Add
SVU to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| SVU > SEC Filings for SVU > Form 10-Q on 16-Oct-2008 | All Recent SEC Filings |
16-Oct-2008
Quarterly Report
(Dollars and shares in millions, except per share data)
OVERVIEW
SUPERVALU is one of the largest grocery companies in the United States. The Company operates in two segments of the grocery industry, Retail food and Supply chain services, primarily wholesale distribution, across the United States retail grocery channel. As of September 6, 2008, the Company has approximately 190,000 employees, 2,500 owned and licensed stores, 900 in-store pharmacies and 130 fuel centers.
The ongoing weakness in the economy and credit market turmoil combined with higher food inflation and energy costs continue to negatively impact consumer confidence and spending. If these trends continue, it could lead to further reduced consumer spending which could impact the Company's sales growth. We expect identical store retail sales growth (which is defined as stores operating for four full quarters, including store expansions and excluding fuel and planned store closures) in the second half of fiscal 2009 to be flat to slightly positive, compared to the second half of fiscal 2008, as our new merchandising and marketing initiatives gain momentum and our store remodel effort continues. For the full year, we expect identical store retail sales growth to be flat to slightly negative. The Company is committed to maintaining our financial flexibility and investing prudently in our long-term growth.
RESULTS OF OPERATIONS
In the second quarter of fiscal 2009, net sales were $10,226 compared with $10,159 in the prior year. Net earnings for the second quarter of fiscal 2009 were $128, basic net earnings per share were $0.60 and diluted net earnings per share were $0.60 compared with net earnings of $148, basic net earnings per share of $0.70 and diluted net earnings per share of $0.69 last year. Results for the second quarter of fiscal 2009 include acquisition-related costs (defined as one-time transaction costs associated with the acquisition of New Albertsons, Inc., which primarily include supply chain consolidation costs, employee-related benefit costs and consultant fees) of $2 after tax, or $0.01 per diluted share, compared with $12 after tax, or $0.05 per diluted share, of acquisition-related costs in the second quarter of fiscal 2008.
Year-to-date for fiscal 2009, net sales were $23,573 compared with $23,450 in the prior year. Year-to-date net earnings for fiscal 2009 were $290, basic net earnings per share were $1.37 and diluted net earnings per share were $1.36 compared with net earnings of $296, basic net earnings per share of $1.40 and diluted net earnings per share of $1.37 last year. Year-to-date results for fiscal 2009 include acquisition-related costs of $8 after tax, or $0.04 per diluted share, compared with $29 after tax, or $0.13 per diluted share, of acquisition-related costs last year.
SECOND QUARTER RESULTS
Net Sales
Net sales for the second quarter of fiscal 2009 increased to $10,226 compared with $10,159 last year due to an increase in Supply chain services sales. Retail food sales were 77.9 percent of Net sales and Supply chain services sales were 22.1 percent of Net sales for the second quarter of fiscal 2009, compared with 78.5 percent and 21.5 percent, respectively, last year.
Retail food net sales for the second quarter of fiscal 2009 were $7,961 compared with $7,977 last year. Identical store retail sales growth for the second quarter of fiscal 2009 compared to last year was negative 1.3 percent, primarily due to soft sales and higher levels of competitive activity.
Total retail square footage at the end of the second quarter of fiscal 2009 was approximately 71 million. Total retail square footage decreased 0.1 percent from the second quarter of fiscal 2008. Total retail square footage, excluding store closures, increased 2.2 percent over the second quarter of fiscal 2008.
Supply chain services net sales for the second quarter of fiscal 2009 were $2,265 compared with $2,182 last year. The increase primarily reflects the pass through of inflationary price increases and new business growth partially offset by customer attrition and the on-going transition of a national retailer's volume to self-distribution.
Gross Profit
Gross profit, as a percent of Net sales, decreased 60 basis points to 22.4 percent in the second quarter of fiscal 2009 compared to 23.0 percent last year. The decrease is primarily attributable to investments in price and higher levels of promotional spending as well as a 15 basis point impact attributable to the change in business segment mix.
Selling and Administrative Expenses
Selling and administrative expenses, as a percent of Net sales, were 19.0 percent in the second quarter of fiscal 2009 compared to 19.0 percent last year, primarily reflecting increases in employee-related costs and occupancy costs offset by lower acquisition-related costs and the impact of the change in business segment mix.
