Exhibit 13
- -----------------------------------
financial review
RESULTS OF OPERATIONS
In fiscal 1998, the company recorded record sales of $17.2 billion, net earnings
of $230.8 million, basic earnings per share of $3.68 and diluted earnings per
share of $3.65. After excluding the non-recurring gain from the sale of the
investment in ShopKo Stores, Inc. ("ShopKo"), net earnings were $177.1 million,
basic earnings per share were $2.83 and diluted earnings per share were $2.80.
Fiscal 1997 sales were $16.6 billion, basic earnings per share were $2.60 and
diluted earnings per share were $2.59. The following table sets forth items
from the company's Consolidated Statements of Earnings:
Fiscal Year Ended
- -----------------------------------------------------------------------------------------------------------
(In millions) February 28,1998 February 22,1997 February 24,1996
(53 weeks) (52 weeks) (52 weeks)
- -----------------------------------------------------------------------------------------------------------
Net sales $17,201.4 100.0% $16,551.9 100.0% $16,486.3 100.0%
Cost of sales 15,430.7 89.7 14,885.3 89.9 14,906.6 90.4
Selling and administrative
expenses 1,365.3 7.9 1,286.1 7.8 1,213.0 7.4
Interest expense 133.6 .8 136.8 .8 140.1 .9
Interest income 19.6 (.1) 16.1 (.1) 23.5 (.2)
Equity in earnings and gain on
sale of ShopKo 93.4 (.5) 20.7 (.1) 17.6 (.1)
---------------------------------------------------------------------------
Earnings before income taxes 384.8 2.2 280.5 1.7 267.7 1.6
Income taxes 154.0 .9 105.5 .6 101.3 .6
---------------------------------------------------------------------------
Net earnings $ 230.8 1.3% $ 175.0 1.1% $ 166.4 1.0%
===========================================================================
Comparison Of Fifty-three Weeks Ended February 28, 1998 ("1998") With Fifty-two
Weeks Ended February 22, 1997 ("1997")
Net Sales
Net sales for 1998 increased 3.9 percent over 1997. On a comparable 52-week
basis, sales increased 2.1 percent, positively impacted by a 2.1 percent
increase in food distribution sales and a 1.8 percent increase in retail food
sales.
Food distribution sales increased in 1998 due to the addition of new customers,
despite the 1997 discontinuance of service to a major customer in the Southeast,
continuing competitive market conditions and low food price inflation. Retail
food sales were favorable in 1998 compared to 1997, primarily due to the
addition of new stores, partially offset by the closing or sale of
underperforming stores and a slight decrease in same-store sales of .4 percent,
reflecting competitive market conditions.
Gross Profit
Gross profit as a percentage of net sales increased to 10.3 percent in 1998,
compared with 10.1 percent in 1997. Food distribution gross profit margin for
1998 was comparable to fiscal 1997. Retail food gross profit margin increased
due to continued focus on merchandising activities.
Selling And Administrative
Expenses
Selling and administrative expenses were 7.9 percent of net sales in 1998,
compared with 7.8 percent in 1997. Food distribution expenses continued to be
impacted by technology related spending in support of new systems development as
well as to make systems year 2000 compliant. Retail food expenses in 1998 were
impacted by unfavorable wage expenses in comparison to 1997 related to both
increased wage rates and expansion of perishable departments.
14
- -----------------------------------
financial review
Operating Earnings
The company's pre-tax operating earnings (earnings before interest, equity in
earnings and gain on sale of ShopKo, and taxes) increased to $405.4 million in
1998, compared with $380.5 million in 1997. Operating earnings before
depreciation and amortization increased to $635.5 million in 1998, compared with
$612.6 million in 1997, a 3.7% increase. Food distribution operating earnings
increased 2.1 percent in 1998 to $317.1 million, from $310.5 million in 1997.
The increase was due to the favorable sales and better buying, offset somewhat
by increased wages, information technology costs and LIFO. Retail food operating
earnings increased 25.5 percent to $117.6 million in 1998, from $93.7 million in
1997. The increase in retail operating earnings was due to increased sales,
merchandising activities and benefits derived from the closing or sale of
underperforming stores, offset somewhat by increased labor costs.
Interest Expense And Income
Interest expense decreased to $133.6 million in 1998, compared with $136.8
million in 1997, reflecting a reduction in debt levels. Interest income
increased to $19.6 million in 1998, compared with $16.1 million in 1997,
primarily due to increased retailer financing.
Equity In Earnings And
Gain On Sale Of ShopKo
On July 2, 1997, the company exited its 46 percent investment in ShopKo through
two simultaneous and cross-conditional transactions: selling 8,174,387 shares
back to ShopKo for an aggregate price of $150 million and a secondary public
offering of all remaining shares. The transactions resulted in proceeds of $305
million and a pretax gain of $90.0 million. Equity in earnings for 1998 were
$3.3 million or $.05 per share (basic and diluted) compared with $20.7 million
or $.31 per share (basic and diluted) in fiscal 1997.
Income Taxes
The effective tax rate increased to 40.0 percent in fiscal 1998, compared with
37.6 percent in 1997, due to the elimination of ShopKo earnings.
Net Earnings
Net earnings were $230.8 million or $3.68 per share - basic ($3.65 per share -
diluted) in 1998 compared with 1997 net earnings of $175.0 million or $2.60 per
share - basic ($2.59 per share - diluted). Excluding the gain on the sale of
ShopKo, net earnings were $177.1 million or $2.83 per share - basic ($2.80 per
share - diluted). Weighted average shares - diluted declined to 63.3 million in
1998 compared with 67.5 million for 1997, primarily due to the repurchase of 6.9
million shares in the second quarter of 1998, with proceeds from the ShopKo
transaction.
Comparison Of Fifty-two Weeks Ended February 22, 1997 ("1997") With Fifty-two
Weeks Ended February 24, 1996 ("1996"):
Net Sales
Net sales increased .4 percent in 1997. The sales increase was driven by an
increase in retail food sales of 7.0 percent, offset partially by a decrease in
food distribution sales of 1.0 percent.
Food distribution sales decreased in 1997, due to competitive market conditions
at the wholesale and retail level, the planned discontinuance of service to a
major customer in the Southeast and the expected liquidation of a major customer
at the end of 1996 in the Northeast. This effect was partially mitigated by the
addition of new retail customers
15
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financial review
and food inflation of about one percent. Retail food sales increased in 1997,
primarily due to the addition of stores. Same-store sales increased 2.2 percent.
The retail food sales increase was partially offset by the closing of
underperforming retail stores pursuant to the restructuring program.
Gross Profit
Gross profit as a percentage of net sales increased to 10.1 percent in 1997,
compared with 9.6 percent in 1996. The increase was due principally to the
growing proportion within the company's total sales mix of the higher-margined
retail food business, which represented 29 percent of total sales in 1997,
compared with 27 percent in 1996. Food distribution gross profit margin
increased slightly due to favorable LIFO expense and certain merchandising
initiatives. The retail food gross profit margin increased as a result of
merchandising activities, changes to product mix and the closing of
underperforming stores.
Selling And Administrative
Expenses
Selling and administrative expenses were 7.8 percent of net sales in 1997,
compared with 7.4 percent in 1996. The higher percentage was primarily due to
the increased proportion of the company's retail food segment which operates at
a higher selling and administrative expense percentage than the food
distribution segment, and the increase in direct and indirect costs related to
the transformation of the distribution operations. Food distribution selling and
administrative expenses as a percent of net sales were higher due to increased
technology related spending in support of the development of market driving
services, as well as costs related to opening the Southeast regional
distribution facility and the impact of fixed expenses as a percent of slightly
decreased sales. Retail food selling and administrative expenses in 1997 as a
percent of net sales were comparable to 1996.
Operating Earnings
The company's pre-tax operating earnings (earnings before interest, equity in
earnings of ShopKo and taxes) were $380.5 million in 1997, compared with $366.8
million in 1996. Operating earnings before depreciation and amortization
increased to $612.6 million in 1997, compared with $585.8 million in 1996. Food
distribution operating earnings were $310.5 million in 1997, compared with
$334.7 million in 1996. Operating earnings in 1997 were negatively impacted by
higher technology related expenses and the general softness in sales. Retail
food operating earnings were $93.7 million in 1997, compared with $57.2 million
in 1996. The increase in 1997 resulted from higher sales and improved gross
margins resulting from merchandising efforts and changes to product mix.
Interest Expense And Income
Interest expense of $136.8 million was incurred in 1997 compared with $140.2
million for 1996. The decrease was primarily due to slightly lower short-term
interest rates. Interest income decreased to $16.1 million in 1997, compared
with $23.5 million in 1996. Interest income decreased due to the reduction in
notes receivable as a result of the sale of notes in the ordinary course of
business at the end of 1996 and in the fourth quarter of 1997.
