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 (“we”, “us”, “our”, “Supervalu” or the “Company”) provides supply chain services, primarily wholesale distribution and support services, and operates
three
retail grocery banners in
three
geographic regions under the Cub Foods, Shoppers Food & Pharmacy, and Hornbacher’s banners. We operate primarily in the United States grocery channel. 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. The Consolidated Financial Statements are prepared in conformity with accounting principles generally accepted in the United States (“GAAP”).
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. Refer to
Note 18—Discontinued Operations
for additional information about our discontinued operations.
Fiscal Year
Our fiscal years end on the last Saturday of February and contain either 52 or 53 weeks. All references to fiscal
2018
,
2017
and
2016
relate to the
52-week
fiscal years ended
February 24, 2018
,
February 25, 2017
and
February 27, 2016
, respectively.
Use of Estimates
The preparation of our Consolidated Financial Statements in conformity with GAAP 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, we provide 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 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 we determine we are acting as a principle in the transaction, which includes our evaluation of whether we are the primary obligor in a transaction, are subject to inventory or credit risk, have latitude in establishing price and selecting suppliers, or have several, but not all, of these indicators. If we are 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 or 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 costs. Costs of sales include depreciation expense and salaries and wages related to warehousing and distribution costs. We receive 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. We recognize 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.
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
$20
,
$25
and
$23
for fiscal
2018
,
2017
and
2016
, respectively.
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
We consider 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. Our banking arrangements allow us to fund outstanding checks when presented to the financial institution for payment. We fund 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 24, 2018
and
February 25, 2017
, we had net book overdrafts of
$144
and
$91
, 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 expense (income) was
$6
,
$(4)
and
$3
in fiscal
2018
,
2017
and
2016
, respectively.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of our inventory consists of finished goods. We use the weighted average cost method, standard costs, the retail inventory method (“RIM”) or replacement cost method to value discrete inventory items at lower of cost or market under the FIFO method before application of any last-in, first-out (“LIFO”) reserve. We evaluate inventory shortages throughout each fiscal year based on actual physical counts in our distribution facilities and stores. 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. See
Note 5—Inventories, Net
for additional information.
Property, Plant and Equipment, Net
Property, plant and equipment are carried at historical cost less any applicable impairment charges. 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
2018
,
2017
and
2016
, respectfully.
Business Dispositions
We review 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 of 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 shift that has a major effect on operations and financial results. In addition, we evaluate 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
(Loss) 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 18—Discontinued Operations
for additional information.
The carrying value of the business held for sale is reviewed for recoverability 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
Goodwill is tested annually for impairment and is tested for impairment more frequently 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 at the reporting unit level. Our 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 our 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.
We review the composition of our reporting units on an annual basis and on an interim basis if events or circumstances indicate that the composition of the reporting units may have changed. There were no changes in our reporting units as a result of the fiscal
2018
review. See
Note 7—Goodwill and Intangible Assets
for additional information.
Intangible Assets, Net
We review intangible assets with indefinite useful lives, which primarily consist of trademarks and tradenames, for impairment during the fourth quarter of each year, and 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 our 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 our 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 7—Goodwill and Intangible Assets
for additional information.
Impairment of Long-Lived Assets
We monitor the recoverability of our long-lived assets such as buildings and equipment, and evaluate 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 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, we recognize 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. We estimate fair value based on our experience and knowledge of the market in which the property is located, including the use of local real estate brokers and advisers. Our 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.
We group 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 has predominately been at the distribution center level for Wholesale and the geographic market level for retail stores f
or
three
geographic marke
t groupings of individual retail stores, but individual store asset groupings may be assessed in certain circumstances.
Due to the highly competitive environment and our ongoing strategic transformation, we continue to evaluate if modifications to the estimation approach of our long-lived asset groups are necessary. Future changes to our 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
We maintain reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. We calculate 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 are usually paid over the remaining lease terms, which generally range from
one
to
12
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 our 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.
Rent Expense
We recognize rent holidays, including the time period during which we have 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. We recognize rent expense and the carrying value of capital lease obligations and property, plant and equipment, related to contractual obligations for properties where we remain the primary obligor upon assignment of the lease and do not obtain a release from landlords or retain the equity interests in the legal entities with the related rent contracts. Deferred rents are included in
Other current liabilities
and
Other long-term liabilities
in the Consolidated Balance Sheets.
Self-Insurance Liabilities
We use a combination of insurance and self-insurance for workers’ compensation, automobile and general liability costs. It is our policy to record 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
2018
,
0.3 percent
to
5.1 percent
for fiscal
2017
and
0.3 percent
to
5.1 percent
for fiscal
2016
.
Changes in our insurance liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
67
|
|
|
$
|
69
|
|
|
$
|
67
|
|
Expense
|
19
|
|
|
16
|
|
|
17
|
|
Claim payments
|
(19
|
)
|
|
(18
|
)
|
|
(16
|
)
|
Reclassification of insurance recoveries to receivables
|
—
|
|
|
—
|
|
|
1
|
|
Ending balance
|
67
|
|
|
67
|
|
|
69
|
|
Less current portion
|
(21
|
)
|
|
(21
|
)
|
|
(22
|
)
|
Long-term portion
|
$
|
46
|
|
|
$
|
46
|
|
|
$
|
47
|
|
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 24, 2018
and
February 25, 2017
, respectively. Amounts due from insurance companies were
$8
and
$9
as of
February 24, 2018
and
February 25, 2017
, 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
We recognize the funded status of our Company-sponsored defined benefit plans in the 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. We sponsor pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. The determination of our 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 11—Benefit Plans
. Actual results that differ from the assumptions are accumulated and amortized over future periods.
We contribute 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 11—Benefit Plans
for additional information on participation in multiemployer plans.
We also contribute 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.
|
We utilized fair value measurements in reporting results of operations and financial position within our Consolidated Financial Statements for the following:
|
|
•
|
Acquired assets and liabilities discussed in
Note 2—Business and Asset 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 7—Goodwill and Intangible Assets
and
Note 18—Discontinued Operations
, 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 8—Fair Value Measurements
.
|
Derivatives
We use derivatives only to manage well-defined risks. We do not use financial instruments or derivatives for any trading or other speculative purposes.
Interest rate swap contracts are entered into to mitigate our 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.
Our limited involvement with diesel fuel derivatives is primarily to manage our 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, we enter into energy commitments for certain amounts of electricity and natural gas purchases that we expect 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. We use 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. The fair value of performance stock units is estimated as of the date of the grant using the Monte Carlo option pricing model.
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 our 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 15—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.
We are currently in various stages of audits, appeals or other methods of review with authorities from various taxing jurisdictions. We establish liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite management’s belief that our tax return positions are supportable, certain positions may be challenged and may need to be revised. We adjust these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. We also provide interest on these liabilities at the appropriate statutory interest rate, and accrue penalties as applicable. We recognize 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 March 2016, the Financial Accounting Standards Board (the “FASB”) issued authoritative guidance under Accounting Standards Update (“ASU”) 2016-09,
Compensation—Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. ASU 2016-09 provides for simplification of several aspects of the accounting for share-based payment transactions, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. We adopted this guidance in the first quarter of fiscal 2018, which resulted in
$7
of additional income tax expense that would have been recorded as an adjustment to Additional paid-in-capital under previous authoritative guidance. The adoption resulted in the presentation of payments for shares traded for taxes within financing activities, which resulted in the retrospective revision of the Consolidated Statements of Cash Flows. In addition, we elected not to change our policy on accounting for forfeitures and continue to estimate the total number of awards for which the requisite service period will not be rendered.
Recently Issued Accounting Standards
In February 2018, the FASB issued authoritative guidance under ASU 2018-02,
Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
. ASU 2018-02 provides that the stranded tax effects from the Tax Cuts and Jobs Act (the “Tax Act”) may be reclassified to retained earnings. We are required to adopt this new guidance in the first quarter of fiscal 2020. We estimate that the stranded tax effects that may be reclassified are approximately $10.
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. We are required to adopt this new guidance in the first quarter of fiscal 2019. We will reclassify $63 of non-service cost components of net periodic benefit income, as disclosed in
Note 11—Benefit Plans
, to an other income and expense line in the Consolidated Statements of Operations upon adoption.
In January 2017, the FASB issued authoritative guidance under ASU 2017-04,
Intangibles – Goodwill and Other: Simplifying the Test for Goodwill Impairment
. 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. ASU 2017-04 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 value exceeds the reporting unit’s fair value. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of adoption of this standard on our 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. We are required to adopt this new guidance in the first quarter of fiscal 2019. We are currently evaluating the potential impact of adoption of this standard on our 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. We are required to adopt this new guidance in the first quarter of fiscal 2021. We are currently evaluating the potential impact of adoption of this standard on our 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, we will be required to recognize most leases on our balance sheet at the beginning of the earliest comparative period presented with a corresponding adjustment to stockholders’ equity. ASU 2016-02 requires us to capitalize most current operating lease obligations as right-of-use assets with a corresponding liability based on the present value of future operating lease obligations. 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. Lease agreements that are 12 months or less are permitted to be excluded from the balance sheet. We are required to adopt this new guidance in the first quarter of fiscal 2020. ASU 2016-02
must be adopted using a modified retrospective transition, applying the new criteria to all leases existing or entered into after the beginning of the earliest comparative period in the consolidated financial statements. The modified retrospective approach includes a number of optional practical expedients that we may elect to apply. Expanded disclosures with additional qualitative and quantitative information will also be required. The adoption will include updates as provided under ASU 2018-01,
Leases (Topic 842): Land Easement Practical Expedient for Transition to Topic 842
. We are currently evaluating the potential impact of adoption of this standard on our consolidated financial statements. For a quantification of our off-balance sheet operating leases subject to capitalization under ASU 2016-02, other than those reserved for as a closed property and certain agreements that may be deemed leases under the new authoritative guidance, refer to total operating lease obligations within
Note 10—Leases
.
In May 2014, the FASB issued authoritative guidance under ASU 2014-09,
Revenue from Contracts with Customers (Topic 606):
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 promised goods or services to a customer at an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services. The new guidance will be adopted by us in 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;
and ASU 2017-14,
Income Statement-Reporting Comprehensive Income (Topic 220), Revenue Recognition (Topic 605), and Revenue from Contracts with Customers (Topic 606).
Adoption is allowed by either the full retrospective or modified retrospective approach.
We do not expect that the standard will materially affect our net earnings, financial position, or cash flows. We are also currently finalizing our accounting policies under Topic 606 and designing and implementing internal controls for the adoption and recognition of revenue under Topic 606. We completed our evaluation of the impact the standard has on our determination of whether we act as principal or agent in certain customer and vendor arrangements where the purchase and sale of inventory are virtually simultaneous, and we will continue to recognize sales and cost of sales on a gross basis. We currently believe that there will be less than a $10 impact to our Wholesale segment’s revenue. We currently believe that there will be less than a $5 increase to our Retail segment’s revenue, which relates primarily to the recognition and classification of customer loyalty programs and the presentation of certain advertising programs. We expect to recognize incentive payments made to customers under supply agreements as assets that will be amortized over the expected term of the related purchases under these agreements. Distribution contracts within Wholesale contain certain promises for goods or services that we believe will be immaterial in the context of the contracts. We will adopt the guidance in the first quarter of fiscal 2019 and plan to use the modified retrospective approach in the first quarter of fiscal 2019.
NOTE 2—BUSINESS AND ASSET ACQUISITIONS
Associated Grocers of Florida, Inc.
On
December 8, 2017
, we completed the acquisition of Associated Grocers of Florida, Inc. (“AG Florida”) pursuant to the terms of an Agreement and Plan of Merger dated
October 17, 2017
by and among Supervalu, a then wholly owned subsidiary of Supervalu (“AG Merger Sub”), and AG Florida. AG Florida was a retailer-owned cooperative. AG Florida distributes full lines of grocery and general merchandise to independent retailers, primarily in South Florida, the Caribbean, Central and South America and Asia.
At the closing of the transaction, AG Merger Sub merged with and into AG Florida and AG Florida became a wholly owned subsidiary of Supervalu. The transaction was valued at
$193
, comprised of
$131
in cash for
100 percent
of the outstanding stock of AG Florida plus the assumption and payoff of AG Florida’s net debt of
$62
at closing. We incurred merger and integration costs of
$5
in fiscal 2018 related to the AG Florida acquisition.
Acquisition of Unified Grocers, Inc.
On
June 23, 2017
, we completed the acquisition of Unified Grocers, Inc. (“Unified”) pursuant to the terms of an Agreement and Plan of Merger dated
April 10, 2017
by and among Supervalu, West Acquisition Corporation, a then wholly owned subsidiary of Supervalu (“Merger Sub”), and Unified. The transaction was valued at
$390
, comprised of
$114
in cash for
100 percent
of the outstanding stock of Unified plus the assumption and payoff of Unified’s net debt of
$276
at closing.
At the closing of the transaction, Merger Sub merged with and into Unified. As a result of the transaction, Unified became a wholly owned subsidiary of Supervalu. We incurred merger and integration costs of
$32
in fiscal 2018 related to the Unified
acquisition.