Operating Earnings
Operating earnings for the second quarter of fiscal 2009 decreased to $342 compared with $406 last year. Retail food operating earnings for the second quarter of fiscal 2009 were $284, or 3.6 percent of Retail food net sales, compared with $385, or 4.8 percent of Retail food net sales last year, primarily reflecting investments in price, higher promotional spending, higher employee-related costs and higher occupancy costs partially offset by acquisition synergies. Supply chain services operating earnings for the second quarter of fiscal 2009 were $77, or 3.4 percent of Supply chain services net sales, compared with $63, or 2.9 percent of Supply chain services net sales last year, primarily reflecting improved sales leverage and cost reduction initiatives.
Net Interest Expense
Net interest expense was $141 in the second quarter of fiscal 2009 compared with $163 last year reflecting lower debt levels and the benefit of lower borrowing rates in the second quarter of fiscal 2009.
Provision for Income Taxes
The effective tax rate was 36.4 percent and 39.0 percent in the second quarters of fiscal 2009 and 2008, respectively. The decrease is reflective of non-taxable life insurance proceeds received during the second quarter of fiscal 2009.
Net Earnings
Net earnings were $128, or $0.60 per basic share and $0.60 per diluted share, in the second quarter of fiscal 2009 compared with Net earnings of $148, or $0.70 per basic share and $0.69 per diluted share last year.
Weighted average basic shares decreased to 211 in the second quarter of fiscal 2009 compared with 212 shares last year and weighted average diluted shares decreased to 213 in the second quarter of fiscal 2009 compared with 216 shares last year.
YEAR-TO-DATE RESULTS
Net Sales
Net sales for fiscal 2009 year-to-date increased to $23,573 compared with $23,450 last year due to an increase in Supply chain services sales. Retail food sales were 77.7 percent of Net sales and Supply chain services sales were 22.3 percent of Net sales for fiscal 2009 year-to-date, compared with 78.5 percent and 21.5 percent, respectively, last year.
Retail food net sales for fiscal 2009 year-to-date were $18,307 compared with $18,400 last year. Identical store retail sales growth for fiscal 2009 year-to-date compared to last year was negative 1.1 percent, primarily due to soft sales and higher levels of competitive activity.
Supply chain services net sales for fiscal 2009 year-to-date were $5,266 compared with $5,050 last year. The increase primarily reflects the pass through of inflationary price increases and new business growth partially offset by normal customer attrition.
Gross Profit
Gross profit, as a percent of Net sales, decreased 40 basis points to 22.7 percent for fiscal 2009 year-to-date compared to 23.1 percent last year. The decrease is primarily attributable to investments in price and higher levels of promotional spending as well as an 18 basis point impact attributable to the change in business segment mix.
Selling and Administrative Expenses
Selling and administrative expenses, as a percent of Net sales, decreased approximately 10 basis points to 19.3 percent for fiscal 2009 year-to-date compared to 19.4 percent last year, primarily reflecting a favorable impact from the change in business segment mix.
Operating Earnings
Operating earnings for fiscal 2009 year-to-date decreased to $798 compared with $872 last year. Retail food operating earnings for fiscal 2009 year-to-date were $683, or 3.7 percent of Retail food net sales, compared with $834, or 4.5 percent of Retail food net sales last year, primarily reflecting investments in price, higher promotional spending and higher occupancy costs partially offset by acquisition synergies.
Supply chain services operating earnings for fiscal 2009 year-to-date were $163, or 3.1 percent of Supply chain services net sales, compared with $130, or 2.6 percent of Supply chain services net sales last year, primarily reflecting improved sales leverage and cost reduction initiatives.
Net Interest Expense
Net interest expense was $331 for fiscal 2009 year-to-date compared with $386 last year reflecting lower debt levels and the benefit of lower borrowing rates in fiscal 2009.
Provision for Income Taxes
The effective tax rate was 37.9 percent and 39.0 percent for fiscal 2009 and 2008 year-to-date, respectively. The decrease is reflective of non-taxable life insurance proceeds received during the second quarter of fiscal 2009. The effective tax rate for fiscal 2008 was 39.3 percent.