Equity In Earnings Of ShopKo
The company's ownership in ShopKo in 1997 was 46 percent and was accounted for
under the equity method. Equity in earnings of ShopKo was
16
- -------------------------
financial review
$20.7 million compared with $17.6 million in 1996. The net earnings increase
resulted from increased sales in ShopKo's ProVantage managed health care
operations and comparable store sales increases of 6 percent.
Income Taxes
The effective tax rate of 37.6 percent for 1997 was comparable with the 1996
effective tax rate of 37.8 percent.
Net Earnings
Net earnings for 1997 were $175.0 million, compared with net earnings for 1996
of $166.4 million. Net earnings were positively impacted by the significant
improvement in the company's retail food operations, which more than offset
increased technology related spending in support of new systems.
LIQUIDITY
Cash provided by operating activities was $393 million in 1998, compared with
$329 million in 1997 and $422 million in 1996. Cash provided from operations in
1998 was primarily used to finance capital expenditures of $230.9 million, repay
long-term debt of $84.6 million and pay dividends of $64.9 million.
On July 2, 1997, the company exited its 46 percent investment in ShopKo which
resulted in proceeds of $305 million. The Board of Directors approved an
additional treasury stock purchase program authorizing the company to repurchase
up to 8.5 million shares with proceeds received from the ShopKo sale. In fiscal
1998, the company repurchased 6.9 million shares at a cost of $266.7 million
under the 1997 program and 1.7 million shares at a cost of $71.7 million under
the 1996 program. In fiscal 1997, the company repurchased 746,000 shares at a
cost of $21.6 million.
Internally-generated funds from operations were the major source of liquidity in
1998. Management expects that the company will continue to replenish operating
assets and reduce aggregate debt with internally-generated funds. The company
has adequate short-term and long-term financing capabilities to fund
acquisitions as the opportunities arise.
SUPERVALU will continue to use short-term and long-term debt as a supplement to
internally generated funds to finance its activities. The company has a $400
million "shelf registration' in effect, pursuant to which the company could
issue $242.5 million of additional debt securities as of the end of fiscal 1998.
A $400 million revolving credit agreement, with rates tied to LIBOR plus .180 to
.275 percent, also is in place and expires in October 2002. The revolving credit
agreement is available for general corporate purposes and to support the
company's commercial paper program. There were no drawings on the revolving
credit agreement during fiscal 1998. Total commercial paper outstanding as of
the the end of fiscal 1998 was $223 million of which $100 million has been
classified as long-term debt as the company has the ability and intent to renew
these obligations past 1999 and into future periods. Maturities of debt issued
will depend on management's views with respect to the relative attractiveness of
interest rates at the time of issuance.
SUPERVALU's capital budget for fiscal 1999, which includes leases, is $370
million compared with $280 million incurred during 1998. The capital budget
17
- --------------------------
financial review
anticipates cash spending of $336 million plus $34 million of capital leases.
Approximately $187 million of the fiscal 1999 capital budget is slated for use
in the company's food distribution activities, including facilities, information
technology and normal replacement spending. The retail food capital budget of
$133 million covers corporately-owned retail food businesses. The budget
provides for approximately 39 new corporate stores including eight new price
superstores and 30 limited assortment stores and also includes capital for
remodeling of existing stores. The balance of the fiscal 1999 capital budget is
dedicated to the corporate area and will be utilized principally for systems-
related items.
In addition, the company is prepared to provide up to $150 million to support
store development and financing for the company's independent retailers. Certain
retailer financing activities do not require new cash outlays because they are
leases or guarantees.
These capital spending activities are not expected to result in an increase in
the company's debt-to-total-capital ratio as internal cash flow is expected to
substantially support spending requirements. Because of the opportunistic nature
of acquisitions, no amount for acquisition activity is included in the capital
budget. The capital budget does include amounts for projects which are subject
to change and for which firm commitments have not been made.
Dividends
Cash dividends declared during 1998 totaled $1.03 per common share, an increase
of 3.5 percent over the 99 1/2 cents per share declared in 1997. This was the
61st year of consecutive cash dividends and the 26th year of successive annual
increases. The company's dividend policy will continue to emphasize a high level
of earnings retention for growth.
Common Stock Price
SUPERVALU's common stock is listed on the New York Stock Exchange under the
symbol SVU. At year-end, there were 7,161 stockholders of record compared with
7,655 at the end of fiscal 1997.
Common Stock Dividends Per
Price Range Share
Fiscal Quarter 1998 1997 1998 1997
- --------------------------------------------------------------------------
High Low High Low
- --------------------------------------------------------------------------
First $36 5/8 $28 5/8 $32 5/8 $30 5/8 $.250 $.245
Second 41 5/8 34 1/2 31 5/8 27 5/8 .260 .250
Third 41 3/4 34 7/8 30 3/8 27 1/4 .260 .250
Fourth 48 9/16 39 9/16 32 3/8 27 3/4 .260 .250
- --------------------------------------------------------------------------
Year $48 9/16 $28 5/8 $32 5/8 $27 1/4 $1.030 $.995
- --------------------------------------------------------------------------
Dividend payment dates are on or about the 15th day of March, June, September
and December, subject to Board of Directors approval.
New Accounting Standards
Earnings Per Share
Statement of Financial Accounting Standards No. 128, "Earnings per Share" was
issued in February 1997 and was adopted in fiscal 1998.
Reporting Comprehensive Income
Statement of Financial Accounting Standard No. 130, "Reporting Comprehensive
Income" was issued in June 1997. This statement establishes standards for the
reporting and display of
18
- ----------------------------
financial review
comprehensive income in the consolidated financial statements. The provisions of
the statement are effective for fiscal 1999.
Disclosures About Segments of
an Enterprise
Statement of Financial Accounting Standard No. 131, "Disclosures About Segments
of an Enterprise and Related Information" was issued in June 1997. This
statement establishes standards for the reporting of information concerning
operating segments in the consolidated financial statements. The provisions of
the statement are effective for fiscal 1999.
Pensions And Other
Postretirement Benefits
Statement of Financial Accounting Standard No. 132, "Employer's Disclosures
About Pensions and Other Postretirement Benefits" was issued in February 1998.
This statement establishes standards for the reporting of information concerning
pensions and other postretirement benefits. The provisions of this statement are
effective for fiscal 1999.
The new accounting standards above that are effective for fiscal 1999 will be
adopted in fiscal 1999 and are not expected to have a material effect on the
company's consolidated financial position or results of operations.
Year 2000
The company has established processes for evaluating and managing the risks and
costs associated with the year 2000 issue and is remediating its computer
applications and business processes to provide for their continued
functionality. The company has initiated formal communications with significant
suppliers and large customers to determine the extent to which the company is
vulnerable to those third parties' failure to address their own year 2000
issues. Failure of the company's suppliers or its customers to become year 2000
compliant may have a material adverse impact on the company's operations.
The company expects to complete the majority of the project in the spring of
1999. The total estimated cost of the project, which began in fiscal 1997, is
estimated at approximately $26 million, excluding the cost of new systems which
will be capitalized. The company has delayed other non-critical systems
development activities and expects that fiscal 1999 information technology
expenses will not differ significantly from the fiscal 1998 level.
Cautionary Statements For Purposes Of The Safe Harbor Provisions Of The Private
Securities Litigation Reform Act Of 1995
The information in this Annual Report includes forward-looking statements.
Important risks and uncertainties that could cause actual results to differ
materially from those discussed in such forward looking statements are detailed
in Exhibit 99.1 to the company's Annual Report on Form 10-K, for the Year Ended
February 28, 1998; other risks or uncertainties may be detailed from time to
time in the company's future Securities and Exchange Commission filings.
