharmacy inventory and dairy deflation. Our FIFO gross margin rate, which excludes the LIFO charge, was 23.32% in 2020, compared to 22.16% in 2019. Our fuel sales lower our FIFO gross margin rate due to the very low FIFO gross margin rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, our FIFO gross margin rate increased 14 basis points in 2020, compared to 2019. This increase resulted primarily from growth in our alternative profit stream portfolio, effective negotiations to achieve savings on the cost of products sold and decreased shrink, transportation and advertising costs, as a percentage of sales, reflecting the significant increase in sales volumes, partially offset by continued investments in lower prices for our customers and a change in our product sales mix, including lower relative sales in higher gross margin categories such as deli/bakery.
Operating, General and Administrative Expenses
OG&A expenses consist primarily of employee-related costs such as wages, healthcare benefit costs, 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 18.49% in 2020 and 17.34% in 2019. The increase in 2020, compared to 2019, resulted primarily from the First Quarter 2020 Multi-Employer Pension Contribution, the 2020 OG&A Adjusted Items, the COVID-19 Investments, growth in our digital channel as a result of heightened demand during the pandemic, increased incentive plan costs and the effect of decreased fuel sales, which increases our OG&A rate, as a percentage of sales, partially offset by the effect of increased sales due to the pandemic which decreases our OG&A rate, as a percentage of sales, the 2019 OG&A Adjusted Items and broad based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions. 29 Our fuel sales lower our OG&A rate, as a percentage of sales, due to the very low OG&A rate, as a percentage of sales, of fuel sales compared to non-fuel sales. Excluding the effect of fuel, the 2020 OG&A Adjusted Items and the 2019 OG&A Adjusted Items, our OG&A rate decreased 6 basis points in 2020, compared to 2019. This decrease resulted primarily from the effect of increased sales due to the pandemic which decreases our OG&A rate, as a percentage of sales and broad based improvement from cost savings initiatives that drive administrative efficiencies, store productivity and sourcing cost reductions, partially offset by the First Quarter 2020 Multi-Employer Pension Contribution, the COVID-19 Investments, growth in our digital channel as a result of heightened demand during the pandemic and increased incentive plan costs. Excluding the$236 million First Quarter 2020 Multi-Employer Pension Contribution from the above calculation, which we proactively made to cover future funding requirements for certain multi-employer pension plans, our OG&A rate improved 25 basis points. Rent Expense Rent expense was$874 million , or 0.66% of sales, for 2020, compared to$884 million , or 0.72% of sales, for 2019. Rent expense, as a percentage of sales, decreased 6 basis points in 2020, compared to 2019, primarily due to the effect of increased sales due to the pandemic which decreases our rent expense, as
a percentage of sales.
Depreciation and Amortization Expense
Depreciation and amortization expense was$2.7 billion , or 2.07% of sales, for 2020, compared to$2.6 billion , or 2.17% of sales, for 2019. Depreciation and amortization expense, as a percentage of sales, decreased 10 basis points in 2020, compared to 2019. This decrease resulted primarily from the effect of increased sales due to the pandemic which decreases our depreciation expense, as a percentage of sales, partially offset by decreased fuel sales, which increases our depreciation expense, as a percentage of sales, additional depreciation on capital investments, excluding mergers and lease buyouts, of$3.2 billion during 2020 and a decrease in the average useful life on these capital investments. Our strategy includes initiatives to enhance the customer experience in stores, improve our process efficiency and integrate our digital shopping experience through technology developments. As such, the percentage of capital investments related to digital and technology has grown compared to the prior year, which has caused a decrease in the average depreciable life of our capital portfolio.
