NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars and shares in millions, except per share data)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Registrant
The accompanying Condensed Consolidated Financial Statements of SUPERVALU INC. (“Supervalu”, the “Company”, “we”, “us”, or “our”) for the
first
quarters ended
June 17, 2017
and
June 18, 2016
are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial condition, results of operations and cash flows for such periods. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes in Supervalu’s Annual Report on Form 10-K for the fiscal year ended
February 25, 2017
. The results of operations for the
first
quarter ended
June 17, 2017
are not necessarily indicative of the results expected for the full year.
Accounting Policies
The summary of significant accounting policies is included in the Notes to Consolidated Financial Statements set forth in Supervalu’s Annual Report on Form 10-K for the fiscal year ended
February 25, 2017
.
Fiscal Year
Supervalu operates on a 52/53 week fiscal year basis, with its fiscal year ending on the last Saturday in February. References to the
first
quarters of fiscal
2018
and
2017
relate to the 16 week fiscal quarters ended
June 17, 2017
and
June 18, 2016
, respectively.
Use of Estimates
The preparation of Supervalu’s Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
Supervalu considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. Supervalu’s banking arrangements allow Supervalu to fund outstanding checks when presented to the financial institution for payment. Supervalu funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create net book overdrafts, which are recorded in Accounts payable in the Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of
June 17, 2017
and
February 25, 2017
, Supervalu had net book overdrafts of
$77
and
$91
, respectively.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of Supervalu’s inventories consist of finished goods and a substantial portion of Supervalu’s inventories have a last-in, first-out (“LIFO”) reserve applied. Interim LIFO calculations are based on Supervalu’s estimates of expected year-end inventory levels and costs, as the actual valuation of inventory under the LIFO method is computed at the end of each year based on the inventory levels and costs at that time. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately
$218
at
June 17, 2017
and
$216
at
February 25, 2017
. Supervalu recorded a LIFO charge of
$2
and
$2
for the
first
quarters ended
June 17, 2017
and
June 18, 2016
, respectively.
Recently Adopted Accounting Standards
In March 2016, the Financial Accounting Standards Board (the "FASB") issued authoritative guidance under Accounting Standards Update ("ASU") 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. Supervalu adopted this guidance in the first quarter of fiscal 2018, which resulted in
$5
of additional income tax expense that would have been recorded as an adjustment to Additional paid-in-capital under previous authoritative guidance. The adoption resulted in the presentation of payments for shares traded for taxes within financing activities, which resulted in the retrospective revision of the Condensed Consolidated Statements of Cash Flows. In addition, estimated forfeitures continued to be recorded as stock-based compensation expense.
Recently Issued Accounting Standards
In March 2017, the FASB issued authoritative guidance under ASU 2017-07,
Compensation—Retirement Benefits (Topic 715): Improving the Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost.
ASU 2017-07 changes how benefit plan costs for defined benefit pension and other postretirement benefit plans are presented in the statement of operations. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2019. Early adoption is permitted as of the beginning of an annual period for which financial statements (interim or annual) have not been issued or made available for issuance. Supervalu is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.
In August 2016, the FASB issued authoritative guidance under ASU 2016-15,
Statement of Cash Flows (Topic 320): Classification of Certain Cash Receipts and Cash Payments.
ASU 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2019. Supervalu is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.
In June 2016, the FASB issued authoritative guidance under ASU 2016-13,
Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
ASU 2016-13 changes the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to use a new forward-looking “expected loss” model that will replace today’s “incurred loss” model and generally will result in the earlier recognition of allowances for losses. For available-for-sale debt securities with unrealized losses, entities will measure credit losses in a manner similar to current practice, except that the losses will be recognized as an allowance. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2021. Supervalu is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.
In February 2016, the FASB issued authoritative guidance under ASU 2016-02,
Leases (Topic 842)
. ASU 2016-02 provides new comprehensive lease accounting guidance that supersedes existing lease guidance. Upon adoption of ASU 2016-02, Supervalu will be required to recognize most leases on its balance sheet at the beginning of the earliest comparative period presented with a corresponding adjustment to stockholders’ equity (deficit). ASU 2016-02 requires Supervalu to capitalize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating leases. Criteria for distinguishing leases between finance and operating are substantially similar to criteria for distinguishing between capital leases and operating leases in existing lease guidance. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2020. Supervalu is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements. For a quantification of Supervalu’s off-balance sheet operating leases subject to capitalization under ASU 2016-02, other than those reserved for as a closed property and certain agreements that may be deemed leases under the new authoritative guidance, refer to total operating lease obligations within
Note 9—Leases
in the Notes to Consolidated Financial Statements included in Part II, Item 8 of Supervalu's Annual Report on Form 10-K for the fiscal year ended
February 25, 2017
.
In January 2016, the FASB issued authoritative guidance under ASU 2016-01,
Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
. ASU 2016-01 revises the classification, measurement and disclosure of investments in equity securities. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2019. Supervalu is currently evaluating the potential impact of adoption of this standard on its consolidated financial statements.
In May 2014, the FASB issued authoritative guidance under ASU 2014-09,
Revenue from Contracts with Customers (Topic 606): Revenue from Contracts with Customers
. ASU 2014-09 supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model that requires entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or
services. The new guidance will likely be adopted by Supervalu during the first quarter of fiscal 2019, as permitted by ASU 2015-14,
Revenue from Contracts with Customers (Topic 606): Deferral of the Effective Date
. The adoption will include updates as provided under ASU 2016-08,
Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net);
ASU 2016-10,
Revenue from Contracts with Customers: Identifying Performance Obligations and Licensing;
ASU 2016-12,
Revenue from Contracts with Customers: Narrow-Scope Improvements and Practical Expedients;
and ASU 2016-20,
Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers.
Adoption is allowed by either the full retrospective or modified retrospective approach.
Supervalu is currently evaluating which of the alternative approaches it will apply and the potential impact of adoption of the revised revenue standards on its consolidated financial statements. Supervalu believes that there will be few, if any, substantial changes to its Retail segment. Arrangements where Supervalu has determined it was a principal versus an agent are expected to remain relatively unchanged. Distribution contracts within Wholesale contain certain immaterial promises for goods or services that Supervalu believes will be immaterial in the context of the contracts. Supervalu expects to complete its evaluation in fiscal 2018. Upon conclusion of the revised revenue assessment, Supervalu will determine whether to adopt the guidance under the full retrospective or modified retrospective approach.
NOTE 2—BUSINESS ACQUISITIONS
On June 23, 2017, Supervalu completed the acquisition of Unified Grocers, Inc. (“Unified”) pursuant to the terms of an Agreement and Plan of Merger dated April 10, 2017 (the “Merger Agreement”) by and among Supervalu, West Acquisition Corporation, a wholly owned subsidiary of Supervalu (“Merger Sub”), and Unified. Supervalu acquired Unified in a transaction valued at
$390
, comprised of
$114
in cash for
100 percent
of the outstanding stock of Unified plus the assumption and payoff of Unified’s net debt of
$276
at closing.
At the closing of the transaction, Merger Sub merged with and into Unified. As a result of the transaction, Unified became a wholly owned subsidiary of Supervalu and the shares of Unified were converted into the right to receive from Supervalu
$114
in cash in the aggregate.