19
- --------------------------------------------------
ten year financial and operating summary
1998 (b) 1997 1996 1995 (c)
- -----------------------------------------------------------------------------------------------------------------------------
STATEMENT OF EARNINGS DATA (a)
Net sales $17,201,378 $16,551,902 $16,486,321 $16,563,772
Cost of sales 15,430,642 14,885,249 14,906,602 15,040,117
Selling and administrative expense 1,365,327 1,286,121 1,212,967 1,169,843
Restructuring and other charges -- -- -- 244,000
Interest, net 113,993 120,695 116,678 111,271
Equity in earnings and gain on sale of ShopKo 93,364 20,675 17,618 17,384
Earnings before taxes and accounting change 384,780 280,512 267,692 15,925
Provision for income taxes 154,023 105,468 101,259 (27,409)
Net earnings 230,757 175,044 166,433 43,334
Earnings per common share before accounting change-basic 3.68 2.60 2.44 .61
Earnings per common share before accounting change-diluted 3.65 2.59 2.43 .61
Net earnings per common share-basic 3.68 2.60 2.44 .61
Net earnings per common share-diluted 3.65 2.59 2.43 .61
-------------------------------------------------------------
BALANCE SHEET DATA (a)
Inventories (FIFO) $ 1,247,429 $ 1,221,344 $ 1,158,028 $ 1,230,017
Working capital (e) 286,800 361,260 355,124 319,429
Net property, plant and equipment 1,589,601 1,648,524 1,600,166 1,571,298
Total assets 4,093,010 4,283,326 4,183,503 4,305,149
Long-term debt (f) 1,260,728 1,420,591 1,445,562 1,459,766
Stockholders' equity 1,201,905 1,307,423 1,216,176 1,193,222
-------------------------------------------------------------
OTHER STATISTICS (a)
Earnings before accounting change as a percent of net sales 1.34% 1.06% 1.01% .26%
Return on average stockholders' equity 18.49% 13.89% 13.96% 3.46%
Book value per common share $ 19.87 $ 19.46 $ 17.94 $ 16.92
Current ratio (e) 1.20:1 1.26:1 1.27:1 1.22:1
Debt to capital ratio 57% 56% 57% 59%
Dividends declared per common share $ 1.03 $ .99 1/2 $ .97 $ .92 1/2
Weighted average common shares outstanding-basic 62,663 67,255 68,277 71,388
Weighted average common shares outstanding-diluted 63,275 67,477 68,492 71,528
Depreciation and amortization $ 230,082 $ 232,071 $ 219,084 $ 198,718
Capital expenditures, excluding retailer financing $ 279,768 $ 285,939 $ 271,456 $ 319,560
=============================================================
Notes:
(a) Amounts for all years prior to 1992 have been restated to reflect the
company's ownership percentage in ShopKo under the equity method of
accounting because of the sale of a 54 percent interest in ShopKo,
effective October 16, 1991. Fiscal 1998 and Fiscal 1992 contain 53 weeks;
all other years cover 52 weeks. Dollars in thousands except per share and
percentage data.
(b) Net earnings include a gain on the sale of ShopKo of $53.7 million ($.85
per share-diluted). All statistics include this transaction.
(c) Net earnings were reduced by restructuring and other charges of $159.4
million ($2.23 per share-diluted). The provision for income taxes includes
a reversal of $40.8 million ($.57 per share-diluted) of deferred taxes in
1995 related to the partial disposition of ShopKo in 1992. The 1995 ratios
were calculated including the restructuring and other charges and including
the reversal of $40.8 million of deferred taxes related to the partial
disposition of ShopKo. The ratios for earnings before accounting change as
a percent of net sales and the return on average stockholders' equity
would have been .98 and 12.95 percent, respectively, if the restructuring
and other charges and the reversal of $40.8 million of deferred taxes had
been excluded.
(d) The cumulative effect of adopting Statement of Financial Accounting
Standards No. 106, "Employers' Accounting for Postretirement Benefits
Other Than Pensions," resulted in a decrease in net earnings of $13.3
million ($.18 per share-diluted). A $51.3 million after-tax gain on the
sale of a 54 percent interest in ShopKo was included in fiscal 1992 net
earnings ($.68 per share-diluted). All statistics include the results of
both transactions.
(e) Working capital and current ratio are calculated after adding back the LIFO
reserve.
(f) Total long-term debt includes long-term debt and long-term obligations
under capital leases.
20
1994 1993 1992 (d) 1991 1990 1989
- ---------------------------------------------------------------------------------------------------
$15,936,925 $12,568,000 $10,632,301 $10,104,899 $9,734,811 $9,061,176
14,523,434 11,531,394 9,807,633 9,360,886 9,043,953 8,429,692
1,044,433 746,857 583,789 531,972 484,586 433,177
-- -- -- -- -- --
89,767 54,203 34,320 31,441 33,104 34,532
14,789 23,072 116,281 45,080 42,562 36,943
294,080 258,618 322,840 225,680 215,730 200,718
108,827 94,092 115,175 70,544 67,984 63,250
185,253 164,526 194,377 155,136 147,746 137,468
2.58 2.31 2.78 2.06 1.97 1.84
2.56 2.30 2.77 2.06 1.96 1.83
2.58 2.31 2.60 2.06 1.97 1.84
2.56 2.30 2.59 2.06 1.96 1.83
- ---------------------------------------------------------------------------------------------------
$ 1,227,170 $ 1,247,337 $ 862,621 $ 785,395 $ 726,194 $ 688,947
452,121 361,093 534,182 196,217 188,139 165,887
1,410,123 1,384,241 879,186 789,443 701,162 666,508
4,042,351 4,064,189 2,484,300 2,401,357 2,239,900 2,116,202
1,262,995 1,347,386 608,241 567,444 549,694 557,828
1,275,458 1,134,820 1,030,981 978,678 869,891 763,706
- ---------------------------------------------------------------------------------------------------
1.16% 1.31% 1.95% 1.54% 1.52% 1.52%
15.40% 15.32% 20.17% 16.82% 18.12% 19.31%
$ 17.62 $ 15.84 $ 14.35 $ 13.01 $ 11.59 $ 10.20
1.37:1 1.27:1 1.72:1 1.24:1 1.25:1 1.22:1
53% 59% 43% 46% 46% 46%
$ .85 1/2 $ .76 1/2 $ .70 1/2 $ .64 1/2 $ .58 1/2 $ .48 1/2
71,817 71,341 74,700 75,165 74,972 74,785
72,240 71,608 74,947 75,390 75,336 75,092
$ 186,261 $ 140,790 $ 111,488 $ 105,582 $ 95,593 $ 86,944
$ 239,602 $ 164,728 $ 175,624 $ 203,199 $ 142,899 $ 193,218
===================================================================================================
21
- --------------------------------------------------------------------------
consolidated composition of net sales and operating earnings
(in thousands, except percent data)
The following table sets forth, for each of the last five fiscal years, the
composition of the company's net sales and operating earnings.
1998 1997 1996 1995 1994
..................................................................................................................
NET SALES
Food distribution $ 15,108,779 $14,545,266 $14,685,899 $14,820,009 $14,361,255
87.8% 87.9% 89.1% 89.5% 90.1%
Retail food 4,877,290 4,719,079 4,412,203 4,219,691 3,696,145
28.4% 28.5% 26.7% 25.4% 23.2%
Less: Eliminations (2,784,691) (2,712,443) (2,611,781) (2,475,928) (2,120,475)
(16.2)% (16.4)% (15.8)% (14.9)% (13.3)%
Total net sales $ 17,201,378 $16,551,902 $16,486,321 $16,563,772 $15,936,925
100.0% 100.0% 100.0% 100.0% 100.0%
................................................................................
OPERATING EARNINGS
Food distribution $ 317,068 $ 310,455 $ 334,673 $ 257,495 $ 365,527
Retail food 117,576 93,662 57,176 (104,338) 31,366
--------------------------------------------------------------------------------
Total operating earnings 434,644 404,117 391,849 153,157 396,893
Interest expense, net (113,993) (120,695) (116,678) (111,271) (89,767)
General corporate expenses (29,235) (23,585) (25,097) (43,345) (27,835)
--------------------------------------------------------------------------------
Earnings before equity
in earnings and gain on
sale of ShopKo and
income taxes 291,416 259,837 250,074 (1,459) 279,291
Equity in earnings and gain on
sale of ShopKo 93,364 20,675 17,618 17,384 14,789
--------------------------------------------------------------------------------
Earnings before income taxes $ 384,780 $ 280,512 $ 267,692 $ 15,925 $ 294,080
--------------------------------------------------------------------------------
IDENTIFIABLE ASSETS
Food distribution $ 2,825,762 $ 2,746,284 $ 2,684,088 $ 2,843,862 $ 2,644,670
Retail food 1,109,296 1,166,870 1,126,197 1,121,596 948,551
Corporate 157,952 370,172 373,218 339,691 449,130
--------------------------------------------------------------------------------
Total $ 4,093,010 $ 4,283,326 $ 4,183,503 $ 4,305,149 $ 4,042,351
................................................................................
DEPRECIATION AND
AMORTIZATION
Food distribution $ 118,556 $ 122,778 $ 115,507 $ 107,471 $ 105,763
Retail food 90,704 90,389 85,010 76,145 64,924
Corporate 20,822 18,904 18,567 15,102 15,574
--------------------------------------------------------------------------------
Total $ 230,082 $ 232,071 $ 219,084 $ 198,718 $ 186,261
................................................................................
CAPITAL EXPENDITURES
Food distribution $ 166,066 $ 139,779 $ 102,435 $ 159,838 $ 131,322
Retail food 92,651 120,881 137,914 119,605 69,939
Corporate 21,051 25,279 31,107 40,117 38,341
................................................................................
Total $ 279,768 $ 285,939 $ 271,456 $ 319,560 $ 239,602
================================================================================
The company's food distribution operations include sales to independently owned
and operated food stores, sales to food stores owned by the company, and the
operations of several allied service operations throughout the United States.