The tables immediately below summarize the preliminary fair values assigned to Unified’s and AG Florida’s net assets acquired. As of
February 24, 2018
, the fair value allocation for each of the acquisitions was preliminary and will be finalized when the valuation is completed. There can be no assurance that such finalizations will not result in material changes from the preliminary purchase price allocations. Our estimates and assumptions are subject to change during the measurement period (up to one year from the applicable acquisition date), as we finalize the valuations of certain tangible and intangible assets acquired and liabilities assumed in connection with the acquisitions. The primary areas of the purchase price allocations that are not yet finalized relate to real and personal property, identifiable intangible assets, goodwill, income taxes and deferred taxes.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unified
|
|
AG Florida
|
|
As Originally Reported
|
|
As
Revised
|
|
As Originally Reported
|
Cash and cash equivalents
|
$
|
9
|
|
|
$
|
9
|
|
|
$
|
1
|
|
Accounts receivable
|
176
|
|
|
178
|
|
|
49
|
|
Inventories
|
237
|
|
|
237
|
|
|
48
|
|
Other current assets
|
31
|
|
|
24
|
|
|
4
|
|
Property, plant and equipment
|
285
|
|
|
285
|
|
|
84
|
|
Goodwill
|
29
|
|
|
26
|
|
|
44
|
|
Intangible assets
|
54
|
|
|
56
|
|
|
52
|
|
Deferred tax assets
|
(19
|
)
|
|
(13
|
)
|
|
(28
|
)
|
Other assets
|
65
|
|
|
65
|
|
|
4
|
|
Accounts payable
|
(255
|
)
|
|
(255
|
)
|
|
(53
|
)
|
Other current liabilities
|
(89
|
)
|
|
(89
|
)
|
|
(13
|
)
|
Long-term debt and capital lease obligations
|
(270
|
)
|
|
(270
|
)
|
|
(60
|
)
|
Pension and other postretirement benefit obligations
|
(103
|
)
|
|
(101
|
)
|
|
—
|
|
Other liabilities assumed
|
(36
|
)
|
|
(38
|
)
|
|
(1
|
)
|
Total fair value of net assets acquired
|
114
|
|
|
114
|
|
|
131
|
|
Assumed obligations to make patronage payments to member-owners
|
—
|
|
|
—
|
|
|
5
|
|
Less cash acquired
|
(9
|
)
|
|
(9
|
)
|
|
(1
|
)
|
Total consideration for acquisition, less cash acquired
|
$
|
105
|
|
|
$
|
105
|
|
|
$
|
135
|
|
Recognized goodwill is primarily attributable to expected synergies from combining operations, as well as intangible assets that do not qualify for separate recognition.
As part of the acquisitions of Unified and AG Florida we recognized the following finite lived intangible assets:
|
|
|
|
|
|
|
|
Estimated Useful Life (in years)
|
|
Amounts Acquired
|
Customer relationships
|
15 years
|
|
$
|
41
|
|
Favorable operating leases
|
3-14 years
|
|
7
|
|
Trade names
|
14 years
|
|
8
|
|
Total Unified finite-lived intangibles acquired
|
|
|
$
|
56
|
|
Customer relationships and supply agreements
|
15 years
|
|
47
|
|
Favorable operating leases
|
2-5 years
|
|
5
|
|
Total AG Florida finite-lived intangibles acquired
|
|
|
$
|
52
|
|
Combined Results
The following unaudited pro forma consolidated condensed financial results of operations are presented as if the AG Florida and Unified acquisitions were consummated on February 28, 2016, the beginning of the comparable prior annual reporting period:
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
(1)
|
Net sales
|
|
$
|
15,892
|
|
|
$
|
15,323
|
|
Net earnings from continuing operations attributable to SUPERVALU INC.
|
|
$
|
48
|
|
|
$
|
20
|
|
Basic net earnings from continuing operations per share attributable to SUPERVALU INC.
|
|
$
|
1.24
|
|
|
$
|
0.52
|
|
Diluted net earnings from continuing operations per share attributable to SUPERVALU INC.
|
|
$
|
1.24
|
|
|
$
|
0.52
|
|
|
|
(1)
|
This unaudited pro forma financial information is based on Unified’s and AG Florida’s historical reporting periods. The results reflect Unified’s and AG Florida’s 52-week fiscal periods ended December 31, 2016 and January 14, 2017, respectively.
|
As required by GAAP, these unaudited pro forma results do not reflect any cost saving synergies from operating efficiencies. Accordingly, these unaudited pro forma results are presented for informational purposes only and are not necessarily indicative of what the actual results of operations of the combined companies would have been had the acquisitions occurred at the beginning of the period being presented, nor are they indicative of future results of operations.
Cub Foods Franchised Stores
In fiscal 2018, we paid
$6
to acquire the minority equity interests of
six
limited liability companies that own and operate six Cub Foods stores. We now own 100 percent of these companies. The results from these companies will continue to be presented on a consolidated basis in our consolidated financial statements.
Distribution Center Asset Acquisitions
In fiscal 2018, we paid
$61
to acquire the land and building for a distribution center located in Joliet, IL, and we also paid
$37
to acquire the land and building for a distribution center located in Harrisburg, PA. The consideration paid for the acquired assets was allocated based on the proportionate fair value of the underlying acquired assets prior to the facilities being placed into service.
Other 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 our Consolidated Financial Statements.
During fiscal 2016, we 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.
NOTE 3—ALLOWANCE FOR DOUBTFUL ACCOUNTS
Changes in our allowance for doubtful accounts and notes receivable consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
6
|
|
|
$
|
11
|
|
|
$
|
17
|
|
Additions charged to costs and expenses
|
8
|
|
|
2
|
|
|
3
|
|
Deductions
|
—
|
|
|
(7
|
)
|
|
(9
|
)
|
Ending balance
|
$
|
14
|
|
|
$
|
6
|
|
|
$
|
11
|
|
NOTE 4—RESERVES FOR CLOSED PROPERTIES AND PROPERTY, PLANT AND EQUIPMENT-RELATED IMPAIRMENT CHARGES
Reserves for Closed Properties
Changes in reserves for closed properties consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
22
|
|
|
$
|
24
|
|
|
$
|
31
|
|
Additions
|
3
|
|
|
3
|
|
|
3
|
|
Payments
|
(7
|
)
|
|
(9
|
)
|
|
(9
|
)
|
Adjustments
|
(4
|
)
|
|
4
|
|
|
(1
|
)
|
Ending balance
|
$
|
14
|
|
|
$
|
22
|
|
|
$
|
24
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Property, plant and equipment:
|
|
|
|
|
|
Carrying value
|
$
|
22
|
|
|
$
|
21
|
|
|
$
|
1
|
|
Fair value measured using Level 3 inputs
|
16
|
|
|
18
|
|
|
0
|
|
Impairment charges
|
$
|
6
|
|
|
$
|
3
|
|
|
$
|
1
|
|
NOTE 5—INVENTORIES, NET
Inventories, net consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Inventory carried under LIFO:
|
Weighted average cost
|
$
|
553
|
|
|
47
|
%
|
|
$
|
510
|
|
|
61
|
%
|
Standard cost
|
258
|
|
|
22
|
|
|
—
|
|
|
—
|
|
RIM
|
98
|
|
|
8
|
|
|
87
|
|
|
10
|
|
Replacement cost
|
35
|
|
|
3
|
|
|
52
|
|
|
6
|
|
Total cost-basis inventory carried under LIFO
|
$
|
944
|
|
|
80
|
%
|
|
$
|
649
|
|
|
77
|
%
|
Inventory carried under FIFO:
|
|
|
|
|
|
|
|
Weighted average cost
|
$
|
201
|
|
|
17
|
%
|
|
$
|
173
|
|
|
21
|
%
|
RIM
|
17
|
|
|
2
|
|
|
18
|
|
|
2
|
|
Standard cost
|
15
|
|
|
1
|
|
|
—
|
|
|
—
|
|
Replacement cost
|
3
|
|
|
—
|
|
|
3
|
|
|
—
|
|
Total cost-basis of inventory carried under FIFO
|
$
|
236
|
|
|
20
|
%
|
|
$
|
194
|
|
|
23
|
%
|
Total inventory, gross
|
1,180
|
|
|
|
|
843
|
|
|
|
LIFO reserve
|
(199
|
)
|
|
|
|
(198
|
)
|
|
|
Inventories, net
|
$
|
981
|
|
|
|
|
$
|
645
|
|
|
|
NOTE 6—PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment, net, consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Land
|
$
|
189
|
|
|
$
|
61
|
|
Buildings
|
1,255
|
|
|
946
|
|
Property under construction
|
75
|
|
|
50
|
|
Leasehold improvements
|
302
|
|
|
258
|
|
Equipment
|
1,489
|
|
|
1,503
|
|
Capitalized lease assets
|
218
|
|
|
265
|
|
Total property, plant and equipment
|
3,528
|
|
|
3,083
|
|
Accumulated depreciation
|
(2,034
|
)
|
|
(2,020
|
)
|
Accumulated amortization on capitalized lease assets
|
(152
|
)
|
|
(187
|
)
|
Total property, plant and equipment, net
|
$
|
1,342
|
|
|
$
|
876
|
|
Depreciation expense was
$170
,
$149
and
$152
for fiscal
2018
,
2017
and
2016
, respectively. Amortization expense related to capitalized lease assets was
$14
,
$15
and
$15
for fiscal
2018
,
2017
and
2016
, respectively.
NOTE 7—GOODWILL AND INTANGIBLE ASSETS
Changes in the carrying value of Goodwill by goodwill reportable unit consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 27,
2016
|
|
Additions
|
|
Impairments
|
|
February 25,
2017
|
|
Additions
|
|
Impairments
|
|
February 24,
2018
|
Goodwill:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Wholesale
|
$
|
710
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
710
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
780
|
|
Retail
|
13
|
|
|
—
|
|
|
(13
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total goodwill
|
$
|
723
|
|
|
$
|
—
|
|
|
$
|
(13
|
)
|
|
$
|
710
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
780
|
|
In fiscal 2017, we conducted an impairment review of the carrying value of our reporting units due to declines in sales and cash flows within Retail. The review indicated 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, we performed the step 2 assessment and recorded a non-cash goodwill impairment charge of
$13
in the Retail segment in fiscal 2017.
Identifiable intangible assets consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 24, 2018
|
|
February 25, 2017
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
|
Cost
|
|
Accumulated Amortization
|
|
Net
|
Customer lists, supply agreements, prescription files and other
|
$
|
177
|
|
|
$
|
(66
|
)
|
|
$
|
111
|
|
|
$
|
81
|
|
|
$
|
(54
|
)
|
|
$
|
27
|
|
Favorable operating leases
|
21
|
|
|
(6
|
)
|
|
15
|
|
|
9
|
|
|
(4
|
)
|
|
5
|
|
Total finite-life intangibles
|
$
|
198
|
|
|
$
|
(72
|
)
|
|
$
|
126
|
|
|
$
|
90
|
|
|
$
|
(58
|
)
|
|
$
|
32
|
|
Indefinite-lived tradename intangibles
|
5
|
|
|
—
|
|
|
5
|
|
|
5
|
|
|
—
|
|
|
5
|
|
Total intangibles
|
$
|
203
|
|
|
$
|
(72
|
)
|
|
$
|
131
|
|
|
$
|
95
|
|
|
$
|
(58
|
)
|
|
$
|
37
|
|
Amortization expense of intangible assets with finite useful lives of
$13
,
$9
and
$8
was recorded in fiscal
2018
,
2017
and
2016
, respectively.
There were no impairment charges in fiscal
2018
and
2017
, respectively. In fiscal
2016
, we recorded a non-cash intangible impairment charge of
$6
within the Wholesale segment.
The estimated future amortization expense for the next five fiscal years and thereafter on intangible assets outstanding as of
February 24, 2018
consists of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Estimated amortization expense
|
$
|
14
|
|
13
|
|
12
|
|
11
|
|
11
|
|
$
|
65
|
|
NOTE 8—FAIR VALUE MEASUREMENTS
Recurring fair value measurements were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 24, 2018
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
Other assets
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
Total
|
|
|
$
|
4
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
0
|
|
|
$
|
—
|
|
|
$
|
0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
February 25, 2017
|
|
Balance Sheet Location
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Total
|
Assets:
|
|
|
|
|
|
|
|
|
|
Mutual funds
|
Other assets
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
Total
|
|
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
|
Diesel fuel derivatives
|
Other current liabilities
|
|
—
|
|
|
0
|
|
|
—
|
|
|
0
|
|
Interest rate swap derivative
|
Other current liabilities
|
|
—
|
|
|
2
|
|
|
—
|
|
|
2
|
|
Interest rate swap derivative
|
Other long-term liabilities
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
Total
|
|
|
$
|
—
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
$
|
3
|
|
Mutual Funds
Mutual fund assets consist of balances held in investments to fund certain deferred compensation plans. The fair values of mutual fund 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. Mutual fund 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.
