Back to GetFilings.com




UNITED STATES

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 November 29, 2003.

 

¨ 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   41-0617000

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

identification No.)

11840 VALLEY VIEW ROAD,

EDEN PRAIRIE, MINNESOTA

  55344
(Address of principal executive offices)   (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  ¨

 

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 January 9, 2004 is as follows:

 

Title of Each Class


 

Shares Outstanding


Common Shares   134,399,251

 



PART I—FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED STATEMENTS OF EARNINGS

 

(In thousands, except percent and per share data)

 

     Third Quarter (12 weeks) ended

 
    

November 29,

2003


   % of
sales


   

November 30,

2002


   % of
sales


 

Net sales

   $ 4,738,983    100.0 %   $ 4,553,443    100.0 %

Costs and expenses

                          

Cost of sales

     4,093,353    86.38       3,957,100    86.90  

Selling and administrative expenses

     511,034    10.78       467,818    10.28  

Restructure and other charges

     7,154    0.15       —      —    
    

  

 

  

Operating earnings

     127,442    2.69       128,525    2.82  

Interest

                          

Interest expense

     42,121    0.89       42,508    0.93  

Interest income

     4,226    0.09       4,709    0.10  
    

  

 

  

Interest expense, net

     37,895    0.80       37,799    0.83  
    

  

 

  

Earnings before income taxes

     89,547    1.89       90,726    1.99  

Provision for income taxes

                          

Current

     25,461    0.54       13,188    0.29  

Deferred

     15,470    0.32       20,401    0.45  
    

  

 

  

Income tax expense

     40,931    0.86       33,589    0.74  
    

  

 

  

Net earnings

   $ 48,616    1.03 %   $ 57,137    1.25 %
    

  

 

  

Weighted average number of common shares outstanding

                          

Diluted

     135,862            134,087       

Basic

     133,983            133,639       

Net earnings per common share—diluted

   $ 0.36          $ 0.43       

Net earnings per common share—basic

   $ 0.36          $ 0.43       

Dividends per common share

   $ 0.1450          $ 0.1425       

 

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 percent and per share data)

 

     Year-to-date (40 weeks) ended

 
     November 29,
2003


   % of
sales


    November 30,
2002


   % of
sales


 

Net sales

   $ 15,165,920    100.0 %   $ 14,547,446    100.0 %

Costs and expenses

                          

Cost of sales

     13,082,296    86.26       12,602,478    86.63  

Selling and administrative expenses

     1,651,634    10.89       1,510,845    10.39  

Restructure and other charges

     10,601    0.07       —      —    
    

  

 

  

Operating earnings

     421,389    2.78       434,123    2.98  

Interest

                          

Interest expense

     129,249    0.85       143,166    0.98  

Interest income

     13,983    0.09       15,551    0.11  
    

  

 

  

Interest expense, net

     115,266    0.76       127,615    0.87  
    

  

 

  

Earnings before income taxes

     306,123    2.02       306,508    2.11  

Provision for income taxes

                          

Current

     81,668    0.54       78,625    0.54  

Deferred

     39,937    0.26       34,784    0.24  
    

  

 

  

Income tax expense

     121,605    0.80       113,409    0.78  
    

  

 

  

Net earnings

   $ 184,518    1.22 %   $ 193,099    1.33 %
    

  

 

  

Weighted average number of common shares outstanding

                          

Diluted

     135,069            135,160       

Basic

     133,848            133,742       

Net earnings per common share—diluted

   $ 1.37          $ 1.43       

Net earnings per common share—basic

   $ 1.38          $ 1.44       

Dividends per common share

   $ 0.4325          $ 0.4250       

 

All data subject to year-end audit.

 

See notes to consolidated financial statements.

 

3


SUPERVALU INC. and Subsidiaries

 

CONSOLIDATED COMPOSITION OF NET SALES AND OPERATING EARNINGS

 

(In thousands, except percent data)

 

    

Third Quarter

(12 weeks) ended


   

Year-to-date

(40 weeks) ended


 
    

November 29,

2003


   

November 30,

2002


   

November 29,

2003


    November 30,
2002


 

Retail food

   $ 2,417,853     $ 2,271,198     $ 7,759,895     $ 7,330,572  

% of total

     51.0 %     49.9 %     51.2 %     50.4 %

Food distribution

     2,321,130       2,282,245       7,406,025       7,216,874  

% of total

     49.0 %     50.1 %     48.8 %     49.6 %
    


 


 


 


Total net sales

   $ 4,738,983     $ 4,553,443     $ 15,165,920     $ 14,547,446  
       100.0 %     100.0 %     100.0 %     100.0 %
    


 


 


 


Operating earnings

                                

Retail food operating earnings

   $ 83,418     $ 93,385     $ 305,954     $ 321,282  

% of sales

     3.5 %     4.1 %     3.9 %     4.4 %

Food distribution operating earnings

     60,908       43,603       166,515       140,551  

% of sales

     2.6 %     1.9 %     2.2 %     1.9 %
    


 


 


 


Subtotal

     144,326       136,988       472,469       461,833  

% of sales

     3.0 %     3.0 %     3.1 %     3.2 %
    


 


 


 


General corporate expenses

     (9,730 )     (8,463 )     (40,479 )     (27,710 )

Restructure and other charges

     (7,154 )     —         (10,601 )     —    
    


 


 


 


Total operating earnings

     127,442       128,525       421,389       434,123  

% of sales

     2.7 %     2.8 %     2.8 %     3.0 %

Interest expense

     (42,121 )     (42,508 )     (129,249 )     (143,166 )

Interest income

     4,226       4,709       13,983       15,551  
    


 


 


 


Earnings before income taxes

     89,547       90,726       306,123       306,508  

Provision for income taxes

     (40,931 )     (33,589 )     (121,605 )     (113,409 )
    


 


 


 


Net earnings

   $ 48,616     $ 57,137     $ 184,518     $ 193,099  
    


 


 


 


 

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.

 

4


SUPERVALU INC. and Subsidiaries

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

(In thousands)

 

    

Third

Quarter


  

Fiscal Year

End


    

November 29,

2003


  

February 22,

2003


Assets              

Current Assets

             

Cash and cash equivalents

   $ 52,274    $ 29,188

Receivables, net ($0 as of November 29, 2003 and $264,392 as of February 22, 2003 pledged as collateral)

     531,644      477,429

Inventories, net

     1,238,725      1,049,283

Other current assets

     139,421      91,466
    

  

Total current assets

     1,962,064      1,647,366

Long-term receivables, net

     112,226      126,435

Property, plant and equipment, net

     2,081,488      2,220,850

Goodwill

     1,563,487      1,576,584

Other assets

     398,116      325,010
    

  

Total assets

   $ 6,117,381    $ 5,896,245
    

  

Liabilities and Stockholders’ Equity              

Current Liabilities

             

Notes payable

   $ —      $ 80,000

Accounts payable

     1,256,227      1,081,734

Current debt and obligations under capital leases

     311,183      61,580

Other current liabilities

     386,881      301,993
    

  