Retail food operations include sales by food stores owned by the company, other
than transition retail food stores. Eliminations include food distribution sales
to food stores included in the retail food segment.
Industry segment operating earnings were computed as total revenue less
associated operating expenses, which exclude general corporate expenses, net
interest expense and income taxes.
Identifiable assets are those assets of the company directly associated with the
industry segments.
Operating earnings in 1995 for food distribution and retail food were reduced by
$93.1 and $138.4 million, respectively, for restructuring and other charges.
General corporate expenses include $12.6 million for restructuring and other
charges.
See notes following the ten year financial and operating summary and notes to
the consolidated financial statements.
22
- -----------------------------------------------
consolidated statements of earnings
(in thousands, except per share data)
Fiscal Year Ended February 28, February 22, February 24,
1998 1997 1996
(53 Weeks) (52 Weeks) (52 Weeks)
- -------------------------------------------------------------------------------
NET SALES $17,201,378 $16,551,902 $16,486,321
COSTS AND EXPENSES
Cost of sales 15,430,642 14,885,249 14,906,602
Selling and administrative
expenses 1,365,327 1,286,121 1,212,967
Interest
Interest expense 133,619 136,831 140,150
Interest income 19,626 16,136 23,472
-------------------------------------------
Interest expense, net 113,993 120,695 116,678
-------------------------------------------
Total costs and expenses 16,909,962 16,292,065 16,236,247
-------------------------------------------
EARNINGS BEFORE EQUITY IN
EARNINGS AND GAIN ON SALE
OF SHOPKO AND INCOME TAXES 291,416 259,837 250,074
Equity in earnings and gain
on sale of ShopKo 93,364 20,675 17,618
-------------------------------------------
EARNINGS BEFORE INCOME TAXES 384,780 280,512 267,692
PROVISION FOR INCOME TAXES
Current 131,343 77,591 36,692
Deferred 22,680 27,877 64,567
-------------------------------------------
Income tax expense 154,023 105,468 101,259
-------------------------------------------
NET EARNINGS $ 230,757 $ 175,044 $ 166,433
-------------------------------------------
Weighted average number of
common shares outstanding
Basic 62,663 67,255 68,277
Diluted 63,275 67,477 68,492
NET EARNINGS PER COMMON
SHARE-BASIC $ 3.68 $ 2.60 $ 2.44
NET EARNINGS PER COMMON
SHARE-DILUTED $ 3.65 $ 2.59 $ 2.43
============================================
See notes to consolidated financial statements.
23
- -----------------------------------------------------
consolidated balance sheets
(in thousands, except per share data)
February 28, 1998 February 22, 1997
- --------------------------------------------------------------------------------------------------------
Assets
Current Assets
Cash $ 6,100 $ 6,539
Receivables, less allowance for losses of $13,415 in 1998
and $17,806 in 1997 410,741 403,835
Inventories 1,115,529 1,091,805
Other current assets 79,690 98,620
---------- ----------
Total current assets 1,612,060 1,600,799
---------- ----------
Long-term notes receivable 83,401 45,588
Long-term investment in direct financing leases 95,291 84,350
Property, plant and equipment
Land 138,615 140,427
Buildings 929,975 957,815
Property under construction 54,175 28,030
Leasehold improvements 150,745 150,040
Equipment 1,147,626 1,113,486
Assets under capital leases 286,762 298,757
---------- ----------
2,707,898 2,688,555
Less accumulated depreciation and amortization
Owned property, plant and equipment 1,052,521 983,229
Assets under capital leases 65,776 56,802
---------- ----------
Net property, plant and equipment 1,589,601 1,648,524
---------- ----------
Investment in ShopKo -- 209,789
Goodwill 498,438 491,427
Other assets 214,219 202,849
---------- ----------
Total assets $4,093,010 $4,283,326
========== ==========
See notes to consolidated financial statements.
24
- ----------------------------------------------
consolidated balance sheets
(in thousands, except per share data)
February 28, 1998 February 22, 1997
- --------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable $ 149,002 $ 134,272
Accounts payable 924,371 923,958
Accrued vacation, compensation
and benefits 95,129 89,458
Current maturities of long-term debt 156,897 72,905
Current obligations under capital leases 22,697 21,544
Other current liabilities 109,064 126,941
-----------------------------------
TOTAL CURRENT LIABILITIES 1,457,160 1,369,078
-----------------------------------
LONG-TERM DEBT 934,167 1,087,162
LONG-TERM OBLIGATIONS UNDER CAPITAL LEASES 326,561 333,429
DEFERRED INCOME TAXES 41,948 38,054
OTHER LIABILITIES 131,269 148,180
COMMITMENTS AND CONTINGENCIES -- --
STOCKHOLDERS' EQUITY
Preferred stock, no par value: Authorized
1,000 shares
Shares issued and outstanding,
6 in 1998 and 1997 ($1,000
stated value) 5,908 5,908
Common stock, $1.00 par value: Authorized
200,000 shares
Shares issued, 75,335 in 1998 and 1997 75,335 75,335
Capital in excess of par value 16,124 13,296
Retained earnings 1,611,834 1,444,755
Treasury stock, at cost, 15,151 shares in
1998 and 8,453 in 1997 (507,296) (231,871)
-----------------------------------
TOTAL STOCKHOLDERS' EQUITY 1,201,905 1,307,423
-----------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 4,093,010 $ 4,283,326
===================================
25
- ---------------------------------------------------
consolidated statements of stockholder's equity
(in thousands, except per share data)
Capital in
Preferred Common Excess of Treasury Retained
Stock Stock Par Value Stock Earnings Total
- --------------------------------------------------------------------------------------------------------------
Balances at
February 25, 1995 $5,908 $75,335 $12,717 $(137,245) $1,236,507 $1,193,222
Net earnings -- -- -- -- 166,433 166,433
Sales of common stock under
option plans -- -- (84) 3,458 -- 3,374
Cash dividends declared on
common stock--$.970 per share -- -- -- -- (65,998) (65,998)
Compensation under employee
incentive plans -- -- 104 (869) -- (765)
Purchase of shares for treasury -- -- -- (80,090) -- (80,090)
----------------------------------------------------------------------------
Balances at
February 24, 1996 5,908 75,335 12,737 (214,746) 1,336,942 1,216,176
Net earnings -- -- -- -- 175,044 175,044
Sales of common stock under
option plans -- -- 378 3,786 -- 4,164
Cash dividends declared on
common stock--$.995 per share -- -- -- -- (67,231) (67,231)
Compensation under employee
incentive plans -- -- 181 650 -- 831
Purchase of shares for treasury -- -- -- (21,561) -- (21,561)
---------------------------------------------------------------------------
Balances at
February 22, 1997 5,908 75,335 13,296 (231,871) 1,444,755 1,307,423
Net earnings -- -- -- -- 230,757 230,757
Sales of common stock under
option plans -- -- (4,123) 51,623 -- 47,500
Cash dividends declared on
common stock--$1.03 per share -- -- -- -- (63,678) (63,678)
Compensation under employee
incentive plans -- -- 6,951 11,289 -- 18,240
Purchase of shares for treasury -- -- -- (338,337) -- (338,337)
---------------------------------------------------------------------------
Balances at
February 28, 1998 $5,908 $75,335 $16,124 $(507,296) $1,611,834 $1,201,905
===========================================================================
See notes to consolidated financial statements.
26
- -------------------------------------
consolidated statements of cash flows
(in thousands)
Fiscal Year Ended February 28, February 22, February 24,
1998 1997 1996
(53 weeks) (52 weeks) (52 weeks)
----------- ----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES
Net earnings $ 230,757 $ 175,044 $ 166,433
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Equity in earnings and gain on sale of ShopKo (93,364) (20,675) (17,618)
Dividends received from ShopKo -- 4,862 6,482
Depreciation and amortization 230,082 232,071 219,084
Provision for losses on receivables 5,791 8,851 2,269
Deferred income taxes 22,680 27,877 64,567
Other adjustments, net (3,476) (3,100) (12,108)
Changes in assets and liabilities, excluding effect from acquisitions:
Receivables (29,905) (30,509) 17,865
Inventories (23,297) (58,658) 79,880
Accounts payable 38,453 (53,872) (59,218)
Other assets and liabilities 15,214 46,898 (45,938)
----------- ----------- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 392,935 328,789 421,698
----------- ----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of ShopKo stock 305,153 -- --
Additions to long-term notes receivable (77,779) (52,727) (28,394)
Proceeds received on long-term notes receivable 39,966 43,870 64,757
Proceeds from sale of property, plant and equipment 90,169 78,825 94,733
Purchase of property, plant and equipment (230,910) (244,682) (236,248)
Business acquisitions, net of cash acquired (23,523) (4,996) --
Other investing activities (28,742) (16,920) (39,645)
----------- ----------- -----------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 74,334 (196,630) (144,797)
----------- ----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in checks outstanding, net of deposits (23,924) 3,270 3,972
Net issuance (reduction) of short-term notes payable 14,730 (23,755) (68,141)
Proceeds from issuance of long-term debt 15,592 3,193 257,500
Repayment of long-term debt (84,595) (7,612) (308,406)
Reduction of obligations under capital leases (24,055) (21,205) (17,529)
Proceeds from the sale of common stock under option plans 37,736 3,719 2,291
Dividends paid (64,855) (66,884) (66,122)
Payment for purchase of treasury stock (338,337) (21,561) (80,090)
----------- ----------- -----------
NET CASH USED IN FINANCING ACTIVITIES (467,708) (130,835) (276,525)
----------- ----------- -----------
Net increase (decrease) in cash (439) 1,324 376
Cash at beginning of year 6,539 5,215 4,839
----------- ----------- -----------
CASH AT END OF YEAR $ 6,100 $ 6,539 $ 5,215
----------- ----------- -----------
See notes to consolidated financial statements.
