Back to GetFilings.com



SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
FORM 10-Q
 
(Mark One)
 
[X]
  
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    
SECURITIES EXCHANGE ACT OF 1934
    
For the quarterly period (12 weeks) ended September 7, 2002.
[  ]
  
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
    
SECURITIES EXCHANGE ACT OF 1934
    
For the transition period from                          to                         .
 
 
Commission file number 1-5418
 
 
SUPERVALU INC.
(Exact name of registrant as specified in its Charter)
 
DELAWARE
(State or other jurisdiction of
incorporation or organization)
    
41-0617000
(I.R.S. Employer identification No.)
11840 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA
(Address of principal executive offices)
    
55344
(Zip Code)
 
(952) 828-4000
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes    x    No    ¨
 
The number of shares outstanding of each of the issuer’s classes of Common Stock as of October 4, 2002 is as follows:
 
Title of Each Class

  
Shares Outstanding

Common Shares
  
133,619,258
 


 
PART I – FINANCIAL INFORMATION
 
ITEM 1.    FINANCIAL STATEMENTS
 
SUPERVALU INC. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
(In thousands, except per share data)
 
    
Second Quarter (12 weeks) ended

 
    
September 7, 2002

  
% of sales

    
September 8, 2001

  
% of sales

 
Net sales
  
$
4,495,008
  
100.00
%
  
$
4,715,257
  
100.00
%
Costs and expenses
                           
Cost of sales
  
 
3,903,339
  
86.84
 
  
 
4,124,244
  
87.46
 
Selling and administrative expenses
  
 
460,345
  
10.24
 
  
 
455,194
  
9.65
 
Amortization of goodwill
  
 
—  
  
0.00
 
  
 
11,106
  
0.24
 
Interest
                           
Interest expense
  
 
42,606
  
0.94
 
  
 
45,942
  
0.97
 
Interest income
  
 
4,625
  
0.10
 
  
 
5,870
  
0.12
 
    

  

  

  

Interest expense, net
  
 
37,981
  
0.84
 
  
 
40,072
  
0.85
 
    

  

  

  

Total costs and expenses
  
 
4,401,665
  
97.92
 
  
 
4,630,616
  
98.20
 
    

  

  

  

Earnings before income taxes
  
 
93,343
  
2.08
 
  
 
84,641
  
1.80
 
Provision for income taxes
                           
Current
  
 
25,719
         
 
29,665
      
Deferred
  
 
8,817
         
 
4,408
      
    

         

      
Income tax expense
  
 
34,536
  
0.77
 
  
 
34,073
  
0.73
 
    

  

  

  

Net earnings
  
$
58,807
  
1.31
%
  
$
50,568
  
1.07
%
    

  

  

  

Weighted average number of common shares outstanding
                           
Diluted
  
 
134,927
         
 
134,249
      
Basic
  
 
133,752
         
 
133,130
      
Net earnings per common share—diluted
  
$
0.44
         
$
0.38
      
Net earnings per common share—basic
  
$
0.44
         
$
0.38
      
Dividends per common share
  
$
.1425
         
$
.1400
      
 
All data subject to year-end audit.
 
See notes to consolidated financial statements.
 

2


SUPERVALU INC. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF EARNINGS
 
(In thousands, except per share data)
 
    
Year-to-date (28 weeks) ended

 
    
September 7,
2002

  
% of
sales

    
September 8,
2001

  
% of
sales

 
Net sales
  
$
10,344,239
  
100.00
%
  
$
11,646,825
  
100.00
%
Costs and expenses
                           
Cost of sales
  
 
8,995,614
  
86.96
 
  
 
10,288,896
  
88.34
 
Selling and administrative expenses
  
 
1,043,027
  
10.08
 
  
 
1,055,634
  
9.06
 
Amortization of goodwill
  
 
—  
  
0.00
 
  
 
25,971
  
0.22
 
Interest
                           
Interest expense
  
 
100,658
  
0.97
 
  
 
108,599
  
0.93
 
Interest income
  
 
10,842
  
0.10
 
  
 
12,300
  
0.10
 
    

  

  

  

Interest expense, net
  
 
89,816
  
0.87
 
  
 
96,299
  
0.83
 
    

  

  

  

Total costs and expenses
  
 
10,128,457
  
97.91
 
  
 
11,466,800
  
98.45
 
    

  

  

  

Earnings before income taxes
  
 
215,782
  
2.09
 
  
 
180,025
  
1.55
 
Provision for income taxes
                           
Current
  
 
65,437
         
 
65,032
      
Deferred
  
 
14,383
         
 
7,457
      
    

         

      
Income tax expense
  
 
79,820
  
0.78
 
  
 
72,489
  
0.63
 
    

  

  

  

Net earnings
  
$
135,962
  
1.31
%
  
$
107,536
  
0.92
%
    

  

  

  

Weighted average number of common shares outstanding
                           
Diluted
  
 
135,619
         
 
133,293
      
Basic
  
 
133,786
         
 
132,766
      
Net earnings per common share—diluted
  
$
1.00
         
$
0.81
      
Net earnings per common share—basic
  
$
1.02
         
$
0.81
      
Dividends per common share
  
$
.2825
         
$
.2775
      
 
All data subject to year-end audit.
 
See notes to consolidated financial statements.

3


 
SUPERVALU INC. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF NET SALES AND EARNINGS
 
(In thousands, except percent data)
 
    
Second Quarter
(12 weeks) ended

    
Year-to-date
(28 weeks) ended

 
    
September 7,
2002

    
September 8,
2001

    
September 7,
2002

    
September 8,
2001

 
Net Sales
                                   
Retail food
  
$
2,247,153
 
  
$
2,157,842
 
  
$
5,059,374
 
  
$
4,978,041
 
% of total
  
 
50.0
%
  
 
45.8
%
  
 
48.9
%
  
 
42.7
%
Food distribution
  
 
2,247,855
 
  
 
2,557,415
 
  
 
5,284,865
 
  
 
6,668,784
 
% of total
  
 
50.0
%
  
 
54.2
%
  
 
51.1
%
  
 
57.3
%
    


  


  


  


Total net sales
  
$
4,495,008
 
  
$
4,715,257
 
  
$
10,344,239
 
  
$
11,646,825
 
    
 
100.0
%
  
 
100.00
%
  
 
100.0
%
  
 
100.0
%
    


  


  


  


Earnings
                                   
Retail food
  
$
98,752
 
  
$
91,135
 
  
$
227,897
 
  
$
178,775
 
% of sales
  
 
4.4
%
  
 
4.2
%
  
 
4.5
%
  
 
3.6
%
Food distribution
  
 
39,775
 
  
 
42,598
 
  
 
96,948
 
  
 
118,385
 
% of sales
  
 
1.8
%
  
 
1.7
%
  
 
1.8
%
  
 
1.8
%
    


  


  


  


Subtotal
  
 
138,527
 
  
 
133,733
 
  
 
324,845
 
  
 
297,160
 
% of sales
  
 
3.1
%
  
 
2.8
%
  
 
3.1
%
  
 
2.6
%
General corporate expenses
  
 
(7,203
)
  
 
(9,020
)
  
 
(19,247
)
  
 
(20,836
)
    


  


  


  


Total operating earnings
  
 
131,324
 
  
 
124,713
 
  
 
305,598
 
  
 
276,324
 
% of sales
  
 
2.9
%
  
 
2.6
%
  
 
3.0
%
  
 
2.4
%
Interest expense
  
 
(42,606
)
  
 
(45,942
)
  
 
(100,658
)
  
 
(108,599
)
Interest income
  
 
4,625
 
  
 
5,870
 
  
 
10,842
 
  
 
12,300
 
    


  


  


  


Earnings before income taxes
  
 
93,343
 
  
 
84,641
 
  
 
215,782
 
  
 
180,025
 
Provision for income taxes
  
 
(34,536
)
  
 
(34,073
)
  
 
(79,820
)
  
 
(72,489
)
    


  


  


  


Net earnings
  
$
58,807
 
  
$
50,568
 
  
$
135,962
 
  
$
107,536
 
    


  


  


  


 
All data subject to year-end audit.
 
