NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars and shares in millions, except per share data, unless otherwise noted)
NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Business Description and Principles of Consolidation
SUPERVALU INC. and its subsidiaries (“Supervalu” or the “Company”) operates primarily in the United States grocery channel. Supervalu provides supply chain services, primarily wholesale distribution and support services, and operates five retail grocery banners in six geographic regions under the Cub Foods, Shoppers Food & Pharmacy, Shop ’n Save, Farm Fresh and Hornbacher’s banners. The Consolidated Financial Statements include the accounts of Supervalu and all its wholly and majority-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
On December 5, 2016, Supervalu completed the sale of Supervalu’s Save-A-Lot business to SAL Acquisition Corp (f/k/a Smith Acquisition Corp), an affiliate of Onex Partners Managers LP, for a purchase price of
$1,365
in cash, subject to customary closing adjustments that reduced the purchase price by approximately
$61
. The sale of Save-A-Lot was completed pursuant to the terms of the Agreement and Plan of Merger, dated as of October 16, 2016 (the “SAL Merger Agreement”), by and among SAL Acquisition Corp, SAL Merger Sub Corp (f/k/a Smith Merger Sub Corp), a newly formed wholly owned subsidiary of the SAL Acquisition Corp, Supervalu and Moran Foods, LLC, a wholly owned subsidiary of Supervalu prior to the sale (“Moran Foods”). Concurrently with entering into the SAL Merger Agreement, Supervalu and Moran Foods also entered into a Separation Agreement (the “Separation Agreement”) pursuant to which, among other things, the assets and liabilities of the Save-A-Lot business were transferred to and assumed by Moran Foods prior to the completion of the sale. Also in connection with the completion of the sale, Supervalu and Moran Foods entered into a Services Agreement, whereby Supervalu is providing certain professional services to Save-A-Lot for a period of
five
years, on and subject to the terms and conditions set forth therein. The assets, liabilities, operating results, and cash flows of Save-A-Lot have been presented separately as discontinued operations in the 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 New Albertson’s, Inc. business that Supervalu sold during fiscal 2013. See
Note 17—Discontinued Operations
for additional information regarding these discontinued operations.
Unless otherwise indicated, references to the Consolidated Statements of Operations and the Consolidated Balance Sheets in the Notes to the Consolidated Financial Statements exclude all amounts related to discontinued operations.
Fiscal Year
Supervalu operates on a 52/53 week fiscal year basis, with its fiscal year ending on the last Saturday in February. All references to fiscal
2017
,
2016
and
2015
relate to the 52-week fiscal year ended
February 25, 2017
, the 52-week fiscal year ended
February 27, 2016
and the 53-week fiscal year ended
February 28, 2015
, respectively.
Use of Estimates
The preparation of Supervalu’s 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 for the reporting periods presented. Actual results could differ from those estimates.
Revenue Recognition
Revenues from Wholesale product sales are recognized upon delivery or shipment. Revenues from Retail product sales are recognized at the point of sale. Typically, invoicing, shipping, delivery and customer receipt of Wholesale product occur on the same business day. Revenues from fixed price services contracts are recognized on a straight-line basis unless revenues are earned and performance obligations are fulfilled under a different pattern. In certain circumstances, Supervalu provides incentives to Wholesale customers through upfront cash payments. Incentives are recognized as a reduction of Net sales over the term of the incentive agreements when clawback rights exist for such payments, which typically coincides with the term of the supply agreements. When no clawback provisions exist, these incentives are recognized immediately. Discounts and allowances provided to customers by Supervalu at the time of sale are recognized as a reduction in Net sales as the products are sold to customers. Sales tax is excluded from Net sales.
Revenues and costs from professional services and third-party logistics operations are recorded gross when Supervalu is the primary obligor in a transaction, is subject to inventory or credit risk, has latitude in establishing price and selecting suppliers, or has several, but not all, of these indicators. If Supervalu is not the primary obligor and amounts earned have little or no inventory or credit risk, revenue is recorded net as management fees when earned.
Revenue is recognized only when evidence of an arrangement exists, the price is fixed and determinable, the products and services have been rendered and collectability is reasonably assured.
Cost of Sales
Cost of sales
in the Consolidated Statements of Operations includes cost of inventory sold during the period, including purchasing, receiving, warehousing and distribution costs, and shipping and handling fees.
Retail store advertising expenses and Wholesale advertising services provided to Wholesale customers are components of
Cost of sales
and are expensed as incurred. Retail advertising expenses, net of cooperative advertising reimbursements, were
$32
,
$29
and
$28
for fiscal
2017
,
2016
and
2015
, respectively.
Supervalu receives allowances and credits from vendors for volume incentives, promotional allowances and, to a lesser extent, new product introductions, which are typically based on contractual arrangements covering a period of one year or less. Supervalu recognizes vendor funds for merchandising and buying activities as a reduction of
Cost of sales
when the related products are sold. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. When payments or rebates can be reasonably estimated and it is probable that the specified target will be met, the payment or rebate is accrued. However, when attaining the milestone is not probable, the payment or rebate is recognized only when and if the milestone is achieved. Any upfront payments received for multi-period contracts are generally deferred and amortized on a straight-line basis over the life of the contracts.
Selling and Administrative Expenses
Selling and administrative expenses
consist primarily of store and corporate employee-related costs, such as salaries and wages, incentive compensation, health and welfare and workers’ compensation, as well as net periodic pension expense, occupancy costs, including rent, utilities and operating costs of retail stores, depreciation and amortization, impairment charges on property, plant and equipment and other administrative costs. The shared service center costs incurred to support back office functions related to services agreements represent administrative overhead and are recorded in Selling and administrative expenses.
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. Cash and cash equivalents include amounts due from credit card sales transactions that are settled early in the following period. 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 book overdrafts, which are recorded in
Accounts payable
in the Consolidated Balance Sheets and are reflected as an operating activity in the Consolidated Statements of Cash Flows. As of
February 25, 2017
and
February 27, 2016
, Supervalu had net book overdrafts of
$91
and
$79
, respectively.
Allowances for Losses on Receivables
Management makes estimates of the uncollectability of its accounts and notes receivable. In determining the adequacy of the allowances, management analyzes customer creditworthiness, aging of receivables, the value of the collateral, customer financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments, estimations and assumptions based on the information considered and result in a further deterioration of accounts and notes receivable. Bad debt (income) expense was
$(5)
,
$3
and
$0
in fiscal 2017, 2016 and 2015, respectively.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of Supervalu’s inventory consists of finished goods.
Supervalu uses the weighted average cost method, the retail inventory method (“RIM”) or replacement cost method to value discrete inventory items at lower of cost or market under the first-in, first-out (“FIFO”) method before application of any last-
in, first-out (“LIFO”) reserve. As of
February 25, 2017
and
February 27, 2016
, approximately
73 percent
and
75 percent
, respectively, of Supervalu’s inventories were valued under the LIFO method.
As of
February 25, 2017
and
February 27, 2016
, approximately
9 percent
of Supervalu’s inventories were valued under the replacement cost method before application of any LIFO reserve. The weighted average cost and RIM methods of inventory valuation together comprised approximately
91 percent
and
91 percent
of inventory as of
February 25, 2017
and
February 27, 2016
, respectively, before application of any LIFO reserve.
Under the replacement cost method applied on a LIFO basis, the most recent purchase cost is used to calculate the current cost of inventory before application of any LIFO reserve. The replacement cost approach results in inventories being valued at the lower of cost or market because of the high inventory turnover and the resulting low inventory days supply on hand combined with infrequent vendor price changes for these items of inventory.
The replacement cost approach under the FIFO method is predominantly utilized in determining the value of high turnover perishable items, including produce, deli, bakery, meat and floral, and pharmacy inventory.
As of
February 25, 2017
and
February 27, 2016
, approximately
25 percent
and
23 percent
, respectively, of Supervalu’s inventories were valued using the weighted average cost, RIM and replacement cost methods under the FIFO method of inventory accounting. The remaining
2 percent
and
2 percent
of Supervalu’s inventories as of
February 25, 2017
and
February 27, 2016
, respectively, were valued using the replacement cost approach under the FIFO method of inventory accounting. The replacement cost approach applied under the FIFO method results in inventories recorded at the lower of cost or market because of the very high inventory turnover and the resulting low inventory days supply for these items of inventory.
During fiscal
2017
and
2016
, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal
2017
and
2016
purchases. As a result, Cost of sales decreased by
$2
and
$1
in fiscal
2017
and
2016
, respectively. If the FIFO method had been used to determine cost of inventories for which the LIFO method is used, Supervalu’s inventories would have been higher by approximately
$216
and
$215
as of
February 25, 2017
and
February 27, 2016
, respectively.
Supervalu evaluates inventory shortages throughout each fiscal year based on actual physical counts in its stores and distribution facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year.
Property, Plant and Equipment, Net
Property, plant and equipment are carried at cost. Depreciation is based on the estimated useful lives of the assets using the straight-line method. Estimated useful lives generally are
ten
to
40
years for buildings and major improvements,
three
to
ten
years for equipment, and the shorter of the term of the lease or expected life for leasehold improvements and capitalized lease assets. Interest on property under construction of
$1
,
$1
and
$1
was capitalized in fiscal
2017
,
2016
and
2015
, respectfully.
Business Dispositions
Supervalu reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred.
The review consists of evaluating whether the business meets the definition as a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the disposition represents a strategic transaction that has a major effect on operations and financial results. In addition, Supervalu evaluates whether the business has met the criteria as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.
Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within
Income from discontinued operations, net of tax
in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets. See
Note 17—Discontinued Operations
for additional information.
Businesses held for sale are reviewed for recoverability of the carrying value of the business upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite
lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized. The carrying value of a held for sale business includes the portion of the accumulated other comprehensive loss associated with pension and postretirement benefit obligations of the operations of the business.
There are inherent judgments and estimates used in determining impairment charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.
Goodwill
Supervalu reviews goodwill for impairment during the fourth quarter of each year, and at other points in the fiscal year if events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying value. The reviews consist of comparing estimated fair value to the carrying value at the reporting unit level. Supervalu’s reporting units are the operating segments of the business, which consist of Wholesale and Retail. Goodwill was assigned to these reporting units as of the applicable acquisition dates, with no amounts being allocated between reporting units. Fair values are determined by using both the market approach, applying a multiple of earnings and revenue based on guidelines for publicly traded companies, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on Supervalu’s industry, capital structure and risk premiums in each reporting unit, including those reflected in the current market capitalization. If management identifies the potential for impairment of goodwill, the implied fair value of the goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value.
Supervalu reviews the composition of its reporting units on an annual basis and on an interim basis if events or circumstances indicate that the composition of Supervalu’s reporting units may have changed. There were no changes in Supervalu’s reporting units as a result of the fiscal
2017
review. During the fiscal
2016
review, Supervalu separated the Save-A-Lot reporting unit into the Licensee Distribution and Corporate Stores reporting units. See
Note 6—Goodwill and Intangible Assets
for additional information.
Intangible Assets, Net
Supervalu reviews intangible assets with indefinite useful lives, which primarily consist of trademarks and tradenames, for impairment during the fourth quarter of each year, and also if events or changes in circumstances indicate that the asset might be impaired. The reviews consist of comparing estimated fair value to the carrying value. Fair values of Supervalu’s trademarks and tradenames are determined primarily by discounting an assumed royalty value applied to management’s estimate of projected future revenues associated with the tradename using management’s expectations of the current and future operating environment. The royalty cash flows are discounted using rates based on the weighted average cost of capital discussed above and the specific risk profile of the tradenames relative to Supervalu’s other assets. These estimates are impacted by variable factors, including inflation, the general health of the economy and market competition. The impairment review calculation contains significant judgments and estimates, including the weighted average cost of capital, any specified risk profile of the tradename, and future revenue and profitability. See
Note 6—Goodwill and Intangible Assets
for additional information.
Impairment of Long-Lived Assets
Supervalu monitors the recoverability of its long-lived assets such as buildings and equipment, and evaluates their carrying value for impairment whenever events or changes in circumstances indicate that the carrying value of such assets may not be fully recoverable. Events that may trigger such an evaluation include current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or Supervalu’s plans for closures. When such events or changes in circumstances occur, a recoverability test is performed by comparing projected undiscounted future cash flows to the carrying value of the group of assets being tested.
If impairment is identified for long-lived assets to be held and used, the fair value is compared to the carrying value of the group of assets and an impairment charge is recorded for the excess of the carrying value over the fair value. For long-lived assets that are classified as assets held for sale, Supervalu recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the estimated fair value. Fair value is based on current market values or discounted future cash flows using Level 3 inputs. Supervalu estimates fair value based on Supervalu’s experience and knowledge of the market in which the property is located, including the use of local real estate brokers and advisers. Supervalu’s estimate of undiscounted cash flows attributable to the asset groups includes only future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. Long-lived asset impairment charges are a component of
Selling and administrative expenses
in the Consolidated Statements of Operations.
Supervalu groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets, which historically has predominately been at the geographic market level for retail stores, but individual store asset groupings have been assessed in certain circumstances.
Retail’s long-lived assets are reviewed for impairment at the geographic market group level for
six
geographic marke
t groupings of individual retail stores. Wholesale’s long-lived assets are reviewed for impa
irment at the distribution center level.
Due to the ongoing business transformation and highly competitive environment, Supervalu will continue to evaluate its long-lived asset policy and current asset groups to determine if additional modifications to the policy are necessary. Future changes to Supervalu’s assessment of its long-lived asset policy and changes in circumstances, operating results or other events may result in additional asset impairment testing and charges.
Reserves for Closed Properties
Supervalu maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. Supervalu provides for closed property operating lease liabilities using a discount rate to calculate the present value of the remaining noncancellable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. Lease reserve impairment charges are recorded as a component of
Selling and administrative expenses
in the Consolidated Statements of Operations.
The closed property lease liabilities usually are paid over the remaining lease terms, which generally range from
one
to
15
years. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.
The calculation of the closed property charges requires significant judgments and estimates, including estimated subtenant rentals, discount rates and future cash flows based on Supervalu’s experience and knowledge of the market in which the closed property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions. Reserves for closed properties are included in
Other current liabilities
and
Other long-term liabilities
in the Consolidated Balance Sheets.
Deferred Rent
Supervalu recognizes rent holidays, including the time period during which Supervalu has access to the property prior to the opening of the site, as well as construction allowances and escalating rent provisions, on a straight-line basis over the term of the operating lease. The deferred rents are included in
Other current liabilities
and
Other long-term liabilities
in the Consolidated Balance Sheets.