No amounts of revenue or expenses of Unified were included in the first quarter of fiscal 2018 results of operations, financial position or cash flows of Supervalu since the business was not acquired until the second quarter of fiscal 2018. Supervalu incurred merger and integration costs of
$4
in the first quarter of fiscal 2018 related to the Unified acquisition. Supervalu has not included pro forma financial disclosures for the Unified acquisition in this Quarterly Report on Form 10-Q for the 16 weeks ended June 17, 2017 because the information necessary to complete the disclosure was not yet available.
NOTE 3—RESERVES FOR CLOSED PROPERTIES AND PROPERTY, PLANT AND EQUIPMENT-RELATED IMPAIRMENT CHARGES
Reserves for Closed Properties
Changes in Supervalu’s reserves for closed properties consisted of the following:
|
|
|
|
|
|
June 17,
2017
(16 weeks)
|
Reserves for closed properties at beginning of the fiscal year
|
$
|
22
|
|
Additions
|
—
|
|
Payments
|
(2
|
)
|
Adjustments
|
(1
|
)
|
Reserves for closed properties at the end of period
|
$
|
19
|
|
Property, Plant and Equipment-Related Impairment Charges
The following table presents impairment charges related to property, plant and equipment measured at fair value on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Property, plant and equipment:
|
|
|
|
Carrying value
|
$
|
—
|
|
|
$
|
2
|
|
Fair value measured using Level 3 inputs
|
—
|
|
|
2
|
|
Impairment charge
|
$
|
—
|
|
|
$
|
—
|
|
NOTE 4—GOODWILL AND INTANGIBLE ASSETS
Changes in Supervalu’s Goodwill and Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 25,
2017
|
|
Additions
|
|
Impairments
|
|
Other net
adjustments
|
|
June 17,
2017
|
Wholesale goodwill
|
$
|
710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
710
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
Favorable operating leases, prescription files, customer lists and other
|
$
|
141
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
141
|
|
Trademarks and tradenames – indefinite useful lives
|
5
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Total intangible assets
|
146
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
146
|
|
Accumulated amortization
|
(107
|
)
|
|
(4
|
)
|
|
—
|
|
|
—
|
|
|
(111
|
)
|
Total intangible assets, net
|
$
|
39
|
|
|
|
|
|
|
|
|
$
|
35
|
|
Amortization of intangible assets with definite useful lives was
$4
and
$3
for the
first
quarters ended
June 17, 2017
and
June 18, 2016
, respectively. Future amortization expense is anticipated to be approximately
$7
, and
$6
,
$4
,
$4
,
$3
and
$3
for the remainder of fiscal 2018, and for fiscal 2019, 2020, 2021, 2022 and 2023, respectively.
NOTE 5—FAIR VALUE MEASUREMENTS
Recurring fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 17, 2017
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
Other assets
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Total
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 25, 2017
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
Other assets
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Total
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
$
|
—
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
2
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Diesel Fuel Derivatives
Fuel derivative gains (losses) are included within Cost of sales in the Condensed Consolidated Statements of Operations and were
$0
and
$0
for the
first
quarters of fiscal
2018
and
2017
, respectively.
Interest Rate Swap Derivatives
Interest rate swap derivative reclassifications from Accumulated other comprehensive loss into earnings are recorded within Interest expense, net in the Condensed Consolidated Statements of Operations and were
$1
and
$1
in the
first
quarters of fiscal
2018
and
2017
, respectively. No amounts were reclassified related to hedging ineffectiveness.
As of
June 17, 2017
, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the interest rate swap by approximately
$5
and a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swap by approximately
$2
.
Non-recurring Fair Value Measurements
Impairment charges related to goodwill and intangible assets discussed in
Note 4—Goodwill and Intangible Assets
and to property, plant and equipment discussed in
Note 3—Reserves for Closed Properties and Property, Plant and Equipment-related Impairment Charges
were measured at fair value using Level 3 inputs.
Fair Value Estimates
For certain of Supervalu’s financial instruments, including cash and cash equivalents, receivables, accounts payable, accrued salaries and other current assets and liabilities, the fair values approximate carrying amounts due to their short maturities.
The estimated fair value of notes receivable was greater than their carrying amount by approximately
$0
and
$0
as of
June 17, 2017
and
February 25, 2017
, respectively. Notes receivable are valued based on a discounted cash flow approach applying
a market rate for similar instruments that is determined using Level 3 inputs.
The estimated fair value of Supervalu’s long-term debt was lower than the carrying amount, excluding debt financing costs, by approximately
$14
as of
June 17, 2017
and equal to the carrying amount, excluding debt financing costs, as of
February 25, 2017
. The estimated fair value was based on market quotes, where available, or market values for similar instruments, using Level 2 and Level 3 inputs.
NOTE 6—LONG-TERM DEBT
Supervalu’s long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
June 17,
2017
|
|
February 25,
2017
|
4.59% Secured Term Loan Facility due June 2024
|
$
|
525
|
|
|
$
|
—
|
|
5.54% Secured Term Loan Facility due March 2019
|
—
|
|
|
524
|
|
6.75% Senior Notes due June 2021
|
400
|
|
|
400
|
|
7.75% Senior Notes due November 2022
|
350
|
|
|
350
|
|
4.25% Revolving ABL Credit Facility due February 2021
|
—
|
|
|
—
|
|
Other
|
27
|
|
|
—
|
|
Debt financing costs, net
|
(13
|
)
|
|
(10
|
)
|
Original issue discount on debt
|
(3
|
)
|
|
(1
|
)
|
Total debt
|
1,286
|
|
|
1,263
|
|
Less current maturities of long-term debt
|
(4
|
)
|
|
—
|
|
Long-term debt
|
$
|
1,282
|
|
|
$
|
1,263
|
|
Supervalu’s credit facilities and certain long-term debt agreements have restrictive covenants and cross-default provisions, which generally provide, subject to Supervalu’s right to cure, for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain other debt agreements. Supervalu was in compliance with all such covenants and provisions for all periods presented.
Senior Secured Credit Agreements
During the first quarter of fiscal 2018, Supervalu entered into a fourth amendment agreement (the “Fourth Term Loan Amendment”) amending and restating its Secured Term Loan Facility due March 2019 (the “Secured Term Loan Facility due March 2019” and as amended and restated, the “Secured Term Loan Facility”). The Secured Term Loan Facility provides for (i) an initial term loan facility of
$525
, which was drawn down in full to refinance outstanding loans under the Secured Term Loan Facility due March 2019 at a lower interest rate and (ii) a delayed draw term loan facility of
$315
, which was drawn down in full in the second quarter of fiscal 2018 for the purpose of consummating the acquisition of Unified. Borrowings under the Secured Term Loan Facility bear interest at the rate of LIBOR plus
3.50 percent
with a floor on LIBOR set at
1.00 percent
, compared to the rate under the Secured Term Loan Facility due March 2019 of LIBOR plus
4.50 percent
with a floor of
1.00 percent
. The Secured Term Loan Facility will mature on June 8, 2024. However, if Supervalu has not repaid its
6.75 percent
Senior Notes due June 2021 or its
7.75 percent
Senior Notes due November 2022 by the date that is
91
days prior to the respective maturity date of such notes, the Secured Term Loan Facility will mature on the date that is
91
days prior to the maturity date of such notes. The Secured Term Loan Facility will also mature early upon the occurrence of a Change of Control (as defined in the Secured Term Loan Facility). During the first quarter ended June 17, 2017, in connection with the completion of the Fourth Term Loan Amendment, Supervalu paid debt financing costs of approximately
$8
, of which
$5
was capitalized and
$3
was expensed, and paid original issue discount of approximately
$2
, all of which was capitalized, and recognized a non-cash charge of approximately
$2
for the write-off of existing unamortized debt financing costs. On June 23, 2017, in connection with the closing of the acquisition of Unified, Supervalu executed the delayed draw under the Secured Term Loan Facility and increased the outstanding borrowings under the facility to
$840
.