Total current liabilities

     1,954,291      1,525,307

Long-term debt and obligations under capital leases

     1,624,854      2,019,658

Other liabilities and deferred income taxes

     396,075      342,040

Commitments and contingencies

             

Total stockholders’ equity

     2,142,161      2,009,240
    

  

Total liabilities and stockholders’ equity

   $ 6,117,381    $ 5,896,245
    

  

 

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

 

Capital in

Excess of

Par Value


    Treasury Stock

   

Accumulated

Other

Comprehensive

Losses


   

Retained

Earnings


    Total

 
    Shares

  Amount

    Shares

    Amount

       

BALANCES AT FEBRUARY 23, 2002

  150,670   $ 150,670   $ 121,444     (17,781 )   $ (335,885 )   $ (7,075 )   $ 1,969,984     $ 1,899,138  

Comprehensive income:

                                                       

Net earnings

  —       —       —       —         —         —         257,042       257,042  

Amortization of loss on derivative financial instruments, net of deferred taxes of $0.2 million

  —       —       —       —         —         340       —         340  

Minimum pension liability, net of deferred taxes of $47.1 million

  —       —       —       —         —         (72,328 )     —         (72,328 )
                                                   


Total comprehensive income

  —       —       —       —         —         —         —         185,054  

Sales of common stock under option plans

  —       —       (9,196 )   2,155       47,618       —         —         38,422  

Cash dividends declared on common stock—$.5675 per share

  —       —       —       —         —         —         (76,094 )     (76,094 )

Compensation under employee incentive plans

  —       —       1,780     152       3,099       —         —         4,879  

Purchase of shares for treasury

  —       —       —       (1,508 )     (42,159 )     —         —         (42,159 )
   
 

 


 

 


 


 


 


BALANCES AT FEBRUARY 22, 2003

  150,670     150,670     114,028     (16,982 )     (327,327 )     (79,063 )     2,150,932       2,009,240  

Comprehensive income:

                                                       

Net earnings

  —       —       —       —         —         —         184,518       184,518  

Amortization of loss on derivative financial instruments (including impact of debt redemption), net of deferred taxes of $4.2 million

  —       —       —       —         —         6,735       —         6,735  
                                                   


Total comprehensive income

  —       —       —       —         —         —         —         191,253  

Sales of common stock under option plans

  —       —       (9,489 )   743       22,144       —         —         12,655  

Cash dividends declared on common stock—$0.4325 per share

  —       —       —       —         —         —         (57,952 )     (57,952 )

Compensation under employee incentive plans

  —       —       (681 )   93       2,245       —         —         1,564  

Purchase of shares for treasury

  —       —       —       (614 )     (14,599 )     —         —         (14,599 )
   
 

 


 

 


 


 


 


BALANCES AT NOVEMBER 29, 2003

  150,670   $ 150,670   $ 103,858     (16,760 )   $ (317,537 )   $ (72,328 )   $ 2,277,498     $ 2,142,161  
   
 

 


 

 


 


 


 


 

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

(40 weeks) ended


 
    

November 29,

2003


    November 30,
2002


 

Net cash provided by operating activities

   $ 472,943     $ 388,596  
    


 


Cash flows from investing activities

                

Additions to long-term notes receivable

     (15,670 )     (44,755 )

Proceeds received on long-term notes receivable

     26,176       34,284  

Proceeds from sale of assets

     53,787       37,317  

Purchases of property, plant and equipment

     (224,968 )     (290,339 )
    


 


Net cash used in investing activities

     (160,675 )     (263,493 )
    


 


Cash flows from financing activities

                

Net (reduction) issuance of notes payable

     (80,000 )     199,800  

Proceeds from issuance of long-term debt

     —         296,535  

Repayment of long-term debt

     (120,109 )     (488,432 )

Reduction of obligations under capital leases

     (26,091 )     (24,493 )

Net proceeds from the sale of common stock under option plans

     9,207       31,542  

Dividends paid

     (57,590 )     (56,584 )

Payment for purchase of treasury shares

     (14,599 )     (42,159 )
    


 


Net cash used in financing activities

     (289,182 )     (83,791 )
    


 


Net increase in cash and cash equivalents

     23,086       41,312  

Cash and cash equivalents at beginning of period

     29,188       12,171  
    


 


Cash and cash equivalents at the end of period

   $ 52,274     $ 53,483  
    


 


Supplemental Information:

                

Pretax LIFO expense

   $ 4,573     $ 2,766  

Pretax depreciation and amortization

   $ 227,853     $ 221,746  

 

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 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 November 29, 2003 and November 30, 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.

 

    

Third Quarter

(12 weeks) ended


  

Year-to-date

(40 weeks) ended


     November 29,
2003


   November 30,
2002


   November 29,
2003


   November 30,
2002


     (In thousands)

Amounts invoiced to independent retailers

   $ 190,471    $ 154,481    $ 573,916    $ 512,682

Amounts due and paid to vendors

     186,512      151,325      561,687      501,561
    

  

  

  

Net gross margin

   $ 3,959    $ 3,156    $ 12,229    $ 11,121
    

  

  

  

 

8


Comprehensive Income:

 

The components of comprehensive income, net of related tax, are as follows:

 

    

Third Quarter

(12 weeks) ended


  

Year-to-date

(40 weeks) ended


    

November 29,

2003


  

November 30,

2002


  

November 29,

2003


  

November 30,

2002


     (In thousands)

Net earnings

   $ 48,616    $ 57,137    $ 184,518    $ 193,099

Amortization of loss on derivative financial instruments

     78      78      262      262

Accelerated amortization of loss on derivative financial instruments due to debt redemption

     6,473      —        6,473      —  
    

  

  

  

Total amortization

     6,551      —        6,735      —  
    

  

  

  

Total comprehensive income

   $ 55,167    $ 57,215    $ 191,253    $ 193,361
    

  

  

  

 

On February 25, 2001, due to the implementation of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, the company’s existing interest rate swap agreements were recorded at fair market value in the company’s Condensed Consolidated Balance Sheets. On July 6, 2001, the two swaps were terminated and the remaining fair market value adjustments, which were offsetting, were being amortized over the original term of the hedge. In conjunction with the company’s early redemption of its $100 million 8.875% Notes due 2022 during the third quarter of fiscal 2004, the remaining fair market value adjustments of the two terminated swaps relating to these notes were recognized as interest expense during the third quarter of fiscal 2004. There was no net impact to the Consolidated Statement of Earnings for the third quarter of fiscal 2004 as the two terminated swaps were offsetting.

