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SUPERVALU INC - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) (Dollars and shares in millions, except per share data and stores) This Management's Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with the unaudited Condensed Consolidated Financial Statements contained in this Quarterly Report on Form 10-Q, the information contained under the caption "Cautionary Statements for Purposes of the Safe Harbor Provisions of the Private Securities Litigation Reform Act" in this Quarterly Report on Form 10-Q and the information in the Company's Annual Report on Form 10-K for the fiscal year ended February 22, 2014. MANAGEMENT OVERVIEW Business Overview SUPERVALU operates its business in three segments: Independent Business, Save-A-Lot and Retail Food. Independent Business is one of the largest wholesale distributors to independent retail customers across the United States. Save-A-Lot is one of the nation's largest hard discount grocery retailers by store count. The Retail Food business operates traditional grocery stores under five regionally-based banners: Cub Foods, Shoppers Food & Pharmacy, Shop 'n Save, Farm Fresh and Hornbacher's. The Company leverages its distribution operations by providing wholesale distribution and logistics service solutions to its independent retail customers and distribution to its Retail Food stores through the Independent Business segment. Save-A-Lot provides wholesale distribution and service solutions to its licensees, and distribution to Save-A-Lot corporate stores. Management continues to focus on simplifying the Company's operations with a view towards driving top-line sales while managing the Company's cost structure. These actions are being undertaken as part of the continued focus on the Company's long-term plans to increase sales and operating cash flow, improve the condition of its balance sheet and generate returns for its stockholders. Independent Business continues to target sales growth by affiliating new customers and driving sales to existing customers while also managing expenses and aligning the business to operate more efficiently. In the first quarter of 2015, Independent Business's Eastern and Southeast regions were combined to form the East region, and the Midwest and Northern regions were combined to form the West region to further streamline the organization, reduce operating costs and create common region organizational structures that more effectively utilize resources and serve the Company's customers. In the second quarter of fiscal 2015, Independent Business began supplying all 18 stores acquired by the Company and its independent retail customers and franchisees from Roundy's Inc. Save-A-Lot continues to drive sales and performance through its meat and produce programs, competitive pricing enhancements, improved grocery and merchandise offerings and incremental marketing activities. Save-A-Lot is focused on long-term sales and earnings growth through execution of these initiatives at existing locations and expansion through corporate and licensee store development. In fiscal 2015 year-to-date, the Company added 18 new Save-A-Lot stores, comprised of 13 new licensee stores and 5 new corporate stores, and licensee operators closed 18 stores. In addition, the Company opened 21 corporate stores acquired from licensees and sold 4 corporate stores to licensees. Retail Food is focused on driving sales and performance through competitive pricing and promotional activities, enhanced perishable offerings, store remodels and resets, and integrating the newly acquired stores from Roundy's Inc. Total retail square footage as of the end of the second quarter of fiscal 2015 was approximately 18.1 million, an increase of approximately 4.3 percent from the end of fiscal 2014. Total retail square footage, excluding actual and planned store dispositions, increased 5.6 percent from the end of fiscal 2014. The Company continues to reduce Corporate costs, including costs related to providing services under the Transition Services Agreements with New Albertson's, Inc. ("NAI") and Albertson's LLC (collectively, the "TSA"). Management believes that this cost management by the Company has reduced the cost to operate the TSA, which has contributed to our overall consolidated operating profit for the quarter and year-to-date period ended September 6, 2014. Each TSA had an initial term expiring on September 21, 2015, subject to annual renewal by notice given at least 12 months prior to expiration of the then current term. On September 12, 2014, NAI and Albertson's LLC each notified the Company that it was exercising its right to renew the term of its respective TSA for an additional year. Pursuant to this notice, the TSA will now expire on September 21, 2016 unless renewed again by notice given no later than September 21, 2015. Pursuant to the terms of the TSA, NAI and Albertson's LLC may cancel TSA services at any of its stores or distribution centers for any reason, including closure or removal of stores or distribution centers from the scope of the TSA. The cancellation of TSA services at stores or distribution centers would reduce the variable fee the Company receives under the TSA beginning ten weeks after the Company receives notice of such cancellation. The cancellation of TSA services at stores or distribution centers before September 21, 2015 would also reduce the fixed fee the Company receives under the TSA during the one-year extension period (from September 22, 2015 to September 21, 2016). In addition, in March 2014, AB Acquisition LLC, the parent company of NAI and Albertson's LLC, announced a definitive agreement for the acquisition of Safeway Inc. An acquisition of Safeway Inc., as well as other factors, may result in the cancellation of TSA services at stores and distribution centers and nonrenewal 24-------------------------------------------------------------------------------- Table of Contents of the TSA beyond September 21, 2016. The impact of the TSA on the Company's results of operations depends on the revenue received by the Company and the Company's ability to manage its cost structure. A decrease in the revenue received by the Company under the TSA, including in the event of any non-renewal or reduction in the scope or level of services, could adversely impact the Company's results of operations, in particular if the Company is not able to manage its cost structure and overhead to appropriately correspond to loss in revenue. The Company continues to be focused on providing quality services under the TSA, and remains committed to being an efficient organization. The United States grocery channel in which the Company operates is highly competitive. Competition is experienced through multiple retailing formats and affects the Company's ability to attract and retain customers. Management expects operating results for the Company will continue to be impacted by the effects of operating in a highly competitive and price-sensitive marketplace. The Company monitors product inflation and evaluates whether to pass cost inflation on or absorb cost increases in the form of incremental investments to lower prices to customers. Inflation for fiscal 2015 is estimated to be in the low single digits as a percentage, with higher levels in certain dairy and meat categories. Information Technology Intrusions Intrusion Announced in August 2014 - On August 14, 2014, the Company announced it had experienced a criminal intrusion into the portion of its computer network that processes payment card transactions for some of its Retail Food stores, including some of its associated stand-alone liquor stores, and that an investigation of that intrusion supported by third-party data forensics experts had been initiated to better understand the nature and scope of the intrusions. That investigation is ongoing. The Company believes this criminal intrusion may have resulted in the collection of account numbers, and in some cases also the expiration date, other numerical information and/or the cardholder's name, from payment cards used during the period of June 22 (at the earliest) through July 17 (at the latest), 2014, at 209 SUPERVALU owned and franchised stores and stand-alone liquor stores, which stores operate under the Cub Foods, Farm Fresh, Hornbacher's, Shop 'n Save, and Shoppers Food & Pharmacy banners. Intrusion Announced in September 2014 - On September 29, 2014, the Company announced it had experienced a separate criminal intrusion, in what it believes to have been late August or early September 2014, when an intruder installed malware into the portion of its computer network that processes payment card transactions for some of its owned and franchised retail stores, including some of its associated stand-alone liquor stores. The investigation of the intrusion announced in August 2014 was extended to cover this intrusion as well. Although that investigation is ongoing, the Company currently believes the only affected SUPERVALU owned and franchised stores where this malware may have succeeded in capturing payment card data were four Minnesota franchised Cub Foods stores. At these four stores, the Company believes the malware may have successfully captured account numbers, and in some cases also the expiration date, other numerical information and/or the cardholder's name, from payment cards used at some checkout lanes during the period of August 27 (at the earliest) through September 21 (at the latest), 2014. Investigations and Security Enhancement - In the case of both intrusions, the Company has not determined that any cardholder data potentially captured by either malware was in fact stolen by the intruder(s). As to both intrusions, given the continuing nature of the investigation, it is possible that time frames, locations, at-risk data, and/or other facts in addition to those described above will be identified in the future. Upon recognition of each intrusion, the Company took immediate steps to secure the affected part of its network, and the Company believes that it has eradicated the malware used in each intrusion. The Company has notified federal law enforcement authorities and is cooperating in their efforts to investigate these intrusions and identify those responsible for the intrusions. The Company has also notified the major payment card brands and is cooperating in their investigations of the intrusions. Although the Company has not determined that any cardholder data was in fact stolen by the intruder(s), the Company is offering customers who used their payment cards at the relevant stores during the relevant time periods 12 months of complimentary consumer identity protection services through AllClear ID. The Company has also established a call center to answer questions about the intrusions and the identity threat protection services being offered. Some stores owned and operated by Albertson's LLC and NAI experienced related criminal intrusions. The Company provides information technology services to these Albertson's LLC and NAI stores pursuant to the TSA (as defined below), and the Company has been working together with Albertson's LLC and NAI to respond to the intrusions into their stores. The Company believes that any losses incurred by Albertson's LLC or NAI as a result of the intrusions affecting their stores would not be the Company's responsibility. Investigations and Proceedings - As a result of the criminal intrusions, the payment card brands are conducting investigations into whether the portion of the Company's network that handles payment card data was compliant with applicable data security standards at the time of the intrusions and, if not, whether any non-compliance caused any compromise of payment card data that may have occurred during the intrusions. The Company's network has previously been found to be compliant with those standards; however, the Company understands that, in other data breach situations, the forensic investigator working on behalf of the payment card brands has