SUPERVALU INC - FORM 10-Q - October 21, 2015

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period (12 weeks) ended September 12, 2015.
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from                      to                     .
Commission File Number: 1-5418
 
SUPERVALU INC.
(Exact name of registrant as specified in its charter)
 
DELAWARE
 
41-0617000
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
 
 
 
11840 VALLEY VIEW ROAD
EDEN PRAIRIE, MINNESOTA
 
55344
(Address of principal executive offices)
 
(Zip Code)
(952) 828-4000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  x    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer  x
 
Accelerated filer  ¨
 
Non-accelerated filer  ¨
 
Smaller reporting company  ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  x
As of October 16, 2015, there were 265,916,275 shares of the issuer’s common stock outstanding.
 


SUPERVALU INC. and Subsidiaries
Quarterly Report on Form 10-Q
TABLE OF CONTENTS
Item
 
Page
 
 
 
 
 
1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
 
 
 
 
 
1.
 
 
 
1A.
 
 
 
2.
 
 
 
3.
 
 
 
4.
 
 
 
5.
 
 
 
6.
 
 
 
 



PART I - FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED SEGMENT FINANCIAL INFORMATION
(Unaudited)
(In millions, except percent data)
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net sales
 
 
 
 
 
 
 
Independent Business
$
1,831

 
$
1,835

 
$
4,293

 
$
4,255

% of total
45.1
%
 
45.4
%
 
45.4
%
 
45.8
%
Save-A-Lot
1,091

 
1,057

 
2,499

 
2,413

% of total
26.8
%
 
26.2
%
 
26.4
%
 
25.9
%
Retail Food
1,092

 
1,105

 
2,565

 
2,535

% of total
26.9
%
 
27.3
%
 
27.1
%
 
27.2
%
Corporate
48

 
44

 
112

 
102

% of total
1.2
%
 
1.1
%
 
1.1
%
 
1.1
%
Total net sales
$
4,062

 
$
4,041

 
$
9,469

 
$
9,305

 
100.0
%
 
100.0
%
 
100.0
%
 
100.0
%
Operating earnings
 
 
 
 
 
 
 
Independent Business
$
49

 
$
54

 
$
126

 
$
120

% of Independent Business sales
2.7
%
 
2.9
%
 
2.9
%
 
2.8
%
Save-A-Lot
32

 
26

 
83

 
72

% of Save-A-Lot sales
3.0
%
 
2.5
%
 
3.3
%
 
3.0
%
Retail Food
10

 
20

 
43

 
50

% of Retail Food sales
0.9
%
 
1.8
%
 
1.7
%
 
2.0
%
Corporate
3

 
(6
)
 
—

 
(13
)
Total operating earnings
94

 
94

 
252

 
229

% of total net sales
2.3
%
 
2.3
%
 
2.7
%
 
2.5
%
Interest expense, net
44

 
46

 
103

 
110

Equity in earnings of unconsolidated affiliates
—

 
(1
)
 
(2
)
 
(2
)
Earnings from continuing operations before income taxes
50

 
49

 
151

 
121

Income tax provision
19

 
18

 
57

 
42

Net earnings from continuing operations
31

 
31

 
94

 
79

Income (loss) from discontinued operations, net of tax
2

 
2

 
3

 
(1
)
Net earnings including noncontrolling interests
33

 
33

 
97

 
78

Less net earnings attributable to noncontrolling interests
(2
)
 
(2
)
 
(5
)
 
(4
)
Net earnings attributable to SUPERVALU INC.
$
31

 
$
31

 
$
92

 
$
74

See Notes to Condensed Consolidated Financial Statements.

1

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In millions, except per share data)
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net sales
$
4,062

 
$
4,041

 
$
9,469

 
$
9,305

Cost of sales
3,479

 
3,467

 
8,076

 
7,976

Gross profit
583

 
574

 
1,393

 
1,329

Selling and administrative expenses
489

 
480

 
1,141

 
1,100

Operating earnings
94

 
94

 
252

 
229

Interest expense, net
44

 
46

 
103

 
110

Equity in earnings of unconsolidated affiliates
—

 
(1
)
 
(2
)
 
(2
)
Earnings from continuing operations before income taxes
50

 
49

 
151

 
121

Income tax provision
19

 
18

 
57

 
42

Net earnings from continuing operations
31

 
31

 
94

 
79

Income (loss) from discontinued operations, net of tax
2

 
2

 
3

 
(1
)
Net earnings including noncontrolling interests
33

 
33

 
97

 
78

Less net earnings attributable to noncontrolling interests
(2
)
 
(2
)
 
(5
)
 
(4
)
Net earnings attributable to SUPERVALU INC.
$
31

 
$
31

 
$
92

 
$
74

 
 
 
 
 
 
 
 
Basic net earnings (loss) per share attributable to SUPERVALU INC.:
Continuing operations
$
0.11

 
$
0.11

 
$
0.34

 
$
0.29

Discontinued operations
$
0.01

 
$
0.01

 
$
0.01

 
$
(0.01
)
Basic net earnings per share
$
0.12

 
$
0.12

 
$
0.35

 
$
0.28

Diluted net earnings (loss) per share attributable to SUPERVALU INC.:
Continuing operations
$
0.11

 
$
0.11

 
$
0.33

 
$
0.29

Discontinued operations
$
0.01

 
$
0.01

 
$
0.01

 
$
(0.01
)
Diluted net earnings per share
$
0.11

 
$
0.11

 
$
0.34

 
$
0.28

Weighted average number of shares outstanding:
 
 
 
 
 
 
 
Basic
263

 
260

 
262

 
260

Diluted
268

 
264

 
268

 
263

See Notes to Condensed Consolidated Financial Statements.