 

Net Earnings Per Share (EPS):

 

Basic EPS is calculated using earnings available to common shareholders divided by the weighted average number of common shares outstanding during the period. Diluted EPS is similar to basic EPS except that the weighted average number of common shares outstanding includes 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:

 

    

Third Quarter

(12 weeks) ended


  

Year-to-date

(40 weeks) ended


    

November 29,

2003


  

November 30,

2002


  

November 29,

2003


  

November 30,

2002


     (In thousands, except per share data)

Earnings per share – basic

                           

Income available to common shareholders

   $ 48,616    $ 57,137    $ 184,518    $ 193,099

Weighted average shares outstanding

     133,983      133,639      133,848      133,742

Earnings per share – basic

   $ 0.36    $ 0.43    $ 1.38    $ 1.44
    

  

  

  

Earnings per share – diluted

                           

Income available to common shareholders

   $ 48,616    $ 57,137    $ 184,518    $ 193,099

Weighted average shares outstanding

     133,983      133,639      133,848      133,742

Dilutive impact of options outstanding

     1,879      448      1,221      1,418
    

  

  

  

Weighted average shares and potential dilutive shares outstanding

     135,862      134,087      135,069      135,160

Earnings per share – diluted

   $ 0.36    $ 0.43    $ 1.37    $ 1.43
    

  

  

  

 

9


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 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:

 

    

Third Quarter

(12 weeks) ended


   

Year-to-date

(40 weeks) ended


 
    

November 29,

2003


   

November 30,

2002


   

November 29,

2003


   

November 30,

2002


 
     (In thousands, except per share data)  

Net earnings, as reported

   $ 48,616     $ 57,137     $ 184,518     $ 193,099  

Deduct: total stock-based employee compensation expense determined under fair value based method for all awards, net of related tax effect

     (2,108 )     (1,788 )     (7,527 )     (7,735 )
    


 


 


 


Pro forma net earnings

   $ 46,508     $ 55,349     $ 176,991     $ 185,364  
    


 


 


 


Earnings per share – basic:

                                

As reported

   $ 0.36     $ 0.43     $ 1.38     $ 1.44  

Pro forma

   $ 0.34     $ 0.41     $ 1.32     $ 1.38  

Earnings per share – diluted:

                                

As reported

   $ 0.36     $ 0.43     $ 1.37     $ 1.43  

Pro forma

   $ 0.34     $ 0.41     $ 1.31     $ 1.37  

 

Reclassifications:

 

Certain reclassifications have been made to conform prior year’s 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.

 

10


New 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 an 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 sale-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 second quarter of fiscal 2004. SFAS No. 145 did not have an 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, FASB Staff Position No. 46-6 delayed the consolidation requirements until annual or interim periods ending after December 15, 2003. The company does not expect FIN No. 46 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 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 did not have an 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 was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 did not have an impact on the company’s consolidated financial statements.

 

In December 2003, the FASB issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. These revisions require changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans. The revisions to SFAS No. 132 are effective for fiscal years ending after December 15, 2003 and will be incorporated in the company’s year-end consolidated financial statements for fiscal 2004.

 

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 was effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF Issue No. 00-21 did not have an impact on the company’s consolidated financial statements.

 

EITF Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease”, determines whether an arrangement conveying the right to use property, plant and equipment meets the definition of a lease within the scope of SFAS 13, “Accounting for Leases”. EITF Issue No. 01-8 was effective the first interim period beginning after May 28, 2003. EITF Issue No. 01-8 did not have an impact on the company’s consolidated financial statements.

 

EITF Issue No. 03-1, “The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments”, addresses both qualitative and quantitative disclosures. These disclosures are required for marketable equity and debt securities accounted for under FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The disclosure requirements are effective for fiscal years ending after December 15, 2003. EITF Issue No. 03-1 will not have an impact on the company’s consolidated financial statements.

 

11


EITF Issue No. 03-10, “Application of EITF 02-16, ‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales Incentives Offered to Consumers by Manufacturers”, requires that when specified criteria are met, a retailer accepting manufacturers’ coupons should reflect the value of the coupon as revenue and not as a reduction in cost of sales. EITF Issue No. 03-10 is effective for the first interim period beginning after November 25, 2003. EITF Issue No. 03-10 will not have an impact on the company’s consolidated financial statements.

 

RESTRUCTURE AND OTHER CHARGES

 

In the third quarter of fiscal 2004, the company recognized pre-tax restructure and other charges of $7.2 million reflected in the “Restructure and other charges” line in the accompanying Consolidated Statements of Earnings. The charges reflect adjustments to the restructure reserves and asset impairment charges for restructure 2001. For year-to-date fiscal 2004, the company recognized pre-tax restructure and other charges of $10.6 million. The charges reflect the net adjustments to the restructure reserves and asset impairment charges of $0.6 million, $9.7 million and $0.3 million for restructure 2002, 2001 and 2000, respectively. The increases are due to higher than anticipated employee benefit related costs and continued softening of real estate in certain markets.

 

The information within this footnote includes only those restructure and other charges that are the result of previously initiated restructure activities. In addition, the company maintains reserves for properties that have been closed as part of management’s ongoing operating decisions. Those reserves are disclosed within the Reserves for Closed Properties, Assets Held for Sale and Asset Impairment note.

 

Restructure 2002

 

In the fourth quarter of fiscal 2002, the company identified additional efforts that would allow it to extend its food distribution efficiency program that began early in fiscal 2001. The additional food 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.

 

In the second quarter of fiscal 2004, the fiscal 2002 restructure charges were increased by $0.6 million due to higher than anticipated severance costs for certain employees.

 

Remaining reserves for the fiscal 2002 restructure plan represent future lease payments. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows:

 

    

Balance

February 22,

2003


  

Fiscal

2004

Usage


   

Fiscal

2004

Adjustment


   

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                             

Transportation efficiency initiatives

   $ 1,054    $ (630 )   $ (43 )   $ 381
    

  


 


 

       1,054      (630 )     (43 )     381

Employee related costs:

                             

Administrative realignment

     2,390      (3,019 )     629       —  
    

  


 


 

       2,390      (3,019 )     629       —  
    

  


 


 

Total restructure charges

   $ 3,444    $ (3,649 )   $ 586     $ 381
    

  


 


 

 

 

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

 

    

Original

Estimate


  

Employees

Terminated

in Fiscal 2003


   

Balance

February 22,

2003


  

Employees

Terminated

in Fiscal 2004


   

Balance

November 29,

2003


Employees

   800    (650 )   150    (150 )   —  

 

12


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 sale, sublease or assignment 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 third quarter of fiscal 2004, the fiscal 2001 restructure and other charges were increased by $7.2 million, including a $6.0 million increase to the restructure reserves and a $1.2 million increase in asset impairment charges. The reserve increase of $6.0 million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities. For year-to-date fiscal 2004, the fiscal 2001 restructure and other charges were increased by $9.7 million, including an $8.5 million increase to the restructure reserves and a $1.2 million increase in asset impairment charges. The reserve increase of $8.5 million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities and changes in estimates on exited real estate in certain markets for food distribution properties.

 

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 accompanying 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. In the third quarter of fiscal 2004, the fiscal 2001 asset impairment charges for property, plant and equipment were increased by $1.2 million primarily due to changes in estimates on exited real estate in certain markets for food distribution 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.

