Back to GetFilings.com

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period (16 weeks) ended June 14, 2003.

For the transition period from                     to                    .

Commission file number 1-5418

SUPERVALU INC.

(Exact name of registrant as specified in its Charter)

(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  ¨

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No ¨

The number of shares outstanding of each of the issuer’s classes of Common Stock as of July 24, 2003 is as follows:

1

PART I—FINANCIAL INFORMATION

SUPERVALU INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except percent and per share data)

All data subject to year-end audit.

See notes to consolidated financial statements.

2

SUPERVALU INC. and Subsidiaries

CONSOLIDATED COMPOSITION OF NET SALES AND OPERATING EARNINGS

(In thousands, except percent data)

The company’s business is classified by management into two reportable segments: Retail food and food distribution. Retail food operations include three retail formats: extreme value stores, regional price superstores and regional supermarkets. The retail formats include results of food stores owned and results of sales to extreme value stores licensed by the company. Food distribution operations include results of sales to affiliated food stores, mass merchants and other customers, and other logistics arrangements. Management utilizes more than one measurement and multiple views of data to assess segment performance and to allocate resources to the segments. However, the dominant measurements are consistent with the consolidated financial statements. Reportable segment operating earnings were computed as total revenue less associated operating expenses.

All data subject to year-end audit.

See notes to consolidated financial statements.

3

SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED BALANCE SHEETS

(In thousands)

All data subject to year-end audit.

See notes to consolidated financial statements.

4

SUPERVALU INC. and Subsidiaries

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY

(In thousands, except per share data)

All data subject to year-end audit.

See notes to consolidated financial statements.

5

SUPERVALU INC. and Subsidiaries

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(In thousands)

All data subject to year-end audit.

See notes to consolidated financial statements.

6

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 company’s Annual Report on Form 10-K for its fiscal year ended February 22, 2003 (fiscal 2003). References to the company refer to SUPERVALU INC. and Subsidiaries.

Fiscal Year:

The company’s fiscal year ends on the last Saturday in February. The company’s first quarter consists of 16 weeks, the second and third quarters each consist of 12 weeks and the fourth quarter consists of 13 weeks for a total of 53 weeks for fiscal 2004. Fiscal 2003 comprised 52 weeks with the first quarter consisting of 16 weeks, while the second, third and fourth quarters each consisted of 12 weeks.

Statement of Registrant:

The data presented herein is unaudited but, in the opinion of management, includes all adjustments, consisting of normal recurring adjustments, necessary for a fair presentation of the condensed consolidated financial position of the company and its subsidiaries at June 14, 2003 and June 15, 2002, and the results of the company’s operations and condensed consolidated cash flows for the periods then ended. These interim results are not necessarily indicative of the results that may be expected for the full fiscal year.

Use of Estimates:

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

Facilitative Services:

The company provides certain facilitative services between its independent retailers and vendors related to products typically known as direct store delivery products. These services include sourcing, invoicing and payment services. The net gross margin associated with such facilitative services is reflected as a component of net sales.

7

Comprehensive Income:

The components of comprehensive income, net of related tax, for the 16 week periods ended June 14, 2003 and June 15, 2002 are as follows:

Net Earnings Per Share (EPS):

Basic EPS is calculated using earnings 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 exercised.

The following table reflects the calculation of basic and diluted earnings per share:

Stock-based Compensation:

The company has stock based employee compensation plans, which are described more fully in the Stock Option Plans note in the Notes to Consolidated Financial Statements set forth in the company’s Annual Report on Form 10-K for fiscal 2003. The company utilizes the intrinsic value-based method, per Accounting Principles Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees,” for measuring the cost of compensation paid in company common stock. This method defines the company’s cost as the excess of the stock’s market value at the time of the grant over the amount that the employee is required to pay. In accordance with APB Opinion No. 25, no compensation expense was recognized for options issued under the stock option plans in fiscal 2004 and 2003

8

as the exercise price of all options granted was not less than 100 percent of fair market value of the common stock on the date of grant.

