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| SVU > SEC Filings for SVU > Form 10-Q on 8-Jan-2009 | All Recent SEC Filings |
8-Jan-2009
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 November 29, 2008, the Company has approximately
190,000 employees, 2,500 owned and licensed stores, 900 in-store pharmacies and
130 fuel centers.
The unprecedented decline in the economy and continuing credit market turmoil
during the third quarter of fiscal 2009 combined with high 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. For the full year, 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) is projected to be approximately negative 1.0 percent. The Company is
committed to maintaining its financial flexibility and investing prudently for
the long term.
RESULTS OF OPERATIONS
In the third quarter of fiscal 2009, net sales were $10,171 and net loss was
$2,944, or $13.95 per basic and diluted share. Results for the third quarter of
fiscal 2009 include the preliminary estimate of non-cash goodwill and intangible
asset impairment charges of $3,250 before tax or $3,076 after tax, or $14.57 per
diluted share, as more fully described below. In the third quarter of fiscal
2008, net sales were $10,211 and net earnings were $141, or $0.67 per basic
share and $0.66 per diluted share. Results for the third quarter of fiscal 2008
included 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 $7 after tax, or $0.03 per diluted share.
Year-to-date for fiscal 2009, net sales were $33,744 and net loss was $2,654, or
$12.56 per basic and diluted share. Year-to-date results for fiscal 2009 include
the preliminary estimate of goodwill and intangible asset impairment charges of
$3,250 before tax or $3,076 after tax, or $14.54 per diluted share, as more
fully described below. Year-to-date results for fiscal 2009 also include
acquisition-related costs of $8 after tax, or $0.04 per diluted share.
Year-to-date for fiscal 2008, net sales were $33,661 and net earnings were $437,
or $2.06 per basic share and $2.03 per diluted share. Results for fiscal
2008 year-to-date included acquisition-related costs of $36 after tax, or $0.16
per diluted share.
THIRD QUARTER RESULTS
Net Sales
Net sales for the third quarter of fiscal 2009 were $10,171 compared with
$10,211 last year, primarily reflecting a decrease in Supply chain services
sales. Retail food sales were 77.3 percent of Net sales and Supply chain
services sales were 22.7 percent of Net sales for the third quarter of fiscal
2009, compared with 77.0 percent and 23.0 percent, respectively, last year.
Retail food net sales for the third quarter of fiscal 2009 were $7,861 compared
with $7,858 last year. New store growth was offset by the impact of store
closures and negative identical store retail sales. Identical store retail sales
growth for the third quarter of fiscal 2009 compared to last year was negative
0.5 percent as a result of soft sales and higher levels of competitive activity.
Total retail square footage at the end of the third quarter of fiscal 2009 was
approximately 71 million. Total retail square footage decreased 0.3 percent from
the third quarter of fiscal 2008. Total retail square footage, excluding store
closures, increased 2.0 percent over the third quarter of fiscal 2008.
Supply chain services net sales for the third quarter of fiscal 2009 were $2,310
compared with $2,353 last year, reflecting the on-going transition of a national
retailer's volume to self-distribution and customer attrition, which was
partially offset by the pass through of inflation and new business growth.
Gross Profit
Gross profit, as a percent of Net sales, increased 20 basis points to
22.4 percent in the third quarter of fiscal 2009 compared to 22.2 percent last
year. The increase primarily reflects the benefit of merchandising initiatives,
higher margins on fuel and a favorable impact from the change in business
segment mix, partially offset by higher LIFO charges.
Selling and Administrative Expenses
Selling and administrative expenses, as a percent of Net sales, were
18.9 percent in the third quarter of fiscal 2009 compared to 18.3 percent last
year, primarily reflecting increases in employee-related costs and depreciation
expense and an unfavorable impact from the change in business segment mix,
partially offset by lower acquisition-related costs.
Goodwill and intangible asset impairment charges
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company applies a fair value based impairment test to the net book value of
goodwill and indefinite-lived intangible assets on an annual basis and on an
interim basis if certain events or circumstances indicate that an impairment
loss may have occurred. For the third quarter of fiscal 2009 the Company's stock
price had a significant and sustained decline and book value per share
substantially exceeded the stock price. Consistent with SFAS No. 142, the
Company performed an interim impairment test of goodwill and indefinite-lived
intangible assets at the end of the third quarter of fiscal 2009. Although this
analysis has not been completed due to its complexity, based on the work
performed to date the Company has recorded a preliminary estimate of impairment
charges of $3,250, comprised of $3,000 of goodwill and $250 of indefinite-lived
intangibles. The impairment charges are subject to finalization of fair values
which the Company will complete in the fourth quarter of fiscal 2009. The
Company believes that the preliminary estimates of impairment charges are
reasonable and represent the Company's best estimate of the impairment charges
to be incurred; however, it is possible that material adjustments to the
preliminary estimates may be required as the analysis is finalized.