Interest Rate Swap Derivatives
In fiscal 2016, we effectively converted
$300
of variable rate debt under our 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. This transaction was entered into to reduce our exposure to changes in market interest rates associated with our variable rate debt. We designated this derivative as a cash flow hedge of the variability in expected cash outflows for interest payments. On June 8, 2017, we entered into a fourth amendment to the Secured Term Loan Facility that decreased the interest rate for the term loan from LIBOR plus
4.50 percent
to LIBOR plus
3.50 percent
. Following this amendment, the all-in rate for this
$300
tranche was
5.5075 percent
.
In fiscal
2018
,
2017
and
2016
, no amounts were recorded in the Consolidated Statements of Operations for interest rate swap derivative ineffectiveness.
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 24, 2018
, a 100 basis point increase in forward LIBOR interest rates
would increase the fair value of the interest rate swap by approximately
$3
; a 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swap by approximately
$3
.
Diesel Fuel Derivatives
Commodity derivatives consist of forward fixed price purchase diesel fuel contracts. The fair value of our diesel fuel derivatives is measured using Level 2 inputs due to our 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
,
$0
and
$(3)
for fiscal
2018
,
2017
and
2016
, respectively.
Fair Value Estimates
For certain of our 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 less than the carrying value by
$1
as of
February 24, 2018
and there was
no
difference to the carrying amount as of
February 25, 2017
. 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 our long-term debt was lower than the carrying amount, excluding debt financing costs, by approximately
$23
as of
February 24, 2018
and there was
no
difference to the carrying amount, excluding debt financing costs, as of
February 25, 2017
. The estimated fair value was based on market quotes, where available, or market values for similar instruments, using Level 2 and 3 inputs.
NOTE 9—LONG-TERM DEBT
Our long-term debt consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
Interest Rate at
February 24, 2018
|
|
Maturity Year
|
|
February 24,
2018
|
|
February 25,
2017
|
Secured Term Loan Facility - variable rate
|
5.07%
|
|
2024
|
|
$
|
834
|
|
|
$
|
—
|
|
Secured Term Loan Facility - variable rate
|
5.50%
|
|
2019
|
|
—
|
|
|
524
|
|
Senior Notes - fixed rate
|
6.75%
|
|
2021
|
|
400
|
|
|
400
|
|
Senior Notes - fixed rate
|
7.75%
|
|
2022
|
|
350
|
|
|
350
|
|
Revolving ABL Credit Facility - variable rate
|
3.01%
|
|
2021
|
|
127
|
|
|
—
|
|
Other secured loans - variable rate
|
4.02%
|
|
2022-2023
|
|
48
|
|
|
—
|
|
Debt financing costs, net
|
|
|
|
|
(24
|
)
|
|
(10
|
)
|
Original issue discount on debt
|
|
|
|
|
(3
|
)
|
|
(1
|
)
|
Total debt
|
|
|
|
|
1,732
|
|
|
1,263
|
|
Less current maturities of long-term debt
|
|
|
|
|
(8
|
)
|
|
—
|
|
Long-term debt
|
|
|
|
|
$
|
1,724
|
|
|
$
|
1,263
|
|
Future maturities of long-term debt, excluding debt financing costs and the original issue discount on debt, as of
February 24, 2018
, consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year
|
2019
|
2020
|
2021
|
2022
|
2023
|
Thereafter
|
Total
|
Contractual debt obligation maturities
|
$
|
8
|
|
13
|
|
141
|
|
414
|
|
386
|
|
797
|
|
$
|
1,759
|
|
Our credit facilities and certain long-term debt agreements have restrictive covenants and cross-default provisions, which generally provide, subject to our 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. We were in compliance with all such covenants and provisions for all periods presented.
Secured Credit Agreements
On June 8, 2017, we entered into a fourth amendment agreement (the “Fourth Term Loan Amendment”) amending and restating our Secured Term Loan Facility due March 2019 (the “Secured Term Loan Facility due March 2019” and as amended and restated, the “Secured Term Loan Facility”). The Secured Term Loan Facility provides for (i) an initial term loan facility of
$525
, which was drawn down in full to refinance outstanding loans under the Secured Term Loan Facility due March 2019, and (ii) a delayed draw term loan facility of
$315
, which was drawn down in full in the second quarter of fiscal 2018 for the purpose of consummating the acquisition of Unified. Borrowings under the Secured Term Loan Facility bear interest at the rate of LIBOR plus
3.50 percent
with a floor on LIBOR set at
1.00 percent
, compared to the rate under the Secured Term Loan Facility due March 2019 of LIBOR plus
4.50 percent
with a floor of
1.00 percent
. The Secured Term Loan Facility will mature on June 8, 2024. However, if we have not repaid our
6.75 percent
Senior Notes due June 2021 or our
7.75 percent
Senior Notes due November 2022 by the date that is
91
days prior to the respective maturity date of such notes, the Secured Term Loan Facility will mature on the date that is
91
days prior to the maturity date of such notes. In fiscal 2018, in connection with the completion of the Fourth Term Loan Amendment, we paid debt financing costs of approximately
$8
, of which
$5
was capitalized and
$3
was expensed, incurred an original issue discount on borrowings of approximately
$2
and recognized a non-cash charge of approximately
$2
for the write-off of existing unamortized debt financing costs. On June 23, 2017, in connection with the closing of the acquisition of Unified, we executed the delayed draw under the Secured Term Loan Facility and increased the outstanding borrowings under the facility to
$840
.
The Secured Term Loan Facility is secured by substantially all of our real estate, equipment and certain other assets. The Secured Term Loan Facility is guaranteed by our 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 24, 2018
and
February 25, 2017
, there was
$710
and
$520
, respectively, of owned or ground-leased real estate and associated equipment pledged as collateral, which was included in Property, plant and equipment, net and 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 our
$1,000
asset-based revolving credit facility (the “Revolving ABL Credit Facility”). As of
February 24, 2018
and
February 25, 2017
,
$8
and
$0
of the Secured Term Loan Facility was classified as current, respectively, excluding debt financing costs and original issue discount.
The loans under the Secured Term Loan Facility may be voluntarily prepaid in certain minimum principal amounts, subject to the payment of breakage or similar costs. Pursuant to the Secured Term Loan Facility, we must, subject to certain exemptions and certain customary reinvestment rights, apply
100
percent of Net Cash Proceeds (as defined in the facility) from certain types of asset sales (excluding proceeds of the collateral security of the Revolving ABL Credit Facility and other secured indebtedness) to prepay the loans outstanding under the Secured Term Loan Facility. We 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 our 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 our Excess Cash Flow for the fiscal year ended
February 24, 2018
, no prepayments will be required under the Secured Term Loan Facility in fiscal 2019.
The assets included in the Consolidated Balance Sheets securing the outstanding borrowings under the Revolving ABL Credit Facility on a first-priority basis, and the unused available credit and fees under the Revolving ABL Credit Facility, were as follows:
|
|
|
|
|
|
|
|
|
|
Assets securing the Revolving ABL Credit Facility:
|
|
February 24,
2018
|
|
February 25,
2017
|
Certain inventory assets included in Inventories, net and Current assets of discontinued operations
|
|
$
|
1,176
|
|
|
$
|
949
|
|
Certain receivables included in Receivables, net and Current assets of discontinued operations
|
|
410
|
|
|
228
|
|
Certain amounts included in Cash and cash equivalents and Current assets of discontinued operations
|
|
20
|
|
|
19
|
|
|
|
|
|
|
|
|
|
|
|
Unused available credit and fees under the Revolving ABL Credit Facility:
|
|
February 24,
2018
|
|
February 25,
2017
|
Outstanding letters of credit
|
|
$
|
57
|
|
|
$
|
53
|
|
Letter of credit fees
|
|
1.375
|
%
|
|
1.375
|
%
|
Unused available credit
|
|
816
|
|
|
748
|
|
Unused facility fees
|
|
0.25
|
%
|
|
0.25
|
%
|
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 INC. and those subsidiaries named as borrowers under the Revolving ABL Credit Facility are required to repay the revolving loans in cash and provide cash collateral under this facility to the extent that the revolving loans and letters of credit exceed the lesser of the borrowing base then in effect or the aggregate amount of the lenders’ commitments under the Revolving ABL Credit Facility. Certain of our material subsidiaries are co-borrowers under the Revolving ABL Credit Facility, and this facility is guaranteed by the rest of our material subsidiaries (SUPERVALU INC. 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 our outstanding debt instruments and leases.
Both the Secured Term Loan Facility and the Revolving ABL Credit Facility limit our 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 and share repurchases. The Secured Term Loan Facility allows up to
$125
of Restricted Payments regardless of the resulting pro forma Total Leverage Ratio (as defined in the facility). The Secured Term Loan Facility caps the aggregate amount of additional Restricted Payments that may be made over the life of the Secured Term Loan Facility, with the additional Restricted Payments being subject to a pro forma Total Secured Leverage Ratio requirement (as defined in the facility) of
3.5
to 1. That aggregate cap can fluctuate over time and the cap could be reduced by certain other actions we may take, including prepayments of debt other than the senior notes and Permitted Investments (as defined in the Secured Term Loan Facility). As of
February 24, 2018
, that aggregate cap on Restricted Payments was approximately
$502
. The Secured Term Loan Facility permits unlimited Restricted Payments if the Total Leverage Ratio (as defined in the the Secured Term Loan Facility) after giving effect thereto would be less than
2.0
to 1. 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 we make. 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. We were in compliance with all such covenants and provisions for all periods presented.
NOTE 10—LEASES
We lease most of our 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 us for noncancellable operating leases and capital leases as of
February 24, 2018
consist of the following:
|
|
|
|
|
|
|
|
|
|
Lease Obligations
|
Fiscal Year
|
Operating Leases
|
|
Capital Leases
|
2019
|
$
|
77
|
|
|
$
|
41
|
|
2020
|
79
|
|
|
38
|
|
2021
|
62
|
|
|
34
|
|
2022
|
46
|
|
|
30
|
|
2023
|
34
|
|
|
23
|
|
Thereafter
|
123
|
|
|
84
|
|
Total future minimum obligations
|
$
|
421
|
|
|
250
|
|
Less interest
|
|
|
(75
|
)
|
Present value of net future minimum obligations
|
|
|
175
|
|
Less current capital lease obligations
|
|
|
(26
|
)
|
Long-term capital lease obligations
|
|
|
$
|
149
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Minimum rent
|
$
|
103
|
|
|
$
|
86
|
|
|
$
|
87
|
|
Contingent rent
|
3
|
|
|
4
|
|
|
4
|
|
Rent expense
(1)
|
106
|
|
|
90
|
|
|
91
|
|
Less subtenant rentals
|
(29
|
)
|
|
(27
|
)
|
|
(27
|
)
|
Total net rent expense
|
$
|
77
|
|
|
$
|
63
|
|
|
$
|
64
|
|
|
|
(1)
|
Rent expense as presented here includes $13, $12 and $11, respectively, of operating lease rent expense related to stores within discontinued operations for which we expect to assign the lease of the stores that are held for sale within discontinued operations, but for which GAAP requires the historical expense to be included within continuing operations, as we expect to remain primarily obligated under these leases.
|
We lease certain property to third parties under operating, capital and direct financing leases. Under the direct financing leases, we lease 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 we are the lessor, as of
February 24, 2018
, consist of the following:
|
|
|
|
|
|
|
|
|
|
Lease Receipts
|
Fiscal Year
|
Operating Leases
|
|
Direct Financing Leases
|
2019
|
$
|
20
|
|
|
$
|
1
|
|
2020
|
19
|
|
|
—
|
|
2021
|
15
|
|
|
—
|
|
2022
|
13
|
|
|
—
|
|
2023
|
8
|
|
|
—
|
|
Thereafter
|
23
|
|
|
—
|
|
Total minimum lease receipts
|
$
|
98
|
|
|
$
|
1
|
|
The carrying value of owned property leased to third parties under operating leases was as follows:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Property, plant and equipment
|
$
|
4
|
|
|
$
|
4
|
|
Less accumulated depreciation
|
(3
|
)
|
|
(3
|
)
|
Property, plant and equipment, net
|
$
|
1
|
|
|
$
|
1
|
|
NOTE 11—BENEFIT PLANS
Substantially all of our employees are covered by various contributory and non-contributory pension, profit sharing or 401(k) plans. Our 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, we provide healthcare and life insurance benefits for eligible retired employees under postretirement benefit plans. We also provide 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, we provide a fixed dollar contribution and retirees pay contributions to fund the remaining cost.
