FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period (16 weeks) ended June 19, 1999.
[ ] 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 (I.R.S. Employer Identification No.)
incorporation or organization)
11840 VALLEY VIEW ROAD, EDEN PRAIRIE, MINNESOTA 55344
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (612) 828-4000
Former name, former address and former fiscal year, if changed since last
report:
N/A
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
The number of shares outstanding of each of the issuer's classes of Common Stock
as of July 7, 1999 is as follows:
Title of Each Class Shares Outstanding
------------------- ------------------
Common Shares 119,867,051
PART I - FINANCIAL INFORMATION
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Item 1: Financial Statements
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CONSOLIDATED STATEMENTS OF EARNINGS
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SUPERVALU INC. and Subsidiaries
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(In thousands, except per share data)
First Quarter (16 weeks) ended
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June 19, 1999 % of sales June 20, 1998 % of sales
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Net sales $ 5,289,720 100.00% $ 5,202,576 100.00%
Costs and expenses:
Cost of sales 4,746,897 89.74 4,683,755 90.03
Selling and administrative expenses 413,598 7.81 394,051 7.57
Amortization of goodwill 6,826 0.13 6,322 0.12
Gain on sale 163,662 3.09 - -
Restructuring and other charges 103,596 1.96 - -
Interest
Interest expense 35,570 0.67 38,322 0.74
Interest income 5,325 0.10 6,177 0.12
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Interest expense, net 30,245 0.57 32,145 0.62
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Total costs and expenses 5,137,500 97.12 5,116,273 98.34
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Earnings before income taxes 152,220 2.88 86,303 1.66
Provision for income taxes
Current 134,372 33,288
Deferred (48,873) 1,217
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Income tax expense 85,499 1.62 34,505 0.66
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Net earnings $ 66,721 1.26% $ 51,798 1.00%
=========================================================
Net earnings per common share - diluted $ .55 $ .42
Net earnings per common share - basic $ .56 $ .43
Weighted average number of common
shares outstanding
Diluted 120,769 122,145
Basic 119,631 120,565
Dividends declared per common share $ .1325 $ .1300
All data subject to year-end audit.
See notes to consolidated financial statements.
2
CONSOLIDATED STATEMENTS OF NET SALES AND EARNINGS
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SUPERVALU INC. and Subsidiaries
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(In thousands)
First Quarter (16 weeks) ended
-------------------------------------------
Net sales June 19, 1999 June 20, 1998
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Retail food $ 1,586,673 $ 1,408,603
30.0 % 27.1 %
Food distribution 4,599,215 4,609,097
86.9 % 88.6 %
Sales eliminations (896,168) (815,124)
(16.9)% (15.7)%
-------------------------------------------
Total net sales $ 5,289,720 $ 5,202,576
100.0 % 100.0 %
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Earnings
- -------------------------------------------------------------------------------
Retail food $ 42,115 $ 37,226
Food distribution 90,044 89,990
Gain on sale 163,662 -
Restructuring and other charges (1) (103,596) -
-------------------------------------------
Total operating earnings 192,225 127,216
Interest income 5,325 6,177
Interest expense (35,570) (38,322)
General corporate expenses (9,760) (8,768)
-------------------------------------------
Earnings before income taxes 152,220 86,303
Provision for income taxes (85,499) (34,505)
-------------------------------------------
Net earnings $ 66,721 $ 51,798
================================================================================
All data subject to year-end audit.
See notes to consolidated financial statements.
(1) The company incurred restructuring and other charges for retail food and
food distribution of $19.4 and $84.2 million, respectively.
3
CONDENSED CONSOLIDATED BALANCE SHEETS
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SUPERVALU INC. and Subsidiaries First Quarter as of Fiscal Year End
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(In thousands) June 19, February 27,
Assets 1999 1999
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Current Assets
Cash and cash equivalents $ 7,748 $ 7,608
Marketable securities 206,150 -
Receivables, less allowance for losses of $21,901 at
June 19, 1999 and $18,983 at February 27, 1999 386,717 410,799
Inventories 1,066,622 1,067,837
Other current assets 111,623 96,283
------------------------------
Total current assets 1,778,860 1,582,527
Long-term notes receivable 156,822 161,273
Property, plant and equipment, net 1,657,750 1,699,024
Goodwill 503,936 567,890
Other assets 238,584 255,235
------------------------------
Total assets $4,335,952 $4,265,949
==============================
Liabilities and Stockholders' Equity
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Current Liabilities
Notes payable $ 37,537 $ 89,157
Accounts payable 1,036,103 981,961
Current debt and obligations under capital leases 185,137 232,928
Other current liabilities 289,510 217,861
------------------------------
Total current liabilities 1,548,287 1,521,907
Long-term debt and obligations under capital leases 1,248,264 1,246,269
Other liabilities and deferred income taxes 197,766 192,134
Total stockholders' equity 1,341,635 1,305,639
------------------------------
Total liabilities and stockholders' equity $4,335,952 $4,265,949
==============================
All data subject to year-end audit.