See notes to consolidated financial statements.

4


SUPERVALU INC. and Subsidiaries
 
CONDENSED CONSOLIDATED BALANCE SHEETS
 
(In thousands)
 
    
Second
Quarter

  
Fiscal Year
End

    
September 7,
2002

  
February 23,
2002

Assets
             
Current Assets
             
Cash and cash equivalents
  
$
294,412
  
$
12,171
Receivables, net
  
 
453,680
  
 
447,243
Inventories, net
  
 
1,075,889
  
 
1,038,050
Other current assets
  
 
75,147
  
 
78,030
    

  

Total current assets
  
 
1,899,128
  
 
1,575,494
Long-term notes receivable, net
  
 
131,968
  
 
137,326
Property, plant and equipment, net
  
 
2,211,578
  
 
2,208,633
Goodwill
  
 
1,576,584
  
 
1,531,312
Other assets
  
 
376,128
  
 
343,484
    

  

Total assets
  
$
6,195,386
  
$
5,796,249
    

  

Liabilities and Stockholders’ Equity
             
Current Liabilities
             
Notes payable
  
$
—  
  
$
27,465
Accounts payable
  
 
1,210,341
  
 
1,013,140
Current debt and obligations under capital leases
  
 
354,124
  
 
356,408
Other current liabilities
  
 
295,530
  
 
293,498
    

  

Total current liabilities
  
 
1,859,995
  
 
1,690,511
Long-term debt and obligations under capital leases
  
 
2,010,995
  
 
1,875,873
Other liabilities and deferred income taxes
  
 
328,844
  
 
330,727
Commitments and contingencies
             
Total stockholders’ equity
  
 
1,995,552
  
 
1,899,138
    

  

Total liabilities and stockholders’ equity
  
$
6,195,386
  
$
5,796,249
    

  

 
All data subject to year-end audit.
 
See notes to consolidated financial statements.

5


 
SUPERVALU INC. and Subsidiaries
 
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
 
(In thousands, except per share data)
 
    
Common Stock

         
Treasury Stock

                                 
    
Shares

  
Amount

  
Capital in
Excess of
Par Value

    
Shares

    
Amount

      
Comprehensive
Income

    
Retained
Earnings

      
Accumulated
Other
Comprehensive
Income

    
Total

 
BALANCES AT FEBRUARY 24, 2001
  
150,670
  
$
150,670
  
$
128,492
 
  
(18,296
)
  
$
(342,100
)
    
$
—  
 
  
$
1,846,087
 
    
$
 
 
  
$
1,783,149
 
Net earnings
       
 
—  
                  
 
—  
 
    
 
198,326
 
  
 
198,326
 
             
 
198,326
 
Sales of common stock under option plans
       
 
—  
  
 
(2,103
)
  
1,401
 
  
 
28,005
 
    
 
—  
 
  
 
—  
 
             
 
25,902
 
Cash dividends declared on common stock—$.5575 per share
       
 
—  
           
—  
 
             
 
—  
 
  
 
(74,429
)
             
 
(74,429
)
Compensation under employee incentive plans
       
 
—  
  
 
(4,945
)
  
576
 
  
 
10,293
 
    
 
—  
 
  
 
—  
 
             
 
5,348
 
Other comprehensive loss
       
 
—  
                             
 
(7,075
)
  
 
—  
 
    
 
(7,075
)
  
 
(7,075
)
Purchase of shares for treasury
       
 
—  
           
(1,462
)
  
 
(32,083
)
    
 
—  
 
  
 
—  
 
             
 
(32,083
)
    
  

  


  

  


    


  


    


  


BALANCES AT FEBRUARY 23, 2002
  
150,670
  
$
150,670
  
$
121,444
 
  
(17,781
)
  
$
(335,885
)
    
$
191,251
 
  
$
1,969,984
 
    
$
(7,075
)
  
$
1,899,138
 
    
  

  


  

  


    


  


    


  


Net earnings
       
 
—  
           
—  
 
  
 
—  
 
    
 
135,962
 
  
 
135,962
 
             
 
135,962
 
Sales of common stock under option plans
       
 
—  
  
 
(9,116
)
  
2,092
 
  
 
45,555
 
    
 
—  
 
  
 
—  
 
             
 
36,439
 
Cash dividends declared on common stock—$.2825 per share
       
 
—  
  
 
 
                    
 
—  
 
  
 
(38,780
)
             
 
(38,780
)
Compensation under employee incentive plans
       
 
—  
  
 
1,816
 
  
146
 
  
 
2,953
 
    
 
—  
 
                      
 
4,769
 
Other comprehensive loss
       
 
—  
                  
 
—  
 
    
 
183
 
  
 
—  
 
    
 
183
 
  
 
183
 
Purchase of shares for treasury
       
 
—  
           
(1,508
)
  
 
(42,159
)
    
 
—  
 
  
 
—  
 
             
 
(42,159
)
    
  

  


  

  


    


  


    


  


BALANCES AT SEPTEMBER 7, 2002
  
150,670
  
$
150,670
  
$
114,144
 
  
(17,051
)
  
$
(329,536
)
    
$
136,145
 
  
$
2,067,166
 
    
$
(6,892
)
  
$
1,995,552
 
    
  

  


  

  


    


  


    


  


 
All data subject to year-end audit.
 
See notes to consolidated financial statements.

6


SUPERVALU INC. and Subsidiaries
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 
(In thousands)
 
    
Year-to-date
(28 weeks ended)

 
    
September 7,
2002

    
September 8,
2001

 
Net cash provided by operating activities
  
$
370,019
 
  
$
479,209
 
    


  


Cash flows from investing activities
                 
Additions to long-term notes receivable
  
 
(11,820
)
  
 
(21,658
)
Proceeds received on long-term notes receivable
  
 
16,568
 
  
 
19,112
 
Proceeds from sale of assets
  
 
21,023
 
  
 
50,562
 
Purchases of property, plant and equipment
  
 
(203,656
)
  
 
(125,972
)
Other investing activities
  
 
(7,599
)
  
 
(30,180
)
    


  


Net cash used in investing activities
  
 
(185,484
)
  
 
(108,136
)
    


  


Cash flows from financing activities
                 
Net increase (decrease) in checks outstanding, net of deposits
  
 
72,870
 
  
 
(119,808
)
Net reduction of short-term notes payable
  
 
(27,465
)
  
 
(192,655
)
Proceeds from issuance of long-term debt
  
 
296,535
 
  
 
10,000
 
Repayment of long-term debt
  
 
(179,444
)
  
 
(11,973
)
Reduction of obligations under capital leases
  
 
(16,591
)
  
 
(13,607
)
Net proceeds from the sale of common stock under option plans
  
 
29,593
 
  
 
5,482
 
Dividends paid
  
 
(37,517
)
  
 
(36,525
)
Payment for purchase of treasury stock
  
 
(40,275
)
  
 
 
    


  


Net cash provided by (used in) financing activities
  
 
97,706
 
  
 
(359,086
)
    


  


Net increase in cash and cash equivalents
  
 
282,241
 
  
 
11,987
 
Cash and cash equivalents at beginning of period
  
 
12,171
 
  
 
10,396
 
    


  


Cash and cash equivalents at the end of period
  
$
294,412
 
  
$
22,383
 
    


  


Supplemental Information:
                 
Pretax LIFO
  
$
1,342
 
  
$
3,882
 
Pretax depreciation and amortization
  
$
153,572
 
  
$
180,261
 
 
All data subject to year-end audit.
 
See notes to consolidated financial statements.

7


SUPERVALU INC. and Subsidiaries
 
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
GENERAL
 
Accounting Policies
 
The summary of significant accounting policies is included in the notes to consolidated financial statements set forth in the Annual Report on Form 10-K/A of SUPERVALU INC. (“SUPERVALU” or the “Company”) for its fiscal year ended February 23, 2002 (“fiscal 2002”).
 
The Company’s fiscal year ends on the last Saturday in February. The Company’s first quarter consists of 16 weeks, while the second, third and fourth quarters each consist of 12 weeks. The last three fiscal years consist of the 52-week periods ended February 23, 2002, February 24, 2001 and February 26, 2000. The Company’s reporting period for the second quarter and year-to-date periods ended September 7, 2002 and September 8, 2001 includes twelve weeks and twenty-eight weeks.
 