27
- ------------------------------------------
notes to consolidated financial statements
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Principles of Consolidation:
The consolidated financial statements include the accounts of the company and
all its subsidiaries. All significant inter-company accounts and transactions
have been eliminated.
Revenue and Income Recognition:
Revenues and income from product sales are recognized upon shipment of the
product for food distribution and at the point of sale for retail food. Revenues
and income from services rendered are recognized immediately after such services
have been provided.
Inventories:
Inventories are stated at the lower of cost or market. Cost is determined
through use of the last-in, first-out method (LIFO) for a major portion of
consolidated inventories: 74.4 percent for fiscal 1998 and 76.3 percent for
fiscal 1997. The first-in, first-out method (FIFO) is used to determine cost
for remaining inventories which are principally perishable products. Market is
replacement value. If the FIFO method had been used to determine cost of
inventories for which the LIFO method is used, the company's inventories would
have been higher by approximately $131.9 million at February 28, 1998 and $129.5
million at February 22, 1997.
Property, Plant and Equipment:
Property, plant and equipment are carried at cost. Depreciation, as well as
amortization of assets under capital leases, is based on the estimated useful
lives of the assets using the straight-line method. Estimated useful lives
generally are 10 to 40 years for buildings and major improvements; 3 to 10
years for equipment; and term of the lease or expected life for leasehold
improvements. Interest on property under construction of $1.9, $2.0 and $2.6
million was capitalized in fiscal years 1998, 1997 and 1996, respectively.
Goodwill:
Amounts paid in excess of the fair value of acquired net assets are amortized on
a straight-line basis. The recoverability of goodwill is assessed by
determining whether the goodwill balance can be recovered through projected cash
flows and operating results over its remaining life. Impairment of the asset
would be recognized when it is probable that such future undiscounted cash flows
will be less than the carrying value of the asset. As of February 28, 1998,
$400 million of goodwill related to the acquisition of Wetterau Incorporated in
fiscal 1993 is being amortized over 40 years. Goodwill related to other
acquisitions is being amortized over 15 to 20 years. Goodwill is shown net of
accumulated amortization of $87.0 and $66.9 million for fiscal 1998 and 1997,
respectively.
Fair Value Disclosures of
Financial Instruments:
The estimated fair value of notes receivable approximates the net carrying value
at February 28, 1998 and February 22, 1997. Notes receivable are valued based
on comparisons to publicly traded debt instruments of similar credit quality.
At February 28, 1998 and February 22, 1997 the estimated fair market value of
the company's long-term debt (including current maturities) exceeded the
carrying value by approximately $42 and $33 million, respectively. The estimated
fair value was based on market quotes where available, discounted cash flows
and market yields for similar instruments. The estimated fair market value of
the company's commercial paper outstanding as of February 28, 1998 and February
22, 1997 approximates the carrying value.
Pre-opening Costs:
Pre-opening costs of retail stores are charged against earnings as incurred.
Net Earnings Per Share:
In fiscal 1998 the company adopted Statement of Financial Accounting Standard
No. 128 (SFAS 128), "Earnings Per Share." SFAS 128 requires the disclosure of
Basic and Diluted Earnings per Share (EPS). Basic EPS is calculated using income
available to common shareholders divided by the weighted average of common
shares outstanding during the year. Diluted EPS is similar to Basic EPS except
that the weighted average of common shares outstanding is increased to include
the number of additional common shares that would have been outstanding if the
dilutive potential common shares, such as options, had been issued. All prior
year EPS have been restated in accordance with the provisions of SFAS 128.
Use of Estimates:
The preparation of consolidated financial statements in conformity with
generally accepted accounting principles 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.
Reclassifications:
Certain reclassifications have been made to prior years' consolidated financial
statements to conform to 1998 presentation. These reclassifications did not
affect results of operations as previously reported.
28
- ------------------------------------------
notes to consolidated financial statements
RESTRUCTURING CHARGES
In fiscal 1995, restructuring charges of $205 million were incurred for the
implementation of the ADVANTAGE project and the sale, closure or restructure of
certain retail businesses.
The company utilized approximately $39.2 million, $44.0 million and $64.0
million of the reserve in 1998, 1997 and 1996 respectively, primarily for
carrying costs and losses on the disposition of property as well as the closing
of underperforming corporate retail stores and employee separation costs.
The remaining $11.6 million of reserve is expected to be utilized for certain
non cancelable lease and other obligations which will extend beyond fiscal
1999.
NOTES RECEIVABLE
Notes receivable arise from fixture and other financing activities related to
independently owned retail food customers. Loans to independent retailers, as
well as trade accounts receivable, are primarily collateralized by the
retailers' inventory, equipment and fixtures. The notes range in length from 1
to 10 years with the average being 7 years, and may be non-interest bearing or
bear interest at rates ranging from 5 to 12 percent.
Included in current receivables are notes receivable due within one year
totaling $16.7 and $6.6 million at February 28, 1998 and February 22, 1997,
respectively.
INVESTMENT IN SHOPKO
On July 2, 1997, the company exited its 46 percent investment in ShopKo, a mass
merchandise discount retailer, through two simultaneous and cross-conditional
transactions: selling 8,174,387 shares back to ShopKo for an aggregate of $150
million and a secondary public offering of 6,557,280 shares. The transactions
resulted in proceeds of $305 million and a net gain of $53.7 million. Proceeds
were primarily used to repurchase shares of SUPERVALU stock.
DEBT
(In thousands, February 28, February 22,
except payment data) 1998 1997
- --------------------------------------------------------------------------------
7.800%-8.875% promissory $ 400,000 $ 400,000
notes semi-annual interest
payments of $16.1 million;
due fiscal 2003 to 2023
7.25% promissory notes 150,000 150,000
semi-annual interest
payments of $5.4 million;
due fiscal 2000
6.09%-6.69% medium-term 132,500 157,500
notes semi-annual interest
payments of $4.2 million;
due fiscal 1999 to 2006
Notes payable 100,000 100,000
Variable rate to 8.25% industrial 88,900 89,369
revenue bonds
9.67% senior subordinated notes 75,000 75,000
due fiscal 1999
8.875% promissory notes 45,000 70,000
semi-annual interest payments
of $2.0 million; due fiscal 2000
6.00%-11.50% promissory notes 24,991 38,482
due fiscal 1999 to 2004
8.28%-9.46% promissory notes
due fiscal 2010 22,894 23,893
9.96% promissory notes
due fiscal 2006 19,643 21,247
8.875% sinking fund debentures 7,110 22,110
due fiscal 2017
Other debt 25,026 12,466
- --------------------------------------------------------------------------------
1,091,064 1,160,067
Less current maturities 156,897 72,905
- --------------------------------------------------------------------------------
Long-term debt $ 934,167 $1,087,162
================================================================================
Aggregate maturities of long-term debt during the next five fiscal years are:
(In thousands)
- --------------------------------------------------------------------------------
1999 $156,897
2000 212,445
2001 78,121
2002 9,395
2003 409,026
================================================================================
The company has a $400 million revolving credit agreement that expires in
October 2002. The company pays an annual facility fee of .09 percent for the
credit agreement. The revolving credit agreement is available for general
corporate purposes and to support the company's commercial paper program. There
were no drawings on the revolving credit agreement during fiscal 1998 and 1997.
As of February 28,
29
- --------------------------------------
notes to consolidated financial statements
1998, and February 22, 1997, total commercial paper outstanding was $223 million
and $213 million, respectively. Of the total commercial paper outstanding
borrowings of $100 million were classified as long-term debt at February 28,
1998 and February 22, 1997, reflecting SUPERVALU's intent and ability, through
the existence of the revolving credit agreement, to refinance these borrowings.