 

13


All activity for the fiscal 2001 restructure plan has been completed. Remaining reserves represent future payments on exited real estate and employee benefit related costs from previously exited food distribution facilities. Details of the fiscal 2001 restructure activity for fiscal 2004 are as follows:

 

    

Balance

February 22,

2003


  

Fiscal

2004

Usage


   

Fiscal

2004

Adjustment


  

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                            

Consolidation of distribution centers

   $ 6,473    $ (1,692 )   $ 133    $ 4,914

Exit of non-core retail markets

     8,844      (3,479 )     1,324      6,689

Disposal of non-core assets and other administrative reductions

     4,299      (1,101 )     543      3,741
    

  


 

  

       19,616      (6,272 )     2,000      15,344

Employee related costs:

                            

Consolidation of distribution centers

     9,604      (5,595 )     6,221      10,230

Exit of non-core retail markets

     2,980      (2,680 )     297      597
    

  


 

  

       12,584      (8,275 )     6,518      10,827
    

  


 

  

Total restructure and other charges

   $ 32,200    $ (14,547 )   $ 8,518    $ 26,171
    

  


 

  

    

Previously

Recorded


        

Fiscal

2004

Adjustment


  

Balance

November 29,

2003


Impairment charges

   $ 86,169            $ 1,156    $ 87,325

 

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:

 

    

Original

Estimate


  

Employees

Terminated

in Prior Years


   

Adjustments

in Prior Years


   

Balance

February 22,

2003


Employees

   4,500    (3,767 )   (733 )   —  

 

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 sale, sublease or assignment in certain markets and higher than anticipated employee related costs.

 

In the second quarter of fiscal 2004 and for year-to-date fiscal 2004, the fiscal 2000 restructure and other charges were increased by $0.2 million and $0.3 million, respectively, as a result of changes in estimates on exited real estate due to the continued softening of real estate marketed for sale, sublease or assignment 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 accompanying 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.

 

14


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:

 

    

Balance

February 22,

2003


  

Fiscal 2004

Usage


   

Fiscal 2004

Adjustment


  

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                            

Facility consolidation

   $ 8,083    $ (7,464 )   $ 48    $ 667

Non-core store disposal

     3,042      (1,123 )     293      2,212
    

  


 

  

Total restructure and other charges

   $ 11,125    $ (8,587 )   $ 341    $ 2,879
    

  


 

  

    

Previously

Recorded


        

Fiscal

2004

Adjustment


  

November 29,

2003


Impairment charges

     12,964            $ —      $ 12,964

 

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 the number of terminated employees are as follows:

 

    

Original

Estimate


  

Employees

Terminated

in Prior Years


   

Adjustments

in Prior Years


   

Balance

February 23,

2002


Employees

   2,517    (1,693 )   (824 )   —  

 

RESERVES FOR CLOSED PROPERTIES, ASSETS HELD FOR SALE AND ASSET IMPAIRMENT

 

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 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:

 

    

Balance

February 22,

2003


   Additions

   Usage

   

Balance

November 29,

2003


Reserves for Closed Properties

   $ 49,873    9,430    (10,164 )   $ 49,139

 

Assets Held for Sale

 

At November 29, 2003, the company had approximately $46.1 million of assets classified as held for sale reflected in the “Other current assets” line in the accompanying Condensed Consolidated Balance Sheets. These assets are comprised primarily of closed distribution centers and retail stores that the company is actively marketing for sale, sub-lease or assignment. The company anticipates selling or disposing of these assets within one year from the date the assets were designated as held for sale.

 

Asset Impairment

 

In the third quarter of fiscal 2004 and for year-to-date fiscal 2004, the company recognized impairment charges of $6.2 million and $7.6 million, respectively, on the write-down of property, plant and equipment for closed properties. The $6.2 million impairment charge recognized in the third quarter of fiscal 2004 related to retail food. Of the $7.6 million impairment charge recognized year-to-date, $6.2 million related to retail food and $1.4 million related to food distribution. Impairment charges, a component of selling and administrative expenses in the accompanying 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 ACQUIRED INTANGIBLE ASSETS

 

In the third quarter of fiscal 2004, the company completed an asset exchange with C&S Wholesale Grocers, Inc. (C&S) whereby the company acquired certain former Fleming Companies’ distribution operations in the Midwest from C&S in exchange for the company’s New England operations (Asset Exchange). The Asset Exchange resulted in the addition of approximately $58.0 million of intangible assets related to customer relationships and trademarks and a reduction in goodwill of $20.0 million related to the company’s New England operations included in the Asset Exchange.

 

15


At November 29, 2003, the company had approximately $1.6 billion of goodwill of which $0.9 billion related to retail food and $0.7 billion related to food distribution.

 

A summary of changes in the company’s other acquired intangible assets during fiscal 2003 and year-to-date fiscal 2004 follows:

 

     February 23,
2002


    Amorti-
zation


    Other net
adjustments


   February 22,
2003


    Amorti-
zation


    Asset
Exchange


   Other net
adjustments


     November 29,
2003


 
     (in thousands)  

Trademarks

   $ —       $ —       $ —      $ —         —       $ 15,106    $ —        $ 15,106  

Customer relationships (accumulated amortization of $0 at November 29, 2003)

     —         —         —        —         —         42,905      —          42,905  

Non-compete agreements (accumulated amortization of $4,376 and $4,834 at February 22 and November 29, 2003)

     8,406       —         100      8,506       —         —        (230 )      8,276  

Customer lists and other (accumulated amortization of $4,313 and $4,236, at February 22 and November 29, 2003)

     8,180       —         190      8,370       —         —        (152 )      8,218  
    


 


 

  


 


 

  


  


Total other acquired intangible assets

     16,586               290      16,876               58,011      (382 )      74,505  

Accumulated amortization

     (7,414 )     (1,380 )     105      (8,689 )     (1,059 )            678        (9,070 )
    


 


 

  


 


 

  


  


Total other acquired intangible assets, net

   $ 9,172     $ (1,380 )   $ 395    $ 8,187     $ (1,059 )   $ 58,011    $ 296      $ 65,435  
    


 


 

  


 


 

  


  


 

16


Other intangible assets are presented in the “Other assets” line in the accompanying Condensed Consolidated Balance Sheets. In the third quarter of fiscal 2004 and for year-to-date fiscal 2004, the company recorded amortization expense of approximately $0.3 million and $1.1 million, respectively. Future amortization expense will approximate $3.0 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 twenty years. All intangible assets are amortizable with the exception of the trademarks.

 

FINANCIAL INSTRUMENTS

 

Interest Rate Swap Agreements

 

On February 25, 2001, due to the implementation of SFAS 133, “Accounting for Derivative Instruments and Hedging Activities”, the company’s existing interest rate swap agreements were recorded at fair market value in the company’s Condensed Consolidated Balance Sheets. On July 6, 2001, the two swaps were terminated and the remaining fair market value adjustments, which were offsetting, were being amortized over the original term of the hedge. In conjunction with the company’s early redemption of its $100 million 8.875% Notes due 2022 during the third quarter of fiscal 2004, the remaining fair market value adjustments of the two terminated swaps relating to these notes were recognized as interest expense during the third quarter of fiscal 2004. There was no net impact to the Consolidated Statement of Earnings for the third quarter of fiscal 2004 as the two terminated swaps were offsetting.

