Albertsons 2015 Annual Report Download - page 18

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earlier than the decline in TSA services the Company is required to perform, which the Company expects will prevent it from
being able to take out certain costs until some period of time after the TSA revenue declines. This timing difference creates
challenges for the Company in managing its costs and could adversely impact the Company’s results of operations in any given
period.
To date, the Company has already developed plans to eliminate costs and to generate other services revenue streams (such as
the Haggen TSA) that are expected to mitigate approximately two-thirds of the fiscal 2015 TSA revenue by the end of the
estimated four year wind down of the TSA. The Company is developing additional plans to address the remaining one-third
through other initiatives, including through further reductions in the Company’s cost structure, growth strategies, additional
investment in the business to accelerate revenue growth and, for a period of time, the incremental revenue from the TSA Letter
Agreement to the extent the Company’s costs are lower than the fees received; however, there can be no assurance that the
Company will be able to fully address the impact from the termination of the TSA.
The Company provides information technology services to the Albertson’s LLC and NAI stores under the TSA. Some stores
owned and operated by Albertson’s LLC and NAI experienced criminal intrusions in connection with the criminal intrusions
experienced by the Company in the second quarter of fiscal 2015. The Company does not believe that any losses incurred by
Albertson’s LLC or NAI as a result of the intrusions would be the Company’s responsibility; however, the Company is unable
to assess the impact of such intrusions on the ongoing relationship between the Company and Albertson’s LLC and NAI.
The Company’s ability to continue to perform services under the TSA and the Transition Services Agreement with Haggen (the
“Haggen TSA”) at the applicable service level, and to provide transition and wind down services for the TSA, will depend
partly on its ability to attract and retain qualified personnel. Retaining such personnel may be more difficult in connection with
the transition and wind down of the TSA. A shortage of qualified employees who devote time to services under the TSA or the
Haggen TSA could increase the Company’s costs and decrease the Company’s ability to effectively serve these customers. The
Company could face claims for disruptions or other impacts to the businesses of NAI, Albertson’s LLC or Haggen.
The Company continues to be in discussions with NAI and Albertson’s LLC regarding the $69 of discrete tax benefits that the
Company recognized during the third quarter of fiscal 2015 relating to tangible property repair regulations and, while the
Company believes it is entitled to these tax benefits, whether the Company will pay any portion of the related tax refund to NAI
and Albertson’s LLC. The Company is also a party to an Operating and Supply Agreement with NAI under which the Company
operates a warehouse/distribution center owned by NAI. The Company provides wholesale distribution of products to certain
NAI banners and to certain of the Company’s independent retail customers from this warehouse/distribution center. This
agreement may be terminated by either party on 24 months’ notice. If the Company were not able to supply its independent
retail customers from this warehouse, it would need to identify an alternative warehouse to service those customers and a delay
or failure to do so could adversely impact the Company’s results of operations.
In December 2014, the Company entered into the Haggen TSA to provide certain services to all 164 Haggen stores owned and
being acquired by Haggen in five states in connection with the Safeway Acquisition as the stores are acquired by Haggen. The
Haggen TSA is similar to the TSA supporting NAI and Albertson’s LLC and has a term of two years with three one-year
automatic renewal periods unless earlier notice of nonrenewal is given by either party. The Company’s obligations under the
Haggen TSA could impact the Company’s ability to eliminate costs and overhead in connection with a transition and wind
down of the TSA. Additionally, similar to the TSA, Haggen has the ability to remove stores from receiving services under the
Haggen TSA, which would reduce revenue to the Company and could adversely impact the Company’s results of operations.
The Company experienced information technology intrusions in the second quarter of fiscal 2015 and is not yet able to
determine the full extent of their impact on its business and future operating results.
In the second quarter of fiscal 2015, the Company experienced separate criminal intrusions into the portion of its computer
network that processes payment card transactions for some of its owned and franchised retail food stores, including some of the
associated stand-alone liquor stores. These intrusions may have resulted in the theft of account numbers, and in some cases also
the expiration date, other numerical information and/or the cardholder’s name, from payment cards used at some point of sale
systems at some of the Company’s owned and franchised stores.
While the costs that the Company has incurred to date in connection with the intrusions primarily include professional advisory
and legal costs relating to its continuing investigation of the intrusions, the Company expects to incur additional costs and
expenses related to the intrusions in the future. The Company’s investigation of the intrusions is ongoing, and it is possible that
it will determine that information was in fact stolen from the Company during one or both of these intrusions or that time
frames, locations, at-risk data, and/or other facts in addition to those currently known will be identified in the future, any of
which could materially affect the Company’s losses and cause reputational damage to the Company. The Company may also be