claimed that breached entities that previously had been found compliant with those standards in fact were not in compliance at the 25 -------------------------------------------------------------------------------- Table of Contents time of the intrusion and that the alleged non-compliance caused at least some portion of the compromise of payment card data that allegedly occurred during the intrusion. As a result, the Company believes that the payment card brands may allege that the Company was not compliant with the applicable data security standards at the time of the intrusions and that such alleged non-compliance caused the compromise of payment card data during the intrusions. Moreover, if that happens, the Company believes the payment card brands may make claims against the Company for non-ordinary course operating expenses and incremental counterfeit fraud losses allegedly incurred by them or their issuers by reason of the intrusions. If that were to occur, the Company expects to dispute those claims. While the Company does not believe that a loss is probable by reason of these as yet unasserted claims, the Company believes that a loss in connection with these claims, should they be asserted, is reasonably possible; however, at this time the Company cannot reasonably estimate a range of possible losses because the payment card brands' investigation is ongoing and the payment card brands have not alleged what payment cards they consider to have been compromised, what data from those cards they consider to have been compromised, or the amount of their claimed losses. The Company does not currently believe that the amount, if any, paid on any payment card brand claims that might be asserted would be material to the Company's consolidated results of operations, cash flows or financial condition. The Company has notified federal law enforcement authorities of the criminal intrusions and is cooperating in their efforts to investigate the incidents. The Company has also notified several state Attorneys General of the criminal intrusion incidents. While the Company is not aware of any investigation into the intrusions having been initiated by any regulatory authority, it is possible that regulatory investigations into the intrusions could be initiated in the future and, were that to occur, it is possible that such investigations could result in claims being made against the Company by the regulatory authorities in question. If that were to occur, the Company expects to dispute those claims. As discussed in more detail below in this Note 12 under Legal Proceedings, in August 2014 in response to the intrusion announced in August 2014, two class action complaints were filed against the Company and are currently pending. As indicated in Note 12, the Company believes that a material loss from the two class actions is remote. It is possible that other similar complaints by consumers, banks or others may be filed against the Company in connection with the intrusions. Insurance Coverage - The Company maintains $50 of cyber threat insurance above a $1 deductible per incident and subject to certain sublimits, which it believes should mitigate the financial effect of these intrusions, including claims made or that might be made against the Company based on these intrusions. Based on currently available information, the Company does not believe that the ultimate outcome of these intrusions, including any related lawsuits, claims or other proceedings that might be initiated against the Company, will have a material adverse impact on the Company's consolidated results of operations, cash flows or financial position. Expenses - The Company has and expects to incur various costs related to the intrusions, including the cost of conducting the investigations, the cost of providing identity protection services to the Company's customers and legal and other professional expenses. In the second quarter, the Company recorded $2 of intrusion related costs and anticipated insurance proceeds of $1. These amounts were recorded as Selling and administrative expenses in the Condensed Consolidated Statement of Operations. Anticipated insurance proceeds recorded for the insurance receivable were based on the Company's insurance recovery assessment. This assessment included the review of applicable insurance policies, correspondence with the insurance carriers and analysis by legal counsel. Impact on Sales - Thus far the Company has not experienced weaker than anticipated sales subsequent to the intrusions. However, because the second intrusion occurred and was announced recently, the Company is not yet able to definitively discern the impact of these intrusions on customer confidence and the Company's ability to attract and retain customers. Financial Highlights The following is a summary comparison of financial highlights for the second quarter of fiscal 2015 to the second quarter of fiscal 2014: • Identical store sales for the Save-A-Lot network, Save-A-Lot Company-operated stores and stores in the Retail Food segment increased 6.5 percent, 8.2 percent and 0.4 percent, respectively; and Independent Business segment sales decreased 1.1 percent. • Customer counts increased 6.4 percent and 1.4 percent in Save-A-Lot Company-operated stores and Retail Food stores, respectively. • Gross profit declined due to lower transitional TSA fees and higher advertising costs and last-in, first-out charge ("LIFO charge"), offset by higher gross profit from increased sales. • Operating earnings decreased $18 partly due to a net gain of $9 last year comprised of a gain on sale of property offset in part by a legal settlement charge. The second quarter of fiscal 2015 includes $1 of information technology intrusion costs, net of insurance recoverable. When adjusted for these items, Operating earnings decreased $8, primarily from lower transitional TSA fees and a higher LIFO charge, offset in part by lower depreciation and contracted services expense. • Interest expense, net decreased $5 from lower average interest rates and outstanding debt balances. • Net earnings from continuing operations decreased $9 and continuing operations diluted earnings per share decreased $0.04 primarily due to the above items. 26 -------------------------------------------------------------------------------- Table of Contents The following is a summary comparison of financial highlights for fiscal 2015 year-to-date to fiscal 2014 year-to-date: • Identical store sales for the Save-A-Lot network, Save-A-Lot Company-operated stores and stores in the Retail Food segment increased 6.0 percent, 7.7 percent and 0.5 percent, respectively; and Independent Business segment sales decreased 1.9 percent. • Customer counts increased 6.2 percent and 2.0 percent in Save-A-Lot Company-operated stores and Retail Food stores, respectively. • Gross profit declined due to lower transitional TSA fees, incremental investments to lower prices, and higher shrink, advertising costs and LIFO charge, offset by higher gross profit from increased sales and lower employee-related costs. Operating earnings increased $33 due to lower costs and charges associated with severance, a legal settlement charge and other items; when adjusted for these items, Operating earnings decreased $14, primarily due to lower TSA fees attributable to the one-year transitional TSA fee, incremental price investments and higher shrink, advertising costs and LIFO charge, offset in part by lower employee-related costs and lower depreciation and amortization. • Interest expense, net decreased $190 due to $167 of lower refinancing charges and costs and $23 of savings from lower average interest rates and outstanding debt balances. • Net earnings from continuing operations increased $141 and continuing operations diluted earnings per share increased $0.55 primarily due to the above items. • Net cash provided by operating activities of continuing operations increased $271 primarily due to less cash utilized for operating assets and liabilities, including income taxes and accrued liabilities, compared with last year. • Net cash used in investing activities of continuing operations increased $92 due to increased capital expenditures of $47 including investments in Retail Food store remodels, logistics and information technology and $47 cash paid for business combinations reflecting the newly acquired Rainbow stores within the Minneapolis/St. Paul market and Save-A-Lot licensee stores acquisitions. • Net cash used in financing activities of continuing operations was $34 as compared to cash provided of $109 last year primarily due to lower proceeds from the sale of common stock offset in part by lower financing costs. 27 -------------------------------------------------------------------------------- Table of Contents SECOND QUARTER RESULTS OF OPERATIONS The following discussion summarizes operating results in the second quarter of fiscal 2015 compared to the second quarter of fiscal 2014: Second Quarter Ended September 6, % of September 7, % of 2014 Net 2013 Net (12 weeks) Sales (12 weeks) Sales Net sales $ 4,018 100.0 % $ 3,947 100.0 % Cost of sales 3,446 85.8 3,371 85.4 Gross profit 572 14.2 576 14.6 Selling and administrative expenses 478 11.9 464 11.8 Operating earnings 94 2.3 112 2.8 Interest expense, net 46 1.1 51 1.3 Equity in earnings of unconsolidated affiliates (1 ) - (1 ) - Earnings from continuing operations before income taxes 49 1.2 62 1.6 Income tax provision 18 0.4 22 0.5 Net earnings from continuing operations 31 0.8 40 1.0 Income from discontinued operations, net of tax 2 - 1 - Net earnings including noncontrolling interests 33 0.8 41 1.0 Net earnings attributable to noncontrolling interests 2 - 1 - Net earnings attributable to SUPERVALU INC. $ 31 0.8 % $ 40 1.0 % Basic net earnings per share attributable to SUPERVALU INC.: Continuing operations $ 0.11 $ 0.15 Discontinued operations $ 0.01 $ - Basic net earnings per share $ 0.12 $ 0.15 Diluted net earnings per share attributable to SUPERVALU INC.: Continuing operations $ 0.11 $ 0.15 Discontinued operations $ 0.01 $ - Diluted net earnings per share $ 0.11 $ 0.15 Net Sales Net sales for the second quarter of fiscal 2015 were $4,018, compared with $3,947 last year, an increase of $71 or 1.8 percent. Independent Business net sales were 45.3 percent of Net sales, Save-A-Lot net sales were 26.1 percent of Net sales, Retail Food net sales were 27.5 percent of Net sales and Corporate TSA fees were 1.1 percent of Net sales for the second quarter of fiscal 2015, compared with 46.6 percent, 24.6 percent, 27.2 percent and 1.6 percent, respectively, for the second quarter of fiscal 2014. Independent Business net sales for the second quarter of fiscal 2015 were $1,820, compared with $1,840 last year, a decrease of $20 or 1.1 percent. The decrease is primarily due to lost accounts, including lower sales to one NAI banner that completed the transition to self-distribution and the loss of one of its larger customers, and lower military sales, offset in part by increased sales to new accounts and existing customers. Save-A-Lot net sales for the second quarter of fiscal 2015 were $1,050, compared with $972 last year, an increase of $78 or 8.0 percent. The increase is primarily due to positive network identical store sales of 6.5 percent or $60 (defined as net sales from Company-operated stores and sales to licensee stores operating for four full quarters, including store expansions and excluding planned store dispositions) and $32 of sales due to new store openings, offset in part by a decrease of $14 due to store dispositions by licensees. Save-A-Lot identical store sales for Company-operated stores (defined as net sales from Company-operated stores operating for four full quarters, including store expansions and excluding planned store dispositions) were positive 8.2 percent or $32 for the second quarter of fiscal 2015. Save-A-Lot corporate identical store sales performance was primarily the result of a 6.4 percent increase in customer count and a 1.8 percent increase in average