Statement of Registrant
 
The data presented herein is unaudited but, in the opinion of management, includes all adjustments necessary for a fair presentation of the condensed consolidated financial position of the Company and its subsidiaries at September 7, 2002 and September 8, 2001, and the results of the Company’s consolidated operations and condensed consolidated cash flows for the periods then ended. These interim results are not necessarily indicative of the results of the fiscal years as a whole.
 
Earnings Per Share (EPS)
 
Basic EPS is calculated using income available to common shareholders divided by the weighted average of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the weighted average of common shares outstanding is increased to include the number of additional common shares that would have been outstanding if the dilutive potential common shares, such as options, had been issued.
 
The following table details the computation of EPS:
 
    
Second Quarter
(12 weeks) ended

  
Year-to-date
(28 weeks) ended

    
Sept. 7, 2002

  
Sept. 8, 2001

  
Sept. 7, 2002

  
Sept. 8, 2001

    
(In thousands, except per share amounts)
Earnings per share – basic
                           
Income available to common shareholders
  
$
58,807
  
$
50,568
  
$
135,962
  
$
107,536
Weighted average shares outstanding
  
 
133,752
  
$
133,130
  
 
133,786
  
 
132,766
Earnings per share – basic
  
$
0.44
  
$
0.38
  
$
1.02
  
$
0.81
Earnings per share – diluted
                           
Income available to common shareholders
  
$
58,807
  
$
50,568
  
$
135,962
  
$
107,536
Weighted average shares outstanding
  
 
133,752
  
 
133,130
  
 
133,786
  
 
132,766
Dilutive impact of options outstanding
  
 
1,175
  
 
1,119
  
 
1,833
  
 
527
    

  

  

  

Weighted average shares and potential dilutive shares outstanding
  
 
134,927
  
 
134,249
  
 
135,619
  
 
133,293
Earnings per share – diluted
  
$
0.44
  
$
0.38
  
$
1.00
  
$
0.81
    

  

  

  

 

8


 
NEW ACCOUNTING STANDARDS
 
Recently Adopted Accounting Standards
 
In June 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires companies to cease amortizing goodwill and test at least annually for impairment. For SUPERVALU, amortization of goodwill ceased on February 24, 2002, at which time it was tested for impairment. Each of the Company’s reporting units were tested for impairment by comparing the fair value of the respective reporting unit with its carrying value as of February 24, 2002. Fair value was determined primarily based on valuation studies performed by the Company which considered the discounted cash flow method consistent with the Company’s valuation guidelines. As a result of impairment tests performed, the Company recorded no impairment loss. At September 7, 2002, the Company had $1.6 billion of goodwill on its consolidated balance sheets of which $0.9 billion was related to the retail food segment and $0.7 billion was related to the food distribution segment. At September 7, 2002, the net book value of other intangible assets of the Company totaled approximately $8.6 million, which is net of accumulated amortization of approximately $8.1 million.
 
In the following table, the Company has adjusted reported net earnings, diluted net earnings per common share and basic net earnings per common share to exclude amortization expense related to goodwill, that is no longer being amortized upon the adoption of SFAS No. 142:
 
    
Second Quarter
(12 weeks) ended

  
Year-to-date
(28 weeks) ended

    
September 7, 2002

  
September 8, 2001

  
September 7, 2002

  
September 8, 2001

Reported net earnings
  
$
58,807
  
$
50,568
  
$
135,962
  
$
107,536
Goodwill amortization
  
 
—  
  
 
11,106
  
 
—  
  
 
25,971
    

  

  

  

Adjusted net earnings
  
$
58,807
  
$
61,674
  
$
135,962
  
$
133,507
    

  

  

  

Diluted net earnings per common share:
                           
Reported net earnings
  
$
0.44
  
$
0.38
  
$
1.00
  
$
0.81
Goodwill amortization
  
 
—  
  
 
0.08
  
 
—  
  
 
0.19
    

  

  

  

Adjusted net earnings
  
$
0.44
  
$
0.46
  
$
1.00
  
$
1.00
    

  

  

  

Basic net earnings per common share:
                           
Reported net earnings
  
$
0 44
  
$
0.38
  
$
1.02
  
$
0.81
Goodwill amortization
  
 
—  
  
 
0.08
  
 
—  
  
 
0.19
    

  

  

  

Adjusted net earnings
  
$
0.44
  
$
0.46
  
$
1.02
  
$
1.00
    

  

  

  

9


In August 2001, the FASB issued SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”. The Company adopted the provisions of SFAS No. 144 effective February 24, 2002. As a result of impairment tests performed, the Company recorded no impairment loss.
 
Emerging Issue Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor’s Products)”, which codified EITF Issue Nos. 00-14, “Accounting for Certain Sales Incentives”; 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future”; and 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, became effective for the Company on February 24, 2002. These issues address the appropriate accounting for certain vendor contracts and loyalty programs. This EITF did not have a material impact on the Company’s consolidated financial statements.
 
Statement of Position (SOP) No. 01-06, “Accounting by Certain Entities (Including Entities with Trade Receivables) that Lend to or Finance the Activities of Others”, became effective for the Company on February 24, 2002. SOP No. 01-06 addresses the appropriate accounting for a company’s financing and lending activities. SOP No. 01-06 did not have a material impact on the Company’s consolidated financial statements.
 
Recently Issued Accounting Standards
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company plans to adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2004. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its consolidated financial statements.
 
In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 allows only those gains and losses on the extinguishment of debt that meet the criteria of extraordinary items to be treated as such in the financial statements. SFAS No. 145 also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. Certain provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, while the remaining provisions will be effective for the Company in the first quarter of fiscal 2004. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its consolidated financial statements.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires recognition of a liability for the costs associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan as required under EITF Issue 94-3. The Company plans to adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. The Company is currently analyzing the impact SFAS No. 146 will have on its consolidated financial statements.
 
EITF Issue No. 02-13, “Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB Statement No. 142, ‘Goodwill and Other Intangible Assets’ ”, requires that deferred income taxes be included in the carrying amount of a reporting unit for the purposes of the first step of the SFAS No. 142 goodwill impairment test. EITF No. 02-13 is effective for goodwill impairment tests performed after September 12, 2002. The Company is currently analyzing the impact EITF No. 02-13 will have on its consolidated financial statements.
 
EITF Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor”, addresses how a reseller of a vendor’s products should account for cash consideration received from a vendor and how to measure that consideration in its income statement. The EITF has not yet reached a final consensus on this issue. The Company will continue to monitor, until consensus is reached, the impact EITF No. 02-16 will have on its consolidated financial statements.
 
RESTRUCTURE AND OTHER CHARGES
 
Restructure 2002
 
In the fourth quarter of fiscal 2002, the Company identified additional efforts that will allow it to extend its distribution efficiency program begun early in fiscal 2001. The additional distribution efficiency initiatives identified resulted in pre-tax restructure charges of $16.3 million, primarily related to personnel reductions in administrative and transportation functions. Management began the initiatives in fiscal 2003 and expects the majority of these actions to be completed by the end of fiscal 2003.

10


 
Reserves for the fiscal 2002 restructure plan represent lease related costs as well as severance and employee related costs. Details of the fiscal 2002 restructure activity for fiscal 2003 are as follows:
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs:
                    
Transportation efficiency initiatives
  
$
3,235
  
$
181
  
$
3,054
    

  

  

    
 
3,235
  
 
181
  
 
3,054
Employee related costs:
                    
Administrative realignment
  
 
8,000
  
 
641
  
 
7,359
Transportation efficiency initiatives
  
 
5,065
  
 
4,036
  
 
1,029
    

  

  

    
 
13,065
  
 
4,677
  
 
8,388
    

  

  

Total restructure and other charges
  
$
16,300
  
$
4,858
  
$
11,442
    

  

  

 
Details of the fiscal 2002 restructure activity as it relates to the number of terminated employees are as follows:
 
    
Original Estimate

    
Employees Terminated in Prior Year

    
Balance February 23, 2002

    
Employees Terminated in Fiscal 2003

    
Balance September 7, 2002

Employees
  
800
    
0
    
800
    
300
    
500
 
Restructure 2001
 
In the fourth quarter of fiscal 2001, the Company completed a strategic review that identified certain assets that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments. This review process culminated in the Company recording pre-tax restructure and other charges of $181.6 million, including $89.7 million for asset impairment charges, $52.1 million for lease subsidies, lease cancellation fees, future payments on exited leased facilities and guarantee obligations, and $39.8 million for severance and employee related costs. During fiscal 2002, the fiscal 2001 charges were increased by $17.8 million as a result of changes in estimates primarily due to the softening real estate market, including $19.1 million for increased lease liabilities in exiting the non-core retail markets and the disposal of non-core assets, offset by a net decrease of $1.3 million in restructure reserves for the consolidation of distribution centers.
 