The Secured Term Loan Facility is secured by substantially all of Supervalu’s real estate, equipment and certain other assets. The Secured Term Loan Facility is guaranteed by Supervalu’s material subsidiaries (together with Supervalu, the “Term Loan Parties”). To secure their obligations under the Secured Term Loan Facility, the Term Loan Parties have granted a perfected first-priority security interest in substantially all of their intellectual property and a first-priority mortgage lien and security interest in certain owned or ground-leased real estate and associated equipment pledged as collateral. As of June 17, 2017 and February 25, 2017, there was
$530
and
$520
, respectively, of owned or ground-leased real estate and associated equipment pledged as collateral, which was included in Property, plant and equipment, net in the Condensed Consolidated Balance Sheets. In addition, the obligations of the Term Loan Parties under the Secured Term Loan Facility are secured by second-priority security interests in the collateral securing Supervalu’s
$1,000
asset-based revolving credit facility (the “Revolving ABL Credit
Facility”). As of
June 17, 2017
and
February 25, 2017
,
$5
and
$0
of the Secured Term Loan Facility was classified as current, respectively, excluding debt financing costs and original issue discount.
The loans under the Secured Term Loan Facility may be voluntarily prepaid in certain minimum principal amounts, subject to the payment of breakage or similar costs and, in certain circumstances, a prepayment fee. Pursuant to the Secured Term Loan Facility, Supervalu must, subject to certain exceptions and certain customary reinvestment rights, apply
100 percent
of Net Cash Proceeds (as defined in the facility) from certain types of asset sales (excluding proceeds of the collateral security of the Revolving ABL Credit Facility and other secured indebtedness) to prepay the loans outstanding under the Secured Term Loan Facility. Supervalu must also prepay loans outstanding under the facility no later than
90
days after the fiscal year end in an aggregate principal amount equal to a percentage (which percentage ranges from
0
to
50
percent depending on Supervalu’s Total Secured Leverage Ratio (as defined in the facility) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the facility) for the fiscal year then ended, minus any voluntary prepayments made during such fiscal year with Internally Generated Cash (as defined in the facility). Based on Supervalu’s Total Secured Leverage Ratio (as defined in the facility) as of the last day of fiscal 2017, no prepayment from Excess Cash Flow in fiscal 2017 was required in the first quarter of fiscal 2018. The potential amount of prepayment from Excess Cash Flow that may be required for fiscal 2018 is not reasonably estimable as of June 17, 2017.
The revolving loans under the Revolving ABL Credit Facility may be voluntarily prepaid in certain minimum principal amounts, in whole or in part, without premium or penalty, subject to breakage or similar costs. Supervalu and those subsidiaries named as borrowers under the Revolving ABL Credit Facility are required to repay the revolving loans in cash and provide cash collateral under this facility to the extent that the revolving loans and letters of credit exceed the lesser of the borrowing base then in effect or the aggregate amount of the lenders’ commitments under the Revolving ABL Credit Facility. Certain of Supervalu’s material subsidiaries are co-borrowers under the Revolving ABL Credit Facility, and this facility is guaranteed by the rest of Supervalu’s material subsidiaries (Supervalu and those subsidiaries named as borrowers and guarantors under the Revolving ABL Credit Facility, the “ABL Loan Parties”). To secure their obligations under this facility, the ABL Loan Parties have granted a perfected first-priority security interest for the benefit of the facility lenders in their present and future inventory, credit card, wholesale trade, pharmacy and certain other receivables, prescription files and related assets. In addition, the obligations under the Revolving ABL Credit Facility are secured by second-priority liens on and security interests in the collateral securing the Secured Term Loan Facility, subject to certain limitations to ensure compliance with Supervalu’s outstanding debt instruments and leases.
As of June 17, 2017 and February 25, 2017, there were no outstanding borrowings under the Revolving ABL Credit Facility. The assets included in the Condensed Consolidated Balance Sheets securing the outstanding borrowings under the Revolving ABL Credit Facility on a first-priority basis, and the unused available credit and fees under the Revolving ABL Credit Facility, were as follows:
|
|
|
|
|
|
|
|
|
|
Assets securing the Revolving ABL Credit Facility
(1)
:
|
|
June 17, 2017
|
|
February 25, 2017
|
Certain inventory assets included in Inventories, net
|
|
$
|
1,014
|
|
|
$
|
949
|
|
Certain receivables included in Receivables, net
|
|
248
|
|
|
228
|
|
Certain amounts included in Cash and cash equivalents
|
|
21
|
|
|
19
|
|
|
|
(1)
|
The Revolving ABL Credit Facility is also secured by all of Supervalu's pharmacy scripts included in Intangible assets, net.
|
|
|
|
|
|
|
|
|
|
|
Unused available credit and fees under the Revolving ABL Credit Facility:
|
|
June 17, 2017
|
|
February 25, 2017
|
Outstanding letters of credit
|
|
$
|
52
|
|
|
$
|
53
|
|
Letters of credit fees
|
|
1.375
|
%
|
|
1.375
|
%
|
Unused available credit
|
|
785
|
|
|
748
|
|
Unused facility fees
|
|
0.25
|
%
|
|
0.25
|
%
|
Both the Secured Term Loan Facility and the Revolving ABL Credit Facility limit Supervalu’s ability to make Restricted Payments (as defined in both the Secured Term Loan Facility and the Revolving ABL Credit Facility), which include dividends to stockholders. The Secured Term Loan Facility caps the aggregate amount of Restricted Payments that may be made over the life of the Secured Term Loan Facility. That aggregate cap can fluctuate over time and the cap could be reduced by certain other actions taken by Supervalu, including certain debt prepayments and Permitted Investments (as defined in the Secured Term Loan Facility). As of
June 17, 2017
, the aggregate cap on Restricted Payments was approximately
$502
. The Revolving ABL Credit Facility permits dividends up to
$75
per fiscal year, not to exceed
$175
in the aggregate over the life of the Revolving
ABL Credit Facility as long as no Cash Dominion Event (as defined in the Revolving ABL Credit Facility) exists. Those caps could be reduced by certain debt prepayments made by Supervalu. The Revolving ABL Credit Facility permits other Restricted Payments as long as the Payment Conditions (as defined in the Revolving ABL Credit Facility) are met.
Debentures
The
$400
of
6.75 percent
Senior Notes due June 2021 and the
$350
of
7.75 percent
Senior Notes due November 2022 contain operating covenants, including limitations on liens and on sale and leaseback transactions. Supervalu was in compliance with all such covenants and provisions for all periods presented.