In fiscal 2016, we 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 our defined benefit pension plans and other postretirement benefit plans consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pension Benefits
|
|
Other Postretirement Benefits
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Changes in Benefit Obligation
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year
|
$
|
2,480
|
|
|
$
|
2,664
|
|
|
$
|
44
|
|
|
$
|
54
|
|
Acquired benefit plan obligations
|
268
|
|
|
—
|
|
|
28
|
|
|
—
|
|
Plan amendment
|
(21
|
)
|
|
—
|
|
|
(1
|
)
|
|
(7
|
)
|
Service cost
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Interest cost
|
83
|
|
|
84
|
|
|
2
|
|
|
2
|
|
Actuarial loss (gain)
|
2
|
|
|
37
|
|
|
(3
|
)
|
|
(3
|
)
|
Settlements paid
|
—
|
|
|
(200
|
)
|
|
—
|
|
|
—
|
|
Plan termination
|
—
|
|
|
—
|
|
|
(11
|
)
|
|
—
|
|
Benefits paid
|
(140
|
)
|
|
(105
|
)
|
|
(3
|
)
|
|
(3
|
)
|
Benefit obligation at end of year
|
2,672
|
|
|
2,480
|
|
|
56
|
|
|
44
|
|
Changes in Plan Assets
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year
|
2,183
|
|
|
2,119
|
|
|
16
|
|
|
15
|
|
Acquired benefit plan assets
|
193
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Actual return on plan assets
|
206
|
|
|
307
|
|
|
—
|
|
|
—
|
|
Employer contributions
|
2
|
|
|
62
|
|
|
—
|
|
|
4
|
|
Plan participants’ contributions
|
—
|
|
|
—
|
|
|
1
|
|
|
2
|
|
Settlements paid
|
—
|
|
|
(200
|
)
|
|
—
|
|
|
—
|
|
Benefits paid
|
(140
|
)
|
|
(105
|
)
|
|
(4
|
)
|
|
(5
|
)
|
Fair value of plan assets at end of year
|
2,444
|
|
|
2,183
|
|
|
13
|
|
|
16
|
|
Unfunded status at end of year
|
$
|
(228
|
)
|
|
$
|
(297
|
)
|
|
$
|
(43
|
)
|
|
$
|
(28
|
)
|
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
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Accrued vacation, compensation and benefits
|
$
|
(2
|
)
|
|
$
|
(2
|
)
|
|
$
|
(4
|
)
|
|
$
|
(1
|
)
|
Pension and other postretirement benefit obligations
|
(226
|
)
|
|
(295
|
)
|
|
(39
|
)
|
|
(27
|
)
|
Total
|
$
|
(228
|
)
|
|
$
|
(297
|
)
|
|
$
|
(43
|
)
|
|
$
|
(28
|
)
|
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
|
|
2018
|
|
2017
|
|
2018
|
|
2017
|
Prior service benefit
|
$
|
21
|
|
|
$
|
—
|
|
|
$
|
21
|
|
|
$
|
42
|
|
Net actuarial loss
|
(401
|
)
|
|
(478
|
)
|
|
(8
|
)
|
|
(13
|
)
|
Total recognized in Accumulated other comprehensive loss
|
$
|
(380
|
)
|
|
$
|
(478
|
)
|
|
$
|
13
|
|
|
$
|
29
|
|
Total recognized in Accumulated other comprehensive loss, net of tax
|
$
|
(216
|
)
|
|
$
|
(293
|
)
|
|
$
|
6
|
|
|
$
|
17
|
|
Net periodic benefit (income) cost 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
|
|
2018
|
|
2017
|
|
2016
|
|
2018
|
|
2017
|
|
2016
|
Net Periodic Benefit (Income) Cost
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
Interest cost
|
83
|
|
|
84
|
|
|
106
|
|
|
2
|
|
|
2
|
|
|
3
|
|
Expected return on plan assets
|
(138
|
)
|
|
(141
|
)
|
|
(142
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
(16
|
)
|
|
(15
|
)
|
|
(15
|
)
|
Amortization of net actuarial loss
|
12
|
|
|
43
|
|
|
79
|
|
|
2
|
|
|
2
|
|
|
3
|
|
Plan termination
|
—
|
|
|
—
|
|
|
—
|
|
|
(8
|
)
|
|
—
|
|
|
—
|
|
Settlement
|
—
|
|
|
42
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Net periodic benefit (income) cost
|
(43
|
)
|
|
28
|
|
|
43
|
|
|
(20
|
)
|
|
(10
|
)
|
|
(9
|
)
|
Other Changes in Plan Assets and Benefit Obligations Recognized in Other Comprehensive Income (Loss)
|
|
|
|
|
|
|
|
|
|
|
|
Prior service benefit
|
(22
|
)
|
|
—
|
|
|
—
|
|
|
5
|
|
|
(7
|
)
|
|
(21
|
)
|
Amortization of prior service benefit
|
—
|
|
|
—
|
|
|
—
|
|
|
16
|
|
|
15
|
|
|
15
|
|
Net actuarial (gain) loss
|
(66
|
)
|
|
(172
|
)
|
|
76
|
|
|
(3
|
)
|
|
(3
|
)
|
|
(7
|
)
|
Amortization of net actuarial loss
|
(11
|
)
|
|
(43
|
)
|
|
(79
|
)
|
|
(1
|
)
|
|
(2
|
)
|
|
(3
|
)
|
Total expense (benefit) recognized in Other comprehensive income (loss)
|
(99
|
)
|
|
(215
|
)
|
|
(3
|
)
|
|
17
|
|
|
3
|
|
|
(16
|
)
|
Total expense (benefit) recognized in net periodic benefit cost (income) and Other comprehensive income (loss)
|
$
|
(142
|
)
|
|
$
|
(187
|
)
|
|
$
|
40
|
|
|
$
|
(3
|
)
|
|
$
|
(7
|
)
|
|
$
|
(25
|
)
|
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 2019 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 2019 is
$13
.
Assumptions
Weighted average assumptions used to determine benefit obligations and net periodic benefit cost consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Benefit obligation assumptions:
|
|
|
|
|
|
Discount rate
|
4.04 – 3.37%
|
|
|
3.92 – 3.78%
|
|
|
4.16 – 3.95%
|
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Net periodic benefit cost assumptions:
(1)
|
|
|
|
|
|
Discount rate
|
3.92 – 2.75%
|
|
|
4.16
|
%
|
|
3.80
|
%
|
Rate of compensation increase
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Expected return on plan assets
(2)
|
6.25– 6.00%
|
|
|
6.50
|
%
|
|
6.50
|
%
|
|
|
(1)
|
For fiscal
2018
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. We also assess 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.
|
We review and select the discount rate to be used in connection with measuring our pension and other postretirement benefit obligations annually. In determining the discount rate, we use 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.
In fiscal 2018, we began recognizing the amortization of net actuarial loss on the SUPERVALU Retirement Plan over the remaining life expectancy of inactive participants based on our 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, we utilized an over approximately 90 percent threshold established under our policy. This change did not affect the measurement of total benefit obligations in fiscal 2017, and instead impacted the recognition of certain components of net periodic pension expense prospectively. The impact of the change in estimate was a reduction of the interest and service cost components within net periodic benefit cost by
$31
for the defined benefit pension plans.
Effective fiscal 2017, we 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 by 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 our 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. We have 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
7.80 percent
as of
February 24, 2018
. The assumed healthcare cost trend rate for retirees before age 65 will decrease 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
8.70 percent
as of
February 24, 2018
. 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 our service and interest cost by less than
$1
for fiscal
2018
; a 100 basis point decrease in the trend rate would have decreased our accumulated postretirement benefit obligation as of the end of fiscal
2018
by approximately
$3
; and a 100 basis point increase would have increased our accumulated postretirement benefit obligation by approximately
$3
.
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. We employ 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 our 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
|
|
2018
|
|
2017
|
Domestic equity
|
21.6
|
%
|
|
26.3
|
%
|
|
22.0
|
%
|
International equity
|
6.5
|
%
|
|
4.4
|
%
|
|
9.5
|
%
|
Private equity
|
4.9
|
%
|
|
4.7
|
%
|
|
5.9
|
%
|
Fixed income
|
62.3
|
%
|
|
57.3
|
%
|
|
54.1
|
%
|
Real estate
|
4.7
|
%
|
|
7.3
|
%
|
|
8.5
|
%
|
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 we believe our 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 our defined benefit pension plans held in a master trust as of
February 24, 2018
, by asset category, consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
Measured at NAV
|
|
Total
|
Common stock
|
$
|
188
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
188
|
|
Common collective trusts
|
—
|
|
|
728
|
|
|
—
|
|
|
75
|
|
|
803
|
|
Corporate bonds
|
—
|
|
|
418
|
|
|
—
|
|
|
—
|
|
|
418
|
|
Government securities
|
68
|
|
|
168
|
|
|
—
|
|
|
—
|
|
|
236
|
|
Mutual funds
|
46
|
|
|
440
|
|
|
—
|
|
|
—
|
|
|
486
|
|
Mortgage-backed securities
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Other
|
10
|
|
|
21
|
|
|
—
|
|
|
—
|
|
|
31
|
|
Private equity and real estate partnerships
|
—
|
|
|
—
|
|
|
—
|
|
|
282
|
|
|
282
|
|
Total plan assets at fair value
|
$
|
312
|
|
|
$
|
1,775
|
|
|
$
|
—
|
|
|
$
|
357
|
|
|
$
|
2,444
|
|
The fair value of assets of our 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
|
|
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, our required pension contributions to the SUPERVALU Retirement Plan decreased significantly in fiscal 2016 compared to fiscal 2015, and we expect that to continue for the next several years. In fiscal 2019,
$4
of minimum pension contributions are required to be made under the Unified Grocers, Inc. Cash Balance Plan under Employee Retirement Income Security Act of 1974, as amended (“ERISA”). No minimum pension contributions are required to be made to the SUPERVALU Retirement Plan under ERISA in fiscal 2019. We expect to contribute approximately
$5
to
$10
to our defined benefit pension plans and postretirement benefit plans in fiscal
2019
.
We fund our 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 our external actuarial consultant, and additional contributions made at our discretion. In connection with the sale of Save-A-Lot, we
agreed with the Pension Benefit Guaranty Corporation (the “PBGC”) to make
$60
in aggregate contributions to the SUPERVALU Retirement Plan in excess of required minimum contributions. We made those contributions in the fourth quarter of fiscal 2017 and have fully fulfilled our obligations under our agreement with the PBGC. We will recognize contributions in accordance with applicable regulations, with consideration given to recognition for the earliest plan year permitted.
At our discretion, additional funds may be contributed to the pension plan. We 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. We assess 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.
Estimated Future Benefit Payments
The estimated future benefit payments to be made from our defined benefit pension and other postretirement benefit plans, which reflect expected future service, are as follows:
|
|
|
|
|
|
|
|
|
Fiscal Year
|
Pension Benefits
|
|
Other Postretirement
Benefits
|
2019
|
$
|
176
|
|
|
$
|
5
|
|
2020
|
155
|
|
|
5
|
|
2021
|
160
|
|
|
5
|
|
2022
|
166
|
|
|
5
|
|
2023
|
173
|
|
|
4
|
|
Years 2024-2028
|
860
|
|
|
19
|
|
Defined Contribution Plans
We sponsor 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. We match a portion of certain employee contributions by contributing cash into the investment options selected by the employees. The total amount contributed by us to the plans is determined by plan provisions or at our discretion. Total employer contribution expenses for these plans were
$11
,
$8
and
$4
for fiscal
2018
,
2017
and
2016
, respectively. Matching contributions were reduced or eliminated in January 2013 for most employees. We made a discretionary match for each of fiscal 2018 and fiscal 2017 for eligible employees. There were no discretionary matches made in fiscal 2016. Since June 2014, plan investment options do not include shares of our common stock.
Post-Employment Benefits
We recognize an obligation for benefits provided to former or inactive employees. We are 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
|
|
|
2018
|
|
2017
|
Accrued vacation, compensation and benefits
|
|
$
|
4
|
|
|
$
|
3
|
|
Other long-term liabilities
|
|
6
|
|
|
7
|
|
Total
|
|
$
|
10
|
|
|
$
|
10
|
|
Multiemployer Plans
We contribute 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 GAAP. We contributed
$44
,
$36
and
$36
to these plans for fiscal years
2018
,
2017
and
2016
, 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 we choose to stop participating in some multiemployer plans, or make market exits or closures or otherwise have participation in the plan drop below certain levels, we may be required to pay those plans an amount based on the underfunded status of the plan, referred to as a withdrawal liability.
|
Our 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
2018
and
2017
relates to the plans’ two most recent fiscal year-ends. The zone status is based on information that we 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 our collective bargaining agreements require that a minimum contribution be made to these plans. Multiemployer pension plan contributions and participants were generally comparable for fiscal
2018
,
2017
and
2016
.
At the date the financial statements were issued, Forms 5500 were generally not available for the plan years ending in
2017
.