The following table illustrates the effect on net earnings and net earnings per share if the company had applied the fair value recognition provisions of Statement of Financial Accounting Standard (SFAS) No. 123, “Accounting for Stock-Based Compensation” to stock-based employee compensation:

Reclassifications:

Certain reclassifications have been made to conform prior years’ data to the current presentation. These reclassifications had no effect on reported earnings.

Prior to the fourth quarter of fiscal 2003, the amounts invoiced to independent retailers by the company for facilitative services were recorded as net sales and the related amounts due and paid by the company to its vendors were recorded as cost of sales. Commencing with the fourth quarter of fiscal 2003, the company has revised amounts previously reported by reclassifying cost of sales against net sales for all prior periods. The effect is to present the net gross margin associated with such facilitative services as a component of net sales. This reclassification had no impact on gross profit, earnings before income taxes, net earnings, cash flows, or financial position for any period or their respective trends.

New Accounting Standards

Recently Adopted Accounting Standards

In June 2001, the Financial Accounting Standards Board (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 adopted the provisions of SFAS No. 143 in the first quarter of fiscal 2004. SFAS No. 143 did not have a material impact on the company’s consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145, “Rescission 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 sale-leaseback accounting for certain lease modifications that have economic effects that are similar to sales-leaseback transactions. Certain provisions of SFAS No. 145 were effective for transactions occurring after May 15, 2002, while the remaining provisions were effective for the company in the first quarter of fiscal 2004. SFAS No. 145 did not have a material impact on the company’s consolidated financial statements.

In January 2003, the FASB issued Interpretation (FIN) No. 46, “Consolidation of Variable Interest Entities”. FIN No. 46 states that companies that have exposure to the economic risks and potential rewards from another entity’s assets and activities have a controlling financial interest in a variable interest entity and should consolidate the entity, despite the absence of clear control through a voting equity interest. The consolidation requirements apply to all variable interest entities created after January 31, 2003. For variable interest entities that existed prior to February 1, 2003, the consolidation requirements are effective for annual or interim periods beginning after June 15, 2003. Disclosure of significant variable interest entities is required in all financial statements issued after January 31, 2003, regardless of when the variable interest was created. FIN No. 46 did not have a material impact on the company’s consolidated financial statements.

9

Recently Issued Accounting Standards

Emerging Issues Task Force (EITF) Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables”, addresses certain aspects of the accounting by a vendor for arrangements under which it will perform multiple revenue-generating activities. EITF Issue No. 00-21 establishes three principles: revenue arrangements with multiple deliverables should be divided into separate units of accounting, arrangement consideration should be allocated among the separate units of accounting based on their relative fair values, and revenue recognition criteria should be considered separately for separate units of accounting. EITF Issue No. 00-21 is effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The company does not expect the adoption of EITF No. 00-21 to have a material impact on the company’s consolidated financial statements.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities”. SFAS No. 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments imbedded in other contracts and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities”. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. The company does not expect the adoption of SFAS No. 149 to have a material impact on the company’s consolidated financial statements.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity”. SFAS No. 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. SFAS No. 150 is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. The company does not expect the adoption of SFAS No. 150 to have a material impact on the company’s consolidated financial statements.

RESTRUCTURE AND OTHER CHARGES

In the first quarter of fiscal 2004, the company recognized pre-tax restructure and other charges of $1.2 million reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings primarily due to continued softening of real estate in certain markets. The charges represent the net adjustment for changes in estimates related to prior years’ restructure reserves, including a net increase of $1.1 million to restructure 2001 and a net increase of $0.1 million to restructure 2000.

Restructure 2002

In the fourth quarter of fiscal 2002, the company identified additional efforts that would allow it to extend its distribution efficiency program that began 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 the majority of these actions were completed by the end of fiscal 2003.

In the fourth quarter of fiscal 2003, the fiscal 2002 restructure charges were decreased by $3.6 million, including a decrease of $1.4 million due to lower than anticipated lease related costs in transportation efficiency initiatives and a decrease of $2.2 million in employee related costs due to lower than anticipated severance costs.