NOTE 7—BENEFIT PLANS
Net periodic benefit income and contributions for defined benefit pension and other postretirement benefit plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
Pension Benefits
|
|
Other Postretirement Benefits
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Interest cost
|
$
|
24
|
|
|
$
|
26
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Expected return on assets
|
(40
|
)
|
|
(44
|
)
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
(5
|
)
|
|
(5
|
)
|
Amortization of net actuarial loss
|
3
|
|
|
14
|
|
|
1
|
|
|
1
|
|
Net periodic benefit income
|
$
|
(13
|
)
|
|
$
|
(4
|
)
|
|
$
|
(4
|
)
|
|
$
|
(3
|
)
|
Contributions to benefit plans
|
$
|
(1
|
)
|
|
$
|
(1
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Multiemployer Pension Plans
During the first quarters of fiscal
2018
and
2017
, Supervalu contributed
$12
and
$12
, respectively, to various multiemployer pension plans, primarily defined benefit pension plans, under collective bargaining agreements.
Pension Contributions
No minimum contributions are required to Supervalu's pension plans in fiscal
2018
in accordance with the Employee Retirement Income Security Act of 1974, as amended (“ERISA”). Supervalu anticipates fiscal
2018
discretionary pension contributions and required minimum other postretirement benefit plan contributions will be approximately
$5
to
$10
.
NOTE 8—NET EARNINGS PER SHARE
Basic net earnings per share is calculated using net earnings attributable to SUPERVALU INC. divided by the weighted average number of shares outstanding during the period. Diluted net earnings per share is similar to basic net earnings per share except that the weighted average number of shares outstanding is computed after giving effect to the dilutive impacts of stock-based awards, if any.
The following table reflects the calculation of basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Net earnings from continuing operations
|
$
|
12
|
|
|
$
|
20
|
|
Less net earnings attributable to noncontrolling interests
|
(1
|
)
|
|
(1
|
)
|
Net earnings from continuing operations attributable to SUPERVALU INC.
|
11
|
|
|
19
|
|
Income from discontinued operations, net of tax
|
—
|
|
|
27
|
|
Net earnings attributable to SUPERVALU INC.
|
$
|
11
|
|
|
$
|
46
|
|
|
|
|
|
Weighted average number of shares outstanding—basic
|
267
|
|
|
264
|
|
Dilutive impact of stock-based awards
|
2
|
|
|
3
|
|
Weighted average number of shares outstanding—diluted
|
269
|
|
|
267
|
|
|
|
|
|
Basic net earnings per share attributable to SUPERVALU INC.:
|
Continuing operations
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
0.10
|
|
Basic net earnings per share
|
$
|
0.04
|
|
|
$
|
0.17
|
|
Diluted net earnings per share attributable to SUPERVALU INC.:
|
Continuing operations
|
$
|
0.04
|
|
|
$
|
0.07
|
|
Discontinued operations
|
$
|
—
|
|
|
$
|
0.10
|
|
Diluted net earnings per share
|
$
|
0.04
|
|
|
$
|
0.17
|
|
Stock-based awa
rds of
13
and
17
that were outstanding during the
first
quarters of fiscal
2018
and
2017
, respectively, were excluded from the calculation of diluted net earnings per share from continuing operations for the periods because their inclusion would be antidilutive.
Reverse Stock Split
At the close of business on August 1, 2017, a 1-for-7 reverse split of Supervalu’s common stock will become effective. When the reverse stock split becomes effective, the number of authorized shares of Supervalu’s common stock will decrease to approximately
57
, while the number of issued and outstanding shares will be reduced from approximately
269
to
38
. No fractional shares will be issued following the reverse stock split. In lieu of any fractional shares, any holder of less than one share of common stock will be entitled to receive cash for such holder’s fractional share. The reverse stock split will not impact the authorized number of shares of preferred stock of Supervalu, none of which are outstanding. The reverse stock split will reduce the number of shares of common stock available for issuance under Supervalu’s equity compensation plans in proportion to the reverse stock split ratio. Upon effectiveness, the reverse stock split will cause a reduction in the number of shares of common stock issuable upon exercise or vesting of equity awards in proportion to the reverse stock split ratio and will cause a proportionate increase in any exercise price of such awards. Supervalu’s common stock will continue to trade on the NYSE under the symbol “SVU.”
The following table provides earnings per share calculated on a pro forma basis after giving effect to the reverse stock split, which Supervalu expects will begin trading on a split-adjusted basis when the market opens on August 2, 2017.
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Pro forma basic net earnings per share attributable to SUPERVALU INC. after reverse stock split:
|
Continuing operations
|
$
|
0.31
|
|
|
$
|
0.50
|
|
Discontinued operations
|
$
|
(0.01
|
)
|
|
$
|
0.72
|
|
Pro forma basic net earnings per share
|
$
|
0.30
|
|
|
$
|
1.22
|
|
Pro forma diluted net earnings per share attributable to SUPERVALU INC. after reverse stock split:
|
Continuing operations
|
$
|
0.30
|
|
|
$
|
0.49
|
|
Discontinued operations
|
$
|
(0.01
|
)
|
|
$
|
0.71
|
|
Pro forma diluted net earnings per share
|
$
|
0.30
|
|
|
$
|
1.20
|
|
NOTE 9—COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE LOSS
Supervalu reports comprehensive income in the Condensed Consolidated Statements of Comprehensive Income. Comprehensive income includes all changes in stockholders’ equity during the reporting period, other than those resulting from investments by and distributions to stockholders. Supervalu’s comprehensive income is calculated as net (loss) earnings including noncontrolling interests, plus or minus adjustments for pension and other postretirement benefit obligations, net of tax, and changes in the fair value of cash flow hedges, net of tax, less comprehensive income attributable to noncontrolling interests.
Accumulated other comprehensive loss represents the cumulative balance of other comprehensive income (loss), net of tax, as of the end of the reporting period and relates to pension and other postretirement benefit obligation adjustments, net of tax, and unrealized losses on cash flow hedges, net of tax.
Changes in Accumulated other comprehensive loss by component for the first quarter of fiscal
2018
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans
|
|
Interest Rate Swap
|
|
Total
|
Accumulated other comprehensive loss at beginning of the fiscal year, net of tax
|
$
|
(276
|
)
|
|
$
|
(2
|
)
|
|
$
|
(278
|
)
|
Other comprehensive income (loss) before reclassifications
(1)
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of amounts included in net periodic benefit income
(2)
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of cash flow hedge
(3)
|
—
|
|
|
—
|
|
|
—
|
|
Net current-period Other comprehensive income
(4)
|
—
|
|
|
—
|
|
|
—
|
|
Accumulated other comprehensive loss at the end of period, net of tax
|
$
|
(276
|
)
|
|
$
|
(2
|
)
|
|
$
|
(278
|
)
|
(1)
Amount is net of tax (benefit) expense of
$0
,
$0
and
$0
, respectively.
(2)
Amount is net of tax (benefit) expense of
$(1)
,
$0
and
$(1)
, respectively.
(3)
Amount is net of tax (benefit) expense of
$0
,
$1
and
$1
, respectively.
(4)
Amount is net of tax (benefit) expense of
$(1)
,
$1
and
$0
, respectively.