 

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 the “Other assets” line in the accompanying Condensed Consolidated Balance Sheets. At November 29, 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 accompanying Consolidated Statements of Earnings, and through November 29, 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

 

In the ordinary course of business, the company guarantees certain leases, fixture financing loans and other debt obligations of various of its food distribution affiliated retailers. These guarantees were made to support the business growth of its affiliated retailers. The guarantees are generally for the entire term of the lease or other debt obligation with remaining terms that range from less than one year to twenty-two years, with a weighted average remaining term of approximately five years. For each guarantee issued, if the affiliated retailer defaults on a payment, the company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the affiliated retailer. At November 29, 2003, the maximum amount of undiscounted payments the company would be required to make in the event of default of all guarantees is $289.8 million and represents $184.3 million on a discounted basis. In addition, the company has guaranteed construction loans on warehouses of $13.9 million at November 29, 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 $3.0 million which is reflected in the “Other liabilities” line in the accompanying Condensed Consolidated Balance Sheets as of November 29, 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

 

17


financial performance. The company believes that the lawsuit is without merit, intends to vigorously defend the action and presently has moved for dismissal. 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 4 for the company’s segment information.

 

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

RESULTS OF OPERATIONS

 

In the third quarter of fiscal 2004, the company achieved net sales of $4.7 billion compared with $4.6 billion last year. Net earnings for the third quarter of fiscal 2004 were $48.6 million and diluted earnings per share were $0.36 compared with net earnings of $57.1 million and diluted earnings per share of $0.43 last year. Operating results for the third quarter of fiscal 2004 include the impact of three events which occurred during the quarter. First, on September 13, 2003, as part of an asset exchange agreement with C&S Wholesale Grocers, Inc., the company acquired certain former Fleming Companies’ distribution operations in the Midwest in exchange for the company’s New England operations (Asset Exchange). Late in the third quarter of fiscal 2004, the company sold or closed its Denver based operations that included nine retail stores and a food distribution facility (Denver Disposition). And third, the company experienced a 28-day strike in St. Louis, Missouri, by its retail union employees which covered 21 of the company’s Shop ’n Save stores (St. Louis Strike).

 

Net Sales

 

Net sales for the third quarter of fiscal 2004 were $4.7 billion, an increase of 4.1 percent from last year. Retail food sales were 51.0 percent of net sales for the third quarter of fiscal 2004 compared with 49.9 percent last year. Food distribution sales were 49.0 percent of net sales for the third quarter of fiscal 2004 compared with 50.1 percent last year.

 

Retail food sales for the third quarter of fiscal 2004 increased 6.5 percent compared with last year, primarily reflecting new store openings and increases in same-store sales, defined as stores operating for four full quarters including store expansions partially offset by the impact of the St. Louis Strike. Same-store retail sales for the third quarter of fiscal 2004 were positive 3.0 percent, impacted by approximately 0.6 percent of planned in-market expansion.

 

Store activity since last year’s third quarter, including licensed stores, resulted in 122 new stores opened and 45 stores closed for a total of 1,468 stores at the end of third quarter fiscal 2004. Total retail square footage, including licensed stores, increased approximately 1.1 percent from last year’s third quarter, reflecting a 2.0 percent impact from the Denver Disposition.

 

Food distribution sales for the third quarter of fiscal 2004 increased 1.7 percent compared with last year, primarily reflecting new customer affiliations, which more than offset customer attrition and the net revenue loss as a result of the Asset Exchange.

 

Gross Profit

 

Gross profit (calculated as net sales less cost of sales), as a percent of net sales, was 13.6 percent for the third quarter of fiscal 2004 compared with 13.1 percent last year. The increase in gross profit as a percent of net sales primarily reflects the improved leverage from the concentration of food distribution volume growth in existing facilities, the benefits of food distribution efficiency initiatives implemented during the course of the prior year and improved merchandising execution across retail operations.

 

Selling and Administrative Expenses

 

Selling and administrative expenses, as a percent of net sales, were 10.8 percent for the third quarter of fiscal 2004 compared with 10.3 percent last year. The increase in selling and administrative expenses, as a percent of net sales, primarily reflects costs associated with the Denver Disposition, including related reserves for closed stores, the impact of the St. Louis Strike and increases in employee benefit related costs.

 

Restructure and Other Charges

 

For the third quarter of fiscal 2004, the company incurred $7.2 million, or 0.2 percent of net sales, in pre-tax restructure and other charges, consisting of $6.0 million for increased liabilities associated with employee benefit related costs from previously exited food distribution facilities and $1.2 million for changes in estimates on exited real estate in certain markets for food distribution.

 

18


Operating Earnings

 

Operating earnings for the third quarter of fiscal 2004 decreased 0.8 percent to $127.4 million compared with $128.5 million last year. Third quarter of fiscal 2004 operating earnings include $7.2 million in pre-tax restructure and other charges. Retail food operating earnings for the third quarter of fiscal 2004 decreased 10.7 percent to $83.4 million, or 3.5 percent of net sales, from last year’s operating earnings of $93.4 million, or 4.1 percent of net sales. The decrease in retail food operating earnings, as a percent of net sales, was due to costs associated with the Denver Disposition, including related reserves for closed stores, and the impact of the St. Louis Strike. In addition, improved merchandising execution was offset by increases in employee benefit related costs, which continue to increase at a rate faster than sales growth. Food distribution operating earnings for the third quarter of fiscal 2004 increased 39.7 percent to $60.9 million, or 2.6 percent of net sales, from last year’s operating earnings of $43.6 million, or 1.9 percent of net sales. The increase in food distribution operating earnings, as a percent of net sales, primarily reflects improved leverage from the concentration of food distribution volume growth in existing facilities and the benefits of efficiency initiatives implemented during the course of the prior year.

 

Net Interest Expense

 

Interest expense was $42.1 million in the third quarter of fiscal 2004 compared with $42.5 million last year. The decrease primarily reflects lower borrowing levels that more than offset $5.8 million in pre-tax costs related to the early redemption of $100 million of debt at a price of 103.956 percent. Interest income was $4.2 million in the third quarter of fiscal 2004 compared with $4.7 million last year.

 

Income Taxes

 

The effective tax rate was 45.7 and 37.0 percent in the third quarter of fiscal 2004 and fiscal 2003, respectively. The increase in the effective tax rate in the current quarter was due to $7.6 million of taxes due on the Asset Exchange.

 

Net Earnings

 

Net earnings were $48.6 million, or $0.36 per diluted share, in the third quarter of fiscal 2004 compared with net earnings of $57.1 million, or $0.43 per diluted share last year.

 

Weighted average diluted shares increased to 135.9 million in the third quarter of fiscal 2004 compared with 134.1 million shares last year, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program.