2

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Unaudited)
(In millions)
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net earnings including noncontrolling interests
$
33

 
$
33

 
$
97

 
$
78

Other comprehensive income:
 
 
 
 
 
 
 
Recognition of pension and other postretirement benefit obligations(1)
9

 
7

 
23

 
18

Change in fair value of cash flow hedges(2)
(1
)
 
—

 
(2
)
 
—

Total other comprehensive income
8

 
7

 
21

 
18

Comprehensive income including noncontrolling interests
41

 
40

 
118

 
96

Less comprehensive income attributable to noncontrolling interests
(2
)
 
(2
)
 
(5
)
 
(4
)
Comprehensive income attributable to SUPERVALU INC.
$
39

 
$
38

 
$
113

 
$
92

(1)
Amounts are net of tax benefit of $6, $5, $14 and $10 for second quarters of fiscal 2016 and 2015, and for fiscal 2016 and 2015 year-to-date, respectively.
(2)
Amounts are net of tax expense of $0, $0, $1 and $0 for the second quarters of fiscal 2016 and 2015, and for fiscal 2016 and 2015 year-to-date, respectively.
See Notes to Condensed Consolidated Financial Statements.


3

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED BALANCE SHEETS
(In millions, except par value data)
 
September 12, 2015
 
February 28, 2015
 
(Unaudited)
 
 
ASSETS
 
 
 
Current assets
 
 
 
Cash and cash equivalents
$
247

 
$
114

Receivables, net
491

 
482

Inventories, net
1,019

 
984

Other current assets
87

 
120

Total current assets
1,844

 
1,700

Property, plant and equipment, net
1,430

 
1,470

Goodwill
865

 
865

Intangible assets, net
66

 
48

Deferred tax assets
266

 
265

Other assets
141

 
137

Total assets
$
4,612

 
$
4,485

LIABILITIES AND STOCKHOLDERS’ DEFICIT
 
 
 
Current liabilities
 
 
 
Accounts payable
$
1,175

 
$
1,121

Accrued vacation, compensation and benefits
192

 
204

Current maturities of long-term debt and capital lease obligations
308

 
35

Other current liabilities
211

 
173

Total current liabilities
1,886

 
1,533

Long-term debt
2,197

 
2,480

Long-term capital lease obligations
208

 
213

Pension and other postretirement benefit obligations
547

 
602

Long-term tax liabilities
112

 
119

Other long-term liabilities
173

 
174

Commitments and contingencies

 

Stockholders’ deficit
 
 
 
Common stock, $0.01 par value: 400 shares authorized; 266 and 262 shares issued, respectively
3

 
3

Capital in excess of par value
2,795

 
2,810

Treasury stock, at cost, 1 and 2 shares, respectively
(4
)
 
(33
)
Accumulated other comprehensive loss
(402
)
 
(423
)
Accumulated deficit
(2,911
)
 
(3,003
)
Total SUPERVALU INC. stockholders’ deficit
(519
)
 
(646
)
Noncontrolling interests
8

 
10

Total stockholders’ deficit
(511
)
 
(636
)
Total liabilities and stockholders’ deficit
$
4,612

 
$
4,485

See Notes to Condensed Consolidated Financial Statements.


4

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ DEFICIT
(Unaudited)
(In millions)
 
Common
Stock
 
Capital in Excess of Par Value
 
Treasury
Stock
 
Accumulated
Other
Comprehensive
Loss
 
Accumulated
Deficit
 
SUPERVALU INC.
Stockholders’
Deficit
 
Non-controlling
Interests
 
Total
Stockholders’
Deficit
Balances as of February 22, 2014
$
3

 
$
2,862

 
$
(101
)
 
$
(307
)
 
$
(3,195
)
 
$
(738
)
 
$
8

 
$
(730
)
Net earnings
—

 
—

 
—

 
—

 
74

 
74

 
4

 
78

Other comprehensive income, net of tax of $10
—

 
—

 
—

 
18

 
—

 
18

 
—

 
18

Sales of common stock under option plans
—

 
(47
)
 
52

 
—

 
—

 
5

 
—

 
5

Stock-based compensation
—

 
12

 
—

 
—

 
—

 
12

 
—

 
12

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(6
)
 
(6
)
Contributions from noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
3

 
3

Tax impact on stock-based awards and other
—

 
(12
)
 
(2
)
 
—

 
—

 
(14
)
 
—

 
(14
)
Balances as of September 6, 2014
$
3

 
$
2,815

 
$
(51
)
 
$
(289
)
 
$
(3,121
)
 
$
(643
)
 
$
9

 
$
(634
)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balances as of February 28, 2015
$
3

 
$
2,810

 
$
(33
)
 
$
(423
)
 
$
(3,003
)
 
$
(646
)
 
$
10

 
$
(636
)
Net earnings
—

 
—

 
—

 
—

 
92

 
92

 
5

 
97

Other comprehensive income, net of tax of $13
—

 
—

 
—

 
21

 
—

 
21

 
—

 
21

Sales of common stock under option plans
—

 
(12
)
 
21

 
—

 
—

 
9

 
—

 
9

Stock-based compensation
—

 
13

 
—

 
—

 
—

 
13

 
—

 
13

Distributions to noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(7
)
 
(7
)
Tax impact on stock-based awards and other
—

 
(16
)
 
8

 
—

 
—

 
(8
)
 
—

 
(8
)
Balances as of September 12, 2015
$
3

 
$
2,795

 
$
(4
)
 
$
(402
)
 
$
(2,911
)
 
$
(519
)
 
$
8

 
$
(511
)
See Notes to Condensed Consolidated Financial Statements.