Changes in Accumulated other comprehensive loss by component for the first quarter of fiscal
2017
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans
|
|
Interest Rate Swap
|
|
Total
|
Accumulated other comprehensive loss at beginning of the fiscal year, net of tax
|
$
|
(418
|
)
|
|
$
|
(4
|
)
|
|
$
|
(422
|
)
|
Other comprehensive loss before reclassifications
(1)
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
Amortization of amounts included in net periodic benefit income
(2)
|
6
|
|
|
—
|
|
|
6
|
|
Amortization of cash flow hedge
(3)
|
—
|
|
|
1
|
|
|
1
|
|
Net current-period Other comprehensive income
(4)
|
6
|
|
|
—
|
|
|
6
|
|
Accumulated other comprehensive loss at the end of period, net of tax
|
$
|
(412
|
)
|
|
$
|
(4
|
)
|
|
$
|
(416
|
)
|
(1)
Amount is net of tax expense of
$0
,
$0
and
$0
, respectively.
(2)
Amount is net of tax expense of
$4
,
$0
and
$4
, respectively.
(3)
Amount is net of tax expense of
$0
,
$0
and
$0
, respectively.
(4)
Amount is net of tax expense of
$4
,
$0
and
$4
, respectively.
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Condensed Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
|
Affected Line Item on Condensed Consolidated Statements of Operations
|
Pension and postretirement benefit plan obligations:
|
|
|
|
|
|
Amortization of amounts included in net periodic benefit income
(1)
|
$
|
(1
|
)
|
|
$
|
9
|
|
|
Selling and administrative expenses
|
Amortization of amounts included in net periodic benefit income
(1)
|
—
|
|
|
1
|
|
|
Cost of sales
|
Total reclassifications
|
(1
|
)
|
|
10
|
|
|
|
Income tax expense (benefit)
|
1
|
|
|
(4
|
)
|
|
Income tax provision
|
Total reclassifications, net of tax
|
$
|
—
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
Interest rate swap cash flow hedge:
|
|
|
|
|
|
Reclassification of cash flow hedge
|
$
|
1
|
|
|
$
|
1
|
|
|
Interest expense, net
|
Income tax benefit
|
(1
|
)
|
|
—
|
|
|
Income tax provision
|
Total reclassifications, net of tax
|
$
|
—
|
|
|
$
|
1
|
|
|
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit expense include amortization of prior service benefit and amortization of net actuarial loss as reflected in
Note 7—Benefit Plans
.
|
As of
June 17, 2017
, Supervalu expects to reclassify
$2
out of Accumulated other comprehensive loss into Interest expense, net during the following twelve-month period.
NOTE 10—STOCK-BASED AWARDS
Supervalu recognized pre-tax stock-based compensation expense (included primarily in Selling and administrative expenses in the Condensed Consolidated Statements of Operations) related to stock options, restricted stock units, restricted stock awards and performance share units (collectively referred to as “stock-based awards”) of
$6
and
$4
for the
first
quarters of fiscal
2018
and
2017
, respectively.
Stock Options
In the
first
quarter of fiscal
2018
and
2017
, Supervalu granted
0
and
1
non-qualified stock options, respectively, to certain employees under Supervalu’s 2012 Stock Plan with weighted average grant date fair values of
$1.99
per share and
$2.67
per share, respectively. The stock options vest over a period of
three
years and were awarded as part of a broad-based employee incentive program designed to retain and motivate employees across Supervalu. Supervalu used the Black-Scholes option pricing model to estimate the fair value of the options at grant date based upon the following assumptions:
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Volatility rate
|
53.7
|
%
|
|
54.2
|
%
|
Risk-free interest rate
|
1.8
|
%
|
|
1.3
|
%
|
Expected life
|
5.0 years
|
|
|
5.0 years
|
|
Restricted Stock and Restricted Stock Units
In the first quarter of fiscal
2018
, Supervalu granted
6
restricted stock units (“RSUs”) to certain employees under the 2012 Stock Plan. The RSUs vest over a
three
-year period from the date of the grant and were granted at a fair value of
$4.17
per unit. In the first quarter of fiscal
2017
, Supervalu granted
4
RSUs to certain employees under the 2012 Stock Plan. The RSUs vest over a
three
-year period from the date of grant and were granted at a fair value of
$5.64
per unit.
Performance Share Units
In the first quarter of fiscal
2018
, Supervalu granted
1
performance share units (“PSUs”) to certain employees under the 2012 Stock Plan. The PSUs have a fiscal 2018-2020 performance period and settle in shares of Supervalu's stock. In April 2016, Supervalu granted
1
PSUs to certain employees under the 2012 Stock Plan. The PSUs have a fiscal 2017-2019 performance period and settle in shares of Supervalu’s stock. Supervalu used the Monte Carlo method to estimate the fair value of the PSUs at grant date based upon the following assumptions:
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
June 18,
2016
(16 weeks)
|
Dividend yield
|
—
|
%
|
—
|
%
|
Volatility rate
|
44.3
|
%
|
41.3
|
%
|
Risk-free interest rate
|
1.41
|
%
|
0.9
|
%
|
Expected life
|
2.8 years
|
|
2.8 years
|
|
NOTE 11—INCOME TAXES
The
first
quarter of fiscal
2018
and
2017
tax provision included
$5
and
$0
of discrete tax expense, respectively. The increase in the discrete tax expense is primarily due to excess tax expense related to the adoption of ASU 2016-09.
NOTE 12—SEGMENT INFORMATION
Summary operating results by reportable segment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended June 17, 2017
|
|
|
Wholesale
|
|
Retail
|
|
Corporate
|
|
Total
|
Net sales
|
|
$
|
2,556
|
|
|
$
|
1,393
|
|
|
$
|
55
|
|
|
$
|
4,004
|
|
Cost of sales
|
|
2,433
|
|
|
1,020
|
|
|
—
|
|
|
3,453
|
|
Gross profit
|
|
123
|
|
|
373
|
|
|
55
|
|
|
551
|
|
Selling and administrative expenses
|
|
61
|
|
|
377
|
|
|
46
|
|
|
484
|
|
Operating earnings
|
|
$
|
62
|
|
|
$
|
(4
|
)
|
|
$
|
9
|
|
|
$
|
67
|
|
Interest expense, net
|
|
|
|
|
|
|
|
43
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
(2
|
)
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
|
$
|
26
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First Quarter Ended June 18, 2016
|
|
|
Wholesale
|
|
Retail
|
|
Corporate
|
|
Total
|
Net sales
|
|
$
|
2,275
|
|
|
$
|
1,431
|
|
|
$
|
59
|
|
|
$
|
3,765
|
|
Cost of sales
|
|
2,166
|
|
|
1,050
|
|
|
—
|
|
|
3,216
|
|
Gross profit
|
|
109
|
|
|
381
|
|
|
59
|
|
|
549
|
|
Selling and administrative expenses
|
|
45
|
|
|
373
|
|
|
42
|
|
|
460
|
|
Operating earnings
|
|
$
|
64
|
|
|
$
|
8
|
|
|
$
|
17
|
|
|
$
|
89
|
|
Interest expense, net
|
|
|
|
|
|
|
|
60
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
|
(1
|
)
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
|
$
|
30
|
|
NOTE 13—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
Supervalu has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of
June 17, 2017
. These guarantees were generally made to support the business growth of Wholesale customers. The guarantees are generally for the entire terms of the leases, fixture financing loans or other debt obligations with remaining terms that range from less than
one
year to
fourteen
years, with a weighted average remaining term of approximately
eight
years. For each guarantee issued, if the Wholesale customer or other third party defaults on a payment, Supervalu would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the Wholesale customer.