 

YEAR-TO-DATE RESULTS:

 

Year-to-date for fiscal 2004, the company achieved net sales of $15.2 billion compared with $14.5 billion last year. Net earnings for fiscal 2004 year-to-date were $184.5 million and diluted earnings per share were $1.37 compared with net earnings of $193.1 million and diluted earnings per share of $1.43 last year. Year-to-date operating results include the impact of the Asset Exchange, Denver Disposition and the St. Louis Strike, which all occurred in the third quarter of fiscal 2004.

 

Net Sales

 

Net sales for fiscal 2004 year-to-date were $15.2 billion, an increase of 4.3 percent from last year. Retail food sales were 51.2 percent of net sales for fiscal 2004 year-to-date compared with 50.4 percent last year. Food distribution sales were 48.8 percent of net sales for fiscal 2004 year-to-date compared with 49.6 percent last year.

 

Retail food sales for fiscal 2004 year-to-date increased 5.9 percent compared with last year, primarily reflecting new store openings and increases in same-store sales partially offset by the impact of the St. Louis Strike. Same-store retail sales for fiscal 2004 year-to-date were positive 2.0 percent, impacted by approximately 0.7 percent of planned in-market expansion.

 

Food distribution sales for fiscal 2004 year-to-date increased 2.6 percent compared with last year, primarily reflecting new customer affiliations, which more than offset customer attrition, and the net revenue loss as a result of the Asset Exchange.

 

Gross Profit

 

Gross profit, as a percent of net sales, was 13.7 percent for fiscal 2004 year-to-date compared with 13.4 percent last year. The increase in gross profit, as a percent of net sales, primarily reflects improved merchandising execution for retail, the food distribution benefits of efficiency initiatives implemented during the course of the prior year and improved leverage from the concentration of food distribution volume growth in existing facilities.

 

19


Selling and Administrative Expenses

 

Selling and administrative expenses, as a percentage of net sales, were 10.9 percent for fiscal 2004 year-to-date compared with 10.4 percent last year. The increase in selling and administrative expenses, as a percent of net sales, reflects costs associated with the Denver Disposition, including related reserves for closed stores and the impact of the St. Louis Strike. In addition, the increase reflects increases in employee benefit related costs, $9.4 million in additional reserves for non-operating properties and approximately $5 million, net, in litigation settlements.

 

Restructure and Other Charges

 

For fiscal 2004 year-to-date, the company incurred $10.6 million, or 0.1 percent of net sales, in pre-tax restructure and other charges, consisting of $6.0 million for increased liabilities associated with employee benefit related costs from previously exited food distribution facilities and $4.6 million for changes in estimates on exited real estate in certain markets for food distribution.

 

Operating Earnings

 

Operating earnings for fiscal 2004 year-to-date decreased 2.9 percent to $421.4 million compared with $434.1 million last year. Fiscal 2004 year-to-date operating earnings include $10.6 million in pre-tax restructure and other charges. Retail food operating earnings for fiscal 2004 year-to-date decreased 4.8 percent to $306.0 million, or 3.9 percent of net sales, from last year’s operating earnings of $321.3 million, or 4.4 percent of net sales. The decrease in retail food operating earnings, as a percent of net sales, was primarily due to costs associated with the Denver Disposition, including related reserves for closed stores and the impact of the St. Louis Strike. In addition, improved merchandising execution was offset by increases in employee benefit related costs, which continue to increase at a rate faster than sales growth. Food distribution operating earnings for fiscal 2004 year-to-date increased 18.5 percent to $166.5 million, or 2.2 percent of net sales, from last year’s operating earnings of $140.6 million, or 1.9 percent of net sales. The increase in food distribution operating earnings, as a percent of net sales, primarily reflects the benefits of efficiency initiatives implemented during the course of the prior year and improved leverage from the concentration of food distribution growth in existing facilities.

 

Net Interest Expense

 

Interest expense was $129.2 million in fiscal 2004 year-to-date compared with $143.2 million last year. The decrease primarily reflects lower borrowing levels that more than offset $5.8 million in pre-tax costs related to the early redemption of $100 million of debt at a price of 103.956 percent in the third quarter of fiscal 2004. Interest income was $14.0 million in fiscal 2004 year-to-date compared with $15.6 million last year.

 

Income Taxes

 

The effective tax rate was 39.7 percent and 37.0 percent in fiscal 2004 year-to-date and fiscal 2003 year-to-date, respectively. The increase in the effective tax rate in the current year was due to $7.6 million of taxes due on the Asset Exchange.

 

Net Earnings

 

Net earnings were $184.5 million, or $1.37 per diluted share, in fiscal 2004 year-to-date compared with net earnings of $193.1 million, or $1.43 per diluted share last year.

 

Weighted average diluted shares decreased to 135.1 million fiscal 2004 year-to-date compared with 135.2 million shares last year, reflecting the net impact of stock option activity and shares repurchased under the treasury stock program.

 

RESTRUCTURE AND OTHER CHARGES

 

In the third quarter of fiscal 2004, the company recognized pre-tax restructure and other charges of $7.2 million reflected in the “Restructure and other charges” line in the accompanying Consolidated Statements of Earnings. The charges reflect adjustments to the restructure reserves and asset impairment charges for restructure 2001. For year-to-date fiscal 2004, the company recognized pre-tax restructure and other charges of $10.6 million. The charges reflect the net adjustments to the restructure reserves and asset impairment charges of $0.6 million, $9.7 million and $0.3 million for restructure 2002, 2001 and 2000, respectively. The increases are due to higher than anticipated employee benefit related costs and continued softening of real estate in certain markets.

 

Restructure 2002

 

In the fourth quarter of fiscal 2002, the company identified additional efforts that would allow it to extend its food distribution efficiency program that began early in fiscal 2001. The additional food 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.

 

20


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.

 

In the second quarter of fiscal 2004, the fiscal 2002 restructure charges were increased by $0.6 million due to higher than anticipated severance costs for certain employees.

 

Remaining reserves for the fiscal 2002 restructure plan represent future lease payments. Details of the fiscal 2002 restructure activity for fiscal 2004 are as follows:

 

    

Balance

February 22,

2003


  

Fiscal

2004

Usage


   

Fiscal

2004

Adjustment


   

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                             

Transportation efficiency initiatives

   $ 1,054    $ (630 )   $ (43 )   $ 381
    

  


 


 

       1,054      (630 )     (43 )     381

Employee related costs:

                             

Administrative realignment

     2,390      (3,019 )     629       —  
    

  


 


 

       2,390      (3,019 )     629       —  
    

  


 


 

Total restructure charges

   $ 3,444    $ (3,649 )   $ 586     $ 381
    

  


 


 

 

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

 

    

Original

Estimate


  

Employees

Terminated

in Fiscal 2003


   

Balance

February 22,

2003


  

Employees

Terminated

in Fiscal 2004


   

Balance

November 29,

2003


Employees

   800    (650 )   150    (150 )   —  

 

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 sale, sublease or assignment 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 third quarter of fiscal 2004, the fiscal 2001 restructure and other charges were increased by $7.2 million, including a $6.0 million increase to the restructure reserves and a $1.2 million increase in asset impairment charges. The reserve increase of $6.0

 

21


million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities. For year-to-date fiscal 2004, the fiscal 2001 restructure and other charges were increased by $9.7 million, including an $8.5 million increase to the restructure reserves and a $1.2 million increase in asset impairment charges. The reserve increase of $8.5 million was a result of changes in estimates on employee benefit related costs from previously exited food distribution facilities and changes in estimates on exited real estate in certain markets for food distribution properties.