Included in the asset impairment charges of $89.7 million were $57.4 million of charges related to the Retail Food segment and $32.3 million of charges related to the Food Distribution segment. Writedowns for property, plant and equipment, goodwill and other intangibles, and other assets were $58.4 million, $21.8 million and $9.5 million, respectively, and were reflected in the restructure and other charges line in the Consolidated Statements of Earnings for fiscal 2001. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values which were based on the estimated market values for similar assets.
 
All activity for the fiscal 2001 restructure plan has been completed. Remaining reserves represent future payments on exited lease facilities and unpaid employee benefits. Details of the fiscal 2001 restructure activity for fiscal 2003 are as follows:
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs:
                    
Consolidation of distribution centers
  
$
8,081
  
$
3,260
  
$
4,821
Exit of non-core retail markets
  
 
15,988
  
 
9,349
  
 
6,639
Disposal of non-core assets and other administrative reductions
  
 
7,194
  
 
1,053
  
 
6,141
    

  

  

    
 
31,263
  
 
13,662
  
 
17,601
Employee related costs:
                    
Consolidation of distribution centers
  
 
17,982
  
 
6,448
  
 
11,534
Exit of non-core retail markets
  
 
6,172
  
 
2,186
  
 
3,986
Disposal of non-core assets and other administrative reductions
  
 
554
  
 
554
  
 
0
    

  

  

    
 
24,708
  
 
9,188
  
 
15,520
    

  

  

Total restructure and other charges
  
$
55,971
  
$
22,850
  
$
33,121
    

  

  

 

11


The number of actual employees terminated under the fiscal 2001 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. Details of the fiscal 2001 restructure activity as it relates to the number of terminated employees are as follows:
 
    
Original
Estimate

    
Employees Terminated in Prior Years

    
Adjustments in Prior Years

    
Balance February 23, 2002

    
Employees Terminated in Fiscal 2003

    
Adjustment

    
Balance September 7, 2002

Employees
  
4,500
    
3,043
    
(707)
    
750
    
567
    
(183)
    
0
 
Restructure 2000
 
In fiscal 2000, the Company recorded pre-tax restructure and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiencies. The restructure and other charges included costs for facility consolidation, non-core store disposal, and rationalization of redundant and certain decentralized administrative functions. The original reserve amount was reduced by $10.3 million in fiscal 2001, primarily for a change in estimate for the closure of a remaining facility. The reserve amount was subsequently increased $12.2 million in fiscal 2002, due to a change in estimate on the remaining facility primarily due to the softening real estate market.
 
All activity for the fiscal 2000 restructure plan has been completed. Remaining reserves represent future payments on exited lease facilities and unpaid employee benefits. Details of the fiscal 2000 restructure activity for fiscal 2003 are as follows:
 
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs
                    
Facility consolidation
  
$
10,300
  
$
1,895
  
$
8,405
Non-core store disposal
  
 
4,611
  
 
814
  
 
3,797
    

  

  

    
 
14,911
  
 
2,709
  
 
12,202
Employee related costs
                    
Facility consolidation
  
 
2,938
  
 
1,480
  
 
1,458
Infrastructure realignment
  
 
142
  
 
142
  
 
0
    

  

  

    
 
3,080
  
 
1,622
  
 
1,458
    

  

  

Total restructure and other charges
  
$
17,991
  
$
4,331
  
$
13,660
    

  

  

 
The number of actual employees terminated under the fiscal 2000 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. Details of the fiscal 2000 restructure activity as it relates to employees are as follows:
 
    
Original Estimate

  
Actual Employees Terminated

    
Adjustments in Prior Years

    
Balance February 23, 2002

Employees
  
2,517
  
1,693
    
(824)
    
0
 
Amounts in the 2002, 2001 and 2000 restructure tables above reflect the reclassification of costs by restructure component.

12


RESERVES FOR CLOSED PROPERTIES
 
The Company maintains reserves for estimated losses on retail stores, distribution warehouses and other properties that are no longer being utilized in current operations. The reserve for closed properties includes management’s estimates for lease subsidies, lease terminations, future payments on exited leased facilities and severance. Details of the closed property activity for fiscal 2003 are as follows:
 
    
Balance
February 23,
2002

  
Additions

  
Deductions

    
Balance
September 7,
2002

Reserve for Closed Properties
  
$
74,996
  
6,055
  
(13,643
)
  
$
67,408
 
The Company also recognized impairment charges of $3.1 million in fiscal 2003 on the write-down of long-lived assets for properties to be closed. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values which were based on the estimated market values for similar assets.
 
FINANCIAL INSTRUMENTS
 
In the first quarter of fiscal 2003, the Company entered into swap agreements in the notional amount of $225 million that exchange a fixed rate payment obligation for a floating rate payment obligation. The swaps have been designated as a fair value hedge on long-term fixed rate debt of the Company and are reflected in other assets in the condensed consolidated balance sheets. At September 7, 2002, the hedge was highly effective. Changes in the fair value of the swaps and debt are reflected in the consolidated statements of earnings and, through September 7, 2002, the net earnings impact was zero.
 
On February 25, 2001, the effective date of SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”, the Company’s existing interest rate swap agreements were recorded at fair value in the Company’s consolidated balance sheets. On July 6, 2001, the swaps were terminated and the remaining fair market value adjustments, which are offsetting, are being amortized over the original term of the hedge.
 
The Company has only limited involvement with derivative financial instruments and uses them only to manage well-defined interest rate risks. The Company does not use financial instruments or derivatives for any trading or other speculative purposes.
 
COMMITMENTS AND CONTINGENCIES
 
In July and August 2002, several class action lawsuits were filed against the Company in the United States District Court for the District of Minnesota on behalf of purchasers of the Company’s securities between July 29, 1999 and June 26, 2002. The complaints allege that the Company and certain of its officers and directors violated Federal securities laws by issuing materially false and misleading statements relating to its financial performance. The complaints have been consolidated into a single lawsuit. The Company believes that the lawsuit is without merit and intends to vigorously defend the action. No damages have been specified. The Company is unable to evaluate the likelihood of prevailing in the case at this early stage of the proceedings.
 

13


ITEM 2.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
RESULTS OF OPERATIONS
 
RESULTS FOR THE QUARTER:
 
In the second quarter of fiscal 2003, the Company achieved net sales of $4.5 billion compared to $4.7 billion in the second quarter of fiscal 2002. Net earnings for second quarter of fiscal 2003 were $58.8 million and diluted earnings per share were $0.44. In the second quarter of fiscal 2002, net earnings were $50.6 million and diluted earnings per share were $0.38. Net earnings for the second quarter of fiscal 2003 reflect the adoption of SFAS No. 142. The effect of the adoption of SFAS No. 142 was to increase earnings for the second quarter of fiscal 2003 by $11.1 million pre-tax, or $0.08 net earnings per share, reflecting the non-amortization of goodwill.
 
Net Sales
 
Net sales for the second quarter of fiscal 2003 were $4.5 billion, a decrease of 4.7 percent from last year. Retail food sales were 50.0 percent of net sales for the second quarter of fiscal 2003 compared with 45.8 percent last year. Distribution sales were 50.0 percent of net sales for the second quarter of fiscal 2003 compared with 54.2 percent last year.
 