Self-Insurance Liabilities
Supervalu uses a combination of insurance and self-insurance for workers’ compensation, automobile and general liability costs. It is Supervalu’s policy to record its insurance liabilities based on management’s estimate of the ultimate cost of reported claims and claims incurred but not yet reported and related expenses, discounted at a risk-free interest rate. The present value of such claims was calculated using dis
count rates ranging from
0.3 percent
to
5.1 percent
fo
r fiscal
2017
,
0.3 percent
to
5.1 percent
for fiscal
2016
and
0.3 percent
to
5.1 percent
for fiscal
2015
.
Changes in Supervalu’s insurance liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
69
|
|
|
$
|
67
|
|
|
$
|
74
|
|
Expense
|
16
|
|
|
17
|
|
|
20
|
|
Claim payments
|
(18
|
)
|
|
(16
|
)
|
|
(20
|
)
|
Reclassification of insurance recoveries to receivables
|
—
|
|
|
1
|
|
|
(7
|
)
|
Ending balance
|
67
|
|
|
69
|
|
|
67
|
|
Less current portion
|
(21
|
)
|
|
(22
|
)
|
|
(21
|
)
|
Long-term portion
|
$
|
46
|
|
|
$
|
47
|
|
|
$
|
46
|
|
The current portion of reserves for self-insurance is included in
Other current liabilities
and the long-term portion is included in
Other long-term liabilities
in the Consolidated Balance Sheets. The insurance liabilities as of the end of the fiscal year are net of discounts of
$5
and
$5
as of
February 25, 2017
and
February 27, 2016
, respectively. Amounts due from insurance companies were
$9
and
$9
as of
February 25, 2017
and
February 27, 2016
, respectively. The current portion of the insurance receivables is included in Receivables, net and the long-term portion is included in Other assets in the Consolidated Balance Sheets.
Benefit Plans
Supervalu recognizes the funded status of its Company-sponsored defined benefit plans in its Consolidated Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Accumulated other comprehensive loss, net of tax, in the Consolidated Balance Sheets. Supervalu sponsors pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. The determination of Supervalu’s obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in healthcare and compensation costs. These assumptions are disclosed in
Note 10—Benefit Plans
. Actual results that differ from the assumptions are accumulated and amortized over future periods in accordance with generally accepted accounting standards.
Supervalu contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. Pension expense for these plans is recognized as contributions are funded. See
Note 10—Benefit Plans
for additional information on Supervalu’s participation in multiemployer plans.
Supervalu also contributes to an employee 401(k) retirement savings plan.
Fair Value Measurements
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
|
|
Level 1 -
|
Quoted prices in active markets for identical assets or liabilities.
|
|
|
Level 2 -
|
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable.
|
|
|
Level 3 -
|
Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions that market participants would use to value the asset or liability.
|
Supervalu utilized fair value measurements in reporting results of operations and financial position within its Consolidated Financial Statements for the following:
|
|
•
|
Acquired assets and liabilities discussed in
Note 2—Business Acquisitions
were measured at fair value using Level 3 inputs.
|
|
|
•
|
Impairment charges related to lease reserves and properties held and used and held for sale, as discussed in
Note 4—Reserves for Closed Properties and Property, Plant and Equipment-related Impairment Charges
, were measured at fair value using Level 3 inputs.
|
|
|
•
|
Goodwill and intangible asset impairment charges and acquired intangible assets, as discussed in
Note 6—Goodwill and Intangible Assets
, were measured at fair value using Level 3 inputs.
|
|
|
•
|
Assets and liabilities measured at fair value on a recurring basis using Level 1 and Level 2 inputs as discussed in
Note 7—Fair Value Measurements
.
|
|
|
•
|
Stock-based compensation awards were measured at their grant date fair value upon issuance using Level 3 inputs as discussed in
Note 13—Stock-based Awards
.
|
|
|
•
|
Discontinued operations goodwill impairment charges were recorded in Income from discontinued operations, net of tax, as discussed in
Note 17—Discontinued Operations
, and were measured at fair value using Level 3 inputs.
|
Derivatives
Supervalu uses derivatives only to manage well-defined risks. Supervalu does not use financial instruments or derivatives for any trading or other speculative purposes.
Interest rate swap contracts are entered into to mitigate Supervalu’s exposure to changes in market interest rates. These contracts are reviewed for hedging effectiveness at hedge inception and on an ongoing basis. If these contracts are designated as a cash flow hedge and are determined to be highly effective, changes in the fair value of these instruments are recognized in Accumulated other comprehensive loss in the Consolidated Balance Sheets and reclassified into earnings in the period in which the hedged transaction affects earnings. Hedging ineffectiveness, if any, is recognized in earnings in the Consolidated Statements of Operations.
Supervalu’s limited involvement with diesel fuel derivatives is primarily to manage its exposure to changes in fuel prices utilized in the shipping process. These contracts are economic hedges of price risk and are not designated or accounted for as
hedging instruments for accounting purposes. Changes in the fair value of these instruments are recognized in earnings in the Consolidated Statements of Operations.
In addition, Supervalu enters into energy commitments for certain amounts of electricity and natural gas purchases that it expects to utilize in the normal course of business. Changes in the fair value of these purchase obligations are not recognized in earnings until the underlying commitment is utilized in the normal course of business.
Stock-Based Compensation
Stock-based compensation expense is measured by the fair value of the award on the date of grant, net of the estimated forfeiture rate. Supervalu uses the straight-line method to recognize stock-based compensation expense over the requisite service period related to each award.
The fair value of stock options is estimated as of the date of grant using the Black-Scholes option pricing model using Level 3 inputs. The fair value of performance stock units is estimated as of the date of the grant using the Monte Carlo option pricing model using Level 3 inputs.
The estimation of the fair value of stock options incorporates certain assumptions, such as the risk-free interest rate and expected volatility, dividend yield and life of options. Restricted stock awards and restricted stock units are recorded as stock-based compensation expense over the requisite service period based on the market value of Supervalu’s common stock on the date of grant.
Income Taxes
Deferred income taxes represent future net tax effects resulting from temporary differences between the financial statement amounts and tax bases of assets and liabilities and are measured using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. See
Note 14—Income Taxes
for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income tax assets are reported as a noncurrent asset or liability based on the classification of the related asset or liability or according to the expected date of reversal.
Supervalu is currently in various stages of audits, appeals or other methods of review with authorities from various taxing jurisdictions. Supervalu establishes liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite management’s belief that Supervalu’s tax return positions are supportable, certain positions may be challenged and may need to be revised. Supervalu adjusts these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. Supervalu also provides interest on these liabilities at the appropriate statutory interest rate, and accrues penalties as applicable. Supervalu recognizes interest related to unrecognized tax benefits in Interest expense and penalties in
Selling and administrative expenses
in the Consolidated Statements of Operations.
Recently Adopted Accounting Standards
In May 2015, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under Accounting Standard Update (“ASU”) 2015-07,
Fair Value Measurement: Disclosures for Investments in Certain Entities That Calculate Net Asset Value per Share (or its Equivalent)
. ASU 2015-07 amended ASC 820, Fair Value Measurements and Disclosures, to remove the requirement to categorize within the fair value hierarchy all investments for which fair value is measured using the net asset value per share practical expedient. The amendment also removes the requirement to make certain disclosures for these investments. ASU 2015-07 has been adopted retrospectively in Supervalu’s consolidated financial statements for the year ended February 25, 2017. Disclosures within
Note 10—Benefit Plans
have been updated to reflect the revised guidance.
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 January 2017, the FASB issued authoritative guidance under ASU 2017-04,
Intangibles—Goodwill and Other (Topic 350).
ASU 2017-04 simplifies the subsequent measurement of goodwill by eliminating step 2 of the goodwill impairment test. If a reporting unit fails step 1 of the goodwill impairment test, entities are no longer required to compute the implied fair value of goodwill following the same procedure that would be required in determining the fair value of assets acquired and liabilities
assumed in a business combination. Instead, the guidance requires an entity to perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying value, and recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. Supervalu is required to adopt this new guidance in the first quarter of fiscal 2021. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. 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 March 2016, the FASB issued authoritative guidance under 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 is required to adopt this new guidance in the first quarter of fiscal 2018. 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 authoritative guidance in the first quarter of fiscal 2020. Supervalu is currently evaluating the potential adoption impact on its financial statements. For a quantification of Supervalu’s off-balance sheet operating leases subject to capitalization under ASU 2016-02, besides 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 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;
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 approach it will apply and the potential impact of the adoption on its consolidated financial statements.
Supervalu is currently in the process of evaluating the impact of adoption of the revised revenue standards on its consolidated financial statements. Supervalu believes that there will be few, if any, 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 and is currently in the assessment phase of determining the impact of the revised guidance. 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
The Consolidated Financial Statements reflect the final purchase accounting allocations of the acquisitions discussed below. Pro forma information for the acquisitions discussed below are not presented since the results of operations of the acquired businesses, both individually and in the aggregate, are not material to Supervalu’s Consolidated Financial Statements.
During fiscal 2017, Supervalu paid
$17
to acquire
22
Food Lion stores located in northern West Virginia, western Maryland, south central Pennsylvania and northwestern Virginia, and separately paid
$2
to acquire inventories and buildings of
two
retail stores. The acquisition of the Food Lion stores included certain store assets, including inventories, property, plant, and equipment, and capital and operating leases. The fair value of the
22
Food Lion stores acquired was
$17
, including property, plant and equipment of
$18
, inventories of
$8
, favorable operating lease intangibles of
$1
and other current assets of
$1
, and the assumption of capital lease obligations of
$11
. The acquired Food Lion stores were converted to Supervalu’s Shop ‘n Save format that is currently used by certain of Supervalu’s Wholesale customers in that region. The results of these stores are included within Retail.
During fiscal 2016, Supervalu paid
$7
to acquire
equipment and leasehold improvements, identifiable finite-lived intangible assets and inventories of
four
retail stores from multiple Wholesale customers. The purchase price was allocated to the acquired store assets and such assets were recognized at their estimated fair values and included inventories, property, plant and equipment, and goodwill.
During fiscal 2015, Supervalu completed the purchase of
seven
Rainbow Foods grocery stores,
11
Rainbow Foods pharmacy locations and
one
Rainbow Foods liquor store from RBF, LLC and Roundy’s Supermarkets, Inc.
Five
of the grocery stores, each of the pharmacies and the liquor store are operating under the Cub Foods banner, and
two
of the grocery stores are operating as Rainbow Foods grocery stores. Total consideration for the stores and pharmacies acquired by Supervalu was
$34
plus cash payments of
$5
for inventories. Supervalu assumed certain off-balance sheet obligations, including operating leases and multiemployer pension obligations with respect to the acquired stores. In addition, Supervalu also acquired the RAINBOW™ trademark. The fair value of assets acquired was
$39
, including property, plant and equipment of
$15
, goodwill of
$14
, inventories of
$5
, identifiable finite-lived intangible assets of
$4
and other current assets of
$1
.
NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in Supervalu’s allowance for doubtful accounts and notes receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
11
|
|
|
$
|
17
|
|
|
$
|
18
|
|
Additions charged to costs and expenses
|
2
|
|
|
3
|
|
|
1
|
|
Deductions
|
(7
|
)
|
|
(9
|
)
|
|
(2
|
)
|
Ending balance
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
17
|
|
NOTE 4—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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
24
|
|
|
$
|
31
|
|
|
$
|
42
|
|
Additions
|
3
|
|
|
3
|
|
|
2
|
|
Payments
|
(9
|
)
|
|
(9
|
)
|
|
(10
|
)
|
Adjustments
|
4
|
|
|
(1
|
)
|
|
(3
|
)
|
Ending balance
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
31
|
|
In fiscal
2017
, Supervalu closed
four
non-strategic leased Retail stores and one leased warehouse. Supervalu recorded an impairment charge of
$1
related to the operating leases for these locations within the Retail and Wholesale segments.
Property, Plant and Equipment Impairment Charges
The following table presents impairment charges related to property, plant and equipment measured at fair value on a non-recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Property, plant and equipment:
|
|
|
|
|
|
Carrying value
|
$
|
80
|
|
|
$
|
1
|
|
|
$
|
1
|
|
Fair value measured using Level 3 inputs
|
35
|
|
|
0
|
|
|
—
|
|
Impairment charges
|
$
|
45
|
|
|
$
|
1
|
|
|
$
|
1
|
|
In the third quarter of fiscal 2017, Supervalu performed interim impairment reviews of certain Retail geographic market asset groups in conjunction with its impairment review of goodwill and due to declines in sales and cash flows within Retail. The review indicated that there was no impairment for Supervalu’s long-lived assets within the asset groups. During the fourth quarter of fiscal 2017, the results of operations and cash flows of certain Retail asset groups continued to decline, and as a result, revised projected financial information was used in the fourth quarter asset impairment review, which resulted in one of the Retail asset groups failing its step 1 long-lived asset recoverability test. Accordingly, a fair value assessment was performed over one Retail banner’s long-lived assets. The carrying value of the assets within this asset group exceeded the estimated fair value and was reduced until all long-lived assets were recorded at the lower of their carrying value or fair value, resulting in an impairment charge of
$41
within Selling and administrative expenses and the Retail segment. Fiscal 2017 impairment charges also included impairment charges related to the closure of non-strategic Retail stores.
NOTE 5—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Land
|
$
|
81
|
|
|
$
|
78
|
|
Buildings
|
1,017
|
|
|
1,002
|
|
Property under construction
|
57
|
|
|
39
|
|
Leasehold improvements
|
487
|
|
|
501
|
|
Equipment
|
1,742
|
|
|
1,645
|
|
Capitalized lease assets
|
293
|
|
|
283
|
|
Total property, plant and equipment
|
3,677
|
|
|
3,548
|
|
Accumulated depreciation
|
(2,467
|
)
|
|
(2,332
|
)
|
Accumulated amortization on capitalized lease assets
|
(206
|
)
|
|
(195
|
)
|
Total property, plant and equipment, net
|
$
|
1,004
|
|
|
$
|
1,021
|
|
Depreciation expense was
$179
,
$184
and
$198
for fiscal
2017
,
2016
and
2015
, respectively. Amortization expense related to capitalized lease assets was
$17
,
$17
and
$18
for fiscal
2017
,
2016
and
2015
, respectively.