The following table contains information about our multiemployer plans:
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|
|
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|
|
|
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|
|
|
|
|
|
|
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|
|
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|
|
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
|
2018
|
|
2017
|
|
2018
|
|
2017
|
|
2016
|
|
Minneapolis Food Distributing Industry Pension Plan
|
416047047-001
|
|
12/31
|
|
Green
|
|
Green
|
|
Implemented
|
|
$
|
10
|
|
|
$
|
10
|
|
|
$
|
10
|
|
|
No
|
|
No
|
Minneapolis Retail Meat Cutters and Food Handlers Pension Fund
|
410905139-001
|
|
2/28
|
|
Yellow
|
|
Green
|
|
Implemented
|
|
9
|
|
|
9
|
|
|
9
|
|
|
No
|
|
No
|
Central States, Southeast and Southwest Areas Pension Fund
|
366044243-001
|
|
12/31
|
|
Deep Red
|
|
Deep Red
|
|
Implemented
|
|
5
|
|
|
4
|
|
|
4
|
|
|
No
|
|
Yes
|
UFCW Unions and Participating Employers Pension Fund
|
526117495-002
|
|
12/31
|
|
Red
|
|
Red
|
|
Implemented
|
|
6
|
|
|
6
|
|
|
5
|
|
|
No
|
|
Yes
|
Western Conference of Teamsters Pension Plan
|
916145047-001
|
|
12/31
|
|
Green
|
|
Green
|
|
No
|
|
11
|
|
|
4
|
|
|
4
|
|
|
No
|
|
No
|
UFCW Unions and Employers Pension Plan
|
396069053-001
|
|
10/31
|
|
Red
|
|
Red
|
|
Implemented
|
|
2
|
|
|
2
|
|
|
2
|
|
|
No
|
|
Yes
|
All Other Multiemployer Pension Plans
(2)
|
|
|
|
|
|
|
|
|
|
|
1
|
|
|
1
|
|
|
2
|
|
|
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
$
|
44
|
|
|
$
|
36
|
|
|
$
|
36
|
|
|
|
|
|
|
|
(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
7
plans, none of which is individually significant when considering our contributions to the plan, severity of the underfunded status or other factors.
|
The following table describes the expiration of our collective bargaining agreements associated with the significant multiemployer plans in which we participate:
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|
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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 2018
|
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
|
3/30/2019 - 9/20/2019
|
|
4
|
|
|
9/14/2019
|
|
40.1
|
%
|
|
No
|
UFCW Unions and Participating Employers Pension Plan
|
7/11/2020
|
|
2
|
|
|
7/11/2020
|
|
73.0
|
%
|
|
Yes
|
Western Conference of Teamsters Pension Plan
|
4/21/2018 – 9/26/2020
|
|
22
|
|
|
4/20/2019
|
|
15.8
|
%
|
|
No
|
UFCW Unions and Employers Pension Plan
|
4/6/2019
|
|
1
|
|
|
4/6/2019
|
|
100.0
|
%
|
|
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
We also make 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 our contributions benefit active employees and as such, may not constitute contributions to a postretirement benefit plan. However, we are unable to separate contribution amounts to postretirement benefit plans from contribution amounts paid to benefit active employees.
We
co
ntributed
$92
,
$78
and
$70
for fiscal
2018
,
2017
and
2016
, 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 we intend, our Selling and admin
istrative expenses could increase in the future.
Collective Bargaining Agreements
As of
February 24, 2018
, we had approximately
23,000
employees. Approximately
14,000
employees are covered by
52
collective bargaining agreements. During fiscal
2018
,
21
collective bargaining agreements covering approximately
5,100
employees were renegotiated.
No
collective bargaining agreements expired without their terms being renegotiated. Negotiations are expected to continue with the bargaining units representing the employees subject to those agreements. During fiscal
2019
,
15
collective bargaining agreements covering approximately
5,000
employees are scheduled to expire.
NOTE 12—NET EARNINGS PER SHARE
The following table reflects the calculation of basic and diluted net earnings per share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net earnings from continuing operations
|
$
|
49
|
|
|
$
|
35
|
|
|
$
|
49
|
|
Less net earnings attributable to noncontrolling interests
|
(1
|
)
|
|
(4
|
)
|
|
(8
|
)
|
Net earnings from continuing operations attributable to SUPERVALU INC.
|
48
|
|
|
31
|
|
|
41
|
|
(Loss) income from discontinued operations, net of tax
|
(3
|
)
|
|
619
|
|
|
137
|
|
Net earnings attributable to SUPERVALU INC.
|
$
|
45
|
|
|
$
|
650
|
|
|
$
|
178
|
|
|
|
|
|
|
|
Weighted average number of shares outstanding—basic
|
38
|
|
|
38
|
|
|
38
|
|
Dilutive impact of stock-based awards
|
—
|
|
|
—
|
|
|
—
|
|
Weighted average number of shares outstanding—diluted
|
38
|
|
|
38
|
|
|
38
|
|
|
|
|
|
|
|
Basic net earnings per share attributable to SUPERVALU INC.:
|
|
|
|
|
|
Continuing operations
|
$
|
1.25
|
|
|
$
|
0.82
|
|
|
$
|
1.08
|
|
Discontinued operations
|
$
|
(0.07
|
)
|
|
$
|
16.35
|
|
|
$
|
3.65
|
|
Basic net earnings per share
|
$
|
1.18
|
|
|
$
|
17.17
|
|
|
$
|
4.72
|
|
Diluted net earnings per share attributable to SUPERVALU INC.:
|
|
|
|
|
|
Continuing operations
|
$
|
1.25
|
|
|
$
|
0.81
|
|
|
$
|
1.06
|
|
Discontinued operations
|
$
|
(0.07
|
)
|
|
$
|
16.19
|
|
|
$
|
3.59
|
|
Diluted net earnings per share
|
$
|
1.18
|
|
|
$
|
17.00
|
|
|
$
|
4.66
|
|
Stock-based awards of
2
,
2
and
1
that were outstanding during fiscal
2018
,
2017
and
2016
, 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.
Reverse Stock Split
At the close of business on August 1, 2017, a 1-for-7 reverse split of our common stock became effective and the number of authorized shares of our common stock decreased to approximately
57
, while the number of issued and outstanding shares was reduced from approximately
269
to
38
. Our common stock began trading on a split-adjusted basis when the market opened on August 2, 2017. No fractional shares were issued from the reverse stock split. In lieu of any fractional shares, any holder of less than one share of common stock was entitled to receive cash for such holder’s fractional share. The reverse stock split did not impact the authorized number of shares of preferred stock of Supervalu, none of which were outstanding. The reverse stock
split reduced the number of shares of common stock available for issuance under our equity compensation plans in proportion to the reverse stock split ratio. The reverse stock split caused a reduction in the number of shares of common stock issuable upon exercise or vesting of equity awards in proportion to the reverse stock split ratio and caused a proportionate increase in any exercise price of such awards. Our common stock continues to trade on the NYSE under the symbol “SVU.”
NOTE 13—COMPREHENSIVE INCOME (LOSS) AND ACCUMULATED COMPREHENSIVE LOSS
Comprehensive income (loss) is reported in the Consolidated Statements of Comprehensive Income. Comprehensive income includes all changes in stockholders’ equity during the reporting period, other than those resulting from investments by and distributions to stockholders. Our 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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated Other Comprehensive Loss
|
|
Benefit Plans
|
|
Interest Rate Swap
|
|
Total
|
February 28, 2015
|
$
|
(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
|
(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
|
(276
|
)
|
|
(2
|
)
|
|
(278
|
)
|
Other comprehensive income before reclassifications
|
68
|
|
|
1
|
|
|
69
|
|
Amortization of amounts included in net periodic benefit income
(1)
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
Amortization of cash flow hedge
|
—
|
|
|
1
|
|
|
1
|
|
Net Other comprehensive income
|
66
|
|
|
2
|
|
|
68
|
|
February 24, 2018
|
$
|
(210
|
)
|
|
$
|
—
|
|
|
$
|
(210
|
)
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit (income) cost includes amortization of prior service benefit and amortization of net actuarial loss as reflected in
Note 11—Benefit Plans
.
|
|
|
(2)
|
Refer to
Note 11—Benefit Plans
for additional information on our fiscal 2017 pension settlement charges.
|
Items reclassified out of Accumulated other comprehensive loss had the following impact on the Consolidated Statements of Operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
|
Affected Line Item on Consolidated Statements of Operations
|
Pension and postretirement benefit plan obligations:
|
|
|
|
|
|
|
|
Amortization of amounts included in
net periodic benefit (income) cost
(1)
|
$
|
(3
|
)
|
|
$
|
28
|
|
|
$
|
59
|
|
|
Selling and administrative expenses
|
Amortization of amounts included in n
et periodic benefit (income) cost
(1)
|
—
|
|
|
2
|
|
|
8
|
|
|
Cost of sales
|
Pension settlement charges
|
—
|
|
|
42
|
|
|
—
|
|
|
Selling and administrative expenses
|
Total reclassifications
|
(3
|
)
|
|
72
|
|
|
67
|
|
|
|
Income tax expense (benefit)
|
1
|
|
|
(27
|
)
|
|
(25
|
)
|
|
Income tax provision (benefit)
|
Total reclassifications, net of tax
|
$
|
(2
|
)
|
|
$
|
45
|
|
|
$
|
42
|
|
|
|
|
|
|
|
|
|
|
|
Interest rate swap cash flow hedge:
|
|
|
|
|
|
|
|
Reclassification of cash flow hedge
|
$
|
1
|
|
|
$
|
3
|
|
|
$
|
—
|
|
|
Interest expense, net
|
Income tax benefit
|
—
|
|
|
(1
|
)
|
|
—
|
|
|
Income tax provision (benefit)
|
Total reclassifications, net of tax
|
$
|
1
|
|
|
$
|
2
|
|
|
$
|
—
|
|
|
|
|
|
(1)
|
Amortization of amounts included in net periodic benefit (income) cost includes amortization of prior service benefit and amortization of net actuarial loss as reflected in
Note 11—Benefit Plans
.
|
As of
February 24, 2018
, we expect to reclassify
$1
out of Accumulated other comprehensive loss into Interest expense, net during the following twelve-month period.
NOTE 14—STOCK-BASED AWARDS
As of
February 24, 2018
, we have 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. Our 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, we have granted stock options to purchase common stock at an exercise price not less than
100 percent
of the fair market value of our 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 our non-employee directors. All stock options, restricted stock awards, restricted stock units and PSUs issued in fiscal 2018, and 2017 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 24, 2018
, there were
4
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 28, 2015
|
2,983
|
|
|
$
|
69.92
|
|
|
6.55
|
|
$
|
61,073
|
|
Granted
|
790
|
|
|
52.11
|
|
|
|
|
|
Exercised
|
(246
|
)
|
|
40.90
|
|
|
|
|
|
Canceled and forfeited
|
(477
|
)
|
|
174.62
|
|
|
|
|
|
Outstanding, February 27, 2016
|
3,050
|
|
|
$
|
51.56
|
|
|
5.93
|
|
$
|
6,827
|
|
Granted
|
137
|
|
|
39.48
|
|
|
|
|
|
Exercised
|
(249
|
)
|
|
25.58
|
|
|
|
|
|
Canceled and forfeited
|
(712
|
)
|
|
68.14
|
|
|
|
|
|
Outstanding, February 25, 2017
|
2,226
|
|
|
$
|
48.38
|
|
|
5.99
|
|
$
|
2,161
|
|
Granted
|
36
|
|
|
29.19
|
|
|
|
|
|
Exercised
|
(10
|
)
|
|
15.96
|
|
|
|
|
|
Canceled and forfeited
|
(542
|
)
|
|
60.75
|
|
|
|
|
|
Outstanding, February 24, 2018
|
1,710
|
|
|
$
|
44.15
|
|
|
5.55
|
|
$
|
—
|
|
Vested and expected to vest in the future as of February 24, 2018
|
1,690
|
|
|
$
|
44.28
|
|
|
5.52
|
|
$
|
—
|
|
Exercisable, February 24, 2018
|
1,487
|
|
|
$
|
44.54
|
|
|
5.20
|
|
$
|
—
|
|
For our annual grant made in the first quarter of fiscal
2018
,
2017
and
2016
, we granted
36 thousand
,
137 thousand
and
552 thousand
, respectively, of non-qualified stock options to certain employees under the 2012 Stock Plan with a weighted average grant date fair value of
$13.92
,
$18.68
and
$25.69
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.
We estimated the fair value of each option on the date of grant using the Black Scholes option pricing mode, based upon the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
|
—
|
%
|
Volatility rate
|
53.7
|
%
|
|
54.2
|
%
|
|
49.0 – 56.5%
|
|
Risk-free interest rate
|
1.8
|
%
|
|
1.3
|
%
|
|
1.2 – 1.4%
|
|
Expected option life
|
5.0 years
|
|
|
5.0 years
|
|
|
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 28, 2015
|
293
|
|
|
76
|
|
|
77.14
|
|
Granted
|
9
|
|
|
334
|
|
|
61.15
|
|
Lapsed
|
(106
|
)
|
|
(65
|
)
|
|
47.77
|
|
Canceled and forfeited
|
(18
|
)
|
|
(34
|
)
|
|
61.53
|
|
Outstanding, February 27, 2016
|
178
|
|
|
311
|
|
|
60.74
|
|
Granted
|
653
|
|
|
1
|
|
|
39.48
|
|
Lapsed
|
(119
|
)
|
|
(108
|
)
|
|
60.11
|
|
Canceled and forfeited
|
(190
|
)
|
|
(78
|
)
|
|
61.53
|
|
Outstanding, February 25, 2017
|
522
|
|
|
126
|
|
|
$
|
60.48
|
|
Granted
|
881
|
|
|
—
|
|
|
—
|
|
Lapsed
|
(225
|
)
|
|
(61
|
)
|
|
60.57
|
|
Canceled and forfeited
|
(166
|
)
|
|
(18
|
)
|
|
59.06
|
|
Outstanding, February 24, 2018
|
1,012
|
|
|
47
|
|
|
$
|
60.86
|
|
(1) Weighted average grant date fair value is only used for restricted stock awards.