10

Remaining reserves for the fiscal 2002 restructure plan represent future lease payments as well as unpaid severance and employee related costs. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows:

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

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 real estate and guarantee obligations and $39.8 million for severance and employee related costs.

In the fourth quarter of fiscal 2002, the fiscal 2001 restructure and other 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.

In the fourth quarter of fiscal 2003, the fiscal 2001 restructure and other charges were increased by $8.1 million, including an $11.7 million increase to the restructure reserves offset by a decrease in asset impairment charges of $3.6 million. The reserve increase of $11.7 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sublease in certain markets, including approximately $5 million relating to the consolidation of distribution centers and approximately $6 million relating to the exit of non-core retail markets and $1.2 million in higher than anticipated employee related costs primarily in the exit of non-core retail markets.

In the first quarter of fiscal 2004, the fiscal 2001 restructure and other charges were increased by $1.1 million as a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sublease in certain markets.

11

Included in the asset impairment charges in fiscal 2001 of $89.7 million were $57.4 million of charges related to retail food properties and $32.3 million of charges related to food distribution properties. 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. In the fourth quarter of fiscal 2003, the fiscal 2001 asset impairment charges for property, plant and equipment were decreased by $3.6 million primarily due to changes in estimates on exited real estate in certain markets and includes a decrease of $8.2 million in estimates related to certain food distribution properties offset by an increase of $4.6 million in estimates related to certain retail food properties. 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 real estate and unpaid employee benefits. Details of the fiscal 2001 restructure activity for fiscal 2004 are as follows:

12

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. There was no activity in fiscal 2004. Details of the fiscal 2001 restructure activity as it relates to the number of terminated employees are as follows:

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. Included in this total was $17.4 million for asset impairment costs. The restructure and other charges include 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 as a result of 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 a remaining facility primarily due to the softening real estate market.

In the fourth quarter of fiscal 2003, the fiscal 2000 restructure and other charges were decreased by $1.6 million, including a $2.9 million increase to the restructure reserves offset by a decrease in asset impairment charges of $4.5 million. The reserve increase of $2.9 million was a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sublease in certain markets and higher than anticipated employee related costs.

In the first quarter of fiscal 2004, the fiscal 2000 restructure and other charges were increased by $0.1 million as a result of changes in estimates on exited real estate primarily due to the continued softening of real estate marketed for sublease in certain markets.

Included in the asset impairment charges in fiscal 2000 of $17.4 million were writedowns on food distribution assets of $10.6 million for property, plant and equipment, $5.6 million of goodwill and other intangibles, and $1.2 million for other assets that were reflected in the “Restructure and other charges” line in the Consolidated Statements of Earnings for fiscal 2000. In the fourth quarter of fiscal 2003, the fiscal 2000 asset impairment charges for property, plant and equipment on food distribution properties were decreased by $4.5 million primarily due to changes in estimates on exited real estate in certain markets. 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 2000 restructure plan has been completed. Remaining reserves represent future payments on exited real estate. Details of the fiscal 2000 restructure activity for fiscal 2004 are as follows:

13

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. There was no activity in fiscal 2003 or fiscal 2004. Details of the fiscal 2000 restructure activity as it relates to employees are as follows:

RESERVES FOR CLOSED PROPERTIES AND ASSET IMPAIRMENT

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 reserves for closed properties include management’s estimates for lease subsidies, lease terminations, future payments on exited real estate and severance. Details of the activity in the closed property reserves for fiscal 2004 are as follows:

The company recognized impairment charges of $1.1 million for fiscal 2004 on the write-down of property, plant and equipment for closed properties, all of which related to food distribution. Impairment charges, a component of selling and administrative expenses in the Consolidated Statements of Earnings, 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.

GOODWILL AND OTHER INTANGIBLE ASSETS

At June 14, 2003, the company had approximately $1.6 billion of goodwill on its Condensed Consolidated Balance Sheets of which $0.9 billion was related to retail food and $0.7 billion was related to food distribution.