basket size. 28 -------------------------------------------------------------------------------- Table of Contents Retail Food net sales for the second quarter of fiscal 2015 were $1,104, compared with $1,073 last year, an increase of $31 or 2.9 percent. Retail Food net sales includes a $23 increase in sales due to newly acquired stores, positive identical store sales of 0.4 percent or $4 (defined as net sales from stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions) and higher fuel sales, offset in part by a store closed in connection with its lease expiration. Retail Food positive identical store sales performance was primarily a result of a 1.4 percent customer count increase, offset in part by a 1.0 percent decrease in average basket size. Net sales for the second quarter of fiscal 2015 include fees earned under the TSA of $44, compared with $62 last year, a decrease of $18. The net sales decrease reflects a one-year transition fee earned under the TSA in fiscal 2014 of $60, of which $18 was recognized in the second quarter of fiscal 2014. Gross Profit Gross profit for the second quarter of fiscal 2015 was $572, compared with $576 last year, a decrease of $4 or 0.7 percent. Gross profit as a percent of Net sales was 14.2 percent for the second quarter of fiscal 2015, compared with 14.6 percent last year. The decrease in gross profit is primarily due to a $18 decrease in TSA fees due to last year's one-year transition fee, $3 of higher advertising costs and $3 of a higher LIFO charge, offset in part by $18 of higher gross profit from increased sales. Independent Business gross profit was $86 or 4.7 percent of Independent Business net sales, compared with $92 or 5.0 percent last year. The 30 basis point decrease in Independent Business gross profit rate is primarily due to stronger private brands' pricing support, lower vendor funding and a higher LIFO charge. Save-A-Lot gross profit was $147 or 14.1 percent of Save-A-Lot net sales, compared with $145 or 14.9 percent last year. The 80 basis point decrease in Save-A-Lot gross profit rate is primarily due to $6 of incremental investments to lower prices to customers and higher shrink, and $4 of higher advertising costs. Retail Food gross profit was $295 or 26.7 percent of Retail Food net sales, compared with $277 or 25.9 percent last year. The 80 basis point increase in Retail Food gross profit rate is primarily due to $10 of lower shrink and investments to lower prices to customers, offset in part by $2 of a higher LIFO charge. Selling and Administrative Expenses Selling and administrative expenses for the second quarter of fiscal 2015 were $478 compared with $464 last year, a net increase of $14 or 3.0 percent. Selling and administrative expenses for the second quarter of fiscal 2015 include $1 of information technology intrusion costs, net of insurance recoverable. Selling and administrative expenses for the second quarter of fiscal 2014 included a net gain of $9, comprised of a gain on sale of property of $14, offset by a legal settlement charge of $5. When adjusted for these items, the remaining $4 increase in Selling and administrative expenses is primarily due to $16 of higher expenses from increased sales volume and $10 of higher employee-related costs, excluding net periodic pension expense, offset in part by $11 of lower net periodic pension expense, $5 of lower depreciation and amortization and $4 of lower contracted services. Selling and administrative expenses for second quarter of fiscal 2015 were 11.9 percent of Net sales, compared with 11.8 percent of Net sales last year. Selling and administrative expenses as a percent of Net sales for the second quarter of fiscal 2014 included 20 basis points from the $9 net gain described above. After adjusting for the above items, the remaining 10 basis point net reduction in Selling and administrative expenses as a percent of Net sales is primarily due to reduced net periodic pension expense, depreciation and amortization and contracted services, offset in part by higher employee-related costs. Operating Earnings Operating earnings for the second quarter of fiscal 2015 were $94, compared with $112 last year, a decrease of $18 or 16.1 percent. Operating earnings for the second quarter of fiscal 2015 include $1 of information technology intrusion costs, net of insurance recoverable. Operating earnings for the second quarter of fiscal 2014 included a net gain of $9, comprised of a gain on sale of property of $14, offset by a legal settlement charge of $5. When adjusted for these items, the remaining $8 decrease in Operating earnings is primarily due to $18 of lower TSA fees primarily due to the one-year transitional fees recognized last year, $10 of higher employee-related costs, excluding net periodic pension expense, and $3 of a higher LIFO charge, offset in part by $11 of lower net periodic pension expense, $6 of lower depreciation and amortization, $4 of lower contracted services and $3 of higher operating earnings from increased sales volume. Independent Business operating earnings for the second quarter of fiscal 2015 were $54, or 2.9 percent of Independent Business net sales, compared with $73, or 3.9 percent last year. Independent Business operating earnings for the second quarter of fiscal 2014 included a gain on sale of property of $14. When adjusted for this item, the remaining $5 decrease in Independent Business operating earnings is primarily due to higher employee-related costs, lower margins from stronger private brands pricing support, lower vendor funding and a higher LIFO charge, offset in part by fees received from early supply agreement termination and lower other administrative expense. 29-------------------------------------------------------------------------------- Table of Contents Save-A-Lot operating earnings for the second quarter of fiscal 2015 were $26, or 2.5 percent of Save-A-Lot net sales, compared with $32, or 3.3 percent last year. Save-A-Lot operating earnings for the second quarter of fiscal 2014 included $5 of legal settlement charges. When adjusted for this item, the remaining $11 decrease in Save-A-Lot's operating earnings is primarily due to $6 of incremental investments to lower prices to customers and higher shrink, $4 of higher advertising costs and $4 of higher employee-related costs, offset in part by $3 of higher operating earnings from increased sales volume. Retail Food operating earnings for the second quarter of fiscal 2015 were $20, or 1.8 percent of Retail Food net sales, compared with $7 or 0.8 percent last year. The $13 increase in Retail Food's operating earnings is primarily due to $10 of lower shrink and incremental investments to lower prices to customers, $4 of lower depreciation expense and $2 of lower contracted services, offset in part by a higher LIFO charge. Corporate operating loss for the second quarter of fiscal 2015 was $6, compared with $0 last year. Corporate operating loss for the second quarter of fiscal 2015 includes $1 of information technology intrusion costs, net of insurance recoverable. When adjusted for this item, the remaining $5 decrease is primarily due to lower TSA fees from the one-year transitional TSA fee, offset in part by lower net periodic pension expense. Interest Expense, Net Interest expense, net was $46 for the second quarter of fiscal 2015, compared with $51 last year. The decrease reflects lower average interest rates on lower outstanding debt balances. Income Tax Provision Income tax expense on continuing operations for the second quarter of fiscal 2015 was $18, or 36.9 percent of Earnings from continuing operations before income taxes, compared with $22, or 35.1 percent of Earnings from continuing operations before income taxes, last year. The increase in the effective tax rate is primarily due to state statutory tax increases. Net Earnings from Continuing Operations Net earnings from continuing operations for the second quarter of fiscal 2015 were $31, compared with $40 last year. Net earnings from continuing operations for the second quarter of fiscal 2015 includes $1 of after-tax information technology intrusion costs, net of insurance recoverable. Net earnings from continuing operations for the second quarter of fiscal 2014 included a net gain of $6 after-tax related to a gain on sale of property and a legal settlement charge. When adjusted for these items, the remaining $2 after-tax decrease is due to $11 of lower TSA fees from the one-year transition fee, $5 of higher employee related costs, excluding net periodic pension expense, and $4 of a higher LIFO charge and higher advertising expenses, offset in part by $7 of lower net periodic pension expense, $4 of lower depreciation expense, $3 of lower interest expense and $4 of higher earnings from increased sales and lower contracted services expense. 30-------------------------------------------------------------------------------- Table of Contents YEAR-TO-DATE RESULTS OF OPERATIONS The following discussion summarizes operating results for fiscal 2015 year-to-date compared to fiscal 2014 year-to-date: Year-To-Date Ended September 6, % of September 7, % of 2014 Net 2013 Net (28 weeks) Sales (28 weeks) Sales Net sales $ 9,252 100.0 % $ 9,188 100.0 % Cost of sales 7,928 85.7 7,817 85.1 Gross profit 1,324 14.3 1,371 14.9 Selling and administrative expenses 1,095 11.8 1,175 12.8 Operating earnings 229 2.5 196 2.1 Interest expense, net 110 1.2 300 3.3 Equity in earnings of unconsolidated affiliates (2 ) - (2 ) - Earnings (loss) from continuing operations before income taxes 121 1.3 (102 ) (1.1 ) Income tax provision (benefit) 42 0.5 (40 ) (0.4 ) Net earnings (loss) from continuing operations 79 0.9 (62 ) (0.7 ) (Loss) income from discontinued operations, net of tax (1 ) - 191 2.1 Net earnings including noncontrolling interests 78 0.8 129 1.4 Net earnings attributable to noncontrolling interests 4 - 4 - Net earnings attributable to SUPERVALU INC. $ 74 0.8 % $ 125 1.4 % Basic net earnings (loss) per share attributable to SUPERVALU INC.: Continuing operations $ 0.29 $ (0.26 ) Discontinued operations $ (0.01 ) $ 0.76 Basic net earnings per share $ 0.28 $ 0.50 Diluted net earnings (loss) per share attributable to SUPERVALU INC.: Continuing operations $ 0.29 $ (0.26 ) Discontinued operations $ (0.01 ) $ 0.75 Diluted net earnings per share $ 0.28 $ 0.49 Net Sales Net sales for fiscal 2015 year-to-date were $9,252, compared with $9,188 last year, an increase of $64 or 0.7 percent. Independent Business net sales were 45.6 percent of Net sales, Save-A-Lot net sales were 25.9 percent of Net sales, Retail Food net sales were 27.4 percent of Net sales and Corporate TSA fees were 1.1 percent of Net sales for fiscal 2015 year-to-date, compared with 46.8 percent, 24.4 percent, 27.2 percent and 1.6 percent, respectively, for last year. Independent Business net sales for fiscal 2015 year-to-date were $4,220, compared with $4,303 last year, a decrease of $83 or 1.9 percent. The decrease is primarily due to lost accounts, including lower sales to one NAI banner that completed the transition to self-distribution part way through the year and the loss of one of its larger customers, and lower military sales, offset in part by increased sales to new accounts and existing customers. Save-A-Lot net sales for fiscal 2015 year-to-date were $2,398, compared with $2,238 last year, an increase of $160 or 7.1 percent. The increase is primarily due to positive network identical store sales of 6.0 percent or $128 (defined as net sales from Company-operated stores and sales to licensee stores operating for four full quarters, including store expansions and excluding planned store dispositions) and $65 of sales due to new store openings, offset in part by a decrease of $33 due to store dispositions by licensees. Save-A-Lot identical store sales for Company-operated stores (defined as net sales from Company-operated stores operating for four full quarters, including store expansions and excluding planned store dispositions) were positive 7.7 percent or $68 for fiscal 2015 year-to-date. Save-A-Lot