See notes to consolidated financial statements.
4
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
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SUPERVALU INC. and Subsidiaries
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(In thousands, except per share data)
Capital in
Preferred Common Excess of Treasury Retained
Stock Stock Par Value Stock Earnings Total
- ----------------------------------------------------------------------------------------------------------------------
Balances at February 28, 1998 $ 5,908 $150,670 $ 2,927 $(507,296) $1,549,696 $1,201,905
Net earnings - - - - 191,338 191,338
Sales of common stock
under option plans - - (5,902) 35,497 (3,667) 25,928
Cash dividends declared
on common stock -
$.5275 per share - - - - (63,985) (63,985)
Compensation under employee
incentive plans - - 1,057 10,914 - 11,971
Treasury shares exchanged for
acquisition - - 1,918 2,167 - 4,085
Purchase of shares for treasury - - - (65,603) - (65,603)
- ----------------------------------------------------------------------------------------------------------------------
Balances at February 27, 1999 5,908 150,670 - (524,321) 1,673,382 1,305,639
Net earnings - - - - 66,721 66,721
Sales of common stock
under option plans - - - 4,491 (2,330) 2,161
Cash dividends declared
on common stock -
$.1325 per share - - - - (15,800) (15,800)
Compensation under employee
incentive plans - - - 5,297 (592) 4,705
Redemption of preferred stock (5,908) - - - - (5,908)
Purchase of shares for treasury - - - (15,883) - (15,883)
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Balances at June 19, 1999 $ - $150,670 $ - $(530,416) $1,721,381 $1,341,635
======================================================================================================================
All data subject to year-end audit.
See notes to consolidated financial statements.
5
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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SUPERVALU INC. and Subsidiaries
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(In thousands)
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Year-to-date
(16 weeks ended)
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June 19, June 20,
1999 1998
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- --------------------------------------------------------------------------------------------
Net cash provided by operating activities $138,939 $131,011
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Cash flows from investing activities
Additions to long-term notes receivable (15,365) (11,252)
Proceeds received on long-term notes receivable 6,419 13,281
Proceeds from sale of assets 356,961 11,807
Purchase of property, plant and equipment (98,020) (83,505)
Business acquisition, net of cash acquired (28,211) -
Other cash used in investing activities 16,450 2,235
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Net cash provided by (used in) investing activities 238,234 (67,434)
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Cash flows from financing activities
Net increase (decrease) in checks outstanding, net of deposits (3,105) 34,893
Net issuance (reduction) of short-term notes payable (51,620) 38,214
Proceeds from issuance of long-term debt - 83,500
Repayment of long-term debt (57,208) (184,537)
Dividends paid (31,820) (32,052)
Payments for purchase of treasury stock (15,883) (4,349)
Other cash provided by (used in) financing activities (11,247) 370
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Net cash used in financing activities (170,883) (63,961)
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Net increase in cash and cash equivalents 206,290 (384)
Cash and cash equivalents at beginning of year 7,608 6,100
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Cash and cash equivalents at end of first quarter $ 213,898 $ 5,716
============================================================================================
Supplemental Information:
Pretax LIFO income (expense) $ (499) $ 1,067
Pretax depreciation and amortization $ 72,619 $ 69,194
All data subject to year-end audit.
See notes to consolidated financial statements.
6
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Accounting Policies
- -------------------
The summary of significant accounting policies is included in the notes to
consolidated financial statements in the 1999 annual report of SUPERVALU INC.
("SUPERVALU" or the "company").
Special Charges
- ---------------
The company recorded one-time, pre-tax restructuring and other charges of $103.6
million as a result of an extensive review to reduce costs and enhance
efficiency. See Management Discussion and Analysis for further detail.