NOTE 6—GOODWILL AND INTANGIBLE ASSETS
Changes in Supervalu’s Goodwill and Intangible assets, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 28,
2015
|
|
Additions
|
|
Impairments
|
|
Other net
adjustments
|
|
February 27,
2016
|
|
Additions
|
|
Impairments
|
|
Other net
adjustments
|
|
February 25,
2017
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
710
|
|
Retail
|
14
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
—
|
|
|
(15
|
)
|
|
—
|
|
|
—
|
|
Total goodwill
|
$
|
724
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
725
|
|
|
$
|
—
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
710
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable operating leases, prescription files, customer lists and other
|
$
|
120
|
|
|
$
|
22
|
|
|
$
|
(6
|
)
|
|
$
|
(1
|
)
|
|
$
|
135
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
$
|
141
|
|
Tradenames and trademarks—indefinite useful lives
|
9
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
9
|
|
|
—
|
|
|
—
|
|
|
(4
|
)
|
|
5
|
|
Total intangible assets
|
129
|
|
|
22
|
|
|
(6
|
)
|
|
(1
|
)
|
|
144
|
|
|
2
|
|
|
—
|
|
|
—
|
|
|
146
|
|
Accumulated amortization
|
(88
|
)
|
|
(10
|
)
|
|
—
|
|
|
1
|
|
|
(97
|
)
|
|
(11
|
)
|
|
—
|
|
|
1
|
|
|
(107
|
)
|
Total intangible assets, net
|
$
|
41
|
|
|
|
|
|
|
|
|
$
|
47
|
|
|
|
|
|
|
|
|
$
|
39
|
|
Supervalu applies a fair value based impairment test to the net book value of goodwill and intangible assets with indefinite useful lives on an annual basis and on an interim basis if events or circumstances indicate that an impairment loss may have occurred.
During the third quarter of fiscal 2017, Supervalu conducted an interim impairment review of the carrying value of Supervalu’s reporting units in conjunction with its impairment review of Save-A-Lot’s goodwill and due to declines in sales and cash flows within Retail. The review indicated that the estimated fair value of the Wholesale reporting unit was substantially in excess of its carrying value. The review also indicated that the carrying value of the Retail reporting unit exceeded its estimated fair value, as determined utilizing the income approach and market approach. As a result, Supervalu performed the step 2 assessment and recorded a non-cash goodwill impairment charge of
$15
in the Retail segment during the third quarter of fiscal 2017. The calculation of the impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
Supervalu conducted an annual impairment review of the net book value of goodwill and intangible assets with indefinite useful lives during the fourth quarter of fiscal
2017
, which indicated that it is not more than likely that the fair value of each goodwill reporting unit is less than their respective carrying values and the carrying value of intangible assets were in excess of their fair value. As a result, the first and second steps of goodwill and intangible assets impairment testing was unnecessary.
In the first quarter ended June 20, 2015, Supervalu recorded intangible assets using valuations based on Level 3 inputs consisting primarily of certain distribution center operation rights, purchase options and other intangibles received by Supervalu under the letter agreement Supervalu entered into with Albertson’s dated May 28, 2015, as described in
Note 15—Commitments, Contingencies and Off-Balance Sheet Arrangements
.
In the third quarter ended December 5, 2015, Supervalu received a notice pursuant to which Supervalu could exercise certain purchase options under the letter agreement. As a result, Supervalu performed a review of the associated intangible assets for impairment, which indicated the carrying value of the intangible exceeded its estimated value. Supervalu recorded a non-cash intangible impairment charge of
$6
within its Wholesale segment.
Annual impairment testing and the related calculation of the impairment charges contain significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
Amortization expense of intangible assets with definite useful lives of
$11
,
$10
and
$8
was recorded in fiscal
2017
,
2016
and
2015
, respectively.
The estimated future amortization expense for the next five fiscal years on intangible assets outstanding as of
February 25, 2017
consists of the following:
|
|
|
|
|
Fiscal Year
|
|
2018
|
$
|
9
|
|
2019
|
5
|
|
2020
|
3
|
|
2021
|
3
|
|
2022
|
3
|
|
Thereafter
|
11
|
|
NOTE 7—FAIR VALUE MEASUREMENTS
Recurring fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 25, 2017
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
Other assets
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Total
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Diesel fuel derivatives
|
Other current liabilities
|
|
—
|
|
|
0
|
|
|
—
|
|
|
—
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 27, 2016
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Deferred compensation
|
Other assets
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
Total
|
|
|
$
|
6
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Diesel fuel derivatives
|
Other current liabilities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
8
|
|
|
$
|
—
|
|
|
$
|
8
|
|
Deferred Compensation
Deferred compensation assets consist of mutual fund investments used to fund certain deferred compensation plans. The fair values of deferred compensation assets are based on quoted market prices of the mutual funds held by the plan at each reporting period. Mutual funds traded in active markets are classified within Level 1 of the fair value hierarchy. Deferred compensation assets are restricted for use to pay deferred compensation liabilities. Deferred compensation liabilities consist of obligations to participants in deferred compensation plans, and are determined based on the fair value of the related deferred compensation plan investments or designated phantom investments of the plan at each reporting period.
Diesel Fuel Derivatives
Commodity derivatives consist of forward fixed price purchase diesel fuel contracts. The fair value of Supervalu’s diesel fuel derivatives is measured using Level 2 inputs due to Supervalu’s use of observable market quotations without significant adjustments to determine fair values.
Fuel derivative gains (losses) are included within
Cost of sales
in the Consolidated Statements of Operations and were
$0
,
$(3)
and
$(1)
for fiscal
2017
,
2016
and
2015
, respectively.
Interest Rate Swap Derivatives
In February 2016, Supervalu effectively converted
$300
of variable rate debt under Supervalu’s Secured Term Loan Facility to a fixed rate by swapping the variable LIBOR rate component to a fixed rate of
2.0075
percent, which matures in March 2019, concurrent with the Secured Term Loan Facility’s maturity. On May 20, 2016, Supervalu entered into a third amendment to the Secured Term Loan Facility which increased the interest rate for the term loan from LIBOR plus
3.50
percent to LIBOR plus
4.50
percent. Following this amendment, the all-in rate for this
$300
tranche was
6.5075
percent. This transaction was entered into to reduce Supervalu’s exposure to changes in market interest rates associated with its variable rate debt. Supervalu designated this derivative as a cash flow hedge of the variability in expected cash outflows for interest payments.
In fiscal 2017, 2016 and 2015, no amounts were recorded in the Consolidated Statements of Operations for interest rate swap derivative ineffectiveness or reclassifications from Accumulated other comprehensive loss into earnings.
The fair value of the interest rate swap is measured using Level 2 inputs. The interest rate swap agreement is valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of
February 25, 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
.
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 values due to their short maturities.
The estimated fair value of notes receivable was greater than the carrying value by
$0
and
$1
as of
February 25, 2017
and
February 27, 2016
, respectively. The estimated fair value of notes receivable was calculated using a discounted cash flow approach applying a market rate for similar instruments using Level 3 inputs.
The estimated fair value of Supervalu’s long-term debt was greater than the carrying amount, excluding debt financing costs, by approximately
$0
as of
February 25, 2017
and less than the carrying amount by approximately
$236
as of
February 27, 2016
. The estimated fair value was based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs.
Supervalu utilized Level 3 fair value inputs in measuring certain non-recurring transactions in fiscal 2016. See
Note 1—Summary of Significant Accounting Policies
.
NOTE 8—LONG-TERM DEBT
Supervalu’s long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
February 25,
2017
|
|
February 27,
2016
|
5.50% Secured Term Loan Facility due March 2019
|
$
|
524
|
|
|
$
|
1,459
|
|
6.75% Senior Notes due June 2021
|
400
|
|
|
400
|
|
7.75% Senior Notes due November 2022
|
350
|
|
|
350
|
|
1.69% to 3.75% Revolving ABL Credit Facility due February 2021
|
—
|
|
|
138
|
|
Debt financing costs, net
|
(10
|
)
|
|
(45
|
)
|
Original issue discount on debt
|
(1
|
)
|
|
(5
|
)
|
Total debt
|
1,263
|
|
|
2,297
|
|
Less current maturities of long-term debt
|
—
|
|
|
(100
|
)
|
Long-term debt
|
$
|
1,263
|
|
|
$
|
2,197
|
|
Future maturities of long-term debt, excluding the original issue discount on debt and debt financing costs, as of
February 25, 2017
, consist of the following:
|
|
|
|
|
Fiscal Year
|
|
2018
|
$
|
—
|
|
2019
|
—
|
|
2020
|
524
|
|
2021
|
—
|
|
2022
|
400
|
|
Thereafter
|
350
|
|
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
As of
February 25, 2017
and
February 27, 2016
, Supervalu had outstanding borrowings of
$524
and
$1,459
, respectively, under its secured term loan facility (the “Secured Term Loan Facility”), which is secured by substantially all of Supervalu’s real estate, equipment and certain other assets, and bears interest at the rate of LIBOR plus
4.50
percent subject to a floor on LIBOR of
1.00
percent. 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 February 25, 2017, there was
$520
of owned or ground-leased real estate and associated equipment pledged as collateral, which was included in Property, plant and equipment, net in the Consolidated Balance Sheets. As of February 27, 2016, there was
$781
of owned or ground-leased real estate and associated equipment pledged as collateral,
$507
of which was included in Property, plant and equipment, net and
$274
of which was included in Long-term assets of discontinued operations in the 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 February 25, 2017 and February 27, 2016,
$0
and
$102
of the Secured Term Loan Facility was classified as current, respectively excluding debt financing costs and original issue discount.
On May 20, 2016, Supervalu entered into a third amendment to the Secured Term Loan Facility (the “Third Term Loan Amendment”) that would permit Supervalu and its subsidiaries to undertake certain transactions reasonably determined by Supervalu to be necessary to effectuate a separation of the Save-A-Lot business. The Third Term Loan Amendment also increased the interest rate for the term loan from LIBOR plus
3.50
percent to LIBOR plus
4.50
percent with the floor on LIBOR remaining at
1.00
percent, subject to a further increase of
0.25
percent if certain rating conditions are not satisfied. During the first quarter ended June 18, 2016, in connection with the completion of the Third Term Loan Amendment, Supervalu paid debt financing costs of approximately
$5
, of which
$4
was capitalized and
$1
was expensed in Interest expense, net, and recognized non-cash charges of approximately
$3
in Interest expense, net for the write-off of existing unamortized debt financing costs and
$1
for the accelerated amortization of 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. Pursuant to the Secured Term Loan Facility, Supervalu must, subject to 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 Excess Cash Flow in fiscal 2016, a
$99
prepayment was required and paid in the first quarter ended June 18, 2016. Based on Supervalu’s Total Secured Leverage Ratio (as defined in the facility) as of February 25, 2017, no prepayment from Excess Cash Flow in fiscal
2017
will be required in fiscal 2018.
Supervalu consummated the sale of its Save-A-Lot business on December 5, 2016. Pursuant to the Secured Term Loan Facility, Supervalu made prepayments in an aggregate amount of
$832
towards the Secured Term Loan Facility, which represents
$750
plus
50%
of the Net Cash Proceeds in excess of
$750
that caused Supervalu’s Total Secured Leverage Ratio, on a pro forma basis after giving effect to such prepayment, to be no higher than
1.50
:1.00. In connection with these mandatory prepayments, Supervalu recognized non-cash charges of approximately
$10
in Interest expense, net for the write-off of existing unamortized
debt financing costs and
$2
for the accelerated amortization of original issue discount based on the aggregate amount of the prepayments in the fourth quarter of fiscal
2017
. Additionally, the security interests in the equity interests of Moran Foods and the Save-A-Lot assets were released under the Secured Term Loan Facility and the Revolving ABL Credit Facility at the time of the sale.
As of
February 25, 2017
and
February 27, 2016
, there were
$0
and
$138
, respectively, of outstanding borrowings under the Revolving ABL Credit Facility. As of
February 25, 2017
, letters of credit outstanding under the Revolving ABL Credit Facility were
$53
at fees of
1.375
percent, and the unused available credit under this facility was
$748
with facility fees of
0.25
percent. As of
February 27, 2016
, letters of credit outstanding under the Revolving ABL Credit Facility were
$69
at fees of
1.625
percent, and the unused available credit under this facility was
$744
with facility fees of
0.25
percent. As of
February 25, 2017
, the Revolving ABL Credit Facility was secured on a first-priority basis by
$949
of certain inventory assets included in Inventories, net,
$228
of certain receivables included in Receivables, net,
$19
of certain amounts included in Cash and cash equivalents and all of Supervalu’s pharmacy scripts included in Intangible assets, net, in the Consolidated Balance Sheets. As of
February 27, 2016
, the Revolving ABL Credit Facility was secured on a first-priority basis by
$931
of certain inventory assets included in Inventories, net,
$222
of certain receivables included in Receivables, net,
$16
of certain amounts included in Cash and cash equivalents and all of Supervalu’s pharmacy scripts included in Intangible assets, net and
$314
of certain amounts included in Current assets of discontinued operations in the Consolidated Balance Sheets.
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. During fiscal
2017
, Supervalu borrowed
$2,837
and repaid
$2,975
under its Revolving ABL Credit Facility. During fiscal
2016
, Supervalu borrowed
$840
and repaid
$702
under its 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.
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
February 25, 2017
, that aggregate cap on Restricted Payments was approximately
$398
. 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 9—LEASES
Supervalu leases most of its Retail stores and certain distribution centers, office facilities and equipment from third parties. Many of these leases include renewal options and, in certain instances, also include options to purchase. Future minimum lease payments to be made by Supervalu for noncancellable operating leases and capital leases as of
February 25, 2017
consist of the following:
|
|
|
|
|
|
|
|
|
|
Lease Obligations
|
Fiscal Year
|
Operating Leases
|
|
Capital Leases
|
2018
|
$
|
76
|
|
|
$
|
42
|
|
2019
|
74
|
|
|
41
|
|
2020
|
63
|
|
|
38
|
|
2021
|
51
|
|
|
33
|
|
2022
|
36
|
|
|
27
|
|
Thereafter
|
133
|
|
|
101
|
|
Total future minimum obligations
|
$
|
433
|
|
|
282
|
|
Less interest
|
|
|
(70
|
)
|
Present value of net future minimum obligations
|
|
|
212
|
|
Less current capital lease obligations
|
|
|
(26
|
)
|
Long-term capital lease obligations
|
|
|
$
|
186
|
|
Total future minimum obligations have not been reduced for future minimum subtenant rentals under certain operating subleases.