 

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 accompanying 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. In the third quarter of fiscal 2004, the fiscal 2001 asset impairment charges for property, plant and equipment were increased by $1.2 million primarily due to changes in estimates on exited real estate in certain markets for food distribution 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 employee benefit related costs from previously exited food distribution facilities. Details of the fiscal 2001 restructure activity for fiscal 2004 are as follows:

 

    

Balance

February 22,

2003


  

Fiscal

2004

Usage


   

Fiscal

2004

Adjustment


  

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                            

Consolidation of distribution centers

   $ 6,473    $ (1,692 )   $ 133    $ 4,914

Exit of non-core retail markets

     8,844      (3,479 )     1,324      6,689

Disposal of non-core assets and other administrative reductions

     4,299      (1,101 )     543      3,741
    

  


 

  

       19,616      (6,272 )     2,000      15,344

Employee related costs:

                            

Consolidation of distribution centers

     9,604      (5,595 )     6,221      10,230

Exit of non-core retail markets

     2,980      (2,680 )     297      597
    

  


 

  

       12,584      (8,275 )     6,518      10,827
    

  


 

  

Total restructure and other charges

   $ 32,200    $ (14,547 )   $ 8,518    $ 26,171
    

  


 

  

    

Previously

Recorded


        

Fiscal

2004

Adjustment


  

Balance

November 29,

2003


Impairment charges

   $ 86,169            $ 1,156    $ 87,325

 

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:

 

    

Original

Estimate


  

Employees

Terminated

in Prior Years


   

Adjustments

in Prior Years


   

Balance

February 22,

2003


Employees

   4,500    (3,767 )   (733 )   —  

 

22


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 sale, sublease or assignment in certain markets and higher than anticipated employee related costs.

 

In the second quarter of fiscal 2004 and for year-to-date fiscal 2004, the fiscal 2000 restructure and other charges were increased by $0.2 million and $0.3 million, respectively, as a result of changes in estimates on exited real estate due to the continued softening of real estate marketed for sale, sublease or assignment 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 accompanying 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:

 

    

Balance

February 22,

2003


  

Fiscal 2004

Usage


   

Fiscal 2004

Adjustment


  

Balance

November 29,

2003


     (In thousands)

Lease related costs:

                            

Facility consolidation

   $ 8,083    $ (7,464 )   $ 48    $ 667

Non-core store disposal

     3,042      (1,123 )     293      2,212
    

  


 

  

Total restructure and other charges

   $ 11,125    $ (8,587 )   $ 341    $ 2,879
    

  


 

  

    

Previously

Recorded


        

Fiscal

2004

Adjustment


  

November 29,

2003


Impairment charges

     12,964            $ —      $ 12,964

 

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 the number of terminated employees are as follows:

 

    

Original

Estimate


  

Employees

Terminated

in Prior Years


   

Adjustments

in Prior Years


   

Balance

February 23,

2002


Employees

   2,517    (1,693 )   (824 )   —  

 

23


LIQUIDITY AND CAPITAL RESOURCES

 

Net cash provided by operating activities was $472.9 million for fiscal 2004 year-to-date compared with $388.6 million last year. The increase in cash from operations as compared to last year is attributable to an improvement in working capital.

 

Net cash used in investing activities was $160.7 million for fiscal 2004 year-to-date compared with $263.5 million last year. Fiscal 2004 year-to-date investing activities primarily reflect capital spending to fund retail store expansion, store remodeling, extreme value distribution facilities and technology enhancements. Fiscal 2003 year-to-date investing activities primarily reflect capital spending to fund retail store expansion, including the acquisition of Deals, store remodeling and technology enhancements.

 

Net cash used in financing activities was $289.2 million for fiscal 2004 year-to-date compared with $83.8 million last year. Fiscal 2004 year-to-date financing activities primarily reflect the early redemption of $100.0 million of the company’s 8.875% notes due in 2022 at the redemption price of 103.956% of the principal amount of the notes, the net reduction in notes payable of $80.0 million, the purchase of treasury shares of $14.6 million and the payment of dividends of $57.6 million. Fiscal 2003 year-to-date financing activities primarily reflect the issuance of $300.0 million 10-year 7.50% Senior Notes, completed in May 2002, the net issuance of notes payable of $199.8 million, the early redemption of $173.0 million of the company’s 9.75% Senior Notes due in fiscal 2005 at the redemption price of 102.4375% of the principal amount of the Senior Notes, the retirement of a $300 million 7.8% bond that matured in November 2002, the purchase of treasury shares of $42.2 million and the payment of dividends of $56.6 million.

 

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.

 

As of November 29, 2003, the company’s current portion of outstanding debt was $280.0 million, which the company anticipates that it will retire through a combination of operating cash flow and its existing available bank facilities. The company had no outstanding borrowings under its unsecured $650.0 million revolving credit facility. Letters of credit outstanding under the credit facility were $129.7 million and the unused available credit under the facility was $520.3 million.

 

In August 2003, the company renewed its annual accounts receivable securitization program, under which the company can borrow up to $200.0 million on a revolving basis, with borrowings secured by eligible accounts receivable. There were no outstanding borrowings under this program as of November 29, 2003.

 

In November 2001, the company sold zero-coupon convertible debentures due 2031. 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. On October 1, 2003, none of the holders exercised this option. In the event SUPERVALU’s stock price reaches the convertible debentures’ conversion trigger price of $36.11 in the fourth quarter of fiscal 2004, the company would be required to include an additional 7.8 million shares in its diluted shares outstanding calculation for the first quarter of fiscal 2005.

 

The company is party to synthetic leasing programs for two of its major warehouses. The leases expire in September 2004 and April 2008. The lease that expires in September 2004 may be renewed with the lessor’s consent through September 2006, and has a purchase option of approximately $25 million. The lease that expires in April 2008 may be renewed with the lessor’s consent through April 2013, and has a purchase option of approximately $60 million.

 

On September 13, 2003, the company acquired certain former Fleming Companies’ distribution operations in the Midwest in exchange for the company’s New England operations as part of an asset exchange agreement with C&S Wholesale Grocers, Inc. This transaction will have no material impact on liquidity or capital resources in fiscal 2004. This transaction is expected to contribute to fiscal 2005 earnings per share in the range of $0.07 to $0.10 on an approximately $100 million to $200 million lower revenue stream.

 

Capital spending during the third quarter of fiscal 2004 was $97.5 million, including $23.5 million in capital leases. Capital spending for year-to-date fiscal 2004 was $259.9 million, including $35.0 million in capital leases. Capital spending primarily included retail store expansion, store remodeling, new extreme value distribution facilities and technology enhancements. The company’s capital budget for fiscal 2004 is projected to be approximately $410.0 million, including approximately $50.0 million in capital leases. The company’s capital budget for fiscal 2005 is projected to be approximately $425.0 million to $450.0 million, including approximately $75.0 million in capital leases.