Operating Earnings (Loss)
Operating loss for the third quarter of fiscal 2009 was $2,891 compared with
operating earnings of $395 last year. Retail food operating loss for the third
quarter of fiscal 2009 was $2,941 compared with operating earnings of $342 last
year, reflecting $3,250 of goodwill and intangible asset impairment charges with
the remaining decrease of $33, or 50 basis points, primarily attributable to
higher employee-related costs and occupancy costs partially offset by higher
gross margins and acquisition synergies.
Supply chain services operating earnings for the third quarter of fiscal 2009
were $69, or 3.0 percent of Supply chain services net sales, compared with $69,
or 2.9 percent of Supply chain services net sales last year.
Net Interest Expense
Net interest expense was $143 in the third quarter of fiscal 2009 compared with
$164 last year, primarily reflecting lower debt levels and the benefit of lower
borrowing rates on floating rate debt in the third quarter of fiscal 2009.
Income Tax Provision (Benefit)
The income tax benefit was $90, or 3.0 percent of loss before income taxes, in
the third quarter of fiscal 2009 compared with income tax expense of $90, or
39.0 percent of earnings before income taxes, last year. The tax rate for the
third quarter of fiscal 2009 reflects the impact of the impairment charges, the
majority of which are non-deductible for income tax purposes. Excluding the
impact of the impairment charges, the effective tax rate for the third quarter
of fiscal 2009 was 39.0 percent.
Net Earnings (Loss)
Net loss was $2,944, or $13.95 per basic and diluted share, in the third quarter
of fiscal 2009 compared with net earnings of $141, or $0.67 per basic share and
$0.66 per diluted share last year. Net loss for the third quarter of fiscal 2009
includes the preliminary estimate of goodwill and intangible asset impairment
charges of $3,076 after tax, or $14.57 per diluted share.
YEAR-TO-DATE RESULTS
Net Sales
Net sales for fiscal 2009 year-to-date increased to $33,744 compared with
$33,661 last year, primarily reflecting an increase in Supply chain services
sales. Retail food sales were 77.5 percent of Net sales and Supply chain
services sales were 22.5 percent of Net sales for fiscal 2009 year-to-date,
compared with 78.0 percent and 22.0 percent, respectively, last year.
Retail food net sales for fiscal 2009 year-to-date were $26,168 compared with
$26,259 last year. New store growth was offset by the impact of store closures
and negative identical store retail sales. Identical store retail sales growth
for fiscal 2009 year-to-date compared to last year was negative 0.9 percent, as
a result of soft sales and higher levels of competitive activity.
Supply chain services net sales for fiscal 2009 year-to-date were $7,576
compared with $7,402 last year. The increase primarily reflects the pass through
of inflation and new business growth, partially offset by normal 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 20 basis points to
22.6 percent for fiscal 2009 year-to-date compared to 22.8 percent last year.
The decrease is primarily attributable to investments in price and higher levels
of promotional spending as well as an unfavorable impact attributable to the
change in business segment mix.
Selling and Administrative Expenses
Selling and administrative expenses, as a percent of Net sales, increased 10
basis points to 19.2 percent for fiscal 2009 year-to-date compared to
19.1 percent last year, primarily reflecting higher employee-related costs and
occupancy costs partially offset by a favorable impact attributable to the
change in business segment mix.
Goodwill and intangible asset impairment charges
In accordance with SFAS No. 142, "Goodwill and Other Intangible Assets," the
Company applies a fair value based impairment test to the net book value of
goodwill and indefinite-lived intangible assets on an annual basis and on an
interim basis if certain events or circumstances indicate that an impairment
loss may have occurred. For the third quarter of fiscal 2009 the Company's stock
price had a significant and sustained decline and book value per share
substantially exceeded the stock price. Consistent with SFAS No. 142, the
Company performed an interim impairment test of goodwill and indefinite-lived
intangible assets at the end of the third quarter of fiscal 2009. Although this
analysis has not been completed due to its complexity, based on the work
performed to date the Company has recorded a preliminary estimate of impairment
charges of $3,250, comprised of $3,000 of goodwill and $250 of indefinite-lived
intangibles. The impairment charges are subject to finalization of fair values
which the Company will complete in the fourth quarter of fiscal 2009. The
Company believes that the preliminary estimates of impairment charges are
reasonable and represent the Company's best estimate of the impairment charges
to be incurred; however, it is possible that material adjustments to the
preliminary estimates may be required as the analysis is finalized.