Supervalu reviews performance risk related to its guarantee obligations based on internal measures of credit performance. As of
June 17, 2017
, the maximum amount of undiscounted payments Supervalu would be required to make in the event of default of all guarantees was
$67
(
$51
on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, Supervalu believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under Supervalu’s guarantee arrangements as the fair value has been determined to be de minimis.
Supervalu is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. Supervalu could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of Supervalu’s lease assignments among third parties, and various other remedies available, Supervalu believes the likelihood that it will be required to assume a material amount of these obligations is remote. No amount has been recorded in the Consolidated Balance Sheets for these contingent obligations under Supervalu’s guarantee arrangements as the fair value has been determined to be de minimis.
Supervalu is a party to a variety of contractual agreements under which it may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. These agreements primarily relate to Supervalu’s commercial contracts, service agreements, contracts entered into for the purchase and sale of stock or assets, operating leases and other real estate contracts, financial agreements, agreements to provide services to Supervalu and agreements to indemnify officers, directors and employees in the performance of their work. While Supervalu’s aggregate indemnification obligations could result in a material liability, Supervalu is not aware of any matters that are expected to result in a material liability. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimis.
Following the sale of New Albertson’s, Inc. (“NAI”) on March 21, 2013, Supervalu remains contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees issued by Supervalu with respect to the obligations of NAI that were incurred while NAI was a subsidiary of Supervalu. As of
June 17, 2017
, using actuarial estimates as of December 31, 2016, the total undiscounted amount of all such guarantees was estimated at
$102
(
$92
on a discounted basis). Based on the expected settlement of the self-insurance claims that underlie Supervalu’s commitments, Supervalu believes that such contingent liabilities will continue to decline. Subsequent to the sale of NAI, NAI collateralized most of these obligations with letters of credit and surety bonds to numerous states. Because NAI remains a primary obligor on these self-insurance and other obligations and has collateralized most of the self-insurance obligations for which Supervalu remains contingently liable, Supervalu believes that the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these guarantees.
Agreements with Save-A-Lot and Onex
The Agreement and Plan of Merger pursuant to which Supervalu sold the Save-A-Lot business (the “SAL Merger Agreement”) contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, on the terms and subject to the limitations set forth in the SAL Merger Agreement. Similarly, the Separation Agreement between Supervalu and Moran Foods (the “Separation Agreement”) contains indemnification obligations and covenants related to the separation of the assets and liabilities of the Save-A-Lot business from Supervalu. Pursuant to the Services Agreement between Supervalu and Moran Foods (the “Services Agreement”), Supervalu is providing Save-A-Lot various technical, human resources, finance and other operational services for a term of
five
years, subject to termination provisions that can be exercised by each party. Save-A-Lot paid Supervalu
$30
upon entry into the Services Agreement, which is being credited against fees due under the Services Agreement, of which
$7
was recognized in Corporate Net sales in fiscal 2017. The initial annual base charge under the Services Agreement is
$30
, subject to adjustments. The Services Agreement generally requires each party to indemnify the other party against third-party
claims arising out of the performance of or the provision or receipt of services under the Services Agreement. While Supervalu’s aggregate indemnification obligations to Save-A-Lot and Onex could result in a material liability, Supervalu is not aware of any matters that are expected to result in a material liability. Supervalu has recorded the fair value of the guarantee in the Condensed Consolidated Balance Sheets.
Agreements with AB Acquisition LLC and Affiliates
In connection with the sale of NAI, Supervalu entered into various agreements with AB Acquisition LLC and its affiliates related to on-going operations, including a Transition Services Agreement with each of NAI and Albertson’s LLC (collectively, the “TSA”). At the time of the sale of NAI, the TSA had initial terms of approximately
30 months
, and are subject to renewal by the parties thereto and also include termination provisions that can be exercised by each party. On September 6, 2016, NAI and Albertson’s LLC each notified Supervalu that it was again exercising its right to renew the term of their respective TSA for an additional year. Pursuant to this notice, each TSA will now expire on September 21, 2018 unless renewed again by notice given no later than September 21, 2017. In addition, Supervalu operates a distribution center in Lancaster, Pennsylvania that is owned by NAI. In March 2017, Supervalu acquired a distribution center in Harrisburg, Pennsylvania that will eventually replace the Lancaster facility.
On April 16, 2015, Supervalu entered into a letter agreement pursuant to which Supervalu is providing services to NAI and Albertson’s LLC as needed to transition and wind down the TSA. In exchange for these transition and wind down services, Supervalu is entitled to receive
eight
payments of approximately
$6
every six months for aggregate fees of
$50
. These payments are separate from and incremental to the fixed and variable fees Supervalu receives under the TSA. Supervalu estimates that the complete transition and wind down of the TSA could take approximately
two
more years.
On May 28, 2015, Supervalu entered into a letter agreement with NAI and Albertson's LLC pursuant to which Supervalu received certain additional rights and benefits, and Supervalu and NAI and Albertson's LLC (and certain of their affiliates, including Safeway, with respect to provisions of the letter agreement applicable to them) agreed to resolve several issues. Among other matters resolved, NAI, Albertson's LLC and AB Acquisition agreed to no longer challenge, and waive all rights relating to, Supervalu's filing with the IRS in fiscal 2015 for a change in accounting method for NAI and its subsidiaries pursuant to the tangible property repair regulations. In consideration for the granting of the additional rights and benefits to Supervalu and the resolution of the various matters under the letter agreement, Supervalu paid
$35
to AB Acquisition, the parent entity of NAI and Albertson's LLC.
Haggen
In connection with Haggen's bankruptcy process, Haggen has now closed or sold all
164
of its stores. The transition and wind down of the Haggen transition services agreement occurred in the second quarter of fiscal 2017, with Supervalu now providing limited services in connection with the wind down of the Haggen estate. Supervalu filed approximately
$2
of administrative 503(b)(9) priority claims and approximately
$8
of unsecured claims with the bankruptcy court, including a number of contingent claims. On September 30, 2016, the bankruptcy court approved settlement agreements resolving Supervalu’s unsecured claims against Haggen. In accordance with the terms of the settlement agreements, Supervalu received approximately
$3
from Haggen on October 11, 2016, and Haggen is obligated to make further payments of approximately
$2
on account of Supervalu’s claims. Pursuant to the settlement agreement, Haggen has agreed not to pursue claw-backs of any transfers made to Supervalu. Supervalu could be exposed to claims from third parties from which Supervalu sourced products, services, licenses and similar benefits on behalf of Haggen. Supervalu has reserved for possible losses related to a portion of these third-party claims. It is reasonably possible that Supervalu could experience losses in excess of the amount of such reserves; however, at this time Supervalu cannot reasonably estimate a range of such excess losses because of the factual and legal issues related to whether Supervalu would have liability for any such third-party claims, if such third-party claims were asserted against Supervalu.