Retail food sales for the second quarter of fiscal 2003 increased 4.1 percent compared to the second quarter of last year, primarily as a result of store growth. Store activity over the past year, including licensed units, resulted in 164 net new stores opened and acquired, including 69 opened and acquired Deal$-Nothing Over a Dollar general merchandise stores, for a total of 1,358 stores at quarter-end, an increase in square footage of approximately 8.0 percent over last year. Same-store retail sales for the second quarter of fiscal 2003 were negative 0.8 percent, impacted by approximately 120 basis points in cannibalization within key expansion markets and continued weakness in food at home spending as consumers traded down to lower-priced goods. Cannibalization is defined as the negative sales impact the opening of a new store has on an existing store in the same market. As the Company adds new stores to major existing markets, it experiences cannibalization.
 
Food distribution sales for the second quarter of fiscal 2003 decreased 12.1 percent compared to the second quarter of last year, primarily reflecting customer losses. The exit of the Kmart supply contract, the loss of Genuardi’s as a customer and restructure activities accounted for approximately 28 percent, 30 percent and 9 percent, respectively, of the decrease.
 
Gross Profit
 
Gross profit as a percentage of net sales increased to 13.2 percent for the second quarter of fiscal 2003 from 12.5 percent last year. The growing proportion of the Company’s retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business, accounted for substantially all of the increase.
 
Selling and Administrative Expenses
 
Selling and administrative expenses as a percentage of net sales increased to 10.2 percent for the second quarter of fiscal 2003 from 9.7 percent last year. The growing proportion of the Company’s retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than does the food distribution business, accounted for substantially all of the increase.
 
Operating Earnings
 
The Company’s earnings before interest and taxes (EBIT) were $131.3 million for the second quarter of fiscal 2003 compared to $124.7 million for the second quarter of last year, a 5.3 percent increase, primarily reflecting the discontinuation of goodwill amortization of $11.1 million effective February 24, 2002. Retail food EBIT increased 8.4 percent to $98.8 million, or 4.4 percent of net sales, for the second quarter of fiscal 2003 from last year’s EBIT of $91.1 million, or 4.2 percent of net sales, primarily reflecting the discontinuation of goodwill amortization of $5.8 million. Food distribution EBIT decreased 6.6 percent to $39.8 million, or 1.8 percent of net sales, for the second quarter of fiscal 2003 from last year’s EBIT of $42.6 million, or 1.7 percent of net sales. The decrease in food distribution EBIT primarily reflects the decline in net sales due to net customer losses, partially offset by the impact of the discontinuation of goodwill amortization of $5.3 million.
 
Earnings before interest, taxes, depreciation and amortization (EBITDA, as calculated and discussed on page 17) decreased 2.0 percent to $198.0 million, or 4.4 percent of net sales, for the second quarter of fiscal 2003 from $202.0 million, or 4.3 percent of net sales last year. Retail food EBITDA increased 4.0 percent to $136.1 million, or 6.1 percent of net sales, for the second quarter of fiscal 2003 from last year’s EBITDA of $130.8 million, or 6.1 percent of net sales. Food distribution EBITDA decreased 13.7 percent to $68.5 million, or 3.1 percent of net sales, for the second quarter of fiscal 2003 from last year’s EBITDA of $79.4 million, or 3.1 percent of net sales.

14


Net Interest Expense
 
Interest expense decreased to $42.6 million for the second quarter of fiscal 2003, compared with $45.9 million last year, reflecting lower average borrowing levels and lower average interest rates, primarily as a result of the interest rate swap agreements entered into in the first quarter of fiscal 2003. Interest income decreased to $4.6 million for the second quarter of fiscal 2003, compared with $5.9 million last year, as a result of lower notes receivable outstanding.
 
Income Taxes
 
The effective tax rate was 37.0 percent for the second quarter of fiscal 2003 compared with 40.3 percent last year. The decrease in the effective tax rate was primarily due to the discontinuation of goodwill amortization as of February 24, 2002, which was not deductible for income tax purposes.
 
Net Earnings
 
Net earnings were $58.8 million, or $.44 per diluted share, for the second quarter of fiscal 2003, compared with net earnings of $50.6 million, or $.38 per diluted share, last year.
 
Weighted average diluted shares increased to 134.9 million for the second quarter of fiscal 2003 compared with last year’s weighted average diluted shares of 134.2 million reflecting the impact of stock option activity, offset in part by shares repurchased under the treasury stock program.
 
YEAR-TO-DATE RESULTS:
 
Year-to-date for fiscal 2003, the Company achieved net sales of $10.3 billion compared to $11.6 billion last year. Net earnings for fiscal 2003 year-to-date were $136.0 million and diluted earnings per share were $1.00. Last year net earnings were $107.5 million and diluted earnings per share were $0.81. Net earnings for fiscal 2003 year-to-date reflect the adoption of SFAS No. 142. The effect of the adoption of SFAS No. 142 was to increase earnings for fiscal 2003 year-to-date by $26.0 million pre-tax, or $0.19 net earnings per share, reflecting the non-amortization of goodwill.
 
Net Sales
 
Net sales for fiscal 2003 year-to-date of $10.3 billion decreased 11.2 percent from $11.6 billion last year. Retail food sales were 48.9 percent of net sales for fiscal 2003 year-to-date compared with 42.7 percent last year. Distribution food sales were 51.1 percent of net sales for fiscal 2003 year-to-date compared with 57.3 percent last year.
 
Retail food sales increased 1.6 percent compared to last year, primarily as a result of store growth. Same-store retail sales for fiscal 2003 year-to-date were negative 1.0 percent, impacted by approximately 120 basis points in cannibalization within key expansion markets and continued weakness in food at home spending as consumers traded down to lower-priced goods.
 
Food distribution sales decreased 20.8 percent compared to last year, reflecting customer losses, primarily the exit of the Kmart supply contract which terminated June 30, 2001. The exit of the Kmart supply contract, the loss of Genuardi’s as a customer and restructure activities accounted for approximately 56 percent, 16 percent and 8 percent, respectively, of the decrease.
 
Gross Profit
 
Gross profit as a percentage of net sales increased to 13.0 percent for fiscal 2003 year-to-date from 11.7 percent last year. The growing proportion of the Company’s retail food business, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business, accounted for approximately 90 basis points of the increase and improved merchandising execution in the retail food business accounted for approximately 40 basis points of the increase.
 
Selling and Administrative Expenses
 
Selling and administrative expenses as a percentage of net sales increased to 10.1 percent for fiscal 2003 from 9.1 percent last year. The growing proportion of the Company’s retail food business, which operates at a higher selling and administrative expense as a percentage of net sales than does the food distribution business, accounted for substantially all of the increase.
 
Operating Earnings
 
The Company’s EBIT was $305.6 million for fiscal 2003 year-to-date compared to $276.3 million last year, a 10.6 percent increase, primarily reflecting the discontinuation of goodwill amortization of $26.0 million effective February 24, 2002. Retail food EBIT increased 27.5 percent to $227.9 million, or 4.5 percent of net sales, for fiscal 2003 year-to-date from last year’s EBIT

15


of $178.8 million, or 3.6 percent of net sales. This increase in retail food EBIT reflects the growth of new stores, improved merchandising execution and the discontinuation of goodwill amortization of $13.7 million. Food distribution EBIT decreased 18.1 percent to $96.9 million, or 1.8 percent of net sales, for fiscal 2003 year-to-date from last year’s EBIT of $118.4 million, or 1.8 percent of sales. The decrease in food distribution EBIT primarily reflects the decline in net sales due to net customer losses, partially offset by the impact of the discontinuation of goodwill amortization of $12.3 million.
 
EBITDA increased 0.6 percent to $459.2 million, or 4.4 percent of net sales, for fiscal 2003 year-to-date from $456.6 million, or 3.9 percent of net sales last year. Retail food EBITDA increased 15.5 percent to $311.5 million, or 6.2 percent of net sales, for fiscal 2003 year-to-date from last year’s EBITDA of $269.7 million, or 5.4 percent of net sales. Food distribution EBITDA decreased 19.6 percent to $165.6 million, or 3.1 percent of net sales, for fiscal 2003 year-to-date from last year’s EBITDA of $206.1 million, or 3.1 percent of net sales.
 