Subsequent Event
- ----------------
On June 9, 1999, the company signed an agreement with Richfood Holdings, Inc.
whereby SUPERVALU would acquire in a merger all of the outstanding common stock
of Richfood. Under the terms of the agreement Richfood's shareholders will have
the option to receive $18.50 per share in cash or SUPERVALU common stock subject
to an allocation and proration. The allocation and proration is subject to an
adjustment whereby the aggregate merger consideration will be 50 percent cash
and 50 percent SUPERVALU common stock. The transaction has a total value of $1.5
billion including the assumption of Richfood's $642 million of debt. The merger
is subject to approval by Richfood's shareholders and regulatory clearance. The
merger will be accounted for as a purchase and the transaction is expected to
close in the third quarter of the current fiscal year.
Statement of Registrant
- -----------------------
The data presented herein is unaudited but, in the opinion of management,
includes all adjustments necessary for a fair presentation of the condensed
consolidated financial position of the company and its subsidiaries at June 19,
1999 and June 20, 1998 and the results of the company's operations and condensed
cash flows for the periods then ended. These interim results are not necessarily
indicative of the results of the fiscal years as a whole.
7
Item 2: Management's Discussion and Analysis of Financial Condition and Results
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of Operations
-------------
Results of Operations
- ---------------------
For the first quarter of fiscal 2000, the company recorded record sales of $5.3
billion, net earnings of $66.7 million and diluted earnings per share of $.55.
Excluding the net impact of the gain on the sale of Hazelwood Farms Bakeries and
restructuring and other charges, net earnings were $55.8 million and diluted
earnings per share were $.46. Last year sales were $5.2 billion, net earnings
were $51.8 million and diluted earnings per share were $.42.
Net sales
Net sales increased 1.7 percent compared to last year, positively impacted by a
12.6 percent increase in retail food sales offset in part by a slight decrease
in food distribution sales.
Retail food sales increased over last year primarily due to acquisitions and new
store openings over the past twelve months. Same-store sales were flat to last
year, impacted by low inflation, competitive activities and cannibalization in
certain markets. Food distribution sales decreased slightly from last year and
included the loss of sales from the sale of Hazelwood Farms Bakeries on May 22,
1999.
Gross profit
Gross profit as a percentage of net sales was 10.3 percent compared to 10.0
percent last year. The growing proportion within the company's total sales mix
of the higher margin retail food business favorably impacted the gross profit
percentage. Retail food and food distribution gross profit margins were
comparable to last year.
Selling and administrative expenses
Selling and administrative expenses were 7.9 percent of net sales compared to
7.7 percent last year. The higher percentage was primarily due to the increased
proportion of the company's retail food business, which operates at a higher
selling and administrative expense percentage than the food distribution
business. Retail food and food distribution selling and administrative expenses
were comparable to last year.
Sale of Business
On May 22, 1999 the company sold Hazelwood Farms Bakeries, which resulted in a
pre-tax gain of $163.7 million. The company had identified Hazelwood Farms
Bakeries as a non-strategic asset to be liquidated to allow the redeployment of
capital. The transaction resulted in $248.2 million of after-tax cash proceeds.
Special Charges
The company recorded one-time, pre-tax restructuring and other charges of $103.6
million as a result of an extensive review to reduce costs and enhance
efficiency over the next 18 months. Included in this total is $14.9 million for
asset impairment costs. The charge by segment was $19.4 million for retail and
$84.2 million for food distribution. The restructuring charges include costs for
facility consolidation, non-core store disposals and rationalization of
redundant and certain decentralized administrative functions.
8
Facility consolidation costs of $47.2 million primarily include losses for the
sale or writedown of assets and leases. Holding costs are also included in this
total. Non-core store disposals include the sale or closure of retail locations
currently operated in the distribution business and other retail stores that are
located in non-strategic markets. These costs total $41.8 million and include
losses to be incurred upon the sale or closure of the stores and related assets,
costs for future lease obligations and lease buy-outs. Rationalization of
redundant and certain decentralized administrative functions consists primarily
of severance for staff reductions as a result of both standardizing and
consolidating business support functions across the company's home office,
retail and distribution operating regions. These costs amount to $14.6 million.
Due to the above restructuring items, the company expects approximately 2,500
employees to be terminated.