5

SUPERVALU INC. and Subsidiaries
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In millions)
 
Year-To-Date Ended
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Cash flows from operating activities
 
 
 
Net earnings including noncontrolling interests
$
97

 
$
78

Income (loss) from discontinued operations, net of tax
3

 
(1
)
Net earnings from continuing operations
94

 
79

Adjustments to reconcile Net earnings from continuing operations to Net cash provided by operating activities – continuing operations:
 
 
 
Asset impairment and other charges
2

 
2

Net gain on sale of assets and exits of surplus leases
(2
)
 
(6
)
Depreciation and amortization
147

 
154

LIFO charge
5

 
4

Deferred income taxes
(22
)
 
(6
)
Stock-based compensation
13

 
13

Net pension and other postretirement benefits cost
20

 
13

Contributions to pension and other postretirement benefit plans
(38
)
 
(68
)
Other adjustments
16

 
14

Changes in operating assets and liabilities, net of effects from business acquisitions
41

 
(41
)
Net cash provided by operating activities – continuing operations
276

 
158

Net cash provided by operating activities – discontinued operations
1

 
2

Net cash provided by operating activities
277

 
160

Cash flows from investing activities
 
 
 
Proceeds from sale of assets
2

 
5

Purchases of property, plant and equipment
(94
)
 
(84
)
Payments for business acquisitions
(6
)
 
(47
)
Other
(21
)
 
5

Net cash used in investing activities
(119
)
 
(121
)
Cash flows from financing activities
 
 
 
Proceeds from sale of common stock
9

 
5

Payments of debt and capital lease obligations
(27
)
 
(31
)
Distributions to noncontrolling interests
(7
)
 
(6
)
Payments of debt financing costs
—

 
(3
)
Other
—

 
1

Net cash used in financing activities
(25
)
 
(34
)
Net increase in cash and cash equivalents
133

 
5

Cash and cash equivalents at beginning of period
114

 
83

Cash and cash equivalents at the end of period
$
247

 
$
88

SUPPLEMENTAL CASH FLOW INFORMATION
The Company’s non-cash activities were as follows:
 
 
 
Purchases of property, plant and equipment included in Accounts payable
$
20

 
$
9

Capital lease asset additions
$
10

 
$
1

Interest and income taxes paid:
 
 
 
Interest paid, net of amounts capitalized
$
85

 
$
83

Income taxes paid, net
$
27

 
$
25


See Notes to Condensed Consolidated Financial Statements.

6

SUPERVALU INC. and Subsidiaries
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars and shares in millions, except per share data)

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Statement of Registrant
The accompanying Condensed Consolidated Financial Statements of SUPERVALU INC. (“SUPERVALU” or the “Company”) for the second quarters and year-to-date periods ended September 12, 2015 and September 6, 2014 are unaudited and, in the opinion of management, contain all adjustments that are of a normal and recurring nature necessary to present fairly the financial condition, results of operations and cash flows for such periods. The Condensed Consolidated Financial Statements should be read in conjunction with the Consolidated Financial Statements and related notes in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015. The results of operations for the second quarter and year-to-date ended September 12, 2015 are not necessarily indicative of the results expected for the full year.
Accounting Policies
The summary of significant accounting policies is included in the Notes to Consolidated Financial Statements set forth in the Company’s Annual Report on Form 10-K for the fiscal year ended February 28, 2015.
Fiscal Year
The Company operates on a 52/53 week fiscal year basis, with its fiscal year ending on the last Saturday in February. References to the second quarters of fiscal 2016 and 2015 relate to the 12 week fiscal quarters ended September 12, 2015 and September 6, 2014, respectively. References to fiscal 2016 and 2015 year-to-date relate to the 28 week fiscal periods ended September 12, 2015 and September 6, 2014, respectively.
Use of Estimates
The preparation of the Company’s Condensed Consolidated Financial Statements in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a maturity of three months or less at the time of purchase to be cash equivalents. The Company’s banking arrangements allow the Company to fund outstanding checks when presented to the financial institution for payment. The Company funds all intraday bank balance overdrafts during the same business day. Checks outstanding in excess of bank balances create net book overdrafts, which are recorded in Accounts payable in the Condensed Consolidated Balance Sheets and are reflected as an operating activity in the Condensed Consolidated Statements of Cash Flows. As of September 12, 2015 and February 28, 2015, the Company had net book overdrafts of $150 and $145, respectively.
Inventories, Net
Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventories consist of finished goods and a substantial portion of the Company’s inventories have a last-in, first-out (“LIFO”) reserve applied. Interim LIFO calculations are based on the Company’s estimates of expected year-end inventory levels and costs, as the actual valuation of inventory under the LIFO method is computed at the end of each year based on the inventory levels and costs at that time. If the first-in, first-out method had been used, Inventories, net would have been higher by approximately $216 at September 12, 2015 and $211 at February 28, 2015. The Company recorded a LIFO charge of $2 and $2 for the second quarters of fiscal 2016 and 2015, respectively. The Company recorded a LIFO charge of $5 and $4 for fiscal 2016 and 2015 year-to-date, respectively.
Presentation Revision
In the first quarter of fiscal 2016, the Company completed an assessment of its revenue and expense presentation primarily related to professional services and certain other transactions. Expenses related to transactions in which the Company