corporate identical store sales performance was primarily a result of a 6.2 percent increase in customer count and a 1.5 percent increase in average basket size. Retail Food net sales for fiscal 2015 year-to-date were $2,532, compared with $2,501 last year, an increase of $31 or 1.2 percent. Retail Food net sales includes a $23 increase in sales due to newly acquired stores, positive identical store sales of 0.5 percent or $12 (defined as net sales from stores operating for four full quarters, including store expansions and excluding fuel and planned store dispositions) and higher fuel sales, offset in part by a store closed in connection with its lease expiration. Retail Food positive identical store sales performance was primarily a result of a 2.0 percent customer count increase, offset in part by a 1.5 percent decrease in average basket size. 31-------------------------------------------------------------------------------- Table of Contents Net sales for fiscal 2015 year-to-date include fees earned under the TSA of $102, compared with $146 last year, a decrease of $44. The net sales decrease reflects a one-year transition fee earned under the TSA in fiscal 2014 of $60, of which $54 was recognized during fiscal 2014 year-to-date, offset in part by higher fees earned during the first quarter of fiscal 2015 due to the timing of the sale of NAI, which closed on March 21, 2013, the commencement date of the TSA. Gross Profit Gross profit for fiscal 2015 year-to-date was $1,324, compared with $1,371 last year, a decrease of $47 or 3.4 percent. Gross profit as a percent of Net sales was 14.3 percent for fiscal 2015 year-to-date, compared with 14.9 percent last year. Gross profit declined due to a $44 net decrease in TSA fees predominantly related to the one-year transition fee recognized last year. The remaining decrease of $3 is primarily due to $24 of incremental investments to lower prices to customers, higher shrink, stronger private brands' pricing support and lower vendor funding, $7 of higher advertising costs and $5 of a higher LIFO charge, offset in part by $29 of higher gross profit from increased sales volume and $7 of lower employee-related costs. Independent Business gross profit was $199 or 4.7 percent of Independent Business net sales, compared with $210 or 4.9 percent last year. The 20 basis point decrease in Independent Business gross profit rate is primarily due to stronger private brands' pricing support, lower vendor funding and higher occupancy costs. Save-A-Lot gross profit was $345 or 14.4 percent of Save-A-Lot net sales, compared with $350 or 15.6 percent last year. The 120 basis point decrease in Save-A-Lot gross profit rate is primarily due to $22 of incremental investments to lower prices to customers and higher shrink and $9 of higher advertising costs. Retail Food gross profit was $678 or 26.8 percent of Retail Food net sales, compared with $665 or 26.6 percent last year. The 20 basis point increase in Retail Food gross profit rate is primarily due to $6 of lower employee-related costs and $2 of lower shrink and incremental investments to lower prices to customers, offset in part by additional private brands expense and $4 of a higher LIFO charge. Selling and Administrative Expenses Selling and administrative expenses for fiscal 2015 year-to-date were $1,095 compared with $1,175 last year, a net decrease of $80 or 6.8 percent. Selling and administrative expenses for fiscal 2015 year-to-date include $1 of severance costs and $1 of information technology intrusion costs, net of insurance recoverable. Selling and administrative expenses for fiscal 2014 year-to-date included net charges and cost of $49, comprised of severance costs and accelerated stock-based compensation charges of $39, asset impairment and other charges of $14, contract breakage and other costs of $5 and a legal settlement charge of $5, offset in part by a gain on sale of property of $14. When adjusted for these items, the remaining $33 reduction in Selling and administrative expenses is primarily due to $25 of lower net periodic pension expense, $15 of reduced depreciation and amortization, $9 of lower employee-related costs and $8 of lower contracted services expense, offset in part by $25 of higher expenses from increased sales volume. Selling and administrative expenses for fiscal 2015 year-to-date were 11.8 percent of Net sales, compared with 12.8 percent of Net sales last year. Selling and administrative expenses as a percent of Net sales for fiscal 2014 year-to-date included 50 basis points from the net charges and costs of $49 described above. After adjusting for the above items, the remaining 50 basis point net reduction in Selling and administrative expenses as a percent of Net sales is primarily due to lower net periodic pension expense, reduced depreciation and amortization, and lower employee-related costs and contracted services expense. Operating Earnings Operating earnings for fiscal 2015 year-to-date were $229, compared with $196 last year, an increase of $33 or 16.8 percent. Operating earnings for fiscal 2015 year-to-date include $1 of severance costs and $1 of information technology intrusion costs, net of insurance recoverable. Operating earnings for fiscal 2014 year-to-date included net charges and cost of $49, comprised of severance costs and accelerated stock-based compensation charges of $39, asset impairment and other charges of $14, contract breakage and other costs of $5 and a legal settlement charge of $5, offset in part by a gain on sale of property of $14. When adjusted for these items, the remaining $14 decrease in Operating earnings is primarily due to $44 of lower TSA fees primarily due to the one-year transitional fee recognized last year, $24 of incremental investments to lower prices to customers, higher shrink, stronger private brands pricing support and lower vendor funding, $7 of higher advertising costs, $6 of other administrative expenses and a higher LIFO charge of $5, offset in part by $25 of lower net periodic pension expense, $17 of reduced depreciation and amortization, $16 of lower employee-related costs, $9 of lower contracted services expense and $5 of higher earnings from increased sales volume. Independent Business operating earnings for fiscal 2015 year-to-date were $120, or 2.8 percent of Independent Business net sales, compared with $128, or 3.0 percent last year. Independent Business operating earnings for fiscal 2015 year-to-date include $1 of severance costs. Independent Business operating earnings for fiscal 2014 year-to-date included charges and costs, comprised of 32 -------------------------------------------------------------------------------- Table of Contents severance costs and accelerated stock-based compensation costs of $13 and contract breakage costs of $1, offset by a gain on sale of property of $14. When adjusted for these items, the remaining $7 decrease in Independent Business operating earnings is primarily due to lower margins from stronger private brands pricing support, lower vendor funding and lower sales volume, offset in part by lower depreciation expense and fees received from early supply agreement termination. Save-A-Lot operating earnings for fiscal 2015 year-to-date were $72, or 3.0 percent of Save-A-Lot net sales, compared with $84, or 3.7 percent last year. Save-A-Lot operating earnings for fiscal 2014 year-to-date included charges and costs of $10, comprised of a legal settlement charge of $5, asset impairment and other charges of $3 and severance costs of $2. When adjusted for these items, the remaining $22 decrease in Save-A-Lot's operating earnings is primarily due to $22 of incremental investments to lower prices to customers and higher shrink and $9 of higher advertising costs, offset in part by $9 of higher earnings from increased sales volume and lower employee-related costs. Retail Food operating earnings for fiscal 2015 year-to-date were $50, or 2.0 percent of Retail Food net sales, compared with $14 or 0.6 percent last year. Retail Food operating earnings for fiscal 2014 year-to-date included charges of $18, comprised of asset impairment and other charges of $9, severance costs and accelerated stock-based compensation charges of $7 and contract breakage and other costs of $2. When adjusted for these items, the remaining $18 increase in Retail Food's operating earnings is primarily due to $11 of lower depreciation expense and $11 of lower employee-related and contracted services costs, offset in part by $4 of a higher LIFO charge. Corporate operating loss for fiscal 2015 year-to-date was $13, compared with $30 last year. Corporate expenses for fiscal 2015 year-to-date include $1 of information technology intrusion costs, net of insurance recoverable. Corporate expenses for fiscal 2014 year-to-date included charges of $21, comprised of severance costs and accelerated stock-based compensation charges of $17, contract breakage and other costs of $2 and asset impairment and other charges of $2. When adjusted for these items, the remaining $3 net increase in Corporate operating loss was primarily due to lower TSA fees primarily due to the one-year transitional fee recognized last year, which more than offset $25 of lower net periodic pension expense, $12 of lower employee-related costs and $5 of lower contracted services expense. Interest Expense, Net Interest expense, net for fiscal 2015 year-to-date was $110, compared with $300 last year. Interest expense, net for fiscal 2015 year-to-date includes $2 of unamortized financing cost charges related to the Company's first amendment to the Revolving ABL Credit Facility discussed under "Liquidity and Capital Resources" below. Interest expense, net for the fiscal 2014 year-to-date included $98 of unamortized financing cost charges and original issue discount acceleration and $71 of debt refinancing costs related to refinancing activities in conjunction with the sale of NAI and subsequent refinancing activities. When adjusted for these items, the remaining $23 decrease in Interest expense, net is primarily due to lower average interest rates on lower outstanding debt balances. Income Tax Provision (Benefit) Income tax expense on continuing operations for fiscal 2015 year-to-date was $42, or 34.6 percent of Earnings from continuing operations before income taxes, compared with an income tax benefit of $40, or 38.9 percent of Loss from continuing operations before income taxes, last year. The decrease in the effective tax rate reflects $2 of discrete tax benefits. Net Earnings (Loss) from Continuing Operations Net earnings from continuing operations for fiscal 2015 year-to-date were $79, compared with a Net loss from continuing operations of $62 last year. Net earnings from continuing operations for fiscal 2015 year-to-date include $3 of after-tax charges and costs related to unamortized financing cost charges, severance costs and information technology intrusion costs. Net loss from continuing operations for fiscal 2014 year-to-date included net charges and costs of $133 after-tax primarily related to debt refinancing activity, severance costs and acceleration of stock-based compensation charges, asset impairment, contract breakage costs and a legal settlement charge, offset in part by a gain on sale of property. When adjusted for these items, the remaining $9 after-tax increase is primarily due to $15 of lower net periodic pension expense, $14 of lower interest expense, $11 of lower depreciation and amortization, $10 of lower employee-related costs, $6 of lower contracted services, $3 of higher earnings from increased sales volume and $2 of discrete tax benefits, offset in part by $27 of lower TSA fees primarily due to the one-year transitional fees recognized last year, $14 of incremental investments to lower prices to customers, higher shrink, stronger private brands pricing and lower vendor funding, and $14 of higher other administrative costs, advertising costs and LIFO charge. (Loss) Income from Discontinued Operations, Net of Tax On January 10, 2013, the Company entered into a stock purchase agreement to sell NAI, which included components of Retail Food and functions of Corporate. The Company completed the sale of NAI on March 21, 2013. The financial results for those operations are presented as discontinued operations for all periods presented. Loss from discontinued operations, net of tax, was $1 for fiscal 2015 year-to-date, compared with income from discontinued operations, net of tax of $191 last year. Discontinued operations results for fiscal 2014 year-to-date reflect the completion of the sale of NAI on March 21, 2013, discrete tax benefits of $117 and a reduction to the loss on sale of NAI of $90, offset in part by severance and other costs of $13. 