Operating Profit and FIFO Operating Profit
Operating profit was$2.8 billion , or 2.10% of sales, for 2020, compared to$2.3 billion , or 1.84% of sales, for 2019. Operating profit, as a percentage of sales, increased 26 basis points in 2020, compared to 2019, due to improved sales to retail customers without fuel, a higher gross margin rate, decreased rent and depreciation and amortization expenses, as a percentage of sales, and increased fuel earnings, partially offset by increased OG&A expense with fuel, as a percentage of sales. FIFO operating profit was$2.8 billion , or 2.09% of sales, for 2020, compared to$2.4 billion , or 1.93% of sales, for 2019. FIFO operating profit, excluding the 2020 and 2019 Adjusted Items, increased 64 basis points in 2020, compared to 2019, due to improved sales to retail customers without fuel, a higher gross margin rate, decreased rent and depreciation and amortization expenses, as a percentage of sales, and increased fuel earnings, partially offset by increased OG&A expense with fuel, as a percentage of sales.
Specific factors contributing to the trends driving operating profit and FIFO operating profit identified above are discussed earlier in this section.
30
The following table provides a reconciliation of operating profit to FIFO operating profit, excluding the 2020 and 2019 Adjusted Items.
Operating Profit excluding the Adjusted Items ($ in millions) 2020 2019 Operating profit$ 2,780 $ 2,251 LIFO (credit) charge (7) 105 FIFO Operating profit 2,773 2,356
Adjustment for pension plan withdrawal liabilities 989 135 Adjustment for Home Chef contingent consideration 189 (69) Adjustment for severance charge and related benefits - 80 Adjustment for transformation costs(1) 111 52 Adjustment for deconsolidation and impairment of Lucky's Market(2)
- 412 Other (6) 29 2020 and 2019 Adjusted items 1,283 639
Adjusted FIFO operating profit excluding the adjustment items above
Transformation costs primarily include costs related to store and business (1) closures and third-party professional consulting fees associated with
business transformation and cost saving initiatives.
(2) The adjustment for impairment of Lucky's Market includes a
loss attributable to the minority interest of Lucky's Market. Interest Expense
Interest expense totaled
Income Taxes
Our effective income tax rate was 23.2% in 2020 and 23.7% in 2019. The 2020 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes, partially offset by the utilization of tax credits and deductions. The 2019 tax rate differed from the federal statutory rate primarily due to the effect of state income taxes and Lucky's Market losses attributable to the noncontrolling interest which reduced pre-tax income but did not impact tax expense.
Net Earnings and Net Earnings Per Diluted Share
Our net earnings are based on the factors discussed in the Results of Operations section.
Net earnings were$3.27 per diluted share for 2020 compared to net earnings of$2.04 per diluted share for 2019. Adjusted net earnings of$3.47 per diluted share for 2020 represented an increase of 58.4% compared to adjusted net earnings of$2.19 per diluted share for 2019. The increase in adjusted net earnings per diluted share resulted primarily from increased FIFO operating profit without fuel, the decrease in the LIFO charge, increased fuel earnings and lower weighted average common shares outstanding due to common share repurchases, partially offset by a higher income tax expense. 31
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. The share repurchase programs do not have an expiration date but may be suspended or terminated by our Board of Directors at any time. We made open market purchases of our common shares totaling$1.2 billion in 2020 and$400 million in 2019. 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$128 million in 2020 and$65 million in 2019 of our common shares under the stock option program. OnNovember 5, 2019 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "November 2019 Repurchase Program"). OnSeptember 11, 2020 , our Board of Directors approved a$1.0 billion share repurchase program to reacquire shares via open market purchase or privately negotiated transactions, block trades, or pursuant to trades intending to comply with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended (the "September 2020 Repurchase Program"). TheSeptember 2020 Repurchase Program authorization replaced the existingNovember 2019 Repurchase Program.
The shares repurchased in 2020 were reacquired under the following share repurchase programs:
? The
? The
A program announced on
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 ("1999 Repurchase
Program").