The carrying amount of other intangible assets as of June 14, 2003 are as follows:

Other intangible assets are presented in the “Other assets” line in the Condensed Consolidated Balance Sheets. Amortization expense of approximately $0.4 million was recorded in the first quarter of fiscal 2004. Future amortization expense will approximate $1.0 million per year for each of the next five years. Intangible assets with a definite life are amortized on a straight-line basis with estimated useful lives ranging from five to ten years.

14

FINANCIAL INSTRUMENTS

Interest Rate Swap Agreements

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 Condensed 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. Approximately $0.3 million of after-tax loss is expected to be amortized into the Consolidated Statements of Earnings from Accumulated Other Comprehensive Losses within the next 12 months.

In the first quarter of fiscal 2003, the company entered into swap agreements in the notional amount of $225.0 million that exchange a fixed interest rate payment obligation for a floating interest 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 June 14, 2003, the hedge was highly effective. Changes in the fair value of the swaps and debt are reflected as a component of selling and administrative expense in the Consolidated Statements of Earnings, and through June 14, 2003, the net earnings impact was zero.

The company has 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, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

The company has guaranteed certain leases, fixture financing loans and other debt obligations of various retailers at June 14, 2003. These guarantees were made to support the business growth of affiliated retailers. The guarantees are generally for the entire term of the lease or other debt obligation. 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. At June 14, 2003, the maximum amount of undiscounted payments the company would be required to make in the event of default of all guarantees is $301.5 million and represents $197.9 million on a discounted basis. In addition, the company has guaranteed construction loans on warehouses of $34.2 million at June 14, 2003 that the company will purchase upon completion. In April 2003, the company refinanced a synthetic lease including a residual value guarantee with a fair value of approximately $3.5 million reflected in “Other liabilities” in the Condensed Consolidated Balance Sheets as of June 14, 2003.

In July and August 2002, several class action lawsuits were filed against the company and certain of its officers and directors in the United States District Court for the District of Minnesota on behalf of purchasers of the company’s securities between July 11, 1999 and June 26, 2002. The lawsuits have been consolidated into a single action, in which it is alleged 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 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 stage of the proceedings.

The company is a party to various other legal proceedings arising from the normal course of business activities, none of which, in management’s opinion, is expected to have a material adverse impact on the company’s consolidated statement of earnings or consolidated financial position.

SEGMENT INFORMATION

Refer to page 3 for the company’s segment information.

15

RESULTS OF OPERATIONS

In the first quarter of fiscal 2004, the company achieved net sales of $5.8 billion compared with $5.7 billion in the first quarter of last year. Net earnings for the first quarter of fiscal 2004 were $73.7 million, and diluted earnings per share were $0.55 compared with $77.2 million and diluted earnings per share of $0.57 in the first quarter of last year.

Net Sales

Net sales for the first quarter of fiscal 2004 were $5.8 billion, an increase of 3.2 percent from the first quarter of last year. Retail food sales were 50.7 percent of net sales for the first quarter of fiscal 2004 compared with 49.7 percent for the first quarter of last year. Food distribution sales were 49.3 percent of net sales for the first quarter of fiscal 2004 compared with 50.3 percent for the first quarter of last year.

Retail food sales for the first quarter of fiscal 2004 increased 5.1 percent compared with the first quarter of last year, primarily reflecting new store openings and the full quarter inclusion of Deals$—Nothing Over a Dollar (Deals) stores, which was acquired late in last year’s first quarter. Same-store retail sales for the first quarter of fiscal 2004 were 0.4 percent, impacted by approximately 0.7 percent in cannibalization within key expansion markets. 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.

Store activity since last year’s first quarter, including licensed stores, resulted in 152 new stores opened and 46 stores closed for a total of 1,436 stores at the end of first quarter fiscal 2004. Total retail square footage, including licensed stores, increased approximately 4.7 percent from last year’s first quarter.

Food distribution sales for the first quarter of fiscal 2004 increased 1.3 percent compared with the first quarter of last year, primarily reflecting new business with existing customers, which more than offset customer attrition.