Information Technology Intrusions
Computer Network Intrusions
– In fiscal 2015, Supervalu announced it had experienced
two
separate criminal intrusions into the portion of its computer network that processes payment card transactions for some of its owned and franchised retail stores, including some of its associated stand-alone liquor stores.
Some stores owned and operated by Albertson's LLC and NAI experienced related criminal intrusions. Supervalu provides information technology services to these Albertson's LLC and NAI stores pursuant to the TSA. Supervalu believes that any losses incurred by Albertson's LLC or NAI as a result of the intrusions affecting their stores would not be Supervalu's responsibility.
Investigations and Proceedings
– As a result of the criminal intrusions, the payment card brands are conducting investigations and, although Supervalu’s network has previously been found to be compliant with applicable data security standards, the forensic investigator working on behalf of the payment card brands has concluded that Supervalu was not in compliance at the time of the intrusions and that the alleged non-compliance caused at least some portion of the compromise of payment card data that allegedly occurred during the intrusions. On August 1, 2016, MasterCard provided notice of its assessment of non-ordinary course expenses and incremental counterfeit fraud losses allegedly incurred by it or its issuers as a result of the criminal intrusions. On September 1, 2016, Supervalu submitted an appeal of the assessment to MasterCard and on December 5, 2016, MasterCard denied the appeal and imposed a reduced assessment. Supervalu expects the other payment card brands to also allege that Supervalu was not compliant with the applicable data security standards at the time of the intrusions and that such alleged non-compliance caused the compromise of payment card data during the intrusions. Supervalu believes these payment card brands will also make claims against Supervalu for non-ordinary course operating expenses and incremental counterfeit fraud losses allegedly incurred by them or their issuers by reason of the intrusions and Supervalu expects to dispute those claims. While Supervalu does not believe that a loss is probable by reason of these as yet unasserted claims, Supervalu believes that a loss in connection with these claims, should they be asserted, is reasonably possible; however, at this time Supervalu cannot reasonably estimate a range of possible losses because the payment card brands’ investigation is ongoing and the payment card brands have not alleged what payment cards they consider to have been compromised, what data from those cards they consider to have been compromised, or the amount of their and/or their issuers' claimed losses. Similar to the assessment imposed by MasterCard, Supervalu does not currently believe that any amount that may be paid for other payment card brand claims that might be asserted will be material to Supervalu’s consolidated results of operations, cash flows or financial condition. In addition, one payment card brand has placed Supervalu in a “probationary status” for a period of
two
years following Supervalu's re-validation as PCI-DSS compliant, during which time Supervalu's failure to comply with the probationary requirements set forth by the payment card brand could result in the imposition of further conditions, including but not limited to disqualification from the payment system. Supervalu does not anticipate material costs to comply with the probationary requirements.
On October 23, 2015, Supervalu received a letter from a multistate group of Attorneys General seeking information regarding the intrusions. Supervalu is cooperating with the request. To date, no claims have been asserted against Supervalu related to this inquiry. If any claims are asserted, Supervalu expects to dispute those claims.
As discussed in more detail below in this Note 13 under
Legal Proceedings
,
four
class action complaints related to the intrusions have been filed against Supervalu and consolidated into
one
action and are currently pending. As indicated below, Supervalu believes that the likelihood of a material loss from the four class actions is remote. It is possible that other similar complaints by consumers, banks or others may be filed against Supervalu in connection with the intrusions.
Insurance Coverage and Expenses
– Supervalu had
$50
of cyber threat insurance above a per incident deductible of
$1
at the time of the intrusions, which it believes should mitigate the financial effect of these intrusions, including claims made or that might be made against Supervalu based on these intrusions. Supervalu now maintains
$90
of cyber threat insurance above a per incident deductible of approximately
$3
, in each case subject to certain sublimits.
Other Contractual Commitments
In the ordinary course of business, Supervalu enters into supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of
June 17, 2017
, Supervalu had approximately
$293
of non-cancelable future purchase obligations.
Legal Proceedings
Supervalu is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business. In the opinion of management, based upon currently available facts, the likelihood that the ultimate outcome of any lawsuits, claims and other proceedings will have a material adverse effect on the overall results of Supervalu’s operations, its cash flows or its financial position is remote.
In September 2008, a class action complaint was filed against Supervalu, as well as International Outsourcing Services, LLC (“IOS”); Inmar, Inc.; Carolina Manufacturer’s Services, Inc.; Carolina Coupon Clearing, Inc. and Carolina Services in the United States District Court in the Eastern District of Wisconsin. The plaintiffs in the case are a consumer goods manufacturer, a grocery co-operative and a retailer marketing services company that allege on behalf of a purported class that Supervalu and the other defendants (i) conspired to restrict the markets for coupon processing services under the Sherman Act and (ii) were part of an illegal enterprise to defraud the plaintiffs under the Federal Racketeer Influenced and Corrupt Organizations Act. The plaintiffs seek monetary damages, attorneys’ fees and injunctive relief. All proceedings had been stayed in the case pending the result of the criminal prosecution of certain former officers of IOS. The final criminal trial concluded in December 2016. The
District Court has indicated that it will release the stay of the civil case and issue a scheduling order. At a mediation on May 22, 2017, Supervalu reached a preliminary settlement for a nominal amount, subject to certain non-monetary terms that Supervalu is in the process of negotiating.
In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against Supervalu alleging that a 2003 transaction between Supervalu and C&S Wholesale Grocers, Inc. (“C&S”) was a conspiracy to restrain trade and allocate markets. In the 2003 transaction, Supervalu purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain assets of Supervalu to C&S that were located in New England.
Three
other retailers filed similar complaints in other jurisdictions and the cases were consolidated and are proceeding in the United States District Court in Minnesota. The complaints allege that the conspiracy was concealed and continued through the use of non-compete and non-solicitation agreements and the closing down of the distribution facilities that Supervalu and C&S purchased from each other. Plaintiffs are seeking monetary damages, injunctive relief and attorneys’ fees. On July 5, 2011, the District Court granted Supervalu’s Motion to Compel Arbitration for those plaintiffs with arbitration agreements and plaintiffs appealed. On July 16, 2012, the District Court denied plaintiffs’ Motion for Class Certification and on January 11, 2013, the District Court granted Supervalu’s Motion for Summary Judgment and dismissed the case regarding the non-arbitration plaintiffs. On February 12, 2013, the 8th Circuit reversed the District Court decision requiring plaintiffs with arbitration agreements to arbitrate and remanded to the District Court. On October 30, 2013, the parties attended a District Court ordered mandatory mediation, which was not successful in resolving the matter. On May 21, 2014, the 8th Circuit (1) reversed the District Court’s decision granting summary judgment in favor of Supervalu, and (2) affirmed the District Court’s decision denying class certification of a class consisting of all retailers located in the States of Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio and Wisconsin that purchased wholesale grocery products from Supervalu between December 31, 2004 and September 13, 2008, but remanded the case for the District Court to consider whether to certify a narrower class of purchasers supplied from Supervalu’s Champaign, Illinois distribution center and potentially other distribution centers. On June 19, 2015, the District Court Magistrate Judge entered an order that decided a number of matters including granting plaintiffs' request to seek class certification for certain Midwest Distribution Centers and denying plaintiffs' request to add an additional New England plaintiff and denying plaintiffs’ request to seek class certification for a group of New England retailers. On August 20, 2015, the District Court affirmed the Magistrate Judge’s order. In September 2015, the plaintiffs appealed to the 8th Circuit the denial of the request to add an additional New England plaintiff and to seek class certification for a group of New England retailers and the hearing before the 8th Circuit occurred on May 17, 2016. On March 1, 2016, the plaintiffs filed a class certification motion seeking to certify
five
District Court classes of retailers in the Midwest and Supervalu filed its response on May 6, 2016. On September 7, 2016, the District Court granted plaintiffs’ motion to certify
five
Midwest distribution center classes, only
one
of which is suing Supervalu (the non-arbitration Champaign distribution center class). On March 1, 2017, the 8th Circuit denied plaintiffs' appeals seeking to join an additional New England plaintiff and the appeal seeking the ability to move for class certification of a smaller New England class. At a mediation on May 25, 2017, Supervalu reached a settlement with the non-arbitration Champaign distribution center class, which is the one Midwest class suing Supervalu. Supervalu and the plaintiffs have executed a final settlement agreement and the settlement is subject to preliminary and final court approval. The material terms of the settlement include: (1) denial of wrongdoing and liability by Supervalu; (2) release of all claims against Supervalu related to the allegations and transactions at issue in the litigation that were raised or could have been raised by the non-arbitration Champaign distribution center class; and (3) payment by Supervalu of
$9
. There is no contribution between C&S and Supervalu, and C&S did not settle the claims alleged against them. The New England Village Markets plaintiff is not a party to the settlement and is pursuing its individual claims against Supervalu, which at this time are determined as remote.