The company also has a $400 million "shelf registration" in effect pursuant to
which the company could issue $242.5 million of additional debt securities. The
debt agreements contain various covenants including maximum permitted leverage.
Under the most restrictive covenants, retained earnings of approximately $134
million were available at year-end for payment of cash dividends.
The weighted-average interest rate on short-term borrowings outstanding was 5.7
percent at February 28, 1998 and 5.5 percent at February 22, 1997.
LEASES
Capital and Operating Leases:
The company leases certain food distribution warehouse and office facilities, as
well as corporate-owned retail food stores. Many of these leases include renewal
options, and to a limited extent, include options to purchase. Amortization of
assets under capital leases was $17.9, $18.2 and $13.8 million in fiscal 1998,
1997 and 1996, respectively.
Future minimum obligations under capital leases in effect at February 28, 1998
are as follows:
(In thousands) Lease
Fiscal Year Obligations
- --------------------------------------------------------------------------------
1999 $ 33,266
2000 32,608
2001 31,699
2002 30,812
2003 30,350
Later 250,928
- --------------------------------------------------------------------------------
Total future minimum obligations 409,663
Less interest 161,322
- --------------------------------------------------------------------------------
Present value of net future minimum obligations 248,341
Less current portion 13,601
- --------------------------------------------------------------------------------
Long-term obligations $234,740
================================================================================
The present values of future minimum obligations shown are calculated based on
interest rates ranging from 6.7 percent to 13.8 percent, with a weighted
average of 9.2 percent, determined to be applicable at the inception of the
leases.
In addition to its capital leases, the company is obligated under operating
leases, primarily for buildings, warehouse and computer equipment. Future
minimum obligations under operating leases in effect at February 28, 1998 are as
follows:
(In thousands) Lease
Fiscal Year Obligations
- --------------------------------------------------------------------------------
1999 $ 60,393
2000 55,213
2001 49,291
2002 40,912
2003 30,935
Later 101,566
- --------------------------------------------------------------------------------
Total future minimum obligations $338,310
================================================================================
Total rent expense, net of sublease income, relating to all operating leases
with terms greater than one year was $40.0, $36.5, and $33.0 million in fiscal
1998, 1997 and 1996, respectively.
Future minimum receivables under operating leases and subleases in effect at
February 28, 1998 are as follows:
(In thousands) Owned Leased
Fiscal Year Property Property Total
- --------------------------------------------------------------------------------
1999 $ 3,140 $17,495 $ 20,635
2000 2,515 15,085 17,600
2001 2,027 12,791 14,818
2002 1,853 9,840 11,693
2003 1,725 7,171 8,896
Later 5,601 21,484 27,085
- --------------------------------------------------------------------------------
Total future
minimum receivables $16,861 $83,866 $100,727
================================================================================
Owned property under operating leases is as follows:
(In Thousands) February 28, February 22,
1998 1997
- --------------------------------------------------------------------------------
Land, buildings and equipment $35,507 $45,513
Less accumulated depreciation 11,428 14,922
- --------------------------------------------------------------------------------
Net land, buildings and equipment $24,079 $30,591
================================================================================
Direct Financing Leases:
Under direct financing capital leases, the company leases buildings on behalf of
independent retailers with terms ranging from 5 to 25 years. Future minimum
rentals to be received under direct financing leases and future minimum
obligations under the related capital leases in effect at February 28, 1998 are
as follows:
30
- --------------------------------------------
notes to consolidated financial statements
(In thousands) Direct Financing Capital Lease
Fiscal Year Lease Receivables Obligations
- --------------------------------------------------------------------------------
1999 $ 18,678 $ 17,357
2000 16,830 15,668
2001 14,855 13,840
2002 13,998 13,069
2003 12,921 12,082
Later 100,012 94,140
- --------------------------------------------------------------------------------
Total minimum lease payments 177,294 166,156
Less unearned income 73,106 --
Less interest -- 65,239
- --------------------------------------------------------------------------------
Present value of net minimum
lease payments 104,188 100,917
Less current portion 8,897 9,096
- --------------------------------------------------------------------------------
Long-term portion $ 95,291 $ 91,821
================================================================================
INCOME TAXES
The provision for income taxes consists of the following:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Current
Federal $109,550 $ 64,033 $ 30,427
State 22,161 13,730 6,548
Tax credits (368) (172) (283)
Deferred
Restructuring charges 15,550 15,599 31,565
Other 7,130 12,278 33,002
- --------------------------------------------------------------------------------
Total provision $154,023 $105,468 $101,259
================================================================================
The difference between the actual tax provision and the tax provision computed
by applying the statutory Federal income tax rate to earnings before taxes is
attributable to the following:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Federal taxes based on
statutory rate $134,680 $ 98,180 $ 93,692
State income taxes,
net of federal
benefit 16,508 12,763 12,180
Benefit of dividends
received deduction (1,342) (7,793) (6,455)
Nondeductible goodwill 6,248 6,277 5,973
Other (2,071) (3,959) (4,131)
- --------------------------------------------------------------------------------
Total provision $154,023 $105,468 $101,259
================================================================================
Temporary differences which give rise to significant portions of the net
deferred tax asset (liability) as of February 28, 1998 and February 22, 1997
are as follows:
(In thousands) 1998 1997
- --------------------------------------------------------------------------------
Deferred tax assets:
Depreciation and amortization $ 20,676 $ 18,442
Restructuring charges 13,089 28,639
Net operating loss from acquired
subsidiaries 19,964 21,968
Valuation allowance (8,000) (8,000)
Provision for obligations to be
settled in future periods 105,193 139,774
Inventory 14,269 14,559
Other 10,566 8,858
- --------------------------------------------------------------------------------
Total deferred tax assets 175,757 224,240
- --------------------------------------------------------------------------------
Deferred tax liabilities:
Depreciation and amortization (85,767) (85,867)
Acquired assets adjustment
to fair values (50,573) (85,699)
Accelerated tax deductions
for benefits to be paid in
future periods (34,860) (30,483)
Other (10,687) (5,641)
- --------------------------------------------------------------------------------
Total deferred tax liabilities (181,887) (207,690)
- --------------------------------------------------------------------------------
Net deferred tax asset (liability) $ (6,130) $ 16,550
================================================================================
The company acquired net operating loss (NOL) carryforwards of $58.1 million for
tax purposes which expire beginning in 2000 and continuing through 2010. A
valuation allowance of $8.0 million relates to NOL carryforwards not expected to
be realized.
Temporary differences attributable to obligations consist primarily of accrued
postretirement benefits, vacation pay and other expenses which are not
deductible for income tax purposes until paid.
SUPPLEMENTAL CASH FLOW INFORMATION
The company's non-cash investing and financing activities were as follows:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Leased asset additions
and related obligation $39,072 $41,257 $37,769
=================================
Acquisitions:
Fair value of
assets acquired 28,114 25,169 --
Cash paid 23,570 5,014 --
- --------------------------------------------------------------------------------
Liabilities assumed $ 4,544 $20,155 --
================================================================================
Payments for interest and income taxes were as follows:
(In thousands) 1998 1997 1996
- --------------------------------------------------------------------------------
Interest (net of
amount capitalized) $134,645 $136,618 $144,599
Income taxes 142,829 58,551 61,994
================================================================================
31
- --------------------------------------------------
notes to consolidated financial statements
STOCK OPTION PLANS
The company's 1997, 1993 and 1983 stock option plans allow the granting of non-
qualified stock options and incentive stock options to key salaried executive
employees at prices not less than 100 percent of fair market value, determined
by averaging the open and close price on the date of grant. In April 1997, the
Board of Directors reserved an additional 2.0 million shares to be issued for
stock option plans. The plans provide that the Board of Directors or the
Executive Personnel and Compensation Committee of the Board may determine at
the time of granting whether each option granted will be a non-qualified or
incentive stock option under the Internal Revenue Code. The term of each option
will be determined by the Board of Directors or the Committee, but shall not be
for more than 10 years from the date of grant. Options may be exercised in
installments or otherwise, as the Board of Directors or the Committee may
determine.
Changes in the options were as follows:
Shares Weighted Average
(In thousands) Price per Share
- -------------------------------------------------------------------------------
Outstanding, February 25, 1995 3,539 $28.79
Granted 1,444 27.36
Exercised (187) 24.30
Canceled and forfeited (195)
- -------------------------------------------------------------------------------
Outstanding, February 24, 1996 4,601 28.43
Granted 705 31.50
Exercised (199) 25.81
Canceled and forfeited (79)
- -------------------------------------------------------------------------------
Outstanding, February 22, 1997 5,028 28.92
Granted 1,398 35.04
Exercised (2,051) 28.01
Canceled and forfeited (186)
- -------------------------------------------------------------------------------
Outstanding, February 28, 1998 4,189 $31.34
===============================================================================
The outstanding stock options at February 28, 1998 have exercise prices ranging
from $20.63 to $48.31 and a weighted average remaining contractual life of 6.7
years. Options to purchase 2.5 and 3.1 million shares were exercisable at
February 28, 1998, and February 22, 1997, respectively. These options have a
weighted average exercise price of $31.35 and $28.54, respectively. Option
shares available for grant were 1.9 and 1.1 million at February 28, 1998, and
February 22, 1997, respectively. The company has reserved 6.1 million shares, in
aggregate, for the plans.