Net Interest Expense
 
Interest expense decreased to $100.7 million for fiscal 2003 year-to-date compared with $108.6 million last year, reflecting lower average borrowing levels and lower average interest rates, primarily as a result of the interest rate swap agreements entered into in the first quarter of fiscal 2003. Interest income decreased to $10.8 million for fiscal 2003 year-to-date, compared with $12.3 million last year, as a result of lower notes receivable outstanding.
 
Income Taxes
 
The effective tax rate was 37.0 percent for fiscal 2003 year-to-date compared with 40.3 percent last year. The decrease in the effective tax rate was primarily due to the discontinuation of goodwill amortization as of February 24, 2002, which was not deductible for income tax purposes.
 
Net Earnings
 
Net earnings were $136.0 million, or $1.00 per diluted share, for fiscal 2003 year-to-date, compared with net earnings of $107.5 million, or $.81 per diluted share, last year.
 
Weighted average diluted shares increased to 135.6 million for fiscal 2003 year-to-date compared with last year’s weighted average diluted shares of 133.3 million, reflecting the impact of stock option activity, offset in part by shares repurchased under the treasury stock program.
 
LIQUIDITY AND CAPITAL RESOURCES
 
Net cash from operations was $370.0 million for fiscal 2003 year-to-date compared with $479.2 million last year. The decrease in cash from operations as compared to last year reflects the prior year reduction in working capital, primarily relating to the exit of the Kmart supply contract in fiscal 2002.
 
Cash used in investing activities was $185.5 million for fiscal 2003 year-to-date. Cash used in investing activities year-to-date was primarily attributable to capital spending to fund retail store expansion, including the acquisition of Deal$-Nothing Over a Dollar stores, remodeling and technology enhancements.
 
Cash provided by financing activities was $97.7 million for fiscal 2003 year-to-date. Cash provided by financing activities year-to-date reflects both the $300 million 10-year 7 ½% bond offering completed in May 2002 and the redemption of $173 million of the Company’s 9.75% Senior Notes due 2004 at the redemption price of 102.4375% of the principal amount of the Senior Notes, plus accrued and unpaid interest. The Company also plans to retire a $300 million bond that matures in November of 2002 using primarily cash on hand and funds available through its existing credit facilities.
 
In April 2002, the Company finalized a new three-year, unsecured $650 million revolving credit agreement with rates tied to LIBOR plus 0.650 to 1.400 percent, based on the Company’s credit ratings. The agreement contains various financial covenants including ratios for fixed charge interest coverage, asset coverage and debt leverage, in addition to a minimum net worth covenant. This credit facility replaced the Company’s $300 million and $400 million credit facilities, which had expiration dates in August and October of 2002, respectively. As of September 7, 2002, the Company had no outstanding borrowings under the credit facility. Letters of credit outstanding under the credit facility were $129.0 million and the unused available credit under the facility was $521.0 million.
 
As of September 7, 2002, $200 million in borrowing capacity was available under the Company’s $200 million accounts receivable securitization program. The program was renewed for another year in August 2002.
 

16


 
In November 2001, the Company sold zero-coupon convertible debentures due 2031. In the event SUPERVALU’s stock price reaches the convertible debentures’ conversion trigger price of $34.29 in the third quarter of fiscal 2003, the Company would be required to include an additional 7.8 million shares in its diluted shares outstanding calculation for the third quarter. Holders of the debentures may require the Company to purchase all or a portion of their debentures on the first day of October 2003, 2006 and 2011 at a purchase price equal to the accreted value of the debentures, which includes accrued and unpaid interest.
 
During fiscal 2003, the Company repurchased 1.5 million shares of treasury stock at an average cost of $27.96 as part of the 5.0 million stock repurchase program authorized in fiscal 2002.
 
The Company is currently evaluating its pension benefit plan assumptions including asset return performance. Any changes in the benefit plan assumptions as well as the funded status of the plan, may impact funding and expense levels in the future.
 
Net cash flows from operating activities as presented in the condensed consolidated statements of cash flows is an important measure of cash generated by the Company’s operating activities. EBITDA is similar to net cash flows from operations because it excludes certain non-cash items. However, EBITDA also excludes interest expense and income taxes. EBITDA should not be considered as an alternative to GAAP reported measures of net income or cash flows from operating activities, as an indicator of operating performance or as a measure of liquidity. Management believes that EBITDA is relevant because it assists investors in evaluating the Company’s performance. Other companies may define EBITDA differently and, as a result, such measures may not be comparable to the Company’s EBITDA. The Company’s calculation of EBITDA is as follows:
 
    
Second Quarter
(12 weeks) ended

    
Year-to-date
(28 weeks) ended

 
    
September 7,
2002

    
September 8,
2001

    
September 7,
2002

    
September 8,
2001

 
    
(Dollars in millions)
 
EBITDA:
                                   
Total EBIT
  
$
131.3
 
  
$
124.7
 
  
$
305.6
 
  
$
276.3
 
Add :
                                   
Depreciation and amortization
  
 
66.7
 
  
 
77.3
 
  
 
153.6
 
  
 
180.3
 
    


  


  


  


Total EBITDA
  
$
198.0
 
  
$
202.0
 
  
$
459.2
 
  
$
456.6
 
    


  


  


  


 
Retail EBITDA:
                                   
Total Retail EBIT
  
$
98.8
 
  
$
91.1
 
  
$
227.9
 
  
$
178.8
 
Add:
                                   
Depreciation and amortization
  
 
37.3
 
  
 
39.7
 
  
 
83.6
 
  
 
90.9
 
    


  


  


  


Total Retail EBITDA
  
$
136.1
 
  
$
130.8
 
  
$
311.5
 
  
$
269.7
 
    


  


  


  


Distribution EBITDA:
                                   
Total Distribution EBIT
  
$
39.8
 
  
$
42.6
 
  
$
96.9
 
  
$
118.4
 
Add:
                                   
Depreciation and amortization
  
 
28.7
 
  
 
36.8
 
  
 
68.7
 
  
 
87.7
 
    


  


  


  


Total Distribution EBITDA
  
$
68.5
 
  
$
79.4
 
  
$
165.6
 
  
$
206.1
 
    


  


  


  


Retail EBITDA
  
$
136.1
 
  
$
130.8
 
  
$
311.5
 
  
$
269.7
 
Distribution EBITDA
  
 
68.5
 
  
 
79.4
 
  
 
165.6
 
  
 
206.1
 
General Corporate EBITDA
  
 
(6.6
)
  
 
(8.2
)
  
 
(17.9
)
  
 
(19.2
)
    


  


  


  


Total EBITDA
  
$
198.0
 
  
$
202.0
 
  
$
459.2
 
  
$
456.6
 
    


  


  


  


Cash Flow:
                                   
Net cash provided by operating activities
  
$
171.8
 
  
$
261.3
 
  
$
370.0
 
  
$
479.2
 
    


  


  


  


Net cash used in investing activities
  
($
60.2
)
  
($
32.9
)
  
($
185.5
)
  
($
108.1
)
    


  


  


  


Net cash (provided by) used in financing activities
  
($
164.1
)
  
($
246.1
)
  
$
97.7
 
  
($
359.1
)
    


  


  


  


 
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 financing from its revolving credit agreement with various financial institutions, as well as through its accounts receivable securitization program. Long-term financing will be maintained through existing and new debt issuances. 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 its capital expenditures and acquisitions as opportunities arise. 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.
 
RESTRUCTURE AND OTHER CHARGES
 
Restructure 2002
 
In the fourth quarter of fiscal 2002, the Company identified additional efforts that will allow it to extend its distribution efficiency program begun early in fiscal 2001. The additional distribution efficiency initiatives identified resulted in pre-tax restructure charges of $16.3 million, primarily related to personnel reductions in administrative and transportation functions. Management began the initiatives in fiscal 2003 and expects the majority of these actions to be completed by the end of fiscal 2003.
 