Net Earnings
Net earnings were $290, or $1.37 per basic share and $1.36 per diluted share, for fiscal 2009 year-to-date compared with Net earnings of $296, or $1.40 per basic share and $1.37 per diluted share last year.
Weighted average basic shares were 211 for fiscal 2009 year-to-date compared with 211 shares last year and weighted average diluted shares decreased to 213 for fiscal 2009 year-to-date compared with 216 shares last year.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $745 for fiscal 2009 year-to-date compared with $1,018 last year. The decrease is primarily attributable to the timing of income tax payments and profit sharing contributions.
Net cash used in investing activities was $585 for fiscal 2009 year-to-date compared with $395 last year. Investing activities for fiscal 2009 year-to-date consist primarily of capital spending to fund retail store remodeling and store expansion. The increase is attributable primarily to higher capital spending in the first 28 weeks of fiscal 2009 compared to last year.
Net cash used in financing activities was $130 for fiscal 2009 year-to-date compared with $631 last year. Financing activities for fiscal 2009 year-to-date relate primarily to proceeds received from the issuance of long-term debt offset by repayments of long-term debt.
Management expects that the Company will continue to replenish operating assets with internally generated funds. There can be no assurance, however, that the Company's business will continue to generate cash flow at current levels. The Company will continue to obtain short-term or long-term financing from its credit facilities. Long-term financing will be maintained through existing and new debt issuances. Maturities of debt issued will depend on management's views with respect to the relative attractiveness of interest rates at the time of issuance and other debt maturities. Although there can be no assurances in these difficult economic times for financial institutions, the Company believes that the lenders participating in its credit facilities will be willing and able to provide financing to the Company in accordance with their legal obligations under the credit facilities. While the Company's short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures and acquisitions as opportunities arise, the current decline in the global financial markets may negatively impact the Company's ability to access the capital markets in a timely manner and on attractive terms.
The Company has senior secured credit facilities in the amount of $4,000. These facilities were provided by a group of lenders and consist of a $2,000 five-year revolving credit facility (the "Revolving Credit Facility"), a $750 five-year term loan ("Term Loan A") and a $1,250 six-year term loan ("Term Loan B"). The rates in effect on outstanding borrowings under the facilities as of September 6, 2008, based on the current credit rating of the facilities, were 0.20 percent for the facility fees, LIBOR plus 0.875 percent for Term Loan A, LIBOR plus 1.25 percent for Term Loan B, LIBOR plus 1.00 percent for LIBOR revolving advances and Prime Rate for base rate revolving advances.
All obligations under the senior secured credit facilities are guaranteed by each material subsidiary of the Company. The obligations are also secured by a pledge of the equity interests in those same material subsidiaries, limited as required by the existing public indentures of the Company, such that the respective debt issued need not be equally and ratably secured.
The senior secured credit facilities also contain various financial covenants, including a minimum interest expense coverage ratio and a maximum debt leverage ratio. The interest expense coverage ratio shall not be less than 2.20 to 1 for each of the fiscal quarters ending up through December 30, 2008, and moves progressively to a ratio of not less than 2.30 to 1 for the fiscal quarters ending after December 30, 2009. The debt leverage ratio shall not exceed 4.25 to 1 for each of the fiscal quarters ending up through December 30, 2008 and moves progressively to a ratio not to exceed 3.75 to 1 for each of the fiscal quarters ending after December 30, 2009. As of September 6, 2008, the Company was in compliance with the covenants of the senior secured credit facilities.
Borrowings under Term Loan A and Term Loan B may be repaid, in full or in part, at any time without penalty. Term Loan A has required repayments, payable quarterly, equal to 2.50 percent of the initial drawn balance for the first four quarterly payments (year one) and 3.75 percent of the initial drawn balance for each quarterly payment in years two through five, with the entire remaining balance due at the five year anniversary of the inception date, June 1, 2006. Term Loan B has required repayments, payable quarterly, equal to 0.25 percent of the initial drawn balance, with the entire remaining balance due at the six year anniversary of the inception date. Advances shall be applied pro rata to the remaining amortization payments.