As of
During the first quarter throughMarch 24, 2021 , we repurchased an additional$36 million of our common shares under the stock option program and$191 million additional shares under theSeptember 2020 Repurchase Program. As ofMarch 24, 2021 , we have$209 million remaining under theSeptember 2020 Repurchase Program. CAPITAL INVESTMENTS
Capital investments, including changes in construction-in-progress payables and excluding mergers and the purchase of leased facilities, totaled$3.2 billion in 2020 and$3.0 billion in 2019. Capital investments for the purchase of leased facilities totaled$58 million in 2020 and$82 million in 2019. The table below shows our supermarket storing activity and our total supermarket square footage: 32 Supermarket Storing Activity 2020 2019 2018 Beginning of year 2,757 2,764 2,782 Opened 5 10 10 Opened (relocation) 6 9 4 Acquired - 6 10 Closed (operational) (20) (19) (38) Closed (relocation) (6) (13) (4) End of year 2,742 2,757 2,764
Total supermarket square footage (in millions) 179 180 179
RETURN ON INVESTED CAPITAL
We calculate return on invested capital ("ROIC") by dividing adjusted ROIC operating profit for the prior four quarters by the average invested capital. Adjusted operating profit for ROIC purposes is calculated by excluding certain items included in operating profit, and adding back our LIFO charge (credit), depreciation and amortization and rent to ourU.S. GAAP operating profit of the prior four quarters. 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) for 2019, an adjustment due to the adoption of ASU 2016-02, "Leases," at the beginning of 2019 as further described in Notes 10 and 18 to the Consolidated Financial Statements; minus (i) the average taxes receivable, (ii) the average trade accounts payable, (iii) the average accrued salaries and wages, (iv) the average other current liabilities, excluding accrued income taxes, (v) the average liabilities held for sale and (vi) certain other adjustments. Averages are calculated for ROIC 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. 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.
Although ROIC is a relatively standard financial term, numerous methods exist for calculating a company's 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.
33 The following table provides a calculation of ROIC for 2020 and 2019 on a 52 week basis ($ in millions). The 2019 calculation of ROIC excludes the financial position and results of operations of You Technology andTurkey Hill Dairy , due to the sales in 2019, and Lucky's Market, due to the deconsolidation in 2019. Fiscal Year Ended January 30, February 1, 2021 2020 Return onInvested Capital Numerator Operating profit$ 2,780 $ 2,251 LIFO charge (credit) (7) 105 Depreciation and amortization 2,747 2,649 Rent 874 884 Adjustment for Home Chef contingent consideration 189 (69) Adjustment for pension plan withdrawal liabilities 989 135 Adjustment for severance charge and related benefits - 80 Adjustment for transformation costs 111 52 Adjustment for deconsolidation and impairment of Lucky's Market - 412 Adjustment for operating losses of Lucky's Market - 75 Adjustment for disposal of You Technology - (49) Adjusted ROIC operating profit$ 7,683 $ 6,525 Denominator Average total assets$ 46,959 $ 41,687 Average taxes receivable(1) (74) (41) Average LIFO reserve 1,377 1,329 Average accumulated depreciation and amortization 24,161 23,404 Average trade accounts payable (6,514) (6,204) Average accrued salaries and wages (1,291) (1,198) Average other current liabilities(2) (4,926) (3,942) Average liabilities held for sale - (26) Adjustment for disposal of Turkey Hill Dairy - (45) Adjustment for disposal of You Technology - (13) Adjustment for deconsolidation of Lucky's Market - (25)
Initial operating lease assets at adoption of ASU 2016-02, "Leases" (see Notes 10 and 18)
- 3,406 Average invested capital$ 59,692 $ 58,332 Return onInvested Capital
12.87 % 11.19 %
(1)Taxes receivable were$66 as ofJanuary 30, 2021 and$82 as ofFebruary 1, 2020 . We did not have any taxes receivable as ofFebruary 2, 2019 . (2)Other current liabilities included accrued income taxes of$9 as ofJanuary 30, 2021 and$60 as ofFebruary 2, 2019 . We did not have any accrued income taxes as ofFebruary 1, 2020 . Accrued income taxes are removed from other current liabilities in the calculation of average invested capital. 34 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 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.
