Kroger Family of Companies' Associates Ratify Agreement with 20 UFCW Local Unions to Improve Security and Stability of Future Pension Benefits

Rhea-AI Summary

The Kroger Co. (NYSE: KR) announced the ratification of an agreement with 20 local unions to withdraw from the UFCW International Union-Industry Pension Fund. This decision involves a withdrawal liability payment of $962 million and a $27 million transition reserve contribution, totaling approximately $760 million after taxes. The agreement aims to enhance the stability of future pension benefits for associates. This move reflects Kroger's commitment to securing associate pensions amidst funding challenges, incurring an estimated $0.98 charge per diluted share in Q4 2020.

Positive

• Kroger invests nearly $1 billion to enhance associate pension security.
• Establishing a new variable annuity pension plan, addressing future pension costs for the next 8 years.

Negative

• The agreement incurs a $0.98 charge per diluted share for Q4 2020.
• Kroger faces future financial risks related to the performance of the new pension plan.

CINCINNATI, Nov. 30, 2020 /PRNewswire/ -- The Kroger Co. (NYSE: KR) announced today that associates across 14 divisions have ratified an agreement with 20 local unions of the United Food and Commercial Workers (UFCW) to withdraw from the UFCW International Union-Industry Pension Fund ("National Fund"). A tentative agreement was announced on July 21, 2020.

"We are pleased to reach an agreement that improves the security and stability of future benefits for our associates and modernizes our retirement benefits offering," said Gary Millerchip, Kroger's chief financial officer. "In an environment where pensions are faced with funding challenges, our strong financial position permits us to invest in our associates."

This agreement has been approved by Kroger, the National Fund Board of Trustees, the UFCW local unions and associates. The Stop and Shop Supermarket Company LLC and Albertsons Companies, Inc. have each entered into separate agreements with the UFCW local unions to withdraw from the National Fund. Together, Kroger, Stop & Shop and the UFCW have created the UFCW and Employer's Variable Annuity Pension Plan for benefits for future service.

Kroger will pay the National Fund withdrawal liability of $962 million, on a pre-tax basis, to fulfill obligations for past service for associates and retirees in the National Fund. Kroger will also make a $27 million contribution to a transition reserve in the new variable annuity pension plan. On an after-tax basis, the withdrawal liability and contribution to the transition reserve total approximately $760 million. This withdrawal liability will be satisfied by installment payments to the National Fund over the next three years.

"Kroger's investment of nearly $1 billion to help secure and stabilize pensions for our associates is the most recent of several meaningful commitments we've made over the last decade to address the funding challenges facing associate pension plans," said Tim Massa, senior vice president and chief people officer. "This pension investment is in addition to the more than $1 billion we have invested since March to both reward our associates and to safeguard them and our customers through the implementation of dozens of COVID-19 safety measures. Additionally, as part of Restock Kroger announced in 2017, over the period of 2018 to 2020 Kroger will have invested an incremental $800 million in associate wage increases."

The agreement also establishes a pension benefit formula for the Kroger organization's contributions to the new plan through June 2028 – at which time it is subject to negotiation with the union. This effectively fixes the terms of the Kroger family of companies' collectively bargained pension obligation with these 20 UFCW local unions for the next eight years, thereby addressing Kroger's projected future pension costs and minimizing future exposure to market risk associated with the current plan.

As a result of this agreement, the company will incur a charge to net earnings during the fourth quarter of 2020. The charge to net earnings is estimated to be approximately $0.98 per diluted share on a GAAP basis. This does not affect adjusted earnings per diluted share results for 2020, which are provided on a basis that excludes adjustment items such as this contribution.

Capital Allocation Strategy
The Company continues to generate strong free cash flow and remains committed to investing in the business to drive profitable growth, maintaining its current investment grade debt rating, and returning excess free cash flow to shareholders via share repurchase and a growing dividend over time.

About Kroger
At The Kroger Co. (NYSE: KR), we are Fresh for Everyone™ and dedicated to our Purpose: To Feed the Human Spirit®. We are, across our family of companies, nearly half a million associates who serve over 11 million customers daily through a seamless shopping experience under a variety of banner names. We are committed to creating #ZeroHungerZeroWaste communities by 2025. To learn more about us, visit our newsroom and investor relations site.