Rent expense, other operating lease expense and subtenant rentals all under operating leases consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Minimum rent
|
$
|
92
|
|
|
$
|
96
|
|
|
$
|
95
|
|
Contingent rent
|
4
|
|
|
4
|
|
|
6
|
|
Rent expense
|
96
|
|
|
100
|
|
|
101
|
|
Less subtenant rentals
|
(27
|
)
|
|
(27
|
)
|
|
(27
|
)
|
Total net rent expense
|
$
|
69
|
|
|
$
|
73
|
|
|
$
|
74
|
|
Supervalu leases certain property to third parties under operating, capital and direct financing leases. Under the direct financing leases, Supervalu leases buildings to Wholesale customers with terms ranging from
one
to
three
years.
Future minimum lease and subtenant rentals to be received under noncancellable operating and deferred financing income leases, under which Supervalu is the lessor, as of
February 25, 2017
, consist of the following:
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
Fiscal Year
|
Operating Leases
|
|
Direct Financing Leases
|
2018
|
$
|
17
|
|
|
$
|
—
|
|
2019
|
16
|
|
|
—
|
|
2020
|
11
|
|
|
1
|
|
2021
|
7
|
|
|
—
|
|
2022
|
6
|
|
|
—
|
|
Thereafter
|
28
|
|
|
—
|
|
Total minimum lease receipts
|
$
|
85
|
|
|
1
|
|
Less interest
|
|
|
—
|
|
Net investment in direct financing leases
|
|
|
1
|
|
Less current portion
|
|
|
—
|
|
Long-term portion
|
|
|
$
|
1
|
|
The carrying value of owned property leased to third parties under operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Property, plant and equipment
|
$
|
4
|
|
|
$
|
4
|
|
Less accumulated depreciation
|
(3
|
)
|
|
(3
|
)
|
Property, plant and equipment, net
|
$
|
1
|
|
|
$
|
1
|
|
NOTE 10—BENEFIT PLANS
Substantially all employees of Supervalu are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans. Supervalu’s primary defined benefit pension plan, the SUPERVALU Retirement Plan, and certain supplemental executive retirement plans were closed to new participants and service crediting ended for all participants as of December 31, 2007. Pay increases were reflected in the amount of benefits accrued in these plans until December 31, 2012. Most union employees participate in multiemployer retirement plans under collective bargaining agreements, unless the collective bargaining agreement provides for participation in plans sponsored by Supervalu. In addition to sponsoring both defined benefit and defined contribution pension plans, Supervalu provides healthcare and life insurance benefits for eligible retired employees under postretirement benefit plans. Supervalu also provides certain health and welfare benefits, including short-term and long-term disability benefits, to inactive disabled employees prior to retirement. The terms of the postretirement benefit plans vary based on employment history, age and date of retirement. For many retirees, Supervalu provides a fixed dollar contribution and retirees pay contributions to fund the remaining cost.
In fiscal 2016, Supervalu amended the Supervalu Retiree Benefit Plan which provides medical, prescription drug, dental and life benefits, to eliminate benefits provided by the plan for certain participants under a collective bargaining agreement. As a result of the plan amendment, certain Supervalu Retiree Benefit Plan obligations were re-measured using a discount rate of
4.25 percent
and the MP-2015 mortality improvement scale. This re-measurement resulted in a
$28
reduction in postretirement benefit obligations within Pension and other postretirement benefit obligations with a corresponding decrease to Accumulated other comprehensive loss.
The benefit obligation, fair value of plan assets and funded status of Supervalu’s defined benefit pension plans and other postretirement benefit plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Changes in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
2,664
|
|
|
$
|
2,849
|
|
|
$
|
54
|
|
|
$
|
82
|
|
Plan amendment
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(21
|
)
|
Service cost
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Interest cost
|
84
|
|
|
106
|
|
|
2
|
|
|
3
|
|
Actuarial loss (gain)
|
37
|
|
|
(175
|
)
|
|
(3
|
)
|
|
(6
|
)
|
Settlements paid
|
(200
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(105
|
)
|
|
(115
|
)
|
|
(3
|
)
|
|
(4
|
)
|
Benefit obligation at end of year
|
2,480
|
|
|
2,664
|
|
|
44
|
|
|
54
|
|
Changes in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
2,119
|
|
|
2,317
|
|
|
15
|
|
|
4
|
|
Actual return (loss) on plan assets
|
307
|
|
|
(109
|
)
|
|
—
|
|
|
—
|
|
Employer contributions
|
62
|
|
|
27
|
|
|
4
|
|
|
15
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
Settlements paid
|
(200
|
)
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(105
|
)
|
|
(115
|
)
|
|
(5
|
)
|
|
(6
|
)
|
Other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fair value of plan assets at end of year
|
2,183
|
|
|
2,119
|
|
|
16
|
|
|
15
|
|
Unfunded status at end of year
|
$
|
(297
|
)
|
|
$
|
(545
|
)
|
|
$
|
(28
|
)
|
|
$
|
(39
|
)
|
For the defined benefit pension plans, the accumulated benefit obligation is equal to the projected benefit obligation.
Amounts recognized in the Consolidated Balance Sheets consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Accrued vacation, compensation and benefits
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(1
|
)
|
|
$
|
(4
|
)
|
Pension and other postretirement benefit obligations
|
(295
|
)
|
|
(543
|
)
|
|
(27
|
)
|
|
(35
|
)
|
Total
|
$
|
(297
|
)
|
|
$
|
(545
|
)
|
|
$
|
(28
|
)
|
|
$
|
(39
|
)
|
Amounts recognized in
Accumulated other comprehensive loss
for the defined benefit pension and other postretirement benefit plans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
Prior service benefit
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
42
|
|
|
$
|
50
|
|
Net actuarial loss
|
(478
|
)
|
|
(693
|
)
|
|
(13
|
)
|
|
(17
|
)
|
Total recognized in Accumulated other comprehensive loss
|
$
|
(478
|
)
|
|
$
|
(693
|
)
|
|
$
|
29
|
|
|
$
|
33
|
|
Total recognized in Accumulated other comprehensive loss, net of tax
|
$
|
(293
|
)
|
|
$
|
(438
|
)
|
|
$
|
17
|
|
|
$
|
20
|
|
Net periodic benefit cost (income) and other changes in plan assets and benefit obligations recognized in Other comprehensive income (loss) for defined benefit pension and other postretirement benefit plans consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2017
|
|
2016
|
|
2015
|
|
2017
|
|
2016
|
|
2015
|
Net Periodic Benefit Cost (Income)
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
Interest cost
|
84
|
|
|
106
|
|
|
121
|
|
|
2
|
|
|
3
|
|
|
4
|
|
Expected return on plan assets
|
(141
|
)
|
|
(142
|
)
|
|
(149
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(15
|
)
|
|
(15
|
)
|
|
(16
|
)
|
Amortization of net actuarial loss
|
43
|
|
|
79
|
|
|
68
|
|
|
2
|
|
|
3
|
|
|
3
|
|
Settlement
|
42
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit cost (income)
|
28
|
|
|
43
|
|
|
104
|
|
|
(10
|
)
|
|
(9
|
)
|
|
(8
|
)
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(7
|
)
|
|
(21
|
)
|
|
(5
|
)
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
15
|
|
|
15
|
|
|
16
|
|
Net actuarial (gain) loss
|
(172
|
)
|
|
76
|
|
|
195
|
|
|
(3
|
)
|
|
(7
|
)
|
|
6
|
|
Amortization of net actuarial loss
|
(43
|
)
|
|
(79
|
)
|
|
(66
|
)
|
|
(2
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Total expense (benefit) recognized in Other comprehensive income (loss)
|
(215
|
)
|
|
(3
|
)
|
|
129
|
|
|
3
|
|
|
(16
|
)
|
|
14
|
|
Total expense (benefit) recognized in net periodic benefit cost (income) and Other comprehensive income (loss)
|
$
|
(187
|
)
|
|
$
|
40
|
|
|
$
|
233
|
|
|
$
|
(7
|
)
|
|
$
|
(25
|
)
|
|
$
|
6
|
|
The estimated net actuarial loss that will be amortized from
Accumulated other comprehensive loss
into net periodic benefit cost for the defined benefit pension plans during fiscal 2018 is
$11
. The estimated net amount of prior service benefit and net actuarial loss for the postretirement benefit plans that will be amortized from Accumulated other comprehensive loss into net periodic benefit cost during fiscal 2018 is
$14
.
Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Benefit obligation assumptions:
|
|
|
|
|
|
Discount rate
|
3.92 – 3.78%
|
|
|
4.16 – 3.95%
|
|
|
3.80
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Net periodic benefit cost assumptions:
(1)
|
|
|
|
|
|
Discount rate
|
4.16
|
%
|
|
3.80
|
%
|
|
4.65 – 4.10%
|
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected return on plan assets
(2)
|
6.50
|
%
|
|
6.50
|
%
|
|
7.00 – 6.50%
|
|
|
|
(1)
|
For fiscal
2017
and prior, net periodic benefit cost is measured using weighted average assumptions as of the beginning of each year.
|
|
|
(2)
|
Expected return on plan assets is estimated by utilizing forward-looking, long-term return, risk and correlation assumptions developed and updated annually by Supervalu. These assumptions are weighted by the actual or target allocation to each underlying asset class represented in the pension plan asset portfolio. Supervalu also assesses the expected long-term return on plan assets assumption by comparison to long-term historical performance on an asset class to ensure the assumption is reasonable. Long-term trends are also evaluated relative to market factors such as inflation, interest rates, and fiscal and monetary policies in order to assess the capital market assumptions.
|
Supervalu reviews and selects the discount rate to be used in connection with measuring its pension and other postretirement benefit obligations annually. In determining the discount rate, Supervalu uses the yield on corporate bonds (rated AA or better) that coincides with the cash flows of the plans’ estimated benefit payouts. The model uses a yield curve approach to discount each cash flow of the liability stream at an interest rate specifically applicable to the timing of each respective cash flow. The model totals the present values of all cash flows and calculates the equivalent weighted average discount rate by imputing the singular interest rate that equates the total present value with the stream of future cash flows. This resulting weighted average discount rate is then used in evaluating the final discount rate to be used by Supervalu.
Effective for fiscal 2018, Supervalu expects to begin recognizing the amortization of net actuarial loss on the SUPERVALU Retirement Plan over the remaining life expectancy of inactive participants based on its determination that almost all of the defined benefit pension plan participants are inactive and the plan is frozen to new participants. For the purposes of inactive participants, Supervalu utilized an over approximately 90 percent threshold established under Supervalu policy. This change did not affect the measurement of total benefit obligations in fiscal 2017, and instead impacts the recognition of certain components of net periodic pension expense prospectively beginning in fiscal 2018. The impact of the change in estimate is an anticipated reduction of the interest and service cost components within net periodic benefit cost in fiscal 2018 by approximately
$31
for the defined benefit pension plans.
Effective fiscal 2017, Supervalu adopted the “full yield curve” approach for determining the interest and service cost components of net periodic benefit cost for defined benefit pension and other postretirement benefit plans. Under this method, the discount rate assumption used in the interest and service cost components of net periodic benefit cost was built through applying the specific spot rates along the yield curve used in the determination of the benefit obligation described above, to the relevant projected future cash flows of Supervalu’s pension and other postretirement benefit plans. Prior to fiscal 2017, the interest and service cost components of pension expense were estimated using a single weighted-average discount rate derived from the yield curve used to measure the projected benefit obligation at the beginning of the period.
The alternative approach improves the correlation between projected benefit cash flows and the corresponding yield curve spot rates and provides a more precise measurement of interest and service costs. This change did not affect the measurement of total benefit obligations. Supervalu has concluded that the application of the full yield curve approach was a change in estimate and, accordingly, recognized the effect prospectively beginning in fiscal 2017. The impact of the change in estimate was an anticipated reduction of the interest and service cost components within net periodic benefit cost in fiscal 2017 by approximately
$22
for the defined benefit pension plans and less than
$1
for postretirement benefit plans compared to the fiscal 2016 approach.
For those retirees whose health plans provide for variable employer contributions, the assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation before age 65 was
6.75 percent
as of
February 25, 2017
. The assumed healthcare cost trend rate for retirees before age 65 will decrease by
0.25 percent
for each year through fiscal 2026, until it reaches the ultimate trend rate of
4.50 percent
. For those retirees whose health plans provide for variable employer contributions, the assumed healthcare cost trend rate used in measuring the accumulated postretirement benefit obligation after age
65
was
7.50 percent
as of
February 25, 2017
. The assumed healthcare cost trend rate for retirees after age 65 will decrease through fiscal 2026, until it reaches the ultimate trend rate of
4.50 percent
. For those retirees whose health plans provide for a fixed employer contribution rate, a healthcare cost trend is not applicable. The healthcare cost trend rate assumption would have had the following impact on the amounts reported: a 100 basis point increase in the trend rate would have impacted Supervalu’s service and interest cost by less than
$1
for fiscal
2017
; a 100 basis point decrease in the trend rate would have decreased Supervalu’s accumulated postretirement benefit obligation as of the end of fiscal
2017
by approximately
$2
; and a 100 basis point increase would have increased Supervalu’s accumulated postretirement benefit obligation by approximately
$2
.
Pension Plan Assets
Pension plan assets are held in a master trust and invested in separately managed accounts and other commingled investment vehicles holding domestic and international equity securities, domestic fixed income securities and other investment classes. Supervalu employs a total return approach whereby a diversified mix of asset class investments is used to maximize the long-term return of plan assets for an acceptable level of risk. Alternative investments are also used to enhance risk-adjusted long-term returns while improving portfolio diversification. Risk is managed through diversification across asset classes, multiple investment manager portfolios and both general and portfolio-specific investment guidelines. Risk tolerance is established
through careful consideration of the plan liabilities, plan funded status and Supervalu’s financial condition. This asset allocation policy mix is reviewed annually and actual versus target allocations are monitored regularly and rebalanced on an as-needed basis. Plan assets are invested using a combination of active and passive investment strategies. Passive, or “indexed” strategies, attempt to mimic rather than exceed the investment performance of a market benchmark. The plan’s active investment strategies employ multiple investment management firms. Managers within each asset class cover a range of investment styles and approaches and are combined in a way that controls for capitalization, and style biases (equities) and interest rate exposures (fixed income) versus benchmark indices. Monitoring activities to evaluate performance against targets and measure investment risk take place on an ongoing basis through annual liability measurements, periodic asset/liability studies and quarterly investment portfolio reviews.