33-------------------------------------------------------------------------------- Table of Contents Non-GAAP Financial Measures The Company's Condensed Consolidated Financial Statements are prepared and presented in accordance with generally accepted accounting principles ("GAAP"). In addition to the above analysis of results of operations, the Company also considers certain other non-GAAP financial measures to assess the performance of our businesses. The measures and items identified below, such as Adjusted EBITDA, are provided as a supplement to our results of operations and related analysis, and should not be considered superior to, a substitute for or an alternative to any financial measure of performance prepared and presented in accordance with GAAP. Investors are cautioned that there are material limitations associated with the use of non-GAAP financial measures as an analytical tool. Certain adjustments to our GAAP financial measures reflected below exclude certain items that are occasionally recurring in nature and may be reflected in our financial results for the foreseeable future. These measurements and items may be different from non-GAAP financial measures used by other companies. All measurements are provided with a reconciliation from a GAAP measurement. Management believes the measurements and items identified below are important measures of business performance that provide investors with useful supplemental information. The Company utilizes certain non-GAAP measures to analyze underlying core business trends to understand operating performance. In addition, management utilizes certain non-GAAP measures as a compensation performance measure. The non-GAAP financial measures below should only be considered as an additional supplement to the Company's financial results reported in accordance with GAAP and should be reviewed in conjunction with the Company's results reported in accordance with GAAP in this Quarterly Report on Form 10-Q and in the Company's Annual Report on Form 10-K for the fiscal year ended February 22, 2014. Adjusted EBITDA is a non-GAAP supplemental performance measure the Company uses to facilitate operating performance comparisons of our businesses on a consistent basis. Adjusted EBITDA provides additional understanding of other factors and trends affecting our business which are used in the business planning process to understand expected performance, to evaluate results against those expectations, and as one of the compensation performance measures under certain compensation programs and plans. The Company defines Adjusted EBITDA as Net earnings (loss) from continuing operations, plus Interest expense, net and Income tax provision (benefit), less Net earnings attributable to noncontrolling interests calculated in accordance with GAAP, plus non-GAAP adjustments for Depreciation and amortization, LIFO charge (credit), certain non-recurring or unusual employee-related costs and pension related items (including severance costs, accelerated stock-based compensation charges, multiemployer pension withdrawal charges and other items), charges and costs related to debt financing activities, non-cash asset impairment and other charges and gains (including store closures, market exits and certain gains on the sale of property), goodwill and intangible asset impairment charges, legal settlement charges and gains, contract breakage costs and certain other non-cash charges or unusual items. Concurrent with the revised presentation of earnings attributable to noncontrolling interests as described in Note 1-Summary of Significant Accounting Policies within Part I, Item 1 of this Quarterly Report on Form 10-Q, the Company also revised its definition of Adjusted EBITDA to include net earnings attributable to noncontrolling interests such that the previously reported Adjusted EBITDA measures remained unchanged after corrections were made to certain Condensed Consolidated Financial Statement line items. These items are omitted either because they are non-cash items or are items that are not considered in our supplemental assessment of on-going business performance. Certain of these adjustments are considered in similar supplemental analyses by other companies, such as Depreciation and amortization, LIFO charge (credit) and certain other adjustments. Adjusted EBITDA is less disposed to variances in actual performance resulting from depreciation, amortization and other non-cash charges and credits, and more reflective of other factors that affect the Company's underlying operating performance. There are significant limitations to using Adjusted EBITDA as a financial measure including, but not limited to, it not reflecting cash expenditures for capital assets or contractual commitments, changes in working capital, income taxes and debt service expenses that are recurring in our results of operations. 34 -------------------------------------------------------------------------------- Table of Contents The following summarizes the calculation of Adjusted EBITDA for the second quarters of fiscal 2015 and 2014 and year-to-date periods ended September 6, 2014 and September 7, 2013: Second Quarter Ended Year-To-Date Ended September 6, September 7, September 6, September 7, 2014 2013 2014 2013 (12 weeks) (12 weeks) (28 weeks) (28 weeks) Net earnings (loss) from continuing operations $ 31 $ 40 $ 79 $ (62 ) Less Net earnings attributable to noncontrolling interests (2 ) (1 ) (4 ) (4 ) Income tax provision (benefit) 18 22 42 (40 ) Interest expense, net 46 51 110 300 Depreciation and amortization 65 70 154 168 LIFO charge (credit) 2 (1 ) 4 (1 ) Unusual employee-related costs and pension related items - - 1 39 Asset impairment and other charges, net of gains - (14 ) - - Legal settlement charges - 5 - 5 Contract breakage costs and certain other charges - - - 5 Information technology intrusion costs, net of insurance recoverable 1 - 1 - Adjusted EBITDA $ 161 $ 172 $ 387 $ 410 Comparison of Second Quarter Fiscal 2015 Adjusted EBITDA to Second Quarter Fiscal 2014 Adjusted EBITDA Adjusted EBITDA for the second quarter of fiscal 2015 was $161 compared with $172 last year, a decrease of $11. The decrease in Adjusted EBITDA is primarily attributable to $18 of lower TSA fees primarily due to the one-year transitional fees recognized last year, $10 of higher employee-related costs, excluding net periodic pension expense, and $3 of higher advertising expenses, offset in part by $11 of lower net periodic pension expense, $5 of higher earnings from increased sales volume and $4 of lower contracted services. Comparison of Fiscal 2015 Year-To-Date Adjusted EBITDA to Fiscal 2014 Year-To-Date Adjusted EBITDA Adjusted EBITDA for the year-to-date ended September 6, 2014 was $387 compared with $410 last year, a decrease of $23. The decrease in Adjusted EBITDA is primarily attributable to $44 of lower TSA fees primarily due to the one-year transitional fee recognized last year, $24 of incremental investments to lower prices to customers, higher shrink, stronger private brands pricing support and lower vendor funding, $7 of higher advertising costs and $6 of other administrative expenses, offset in part by $25 of lower net periodic pension expense, $16 of lower employee-related costs, $9 of lower contracted services expense and $8 of higher earnings from increased sales volume. LIQUIDITY AND CAPITAL RESOURCES Overview Management expects that the Company will continue to replenish operating assets and pay down debt obligations with internally generated funds. The Company's primary source of liquidity is from internally generated funds and from borrowing capacity under its credit facilities. The Company will continue to obtain short-term or long-term financing from its credit facilities. Long-term financing will be maintained through existing and new debt issuances and its credit facilities. The Company's short-term and long-term financing abilities are believed to be adequate as a supplement to internally generated cash flows to fund capital expenditures as opportunities arise. There can be no assurance, however, that the Company's business will continue to generate cash flow at current levels or that it will continually have access to credit on acceptable terms. Maturities of debt issued will depend on management's views with respect to the relative attractiveness of interest rates at the time of issuance and other debt maturities. A significant reduction in operating earnings or the incurrence of operating losses could have a negative impact on the Company's operating cash flow, which may limit the Company's ability to pay down its outstanding indebtedness as planned. As of September 6, 2014 and February 22, 2014, the Company had access to funds totaling $887 and $786, respectively, from the unused available credit under the Revolving ABL Credit Facility (as defined below). Working capital was $298 and $254 excluding the LIFO reserve as of September 6, 2014 and February 22, 2014, respectively. The Company has approximately $5 and $15 in aggregate debt maturities due in the remainder of fiscal 2015 and fiscal 2016, respectively. Aggregate debt maturities for fiscal 2016 are exclusive of any Excess Cash Flow prepayment requirements under the provisions of the Secured Term Loan Facility (as defined below), as that prepayment amount, if any, is not reasonably estimable as of September 6, 2014. Payments to reduce capital lease obligations are expected to total approximately $27 in both fiscal 2015 and 2016. 35-------------------------------------------------------------------------------- Table of Contents Strategic and operational investments in the Company's businesses and working capital needs are funded by cash provided from operations and on a short-term basis through available liquidity. Primary uses of cash include debt maturities and servicing, capital expenditures, working capital maintenance, contributions to various retirement plans and income tax payments. The Company's working capital needs are generally greater during the months leading up to high sales periods, such as the time period from prior to Thanksgiving through December. The Company typically finances these working capital needs with funds provided by operating activities and short-term borrowings. Inventories are managed primarily through demand forecasting and replenishing depleted inventories. The Company's continued access to short-term and long-term financing through credit markets depends on numerous factors including the condition of the credit markets and the Company's results of operations, cash flows, financial position and credit ratings. Cash Flow Information Operating Activities Net cash provided by (used in) operating activities from continuing operations was $158 and $(113) for fiscal 2015 and 2014 year-to-date, respectively. The increase in net cash provided by operating activities from continuing operations compared to last year is primarily attributable to a decrease in cash utilized in operating assets and liabilities, including income taxes, accrued liabilities and interest payable, offset in part by an increase in cash used in inventories. Net cash provided by (used in) operating activities from discontinued operations was $2 and $(111) for fiscal 2015 and 2014 year-to-date, respectively. Net cash used in fiscal 2014 reflects the