7

determined it was the principal were previously presented net of related revenues within Net sales in the Condensed Consolidated Statements of Operations. The presentation of these expenses has been revised to include them within Cost of sales and Selling and administrative expenses. These revisions had the effect of increasing Net sales with a corresponding increase to Cost of sales and Selling and administrative expenses. These revisions did not impact Operating earnings, Earnings from continuing operations before income taxes, Net earnings attributable to SUPERVALU INC., cash flows, or financial position for any period reported. These revisions have similarly impacted the Company's financial statements across fiscal periods. Management determined that these revisions are not material to any period reported. Prior period amounts have been revised to conform to the current period presentation as shown below.
The following tables present the impact of these revisions on the Company's previously reported results as reported in this Quarterly Report on Form 10-Q:
 
 
Second Quarter Ended September 6, 2014 
 (12 weeks)
 
Year-To-Date Ended September 6, 2014 
 (28 weeks)
 
 
As Originally Reported
 
Revision
 
As Revised
 
As Originally Reported
 
Revision
 
As Revised
Net sales
 
$
4,018

 
$
23

 
$
4,041

 
$
9,252

 
$
53

 
$
9,305

Cost of sales
 
3,446

 
21

 
3,467

 
7,928

 
48

 
7,976

Gross profit
 
572

 
2

 
574

 
1,324

 
5

 
1,329

Selling and administrative expenses
 
478

 
2

 
480

 
1,095

 
5

 
1,100

Operating earnings
 
$
94

 
$
—

 
$
94

 
$
229

 
$
—

 
$
229

 
 
Second Quarter Ended September 6, 2014 
 (12 weeks)
 
Year-To-Date Ended September 6, 2014 
 (28 weeks)
 
 
As Originally Reported
 
Revision
 
As Revised
 
As Originally Reported
 
Revision
 
As Revised
Net sales
 
 
 
 
 
 
 
 
 
 
 
 
Independent Business
 
$
1,820

 
$
15

 
$
1,835

 
$
4,220

 
$
35

 
$
4,255

% of total
 
45.3
%
 
0.1
 %
 
45.4
%
 
45.6
%
 
0.2
 %
 
45.8
%
Save-A-Lot
 
1,050

 
7

 
1,057

 
2,398

 
15

 
2,413

% of total
 
26.1
%
 
0.1
 %
 
26.2
%
 
25.9
%
 
—
 %
 
25.9
%
Retail Food
 
1,104

 
1

 
1,105

 
2,532

 
3

 
2,535

% of total
 
27.5
%
 
(0.2
)%
 
27.3
%
 
27.4
%
 
(0.2
)%
 
27.2
%
Corporate
 
44

 
—

 
44

 
102

 
—

 
102

% of total
 
1.1
%
 
—
 %
 
1.1
%
 
1.1
%
 
—
 %
 
1.1
%
Total net sales
 
$
4,018

 
$
23

 
$
4,041

 
$
9,252

 
$
53

 
$
9,305

 
 
100.0
%
 
—
 %
 
100.0
%
 
100.0
%
 
—
 %
 
100.0
%
Recently Issued Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under accounting standard update (“ASU”) 2014-09, Revenue from Contracts with Customers. ASU 2014-09 supersedes existing revenue recognition requirements and provides a new comprehensive revenue recognition model that requires entities to recognize revenue to depict the transfer of goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services. The new authoritative guidance will likely be adopted during the first quarter of fiscal 2019, as permitted by ASU 2015-14. Adoption is allowed by either the full retrospective or modified retrospective approach. The Company is currently evaluating which approach it will apply and the potential adoption impact on its financial statements.

In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest: Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires debt issuance costs to be presented in the balance sheet as a direct deduction from the carrying amount of the related debt obligation. This ASU will be effective retrospectively for fiscal years beginning after December 15, 2015, and interim periods within those years. Debt issuance costs related to the Company's credit facilities and senior notes included in Other assets were approximately $52 as of September 12, 2015.


8

NOTE 2—GOODWILL AND INTANGIBLE ASSETS
Changes in the Company’s Goodwill and Intangible assets, net consisted of the following:
 
February 28,
2015
 
Additions
 
Impairments
 
Other net
adjustments
 
September 12,
2015
Goodwill:
 
 
 
 
 
 
 
 
 
Independent Business goodwill
$
710

 
$
—

 
$
—

 
$
—

 
$
710

Save-A-Lot goodwill
141

 
—

 
—

 
—

 
141

Retail Food goodwill
14

 
—

 
—

 
—

 
14

Total goodwill
$
865

 
$
—

 
$
—

 
$
—

 
$
865

 
 
 
 
 
 
 
 
 
 
Intangible assets:
 
 
 
 
 
 
 
 
 
Favorable operating leases, prescription files, customer lists and other (accumulated amortization of $92 and $86 as of September 12, 2015 and February 28, 2015, respectively)
$
124

 
$
24

 
$
—

 
$
—

 
$
148

Trademarks and tradenames – indefinite useful lives
9

 
—

 
—

 
—

 
9

Non-compete agreements (accumulated amortization of $2 and $2 as of September 12, 2015 and February 28, 2015, respectively)
3

 
—

 
—

 
—

 
3

Total intangible assets
136

 
24

 
—

 
—

 
160

Accumulated amortization
(88
)
 
(6
)
 
—

 
—

 
(94
)
Total intangible assets, net
$
48

 
 
 
 
 
 
 
$
66

Amortization of intangible assets with definite useful lives was $6 and $5 for fiscal 2016 and 2015 year-to-date, respectively. Future amortization expense is anticipated to average approximately $7 per fiscal year for each of the next five fiscal years.
In the first quarter ended June 20, 2015, the Company recorded intangible assets using valuations based on Level 3 inputs consisting primarily of certain distribution center operation rights, purchase options and other intangibles received by the Company under the letter agreement the Company entered into with Albertson's dated May 28, 2015, as described in Note 11—Commitments, Contingencies and Off-Balance Sheet Arrangements.