The asset allocation targets and the actual allocation of pension plan assets are as follows:
|
|
|
|
|
|
|
|
|
|
Asset Category
|
Target
|
|
2017
|
|
2016
|
Domestic equity
|
22.1
|
%
|
|
22.0
|
%
|
|
22.4
|
%
|
International equity
|
9.2
|
%
|
|
9.5
|
%
|
|
11.1
|
%
|
Private equity
|
5.9
|
%
|
|
5.9
|
%
|
|
6.6
|
%
|
Fixed income
|
53.9
|
%
|
|
54.1
|
%
|
|
47.3
|
%
|
Real estate
|
8.9
|
%
|
|
8.5
|
%
|
|
12.6
|
%
|
Total
|
100.0
|
%
|
|
100.0
|
%
|
|
100.0
|
%
|
The following is a description of the valuation methodologies used for investments measured at fair value:
Common stock
—Valued at the closing price reported in the active market in which the individual securities are traded.
Common collective trusts
—Investments in common/collective trust funds are stated at net asset value (“NAV”) as determined by the issuer of the common/collective trust funds and is based on the fair value of the underlying investments held by the fund less its liabilities. The majority of the common/collective trust funds have a readily determinable fair value and classified as level 2. Other investments in common/collective trust funds determine NAV on a less frequent basis and/or have redemption restrictions. For these investments, NAV is used as a practical expedient to estimate fair value.
Corporate bonds
—Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar bonds, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Government securities
—Certain government securities are valued at the closing price reported in the active market in which the security is traded. Other government securities are valued based on yields currently available on comparable securities of issuers with similar credit ratings.
Mortgage backed securities
—Valued based on yields currently available on comparable securities of issuers with similar credit ratings. When quoted prices are not available for identical or similar securities, the fair value is based upon an industry valuation model, which maximizes observable inputs.
Mutual funds
—Mutual funds are valued at the closing price reported in the active market in which the individual securities are traded.
Private equity and real estate partnerships
—Valued based on NAV provided by the investment manager, updated for any subsequent partnership interests’ cash flows or expected changes in fair value. The NAV is used as a practical expedient to estimate fair value.
Other
—Valued under an approach that maximizes observable inputs, such as gathering consensus data from the market participant’s best estimate of mid-market pricing for actual trades or positions held.
The valuation methods described above may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. Furthermore, while Supervalu believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different fair value measurement.
The fair value of assets of Supervalu’s defined benefit pension plans held in a master trust as of
February 25, 2017
, by asset category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
Common stock
|
$
|
366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
366
|
|
Common collective trusts
|
—
|
|
|
735
|
|
|
—
|
|
|
102
|
|
|
837
|
|
Corporate bonds
|
—
|
|
|
248
|
|
|
—
|
|
|
—
|
|
|
248
|
|
Government securities
|
27
|
|
|
133
|
|
|
—
|
|
|
—
|
|
|
160
|
|
Mutual funds
|
54
|
|
|
205
|
|
|
—
|
|
|
—
|
|
|
259
|
|
Mortgage-backed securities
|
—
|
|
|
18
|
|
|
—
|
|
|
—
|
|
|
18
|
|
Other
|
4
|
|
|
5
|
|
|
—
|
|
|
—
|
|
|
9
|
|
Private equity and real estate partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
286
|
|
|
286
|
|
Total plan assets at fair value
|
$
|
451
|
|
|
$
|
1,344
|
|
|
$
|
—
|
|
|
$
|
388
|
|
|
$
|
2,183
|
|
The fair value of assets of Supervalu’s defined benefit pension plans held in a master trust as of
February 27, 2016
, by asset category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
Common stock
|
$
|
432
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
432
|
|
Common collective trusts
|
—
|
|
|
555
|
|
|
—
|
|
|
211
|
|
|
766
|
|
Corporate bonds
|
—
|
|
|
201
|
|
|
—
|
|
|
—
|
|
|
201
|
|
Government securities
|
49
|
|
|
114
|
|
|
—
|
|
|
—
|
|
|
163
|
|
Mutual funds
|
56
|
|
|
179
|
|
|
—
|
|
|
—
|
|
|
235
|
|
Mortgage-backed securities
|
—
|
|
|
14
|
|
|
—
|
|
|
—
|
|
|
14
|
|
Other
|
—
|
|
|
3
|
|
|
—
|
|
|
—
|
|
|
3
|
|
Private equity and real estate partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
305
|
|
|
305
|
|
Total plan assets at fair value
|
$
|
537
|
|
|
$
|
1,066
|
|
|
$
|
—
|
|
|
$
|
516
|
|
|
$
|
2,119
|
|
Contributions
In August 2014, the Highway and Transportation Funding Act of 2014, which included an extension of pension funding interest rate relief, was signed into law. The Highway and Transportation Funding Act includes a provision for interest rate stabilization for defined benefit employee pension plans. As a result of this stabilization provision, Supervalu’s required pension contributions to the SUPERVALU Retirement Plan decreased significantly in fiscal 2016 compared to fiscal 2015 and Supervalu expects that to continue for the next several years. Supervalu expects to contribute approximately
$5
to
$10
to its defined benefit pension plans and postretirement benefit plans in fiscal
2018
.
Supervalu funds its defined benefit pension plans based on the minimum contribution required under the Employee Retirement Income Security Act of 1974, as amended, the Pension Protection Act of 2006 and other applicable laws, as determined by Supervalu’s external actuarial consultant, and additional contributions made at Supervalu’s discretion. In connection with the sale of Save-A-Lot, Supervalu agreed with the Pension Benefit Guarantee Corporation (the “PBGC”) to make
$60
in aggregate contributions to the SUPERVALU Retirement Plan in excess of required minimum contributions. Supervalu made those contributions in the fourth quarter of fiscal 2017 and has fully fulfilled its obligations under its agreement with the PBGC. Supervalu will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
At Supervalu’s discretion, additional funds may be contributed to the pension plan. Supervalu may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. Supervalu assesses the relative attractiveness of the use of cash including such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required PBGC variable rate premiums or the ability to achieve exemption from participant notices of underfunding.
Lump Sum Pension Settlement
During fiscal 2017, the SUPERVALU Retirement Plan made lump sum settlement payments to certain deferred vested pension plan participants under a lump sum payment option window. The payments were equal to the present value of the participant’s pension benefits, and were made to certain former employees who were deferred vested participants in the SUPERVALU Retirement Plan, who had not yet begun receiving monthly pension benefit payments and who elected to participate in the lump sum payment option window. In fiscal 2017, the SUPERVALU Retirement Plan made lump sum settlement payments of approximately
$200
. The lump sum settlement payments resulted in a non-cash pension settlement charge of
$42
from the acceleration of a portion of the accumulated unrecognized actuarial loss. As a result of the lump sum settlements, the SUPERVALU Retirement Plan assets and liabilities were re-measured at December 3, 2016 using a discount rate of
4.1 percent
, an expected rate of return on plan assets of
6.5 percent
and the RP-2014 Aggregate Mortality Table adjusted back to 2006 using projection scale MP-2014, and then projected forward using MP-2016. The settlement and subsequent re-measurement resulted in a decrease to accumulated other comprehensive loss of
$172
pre-tax (
$105
after-tax) and a corresponding increase to the SUPERVALU Retirement Plan’s funded status.
During fiscal 2015, the SUPERVALU Retirement Plan made lump sum settlement payments to certain deferred vested pension plan participants under a lump sum payment option window similar to that completed in 2017. The payments were equal to the present value of the participant’s pension benefits, and were made to certain former employees who were deferred vested participants in the SUPERVALU Retirement Plan, who had not yet begun receiving monthly pension benefit payments and who elected to participate in the lump sum payment option window. In fiscal 2015, the SUPERVALU Retirement Plan made lump sum settlement payments of approximately
$272
. The lump sum settlement payments resulted in a non-cash pension settlement charge of
$64
from the acceleration of a portion of the accumulated unrecognized actuarial loss. As a result of the lump sum settlements, the SUPERVALU Retirement Plan assets and liabilities were re-measured at November 29, 2014 using a discount rate of
4.1 percent
, an expected rate of return on plan assets of
6.5 percent
and the RP-2014 Mortality Table with generational projection scale using MP-2014. The November 29, 2014 re-measurement resulted in an increase to Accumulated other comprehensive loss of
$200
pre-tax (
$141
after-tax) and a corresponding decrease to the SUPERVALU Retirement Plan’s funded status.
Estimated Future Benefit Payments
The estimated future benefit payments to be made from Supervalu’s defined benefit pension and other postretirement benefit plans, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
2018
|
$
|
156
|
|
|
$
|
4
|
|
2019
|
138
|
|
|
4
|
|
2020
|
144
|
|
|
3
|
|
2021
|
150
|
|
|
3
|
|
2022
|
155
|
|
|
3
|
|
Years 2023-2027
|
793
|
|
|
15
|
|
Defined Contribution Plans
Supervalu sponsors defined contribution and profit sharing plans pursuant to Section 401(k) of the Internal Revenue Code. Employees may contribute a portion of their eligible compensation to the plans on a pre-tax basis. Supervalu matches a portion of certain employee contributions by contributing cash into the investment options selected by the employees. The total amount contributed by Supervalu to the plans is determined by plan provisions or at the discretion of Supervalu. Total employer contribution expenses for these plans were
$13
,
$8
and
$16
for fiscal
2017
,
2016
and
2015
, respectively. Matching contributions were reduced or eliminated in January 2013 for most employees. Supervalu made a discretionary match for fiscal 2017 for eligible employees. There were no discretionary matches made in fiscal 2016. Supervalu adopted and made a discretionary match for fiscal 2015 for employees who had their matching contributions eliminated. Since June 2014, plan investment options do not include shares of Supervalu’s common stock.
Post-Employment Benefits
Supervalu recognizes an obligation for benefits provided to former or inactive employees. Supervalu is self-insured for certain disability plan programs, which comprise the primary benefits paid to inactive employees prior to retirement.
Amounts recognized in the Consolidated Balance Sheets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Post-Employment Benefits
|
|
|
2017
|
|
2016
|
Accrued vacation, compensation and benefits
|
|
$
|
3
|
|
|
$
|
5
|
|
Other long-term liabilities
|
|
7
|
|
|
8
|
|
Total
|
|
$
|
10
|
|
|
$
|
13
|
|
Multiemployer Plans
Supervalu contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These multiemployer plans generally provide retirement benefits to participants based on their service to contributing employers. The benefits are paid from assets held in trust for that purpose. Plan trustees typically are responsible for determining the level of benefits to be provided to participants as well as the investment of the assets and plan administration. Trustees are appointed in equal number by employers and the unions that are parties to the collective bargaining agreement.
Expense is recognized in connection with these plans as contributions are funded, in accordance with U.S. generally accepted accounting standards. Supervalu contributed
$43
,
$43
and
$39
to these plans for fiscal years
2017
,
2016
and
2015
, respectively. The risks of participating in these multiemployer plans are different from the risks associated with single-employer plans in the following respects:
|
|
a.
|
Assets contributed to the multiemployer plan by one employer are held in trust and may be used to provide benefits to employees of other participating employers.
|
|
|
b.
|
If a participating employer stops contributing to the plan, the unfunded obligations of the plan may be borne by the remaining participating employers.
|
|
|
c.
|
If Supervalu chooses to stop participating in some multiemployer plans, or makes market exits or closures or otherwise has participation in the plan drop below certain levels, Supervalu may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Supervalu’s participation in these plans is outlined in the table below. The EIN-Pension Plan Number column provides the Employer Identification Number (“EIN”) and the three-digit plan number, if applicable. Unless otherwise noted, the most recent Pension Protection Act (“PPA”) zone status available in
2017
and
2016
relates to the plans’ two most recent fiscal year-ends. The zone status is based on information that Supervalu received from the plan and is certified by each plan’s actuary. Among other factors, red zone status plans are generally less than
65 percent
funded and are considered in critical status, plans in yellow zone status are less than
80 percent
funded and are considered in endangered or seriously endangered status, and green zone plans are at least
80 percent
funded. The Multiemployer Protection Act of 2014 (“MPRA”) created a new zone status called “critical and declining” or “Deep Red”. Plans are generally considered Deep Red if they are projected to become insolvent within
15
years. The FIP/RP Status Pending/Implemented column indicates plans for which a funding improvement plan (“FIP”) or a rehabilitation plan (“RP”) is either pending or has been implemented by the trustees of each plan.
Certain plans have been aggregated in the All Other Multiemployer Pension Plans line in the following table, as the contributions to each of these plans are not individually material. None of Supervalu’s collective bargaining agreements require that a minimum contribution be made to these plans. Multiemployer pension plan contributions and participants were generally comparable for fiscal
2017
,
2016
and
2015
.
At the date the financial statements were issued, Forms 5500 were generally not available for the plan years ending in
2016
.