completion of the sale of NAI and cash payments made for accrued liabilities and accounts payable related to the sale of NAI during the first quarter of fiscal 2014. Investing Activities Net cash (used in) investing activities from continuing operations was $(121) and $(29) for fiscal 2015 and 2014 year-to-date, respectively. The increase in cash used in investing activities in fiscal 2015 year-to-date compared to last year is primarily attributable to additional cash used for capital expenditures for Retail Food store remodels and business acquisitions. Net cash provided by investing activities from discontinued operations was $112 for fiscal 2014 year-to-date, reflecting proceeds received from the sale of NAI and NAI note receivable collections, offset in part by purchases of discontinued operations' property, plant and equipment. Financing Activities Net cash (used in) provided by financing activities from continuing operations was $(34) and $109 for fiscal 2015 and 2014 year-to-date, respectively. The increase in cash used in financing activities in fiscal 2015 year-to-date compared to last year is primarily attributable to $170 of proceeds received from the sale of the Company's common stock to Symphony Investors LLC (an affiliate of an investor consortium led by Cerberus Capital Management, L.P.) in connection with the sale of NAI in the first quarter of fiscal 2014 and $119 of higher net debt and capital lease payments, offset in part by $143 of lower debt financing costs primarily due to the costs paid last year associated with the sale of NAI, the amendment of the Secured Term Loan Facility and the refinancing of $372 of the Senior Notes due May 2016. Net cash (used in) the financing activities of discontinued operations was $(36) for fiscal 2014 year-to-date, reflecting payments on capital lease and long-term debt obligations prior to the sale of NAI. Debt Management and Credit Agreements The Company's credit facilities and certain long-term debt agreements have restrictive covenants and cross-default provisions which generally provide, subject to the Company's right to cure, for the acceleration of payments due in the event of a breach of a covenant or a default in the payment of a specified amount of indebtedness due under certain other debt agreements. The Company was in compliance with all such covenants and provisions for all periods presented. 36 -------------------------------------------------------------------------------- Table of Contents Senior Secured Credit Agreements As of September 6, 2014 and February 22, 2014, the Company had outstanding borrowings of $1,472 and $1,474, respectively, under its six-year $1,500 term loan facility (the "Secured Term Loan Facility"), secured by substantially all of the Company's real estate, equipment and certain other assets, which bears interest at the rate of LIBOR plus 3.50 percent and includes a floor on LIBOR set at 1.00 percent. The Secured Term Loan Facility is guaranteed by the Company's material subsidiaries (together with the Company, the "Term Loan Parties"). To secure their obligations under the Secured Term Loan Facility, the Company granted a perfected first-priority security interest for the benefit of the facility lenders in the Term Loan Parties' equity interest in Moran Foods, LLC, the parent entity of the Company's Save-A-Lot business, and the Term Loan Parties granted a perfected first priority security interest in substantially all of their intellectual property and a first priority mortgage lien and security interest in certain owned or ground-leased real estate and associated equipment pledged as collateral. As of September 6, 2014 and February 22, 2014, there was $753 and $787, respectively, of owned or ground-leased real estate and associated equipment pledged as collateral, which was included in Property, plant and equipment, net in the Condensed Consolidated Balance Sheets. In addition, the obligations of the Term Loan Parties under the Secured Term Loan Facility are secured by second-priority security interests in the collateral securing the Company's five-year $1,000 asset-based revolving ABL credit facility (the "Revolving ABL Credit Facility"). Including the discount, $4 and $0 of the Secured Term Loan Facility was classified as current as of September 6, 2014 and February 22, 204, respectively. The loans under the Secured Term Loan Facility may be voluntarily prepaid in certain minimum principal amounts, subject to the payment of breakage or similar costs. Pursuant to the Secured Term Loan Facility, the Company must, subject to certain customary reinvestment rights, apply 100 percent of Net Cash Proceeds (as defined in the facility) from certain types of asset sales (excluding proceeds of the collateral security of the Revolving ABL Credit Facility and other secured indebtedness) to prepay the loans outstanding under the Secured Term Loan Facility. Beginning with the fiscal year ended February 22, 2014, the Company must prepay loans outstanding under the facility no later than 90 days after the fiscal year end in an aggregate principal amount equal to a percentage (which percentage ranges from 0 to 50 percent depending on the Company's Total Secured Leverage Ratio (as defined in the facility) as of the last day of such fiscal year) of Excess Cash Flow (as defined in the facility) for the fiscal year then ended minus any voluntary prepayments made during such fiscal year with Internally Generated Cash (as defined in the facility). The potential amount of prepayment from Excess Cash Flow that will be required for fiscal 2015 is not reasonably estimable as of September 6, 2014. On April 17, 2014, the Company entered into an amendment (the "First ABL Amendment") to its Revolving ABL Credit Facility that reduced the interest rates to LIBOR plus 1.50 percent to LIBOR plus 2.00 percent or prime plus 0.50 percent to 1.00 percent, depending on utilization. The First ABL Amendment also eliminated the springing maturity provision that would have accelerated the maturity of the facility to 90 days prior to May 1, 2016 if more than $250 of the Company's 8.00 percent Senior Notes due May 2016 remained outstanding as of that date. The springing maturity provision was replaced with a springing reserve provision that calls for a reserve to be placed against availability under the facility in the amount of any outstanding Material Indebtedness (as defined in the facility) that is due within 30 days of the date the reserve is established. The First ABL Amendment also amended the facility to provide that the Company may incur additional term loans under the Secured Term Loan Facility in an aggregate principal amount of up to $500 instead of $250 as was in effect prior to the First ABL Amendment, subject to identifying term loan lenders or other institutional lenders willing to provide the additional loans and satisfying certain terms and conditions. In addition, the First ABL Amendment extended the maturity date of the facility to February 21, 2019 and contains modified covenants to give the Company additional strategic and operational flexibility. As of September 6, 2014 and February 22, 2014, there were no outstanding borrowings under the Revolving ABL Credit Facility. As of September 6, 2014, letters of credit outstanding under the Revolving ABL Credit Facility were $85 at fees of 1.625 percent, and the unused available credit under this facility was $887 with facility fees of 0.375 percent. As of February 22, 2014, letters of credit outstanding under the Company's previous revolving credit facility due March 2018 were $101 at fees of 2.125 percent, and the unused available credit under this facility was $786 with facility fees of 0.375 percent. As of September 6, 2014 and February 22, 2014, the Revolving ABL Credit Facility and the Company's previous revolving credit facility due March 2018 was secured on a first priority basis by $1,188 and $1,066, respectively, of certain inventory assets included in Inventories, net, all eligible receivables included in Receivables, net, all of the Company's pharmacy scripts included in Intangible assets, net and all credit card receivables of wholly-owned stores included in Cash and cash equivalents in the Condensed Consolidated Balance Sheets. The revolving loans under the Revolving ABL Credit Facility may be voluntarily prepaid in certain minimum principal amounts, in whole or in part, without premium or penalty, subject to breakage or similar costs. The Company and those subsidiaries named as borrowers under the Revolving ABL Credit Facility are required to repay the revolving loans in cash and provide cash collateral under this facility to the extent that the revolving loans and letters of credit exceed the lesser of the borrowing base then in effect or the aggregate amount of the lenders' commitments under the Revolving ABL Credit Facility. During the year-to-date period ended September 6, 2014, the Company borrowed and repaid $1,361 under its Revolving ABL Credit Facility and its previous revolving credit facility due March 2018. During the year-to-date period ended September 7, 2013, the Company borrowed $2,108 and repaid $2,148 under its previous revolving credit facilities. Certain of the Company's material subsidiaries are co-borrowers under the Revolving ABL Credit Facility, and this facility is guaranteed by the rest of the Company's material subsidiaries (the Company and those subsidiaries named as borrowers and guarantors under the Revolving ABL Credit Facility, the "ABL Loan Parties"). To secure their obligations under this facility, the ABL Loan Parties have granted a perfected first-priority security interest for the benefit of the 37-------------------------------------------------------------------------------- Table of Contents facility lenders in its present and future inventory, credit card, wholesale trade, pharmacy and certain other receivables, prescription files and related assets. In addition, the obligations under the Revolving ABL Credit Facility are secured by second-priority liens on and security interests in the collateral securing the Secured Term Loan Facility, subject to certain limitations to ensure compliance with the Company's outstanding debt instruments and leases. Both the Secured Term Loan Facility and the Revolving ABL Credit Facility limit the Company's ability to make Restricted Payments (as defined in both the Secured Term Loan Facility and the Revolving ABL Credit Facility), which include dividends to stockholders. The Secured Term Loan Facility caps the aggregate amount of Restricted Payments that may be made over the life of the Secured Term Loan Facility. That aggregate cap can fluctuate over time and the cap could be reduced by certain other actions taken by the Company, including certain debt prepayments and Permitted Investments (as defined in the Secured Term Loan Facility). As of September 6, 2014, the aggregate cap on Restricted Payments was approximately $311. The Revolving ABL Credit Facility permits regularly scheduled dividends up to $50 in aggregate per fiscal year as long as no Cash Dominion Event (as defined in the Revolving ABL Credit Facility) exists. The Revolving ABL Credit Facility permits other Restricted Payments as long as the Payment Conditions (as defined in the Revolving ABL Credit Facility) are met. On September 30, 2014, the Company entered into a second amendment (the "Second ABL Amendment") to its Revolving ABL Credit Facility that extended the maturity date of the facility to September 30, 2019 from its prior maturity date of February 21, 2019. The Second ABL Amendment also added a springing maturity provision that would accelerate the maturity of the facility to 90 days prior to the scheduled maturity date of the Secured Term Loan Facility if there are any obligations outstanding under the Secured Term Loan Facility as of that date. By extending the maturity date of the Revolving ABL Credit Facility to a date at least six months later than the maturity date of the Secured Term Loan Facility, the Company now has