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$70 million in 2020. In 2019, we recognized an impairment charge related to Lucky's Market totaling$238 million . The Lucky's Market impairment charge consisted of property, plant and equipment of$200 million ; goodwill of$19 million ; operating lease assets of$11 million ; and other charges of$8 million . Additionally, we recorded asset impairments totaling$120 million in 2019, including$70 million of operating lease assets. This 2019 impairment charge included the 35 planned store closures across our footprint in 2020 related to our transformation efforts. We record costs to reduce the carrying value of long-lived assets in the Consolidated Statements of Operations as OG&A expense. 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. Business Combinations We account for business combinations using the acquisition method of accounting. All the assets acquired, liabilities assumed and amounts attributable to noncontrolling interests are recorded at their respective fair values at the date of acquisition once we obtain control of an entity. The determination of fair values of identifiable assets and liabilities involves estimates and the use of valuation techniques when market value is not readily available. We use various techniques to determine fair value in such instances, including the income approach. Significant estimates used in determining fair value include, but are not limited to, the amount and timing of future cash flows, growth rates, discount rates and useful lives. The excess of the purchase price over fair values of identifiable assets and liabilities is recorded as goodwill. See Note 3 for further information about goodwill. 35Goodwill Our goodwill totaled$3.1 billion as ofJanuary 30, 2021 . 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 other consolidated 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 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 management's knowledge of the current operating environment and expectations for the future. We recognize goodwill impairment for any excess of a reporting unit's carrying value over its fair value, not to exceed the total amount of goodwill allocated to the reporting unit. Our annual evaluation of goodwill is performed for our reporting units during the fourth quarter. The 2020 fair value of ourKroger Specialty Pharmacy reporting unit was estimated using multiple valuation techniques: a discounted cash flow model (income approach), a market multiple model and a comparable mergers and acquisition model (market approaches), with each method weighted in the calculation. The income approach relies on management's projected future cash flows, estimates of revenue growth rates, margin assumptions and an appropriate discount rate. The market approaches require the determination of an appropriate peer group, which is utilized to derive estimated fair values based on selected market multiples. The annual evaluation of goodwill performed in 2020, 2019 and 2018 did not result in impairment for any of our reporting units. Based on current and future expected cash flows, we believe additional 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 2020, 2019 and 2018, 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 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, market competition and our ability to successfully integrate recently acquired businesses. Multi-Employer Pension Plans
We contribute to various multi-employer pension plans based on obligations arising from collective bargaining agreements. 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. We recognize expense in connection with these plans as contributions are funded or when commitments are probable and reasonably estimable, in accordance with GAAP. We made cash contributions to these plans of$619 million in 2020,$461 million in 2019 and$358 million in 2018. The increase in 2020, compared to 2019 and 2018 is due to the First Quarter 2020 Multi-Employer Pension Contribution. We continue to evaluate and address our potential exposure to under-funded multi-employer pension plans as it relates to our associates who are beneficiaries of these plans. These under-fundings are not our liability. When an opportunity arises that is economically feasible and beneficial to us and our associates, we may negotiate the restructuring of under-funded multi-employer pension plan obligations to help stabilize associates' future benefits and become the fiduciary of the restructured multi-employer pension plan. The commitments from these restructurings do not change our debt profile as it relates to our credit rating since these off-balance sheet commitments are typically considered in our investment grade debt rating. We are currently designated as the named fiduciary of the UFCW Consolidated Pension Plan and theInternational Brotherhood of Teamsters ("IBT")Consolidated Pension Fund and have sole investment authority over these assets. Significant effects of these restructuring agreements recorded in our Consolidated Financial Statements are:
? In 2020, we incurred a
commitments to certain multi-employer pension funds.
36
In 2019, we incurred a
? obligations related to withdrawal liabilities for certain multi-employer
pension funds.