In fiscal 2018 and 2017, we granted restricted stock units that vest over a
three
-year period from the date of the grant. In fiscal 2016, we 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 our common stock on the date of grant.
Performance Share Units
In fiscal 2018 and 2017, we granted
178 thousand
and
201 thousand
PSUs, respectively, to certain employees under the 2012 Stock Plan. The PSUs granted in fiscal 2018 have a fiscal 2018-2020 performance period and the PSUs granted in fiscal 2017 have a fiscal 2017-2019 performance period, and both settle in shares of our common stock. We used the Monte Carlo method to estimate the fair value of the PSUs at grant date based upon the following assumptions:
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Dividend yield
|
—
|
%
|
|
—
|
%
|
Volatility rate
|
44.3
|
%
|
|
41.3
|
%
|
Risk-free interest rate
|
1.41
|
%
|
|
0.9
|
%
|
Expected PSU life
|
2.8 years
|
|
|
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
|
201
|
|
|
45.17
|
|
Lapsed
|
—
|
|
|
—
|
|
Canceled and forfeited
|
(29
|
)
|
|
45.17
|
|
Outstanding, February 25, 2017
|
172
|
|
|
$
|
45.17
|
|
Granted
|
178
|
|
|
35.18
|
|
Lapsed
|
—
|
|
|
—
|
|
Canceled and forfeited
|
(80
|
)
|
|
37.44
|
|
Outstanding, February 24, 2018
|
270
|
|
|
$
|
40.75
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Stock-based compensation
|
$
|
19
|
|
|
$
|
17
|
|
|
$
|
21
|
|
Income tax benefits
|
(7
|
)
|
|
(7
|
)
|
|
(8
|
)
|
Stock-based compensation, net of tax
|
$
|
12
|
|
|
$
|
10
|
|
|
$
|
13
|
|
Unrecognized Stock-Based Compensation Expense
As of
February 24, 2018
, there was
$23
of unrecognized compensation expense related to unvested stock-based awards granted under our stock plans. The expense is expected to be recognized over a weighted average remaining vesting period of approximately
2
years.
NOTE 15—INCOME TAXES
Income Tax Provision (Benefit)
The income tax provision (benefit) consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Current
|
|
|
|
|
|
Federal
|
$
|
(8
|
)
|
|
$
|
(15
|
)
|
|
$
|
7
|
|
State
|
(2
|
)
|
|
8
|
|
|
(4
|
)
|
Total current
|
(10
|
)
|
|
(7
|
)
|
|
3
|
|
Deferred
|
38
|
|
|
(8
|
)
|
|
1
|
|
Income tax provision (benefit)
|
$
|
28
|
|
|
$
|
(15
|
)
|
|
$
|
4
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Federal taxes based on statutory rate
|
$
|
25
|
|
|
$
|
7
|
|
|
$
|
18
|
|
State income taxes, net of federal benefit
|
1
|
|
|
(1
|
)
|
|
—
|
|
Tax contingency
|
(12
|
)
|
|
(1
|
)
|
|
(8
|
)
|
Change in valuation allowance
|
(21
|
)
|
|
2
|
|
|
—
|
|
Pension
|
(5
|
)
|
|
(9
|
)
|
|
(4
|
)
|
Deferred tax adjustment
|
—
|
|
|
(10
|
)
|
|
—
|
|
U.S. tax reform
|
31
|
|
|
—
|
|
|
—
|
|
Stock Compensation
|
7
|
|
|
—
|
|
|
—
|
|
Other
|
2
|
|
|
(3
|
)
|
|
(2
|
)
|
Income tax provision (benefit)
|
$
|
28
|
|
|
$
|
(15
|
)
|
|
$
|
4
|
|
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. Our deferred tax assets and liabilities consisted of the following:
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
Deferred tax assets:
|
|
|
|
Compensation and benefits
|
$
|
105
|
|
|
$
|
162
|
|
Self-insurance
|
12
|
|
|
17
|
|
Property, plant and equipment and capitalized lease assets
|
30
|
|
|
35
|
|
Loss on sale of discontinued operations
|
795
|
|
|
1,174
|
|
Net operating loss carryforwards
|
50
|
|
|
15
|
|
Other
|
42
|
|
|
75
|
|
Gross deferred tax assets
|
1,034
|
|
|
1,478
|
|
Valuation allowance
|
(787
|
)
|
|
(1,196
|
)
|
Total deferred tax assets
|
247
|
|
|
282
|
|
Deferred tax liabilities:
|
|
|
|
Property, plant and equipment and capitalized lease assets
|
(160
|
)
|
|
(91
|
)
|
Inventories
|
(11
|
)
|
|
(13
|
)
|
Intangible assets
|
(5
|
)
|
|
(7
|
)
|
Other
|
(8
|
)
|
|
(8
|
)
|
Total deferred tax liabilities
|
(184
|
)
|
|
(119
|
)
|
Net deferred tax assets
|
$
|
63
|
|
|
$
|
163
|
|
We have valuation allowances to reduce deferred tax assets to the amount that is more-likely-than-not to be realized. We currently have federal (“NOL”) carryforwards of
$122
and state NOL carryforwards of
$350
for tax purposes. Federal NOL carryforwards of
$84
have no expiration date and federal NOL carryforwards of
$38
expire beginning in 2033 and continuing through 2037. There is no valuation allowance recorded for the federal NOL carryforwards. The state NOL carryforwards expire beginning in fiscal 2019 and continuing through fiscal 2036 and have a
$15
valuation allowance.
In fiscal 2014, the sale of NAI resulted in a capital loss due to the additional tax basis on the sale of the shares. In fiscal 2017, we utilized a portion of the capital loss carryforward offset by a matching release of the valuation allowance on the capital loss. We estimated additional utilization of the capital loss carryforward in fiscal 2018 and recorded an offsetting release of the valuation allowance. At this time, a valuation allowance has been recognized for the remaining capital loss carryforward of
$771
as it is more likely than not that the capital loss will not be used prior to its expiration in fiscal
2019
.
U.S. Tax Reform
On December 22, 2017, the U.S. government enacted comprehensive tax legislation under the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code, including reducing the U.S. federal corporate tax rate from 35 percent to 21 percent, effective January 1, 2018. Shortly after the Tax Act was enacted, the SEC issued accounting guidance, which provides a one-year measurement period during which a company may complete its accounting for the impacts of the Tax Act. To the extent a company’s accounting for certain income tax effects of the Tax Act is incomplete, the company may determine a reasonable estimate for those effects and record a provisional estimate in its financial statements. If a company cannot determine a provisional estimate to be included in the financial statements, it should continue to apply the provisions of the tax laws that were in effect immediately prior to the Tax Act being enacted.
As a result of the Tax Act, we recorded a discrete income tax expense of
$31
in fiscal 2018 associated with the remeasurement of deferred tax assets and liabilities as a result of the reduction in the U.S. federal corporate tax rate. We have not completed our accounting for the income tax effects of certain elements of the Tax Act, but recorded provisional adjustments based on reasonable estimates. These estimates may be impacted by the need for further analysis and future clarification and guidance regarding available tax accounting methods and elections, state tax conformity to federal tax changes, and expected changes to U.S. Treasury regulations. We do not anticipate material changes to these estimates and will record any changes in the quarter in which we complete our analysis, not to exceed one year from the period of enactment.
Uncertain Tax Positions
Changes in our unrecognized tax positions consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Beginning balance
|
$
|
59
|
|
|
$
|
70
|
|
|
$
|
94
|
|
Increase based on tax positions related to the current year
|
2
|
|
|
7
|
|
|
5
|
|
Increase based on tax positions related to prior years
|
2
|
|
|
—
|
|
|
—
|
|
Decrease based on tax positions related to prior years
|
—
|
|
|
(15
|
)
|
|
(23
|
)
|
Decrease related to settlements with taxing authorities
|
—
|
|
|
1
|
|
|
—
|
|
Decrease due to lapse of statute of limitations
|
(23
|
)
|
|
(4
|
)
|
|
(6
|
)
|
Ending balance
|
$
|
40
|
|
|
$
|
59
|
|
|
$
|
70
|
|
Included in the balance of unrecognized tax benefits as of the fiscal year end
2018
,
2017
and
2016
are tax positions, net of tax, of
$23
,
$33
and
$34
, respectively, which would reduce our effective tax rate if recognized in future periods.
Because existing tax positions will continue to generate increased liabilities for unrecognized tax benefits over the next 12 months, and since we are 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, we do not expect the change, if any, to have a material effect on our Consolidated Balance Sheets, Statement of Operations, or Statement Cash Flows within the next 12 months.
We recognized interest expense (income) of
$0
,
$3
and
$(1)
in fiscal
2018
,
2017
and
2016
, respectively, from continuing operations within Interest expense, net in the Consolidated Statements of Operations. No penalty expense has been recognized from continuing operations within Selling and administrative expenses in fiscal
2018
,
2017
and
2016
in the Consolidated Statements of Operations.
At
February 24, 2018
and
February 25, 2017
, we accrued interest of
$11
and
$11
, respectively, related to uncertain tax positions recorded in Other current liabilities, and Long-term tax liabilities in the Consolidated Balance Sheets. At
February 24, 2018
and
February 25, 2017
, we have accrued penalties of
$1
and
$2
, respectively, related to uncertain tax positions recorded in Long-term tax liabilities in the Consolidated Balance Sheets.
We are currently under examination or other methods of review in several tax jurisdictions and remain 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 24, 2018
, we are no longer subject to federal income tax examinations for fiscal years before 2015 and in most states is no longer subject to state income tax examinations for fiscal years before 2008.
NOTE 16—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Guarantees and Contingent Liabilities
We have outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of
February 24, 2018
. These guarantees were generally made to support the business growth of Wholesale customers. The guarantees are generally for the entire terms of the leases, fixture financing loans or other debt obligations with remaining terms that range from less than
one
year to
fourteen
years, with a weighted average remaining term of approximately
eight
years. For each guarantee issued, if the Wholesale customer or other third party defaults on a payment, we would be required to make payments under our guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the Wholesale customer.
We review performance risk related to our guarantee obligations based on internal measures of credit performance. As of
February 24, 2018
, the maximum amount of undiscounted payments we would be required to make in the event of default of all guarantees was
$55
(
$44
on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, we believe the likelihood that we will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Consolidated Balance Sheets for these contingent obligations under our guarantee arrangements as the fair value has been determined to be de minimis.
We are contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. We could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of our lease assignments among third parties, and various other remedies available, we believe the likelihood that we 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 our guarantee arrangements as the fair value has been determined to be de minimis.
We are a party to a variety of contractual agreements under which we 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 our 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 us and agreements to indemnify officers, directors and employees in the performance of their work. While our aggregate indemnification obligations could result in a material liability, we are not aware of any matters that are expected to result in a material liability. No amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations as the fair value has been determined to be de minimis.
Following the sale of NAI on March 21, 2013, we remain contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees we issued with respect to the obligations of NAI that were incurred while NAI was our subsidiary. As of
February 24, 2018
, using actuarial estimates as of June 30, 2017, the total undiscounted amount of all such guarantees was estimated at
$69
(
$62
on a discounted basis). Based on the expected settlement of the self-insurance claims that underlie our commitments, we believe 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 we remain contingently liable, we believe that the likelihood that we will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Consolidated Balance Sheets for these guarantees as the fair value has been determined to be de minimis.
Agreements with Save-A-Lot and Onex
The Agreement and Plan of Merger pursuant to which we sold the Save-A-Lot business (the “SAL Merger Agreement”) contains customary indemnification obligations of each party with respect to breaches of their respective representations, warranties and covenants, and certain other specified matters, on the terms and subject to the limitations set forth in the SAL Merger Agreement. Similarly, we entered into a Separation Agreement with Moran Foods (the “Separation Agreement”) which contains indemnification obligations and covenants related to the separation of the assets and liabilities of the Save-A-Lot business from us. We also entered into a Services Agreement with Moran Foods (the “Services Agreement”), pursuant to which we are 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
$30
upon entry into the Services Agreement, which has been credited against fees due under the Services Agreement. 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 our aggregate indemnification obligations to Save-A-Lot and Onex could result in a material liability, we are not aware of any matters that are expected to result in a material liability. We have 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, we 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”). We are now providing services to NAI and Albertson’s LLC to transition and wind down the TSA. In exchange for these transition and wind down services, we are entitled to receive aggregate fees of
$50
that are being paid in eight
$6
increments from April 2015 through October 2018. These payments are separate from and incremental to the fixed and variable fees we receive under the TSA. On October 17, 2017, we entered into a letter agreement with each of Albertson’s LLC and NAI pursuant to which the parties agreed that the TSA would expire on September 21, 2018 as to those services that we are providing to Albertson’s LLC and NAI, other than with respect to certain limited services. We will provide services to Albertson’s LLC for one distribution center until at least October 2018, and NAI may notify us that it requires services for certain stores beyond September 21, 2018. The fees for these extended services, if any, will be the same per-store weekly fee (subject to a minimum fee) and the same weekly fee for the distribution center that Albertson’s LLC and NAI currently pay to us. The parties do not expect any of these services, or any of the transition and wind down services, to extend beyond April 2019. We also agreed that Albertson’s would no longer provide services to us after September 21, 2019. In addition, we operate a distribution center in Lancaster, PA that is owned by NAI. In March 2017, we acquired a distribution center in Harrisburg, PA that will replace the Lancaster facility in fiscal 2019.