NOTE 3—RESERVES FOR CLOSED PROPERTIES AND PROPERTY, PLANT AND EQUIPMENT-RELATED IMPAIRMENT CHARGES
Reserves for Closed Properties
The Company maintains reserves for costs associated with closures of retail stores, distribution centers and other properties that are no longer being utilized in current operations. The Company provides for closed property operating lease liabilities using a discount rate to calculate the present value of the remaining noncancellable lease payments after the closing date, reduced by estimated subtenant rentals that could be reasonably obtained for the property. Adjustments to closed property reserves primarily relate to changes in expected subtenant income or actual exit costs differing from original estimates. The calculation of the closed property charges requires significant judgments and estimates including estimated subtenant rentals, discount rates and future cash flows based on the Company’s experience and knowledge of the market in which the closed property is located, previous efforts to dispose of similar assets and the assessment of existing market conditions.
Changes in the Company’s reserves for closed properties consisted of the following:
 
September 12, 
 2015 
 (28 weeks)
Reserves for closed properties at beginning of the fiscal year
$
34

Additions
2

Payments
(6
)
Adjustments
(1
)
Reserves for closed properties at the end of period
$
29


9

Property, Plant and Equipment Impairment Charges
Property, plant and equipment impairment charges are recorded as a component of Selling and administrative expenses in the Condensed Consolidated Statements of Operations.
The following table presents impairment charges related to property, plant and equipment measured at fair value on a non-recurring basis:
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Property, plant and equipment:
 
 
 
 
 
 
 
Carrying value
$
1

 
$
2

 
$
3

 
$
2

Fair value measured using Level 3 inputs
—

 
1

 
2

 
1

Impairment charge
$
1

 
$
1

 
$
1

 
$
1


NOTE 4—FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Assets and liabilities recorded at fair value are categorized using defined hierarchical levels directly related to the amount of subjectivity associated with the inputs to fair value measurements, as follows:
Level 1 -
Quoted prices in active markets for identical assets or liabilities;
Level 2 -
Inputs other than quoted prices included within Level 1 that are either directly or indirectly observable;
Level 3 -
Unobservable inputs in which little or no market activity exists, requiring an entity to develop its own assumptions of inputs that market participants would use to value the asset or liability.
Non-recurring Fair Value Measurements
Acquired intangible assets discussed in Note 2—Goodwill and Intangible Assets were measured at fair value using Level 3 inputs. Impairment charges related to property, plant and equipment discussed in Note 3—Reserves for Closed Properties and Property, Plant and Equipment-related Impairment Charges were also measured at fair value using Level 3 inputs.
Financial Instruments not Measured at Fair Value
For certain of the Company’s financial instruments, including cash and cash equivalents, receivables, accounts payable, accrued salaries and other current assets and liabilities, the fair values approximate carrying amounts due to their short maturities.
The estimated fair value of notes receivable was greater than their carrying amount by approximately $1 and $2 as of September 12, 2015 and February 28, 2015, respectively. Notes receivable are valued based on a discounted cash flow approach applying a market rate for similar instruments that is determined using Level 3 inputs.
The estimated fair value of the Company’s long-term debt (including current maturities) was greater than the carrying amount by approximately $35 and $59 as of September 12, 2015 and February 28, 2015, respectively. The estimated fair value was based on market quotes, where available, or market values for similar instruments, using Level 2 and Level 3 inputs.
Fair Value Measurements - Recurring Basis
On February 24, 2015, the Company entered into a forward starting interest rate swap agreement, in effect converting $300 of variable rate debt under the Company's Secured Term Loan Facility (defined below) to a fixed rate of 5.5075 percent. The agreement goes into effect beginning in February 2016, and extends through the Secured Term Loan Facility's maturity in March 2019. This transaction was entered into to reduce the Company's exposure to changes in market interest rates associated with its variable rate debt. The Company designated this derivative as a cash flow hedge of the variability in expected cash outflows of interest payments attributable to future changes in interest rates. The fair value of the interest rate swap was a liability of $4 and $0 as of September 12, 2015 and February 28, 2015, respectively, and is included within Other long-term liabilities and Other current liabilities in the Condensed Consolidated Balance Sheets. The fair value of the interest rate swap is measured using Level 2 inputs. The interest rate swap agreement is valued using an income approach interest rate swap valuation model incorporating observable market inputs including interest rates, LIBOR swap rates and credit default swap rates. As of September 12, 2015, a 100 basis point increase in forward LIBOR interest rates would increase the fair value of the

10

interest rate swap by approximately $7. A 100 basis point decrease in forward LIBOR interest rates would decrease the fair value of the interest rate swap by approximately $5.
The fair value of the Company’s fuel derivatives was a liability of $1 as of September 12, 2015 and February 28, 2015, and fuel derivative gains and losses were insignificant for the second quarters and year-to-date periods of fiscal 2016 and 2015.