In 2018, we incurred a
? obligations related to withdrawal liabilities for certain local unions of the
Central States multi-employer pension fund.
As we continue to work to find solutions to under-funded multi-employer pension plans, it is possible we could incur withdrawal liabilities for certain funds.
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 ofDecember 31, 2020 . 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. As ofDecember 31, 2020 , we estimate our share of the underfunding of multi-employer pension plans to which we contribute was approximately$1.7 billion ,$1.3 billion net of tax. This represents a decrease in the estimated amount of underfunding of approximately$600 million ,$500 million net of tax, as ofDecember 31, 2020 , compared toDecember 31, 2019 . The decrease in the amount of underfunding is primarily attributable to higher expected returns on assets in the funds during 2020, restructuring of theNational Fund and the First Quarter 2020 Multi-Employer Pension Contribution. 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. 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 the event we were to exit certain markets or otherwise cease making contributions to these plans, 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 pension plans, benefit payments or future restructuring agreements. 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 pension 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.
NEW ACCOUNTING STANDARDS
Refer to Note 18 and Note 19 to the Consolidated Financial Statements for
recently adopted accounting standards and recently issued accounting standards
not yet adopted as of
37
LIQUIDITY AND CAPITAL RESOURCES
Cash Flow Information
Net cash provided by operating activities
We generated$6.8 billion of cash from operations in 2020 compared to$4.7 billion in 2019. Net earnings including noncontrolling interests, adjusted for non-cash items and other impacts, generated approximately$5.3 billion of operating cash flow in 2020 compared to$5.0 billion in 2019. Cash provided (used) by operating activities for changes in operating assets and liabilities, including working capital, net of effects from mergers and disposals of businesses was$1.5 billion in 2020 compared to($312) million in 2019. The increase in cash provided by operating activities for changes in operating assets and liabilities, including working capital, net of effects from mergers and disposals of businesses, was primarily due to the following:
A decrease in FIFO inventory at the end of 2020 due to accelerated timing of
? inventory sell-through resulting from elevated demand for our products during
the pandemic;
? An increase in accrued expenses at the end of 2020 primarily due to the
following:
o An increase in the current portion of the deferral of the employer portion of
social security tax payments as a result of the CARES Act;
o An increase in accrued incentive plan costs at the end of 2020; and
o An increase in the current portion of our commitments due to the
and
? An increase in long-term liabilities at the end of 2020, primarily due to the
following:
o An increase in the noncurrent portion of the deferral of the employer portion
of social security tax payments as a result of the CARES Act; and
o An increase in the noncurrent portion of our commitments due to the National
Fund;
Partially offset by an increase in prepaid and other current assets due to
? escrow deposits related to the restructuring of multi-employer pension plans;
and
? Proceeds from a contract associated with the sale of a business that benefited
2019. Cash paid for taxes decreased in 2020, compared to 2019, primarily due to the payment of taxes on the gain on sale of the You Technology and Turkey Hill
Dairy businesses in 2019. Cash paid for interest increased in 2020, compared to 2019, primarily due to the timing of certain semi-annual senior note interest payments that were paid during the first quarter of 2020 which were accrued as of the end of fiscal
year 2019.