The following table contains information about Supervalu’s multiemployer plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EIN—Pension
Plan Number
|
|
Plan
Month/Day
End Date
|
|
Pension Protection Act Zone Status
|
|
FIP/RP Status
Pending/ Implemented
|
|
Contributions
|
|
Surcharges
Imposed
(1)
|
|
Amortization
Provisions
|
Pension Fund
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
2015
|
|
Minneapolis Food Distributing Industry Pension Plan
|
416047047-001
|
|
12/31
|
|
Green
|
|
Green
|
|
Implemented
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
No
|
|
Yes
|
Minneapolis Retail Meat Cutters and Food Handlers Pension Fund
|
410905139-001
|
|
2/29
|
|
Green
|
|
Yellow
|
|
No
|
|
9
|
|
|
9
|
|
|
7
|
|
|
No
|
|
No
|
Central States, Southeast and Southwest Areas Pension Fund
|
366044243-001
|
|
12/31
|
|
Deep Red
|
|
Red
|
|
Implemented
|
|
8
|
|
|
8
|
|
|
8
|
|
|
No
|
|
No
|
UFCW Unions and Participating Employers Pension Fund
|
526117495-002
|
|
12/31
|
|
Red
|
|
Red
|
|
Implemented
|
|
6
|
|
|
5
|
|
|
4
|
|
|
Yes
|
|
No
|
Western Conference of Teamsters Pension Plan
|
916145047-001
|
|
12/31
|
|
Green
|
|
Green
|
|
No
|
|
4
|
|
|
4
|
|
|
4
|
|
|
No
|
|
No
|
UFCW Union Local 655 Food Employers Joint Pension Plan
|
436058365-001
|
|
12/31
|
|
Green
|
|
Green
|
|
No
|
|
2
|
|
|
2
|
|
|
2
|
|
|
No
|
|
No
|
UFCW Unions and Employers Pension Plan
|
396069053-001
|
|
10/31
|
|
Red
|
|
Red
|
|
Implemented
|
|
2
|
|
|
2
|
|
|
1
|
|
|
Yes
|
|
Yes
|
All Other Multiemployer Pension Plans
(2)
|
|
|
|
|
|
|
|
|
|
|
2
|
|
|
3
|
|
|
3
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
43
|
|
|
$
|
43
|
|
|
$
|
39
|
|
|
|
|
|
|
|
(1)
|
PPA surcharges are
5 percent
or
10 percent
of eligible contributions and may not apply to all collective bargaining agreements or total contributions to each plan.
|
|
|
(2)
|
All Other Multiemployer Pension Plans includes
9
plans, none of which is individually significant when considering Supervalu’s contributions to the plan, severity of the underfunded status or other factors.
|
The following table describes the expiration of Supervalu’s collective bargaining agreements associated with the significant multiemployer plans in which Supervalu participates:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Most Significant Collective Bargaining Agreement
|
|
|
Pension Fund
|
Range of Collective Bargaining Agreement Expiration Dates
|
|
Total Collective Bargaining Agreements
|
|
Expiration Date
|
|
% of Associates under Collective Bargaining Agreement
(1)
|
|
Over 5% Contribution 2017
|
Minneapolis Food Distributing Industry Pension Plan
|
5/31/2018
|
|
1
|
|
|
5/31/2018
|
|
100.0
|
%
|
|
Yes
|
Minneapolis Retail Meat Cutters and Food Handlers Pension Fund
|
3/3/2018
|
|
1
|
|
|
3/3/2018
|
|
100.0
|
%
|
|
Yes
|
Central States, Southeast and Southwest Areas Pension Fund
|
6/1/2017 – 7/13/2019
|
|
10
|
|
|
5/31/2019
|
|
28.1
|
%
|
|
No
|
UFCW Unions and Participating Employers Pension Plan
|
7/8/2017
|
|
2
|
|
|
7/8/2017
|
|
68.3
|
%
|
|
Yes
|
Western Conference of Teamsters Pension Plan
|
7/15/2017 – 9/26/2020
|
|
8
|
|
|
9/26/2020
|
|
42.3
|
%
|
|
No
|
UFCW Union Local 655 Food Employers Joint Pension Plan
|
5/11/2019
|
|
1
|
|
|
5/11/2019
|
|
100.0
|
%
|
|
Yes
|
UFCW Unions and Employers Pension Plan
|
4/6/2019
|
|
2
|
|
|
4/6/2019
|
|
75.5
|
%
|
|
Yes
|
|
|
(1)
|
Company participating employees in the most significant collective bargaining agreement as a percent of all Company employees participating in the respective fund.
|
Multiemployer Postretirement Benefit Plans Other than Pensions
Supervalu also makes contributions to multiemployer health and welfare plans in amounts set forth in the related collective bargaining agreements. These plans provide medical, dental, pharmacy, vision and other ancillary benefits to active employees and retirees as determined by the trustees of each plan. The vast majority of Supervalu’s contributions benefit active employees and as such, may not constitute contributions to a postretirement benefit plan. However, Supervalu is unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to benefit active employees.
Supervalu
contributed
$97
,
$95
and
$89
for fiscal
2017
,
2016
and
2015
, respectively, to multiemployer health and welfare plans. If healthcare provisions within these plans cannot be renegotiated in a manner that reduces the prospective healthcare cost as Supervalu intends, Supervalu’s Selling and admin
istrative expenses could increase in the future.
Collective Bargaining Agreements
As of
February 25, 2017
, Supervalu had approximately
29,000
employees. Approximately
16,000
employees are covered by
48
collective bargaining agreements. During fiscal
2017
,
20
collective bargaining agreements covering approximately
9,200
employees were renegotiated. Also,
three
collective bargaining agreements covering approximately
140
employees have already expired without their terms being renegotiated. Negotiations are expected to continue with the bargaining units representing the employees subject to those agreements. During fiscal
2018
,
23
collective bargaining agreements covering approximately
6,000
employees are scheduled to expire.
NOTE 11—NET EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net earnings from continuing operations
|
$
|
27
|
|
|
$
|
84
|
|
|
$
|
25
|
|
Less net earnings attributable to noncontrolling interests
|
(4
|
)
|
|
(8
|
)
|
|
(7
|
)
|
Net earnings from continuing operations attributable to SUPERVALU INC.
|
23
|
|
|
76
|
|
|
18
|
|
Income from discontinued operations, net of tax
|
627
|
|
|
102
|
|
|
174
|
|
Net earnings attributable to SUPERVALU INC.
|
$
|
650
|
|
|
$
|
178
|
|
|
$
|
192
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding—basic
|
265
|
|
|
263
|
|
|
260
|
|
Dilutive impact of stock-based awards
|
3
|
|
|
5
|
|
|
4
|
|
Weighted average number of shares outstanding—diluted
|
268
|
|
|
268
|
|
|
264
|
|
|
|
|
|
|
|
Basic net earnings per share attributable to SUPERVALU INC.:
|
|
|
|
|
|
Continuing operations
|
$
|
0.09
|
|
|
$
|
0.29
|
|
|
$
|
0.07
|
|
Discontinued operations
|
$
|
2.37
|
|
|
$
|
0.39
|
|
|
$
|
0.67
|
|
Basic net earnings per share
|
$
|
2.45
|
|
|
$
|
0.68
|
|
|
$
|
0.74
|
|
Diluted net earnings per share attributable to SUPERVALU INC.:
|
|
|
|
|
|
Continuing operations
|
$
|
0.09
|
|
|
$
|
0.28
|
|
|
$
|
0.07
|
|
Discontinued operations
|
$
|
2.34
|
|
|
$
|
0.38
|
|
|
$
|
0.66
|
|
Diluted net earnings per share
|
$
|
2.43
|
|
|
$
|
0.66
|
|
|
$
|
0.73
|
|
Stock-based awards of
15
,
10
and
10
that were outstanding during fiscal
2017
,
2016
and
2015
, respectively, were excluded from the calculation of Net earnings from continuing operations per share—diluted, Net earnings from discontinued operations per share—diluted and Net earnings per share—diluted for the periods because their inclusion would be antidilutive.
NOTE 12—COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED COMPREHENSIVE LOSS
Supervalu reports comprehensive income (loss) in the Consolidated Statements of Comprehensive Income. Comprehensive income includes all changes in stockholders’ equity (deficit) during the reporting period, other than those resulting from investments by and distributions to stockholders. Supervalu’s comprehensive income (loss) is calculated as net earnings (loss) including noncontrolling interests, plus or minus adjustments for pension and other postretirement benefit obligations and interest rate swaps, 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 interest rate swaps designated as hedges, net of tax. Changes in Accumulated other comprehensive loss by component are as follows:
|
|
|
|
|
|
|
|
|
|
|
Benefit Plans
|
|
Interest Rate Swap
|
|
Total
|
February 22, 2014 accumulated other comprehensive loss
|
(307
|
)
|
|
—
|
|
|
(307
|
)
|
Other comprehensive loss before reclassifications
|
(188
|
)
|
|
—
|
|
|
(188
|
)
|
Pension settlement charge
(2)
|
39
|
|
|
—
|
|
|
39
|
|
Amortization of amounts included in net periodic benefit cost
(1)
|
33
|
|
|
—
|
|
|
33
|
|
Net Other comprehensive loss
|
(116
|
)
|
|
—
|
|
|
(116
|
)
|
February 28, 2015 accumulated other comprehensive loss
|
(423
|
)
|
|
—
|
|
|
(423
|
)
|
Other comprehensive loss before reclassifications
|
(37
|
)
|
|
(4
|
)
|
|
(41
|
)
|
Amortization of amounts included in net periodic benefit cost
(1)
|
42
|
|
|
—
|
|
|
42
|
|
Net Other comprehensive income (loss)
|
5
|
|
|
(4
|
)
|
|
1
|
|
February 27, 2016 accumulated other comprehensive loss
|
(418
|
)
|
|
(4
|
)
|
|
(422
|
)
|
Other comprehensive income before reclassifications
|
97
|
|
|
—
|
|
|
97
|
|
Amortization of amounts included in net periodic benefit cost
(1)
|
19
|
|
|
—
|
|
|
19
|
|
Amortization of cash flow hedge
|
—
|
|
|
2
|
|
|
2
|
|
Pension settlement charges
(2)
|
26
|
|
|
—
|
|
|
26
|
|
Net Other comprehensive income
|
142
|
|
|
2
|
|
|
144
|
|
February 25, 2017 accumulated other comprehensive loss
|
(276
|
)
|
|
(2
|
)
|
|
(278
|
)
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit cost includes amortization of prior service benefit and amortization of net actuarial loss as reflected in
Note 10—Benefit Plans
.
|
|
|
(2)
|
Refer to
Note 10—Benefit Plans
for additional information on Supervalu’s fiscal 2017 and 2015 pension settlement charges.
|
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
|
Affected Line Item on Consolidated Statements of Operations
|
Pension and postretirement benefit plan obligations:
|
|
|
|
|
|
|
|
Amortization of amounts included in net periodic benefit expense
(1)
|
$
|
28
|
|
|
$
|
59
|
|
|
$
|
43
|
|
|
Selling and administrative expenses
|
Amortization of amounts included in net periodic benefit expense
(1)
|
2
|
|
|
8
|
|
|
11
|
|
|
Cost of sales
|
Pension settlement charges
|
42
|
|
|
—
|
|
|
64
|
|
|
Selling and administrative expenses
|
Total reclassifications
|
72
|
|
|
67
|
|
|
118
|
|
|
|
Income tax benefit
|
(27
|
)
|
|
(25
|
)
|
|
(46
|
)
|
|
Income tax (benefit) provision
|
Total reclassifications, net of tax
|
$
|
45
|
|
|
$
|
42
|
|
|
$
|
72
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap cash flow hedge:
|
|
|
|
|
|
|
|
Reclassification of cash flow hedge
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Interest expense, net
|
Income tax benefit
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
Income tax (benefit) provision
|
Total reclassifications, net of tax
|
$
|
2
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit cost include amortization of prior service benefit and amortization of net actuarial loss as reflected in
Note 10—Benefit Plans
.
|
No amounts were reclassified out of Accumulated other comprehensive loss related to the interest rate swap designated as a cash flow hedge. As of
February 25, 2017
, Supervalu expects to reclassify
$3
out of Accumulated other comprehensive loss into Interest expense, net during the following twelve-month period.
NOTE 13—STOCK-BASED AWARDS
As of
February 25, 2017
, Supervalu has stock options, restricted stock awards, restricted stock units and performance share units (collectively referred to as “stock-based awards”) outstanding under the 2012 Stock Plan and 2007 Stock Plan. Supervalu’s 2012 Stock Plan, which was amended and restated in fiscal 2015 and further amended in fiscal 2017 (as amended, the “2012 Stock Plan”), is the only plan under which stock-based awards may be granted to employees. The 2012 Stock Plan provides that the Board of Directors or the Leadership Development and Compensation Committee of the Board (the “Compensation Committee”) may determine at the time of grant whether each stock-based award granted will be a non-qualified or incentive stock-based award under the Internal Revenue Code of 1986, as amended (the “Internal Revenue Code”). The terms of each stock-based award will be determined by the Board of Directors or the Compensation Committee. Generally, stock-based awards granted from fiscal 2006 to fiscal 2012 generally have a term of
seven
years, and starting in fiscal 2013 stock-based awards granted generally have a term of
ten
years.
At the discretion of the Board of Directors or the Compensation Committee, Supervalu has granted stock options to purchase common stock at an exercise price not less than
100 percent
of the fair market value of Supervalu’s common stock on the date of grant, restricted stock awards, restricted stock units and performance share units (“PSUs”) to executive officers and other key salaried employees. Stock options have also been granted to Supervalu’s non-employee directors. All recently issued stock options, restricted stock awards, restricted stock units and PSUs vest either pro rata over
three
years or cliff vest after
three
years. The restrictions on the restricted stock awards and restricted stock units generally lapse between
one
and
five
years from the date of grant. The performance metrics of PSUs are determined at the discretion of the Board of Directors or Compensation Committee.
As of
February 25, 2017
, there were
27
shares available for future issuance of stock-based awards under the 2012 Stock Plan. Common stock has been delivered out of treasury stock or newly issued shares upon the exercise or vesting of stock-based awards. The provisions of future stock-based awards may change at the discretion of the Board of Directors or the Compensation Committee.
Stock Options
Stock options granted, exercised and outstanding consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares Under Option
(In thousands)
|
|
Weighted Average Exercise Price
|
|
Weighted Average Remaining Contractual Term
(In years)
|
|
Aggregate Intrinsic Value
(In thousands)
|
Outstanding, February 22, 2014
|
23,335
|
|
|
$
|
14.87
|
|
|
5.41
|
|
$
|
15,982
|
|
Granted
|
5,022
|
|
|
7.54
|
|
|
|
|
|
Exercised
|
(1,944
|
)
|
|
3.71
|
|
|
|
|
|
Canceled and forfeited
|
(5,533
|
)
|
|
30.68
|
|
|
|
|
|
Outstanding, February 28, 2015
|
20,880
|
|
|
$
|
9.98
|
|
|
6.55
|
|
$
|
61,073
|
|
Granted
|
5,531
|
|
|
7.44
|
|
|
|
|
|
Exercised
|
(1,723
|
)
|
|
5.84
|
|
|
|
|
|
Canceled and forfeited
|
(3,336
|
)
|
|
24.94
|
|
|
|
|
|
Outstanding, February 27, 2016
|
21,352
|
|
|
$
|
7.37
|
|
|
5.93
|
|
$
|
6,827
|
|
Granted
|
960
|
|
|
5.64
|
|
|
|
|
|
Exercised
|
(1,745
|
)
|
|
3.65
|
|
|
|
|
|
Canceled and forfeited
|
(4,982
|
)
|
|
9.73
|
|
|
|
|
|
Outstanding, February 25, 2017
|
15,585
|
|
|
$
|
6.92
|
|
|
5.99
|
|
$
|
2,161
|
|
Vested and expected to vest in the future as of February 25, 2017
|
15,152
|
|
|
$
|
6.95
|
|
|
5.92
|
|
$
|
2,161
|
|
Exercisable as of February 25, 2017
|
11,313
|
|
|
$
|
6.97
|
|
|
5.17
|
|
$
|
2,161
|
|
For Supervalu’s annual grant made in the first quarter of fiscal
2017
,
2016
and
2015
, Supervalu granted
1
,
4
and
5
, respectively, of non-qualified stock options to certain employees under the 2012 Stock Plan with a weighted average grant date fair value of
$2.67
,
$3.67
and
$3.28
per share, respectively. These stock options vest over a period of
three
years, and were awarded as part of a broad-based employee incentive initiative designed to retain and motivate employees across Supervalu.