greater flexibility to prepay the 8.00 percent Senior Notes due May 2016 with proceeds of the Revolving ABL Credit Facility. Debentures The remaining $628 of 8.00 percent Senior Notes due 2016 and the $400 of 6.75 percent Senior Notes due June 2021 contain operating covenants, including limitations on liens and on sale and leaseback transactions. The Company was in compliance with all such covenants and provisions for all periods presented. Capital Expenditures Capital expenditures for fiscal 2015 year-to-date were $85, excluding cash paid for business acquisitions, and primarily consisted of investments in Retail Food store remodels, logistics and information technology. In addition, during fiscal 2015 year-to-date the Company paid $47 for the purchase of Rainbow and licensed Save-A-Lot stores. Capital expenditures and cash paid for business acquisitions for fiscal 2015 are projected to be approximately $270 to $280, including capital lease additions. Pension and Other Postretirement Benefit Obligations Cash contributions to defined benefit pension and other postretirement benefit plans were $68 and $95 in fiscal 2015 and 2014 year-to-date, respectively, in accordance with the Employee Retirement Income Security Act of 1974, as amended ("ERISA") minimum requirements. Cash contributions decreased in fiscal 2015 year-to-date compared to fiscal 2014 year-to-date due to $50 of contributions made in the first quarter of fiscal 2014 prior to the sale of NAI. In August 2014, the Highway and Transportation Funding Act of 2014, which included an extension of pension funding interest rate relief, was signed into law. The Highway and Transportation Funding Act includes a provision for interest rate stabilization for defined benefit employee pension plans. As a result of this stabilization provision, the Company expects its required pension contributions to the SUPERVALU INC. Retirement Plan to decrease significantly for the next several years. The Company anticipates fiscal 2015 contributions to pension and other postretirement benefit plans, including excess contributions under the amended term sheet with AB Acquisition LLC ("AB Acquisition") and the Pension Benefit Guaranty Corporation (the "PBGC") as described in below, will be approximately $120 to $125. The Company's funding policy for the defined benefit pension plans is to contribute the minimum contribution amount required under ERISA and the Pension Protection Act of 2006 as determined by the Company's external actuarial consultant. At the Company's discretion, additional funds may be contributed to the pension plan. The Company may accelerate contributions or undertake contributions in excess of the minimum requirements from time to time subject to the availability of cash in excess of operating and financing needs or other factors as may be applicable. The Company assesses the relative attractiveness of the use of cash to accelerate contributions considering such factors as expected return on assets, discount rates, cost of debt, reducing or eliminating required PBGC variable rate premiums or in order to achieve exemption from participant notices of underfunding. The Company and AB Acquisition entered into a binding term sheet with the PBGC relating to issues regarding the effect of the sale of NAI on certain SUPERVALU retirement plans. The agreement required that the Company not pay any dividends to its stockholders at any time for the period beginning on January 9, 2013 and ending on the earliest of (i) March 21, 2018, (ii) the date on which the total of all contributions made to the SUPERVALU Retirement Plan on or after the closing date of the sale of NAI is at least $450 and (iii) the date on which SUPERVALU's unsecured credit rating is BB+ from Standard & Poor's or Ba1 from Moody's (such earliest date, the end of the "PBGC Protection Period"). The Company had also agreed to make $100 in aggregate contributions to the 38-------------------------------------------------------------------------------- Table of Contents SUPERVALU Retirement Plan in excess of the minimum required contributions at or before the end of fiscal years 2015 - 2017 (where such fiscal years end during the PBGC Protection Period), and AB Acquisition had agreed to provide a guarantee to the PBGC for such excess payments. On September 11, 2014, the Company, AB Acquisition and the PBGC amended the term sheet. Pursuant to that amendment, the Company made excess contributions of $47 to the SUPERVALU Retirement Plan and the PBGC Protection Period ended on September 15, 2014. Including these excess contributions and the impact of the Highway and Transportation Funding Act of 2014 on pension funding requirements described above in Note 9-Benefit Plans of the Condensed Consolidated Financial Statements, the Company anticipates fiscal 2015 total contributions to pension and other postretirement benefit plans to be approximately $120 to $125. The Company is no longer restricted by the term sheet from paying dividends to its stockholders and has fully satisfied its obligations to make excess contributions to the SUPERVALU Retirement Plan. While the Company is no longer restricted from paying dividends to its stockholders under the term sheet, the Company has no current intent to resume paying dividends. The payment of future dividends is subject to the discretion of the Company's Board of Directors and the requirements of Delaware law, and will depend on a variety of factors the Company's Board of Directors may deem relevant. In addition, as described above in Senior Secured Credit Agreements, the Company is limited in the aggregate amount of dividends that the Company may pay during the term of its Secured Term Loan Facility and would need to meet certain conditions in the Secured Term Loan Facility and the Revolving ABL Credit Facility. In the second quarter of fiscal 2015, the Company announced its plans to offer a lump sum payment option to certain former employees who are deferred vested participants in the SUPERVALU INC. Retirement Plan (the "Plan") and who have not yet begun receiving monthly pension benefit payments. The Company expects to incur a non-cash settlement charge in the range of approximately $50 to $65 from the acceleration of a portion of the accumulated unrecognized actuarial loss in the third quarter of 2015. The estimated settlement charge is based on the lump sum election rate of eligible participants and the Plan's estimated funded status at September 30, 2014 using current discount rates, market values of Plan assets, and the anticipated adoption of the RP-2014 Generational Mortality Table (using scale MP-2014). The actual settlement charge could differ from the estimated range due to changes in discount rates, return on Plan assets and the final adoption of the RP-2014 Generational Mortality Table. The voluntary lump sum payments are expected to be completed in the Company's third quarter of fiscal 2015. COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS Guarantees The Company has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various retailers as of September 6, 2014. These guarantees were generally made to support the business growth of independent retail customers. The guarantees are generally for the entire terms of the leases or other debt obligations with remaining terms that range from less than one year to 16 years, with a weighted average remaining term of approximately eight years. For each guarantee issued, if the independent retail customer defaults on a payment, the Company would be required to make payments under its guarantee. Generally, the guarantees are secured by indemnification agreements or personal guarantees of the independent retail customer. The Company reviews performance risk related to its guarantees of independent retail customer obligations based on internal measures of credit performance. As of September 6, 2014, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $75 ($59 on a discounted basis). Based on the indemnification agreements, personal guarantees and results of the reviews of performance risk, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these contingent obligations under the Company's guarantee arrangements. The Company is contingently liable for leases that have been assigned to various third parties in connection with facility closings and dispositions. The Company could be required to satisfy the obligations under the leases if any of the assignees are unable to fulfill their lease obligations. Due to the wide distribution of the Company's assignments among third parties, and various other remedies available, the Company believes the likelihood that it will be required to assume a material amount of these obligations is remote. The Company is a party to a variety of contractual agreements under which it may be obligated to indemnify the other party for certain matters in the ordinary course of business, which indemnities may be secured by operation of law or otherwise. These agreements primarily relate to the Company's commercial contracts, the TSA, contracts entered into for the purchase and sale of stock or assets, operating leases and other real estate contracts, financial agreements, agreements to provide services to the Company and agreements to indemnify officers, directors and employees in the performance of their work. While the Company's aggregate indemnification obligation could result in a material liability, the Company is not aware of any matters that are expected to result in a material liability. Following the sale of NAI, the Company remains contingently liable with respect to certain self-insurance commitments and other guarantees as a result of parental guarantees issued by SUPERVALU INC. with respect to the obligations of NAI that were incurred while NAI was a subsidiary of the Company. As of June 30, 2014, the total undiscounted amount of all such guarantees was $300 ($269 on a discounted basis). Based on the expected settlement of the self-insurance claims that underlie the Company's commitments, the Company believes that such contingent liabilities will continue to decline. Subsequent to the sale of NAI, NAI collateralized most of these obligations with letters of credit to numerous states and certain NAI retail banner real estate assets. Because NAI remains a primary obligor on these self-insurance and other obligations and has collateralized most of the self-insurance obligations for which the Company remains contingently liable, the Company believes that the likelihood that it will be required to assume a material amount of these obligations is remote. Accordingly, no amount has been recorded in the Condensed Consolidated Balance Sheets for these guarantees. 39 -------------------------------------------------------------------------------- Table of Contents Other Contractual Commitments In the ordinary course of business, the Company enters into supply contracts to purchase products for resale and purchase and service contracts for fixed asset and information technology commitments. These contracts typically include either volume commitments or fixed expiration dates, termination provisions and other standard contractual considerations. As of September 6, 2014, the Company had approximately $327 of non-cancelable future purchase obligations. Legal Proceedings The Company is a party to various legal proceedings arising from the normal course of business as described in Part II-Other Information, Item 1, under the caption "Legal Proceedings" and in Note 12-Commitments, Contingencies and Off-Balance Sheet Arrangements of this Quarterly Report on Form 10-Q, none of which, in management's opinion, is expected to have a material adverse impact on the Company's financial condition, results of operations or cash flows. Contractual Obligations There have been no material changes in the Company's contractual obligations since the end of fiscal 2014. Refer to Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended February 22, 2014 for additional information regarding the Company's contractual obligations. CRITICAL ACCOUNTING POLICIES There were no material changes in the Company's critical accounting policies during the period covered by this Quarterly Report on Form 10-Q. Refer to the description of critical accounting policies included in Item 7 of the Company's Annual Report on Form 10-K for the fiscal year ended February 22, 2014. CAUTIONARY STATEMENTS FOR PURPOSES OF THE SAFE HARBOR PROVISIONS OF THE SECURITIES LITIGATION REFORM ACT Any statements contained in this Quarterly Report on Form 10-Q regarding the outlook for the Company's businesses and their respective markets, such as projections of future performance, guidance, statements of the Company's plans and objectives, forecasts of market trends and other matters, are forward-looking statements based on the Company's assumptions and beliefs. Such statements may be identified by such words or phrases as "will likely result," "are expected to," "will continue," "outlook," "will benefit," "is anticipated," "estimate," "project," "believes" or similar expressions. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from those discussed in such statements and no assurance can be given that the results in any forward-looking statement will be achieved. For these statements, SUPERVALU INC. claims the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995. Any forward-looking statement speaks only as of the date on which it is made, and we disclaim any obligation to subsequently revise any forward-looking statement to reflect events or circumstances after such date or to reflect the occurrence of anticipated or unanticipated events. Certain factors could cause the Company's future results to differ materially from those expressed or implied in any forward-looking statements contained in this report. These factors include the factors discussed in Part I, Item 1A of the Company's Annual Report on Form 10-K for the fiscal year ended February 22, 2014 under the heading "Risk Factors," the factors discussed in Part II, Item 1A of this Quarterly Report on Form 10-Q under heading "Risk Factors," the factors discussed below and any other cautionary statements, written or oral, which may be made or referred to in connection with any such forward-looking statements. Since it is not possible to foresee all such factors, these factors should not be considered as complete or exhaustive. Competition • The Company's ability to attract and retain customers, and the success of the Company's independent retailers • Increased competition resulting from consolidation in the grocery industry, and the Company's ability to effectively respond • Competition from other food or drug retail chains, supercenters, hard discount, non-traditional competitors and alternative formats in the Company's markets • Customer reaction to the increased presence of competitors, including non-traditional competitors, in the Company's markets • Competition for employees, store sites and products • The ability of the Company's Independent Business to maintain or increase sales due to wholesaler competition, increased competition faced by customers and increased customer self-distribution • Changes in economic conditions or consumer preferences that affect consumer spending or buying habits • The success of the Company's promotional and sales programs and the Company's ability to respond to the promotional and pricing practices of competitors 40 -------------------------------------------------------------------------------- Table of Contents Execution of Initiatives • The Company's ability to identify and effectively execute on performance improvement and customer service initiatives • The Company's ability to offer competitive products and services at low prices and maintain high levels of productivity and efficiency • The ability to grow by attracting new customers and successfully opening new locations • The ability to successfully execute on initiatives involving acquisitions or dispositions • The Company's ability to respond appropriately to competitors' initiatives Substantial Indebtedness • The impact of the Company's substantial indebtedness, including the restrictive operating covenants in the underlying credit facilities, on its business and financial flexibility • The Company's ability to comply with debt covenants or to refinance the Company's debt obligations • A downgrade in the Company's debt ratings, which may increase the cost of borrowing or adversely affect the Company's ability to access one or more financial markets • The availability of favorable credit and trade terms Economic Conditions • Sustained or worsening economic conditions, and the low level of consumer confidence and high unemployment rates that affect consumer spending or buying habits • Increases in unemployment, insurance and healthcare costs, energy costs and commodity prices, which could impact consumer spending or buying habits and the cost of doing business • Increases in interest rates, labor costs and tax rates, and other changes in applicable law • Food and drug inflation or deflation Labor Relations • The Company's ability to renegotiate labor agreements with its unions • Resolution of issues associated with rising pension, healthcare and employee benefit costs • Potential for work disruption from labor disputes Increased Employee Benefit Costs • Increased operating costs resulting from rising employee benefit costs • Potential increases in health plan costs resulting from health care reform • Pension funding obligations related to current and former employees of the Company and the Company's divested operations • Required funding of multiemployer pension plans and any withdrawal liability • The effect of the financial condition of the Company's pension plans on the Company's debt ratings Relationships with Albertson's LLC and New Albertson's, Inc. • Disruptions in current plans, operations and business relationships • Ability to effectively manage the Company's cost structure to realize benefits from the Transition Services Agreement with each of Albertson's LLC and NAI • Non-renewal or reduction in the scope, level of services, or revenue under the Transition Services Agreements, including as a result of the announced acquisition of Safeway Inc. by AB Acquisition LLC, the parent company to each of Albertson's LLC and NAI • Ability to eliminate costs and overhead, including costs not directly tied to providing services under the Transition Services Agreements, in the event of any non-renewal or reduction in the scope, level of services or revenues provided under the Transition Services Agreements • Ability to continue to perform services at the applicable service level under the Transition Services Agreements • Ability to attract and retain qualified personnel to perform services under the Transition Services Agreements • The effect of the information technology intrusions that also impacted Albertson's LLC and NAI Intrusions to and Disruptions of Information Technology Systems • Dependence of the Company's businesses on computer hardware and software systems that are vulnerable to security breach by computer hackers and cyber terrorists • The recent intrusions into the Company's information technology systems and the Company's current inability to determine the full extent of their impact, if any, on its business and future operating results • Risk of misappropriation of sensitive data, including customer and employee data, as a result of the recent information technology intrusions or any future cyber-attack or breach and potential related claims • Costs of responding to inquiries, claims or enforcement actions in connection with the recent information technology intrusions or any future attack or breach resulting in fees and penalties, the loss, damage or misappropriation of information, and potential related damage to the Company's reputation • Costs of complying with stricter privacy and information security law 41 -------------------------------------------------------------------------------- Table of Contents • Ability of the information technology systems of the Company or its vendors to prevent, contain or detect cyber-attacks or security breaches • Difficulties in developing, maintaining or upgrading information technology systems • Business disruptions or losses resulting from failure of these systems to perform as anticipated for any reason or data theft, information espionage, or other criminal activity directed at the Company's computer or communications systems • Inability to keep pace with changing customer expectations and new developments and technology investments by the Company's competitors Governmental Regulation • Costs of compliance with existing laws and regulations and changes in applicable laws and regulations that impose additional requirements or restrictions on the operation of the Company's businesses • The ability to timely obtain permits, comply with government regulations or make capital expenditures required to maintain compliance with government regulations, including those governing ethical, anti-bribery and similar business practices • Potential costs of compliance with additional foreign laws and regulations if the Company seeks and attains a larger international footprint Food and Drug Safety • Events that give rise to actual or potential food contamination, drug contamination or foodborne illness or injury or any adverse publicity relating to these types of concerns, whether or not valid • Potential recall costs and product liability claims Legal Proceedings • Unfavorable outcomes and the costs to defend litigation, governmental or administrative proceedings or other disputes, including those related to the recent information technology intrusions experienced by the Company • Adverse publicity related to such unfavorable outcomes Severe Weather, Natural Disasters and Adverse Climate Changes • Property damage or business disruption resulting from severe weather conditions and natural disasters that affect the Company and the Company's customers or suppliers • Unseasonably adverse climate conditions that impact the availability or cost of certain products in the grocery supply chain Disruption to Supply Chain and Distribution Network • The Company's ability to effectively maintain its supply chain and distribution network without interruption • Disruptions due to weather, product recalls, crop conditions, regulatory actions, supplier instability, transportation interruptions, labor supply or vendor disputes Changes in Military Business • Competition in the Company's military business • Changes in the commissary system, reductions in government expenditures or funding, or changes in military staffing levels or the locations of bases Adequacy of Insurance • Variability in actuarial projections regarding workers' compensation and associated medical costs, automobile and general liability • Potential increase in the number or severity of claims for which the Company is self-insured • Adequacy of cybersecurity insurance maintained by the Company to offset any losses or damages related to the recent information technology intrusions and any future intrusions experienced by the Company Volatility in Fuel and Energy Costs • Availability and cost of energy and fuel to store and transport products • Volatility of fuel, energy and natural gas prices • Risks associated with possession of compressed natural gas equipment and a fueling station Asset Impairment Charges • Unfavorable changes in the Company's industry, the broader economy, market conditions, business operations, competition or the Company's stock price and market capitalization that could require impairment to intangible assets, including goodwill, and tangible assets, including property, plant and equipment 42 -------------------------------------------------------------------------------- Table of Contents Stock Price Volatility • Fluctuations in the Company's stock price related to actual or perceived operating performance, any of the factors listed above or stock market fluctuations |