In August and November 2014,
four
class action complaints were filed against Supervalu relating to the criminal intrusions into its computer network announced by Supervalu in fiscal 2015 (the “Criminal Intrusion”). The cases were centralized in the Federal District Court for the District of Minnesota under the caption
In Re: SUPERVALU Inc. Customer Data Security Breach Litigation
. On June 26, 2015, the plaintiffs filed a Consolidated Class Action Complaint. Supervalu filed a Motion to Dismiss the Consolidated Class Action Complaint and the hearing took place on November 3, 2015. On January 7, 2016, the District Court granted the Motion to Dismiss and dismissed the case without prejudice, holding that the plaintiffs did not have standing to sue as they had not met their burden of showing any compensable damages. On February 4, 2016, the plaintiffs filed a motion to vacate the District Court's dismissal of the complaint or in the alternative to conduct discovery and file an amended complaint, and Supervalu filed its response in opposition on March 4, 2016. On April 20, 2016, the District Court denied plaintiffs' motion to vacate the District Court's dismissal or in the alternative to amend the complaint. On May 18, 2016, plaintiffs appealed to the 8th Circuit and on May 31, 2016, Supervalu filed a cross-appeal to preserve its additional arguments for dismissal of the plaintiffs' complaint. The hearing on the 8th Circuit appeal occurred on May 10, 2017. The court has not issued a decision.
On June 30, 2015, Supervalu received a letter from the Office for Civil Rights of the U.S. Department of Health and Human Services (“OCR”) seeking documents and information regarding Supervalu’s HIPAA breach notification and reporting from
2009 to the present. The letter indicates that the OCR Midwest Region is doing a compliance review of Supervalu’s alleged failure to report small breaches of protected health information related to its pharmacy operations (e.g., any incident involving less than 500 individuals). On September 4, 2015, Supervalu submitted its response to OCR’s letter. While Supervalu does not believe that a loss is probable by reason of the compliance review, Supervalu believes that a loss is reasonably possible; however, at this time Supervalu cannot estimate a range of possible losses because the OCR's review is at the early stages and Supervalu does not know if OCR will find a violation(s) and, if so, what violation(s) and whether OCR will proceed with corrective action, issuance of penalties or monetary settlement. The potential penalties related to the issues being investigated are up to
$50
thousand per violation (which can be counted per day) with a
$1.5
per calendar year maximum for multiple violations of a single provision (with the potential for finding violations of multiple provisions each with a separate
$1.5
per calendar year maximum); however, as noted above, any actual penalties will be determined only after consideration by OCR of various factors, including the nature of any violation, remedial actions taken by Supervalu and other factors determined relevant by OCR.
On September 21, 2016, Supervalu received an administrative subpoena issued by the Drug Enforcement Administration (“DEA”) on September 9, 2016. In addition to requesting information on Supervalu's pharmacy policies and procedures generally, the subpoena also requested the production of documents that are required to be kept and maintained by Supervalu pursuant to the Controlled Substances Act and its implementing regulations. On November 23, 2016, Supervalu responded to the subpoena and is cooperating fully with DEA's additional requests for information. While Supervalu cannot predict the outcome of this matter at this time, Supervalu does not believe that a monetary loss is probable. However, Supervalu believes that a monetary loss is reasonably possible, but cannot estimate the amount of any such loss as Supervalu does not know what violation(s) the DEA will find and whether the DEA will pursue corrective action or monetary penalties.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. Supervalu regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures.
With respect to the IOS, C&S, Criminal Intrusion and OCR matters discussed above, Supervalu believes the chance of a material loss is remote. It is possible, although management believes that the likelihood is remote, that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on Supervalu’s financial condition, results of operations or cash flows.
NOTE 14—DISCONTINUED OPERATIONS
Supervalu determined that the Save-A-Lot business met the criteria to be held-for-sale and classified as a discontinued operation during the third quarter of fiscal 2017. The Save-A-Lot business was previously disclosed as a separate reporting segment of Supervalu. The assets, liabilities, operating results, and cash flows of the Save-A-Lot business have been presented separately as discontinued operations in the Condensed Consolidated Financial Statements for all periods presented. In addition, discontinued operations include the results of operations and cash flows attributed to the assets and liabilities of the NAI business.
The major classes of operating results classified as discontinued operations within the Condensed Consolidated Statements of Operations were as follows:
|
|
|
|
|
|
|
|
|
|
First Quarter Ended
|
|
June 17,
2017
(16 weeks)
|
|
June 18,
2016
(16 weeks)
|
Net sales
|
$
|
—
|
|
|
$
|
1,432
|
|
Cost of sales
|
—
|
|
|
1,203
|
|
Gross profit
|
—
|
|
|
229
|
|
Selling and administrative expenses
|
1
|
|
|
184
|
|
Operating (loss) earnings
|
(1
|
)
|
|
45
|
|
Interest expense, net
|
—
|
|
|
1
|
|
(Loss) earnings from discontinued operations before income taxes
|
(1
|
)
|
|
44
|
|
Income tax (benefit) provision
|
(1
|
)
|
|
17
|
|
Income from discontinued operations, net of tax
|
$
|
—
|
|
|
$
|
27
|
|
NOTE 15—SUBSEQUENT EVENTS
Refer to
Note 2—Business Acquisitions
for information regarding the acquisition of Unified, which closed on June 23, 2017.
Refer to
Note 6—Long-Term Debt
for information regarding the delayed draw borrowings under the Secured Term Loan Facility that were exercised to partially finance the acquisition of Unified on June 23, 2017.
Refer to
Note 8—Net Earnings Per Share
for information regarding the reserve stock split to be effective at the close of business on August 1, 2017.