 

COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS

 

In the ordinary course of business, the company guarantees certain leases, fixture financing loans and other debt obligations of various of its food distribution affiliated retailers. These guarantees were made to support the business growth of its affiliated retailers. The guarantees are generally for the entire term of the lease or other debt obligation with remaining terms that range from less than one year to twenty-two years, with a weighted average remaining term of approximately five years. For each guarantee issued, if the

 

24


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 November 29, 2003, the maximum amount of undiscounted payments the company would be required to make in the event of default of all guarantees is $289.8 million and represents $184.3 million on a discounted basis. In addition, the company has guaranteed construction loans on warehouses of $13.9 million at November 29, 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 $3.0 million which is reflected in the “Other liabilities” line in the accompanying Condensed Consolidated Balance Sheets as of November 29, 2003.

 

The following table represents the company’s total commitments and total off-balance sheet arrangements at November 29, 2003:

 

     Amount of Commitment Expiration Per Period

    

Total

Amount

Committed


  

Remaining in

Fiscal

2004


  

Fiscal

2005-2006


  

Fiscal

2007-2008


   Thereafter

     (in thousands)

Commitments:

                                  

Debt

   $ 1,391,109    $ 4,454    $ 335,588    $ 79,123    $ 971,944

Capital and Direct Financing Leases

     544,928      31,181      81,813      78,904      353,030
    

  

  

  

  

Total Commitments

   $ 1,936,037    $ 35,635    $ 417,401    $ 158,027    $ 1,324,974
    

  

  

  

  

Off-Balance Sheet Arrangements:

                                  

Retailer Loan and Lease Guarantees

   $ 289,821    $ 19,072    $ 80,275    $ 53,041    $ 137,433

Construction Loan Commitments

     13,893      13,893      —        —        —  

Purchase Options on Synthetic Leases

     85,000      —        25,000      —        60,000

Operating Leases

     1,060,336      49,396      287,463      208,108      515,369
    

  

  

  

  

Total Off-Balance Sheet Arrangements

   $ 1,449,050    $ 82,361    $ 392,738    $ 261,149    $ 712,802
    

  

  

  

  

 

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, intends to vigorously defend the action and presently has moved for dismissal. 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.

 

NEW 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 an 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 sale-leaseback transactions. Certain

 

25


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 second quarter of fiscal 2004. SFAS No. 145 did not have an 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, FASB Staff Position No. 46-6 delayed the consolidation requirements until annual or interim periods ending after December 15, 2003. The company does not expect FIN No. 46 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 was effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. SFAS No. 149 did not have an 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 was effective for financial instruments entered into or modified after May 31, 2003 and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. SFAS No. 150 did not have an impact on the company’s consolidated financial statements.

 

In December 2003, the FASB issued revisions to SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits”. These revisions require changes to existing disclosures as well as new disclosures related to pension and other postretirement benefit plans. The revisions to SFAS No. 132 are effective for fiscal years ending after December 15, 2003 and will be incorporated in the company’s year-end consolidated financial statements for fiscal 2004.

 

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 was effective for all revenue arrangements entered into in fiscal periods beginning after June 15, 2003. EITF Issue No. 00-21 did not have an impact on the company’s consolidated financial statements.

 

EITF Issue No. 01-8, “Determining Whether an Arrangement Contains a Lease”, determines whether an arrangement conveying the right to use property, plant and equipment meets the definition of a lease within the scope of SFAS 13, “Accounting for Leases”. EITF Issue No. 01-8 was effective the first interim period beginning after May 28, 2003. EITF Issue No. 01-8 did not have an impact on the company’s consolidated financial statements.

 

EITF Issue No. 03-1, “The Meaning of Other-Than Temporary Impairment and Its Application to Certain Investments”, addresses both qualitative and quantitative disclosures. These disclosures are required for marketable equity and debt securities accounted for under FASB Statements No. 115, “Accounting for Certain Investments in Debt and Equity Securities”. The disclosure requirements are effective for fiscal years ending after December 15, 2003. EITF Issue No. 03-1 will not have an impact on the company’s consolidated financial statements.

 

EITF Issue No. 03-10, “Application of EITF 02-16, ‘Accounting by a Customer (Including a Reseller) for Certain Consideration Received from a Vendor,’ by Resellers to Sales Incentives Offered to Consumers by Manufacturers”, requires that when specified criteria are met, a retailer accepting manufacturers’ coupons should reflect the value of the coupon as revenue and not as a reduction in cost of sales. EITF Issue No. 03-10 is effective for the first interim period beginning after November 25, 2003. EITF Issue No. 03-10 will not have an impact on the company’s consolidated financial statements.

 

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

 

26


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 successfully integrate acquired entities,

 

  economic conditions that affect the food industry, such as food price deflation and softness in local and national economies, as well as general economic, political conditions or health concerns that affect consumer buying habits generally,

 

  wartime activities, threats, and acts of terror directed at the food industry that affect consumer behavior, as well as related security costs,

 

  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,

 

  our ability to manage increases in health care and pension costs,

 

  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 99.1 to this report. Any forward-looking statement speaks only as of the date on which such statement is made, and except as required by federal securities laws, 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. See our Annual Report on Form 10-K for a discussion of market risk for the company.

 

ITEM 4. CONTROLS AND PROCEDURES

 

(a) Evaluation of disclosure controls and procedures.

 

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 (as defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934 (the “Exchange Act”)) as of November 29, 2003, the end of the period covered by this report. 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 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.

 

During the fiscal quarter ended November 29, 2003, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that has materially affected or is reasonably likely to materially affect, our internal control over financial reporting.

 

27


PART II – OTHER INFORMATION

 

Item 1. Legal Proceedings

 

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, intends to vigorously defend the action and presently has moved for dismissal. 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.

 

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.
(31.1 )   Chief Executive Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2 )   Chief Financial Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1 )   Chief Executive Officer 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.
(32.2 )   Chief Financial Officer 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.
(99.1 )   Cautionary Statements Pursuant to the Securities Litigation Reform Act.

 

Reports on Form 8-K:

 

(i) On October 8, 2003, the Registrant furnished a report on Form 8-K reporting under Item 12 “Results of Operations and Financial Condition”, the results for its quarterly fiscal period ended September 6, 2003.

 

28


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: January 13, 2004

 

By:

 

/s/ PAMELA K. KNOUS


       

Pamela K. Knous

Executive Vice President, Chief Financial Officer

(principal financial and accounting officer)

 

29


EXHIBIT INDEX

 

Exhibit


    
(12)    Ratio of Earnings to Fixed Charges.
(31.1)    Chief Executive Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(31.2)    Chief Financial Officer Certification of Periodic Financial Report pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
(32.1)    Chief Executive Officer 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.
(32.2)    Chief Financial Officer 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.
(99.1)    Cautionary Statements Pursuant to the Securities Litigation Reform Act.

 

 

 

30