NOTE 5—LONG-TERM DEBT
The Company’s long-term debt consisted of the following:
 
September 12,
2015
 
February 28,
2015
4.50% Secured Term Loan Facility due March 2019
$
1,459

 
$
1,469

6.75% Senior Notes due June 2021
400

 
400

7.75% Senior Notes due November 2022
350

 
350

8.00% Senior Notes due May 2016
278

 
278

3.75% Revolving ABL Credit Facility due September 2019
—

 
—

Net discount on debt, using an effective interest rate of 4.63% to 8.56%
(7
)
 
(8
)
Total debt
2,480

 
2,489

Less current maturities of long-term debt
(283
)
 
(9
)
Long-term debt
$
2,197

 
$
2,480

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.
Senior Secured Credit Agreements
As of September 12, 2015 and February 28, 2015, the Company had outstanding borrowings of $1,459 and $1,469, respectively, under its six-year $1,500 term loan facility (the “Secured Term Loan Facility”), which is secured by substantially all of the Company’s real estate, equipment and certain other assets, and bears interest at the rate of LIBOR plus 3.50 percent subject to a floor on LIBOR of 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 interests in Moran Foods, LLC, the main operating 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 12, 2015 and February 28, 2015, there was $773 and $776, 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 original issue discount, $6 and $9 of the Secured Term Loan Facility was classified as current as of September 12, 2015 and February 28, 2015, 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. The Company must also 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 2016 is not reasonably estimable as of September 12, 2015.

11

As of September 12, 2015 and February 28, 2015, there were no outstanding borrowings under the Revolving ABL Credit Facility. As of September 12, 2015, letters of credit outstanding under the Revolving ABL Credit Facility were $73 at fees of 1.625 percent, and the unused available credit under this facility was $877 with facility fees of 0.375 percent. As of February 28, 2015, letters of credit outstanding under the Revolving ABL Credit Facility were $76 at fees of 1.625 percent, and the unused available credit under this facility was $871 with facility fees of 0.375 percent. As of September 12, 2015, the Revolving ABL Credit Facility was secured on a first-priority basis by $1,202 of certain inventory assets included in Inventories, net, $231 of certain receivables included in Receivables, net, $31 of certain amounts included in Cash and cash equivalents and all of the Company’s pharmacy scripts included in Intangible assets, net, in the Condensed Consolidated Balance Sheets. As of February 28, 2015, the Revolving ABL Credit Facility was secured on a first-priority basis by $1,188 of certain inventory assets included in Inventories, net, $220 of certain receivables included in Receivables, net, $28 of certain amounts included in Cash and cash equivalents and all of the Company's pharmacy scripts included in Intangible assets, net, 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 fiscal 2016 year-to-date, the Company borrowed $234 and repaid $234 under its Revolving ABL Credit Facility. During fiscal 2015 year-to-date, the Company borrowed $1,361 and repaid $1,361 under its Revolving ABL Credit Facility. 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 facility lenders in their 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 12, 2015, the aggregate cap on Restricted Payments was approximately $296. 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.
Debentures

The $400 of 6.75 percent Senior Notes due June 2021, the $350 of 7.75 percent Senior Notes due November 2022 and the remaining $278 of 8.00 percent Senior Notes due May 2016 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.

NOTE 6—INCOME TAXES
The tax provision for each of the second quarters of fiscal 2016 and 2015 included certain discrete tax benefits. The tax provision for fiscal 2016 and 2015 year-to-date included $1 and $2 of net discrete tax benefits, respectively.
During fiscal 2016 year-to-date, unrecognized tax benefits decreased by $3 to total $91. The Company does not anticipate that its total unrecognized tax benefits will change significantly in the next 12 months.
As of September 12, 2015, the Company is no longer subject to federal income tax examinations for fiscal years prior to 2011, and in most states, is no longer subject to state income tax examinations for fiscal years before 2006.


12

NOTE 7—STOCK-BASED AWARDS
The Company recognized pre-tax stock-based compensation expense (included primarily in Selling and administrative expenses in the Condensed Consolidated Statements of Operations) related to stock options, restricted stock units and restricted stock awards (collectively referred to as “stock-based awards”) of $6 and $6 for the second quarters of fiscal 2016 and 2015, respectively, and $13 and $13 for fiscal 2016 and 2015 year-to-date, respectively.
Stock Options
In April 2015 and May 2014, the Company granted 4 and 5 non-qualified stock options, respectively, to certain employees under the Company’s 2012 Stock Plan with weighted average grant date fair values of $3.67 per share and $3.28 per share, respectively. The stock options vest over a period of three years and were awarded as part of a broad-based employee incentive program designed to retain and motivate employees across the Company.
The Company used the Black-Scholes option pricing model to estimate the fair value of the options at grant date based upon the following assumptions:
 
Year-To-Date Ended
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Dividend yield
—%
 
—%
Volatility rate
49.0—50.6%
 
50.8—53.2%
Risk-free interest rate
1.2—1.4%
 
1.2—1.6%
Expected life
4.0—5.0 years
 
4.0—5.0 years
Restricted Stock and Restricted Stock Units
In the first quarter of fiscal 2016, the Company granted 2 restricted stock awards ("RSAs") to certain employees under the 2012 Stock Plan. The RSAs vest over a three year period from the date of the grant and were granted at a fair value of $8.79 per award. In the first quarter of fiscal 2015, the Company granted 2 restricted stock units (“RSUs”) to certain employees under the 2012 Stock Plan. The RSUs vest over a three year period from the date of grant and were granted at a fair value of $7.50 per unit.