17


 
Reserves for the fiscal 2002 restructure plan represent lease related costs as well as severance and employee related costs. Details of the fiscal 2002 restructure activity for fiscal 2003 are as follows:
 
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs:
                    
Transportation efficiency initiatives
  
$
3,235
  
$
181
  
$
3,054
    

  

  

    
 
3,235
  
 
181
  
 
3,054
    

  

  

Employee related costs:
                    
Administrative realignment
  
 
8,000
  
 
641
  
 
7,359
Transportation efficiency initiatives
  
 
5,065
  
 
4,036
  
 
1,029
    

  

  

    
 
13,065
  
 
4,677
  
 
8,388
    

  

  

Total restructure and other charges
  
$
16,300
  
$
4,858
  
$
11,442
    

  

  

 
Details of the fiscal 2002 restructure activity as it relates to the number of terminated employees are as follows:
 
    
Original Estimate

    
Employees Terminated in Prior Year

    
Balance February 23, 2002

    
Employees Terminated in Fiscal 2003

    
Balance September 7, 2002

Employees
  
800
    
0
    
800
    
300
    
500
 
Restructure 2001
 
In the fourth quarter of fiscal 2001, the Company completed a strategic review that identified certain assets that did not meet return objectives, provide long-term strategic opportunities or justify additional capital investments. This review process culminated in the Company recording pre-tax restructure and other charges of $181.6 million, including $89.7 million for asset impairment charges, $52.1 million for lease subsidies, lease cancellation fees, future payments on exited leased facilities and guarantee obligations, and $39.8 million for severance and employee related costs. During fiscal 2002, the fiscal 2001 charges were increased by $17.8 million as a result of changes in estimates primarily due to the softening real estate market, including $19.1 million for increased lease liabilities in exiting the non-core retail markets and the disposal of non-core assets, offset by a net decrease of $1.3 million in restructure reserves for the consolidation of distribution centers.
 
Included in the asset impairment charges of $89.7 million were $57.4 million of charges related to the Retail Food segment and $32.3 million of charges related to the Food Distribution segment. Writedowns for property, plant and equipment, goodwill and other intangibles, and other assets were $58.4 million, $21.8 million and $9.5 million, respectively, and were reflected in the restructure and other charges line in the Consolidated Statements of Earnings for fiscal 2001. The impairment charges reflect the difference between the carrying value of the assets and the estimated fair values which were based on the estimated market values for similar assets.
 

18


 
All activity for the fiscal 2001 restructure plan has been completed. Remaining reserves represent future payments on exited lease facilities and unpaid employee benefits. Details of the fiscal 2001 restructure activity for fiscal 2003 are as follows:
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs:
                    
Consolidation of distribution centers
  
$
8,081
  
$
3,260
  
$
4,821
Exit of non-core retail markets
  
 
15,988
  
 
9,349
  
 
6,639
Disposal of non-core assets and other administrative reductions
  
 
7,194
  
 
1,053
  
 
6,141
    

  

  

    
 
31,263
  
 
13,662
  
 
17,601
    

  

  

Employee related costs:
                    
Consolidation of distribution centers
  
 
17,982
  
 
6,448
  
 
11,534
Exit of non-core retail markets
  
 
6,172
  
 
2,186
  
 
3,986
Disposal of non-core assets and other administrative reductions
  
 
554
  
 
554
  
 
0
    

  

  

    
 
24,708
  
 
9,188
  
 
15,520
    

  

  

Total restructure and other charges
  
$
55,971
  
$
22,850
  
$
33,121
    

  

  

 
The number of actual employees terminated under the fiscal 2001 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. Details of the fiscal 2001 restructure activity as it relates to the number of terminated employees are as follows:
 
    
Original
Estimate

    
Employees Terminated in Prior Years

    
Adjustments in Prior Years

    
Balance February 23, 2002

    
Employees Terminated in Fiscal 2003

    
Adjustments

    
Balance September 7, 2002

Employees
  
4,500
    
3,043
    
(707)
    
750
    
567
    
(183)
    
0
 
Restructure 2000
 
In fiscal 2000, the Company recorded pre-tax restructure and other charges of $103.6 million as a result of an extensive review to reduce costs and enhance efficiencies. The restructure and other charges included costs for facility consolidation, non-core store disposal, and rationalization of redundant and certain decentralized administrative functions. The original reserve amount was reduced by $10.3 million in fiscal 2001, primarily for a change in estimate for the closure of a remaining facility. The reserve amount was subsequently increased $12.2 million in fiscal 2002, due to a change in estimate on the remaining facility, primarily due to the softening real estate market.
 
All activity for the fiscal 2000 restructure plan has been completed. Remaining reserves represent future payments on exited lease facilities and unpaid employee benefits. Details of the fiscal 2000 restructure activity for fiscal 2003 are as follows:
 
    
Balance
February 23,
2002

  
Fiscal
2003
Usage

  
Balance
September 7,
2002

    
(In thousands)
Lease related costs
                    
Facility consolidation
  
$
10,300
  
$
1,895
  
$
8,405
Non-core store disposal
  
 
4,611
  
 
814
  
 
3,797
    

  

  

    
 
14,911
  
 
2,709
  
 
12,202
    

  

  

Employee related costs
                    
Facility consolidation
  
 
2,938
  
 
1,480
  
 
1,458
Infrastructure realignment
  
 
142
  
 
142
  
 
0
    

  

  

    
 
3,080
  
 
1,622
  
 
1,458
    

  

  

Total restructure and other charges
  
$
17,991
  
$
4,331
  
$
13,660
    

  

  

 

19


The number of actual employees terminated under the fiscal 2000 restructure plan was adjusted to a lower number than originally expected primarily due to higher than anticipated voluntary attrition. Details of the fiscal 2000 restructure activity as it relates to employees are as follows:
 
    
Original Estimate

  
Actual Employees Terminated

    
Adjustments in Prior Years

    
Balance February 23, 2002

Employees
  
2,517
  
1,693
    
(824)
    
0
 
Amounts in the 2002, 2001 and 2000 restructure tables above reflect the reclassification of costs by restructure component.
 
NEW ACCOUNTING STANDARDS
 
In June 2001, the Financial Accounting Standards Board (FASB) approved Statement of Financial Accounting Standard (SFAS) No. 142, “Goodwill and Other Intangible Assets”. SFAS No. 142 requires companies to cease amortizing goodwill and test at least annually for impairment. For SUPERVALU, amortization of goodwill ceased on February 24, 2002, at which time it was tested for impairment. Each of the Company’s reporting units were tested for impairment by comparing the fair value of the respective reporting unit with its carrying value as of February 24, 2002. Fair value was determined primarily based on valuation studies performed by the Company which considered the discounted cash flow method consistent with the Company’s valuation guidelines. As a result of impairment tests performed, the Company recorded no impairment loss.
 
In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations”, which addresses financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. The Company plans to adopt the provisions of SFAS No. 143 in the first quarter of fiscal 2004. The Company does not expect the adoption of SFAS No. 143 to have a material impact on its consolidated financial statements.
 
In August 2001, the FASB issued SFAS No. 144, “Accounting for Impairment or Disposal of Long-Lived Assets”. The Company adopted the provisions of SFAS No. 144 effective February 24, 2002. As a result of impairment tests performed, the Company recorded no impairment loss.
 
In April 2002, the FASB issued SFAS No. 145, “Recission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical Corrections”. SFAS No. 145 allows only those gains and losses on the extinguishment of debt that meet the criteria of extraordinary items to be treated as such in the financial statements. SFAS No. 145 also requires sales-leaseback accounting for certain lease modifications that have economic effects that are similar to sales lease-back transactions. Certain provisions of SFAS No. 145 are effective for transactions occurring after May 15, 2002, while the remaining of the provisions will be effective for the Company in the first quarter of fiscal 2004. The Company does not expect the adoption of SFAS No. 145 to have a material impact on its consolidated financial statements.
 
In July 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities”. SFAS No. 146 addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)”. SFAS No. 146 requires recognition of a liability for the costs associated with an exit or disposal activity when the liability is incurred, as opposed to when the entity commits to an exit plan as required under EITF Issue 94-3. The Company plans to adopt the provisions of SFAS No. 146 for exit or disposal activities that are initiated after December 31, 2002. The Company is currently analyzing the impact SFAS No. 146 will have on its consolidated financial statements.
 