In fiscal 2016, Supervalu’s Board of Directors granted
2
stock options to Supervalu’s Chief Executive Officer. The stock options have a grant date fair value of
$2.08
per share and vest over
three
years.
Supervalu used the Black Scholes option pricing model to estimate the fair value of the options at grant date based upon the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Volatility rate
|
54.2
|
%
|
|
49.0 – 56.5%
|
|
|
50.8 – 53.2%
|
|
Risk-free interest rate
|
1.3
|
%
|
|
1.2 – 1.4%
|
|
|
1.2 – 1.6%
|
|
Expected option life
|
5.0 years
|
|
|
4.0 years
|
|
|
4.0 – 5.0 years
|
|
Restricted Stock
Restricted stock awards and restricted stock unit activity consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock Units
(In thousands)
|
|
Restricted Stock Awards
(In thousands)
|
|
Weighted Average Grant Date Fair Value
(1)
|
Outstanding, February 22, 2014
|
—
|
|
|
937
|
|
|
9.09
|
|
Granted
|
2,274
|
|
|
18
|
|
|
7.11
|
|
Lapsed
|
(133
|
)
|
|
(417
|
)
|
|
6.54
|
|
Canceled and forfeited
|
(90
|
)
|
|
(2
|
)
|
|
6.09
|
|
Outstanding, February 28, 2015
|
2,051
|
|
|
536
|
|
|
11.02
|
|
Granted
|
65
|
|
|
2,339
|
|
|
8.74
|
|
Lapsed
|
(742
|
)
|
|
(456
|
)
|
|
6.82
|
|
Canceled and forfeited
|
(125
|
)
|
|
(239
|
)
|
|
8.79
|
|
Outstanding, February 27, 2016
|
1,249
|
|
|
2,180
|
|
|
$
|
8.68
|
|
Granted
|
4,575
|
|
|
11
|
|
|
5.64
|
|
Lapsed
|
(834
|
)
|
|
(756
|
)
|
|
8.59
|
|
Canceled and forfeited
|
(1,333
|
)
|
|
(550
|
)
|
|
8.79
|
|
Outstanding, February 25, 2017
|
3,657
|
|
|
885
|
|
|
$
|
8.64
|
|
(1) Weighted average grant date fair value is only used for restricted stock awards.
In fiscal 2017 and 2015, Supervalu granted restricted stock units that vest over a
three
-year period from the date of the grant. In fiscal 2016, Supervalu granted restricted stock awards that vest over a
three
-year period from the date of grant. The fair value of restricted stock awards and restricted stock units is based on the closing price of Supervalu’s common stock on the date of grant.
Performance Share Units
In fiscal 2017, 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:
|
|
|
|
|
2017
|
Dividend yield
|
—
|
%
|
Volatility rate
|
41.3
|
%
|
Risk-free interest rate
|
0.9
|
%
|
Expected PSU life
|
2.8 years
|
|
Performance share unit activity consisted of the following:
|
|
|
|
|
|
|
|
|
Performance Share Units
(In thousands)
|
|
Weighted Average Grant Date Fair Value
|
Outstanding, February 27, 2016
|
—
|
|
|
$
|
—
|
|
Granted
|
1,410
|
|
|
6.65
|
|
Lapsed
|
—
|
|
|
—
|
|
Canceled and forfeited
|
(204
|
)
|
|
6.65
|
|
Outstanding, February 25, 2017
|
1,206
|
|
|
$
|
6.65
|
|
Stock-Based Compensation Expense
The components of pre-tax stock-based compensation expense are included primarily in
Selling and administrative expenses
in the Consolidated Statements of Operations. The expense recognized and related tax benefits were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Stock-based compensation
|
$
|
18
|
|
|
$
|
22
|
|
|
$
|
20
|
|
Income tax benefits
|
(7
|
)
|
|
(9
|
)
|
|
(8
|
)
|
Stock-based compensation, net of tax
|
$
|
11
|
|
|
$
|
13
|
|
|
$
|
12
|
|
Supervalu realized excess tax shortfalls of
$1
,
$1
and
$1
on the exercise of stock-based awards in fiscal
2017
,
2016
and
2015
, respectively.
Unrecognized Stock-Based Compensation Expense
As of
February 25, 2017
, there was
$25
of unrecognized compensation expense related to unvested stock-based awards granted under Supervalu’s stock plans. The expense is expected to be recognized over a weighted average remaining vesting period of approximately
two
years.
NOTE 14—INCOME TAXES
Income Tax Provision
The income tax (benefit) provision consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Current
|
|
|
|
|
|
Federal
|
$
|
(25
|
)
|
|
$
|
25
|
|
|
$
|
(22
|
)
|
State
|
6
|
|
|
—
|
|
|
(6
|
)
|
Total current
|
(19
|
)
|
|
25
|
|
|
(28
|
)
|
Deferred
|
(1
|
)
|
|
(1
|
)
|
|
15
|
|
Total income tax (benefit) provision
|
$
|
(20
|
)
|
|
$
|
24
|
|
|
$
|
(13
|
)
|
The difference between the actual tax provision and the tax provision computed by applying the statutory federal income tax rate to Earnings from continuing operations before income taxes is attributable to the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Federal taxes based on statutory rate
|
$
|
3
|
|
|
$
|
38
|
|
|
$
|
4
|
|
State income taxes, net of federal benefit
|
(1
|
)
|
|
2
|
|
|
(3
|
)
|
Tax contingency
|
(1
|
)
|
|
(9
|
)
|
|
(2
|
)
|
Change in valuation allowance
|
1
|
|
|
4
|
|
|
—
|
|
Pension
|
(9
|
)
|
|
(4
|
)
|
|
(7
|
)
|
Deferred tax adjustment
|
(9
|
)
|
|
—
|
|
|
—
|
|
Other
|
(4
|
)
|
|
(7
|
)
|
|
(5
|
)
|
Total income tax (benefit) provision
|
$
|
(20
|
)
|
|
$
|
24
|
|
|
$
|
(13
|
)
|
Deferred Income Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the basis in assets and liabilities for financial reporting and income tax purposes. Supervalu’s deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets:
|
|
|
|
Compensation and benefits
|
$
|
163
|
|
|
$
|
235
|
|
Self-insurance
|
16
|
|
|
27
|
|
Property, plant and equipment and capitalized lease assets
|
39
|
|
|
47
|
|
Loss on sale of discontinued operations
|
1,174
|
|
|
1,388
|
|
Net operating loss carryforwards
|
15
|
|
|
15
|
|
Other
|
76
|
|
|
83
|
|
Gross deferred tax assets
|
1,483
|
|
|
1,795
|
|
Valuation allowance
|
(1,196
|
)
|
|
(1,408
|
)
|
Total deferred tax assets
|
287
|
|
|
387
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment and capitalized lease assets
|
(92
|
)
|
|
(108
|
)
|
Inventories
|
(15
|
)
|
|
(6
|
)
|
Intangible assets
|
(7
|
)
|
|
(24
|
)
|
Other
|
(8
|
)
|
|
(21
|
)
|
Total deferred tax liabilities
|
(122
|
)
|
|
(159
|
)
|
Net deferred tax assets
|
$
|
165
|
|
|
$
|
228
|
|
Net deferred tax assets are recorded in the Consolidated Balance Sheet as follows:
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
Deferred tax assets
|
$
|
165
|
|
|
$
|
238
|
|
Long-term assets of discontinued operations
|
—
|
|
|
(10
|
)
|
Net deferred tax assets
|
165
|
|
|
228
|
|
Supervalu has valuation allowances to reduce deferred tax assets to the amount that is more-likely-than-not to be realized. Supervalu currently has state net operating loss (“NOL”) carryforwards of
$276
for tax purposes. The NOL carryforwards expire beginning in fiscal 2018 and continuing through fiscal 2035 and have a
$10
valuation allowance.
In fiscal 2014, the sale of NAI resulted in an allocation of tax expense between continuing and discontinued operations and the recognition of the additional tax basis in the shares of NAI offset by a valuation allowance on the capital loss that resulted from the sale of shares. In fiscal 2017, Supervalu utilized a portion of the capital loss offset by a matching release of the valuation allowance on the capital loss. Supervalu has recorded a valuation allowance against the remaining capital loss as there is no evidence that the capital loss will be used prior to its expiration in fiscal
2019
.
Uncertain Tax Positions
Changes in Supervalu’s unrecognized tax positions consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Beginning balance
|
$
|
70
|
|
|
$
|
94
|
|
|
$
|
76
|
|
Increase based on tax positions related to the current year
|
7
|
|
|
5
|
|
|
15
|
|
Decrease based on tax positions related to the current year
|
—
|
|
|
—
|
|
|
—
|
|
Increase based on tax positions related to prior years
|
—
|
|
|
—
|
|
|
15
|
|
Decrease based on tax positions related to prior years
|
(15
|
)
|
|
(23
|
)
|
|
(4
|
)
|
Decrease related to settlements with taxing authorities
|
1
|
|
|
—
|
|
|
(3
|
)
|
Decrease due to lapse of statute of limitations
|
(4
|
)
|
|
(6
|
)
|
|
(5
|
)
|
Ending balance
|
$
|
59
|
|
|
$
|
70
|
|
|
$
|
94
|
|
Included in the balance of unrecognized tax benefits as of
February 25, 2017
,
February 27, 2016
and
February 28, 2015
are tax positions, net of tax, of
$33
,
$34
and
$36
, respectively, which would reduce Supervalu’s effective tax rate if recognized in future periods.
Because existing tax positions will continue to generate increased liabilities for Supervalu for unrecognized tax benefits over the next 12 months, and since Supervalu is routinely under audit by various taxing authorities, it is reasonably possible that the amount of unrecognized tax benefits will change during the next 12 months. An estimate of the amount or range of such change cannot be made at this time. However, Supervalu does not expect the change, if any, to have a material effect on Supervalu’s Consolidated Balance Sheets, Operations, or Cash Flows within the next 12 months.
Supervalu recognized interest income of
$3
,
$9
and
$7
in fiscal
2017
,
2016
and
2015
in
Income from discontinued operations, net of tax
and Interest expense, respectively, and penalty (income) expense of
$(2)
,
$5
, and
$0
in fiscal
2017
,
2016
and
2015
in
Income from discontinued operations, net of tax
and Selling and administrative expenses, respectively, in the Consolidated Statements of Operations. At
February 25, 2017
and
February 27, 2016
, Supervalu had accrued interest of
$11
and
$16
, respectively, related to uncertain tax positions recorded in Other current liabilities, and Long-term tax liabilities in the Consolidated Balance Sheets. At
February 25, 2017
and
February 27, 2016
, Supervalu had accrued penalties of
$2
and
$5
, respectively, related to uncertain tax positions recorded in Long-term tax liabilities in the Consolidated Balance Sheets.
Supervalu is currently under examination or other methods of review in several tax jurisdictions and remains subject to examination until the statute of limitations expires for the respective taxing jurisdiction or an agreement is reached between the taxing jurisdiction and Supervalu. As of
February 25, 2017
, Supervalu is no longer subject to federal income tax examinations for fiscal years before 2014 and in most states is no longer subject to state income tax examinations for fiscal years before 2007.
NOTE 15—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
February 25, 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 and 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
February 25, 2017
, the maximum amount of undiscounted payments Supervalu would be required to make in the event of default of all guarantees was
$66
(
$52
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. 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 minimus.
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 minimus.
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 Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimus.
Following the sale of 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
February 25, 2017
, using actuarial estimates as of December 31, 2016, the total undiscounted amount of all such guarantees was estimated at
$122
(
$109
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. No amount has been recorded in the Consolidated Balance Sheets for these contingent obligations and guarantee arrangements as the fair value has been determined to be de minimus.
Agreements with Save-A-Lot and Onex
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 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, 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 will be 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. The Company has recorded the fair value of the guarantee in the 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
to
three
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 it anticipates Haggen will 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 theses 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 15 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
February 25, 2017
, Supervalu had approximately
$322
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 conclusion 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. A mediation has been scheduled for May 22, 2017.
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. The District Court’s mandatory settlement conference set for February 14-15, 2017 was cancelled by the court and a mediation is scheduled for May 25, 2017. Supervalu continues to vigorously defend this lawsuit. Due to the mediation, it is probable that the parties will engage in settlement negotiations, which may result in a settlement of the matter. However, Supervalu cannot reasonably estimate the range of loss, if any, that may result from this matter due to the procedural status of the case and the lack of a formal demand on Supervalu by the plaintiffs.
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 appeal before the 8th Circuit is set for May 10, 2017.
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, 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 16—SEGMENT INFORMATION
Refer to the Consolidated Segment Financial Information for financial information concerning Supervalu’s operations and financial position by reportable segment.
Supervalu’s operating segments reflect the manner in which the business is managed and how Supervalu allocates resources and assesses performance internally. Supervalu’s chief operating decision maker is the Chief Executive Officer.
Supervalu offers a wide variety of grocery products, general merchandise and health and beauty care, pharmacy, fuel and other items and services. Supervalu’s business is classified by management into
two
reportable segments: Wholesale and Retail. These reportable segments are
two
distinct businesses, each with a different customer base, marketing strategy and management structure. Supervalu reviews its reportable segments on an annual basis, or more frequently if events or circumstances indicate a change in reportable segments has occurred.
The Wholesale reportable segment derives revenues from wholesale distribution and services to retail food stores and other customers (collectively referred to as “Wholesale customers”). The Retail reportable segment derives revenues from the sale of groceries and other products at retail locations operated by Supervalu. Substantially all of Supervalu’s operations are domestic.