As of September 6, 2008, there were $363 of outstanding borrowings under the Revolving Credit Facility, Term Loan A had a remaining principal balance of $562, of which $113 was classified as current, and Term Loan B had a remaining principal balance of $1,122, of which $11 was classified as current. Letters of credit outstanding under the Revolving Credit Facility were $370 and the unused available credit under the Revolving Credit Facility was $1,267. The Company also had $18 of outstanding letters of credit issued under separate agreements with financial institutions. These letters of credit primarily support workers' compensation, merchandise import programs and payment obligations. The Company pays fees, which vary by instrument, of up to 1.4 percent on the outstanding balance of the letters of credit.
In May 2008, the Company amended and extended its 364-day accounts receivable securitization program. The Company can continue to borrow up to $300 on a revolving basis, with borrowings secured by eligible accounts receivable, which remain under the Company's control. Facility fees under this program range from 0.225 percent to 2.00 percent, based on the Company's credit ratings. The facility fee in effect on September 6, 2008, based on the Company's current credit ratings, is 0.25 percent. As of September 6, 2008, there were $346 of accounts receivable pledged as collateral, classified in Receivables in the Condensed Consolidated Balance Sheet. Due to the Company's intent to renew the facility or refinance it with the Revolving Credit Facility, the facility is classified in Long-term debt in the Condensed Consolidated Balance Sheets.
As of September 6, 2008, the Company had $701 of debt, excluding the Accounts Receivable Securitization Facility, with current maturities that are classified in Long-term debt in the Condensed Consolidated Balance Sheets due to the Company's intent to refinance such obligations with the Revolving Credit Facility or other long-term debt.
The Company has $203 of debentures that contain put options exercisable in May 2009, which are classified as current, that would require the Company to repay borrowed amounts prior to the scheduled maturity in May 2037.
Capital spending during the second quarter of fiscal 2009 was approximately $276, including approximately $11 in capital leases. Capital spending year-to-date for fiscal 2009 was approximately $614, including approximately $12 in capital leases. Capital spending primarily included store remodeling activity, new retail stores and technology expenditures. The Company's capital spending for fiscal 2009 is projected to be approximately $1,200, including capital leases.
COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
The Company has guaranteed certain leases, fixture financing loans and other debt obligations of various retailers as of September 6, 2008. These guarantees were generally made to support the business growth of affiliated retailers. The guarantees are generally for the entire terms of the leases or other debt obligations with remaining terms that range from less than one year to 22 years, with a weighted average remaining term of approximately 11 years. For each guarantee issued, if the affiliated retailer defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the affiliated retailer. As of September 6, 2008, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was approximately $188 and represented approximately $138 on a discounted basis. Due to the indemnification agreements and personal guarantees, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under the Company's guarantee arrangements.
The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company 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 the Company's assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote.
In the ordinary course of business, the Company enters into supply contracts to purchase products for resale. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of September 6, 2008, the Company had approximately $2,427 of non-cancelable future purchase obligations primarily related to supply contracts.
The Company is a party to a variety of contractual agreements under which the Company may be obligated to indemnify other parties for certain matters, which indemnities may be secured by operation of law or otherwise, in the ordinary course of business. These contracts primarily relate to the Company's commercial contracts, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company, and agreements to indemnify officers, directors and employees in the performance of their work. While the Company's aggregate indemnification obligation could result in a material liability, the Company is not aware of any current matters that it expects to result in a material liability.
The Company is a party to various legal proceedings arising from the normal course of business as described in Part II-Other Information, Item 1, under the caption "Legal Proceedings" and in Note 10 - Commitments, Contingencies and Off-Balance Sheet Arrangements, none of which, in management's opinion, is expected to have a material adverse impact on the Company's financial condition, results of operations or cash flows.
Pension Plan / Health and Welfare Plan Contingencies
The Company contributes to various multi-employer pension plans under collective bargaining agreements, primarily defined benefit pension plans. These plans generally provide retirement benefits to participants based on their service to contributing employers. Based on available information, the Company believes that some of the multi-employer plans to which it contributes are underfunded. Company contributions to these plans are likely to continue to increase in the near term. However, the amount of any increase or decrease in contributions will depend on a variety of factors, including the results of the Company's collective bargaining efforts, investment return on the assets held in the plans, actions taken by the trustees who manage the plans and requirements under the Pension Protection Act of 2006 and Section 412(e) of the Internal Revenue Code. Furthermore, if the Company were to significantly reduce operations or exit certain markets or otherwise cease making contributions to these plans, it could trigger a partial or complete withdrawal that would require the Company to fund its proportionate share of a plan's unfunded vested benefits.