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, and we now provide limited services in connection with the wind down of the Haggen estate. We 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 our unsecured claims against Haggen. In accordance with the terms of the settlement agreements, we received approximately
$3
from Haggen on October 11, 2016, and Haggen is obligated to make further payments of approximately
$2
on account of our claims. Pursuant to the settlement agreement, Haggen has agreed not to pursue claw-backs of any transfers made to us. We could be exposed to claims from third parties from which we source products, services, licenses and similar benefits on behalf of Haggen. We have reserved for possible losses related to a portion of these third-party claims. It is reasonably possible that we could experience losses in excess of the amount of such reserves; however, at this time we 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 us.
Pursuant to a trade agreement that Unified entered into with Haggen, Haggen paid a substantial portion of Unified’s prepetition receivables in exchange for certain shipping terms from Unified, and Haggen also agreed to stipulate to an allowed administrative 503(b)(9) priority claim for the balance of Unified’s prepetition claim for goods shipped to Haggen. Accordingly, Unified filed a proof of claim asserting an administrative expense priority claim in the amount of
$6
. Haggen has asserted certain potential offsets to Unified’s priority claim that Unified disputes. Unified also filed a proof of claim against Haggen for breach of contract damages related to the termination of its supply agreement and various ancillary agreements. If allowed, such claim would be treated as a general unsecured claim in the Haggen bankruptcy cases. Relatedly, on September 7, 2016, the Official Committee of Unsecured Creditors (the “Committee”) filed a complaint against Comvest Group Holdings, LLC, the private equity owner of Haggen (“Comvest”), certain of Haggen’s non-debtor affiliates, and certain of their respective officers, directors and managers (collectively the “Defendants”) in the bankruptcy court to recover additional funds for Haggen’s bankruptcy estate for the benefit of creditors, including the potential payment of Unified claims. On December 9, 2016, the Defendants filed their answer to the Committee’s complaint generally denying the allegations asserted therein. The trial concluded in November 2017 and on January 22, 2018, the bankruptcy court ruled in favor of the Defendants on all counts dismissing the Committee’s complaint. On February 2, 2018, the Committee filed a Notice of Appeal and subsequently filed a Statement of Issues on Appeal challenging the bankruptcy court’s ruling with respect to the Committee’s recharacterization claim. Absent a successful appeal, it is our understanding that the Haggen estate will not have sufficient assets to pay administrative expense priority claims in full, including our and Unified’s 503(b)(9) priority claims, or to pay any amounts for general unsecured claims.
Information Technology Intrusions
Computer Network Intrusions
- In fiscal 2015, we announced we had experienced
two
separate criminal intrusions into the portion of our computer network that processes payment card transactions for some of our owned and franchised retail stores, including some of our associated stand-alone liquor stores.
Some stores owned and operated by Albertson’s LLC and NAI experienced related criminal intrusions. We provide information technology services to these Albertson’s LLC and NAI stores pursuant to the TSA. We believe that any losses incurred by Albertson’s LLC or NAI as a result of the intrusions affecting their stores would not be our responsibility.
Investigations and Proceedings
- As a result of the criminal intrusions, the payment card brands conducted investigations and, although our network has previously been found to be compliant with applicable data security standards, the forensic investigator working on behalf of the payment card brands concluded that we were 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, we submitted an appeal of the assessment to MasterCard and on December 5, 2016, MasterCard denied the appeal and imposed a reduced assessment. On January 2, 2018, Visa provided notice of its assessment of operating expense and incremental counterfeit fraud losses allegedly incurred by it or its issuers as a result of the criminal intrusions. The other payment card brands may also allege that we were 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. We believe these payment card brands may also make claims against us for non-ordinary course operating expenses and incremental counterfeit fraud losses allegedly incurred by them or their issuers by reason of the intrusions and we expect to dispute those claims. While we do not believe that a loss is probable by reason of these as yet unasserted claims, we believe that a loss in connection with these claims, should they be asserted, is reasonably possible; however, at this time we
cannot reasonably estimate a range of possible losses because 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 assessments imposed by MasterCard and Visa, we do not currently believe that any amount that may be paid for other payment card brand claims that might be asserted will be material to our consolidated results of operations, cash flows or financial condition.
On October 23, 2015, we received a letter from a multistate group of Attorneys General seeking information regarding the intrusions. We are cooperating with the request. To date, no claims have been asserted against us related to this inquiry. If any claims are asserted, we expect to dispute those claims.
As discussed in more detail below in this Note 16 under
Legal Proceedings
,
four
class action complaints related to the intrusions have been filed against us and consolidated into
one
action and are currently on appeal after being dismissed. As indicated below, we believe 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 us in connection with the intrusions.
Insurance Coverage and Expenses
- We had
$50
of cyber threat insurance above a per incident deductible of
$1
at the time of the intrusions, which we believe should mitigate the financial effect of these intrusions, including claims made or that might be made against us based on these intrusions. We now maintain
$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, we enter 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 24, 2018
, we had approximately
$391
of non-cancelable future purchase obligations.
Legal Proceedings
We are 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 our overall results of operations, cash flows or financial position is remote.
In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against us 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, we purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain of our assets 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 alleged 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 we and C&S purchased from each other. Plaintiffs are divided into Midwest plaintiffs and a New England plaintiff and are seeking monetary damages, injunctive relief and attorney’s fees. On June 19, 2015, the District Court Magistrate Judge entered an order that decided a number of matters including granting Midwest plaintiffs’ request to seek class certification for certain Midwest Distribution Centers and denying New England plaintiff’s request to add an additional New England plaintiff and denying plaintiff’s request to seek class certification for a group of New England retailers. In September 2015, the New England plaintiff 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 September 7, 2016, the District Court granted Midwest plaintiffs’ motion to certify
five
Midwest distribution center classes, only
one
of which sued us (the non-arbitration Champaign distribution center class). On March 1, 2017, the 8th Circuit denied the New England plaintiff’s appeals seeking to join an additional New England plaintiff and the appeal seeking the ability to move for class certification of a smaller New England class. At a mediation on May 25, 2017, we reached a settlement with the non-arbitration Champaign distribution center class, which is the one Midwest class suing us. We and the Midwest plaintiffs have entered into a settlement agreement and the court granted final approval of the settlement on November 17, 2017. The material terms of the settlement include: (1) denial of wrongdoing and liability by us; (2) release of all Midwest plaintiffs’ claims against us related to the allegations and transactions at issue in the litigation that were raised or could have been raised by the non-arbitration Champaign distribution center class; and (3) payment by us of
$9
. There is no contribution between us and C&S, and C&S did not settle the claims alleged against it and on April 19, 2018, a jury returned a verdict in favor of C&S determining that there was no conspiracy between Supervalu and C&S to restrain trade. The New England plaintiff is not a party to the settlement and is pursuing its individual claims and potential class action claims against us, which at this time are determined as remote. On
February 15, 2018, we filed a summary judgment and Daubert motion and the New England plaintiff filed a motion for class certification. The hearing on the motions is scheduled for May 16, 2018.
In August and November 2014,
four
class action complaints were filed against us relating to the criminal intrusions into our computer network that we announced 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. We 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 we filed our 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, we filed a cross-appeal to preserve our additional arguments for dismissal of the plaintiffs’ complaint. On August 30, 2017, the 8th Circuit affirmed the dismissal for 14 out of the 15 plaintiffs finding they had no standing. The 8th Circuit did not consider our cross-appeal and remanded the case back for consideration of our additional arguments for dismissal against the one remaining plaintiff. On October 30, 2017, we filed our motion to dismiss the remaining plaintiff and on November 7, 2017, the plaintiff filed a motion to amend its complaint. The Court held a hearing on the motions on December 14, 2017, and on March 7, 2018, the District Court denied plaintiff’s motion to amend and granted our motion to dismiss. On March 14, 2018, plaintiff appealed to the 8th Circuit.
On June 30, 2015, we 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 our HIPAA breach notification and reporting from 2009 to the present. The letter indicates that the OCR Midwest Region is doing a compliance review of our alleged failure to report small breaches of protected health information related to our pharmacy operations (e.g., any incident involving less than 500 individuals). On September 4, 2015, we submitted our response to OCR’s letter. While we do not believe that a loss is probable by reason of the compliance review, we believe that a loss is reasonably possible; however, at this time we cannot estimate a range of possible losses because the OCR’s review is at the early stages and we do 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 us and other factors determined relevant by OCR.
On September 21, 2016, our Farm Fresh retail banner, classified as discontinued operations, received an administrative subpoena issued by the Drug Enforcement Administration (“DEA”). In addition to requesting information on Farm Fresh’s pharmacy policies and procedures generally, the subpoena also requested the production of documents that are required to be kept and maintained by Farm Fresh pursuant to the Controlled Substances Act and its implementing regulations. On November 23, 2016, Farm Fresh responded to the subpoena and is cooperating fully with DEA’s additional requests for information. On February 8, 2018, Farm Fresh received a letter from the US Attorney’s Office asserting violations of the Controlled Substances Act and the potential for penalties. Farm Fresh’s response to the alleged violations is due April 30, 2018. In March 2018, representatives for Farm Fresh engaged in discussions with representatives for the DEA and the US Attorney’s Office. We believe that a settlement of the matter is probable. We do not have a best estimate in the range of probable settlement amounts as the discussions with the DEA and US Attorney’s Office are preliminary and we do not know the amount of monetary penalties, if any, the DEA or US Attorney’s Office may seek. We have therefore accrued for the reasonably estimated loss within discontinued operations based on the low end of the range of probable settlement amounts based on information available to us at this time. Furthermore, we believe that a monetary loss in excess of the probable settlement amounts is reasonably possible, but cannot estimate the amount of any such loss for the reasons stated above.
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. We regularly monitor our exposure to the loss contingencies associated with these matters and may from time to time change our predictions with respect to outcomes and estimates with respect to related costs and exposures.
With respect to the C&S, Criminal Intrusion and OCR matters discussed above, we believe 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 our financial condition, results of operations or cash flows.
NOTE 17—SEGMENT INFORMATION
Our operating segments reflect the manner in which our business is managed, resources are allocated, and internal performance is assessed. Our chief operating decision maker is the Chief Executive Officer.
We offer a wide variety of grocery products, general merchandise and health and beauty care, pharmacy, fuel and other items and services. Our business is classified 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. Reportable segments are reviewed 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 us. Substantially all of our operations are domestic.
We offer 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 our Wholesale segment to Wholesale customers and through our Retail segment in owned and franchised retail stores to shoppers. The following table provides additional detail on the amounts and percentages of Net sales for each group of similar products sold in our Wholesale and Retail segments, and service agreement revenue in Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Wholesale:
|
|
|
|
|
|
|
|
|
|
|
|
Nonperishable grocery products
(1)
|
$
|
7,634
|
|
|
54
|
%
|
|
$
|
5,579
|
|
|
52
|
%
|
|
$
|
5,753
|
|
|
51
|
%
|
Perishable grocery products
(2)
|
3,241
|
|
|
23
|
|
|
1,969
|
|
|
18
|
|
|
2,025
|
|
|
18
|
|
Services to Wholesale customers and other
|
179
|
|
|
1
|
|
|
157
|
|
|
1
|
|
|
157
|
|
|
1
|
|
|
11,054
|
|
|
78
|
%
|
|
7,705
|
|
|
71
|
%
|
|
7,935
|
|
|
70
|
%
|
Retail:
|
|
|
|
|
|
|
|
|
|
|
|
Nonperishable grocery products
(1)
|
$
|
1,612
|
|
|
12
|
%
|
|
$
|
1,663
|
|
|
15
|
%
|
|
$
|
1,731
|
|
|
15
|
%
|
Perishable grocery products
(2)
|
1,002
|
|
|
7
|
|
|
1,026
|
|
|
9
|
|
|
1,072
|
|
|
10
|
|
Pharmacy products
|
302
|
|
|
2
|
|
|
312
|
|
|
3
|
|
|
316
|
|
|
3
|
|
Other
|
27
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
26
|
|
|
—
|
|
|
2,943
|
|
|
21
|
%
|
|
3,028
|
|
|
27
|
%
|
|
3,145
|
|
|
28
|
%
|
Corporate:
|
|
|
|
|
|
|
|
|
|
|
|
Services agreement revenue
|
$
|
160
|
|
|
1
|
%
|
|
$
|
179
|
|
|
2
|
%
|
|
$
|
203
|
|
|
2
|
%
|
Net sales
|
$
|
14,157
|
|
|
100
|
%
|
|
$
|
10,912
|
|
|
100
|
%
|
|
$
|
11,283
|
|
|
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.