NOTE 8—BENEFIT PLANS
Net periodic benefit expense (income) and contributions for defined benefit pension and other postretirement benefit plans consisted of the following:
 
Second Quarter Ended
Pension Benefits
 
Other Postretirement Benefits
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
24

 
27

 
1

 
1

Expected return on assets
(32
)
 
(36
)
 
—

 
—

Amortization of prior service benefit
—

 
—

 
(4
)
 
(4
)
Amortization of net actuarial loss
18

 
15

 
1

 
1

Net periodic benefit expense (income)
$
10

 
$
6

 
$
(2
)
 
$
(2
)
Contributions to benefit plans
$
(1
)
 
$
(22
)
 
$
—

 
$
(1
)

13

 
Year-To-Date Ended
Pension Benefits
 
Other Postretirement Benefits
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Service cost
$
—

 
$
—

 
$
—

 
$
—

Interest cost
57

 
66

 
2

 
2

Expected return on assets
(76
)
 
(83
)
 
—

 
—

Amortization of prior service benefit
—

 
—

 
(8
)
 
(8
)
Amortization of net actuarial loss
42

 
34

 
3

 
2

Net periodic benefit expense (income)
$
23

 
$
17

 
$
(3
)
 
$
(4
)
Contributions to benefit plans
$
(27
)
 
$
(67
)
 
$
(11
)
 
$
(1
)
Multiemployer Pension Plans
During fiscal 2016 and 2015 year-to-date, the Company contributed $20 and $21, respectively, to various multiemployer pension plans, primarily defined benefit pension plans, under collective bargaining agreements.
Pension Contributions
No minimum pension contributions are required in accordance with the Employee Retirement Income Security Act of 1974, as amended, (“ERISA”) to the Company's pension plans in fiscal 2016. The Company anticipates fiscal 2016 discretionary pension contributions and required minimum other postretirement benefit plan contributions will be approximately $65 to $75.

NOTE 9—NET EARNINGS (LOSS) PER SHARE
Basic net earnings (loss) per share is calculated using net earnings (loss) attributable to SUPERVALU INC. divided by the weighted average number of shares outstanding during the period. Diluted net earnings (loss) per share is similar to basic net earnings (loss) per share except that the weighted average number of shares outstanding is computed after giving effect to the dilutive impacts of stock-based awards.

14

The following table reflects the calculation of basic and diluted net earnings (loss) per share:
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net earnings from continuing operations
$
31

 
$
31

 
$
94

 
$
79

Less net earnings attributable to noncontrolling interests
(2
)
 
(2
)
 
(5
)
 
(4
)
Net earnings from continuing operations attributable to SUPERVALU INC.
29

 
29

 
89

 
75

Income (loss) from discontinued operations, net of tax
2

 
2

 
3

 
(1
)
Net earnings attributable to SUPERVALU INC.
$
31

 
$
31

 
$
92

 
$
74

 
 
 
 
 
 
 
 
Weighted average number of shares outstanding—basic
263

 
260

 
262

 
260

Dilutive impact of stock-based awards
5

 
4

 
6

 
3

Weighted average number of shares outstanding—diluted(1)
268

 
264

 
268

 
263

 
 
 
 
 
 
 
 
Basic net earnings (loss) per share attributable to SUPERVALU INC.:
Continuing operations
$
0.11

 
$
0.11

 
$
0.34

 
$
0.29

Discontinued operations
$
0.01

 
$
0.01

 
$
0.01

 
$
(0.01
)
Basic net earnings per share
$
0.12

 
$
0.12

 
$
0.35

 
$
0.28

Diluted net earnings (loss) per share attributable to SUPERVALU INC.:
Continuing operations
$
0.11

 
$
0.11

 
$
0.33

 
$
0.29

Discontinued operations(1)
$
0.01

 
$
0.01

 
$
0.01

 
$
(0.01
)
Diluted net earnings per share
$
0.11

 
$
0.11

 
$
0.34

 
$
0.28

(1)
Weighted average number of shares outstanding—diluted was equal to Weighted average number of shares outstanding—basic for the computation of diluted net loss per share from discontinued operations for fiscal 2015 year-to-date.
Stock-based awards of 10 and 10 that were outstanding during the second quarters of fiscal 2016 and 2015, respectively, were excluded from the calculation of diluted net earnings per share from continuing operations for the periods because their inclusion would be antidilutive. Stock-based awards of 6 and 10 were outstanding during fiscal 2016 and 2015 year-to-date, respectively, but were excluded from the calculation of diluted net earnings (loss) per share from continuing operations for the periods because their inclusion would be antidilutive.

NOTE 10—COMPREHENSIVE INCOME AND ACCUMULATED COMPREHENSIVE LOSS
The Company reports comprehensive income in the Condensed Consolidated Statements of Comprehensive Income. Comprehensive income includes all changes in stockholders’ deficit during the reporting period, other than those resulting from investments by and distributions to stockholders. The Company’s comprehensive income is calculated as net earnings (loss) including noncontrolling interests, plus or minus adjustments for pension and other postretirement benefit obligations, net of tax, and changes in the fair value of cash flow hedges, net of tax, less comprehensive income attributable to noncontrolling interests.
Accumulated other comprehensive loss represents the cumulative balance of other comprehensive income (loss), net of tax, as of the end of the reporting period and relates to pension and other postretirement benefit obligation adjustments, net of tax, and unrealized losses on cash flow hedges, net of tax.