The Company also makes contributions to multi-employer health and welfare plans in amounts set forth in the related collective bargaining agreements. A small minority of the collective bargaining agreements contain reserve requirements that may trigger unanticipated contributions resulting in increased healthcare expenses. If these healthcare provisions cannot be renegotiated in a manner that reduces the prospective healthcare cost as the Company intends, the Company's Selling and administrative expenses could increase in the future.
Contractual Obligations
There have been no material changes in the Company's contractual obligations since the end of fiscal 2008. Refer to the Company's Annual Report on Form 10-K for the fiscal year ended February 23, 2008 for additional information regarding the Company's contractual obligations.
CRITICAL ACCOUNTING POLICIES
The description of critical accounting policies is included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended February 23, 2008.
NEW ACCOUNTING STANDARDS
In September 2006, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 157, "Fair Value Measurements." SFAS No. 157 clarifies the principle that fair value should be based on the assumptions that market participants would use when pricing an asset or liability and establishes a fair value hierarchy that prioritizes the information used to develop those assumptions. Under SFAS No. 157, fair value measurements would be separately disclosed by level within the fair value hierarchy. In February 2008, the FASB approved FASB Staff Position ("FSP") FAS 157-2, "Effective Date of FASB Statement No. 157," that permits companies to partially defer the effective date of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. FSP FAS 157-2 did not permit companies to defer recognition and disclosure requirements for financial assets and financial liabilities or for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually. SFAS No. 157 became effective for the Company on February 24, 2008 for financial assets and financial liabilities and for nonfinancial assets and nonfinancial liabilities that are remeasured at least annually and did not have a material effect on the Company's consolidated financial statements. The Company will defer adoption of SFAS No. 157 for one year for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed at fair value in the financial statements on a nonrecurring basis. The Company is evaluating the effect the implementation of FSP FAS 157-2 will have on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), "Business Combinations" ("SFAS No. 141(R)"). SFAS No. 141(R) expands the definition of a business combination and requires the fair value of the purchase price of an acquisition, including the issuance of equity securities, to be determined on the acquisition date. SFAS No. 141(R) also requires that all assets, liabilities, contingent consideration and contingencies of an acquired business be recorded at fair value at the acquisition date. In
addition, SFAS No. 141(R) requires that acquisition costs generally be expensed as incurred, restructuring costs generally be expensed in periods subsequent to the acquisition date and changes in accounting for deferred tax asset valuation allowances and acquired income tax uncertainties after the measurement period impact income tax expense. SFAS No. 141(R) is effective for the Company's fiscal year beginning March 1, 2009 on a prospective basis for all business combinations for which the acquisition date is on or after the effective date of SFAS No. 141(R), with the exception of the accounting for adjustments to income tax-related amounts, which is applied to acquisitions that closed prior to the effective date of SFAS No. 141(R). The Company is evaluating the effect the implementation of SFAS No. 141(R) will have on the consolidated financial statements.
In December 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in Consolidated Financial Statements-an Amendment of ARB No. 51." SFAS No. 160 changes the accounting and reporting for minority interests such that minority interests will be recharacterized as noncontrolling interests and will be required to be reported as a component of equity, and requires that purchases or sales of equity interests that do not result in a change in control be accounted for as equity transactions and, upon a loss of control, requires the interest sold, as well as any interest retained, to be recorded at fair value with any gain or loss recognized in earnings. SFAS No. 160 is effective for the Company's fiscal year beginning March 1, 2009, with early adoption prohibited. The Company is evaluating the effect the implementation of SFAS No. 160 will have on the consolidated financial statements.
In March 2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments and Hedging Activities." SFAS No. 161 amends and expands the disclosure requirements of SFAS No. 133 for derivative instruments and hedging activities. SFAS No. 161 is effective November 30, 2008 for the Company, with . . .
|
|