Supervalu offers a wide variety of nationally advertised brand name and private-label products, primarily including grocery (both perishable and nonperishable), general merchandise and health and beauty care, pharmacy and fuel, which are sold
through Supervalu’s owned and franchised retail stores to shoppers and through its Wholesale segment to Wholesale customers. The following table provides additional detail on the amounts and percentages of Net sales for each group of similar products sold in the Wholesale and Retail segments, and service agreement revenue in Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
Nonperishable grocery products
(1)
|
$
|
5,579
|
|
|
45
|
%
|
|
$
|
5,753
|
|
|
45
|
%
|
|
$
|
5,939
|
|
|
45
|
%
|
Perishable grocery products
(2)
|
1,969
|
|
|
16
|
|
|
2,025
|
|
|
16
|
|
|
2,099
|
|
|
16
|
|
Services to Wholesale customers and other
|
157
|
|
|
1
|
|
|
157
|
|
|
1
|
|
|
160
|
|
|
1
|
|
|
7,705
|
|
|
62
|
%
|
|
7,935
|
|
|
61
|
%
|
|
8,198
|
|
|
62
|
%
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Nonperishable grocery products
(1)
|
$
|
2,511
|
|
|
20
|
%
|
|
$
|
2,607
|
|
|
20
|
%
|
|
$
|
2,677
|
|
|
20
|
%
|
Perishable grocery products
(2)
|
1,494
|
|
|
12
|
|
|
1,549
|
|
|
12
|
|
|
1,574
|
|
|
12
|
|
Pharmacy products
|
500
|
|
|
4
|
|
|
511
|
|
|
4
|
|
|
510
|
|
|
4
|
|
Fuel
|
55
|
|
|
1
|
|
|
67
|
|
|
1
|
|
|
83
|
|
|
1
|
|
Other
|
36
|
|
|
—
|
|
|
35
|
|
|
—
|
|
|
40
|
|
|
—
|
|
|
4,596
|
|
|
37
|
%
|
|
4,769
|
|
|
37
|
%
|
|
4,884
|
|
|
37
|
%
|
Corporate:
|
|
|
—
|
|
|
|
|
|
|
|
|
|
Services agreement revenue
|
$
|
179
|
|
|
1
|
%
|
|
$
|
203
|
|
|
2
|
%
|
|
$
|
195
|
|
|
1
|
%
|
Net sales
|
$
|
12,480
|
|
|
100
|
%
|
|
$
|
12,907
|
|
|
100
|
%
|
|
$
|
13,277
|
|
|
100
|
%
|
|
|
(1)
|
Includes such items as dry goods, dairy, frozen foods, beverages, general merchandise, home, health and beauty care and candy
|
|
|
(2)
|
Includes such items as meat, produce, deli and bakery
|
Segment operating earnings include revenues and costs attributable to each of the respective business segments and allocated corporate overhead, based on the segment’s estimated consumption of corporately managed resources. Variances to planned corporate overhead allocated to business segments remain in Corporate because allocated corporate overhead affecting segment operating profit is centrally managed. Reported segment information is presented on the same basis as it is reviewed by executive management.
The presentation of identifiable assets by reportable segment includes allocations from Wholesale to Retail of shared assets based on estimated usage. The presentation of capital expenditures by reportable segment includes allocations of corporate expenditures for information technology and other investments from Corporate to Wholesale and Retail based on estimated usage.
NOTE 17—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 Consolidated Financial Statements for all periods presented in a manner consistent with the SAL Merger Agreement and the Separation Agreement. In addition, discontinued operations include the results of operations and cash flows attributed to the assets and liabilities of the NAI business.
Results of Discontinued Operations
The following table provides the composition of the gain on the sale of Save-A-Lot:
|
|
|
|
|
|
2017
|
Purchase price
|
$
|
1,304
|
|
Disposed of balance sheet assets and liabilities, net
|
(635
|
)
|
Transaction costs and other
|
(32
|
)
|
Pre-tax gain on sale
|
637
|
|
Income tax provision
|
(60
|
)
|
After-tax gain on sale
|
$
|
577
|
|
Income taxes on the gain were recorded at a significantly reduced effective rate due to the anticipated utilization of capital loss carryforwards and the release of valuation allowances of approximately
$244
. Income tax on the gain on sale of Save-A-Lot are expected to be paid in Supervalu’s first quarter of fiscal 2018. The closing adjustments under the SAL Merger Agreement are still subject to finalization, which may impact the final calculation of the purchase price and gain on sale. Supervalu believes that any potential adjustment to the purchase price from the closing adjustments will be insignificant.
The following is a summary of Supervalu’s operating results and certain other directly attributable expenses that are included in discontinued operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
2016
|
|
2015
|
Net sales
|
$
|
3,529
|
|
|
$
|
4,621
|
|
|
$
|
4,639
|
|
Cost of sales
|
2,969
|
|
|
3,911
|
|
|
3,949
|
|
Gross profit
|
560
|
|
|
710
|
|
|
690
|
|
Selling and administrative expenses
|
452
|
|
|
563
|
|
|
514
|
|
Goodwill impairment charge
|
37
|
|
|
—
|
|
|
—
|
|
Gain on sale
|
(637
|
)
|
|
—
|
|
|
—
|
|
Operating earnings
|
708
|
|
|
147
|
|
|
176
|
|
Interest income, net
|
(5
|
)
|
|
(7
|
)
|
|
(3
|
)
|
Earnings from discontinued operations before income taxes
|
713
|
|
|
154
|
|
|
179
|
|
Income tax provision
|
86
|
|
|
52
|
|
|
5
|
|
Income from discontinued operations, net of tax
|
$
|
627
|
|
|
$
|
102
|
|
|
$
|
174
|
|
The carrying amounts of major classes of assets and liabilities that were classified as discontinued operations on the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
February 27, 2016
|
Current assets
|
|
Cash and cash equivalents
|
$
|
15
|
|
Receivables, net
|
45
|
|
Inventories, net
|
298
|
|
Other current assets
|
18
|
|
Total current assets of discontinued operations
|
376
|
|
Long-term assets
|
|
Property, plant and equipment, net
|
460
|
|
Goodwill
|
142
|
|
Intangible assets, net
|
8
|
|
Deferred tax assets
|
(10
|
)
|
Other assets
|
13
|
|
Total long-term assets of discontinued operations
|
613
|
|
Total assets of discontinued operations
|
$
|
989
|
|
|
|
Current liabilities
|
|
Accounts payable
|
$
|
289
|
|
Accrued vacation, compensation and benefits
|
34
|
|
Current maturities of capital lease obligations
|
1
|
|
Other current liabilities
|
22
|
|
Total current liabilities of discontinued operations
|
346
|
|
Long-term liabilities
|
|
Long-term capital lease obligations
|
9
|
|
Long-term tax liabilities
|
6
|
|
Other long-term liabilities
|
27
|
|
Total long-term liabilities of discontinued operations
|
42
|
|
Total liabilities of discontinued operations
|
388
|
|
Net assets of discontinued operations
|
$
|
601
|
|
Impairment Charge
Prior to the classification of the Save-A-Lot business as held-for-sale, Supervalu assessed the carrying value of the Save-A-Lot business for impairment in accordance with generally accepted accounting principles to determine if the carrying value of the Save-A-Lot assets exceeded their estimated fair value, prior to measuring the held-for-sale business at fair value less cost to sell. The carrying value of the total net assets of the Save-A-Lot reporting units were compared to their estimated fair value based on the proceeds expected to be received pursuant to the SAL Merger Agreement. Supervalu’s review of goodwill indicated that the estimated fair value of the Save-A-Lot licensee distribution reporting unit was in excess of its carrying value, but that the carrying value of the Save-A-Lot corporate stores reporting unit exceeded its estimated fair value. Supervalu recorded a non-cash goodwill impairment charge of
$37
before tax during the third quarter of fiscal 2017, which was included as a component of
Income from discontinued operations, net of tax
, resulting from a decline in discounted cash flows under the income approach and indicated reporting unit fair values under the market approach. The calculation of the impairment charge contains significant judgments and estimates including weighted average cost of capital, future revenue, profitability, cash flows and fair values of assets and liabilities.
Income Taxes
Income before income taxes from discontinued operations for fiscal 2015 primarily reflects
$6
of property tax refunds and interest income resulting from settlement of income tax audits. The income tax benefit included as a component of Income from discontinued operations, net of tax for fiscal 2015 includes
$66
of net tax benefits, primarily related to tangible property repair regulations and other deduction-related changes.
NOTE 18—SUBSEQUENT EVENTS
On April 10, 2017, Supervalu, a newly formed wholly owned subsidiary of Supervalu (“UG Merger Sub”), and Unified Grocers, Inc. (“Unified Grocers”), entered into an Agreement and Plan of Merger (the “UG Merger Agreement”) pursuant to which Supervalu agreed to acquire Unified Grocers in a transaction valued at approximately
$375
, comprised of approximately
$114
in cash for
100%
of the outstanding stock of Unified Grocers plus the assumption and payoff of Unified Grocers net debt at closing (approximately
$261
as of April 1, 2017). Founded in 1922, Unified Grocers is a retailer-owned wholesale grocery distribution cooperative that supplies independent retailers throughout the western United States and has annual sales of approximately
$3.8
billion. Supervalu expects to use cash on hand and available liquidity under its credit facilities to fund the acquisition and payoff Unified Grocers’ net debt.
On the terms and subject to the conditions set forth in the UG Merger Agreement, at the closing of the transactions contemplated thereby (the “UG Closing”), UG Merger Sub will merge with and into Unified Grocers (the “UG Merger”) with Unified Grocers surviving the UG Merger as a wholly owned subsidiary of Supervalu, and the shares of Unified Grocers will be converted into the right to receive from Supervalu at the UG Closing approximately
$114
in cash in the aggregate.
As further provided in the UG Merger Agreement, the consummation of the transactions contemplated by the UG Merger Agreement is subject to certain closing conditions, including (i) approval of the UG Merger by the shareholders of Unified Grocers, (ii) any applicable waiting periods (or extensions thereof) under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 having expired or been terminated, (iii) the absence of any order by any governmental entity that restrains, enjoins or otherwise prohibits the UG Merger, (iv) the accuracy of the representations and warranties of the parties (generally subject to a material adverse effect standard), (v) material compliance by the parties with their respective obligations under the UG Merger Agreement, (vi) no material adverse effect having occurred with respect to the Unified Grocers business after entry into the UG Merger Agreement, and (vii) other customary closing conditions. The transaction is currently expected to be completed in mid- to late summer 2017.
Under the terms of the UG Merger Agreement, Supervalu will be entitled to receive a termination fee of
$8
, plus reimbursement of up to
$1
in costs and expenses, in the event that the UG Merger Agreement is terminated by Unified Grocers under certain circumstances, including as a result of a change in the recommendation of the board of directors of Unified Grocers. In addition, a reverse termination fee of
$9.5
may be payable by Supervalu to Unified Grocers upon termination of the UG Merger Agreement under certain circumstances, including if Supervalu is unable to obtain antitrust approval before January 5, 2018.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
(In millions, except per share data)
Unaudited quarterly financial information for SUPERVALU INC. and its subsidiaries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First
(16 weeks)
|
|
Second
(12 weeks)
|
|
Third
(12 weeks)
|
|
Fourth
(12 weeks)
|
|
Fiscal Year
(52 weeks)
|
Net sales
|
$
|
3,765
|
|
|
$
|
2,805
|
|
|
$
|
3,003
|
|
|
$
|
2,907
|
|
|
$
|
12,480
|
|
Gross profit
|
$
|
549
|
|
|
$
|
396
|
|
|
$
|
407
|
|
|
$
|
435
|
|
|
$
|
1,787
|
|
Net earnings (loss) from continuing operations
(1)
|
$
|
3
|
|
|
$
|
29
|
|
|
$
|
(11
|
)
|
|
$
|
6
|
|
|
$
|
27
|
|
Net earnings (loss) attributable to SUPERVALU INC.
|
$
|
46
|
|
|
$
|
31
|
|
|
$
|
(26
|
)
|
|
$
|
599
|
|
|
$
|
650
|
|
Net earnings (loss) per share from continuing operations attributable to SUPERVALU INC.—diluted
(1)
|
$
|
0.01
|
|
|
$
|
0.11
|
|
|
$
|
(0.04
|
)
|
|
$
|
0.02
|
|
|
$
|
0.09
|
|
Net earnings (loss) per share attributable to SUPERVALU INC.—diluted
|
$
|
0.17
|
|
|
$
|
0.12
|
|
|
$
|
(0.10
|
)
|
|
$
|
2.23
|
|
|
$
|
2.43
|
|
Dividends declared per share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Weighted average shares—diluted
|
267
|
|
|
267
|
|
|
265
|
|
|
269
|
|
|
268
|
|
|
2016
|
|
First
(16 weeks)
|
|
Second
(12 weeks)
|
|
Third
(12 weeks)
|
|
Fourth
(12 weeks)
|
|
Fiscal Year
(52 weeks)
|
Net sales
|
$
|
4,000
|
|
|
$
|
2,971
|
|
|
$
|
3,045
|
|
|
$
|
2,891
|
|
|
$
|
12,907
|
|
Gross profit
|
$
|
587
|
|
|
$
|
420
|
|
|
$
|
436
|
|
|
$
|
431
|
|
|
$
|
1,874
|
|
Net earnings from continuing operations
(2)
|
$
|
6
|
|
|
$
|
32
|
|
|
$
|
16
|
|
|
$
|
30
|
|
|
$
|
84
|
|
Net earnings attributable to SUPERVALU INC.
|
$
|
61
|
|
|
$
|
31
|
|
|
$
|
34
|
|
|
$
|
52
|
|
|
$
|
178
|
|
Net earnings per share from continuing operations attributable to SUPERVALU INC.—diluted
(2)
|
$
|
0.01
|
|
|
$
|
0.12
|
|
|
$
|
0.05
|
|
|
$
|
0.10
|
|
|
$
|
0.28
|
|
Net earnings per share attributable to SUPERVALU INC.—diluted
|
$
|
0.23
|
|
|
$
|
0.11
|
|
|
$
|
0.13
|
|
|
$
|
0.20
|
|
|
$
|
0.66
|
|
Dividends declared per share
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Weighted average shares—diluted
|
268
|
|
|
268
|
|
|
268
|
|
|
267
|
|
|
268
|
|
|
|
(1)
|
Results from continuing operations for the fiscal year ended
February 25, 2017
include net charges and costs of $110 before tax ($56 after tax, or $0.20 per diluted share). Refer to “Selected Financial Data” in Part II, Item 6 of this Annual Report on Form 10-K for a discussion of these items.
|
|
|
(2)
|
Results from continuing operations for the fiscal year ended
February 27, 2016
include net charges and costs of $29 before tax ($17 after tax, or $0.06 per diluted share). Refer to “Selected Financial Data” in Part II, Item 6 of this Annual Report on Form 10-K for a discussion of these items.
|