Operating Earnings (Loss)
Operating loss for fiscal 2009 year-to-date was $2,093 compared with operating
earnings of $1,267 last year. Retail food operating loss for fiscal 2009
year-to-date was $2,258, compared with operating earnings of $1,176 last year,
reflecting $3,250 of goodwill and intangible asset impairment charges with the
remaining decrease of $184, or 70 basis points, primarily attributable to
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 $232,
or 3.1 percent of Supply chain services net sales, compared with $199, or
2.7 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 $474 for fiscal 2009 year-to-date compared with $550
last year, primarily reflecting lower debt levels and the benefit of lower
borrowing rates on floating rate debt in fiscal 2009.
Income Tax Provision
Income tax expense was $87, or 3.4 percent of loss before income taxes, for
fiscal 2009 year-to-date compared with $280, or 39.0 percent of earnings before
income taxes, last year. The tax rate for fiscal 2009 year-to-date reflects the
impact of the impairment charges recorded in the third quarter of fiscal 2009,
the majority of which are non-deductible for income tax purposes, and
non-taxable life insurance proceeds received during the second quarter of fiscal
2009. Excluding the impact of the impairment charges, the effective tax rate for
fiscal 2009 year-to-date was 38.2 percent. The effective tax rate for fiscal
2008 was 39.3 percent.
Net Earnings (Loss)
Net loss was $2,654, or $12.56 per basic and diluted share, for fiscal
2009 year-to-date compared with net earnings of $437, or $2.06 per basic share
and $2.03 per diluted share last year. Net loss for fiscal 2009 year-to-date
includes the preliminary estimate of goodwill and intangible asset impairment
charges of $3,076 after tax, or $14.54 per diluted share.
SUBSEQUENT EVENT
On January 7, 2009, the Company announced that it expects to incur pre-tax
charges in the range of $150 to $200 in the fourth quarter of fiscal 2009
related to closing certain non-strategic store locations and other cost
mitigation efforts.
LIQUIDITY AND CAPITAL RESOURCES
Net cash provided by operating activities was $1,084 for fiscal
2009 year-to-date compared with $1,001 last year.
Net cash used in investing activities was $826 for fiscal 2009 year-to-date
compared with $631 last year. The increase is primarily attributable to higher
capital spending in the first 40 weeks of fiscal 2009 compared to last year.
Fiscal 2009 year-to-date capital spending relates primarily to store remodeling
activity, new retail stores and technology expenditures.
Net cash used in financing activities was $96 for fiscal 2009 year-to-date
compared with $478 last year. The decrease is primarily attributable to
increased proceeds received from the issuance of long-term debt due to higher
levels of capital spending in fiscal 2009 year-to-date compared to last year.
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. Management believes that the Company's
cash flows and revolving credit facility will be more than sufficient to meet
the Company's financing needs through fiscal 2011 should the capital markets
remain unattractive. However, the Company fully intends to access these markets
as conditions allow.
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
November 29, 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 November 29, 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. Prepayments shall be applied pro rata to the
remaining amortization payments.
As of November 29, 2008, there were $479 of outstanding borrowings under the
Revolving Credit Facility, Term Loan A had a remaining principal balance of
$534, of which $113 was classified as current, and Term Loan B had a remaining
principal balance of $1,119, of which $11 was classified as current. Letters of
credit outstanding under the Revolving Credit Facility were $377 and the unused
available credit under the Revolving Credit Facility was $1,144. The Company
also had $4 of outstanding letters of credit issued under separate agreements
with financial institutions. 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 November 29, 2008, based on the Company's current
credit ratings, is 0.25 percent. As of November 29, 2008, there were $366 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 November 29, 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 $202 of debentures that contain put options exercisable in
May 2009 classified as current that would require the Company to repay borrowed
amounts prior to the scheduled maturity in May 2037.
The Company remains in compliance with all of its debt covenants.
Capital spending during the third quarter of fiscal 2009 was approximately $273,
including approximately $4 in capital leases. Capital spending year-to-date for
fiscal 2009 was approximately $949, including approximately $15 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 November 29, 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. The Company reviews performance risk related to its
guarantees of affiliated retailers on a quarterly basis based on internal
measures of credit performance. As of November 29, 2008, the maximum amount of
undiscounted payments the Company would be required to make in the event of
default of all guarantees was approximately $167 and represented approximately
$94 on a discounted basis. Based on the indemnification agreements, personal
guarantees and results of the quarterly review of performance risk, 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 November 29, 2008, the Company had
approximately $2,125 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
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