Summary operating results by reportable segment consisted of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
Wholesale
|
|
Retail
|
|
Corporate
|
|
Total
|
Net sales
|
$
|
11,054
|
|
|
$
|
2,943
|
|
|
$
|
160
|
|
|
$
|
14,157
|
|
Cost of sales
|
10,591
|
|
|
2,115
|
|
|
—
|
|
|
12,706
|
|
Gross profit
|
463
|
|
|
828
|
|
|
160
|
|
|
1,451
|
|
Selling and administrative expenses
|
237
|
|
|
841
|
|
|
180
|
|
|
1,258
|
|
Operating earnings (loss)
|
$
|
226
|
|
|
$
|
(13
|
)
|
|
$
|
(20
|
)
|
|
$
|
193
|
|
Interest expense, net
|
|
|
|
|
|
|
132
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
(16
|
)
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
77
|
|
Depreciation and amortization
|
$
|
84
|
|
|
$
|
100
|
|
|
$
|
13
|
|
|
$
|
197
|
|
Capital expenditures
|
$
|
207
|
|
|
$
|
70
|
|
|
$
|
—
|
|
|
$
|
277
|
|
Identifiable assets
|
$
|
3,343
|
|
|
$
|
823
|
|
|
$
|
7
|
|
|
$
|
4,173
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
Wholesale
|
|
Retail
|
|
Corporate
|
|
Total
|
Net sales
|
$
|
7,705
|
|
|
$
|
3,028
|
|
|
$
|
179
|
|
|
$
|
10,912
|
|
Cost of sales
|
7,350
|
|
|
2,167
|
|
|
—
|
|
|
9,517
|
|
Gross profit
|
355
|
|
|
861
|
|
|
179
|
|
|
1,395
|
|
Selling and administrative expenses
|
130
|
|
|
851
|
|
|
206
|
|
|
1,187
|
|
Goodwill impairment charge
|
—
|
|
|
13
|
|
|
—
|
|
|
13
|
|
Operating earnings (loss)
|
$
|
225
|
|
|
$
|
(3
|
)
|
|
$
|
(27
|
)
|
|
$
|
195
|
|
Interest expense, net
|
|
|
|
|
|
|
180
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
(5
|
)
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
20
|
|
Depreciation and amortization
|
$
|
54
|
|
|
$
|
108
|
|
|
$
|
11
|
|
|
$
|
173
|
|
Capital expenditures
|
$
|
85
|
|
|
$
|
83
|
|
|
$
|
—
|
|
|
$
|
168
|
|
Identifiable assets
|
$
|
2,182
|
|
|
$
|
829
|
|
|
$
|
297
|
|
|
$
|
3,308
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
Wholesale
|
|
Retail
|
|
Corporate
|
|
Total
|
Net sales
|
$
|
7,935
|
|
|
$
|
3,145
|
|
|
$
|
203
|
|
|
$
|
11,283
|
|
Cost of sales
|
7,564
|
|
|
2,248
|
|
|
—
|
|
|
9,812
|
|
Gross profit
|
371
|
|
|
897
|
|
|
203
|
|
|
1,471
|
|
Selling and administrative expenses
|
147
|
|
|
831
|
|
|
246
|
|
|
1,224
|
|
Intangible asset impairment charge
|
6
|
|
|
—
|
|
|
—
|
|
|
6
|
|
Operating earnings (loss)
|
$
|
218
|
|
|
$
|
66
|
|
|
$
|
(43
|
)
|
|
$
|
241
|
|
Interest expense, net
|
|
|
|
|
|
|
193
|
|
Equity in earnings of unconsolidated affiliates
|
|
|
|
|
|
|
(5
|
)
|
Earnings from continuing operations before income taxes
|
|
|
|
|
|
|
$
|
53
|
|
Depreciation and amortization
|
$
|
49
|
|
|
$
|
114
|
|
|
$
|
12
|
|
|
$
|
175
|
|
Capital expenditures
|
$
|
88
|
|
|
$
|
74
|
|
|
$
|
—
|
|
|
$
|
162
|
|
Identifiable assets
|
$
|
2,203
|
|
|
$
|
874
|
|
|
$
|
9
|
|
|
$
|
3,086
|
|
NOTE 18—DISCONTINUED OPERATIONS
During the fourth quarter of fiscal 2018, we announced that we are pursuing the sale of certain of our corporately owned and operated retail operations consisting of Farm Fresh, Shop ‘n Save, and Shop ‘n Save East. The results of operations, financial position and cash flows of these banners have been presented as discontinued operations and the related assets and liabilities have been reclassified as held-for-sale for all periods presented. These three retail banners were previously separate components included in our Retail reporting segment. We entered into agreements to sell a majority of our Farm Fresh retail stores and pharmacy assets for a total of
$53
in March 2018.
During the third quarter of fiscal 2017, we determined the Save-A-Lot business met the criteria to be held-for-sale and classified as a discontinued operation. The Save-A-Lot business was previously disclosed as a separate reporting segment. 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
Operating results of discontinued operations are summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
2017
|
|
2016
|
Net sales
|
$
|
1,522
|
|
|
$
|
5,097
|
|
|
$
|
6,245
|
|
Cost of sales
|
1,141
|
|
|
4,145
|
|
|
5,132
|
|
Gross profit
|
381
|
|
|
952
|
|
|
1,113
|
|
Selling and administrative expenses
|
409
|
|
|
854
|
|
|
909
|
|
Goodwill impairment charge
|
—
|
|
|
39
|
|
|
—
|
|
Gain on sale
|
—
|
|
|
(637
|
)
|
|
—
|
|
Operating (loss) earnings
|
(28
|
)
|
|
696
|
|
|
204
|
|
Interest expense (income), net
|
—
|
|
|
(4
|
)
|
|
(5
|
)
|
(Loss) earnings from discontinued operations before income taxes
|
(28
|
)
|
|
700
|
|
|
209
|
|
Income tax (benefit) provision
|
(25
|
)
|
|
81
|
|
|
72
|
|
(Loss) income from discontinued operations, net of tax
|
$
|
(3
|
)
|
|
$
|
619
|
|
|
$
|
137
|
|
The carrying amounts of major classes of assets and liabilities that were classified as held-for-sale on the Consolidated Balance Sheets were as follows:
|
|
|
|
|
|
|
|
|
|
February 24, 2018
|
|
February 25, 2017
|
Current assets
|
|
|
|
Cash and cash equivalents
|
$
|
7
|
|
|
$
|
5
|
|
Receivables, net
|
8
|
|
|
10
|
|
Inventories, net
|
109
|
|
|
119
|
|
Other current assets
|
6
|
|
|
4
|
|
Total current assets of discontinued operations
|
130
|
|
|
138
|
|
Long-term assets
|
|
|
|
Property, plant and equipment, net
|
74
|
|
|
128
|
|
Intangible assets, net
|
1
|
|
|
2
|
|
Deferred tax assets
|
8
|
|
|
2
|
|
Other assets
|
1
|
|
|
2
|
|
Total long-term assets of discontinued operations
|
84
|
|
|
134
|
|
Total assets held for sale
|
$
|
214
|
|
|
$
|
272
|
|
|
|
|
|
Current liabilities
|
|
|
|
Accounts payable
|
$
|
51
|
|
|
$
|
59
|
|
Accrued vacation, compensation and benefits
|
20
|
|
|
18
|
|
Current maturities of capital lease obligations
|
2
|
|
|
2
|
|
Other current liabilities
|
9
|
|
|
10
|
|
Total current liabilities of discontinued operations
|
82
|
|
|
89
|
|
Long-term liabilities
|
|
|
|
Long-term capital lease obligations
|
14
|
|
|
17
|
|
Other long-term liabilities
|
3
|
|
|
—
|
|
Total long-term liabilities of discontinued operations
|
17
|
|
|
17
|
|
Total liabilities of discontinued operations
|
99
|
|
|
106
|
|
Net assets of discontinued operations
|
$
|
115
|
|
|
$
|
166
|
|
Gain on Save-A-Lot Sale
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 was paid in fiscal 2018.
Goodwill and Long-Lived Asset Impairment Charges
Prior to the classification of the Save-A-Lot business as held-for-sale, we assessed the carrying value of the Save-A-Lot business for impairment in accordance with GAAP 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. Our 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. We 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
(Loss) 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. Additionally, in fiscal 2017 we conducted an impairment review of the remaining carrying value of our reporting units due to declines in sales and cash flows within Retail. As a result, we recorded an additional non-cash goodwill impairment charge of
$2
, which was allocated to Retail banners classified as discontinued operations as of
February 24, 2018
. 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.
In fiscal 2018, two retail asset groups, which consisted of two separate retail banners, indicated a decline in their results of operations and the cash flow projections of these two retail asset groups declined compared to prior projections. As a result, the two retail asset groups were selected for an undiscounted cash flow review. Both of these retail asset groups failed the long-lived asset recoverability test. Accordingly, a fair value assessment using the income approach was performed over each retail group’s long-lived assets. The carrying value of both asset groups exceeded the estimated fair value and were reduced to the lower of the carrying value or fair value, resulting in an impairment charge of
$47
, within Selling and administrative expenses of discontinued operations.
In fiscal 2017, one retail asset group indicated a decline in their results of operations and the cash flow projections declined compared to prior projections. As a result, the retail asset group was selected for an undiscounted cash flow review. The retail asset group failed the long-lived asset recoverability test. Accordingly, a fair value assessment using the income approach was performed over the retail asset group’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 of discontinued operations.
Multiemployer Plans
We contributed
$6
for each fiscal year 2018, 2017 and 2016, respectively, to multiemployer pension plans included in discontinued operations. We contributed
$2
for each fiscal year 2018, 2017 and 2016, respectively to Central States Southeast and Southwest Areas Pension Fund. See
Note 11—Benefit Plans
, for additional information regarding this plan.
NOTE 19—SUBSEQUENT EVENTS
Sale Leaseback Transaction
On April 23, 2018, we entered into a series of agreements to sell eight of our distribution centers for an aggregate purchase price, excluding costs and taxes, of approximately
$483
. The estimated after-tax net proceeds are expected to be approximately
$445
. We intend to use the net proceeds to pay down outstanding debt. Subject to customary closing conditions, upon closing of the sale of the properties, we will enter into lease agreements for each of the properties for initial terms of 20 years with five five-year renewal options, that are expected to qualify for sale-leaseback accounting and be classified as operating leases. Any gain on the sale of these properties will be deferred and amortized over the term of the leases. The aggregate initial annual rent payment for the eight properties is expected to be approximately
$31
, with scheduled rent increases occurring generally over the initial 20-year term. Of these eight transactions, which are subject to closing conditions, seven are expected to be completed during the first quarter and one is expected to be completed in the third quarter of fiscal 2019. Separate from this sale leaseback transaction, we also entered into an agreement to sell one distribution center. Subject to closing conditions, upon closing of this sale we would enter into a shorter-term lease for the facility.
UNAUDITED QUARTERLY FINANCIAL INFORMATION
(In millions, except per share data)
Unaudited quarterly financial information for SUPERVALU INC. and its subsidiaries is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2018
|
|
First
(16 weeks)
|
|
Second
(12 weeks)
|
|
Third
(12 weeks)
|
|
Fourth
(12 weeks)
|
|
Fiscal Year
(52 weeks)
|
Net sales
|
$
|
3,517
|
|
|
$
|
3,449
|
|
|
$
|
3,597
|
|
|
$
|
3,594
|
|
|
$
|
14,157
|
|
Gross profit
|
$
|
431
|
|
|
$
|
340
|
|
|
$
|
324
|
|
|
$
|
356
|
|
|
$
|
1,451
|
|
Net earnings (loss) attributable to SUPERVALU INC.
|
$
|
11
|
|
|
$
|
(25
|
)
|
|
$
|
26
|
|
|
$
|
33
|
|
|
$
|
45
|
|
Net earnings (loss) per share attributable to SUPERVALU INC.—diluted
|
$
|
0.30
|
|
|
$
|
(0.66
|
)
|
|
$
|
0.67
|
|
|
$
|
0.86
|
|
|
$
|
1.18
|
|
Weighted average shares—diluted
|
38
|
|
|
38
|
|
|
38
|
|
|
38
|
|
|
38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2017
|
|
First
(16 weeks)
|
|
Second
(12 weeks)
|
|
Third
(12 weeks)
|
|
Fourth
(12 weeks)
|
|
Fiscal Year
(52 weeks)
|
Net sales
|
$
|
3,293
|
|
|
$
|
2,461
|
|
|
$
|
2,629
|
|
|
$
|
2,529
|
|
|
$
|
10,912
|
|
Gross profit
|
$
|
432
|
|
|
$
|
310
|
|
|
$
|
315
|
|
|
$
|
338
|
|
|
$
|
1,395
|
|
Net earnings (loss) attributable to SUPERVALU INC.
|
$
|
46
|
|
|
$
|
31
|
|
|
$
|
(26
|
)
|
|
$
|
599
|
|
|
$
|
650
|
|
Net earnings (loss) per share attributable to SUPERVALU INC.—diluted
|
$
|
1.20
|
|
|
$
|
0.81
|
|
|
$
|
(0.70
|
)
|
|
$
|
15.61
|
|
|
$
|
17.00
|
|
Weighted average shares—diluted
|
38
|
|
|
38
|
|
|
38
|
|
|
38
|
|
|
38
|
|