Net cash used by investing activities
Investing activities used cash of
? Decreased proceeds from the sale of assets in 2020 compared to 2019; and
? Proceeds from the sale of businesses that benefited 2019, partially offset by
Payments for property and equipment continued at a slower pace in 2020 due to
? disruptions from the pandemic. However, increased purchase activity near the
end of the year resulted in an increase in construction-in-progress payables as
of year-end 2020 compared to 2019. 38
Net cash used by financing activities
We used$2.7 billion of cash for financing activities in 2020 compared to$2.1 billion during 2019. The amount of cash used for financing activities for 2020, compared to 2019, increased primarily due to increased payments on commercial paper and share repurchases, partially offset by increased proceeds from the issuance of long-term debt and decreased payments on long-term debt. Debt Management Total debt, including both the current and long-term portions of obligations under finance leases, decreased$663 million to$13.4 billion as of year-end 2020 compared to 2019. The decrease in 2020, compared to 2019, resulted primarily from net payments on commercial paper borrowings of$1.2 billion and payment of$700 million of senior notes bearing an interest rate of 3.30%, partially offset by the issuance of$500 million of senior notes bearing an interest rate of 2.20%, the issuance of$500 million of senior notes bearing an interest rate of 1.70% and a net increase in obligations under finance leases of$183 million . Dividends The following table provides dividend information ($ in millions, except per share amounts): 2020 2019 Cash dividends paid$ 534 $ 486
Cash dividends paid per common share
Liquidity Needs 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. Our liquidity needs include anticipated requirements for working capital, capital investments, pension plan commitments, interest payments and scheduled principal payments of debt and commercial paper, offset by cash and temporary cash investments on hand at the end of 2020. We generally operate with a working capital deficit due to our efficient use of cash in funding operations and because we have consistent access to the capital markets. We have approximately$800 million of senior notes maturing in the next twelve months,$311 million of the employer portion of social security tax payments we have deferred under the CARES act that is required to be paid byDecember 31, 2021 and expect to pay approximately$307 million in the first half of 2021 to satisfy a portion of theNational Fund commitment. We expect to satisfy these obligations using cash generated from operations, temporary cash investments on hand, or through the issuance of additional senior notes or commercial paper. We believe we have adequate coverage of our debt covenants to continue to maintain our current investment grade debt ratings and to respond effectively to competitive conditions. We held cash and temporary cash investments of$1.7 billion as of the end of 2020 which reflects our elevated operating performance and significant improvements in working capital. We remain committed to our dividend and share repurchase program and we will evaluate the optimal use of any excess free cash flow, consistent with our previously stated capital allocation strategy. The CARES Act, which was enacted onMarch 27, 2020 , includes measures to assist companies in response to the COVID-19 pandemic. These measures include deferring the due dates of tax payments and other changes to income and non-income-based tax laws. As permitted under the CARES Act, we are deferring the remittance of the employer portion of the social security tax. The social security tax provision requires that the deferred employment tax be paid over two years, with half of the amount required to be paid byDecember 31, 2021 and the other half byDecember 31, 2022 . During 2020, we deferred the employer portion of social security tax of$622 million . Of the total,$311 million is included in "Other current liabilities" and$311 million is included in "Other long-term liabilities" in our Consolidated Balance Sheets. For additional information about our debt activity in 2020, including the drawdown and repayments under our revolving credit facility, forward-starting interest rate swap agreements and our senior notes issuances, see Note 6 to the Consolidated Financial Statements. 39 Factors Affecting Liquidity
We can currently borrow on a daily basis approximately$2.75 billion under our commercial paper program. AtJanuary 30, 2021 , we had no outstanding commercial paper. Commercial paper 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 commercial paper program could be adversely affected for a period of time and increase our interest cost on daily borrowings under our commercial paper 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 commercial paper program would be any lower than$500 million on a daily basis. Although our ability to borrow under the credit facility is not affected by our credit rating, the interest cost and applicable margin on borrowings under the credit facility could be affected by a downgrade in our Public Debt Rating. "Public Debt Rating" means, as of any date, the rating that has been most recently announced by either S&P or Moody's, as the case may be, for any class of non-credit enhanced long-term senior unsecured debt issued by the Company. As ofMarch 24, 2021 , we had no commercial paper borrowings outstanding. Our credit facility requires the maintenance of a Leverage Ratio and a Fixed Charge Coverage Ratio (our "financial covenants"). A failure to maintain our financial covenants would impair our ability to borrow under the credit facility. These financial covenants are described below:
Our Leverage Ratio (the ratio of Net Debt to Adjusted EBITDA, as defined in the
? credit facility) was 1.63 to 1 as of
exceed 3.50 to 1, we would be in default of our credit facility and our ability
to borrow under the facility would be impaired.