As of February 28, 1998, limited stock appreciation rights have been granted and
are outstanding under the 1978, 1989 and 1993 Stock Appreciation Rights Plans.
Such rights relate to options granted to purchase 2.0 million shares of common
stock and are exercisable only upon a "change of control."
In 1997 the company adopted Statement of Financial Accounting Standards (SFAS)
No. 123, "Accounting for Stock Based Compensation." The company has elected to
continue following the accounting guidance of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees" for measurement and
recognition of stock-based transactions with employees. No compensation cost has
been recognized for options issued under the Stock Option Plans because 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. Had compensation cost for
the stock options issued been determined based on the fair value at the grant
date, consistent with provisions of SFAS No. 123, the company's 1998, 1997 and
1996 net income and earnings per share would have been changed to the pro forma
amounts indicated below:
(In thousands, except per share amounts) 1998 1997 1996
- -------------------------------------------------------------------------------
Net earnings
As reported $230,757 $175,044 $166,433
Pro forma 227,896 173,568 165,565
Earnings per share - diluted
As reported $3.65 $2.59 $2.43
Pro forma 3.60 2.57 2.42
===============================================================================
The fair value of each option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average
assumptions and results:
Assumptions 1998 1997 1996
- -------------------------------------------------------------------------------
Dividend yield 2.69% 3.31% 3.30%
Risk free interest rate 5.62% 6.42% 5.81%
Expected life 5 years 7 years 7 years
Expected volatility 18.21% 13.78% 11.52%
Estimated fair value of options
granted per share $6.78 $6.19 $4.75
===============================================================================
TREASURY STOCK PURCHASE PROGRAM
During fiscal 1996, the company repurchased 2.9 million shares at an average per
share cost of $27.99 under the December 1994 program. In August 1996, the Board
of Directors instituted a treasury stock program under which the company is
authorized to repurchase up to 5.0 million shares for reissuance upon the
exercise of employee stock options and for other compensation programs utilizing
the company's stock. Upon adoption of the August 1996 program, the December 1994
and February 1994 treasury stock programs were rescinded. In fiscal 1997, the
company repurchased .7 million shares at an average cost of $28.91 under the
August 1996 program. In June 1997, the Board of Directors instituted a treasury
stock program under which the company is authorized to repurchase up to 8.5
million shares with proceeds received from the sale of ShopKo. In fiscal 1998,
the company repurchased 6.9 million shares at an average cost of $38.72 under
the June 1997 program and 1.7 million shares at an average cost of $41.01 under
the August 1996 program.
32
- ------------------------------------------
notes to consolidated financial statements
STOCKHOLDER RIGHTS PLAN
The company has a "Preferred Share Purchase Rights Plan," in which the Board of
Directors declared a dividend of one preferred share purchase right for each
outstanding share of common stock. The rights, which expire on April 12, 1999,
are exercisable only under certain conditions, and when exercisable the holder
will be entitled to purchase from the company one one-thousandth of a share of a
new series of preferred stock at a price of $95 per one one-thousandth of a
preferred share, subject to certain adjustments. The rights will become
exercisable 10 days after a person or group acquires beneficial ownership of 20
percent or more of the company's shares, or 10 business days (or such later time
as the Board of Directors may determine) after a person or group announces an
offer the consummation of which would result in such person or group owning 20
percent or more of the shares.
EARNINGS PER SHARE
In fiscal 1998 the company adopted Statement of Financial Accounting Standards
(SFAS) No.128 "Earnings per Share." Earnings per share amounts presented for
1997 and 1996 have been restated for the adoption of SFAS 128. The following
table reflects the calculation of basic and diluted earnings per share:
(In thousands,
except per share amounts) 1998 1997 1996
- --------------------------------------------------------------------------
Earnings per share - basic
Income available to
common shareholders $230,757 $175,044 $166,433
Weighted average
shares outstanding 62,663 67,255 68,277
Earnings per share - basic $3.68 $2.60 $2.44
- --------------------------------------------------------------------------
Earnings per share - diluted
Income available to
common shareholders $230,757 $175,044 $166,433
Weighted average
shares outstanding 62,663 67,255 68,277
Dilutive impact of
options outstanding 612 222 215
-------- -------- --------
Weighted average shares and
potential dilutive shares
outstanding 63,275 67,477 68,492
Earnings per share - diluted $3.65 $2.59 $2.43
==========================================================================
COMMITMENTS AND CONTINGENCIES
The company has guaranteed mortgage loan and other debt obligations of $14.8
million. The company has also guaranteed the leases and fixture financing loans
of various affiliated retailers with a present value of $66.4 and $22.4 million,
respectively. The company has provided limited recourse to purchasers of notes
receivable from affiliated retailers with outstanding note balances of $33.6
million and $51.3 million at fiscal 1998 and 1997, $18.2 million of which the
company has contingent liability at both February 28, 1998 and February 22,
1997, respectively. The company has also entered into note repurchase agreements
with various lenders totaling $7.4 million, under which certain events require
the company to repurchase collateralized loans.
The company is a party to various 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
financial statements.
RETIREMENT PLANS
Substantially all non-union employees of the company and its subsidiaries are
covered by various contributory and non-contributory pension or profit-sharing
plans. The company also participates in several multi-employer plans providing
defined benefits to union employees under the provisions of collective
bargaining agreements.
Contributions under the defined contribution profit sharing plans are determined
at the discretion of the Board of Directors and were $1.9, $2.3 and $5.5 million
for fiscal 1998, 1997 and 1996, respectively.
Amounts charged to union pension expense were $37.4, $34.4 and $33.5 million for
fiscal 1998, 1997 and 1996, respectively.
Benefit calculations for the company's defined benefit pension plan are based on
years of service and the participants' highest compensation during five
consecutive years of employment. Annual payments to the pension trust fund are
determined in compliance with the Employee Retirement Income Security Act
(ERISA). Plan assets are held in trust and invested in separately managed
accounts and publicly traded mutual funds holding both equity and fixed income
securities.
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- -----------------------------------------------
notes to consolidated financial statements
The following table sets forth the company's defined benefit pension plans'
funded status and the amounts recognized in the company's financial statements:
(In thousands) February 28, February 22,
1998 1997
- ----------------------------------------------------------------
Actuarial present value of
accumulated benefit obligation:
Vested $ 197,273 $ 189,623
Total $ 220,528 $ 211,917
- ----------------------------------------------------------------
Projected benefit obligation $ 281,665 $ 273,714
Plan assets at fair value (260,028) (233,410)
- ----------------------------------------------------------------
Projected benefit obligation in
excess of plan assets 21,637 40,304
Unrecognized net loss (17,263) (38,419)
Unrecognized prior service cost 1,043 798
Unrecognized transition obligation (190) (285)
Adjustment to minimum liability 168 22
- ----------------------------------------------------------------
Pension liability $ 5,395 $ 2,420
================================================================
Net pension expense included the following components:
(In thousands) 1998 1997 1996
- ----------------------------------------------------------------
Service cost $12,668 $12,197 $8,742
Interest cost 19,545 18,676 16,815
Actual return on
plan assets (27,477) (27,401) (32,468)
Net amortization
and deferral 5,374 9,878 17,053
- ----------------------------------------------------------------
Net pension expense $10,110 $13,350 $10,142
================================================================
For both fiscal 1998 and 1997, the weighted-average discount rate and rate of
increase in future compensation levels used in determining the actuarial
present value of the projected benefit obligation were 7.5 percent and 4.5
percent, respectively. The expected long-term rate of return on assets was 10
percent. The company computes pension expense using the projected unit credit
actuarial cost method.
The company also maintains non-contributory, unfunded pension plans to provide
certain employees with pension benefits in excess of limits imposed by federal
tax law. The projected benefit obligation of the unfunded plans were $14.9
million and $16.4 million at February 28, 1998 and February 22, 1997,
respectively. The accumulated benefit obligation of these plans totaled $11.1
million and $12.9 million at February 28, 1998 and February 22, 1997,
respectively. Net periodic pension cost was $2.3 million for fiscal 1998 and
$2.2 million for fiscal 1997 and 1996.
Other Postretirement Benefits:
In addition to providing pension benefits, the company provides certain health
care and life insurance benefits for retired employees. Employees become
eligible for these benefits upon meeting certain age and service requirements.