This press release contains certain forward-looking statements about the future performance of the company. These statements are based on management's assumptions and beliefs in light of the information currently available to it. These statements are indicated by words such as "commitment," "continue," "will," "expects," "achieves," and "would" and include statements related to the payment and timing of payment in satisfaction of the withdrawal liability and related contributions, the security and stability of future pension benefits, and estimated charges to net earnings, as well as other statements regarding future events. The timing of our payments in satisfaction of our withdrawal liability to the National Fund will be affected by our ability to generate amounts through free cash flow or other sources of funds, including borrowings. The extent to which the Company's withdrawal from the National Fund and its participation in a new variable annuity pension plan will reduce future pension costs, lower future financial risk and stabilize future retirement related benefit costs will be affected primarily by the effectiveness of the new variable annuity pension plan and the cost of funding the Company's withdrawal from  the National Fund. Our expectation that our annual pension costs will be lower than the projected costs, our future financial risk will be lowered, and that pension benefits to covered associates will be more secure could prove inaccurate if the investment performance of the National Fund following our withdrawal is better than projected. Our belief that contributions and related expense would continue to grow in 2020 and beyond absent this agreement is primarily based on actuarial assumptions and anticipated investment performance of assets in the National Fund.

Kroger's ability to achieve sales, earnings, incremental FIFO operating profit, and adjusted free cash flow goals may be affected by: COVID-19 related factors, risks and challenges, including among others, the length of time that the pandemic continues, the temporary inability of customers to shop due to illness, quarantine, or other travel restrictions or financial hardship, shifts in demand away from discretionary or higher priced products to lower priced products, or stockpiling or similar pantry-filling activities, reduced workforces which may be caused by, but not limited to, the temporary inability of the workforce to work due to illness, quarantine, or government mandates,  temporary store closures due to reduced workforces or government mandates, or the availability or efficacy of a vaccine; labor negotiations or disputes; changes in the types and numbers of businesses that compete with Kroger; pricing and promotional activities of existing and new competitors, including non-traditional competitors, and the aggressiveness of that competition; Kroger's response to these actions; the state of the economy, including interest rates, the inflationary and deflationary trends in certain commodities, changes in tariffs, and the unemployment rate; the effect that fuel costs have on consumer spending; volatility of fuel margins; changes in government-funded benefit programs and the extent and effectiveness of any COVID-19 stimulus packages; manufacturing commodity costs; diesel fuel costs related to Kroger's logistics operations; trends in consumer spending; the extent to which Kroger's customers exercise caution in their purchasing in response to economic conditions; the uncertainty of economic growth or recession; changes in inflation or deflation in product and operating costs; stock repurchases; Kroger's ability to retain pharmacy sales from third party payors; consolidation in the healthcare industry, including pharmacy benefit managers; Kroger's ability to negotiate modifications to multi-employer pension plans; natural disasters or adverse weather conditions; the effect of public health crises or other significant catastrophic events, including the coronavirus; the potential costs and risks associated with potential cyber-attacks or data security breaches; the success of Kroger's future growth plans; the ability to execute on Restock Kroger; and the successful integration of merged companies and new partnerships. Our ability to achieve these goals may also be affected by our ability to manage the factors identified above. Our ability to execute our financial strategy may be affected by our ability to generate cash flow.

These forward-looking statements are subject to uncertainties and other factors that could cause actual results to differ materially. We assume no obligation to update the information contained herein. Please refer to Kroger's reports and filings with the Securities and Exchange Commission for a further discussion of these risks and uncertainties.

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SOURCE The Kroger Co.

FAQ

What is the recent agreement between Kroger and UFCW unions?

Kroger has ratified an agreement to withdraw from the UFCW International Union-Industry Pension Fund, improving pension security.

How much will Kroger pay for the pension withdrawal liability?

Kroger will pay $962 million for the withdrawal liability from the UFCW pension fund.

What is the financial impact of Kroger's pension agreement?

The agreement will incur an estimated $0.98 charge per diluted share in Q4 2020.

How will the new pension plan affect Kroger's future costs?

The new variable annuity pension plan will stabilize Kroger's projected pension costs for the next eight years.

What is Kroger's commitment to associate pensions?

Kroger has committed nearly $1 billion to enhance the security and stability of future pension benefits.