Our Fixed Charge Coverage Ratio (the ratio of Adjusted EBITDA plus Consolidated
Rental Expense to Consolidated Cash Interest Expense plus Consolidated Rental
? Expense, as defined in the credit facility) was 5.37 to 1 as of
2021. If this ratio fell below 1.70 to 1, we would be in default of our credit
facility and our ability to borrow under the facility would be impaired.
Our credit facility is more fully described in Note 6 to the Consolidated Financial Statements. We were in compliance with our financial covenants at year-end 2020.
40 The tables below illustrate our significant contractual obligations and other commercial commitments, based on year of maturity or settlement, as ofJanuary 30, 2021 (in millions of dollars): 2021 2022 2023 2024 2025 Thereafter Total Contractual Obligations(1)(2) Long-term debt(3)$ 844 $ 894 $ 617 $ 494 $ 575 $ 8,986 $ 12,410 Interest on long-term debt(4) 491 474 439 427 407 5,001 7,239 Finance lease obligations 109 97 95 93 92 935 1,421 Operating lease obligations 947 865 790 717 653 6,260 10,232 Self-insurance liability(5) 220 156 107 70 45 133 731 Construction commitments(6) 1,030 - - -
- - 1,030 Purchase obligations(7) 742 378 365 257 240 1,950 3,932 Total$ 4,383 $ 2,864 $ 2,413 $ 2,058 $ 2,012 $ 23,265 $ 36,995 Other Commercial Commitments Standby letters of credit$ 368 $ - $ - $ - $ - $ -$ 368 Surety bonds 408 - - - - - 408 Total$ 776 $ - $ - $ - $ - $ -$ 776
The contractual obligations table excludes funding of pension and other
(1) postretirement benefit obligations, which totaled approximately
in 2020. This table also excludes contributions under various multi-employer
pension plans, which totaled
The liability related to unrecognized tax benefits has been excluded from the (2) contractual obligations table because a reasonable estimate of the timing of
future tax settlements cannot be determined.
(3) As of
borrowings under our credit facility.
Amounts include contractual interest payments using the interest rate as of
(4)
for all other debt instruments.
The amounts included in the contractual obligations table for self-insurance (5) liability related to workers' compensation claims have been stated on a
present value basis.
Amounts include funds owed to third parties for projects currently under (6) construction. These amounts are reflected in "Other current liabilities" in
our Consolidated Balance Sheets. 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 food production plants and several
contracts to purchase energy to be used in our stores and food production
plants. 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 (7) Balance Sheets. We included our future commitments for customer fulfillment
centers for which we have placed an order. We did not include our commitments
associated with additional customer fulfillment centers that have not yet
been ordered. We have provided a letter of credit which supports our
commitment to build a certain number of fulfillment centers. The balance of
the letter of credit reduces primarily upon the construction of each
fulfillment center. If we do not reach our total purchase commitment, we will
be responsible for the balance remaining on the letter of credit. This letter
of credit balance is included in the "Standby letters of credit" line above.
As ofJanuary 30, 2021 , we maintained a$2.75 billion (with the ability to increase by$1 billion ), unsecured revolving credit facility that, unless extended, terminates onAugust 29, 2022 . Outstanding borrowings under the credit facility, commercial paper borrowings, and some outstanding letters of credit reduce funds available under the credit facility. As ofJanuary 30, 2021 , we had no outstanding commercial paper and no borrowings under our revolving credit facility. The outstanding letters of credit that reduce funds available under our credit facility totaled$2 million as ofJanuary 30, 2021 . In addition to the available credit mentioned above, as ofJanuary 30, 2021 , we had authorized for issuance$3.3 billion of securities remaining under a shelf registration statement filed with theSEC and effective onMay 24, 2019 . 41 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 multi-employer pension plan 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. 42
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