Gross Profit

Gross profit (calculated as net sales less cost of sales), as a percentage of net sales, was 13.7 percent for the first quarter of fiscal 2004 compared with 13.4 percent for the first quarter of last year. The increase in gross profit, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, including the higher gross profit margin of Deals acquired late in last year’s first quarter, which operates at a higher gross profit margin as a percentage of net sales than does the food distribution business.

Selling and Administrative Expenses

Selling and administrative expenses, as a percentage of net sales, were 10.9 percent for the first quarter of fiscal 2004 compared with 10.3 percent in the first quarter of last year. The increase in selling and administrative expenses, as a percentage of net sales, reflects the growing proportion of the company’s retail food business, including the higher selling and administrative expense ratio of Deals acquired late in last year’s first quarter, which operates at a higher selling and administrative expense as a percentage of net sales than does the food distribution business. In addition, the increase reflects a lack of expense leverage from increases in employee benefit related costs and approximately $5 million, net, in litigation settlements.

Operating Earnings

Operating earnings for the first quarter of fiscal 2004 decreased 7.1 percent to $161.8 million compared with $174.3 million in the first quarter of last year. First quarter of fiscal 2004 operating earnings include approximately $5 million, net, in litigation settlements and $1.2 million in pre-tax restructure and other charges. Retail food first quarter of fiscal 2004 operating earnings decreased 4.3 percent to $123.6 million, or 4.2 percent of net sales, from last year’s first quarter operating earnings of $129.1 million, or 4.6 percent of net sales. The decrease in retail food operating earnings was primarily due to a lack of expense leverage from increases in employee benefit related costs, which continue to increase at a rate faster than sales growth, and the higher mix of new stores, primarily Deals stores, both new and acquired. Food distribution first quarter of fiscal 2004 operating earnings increased 1.8 percent to $58.2 million, or 2.0 percent of net sales, from last year’s first quarter operating earnings of $57.2 million, or 2.0 percent of net sales. The increase in food distribution operating earnings primarily reflects the impact of higher sales volume and benefits of efficiency initiatives implemented during the course of the prior year, which more than offset the changing customer mix and increases in employee benefit related costs.

16

Net Interest Expense

Interest expense decreased to $49.6 million in the first quarter of fiscal 2004 compared with $58.1 million in the first quarter of last year, reflecting lower borrowing levels and lower average interest rates, largely due to the interest rate swap agreements entered into in the first quarter of fiscal 2003. Interest income decreased to $5.1 million in the first quarter of fiscal 2004 compared with $6.2 million in the first quarter of last year, reflecting lower invested cash balances and lower average interest rates.

Income Taxes

The effective tax rate was 37.25 and 37.0 percent in the first quarter of fiscal 2004 and fiscal 2003, respectively.

Net Earnings

Net earnings were $73.7 million, or $0.55 per diluted share, in the first quarter of fiscal 2004 compared with net earnings of $77.2 million, or $0.57 per diluted share in the first quarter of last year.

Weighted average diluted shares decreased to 134.1 million in the first quarter of fiscal 2004 compared with 136.1 shares in the first quarter of last year, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program.

RESTRUCTURE AND OTHER CHARGES

In the first quarter of fiscal 2004, the company recognized pre-tax restructure and other charges of $1.2 million reflected in “Restructure and other charges” line in the Consolidated Statements of Earnings primarily due to continued softening of real estate in certain markets. The charges represent the net adjustment for changes in estimates related to prior years’ restructure reserves, including a net increase of $1.1 million to restructure 2001 and a net increase of $0.1 million to restructure 2000.

Restructure 2002

In the fourth quarter of fiscal 2002, the company identified additional efforts that would allow it to extend its distribution efficiency program that began 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 the majority of these actions were completed by the end of fiscal 2003.

In the fourth quarter of fiscal 2003, the fiscal 2002 restructure charges were decreased by $3.6 million, including a decrease of $1.4 million due to lower than anticipated lease related costs in transportation efficiency initiatives and a decrease of $2.2 million in employee related costs due to lower than anticipated severance costs.

17

Remaining reserves for the fiscal 2002 restructure plan represent future lease payments as well as unpaid severance and employee related costs. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows:

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