The periodic postretirement benefit cost and accumulated postretirement benefit
obligation are as follows:
(In thousands)
Net periodic postretirement
benefit cost 1998 1997 1996
- ----------------------------------------------------------------
Service cost-benefits
attributed to service
during the period $1,850 $1,813 $1,460
Interest cost on
accumulated
postretirement
benefit obligation 4,182 3,932 3,667
Net amortization
and deferral (262) (261) (335)
- ----------------------------------------------------------------
Net periodic postretirement
benefit cost $5,770 $5,484 $4,792
================================================================
(In thousands)
Accumulated postretirement February 28, February 22,
benefit obligation 1998 1997
- ----------------------------------------------------------------
Retirees $24,539 $22,816
Active plan participants 36,166 34,336
- ----------------------------------------------------------------
Total accumulated postretirement
benefit obligation 60,705 57,152
Unrecognized loss (8,259) (5,949)
Unrecognized prior service cost 1,959 2,221
- ----------------------------------------------------------------
Postretirement benefit liability $54,405 $53,424
================================================================
The weighted average discount rate used in determining the accumulated
postretirement benefit obligation was 7.5 percent in 1998 and 1997.
The assumed health care cost trend rate used in measuring the accumulated
postretirement benefit obligation for both fiscal 1998 and 1997 was 9 percent
decreasing to 6 percent by fiscal 2001. The health care cost trend rate
assumption has a significant effect on the amounts reported. For example, a 1
percent increase in the health care trend rate would increase the accumulated
postretirement benefit obligation by $8.7 million and $8.5 million and the net
periodic cost by $1.0 million and $.9 million for fiscal 1998 and 1997,
respectively.
INDUSTRY SEGMENT INFORMATION
Information concerning the company's continuing operations by business segment
for the years ended February 28, 1998, February 22, 1997 and February 24, 1996,
as required by Statement of Financial Accounting Standards No. 14, "Financial
Reporting for Segments of a Business Enterprise," is contained on page 22.
Statement of Financial Standard No. 131, "Disclosures About Segments of an
Enterprise and Related Information" was issued in June 1997 and will be adopted
in fiscal 1999.
34
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unaudited quarterly financial information
(in thousands, except per share data)
Quarterly unaudited financial information for SUPERVALU INC. and subsidiaries is
as follows:
Fiscal Year (53 Weeks) Ended February 28, 1998
First Second Third Fourth Year
(16 wks) (12 wks) (12 wks) (13 wks) (53 wks)
- -------------------------------------------------------------------------------------------------------------
Net sales $5,033,303 $3,866,012 $4,004,565 $4,297,498 $17,201,378
Gross profit 501,129 393,286 403,792 472,529 1,770,736
Net earnings 49,766 89,115 40,249 51,627 230,757
Net earnings per common
share-basic .74 1.44 .67 .86 3.68
Net earnings per common
share-diluted .74 1.42 .66 .85 3.65
Dividends declared per
common share .250 .260 .260 .260 1.030
Weighted average shares-basic 66,977 62,059 60,211 60,175 62,663
Weighted average shares-diluted 67,244 62,840 60,871 61,013 63,275
=======================================================================
The results for the second quarter, fiscal 1998, include an after-tax gain on
the sale of ShopKo stock of $53.7 million.
Fiscal Year (52 Weeks) Ended February 22, 1997
First Second Third Fourth Year
(16 wks) (12 wks) (12 wks) (12 wks) (52 wks)
- -------------------------------------------------------------------------------------------------------------
Net sales $4,978,761 $3,778,745 $3,904,841 $3,889,555 $16,551,902
Gross profit 479,413 380,240 385,210 421,790 1,666,653
Net earnings 45,982 35,864 40,217 52,981 175,044
Net earnings per common
share-basic .68 .53 .60 .79 2.60
Net earnings per common
share-diluted .68 .53 .60 .79 2.59
Dividends declared per
common share .245 .250 .250 .250 .995
Weighted average shares-basic 67,482 67,466 67,110 66,885 67,255
Weighted average shares-diluted 67,794 67,632 67,284 67,093 67,477
=======================================================================
Changes in and Disagreements With Accountants on Accounting and Financial
Disclosure
On May 8, 1998, the company determined not to re-engage its independent
auditors, Deloitte & Touche LLP ("Deloitte") and appointed KP MG Peat Marwick
LLP ("KPMG") as its new independent auditors, effective immediately. This
determination followed the company's decision to seek proposals from independent
accounting firms, including Deloitte, with respect to the engagement of
independent accountants to audit the company's financial statements for the
fiscal year ending February 27, 1999. The decision not to re-engage Deloitte and
to retain KPMG was approved by the unanimous consent of the company's Board of
Directors upon the recommendation of its Audit Committee.
The reports of Deloitte on the financial statements of the company for its
fiscal years ended February 28, 1998 and February 22, 1997 did not contain any
adverse opinion or disclaimer of opinion and were not qualified or modified as
to uncertainty, audit scope or accounting principles. During the company's two
most recent fiscal years and the subsequent interim period through May 8, 1998
(i) there were no disagreements between the company and Deloitte on any matter
of accounting principles or practices, financial statement disclosure or
auditing scope or procedure which, if not resolved to the satisfaction of
Deloitte, would have caused Deloitte to make reference to the subject matter of
the disagreement in connection with its reports (a "Disagreement") and (ii)
there were no reportable events, as defined in Item 304(a)(1)(v) of Regulation
S-K of the Securities and Exchange Commission (a "Reportable Event").
The company has not, during the company's two most recent fiscal years or
the subsequent interim period through May 8, 1998, consulted with KPMG regarding
(i) the application of accounting principles to a specified transaction, either
completed or proposed, or the type of audit opinion that might be rendered on
the company's financial statements, and either a written report was provided to
the company or oral advice was provided that KPMG concluded was an important
factor considered by the company in reaching a decision as to the accounting,
auditing or financial reporting issue, or (ii) any matter that was either the
subject of a Disagreement with Deloitte or a Reportable Event.
The company reported the change in accountants on Form 8-K on May 12, 1998.
The Form 8-K contained a letter from Deloitte addressed to the Securities and
Exchange Commission stating that it agreed with the comments in the second
paragraph of the above statements and had no basis for agreeing or disagreeing
with the remaining comments in the above statements.
35
- ------------------------------
independent auditors' report
SUPERVALU INC.
Board of Directors and Stockholders
Eden Prairie, Minnesota
We have audited the accompanying consolidated balance sheets of SUPERVALU INC.
and subsidiaries as of February 28, 1998 and February 22, 1997, and the related
statements of earnings, stockholders' equity and cash flows for each of the
three years (52-53 weeks) in the period ended February 28, 1998. These
consolidated financial statements are the responsibility of the company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
SUPERVALU INC. and subsidiaries as of February 28, 1998 and February 22, 1997,
and the results of their operations and their cash flows for each of the three
years in the period ended February 28, 1998, in conformity with generally
accepted accounting principles.
/S/ Deloitte & Touche LLP
Minneapolis, Minnesota
April 6, 1998
- ------------------------------
investor information
Annual Meeting
Stockholders are invited to attend the Annual Stockholders' Meeting, which will
be held on July 1, 1998 at 10:30 a.m., Minneapolis time at the:
Minneapolis Convention Center
1301 Second Avenue South
Minneapolis, Minnesota
Transfer Agent and Registrar
Shareholders may contact the transfer agent with any matter concerning ownership
of SUPERVALU stock.
Norwest Shareowner Services
P.O. Box 64854
St. Paul, Minnesota 55164 0854
800 468 9716
Stock Exchange
The company's common stock is listed on the New York Stock Exchange (trading
symbol SVU).
Stockholders of the Company
As of May 13, 1998 there were approximately 7,062 holders of the company's
stock.
Form 10-K
A copy of the annual report to the Securities and Exchange Commission on Form
10-K may be obtained without charge to stockholders after May 29, 1998.
Requests should be directed to:
Office of the Secretary
SUPERVALU INC.
P.O. Box 990
Minneapolis, Minnesota 55440
Dividend Reinvestment Plan
Stockholders of record may elect to participate in the company's dividend
reinvestment plan. No brokerage commission or service fees are charged on any
shares purchased through either reinvested dividends or optional cash payments.
The plan is administered by Norwest Bank Minnesota, N.A. Requests for a
brochure describing terms and conditions of the plan and an authorization card
should be addressed to the Transfer Agent at the address set forth above.
Investor Relations
Inquiries from securities analysts and institutional investors are welcomed and
should be directed to:
Director, Investor Relations
SUPERVALU INC.
P.O. Box 990
Minneapolis, Minnesota 55440
Phone: 612 828 4540
To be added to the company's investor relations mailing list please call or
write:
SUPERVALU INC.
Communications Dept.
P.O. Box 990
Minneapolis, Minnesota 55440
Phone: 612 828 4599
Fax: 612 828 8955
36