Operating earnings
The company's pre-tax operating earnings (earnings before interest and taxes)
increased to $182.5 million compared with $118.4 million last year. Operating
earnings before depreciation and amortization increased to $255.1 million
compared with $187.6 million last year, a 35.9 percent increase. Operating
earnings excluding the gain on the sale of Hazelwood Farms Bakeries and
restructuring and other charges were $122.4 million, a 3.3 percent increase over
last year. Retail food operating earnings decreased 38.9 percent to $22.7
million from last year's $37.2 million. Food distribution operating earnings
increased 88.3 percent to $169.5 million from $90.0 million. Excluding the gain
on the sale of Hazelwood Farms Bakeries and restructuring and other charges,
retail food and food distribution operating earnings increased 13.1 percent and
.1 percent over last year, respectively. The increase in retail food's operating
earnings was due to increased sales.
Interest expense and income
Interest expense decreased to $35.6 million compared with $38.3 million last
year, primarily reflecting lower average borrowings. Interest income decreased
to $5.3 million compared with $6.2 million last year, primarily due to the
reduction of notes receivable as a result of the sale of notes in the fourth
quarter of fiscal 1999 in the ordinary course of business.
Income taxes
The effective tax rate was 56.2 percent in the quarter, compared with 40.0
percent in the first quarter of last year. The higher effective tax rate is
primarily the result of the gain on the sale of Hazelwood Farms Bakeries.
Excluding the impact of the gain on the sale of Hazelwood Farms Bakeries, the
effective tax rate was approximately 39.5 percent, consistent with the annual
effective tax rate last year.
Net earnings
Net earnings were $66.7 million or $.55 per share - diluted compared with last
year's net earnings of $51.8 million or $.42 per share - diluted. Excluding the
gain on the sale of Hazelwood Farms Bakeries and restructuring and other
charges, net earnings were $55.8 million or $.46 per share - diluted. Weighted
average shares - diluted declined to 120.8 million compared with last year's
122.1 million.
9
Liquidity and Capital Resources
- -------------------------------
Internally generated funds from operations continued to be the major source of
liquidity and capital growth. Cash provided from operations for the first
quarter was $138.9 million compared with $131.0 million last year. Net cash
provided from investing activities was $238.2 million compared with net cash
used of $67.4 million last year. The change from the prior year reflects
proceeds received on the sale of assets of $357.0 million, which includes the
proceeds received from the sale of Hazelwood Farms, of which $206.2 million was
invested in marketable securities at the end of the first quarter.
SUPERVALU will continue to use short-term and long-term debt as a supplement to
internally generated funds to finance its activities. Maturities of debt issued
will depend on management's views with respect to the relative attractiveness of
interest rates at the time of issuance. The company has a $400 million "shelf
registration" in effect, pursuant to which the company could issue $159 million
of additional debt securities.
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 the first quarter and no commercial paper outstanding as
of the end of the first quarter. During the first quarter, $10.5 million of
letters of credit were issued under the revolving credit agreement and a total
of $40.5 million were outstanding as of the end of the quarter.
On June 9, 1999, the company signed an agreement with Richfood Holdings, Inc.
whereby SUPERVALU would acquire in a merger all of the outstanding common stock
of Richfood. Under the terms of the agreement Richfood's shareholders will have
the option to receive $18.50 per share in cash or SUPERVALU common stock subject
to an allocation and proration. The allocation and proration is subject to an
adjustment whereby the aggregate merger consideration will be 50 percent cash
and 50 percent SUPERVALU common stock. The merger is subject to approval by
Richfood's shareholders and regulatory clearance.
The company intends to finance the acquisition with a combination of existing
cash, commercial paper issuances (supported by bank credit facilities) and the
proceeds of one or more debt offerings. Approximately $886 million will be paid
to Richfood shareholders, consisting of $443 million of cash and the issuance of
$443 million of SUPERVALU common stock. The merger is expected to be completed
in the third quarter of fiscal 2000.
YEAR 2000
General
SUPERVALU's company wide Year 2000 Project ("Project") is proceeding on
schedule. The Project is addressing the issue of application systems,
information technology (IT) systems and technologies which include embedded
systems being able to distinguish between the year 1900 and the year 2000. In
1996, the company began establishing processes for evaluating and managing the
risks associated with the Project. The Project is divided into six components.
These components include program management,
10
communications, application conversions and technology upgrades, contingency
planning, quality assurance and external entities. The company is using both
internal and external resources to implement the Project. Year 2000 remediation
and testing will be substantially completed by September 1999. The company has
developed contingency plans for key business functions that could be impacted by
year 2000 issues and the focus of the remaining year 2000 work will shift to
readying contingency plans and preparing for the year-end transition.