Emerging Issue Task Force (EITF) Issue No. 01-09, “Accounting for Consideration Given by a Vendor to a Customer (Including a Reseller of a Vendor’s Products)”, which codified EITF Issue Nos. 00-14, “Accounting for Certain Sales Incentives”; 00-22, “Accounting for ‘Points’ and Certain Other Time-Based or Volume-Based Sales and Incentive Offers, and Offers for Free Products or Services to be Delivered in the Future”, and 00-25, “Vendor Income Statement Characterization of Consideration Paid to a Reseller of the Vendor’s Products”, became effective for the Company on February 24, 2002. These issues address the appropriate accounting for certain vendor contracts and loyalty programs. This EITF did not have a material impact on the Company’s consolidated financial statements.
 
EITF Issue No. 02-13, “Deferred Income Tax Considerations in Applying the Goodwill Impairment Test in FASB Statement No. 142, ‘Goodwill and Other Intangible Assets’,” requires that deferred income taxes be included in the carrying amount of a reporting unit for the purposes of the first step of the SFAS No. 142 goodwill impairment test. EITF No. 02-13 is effective for goodwill impairment tests performed after September 12, 2002. The Company is currently analyzing the impact EITF No. 02-13 will have on its consolidated financial statements.
 
EITF Issue No. 02-16, “Accounting by a Reseller for Cash Consideration Received from a Vendor”, addresses how a reseller of a vendor’s products should account for cash consideration received from a vendor and how to measure that consideration in its income statement. The EITF has not yet reached a final consensus on this issue. The Company will continue to monitor, until consensus is reached, the impact EITF No. 02-16 will have on its consolidated financial statements.
 
Statement of Position (SOP) No. 01-06, “Accounting for Certain Entities (Including Entities with Trade Receivables) that Lend to or Finance the Activities of Others”, became effective for the Company on February 24, 2002. SOP No. 01-06 addresses the appropriate accounting for a company’s financing and lending activities. SOP No. 01-06 did not have a material impact on the Company’s consolidated financial statements.

20


 
Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995
 
Any statements in this report regarding SUPERVALU’s outlook for its businesses and their respective markets, such as projections of future performance, statements of management’s plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on management’s assumptions and beliefs. Such statements may be identified by such words or phrases as “will likely result,” “are expected to,” “will continue,” “outlook,” “is anticipated,” “estimate,” “project,” “management believes” or similar expressions. Such forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such forward-looking statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, SUPERVALU claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
 
The following is a summary of certain factors, the results of which could cause SUPERVALU’s future results to differ materially from those expressed or implied in any forward-looking statements contained in this report:
 
 
·
 
competitive practices in the retail food and food distribution industries,
 
·
 
the nature and extent of the consolidation of the retail food and food distribution industries,
 
·
 
our ability to attract and retain customers for our food distribution business and to control food distribution costs,
 
·
 
our ability to grow through acquisitions and assimilate acquired entities,
 
·
 
general economic or political conditions that affect consumer buying habits generally or acts of terror directed at the food industry that affect consumer behavior,
 
·
 
potential work disruptions from labor disputes or national emergencies,
 
·
 
the timing and implementation of certain restructure activities we have announced, including our consolidation of certain distribution facilities and our disposition of under-performing stores and non-operating properties,
 
·
 
the availability of favorable credit and trade terms, and
 
·
 
other risk factors inherent in the retail food and food distribution industries.
 
These risks and uncertainties are set forth in further detail in Exhibit 99(i) to this report. Any forward-looking statement speaks only as of the date on which such statement is made, and SUPERVALU undertakes no obligation to update such statement to reflect events or circumstances arising after such date.
 
ITEM 3.    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
There were no material changes in market risk for the Company in the period covered by this report.
 
ITEM 4.    CONTROLS AND PROCEDURES
 
(a)
 
Evaluation of disclosure controls and procedures.
 
Within 90 days prior to the filing date of this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company’s management, including the Company’s chief executive officer and its chief financial officer, of the effectiveness of the design and operation of the Company’s disclosure controls and procedures pursuant to Rule 13a-14 of the Securities and Exchange Act of 1934 (the “Exchange Act”). Based upon that evaluation, the chief executive officer and chief financial officer concluded that as of the Evaluation Date, the Company’s disclosure controls and procedures (as defined in Rule 13a-14(c) under the Exchange Act) are effective to ensure that information required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.
 
(b)
 
Changes in internal controls.
 
There were no significant changes in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the date of their most recent evaluation nor were there any significant deficiencies or material weaknesses in the Company’s internal controls.

21


PART II – OTHER INFORMATION
 
Item 1.    Legal Proceedings
 
In June 2002, the Company announced that it had identified an understatement of cost of goods sold resulting from intentional inventory misstatements by a former employee in its pharmacy division. The effect of the correction of the misstatements was to reduce previously reported net income $7.2 million, $9.1 million and $1.3 million and net earnings per share – diluted by $0.05, $0.07, and $0.01 for fiscal 2002, 2001 and 2000 respectively. The consolidated financial statements as of and for the years ended February 23, 2002, February 24, 2001 and February 26, 2000, and the notes thereto, included in amended Annual Reports on Form 10-K have been restated to include the effects of the corrections of these misstatements.
 
Following the announcement of the Company’s restatement, several class action lawsuits were filed in July and August 2002 against the Company in the United States District Court for the District of Minnesota on behalf of purchasers of the Company’s securities between July 29, 1999 and June 26, 2002. The complaints allege that the Company and certain of its officers and directors violated Federal securities laws by issuing materially false and misleading statements relating to its financial performance. The complaints have been consolidated into a single lawsuit. The Company believes that the lawsuit is without merit and intends to vigorously defend the action. No damages have been specified. The Company is unable to evaluate the likelihood of prevailing in the case at this early stage of the proceedings.
 
Item 2.    Changes in Securities and Use of Proceeds
 
None
 
Item 3.    Defaults Upon Senior Securities
 
None
 
Item 4.    Submission of Matters to a Vote of Security Holders
 
None
 
Item 5.    Other Information
 
None
 
Item 6.    Exhibits and Reports on Form 8-K.
 
 
(a)
 
Exhibits filed with this Form 10-Q:
 
(12)
  
Ratio of Earnings to Fixed Charges.
(99)(i)
  
Cautionary Statements pursuant to the Securities Litigation Reform Act.
(99)(ii)
  
Certification of Periodic Financial Report pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
 
Reports on Form 8-K:
 
 
(i)
 
On June 25, 2002, the Registrant filed a report on Form 8-K reporting under Item 5 “Other Events and Regulation FD Disclosure,” a charge to earnings resulting from inventory misstatements by a former employee.
 

22


SIGNATURES
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
   
SUPERVALU INC. (Registrant)
Dated: October 22, 2002
 
By:
 
/s/    PAMELA K. KNOUS

           
Pamela K. Knous
Executive Vice President,
Chief Financial Officer
(principal financial and
accounting officer)

23


I, Jeffrey Noddle, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of SUPERVALU INC.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 
 
Date:
 
October 22, 2002

         
/s/    JEFFREY NODDLE

               
Chief Executive Officer
 

24


I, Pamela K. Knous, certify that:
 
 
1.
 
I have reviewed this quarterly report on Form 10-Q of SUPERVALU INC.;
 
 
2.
 
Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;
 
 
3.
 
Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;
 
 
4.
 
The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:
 
 
a)
 
designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the quarterly report is being prepared;
 
 
b)
 
evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and
 
 
c)
 
presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;
 
 
5.
 
The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):
 
 
a)
 
all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
 
 
b)
 
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and
 
 
6.
 
The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.
 
 
 
Date:
 
October 22, 2002

         
/s/    PAMELA K. KNOUS

               
Chief Financial Officer
 

25


 
EXHIBIT INDEX
 
 
Exhibit

    
(12)
  
Ratio of Earnings to Fixed Charges.
(99)(i)
  
Cautionary Statements pursuant to the Securities Litigation Reform Act.
(99)(ii)
  
Certification of Periodic Financial Report pursuant to 18 U.S.C. Section 1350, adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

26