The company has relationships with a significant number of key business
partners. The company has had formal communications with its key business
partners and has developed formal contingency plans to mitigate the risk to the
company if the business partners are not prepared for the year 2000. The company
will continue to communicate with its key business partners on relevant issues
throughout 1999 and beyond. There can be no guarantee that the business partners
will successfully and timely reprogram or replace and test all of their own
computer hardware, software and process control systems. While the failure of a
single business partner to achieve year 2000 compliance should not have a
material adverse effect on the company's results of operations, the failure of
several key business partners could have such an effect.
Costs
The total costs associated with required modifications to become Year 2000
compliant is not expected to be material to the company's financial position.
The company has incurred costs to date of $25.2 million. Estimated costs for the
remainder of work is $4.1 million for a total projected Project cost of $29.3
million.
Risks
While the effort to assess and correct the company's Year 2000 issues are
expected to be complete prior to related forecasted failure horizons, the
company is taking specific measures to assess risks and develop specific
contingency plans. Key business functions have been assessed and action plans
have been created which describe the communications, operations and IT
activities that will be conducted if the contingency plan must be executed.
The costs of the Project and the completion dates are based on management's best
estimates, which were derived from assumptions of future events including the
availability of resources, key business partner modification plans and other
factors. There can be no guarantee that these estimates will be achieved and
actual results could vary due to uncertainties.
The company's Year 2000 efforts are ongoing and its overall Project will
continue to evolve as new information becomes available. The failure to correct
a material Year 2000 problem could result in an interruption in certain normal
business activities and operations. Due to the general uncertainty inherent in
the Year 2000 problem, resulting in part from the uncertainty of the Year 2000
readiness of third parties on whom the company relies, the company is unable to
determine at this time whether the consequences of Year 2000 failures will have
a material adverse impact on the company's results of operation but the company
believes that, with the implementation of new business systems and completion of
the Project as scheduled, the possibility of significant interruptions of normal
operations should be reduced.
11
Cautionary statements for purposes of the Safe Harbor Provisions of the Private
Securities Litigation Reform Act of 1995
The information in this 10Q 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 fiscal year ended February
27, 1999 and under the caption "Year 2000" in this Form 10-Q; other risks or
uncertainties may be detailed from time to time in the company's future
Securities and Exchange Commission filings.
12
PART II - OTHER INFORMATION
---------------------------
Item 4. Submission of Matters to a Vote of Security Holders.
----------------------------------------------------
The Registrant held its Annual Meeting of Stockholders on June 30, 1999 at
which the stockholders took the following actions:
(a) elected Edwin C. Gage, Garnett L. Keith, Jr., Richard L. Knowlton and
Carole F. St. Mark to the Board of Directors for terms expiring in
2002. The votes cast for and withheld with respect to each such
Director was as follows:
Votes For Votes Withheld
--------- --------------
Edwin C. Gage 99,368,271 2,202,080
Garnett L. Keith, Jr. 97,920,538 3,649,813
Richard L. Knowlton 99,992,012 1,578,339
Carole F. St. Mark 100,092,886 1,477,465
The Directors whose terms continued after the meeting are as follows:
Herman Cain, Lawrence A. Del Santo, William A. Hodder, Charles M.
Lillis, Harriet Perlmutter, Steven S. Rogers and Michael W. Wright.
(b) ratified by a vote of 100,998,141 for, 126,073 against, and
446,137 abstaining, the appointment of KPMG Peat Marwick LLP as
the independent auditors of Registrant for the fiscal year ending
February 26, 2000.
(c) approved by a vote of 93,035,106 for, 7,368,898 against, and
1,094,347 abstaining, the adoption of certain amendments to the
SUPERVALU INC. 1993 Stock Plan.
13
Item 6. Exhibits and Reports on Form 8-K.
---------------------------------
(a) Exhibits filed with this Form 10-Q:
(2) Agreement and Plan of Merger, dated as of June 9, 1999,
among SUPERVALU INC., Winter Acquisition, Inc. and Richfood
Holdings, Inc.
The Registrant agrees to furnish supplementally to the
Securities and Exchange Commission, upon request, a copy of
any omitted schedule.
(11) Computation of Earnings Per Common Share.
(27) Financial Data Schedule.
(b) Reports on Form 8-K:
No reports on Form 8-K were filed during the quarter.
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: July 12, 1999 By: /s/ Pamela K. Knous
--------------------------------
Pamela K. Knous
Executive Vice President, Chief
Financial Officer (Authorized
officer of Registrant)
14