15

Changes in Accumulated other comprehensive loss by component for fiscal 2016 year-to-date are as follows:
 
Benefit Plans
 
Interest Rate Swap
 
Total
Accumulated other comprehensive loss at beginning of the fiscal year, net of tax
$
(423
)
 
$
—

 
$
(423
)
Other comprehensive loss before reclassifications(1)
—

 
(2
)
 
(2
)
Amortization of amounts included in net periodic benefit cost(2)
23

 
—

 
23

Net current-period Other comprehensive income (loss)(3)
23

 
(2
)
 
21

Accumulated other comprehensive loss at the end of period, net of tax
$
(400
)
 
$
(2
)
 
$
(402
)
(1)
Amount is net of tax benefit of $1.
(2)
Amount is net of tax expense of $14.
(3)
Amount is net of tax expense of $13.
Changes in Accumulated other comprehensive loss by component for fiscal 2015 year-to-date are as follows:
 
Benefit Plans
Accumulated other comprehensive loss at beginning of the fiscal year, net of tax
$
(307
)
Other comprehensive loss before reclassifications
—

Amortization of amounts included in net periodic benefit cost(1)
18

Net current-period Other comprehensive income(2)
18

Accumulated other comprehensive loss at the end of period, net of tax
$
(289
)
(1)
Amount is net of tax expense of $10.
(2)
Amount is net of tax expense of $10.
Items reclassified out of pension and postretirement benefit plan accumulated other comprehensive loss had the following impact on the Condensed Consolidated Statements of Operations:
 
Second Quarter Ended
 
Year-To-Date Ended
 
 
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
 
Affected Line Item on Condensed Consolidated Statement of Operations
Pension and postretirement benefit plan obligations:
 
 
 
 
 
 
 
 
 
Amortization of amounts included in net periodic benefit expense(1)
$
13

 
$
10

 
$
33

 
$
22

 
Selling and administrative expenses
Amortization of amounts included in net periodic benefit expense(1)
2

 
2

 
4

 
6

 
Cost of sales
Total reclassifications
15

 
12

 
37

 
28

 
 
Income tax benefit
(6
)
 
(5
)
 
(14
)
 
(10
)
 
Income tax provision
Total reclassifications, net of tax
$
9

 
$
7

 
$
23

 
$
18

 
 
(1)
Amortization of amounts included in net periodic benefit cost include amortization of prior service benefit and amortization of net actuarial loss as reflected in Note 8—Benefit Plans.
No amounts were reclassified out of Accumulated other comprehensive loss related to the interest rate swap designated as a cash flow hedge.

NOTE 11—COMMITMENTS, CONTINGENCIES AND OFF-BALANCE SHEET ARRANGEMENTS
Potential Separation of Save-A-Lot Business
On July 28, 2015, the Company announced that it is exploring a separation of its Save-A-Lot segment, and that as part of that process it has begun preparations to allow for a possible spin-off of Save-A-Lot into a stand-alone, publicly traded company, including engaging financial and legal advisors. No specific timetable for a separation has been set and there can be no assurance that a separation will be completed or that any other change in the Company’s overall structure or business model will occur.

16

Guarantees
The Company has outstanding guarantees related to certain leases, fixture financing loans and other debt obligations of various independent retail customers as of September 12, 2015. 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 15 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 12, 2015, the maximum amount of undiscounted payments the Company would be required to make in the event of default of all guarantees was $68 ($56 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, transition services agreements, 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 New Albertson’s, Inc. (“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 September 12, 2015, using actuarial estimates as of June 30, 2015, the total undiscounted amount of all such guarantees was estimated at $184 ($165 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 and surety bonds to numerous states. 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.
Agreements with AB Acquisition LLC and Affiliates
In connection with the sale of NAI on March 21, 2013, the Company entered into various agreements with AB Acquisition LLC and its affiliates related to on-going operations, including a Transition Services Agreement with each of NAI and Albertson’s LLC (collectively, the “TSA”) and operating and supply agreements. At the time of the sale of NAI, these arrangements had initial terms ranging from 12 months to five years, and are generally subject to renewal upon mutual agreement by the parties thereto and also include termination provisions that can be exercised by each party. The Company operates a distribution center owned by NAI for an initial term of five years, subject to renewal at the Company's option for two additional five year terms and certain termination rights for each of the Company and NAI.
On April 16, 2015, the Company entered into a letter agreement pursuant to which the Company is providing services to NAI and Albertson’s LLC as needed to transition and wind down the TSA. In exchange for these transition and wind down services, the Company is entitled to receive eight payments of approximately $6 every six months for aggregate fees of $50. These payments are separate from and incremental to the fixed and variable fees the Company receives under the TSA. The Company estimates that the complete transition and wind down of the TSA could take approximately three more years.

17

On May 28, 2015, the Company entered into a letter agreement with NAI and Albertson's LLC pursuant to which the Company received certain additional rights and benefits, and the Company and NAI and Albertson's LLC (and certain of their affiliates, including Safeway, with respect to provisions of the letter agreement applicable to them) agreed to resolve several issues. Among other matters resolved, NAI, Albertson's LLC and AB Acquisition agreed to no longer challenge, and waive all rights relating to, the Company's filing with the IRS in fiscal 2015 for a change in accounting method for NAI and its subsidiaries pursuant to the tangible property repair regulations. In consideration for the granting of the additional rights and benefits to the Company and the resolution of the various matters under the letter agreement, the Company paid $35 to AB Acquisition, the parent entity of NAI and Albertson's LLC.
Haggen
The Company entered into a transition services agreement with Haggen in December 2014 (the “Haggen TSA”) to provide certain services to stores owned and being acquired by Haggen in five states. The Haggen TSA is similar to the TSA supporting NAI and Albertson’s LLC and has a term of two years with three one-year automatic renewal periods unless earlier notice of nonrenewal is given by either party. The Company is also party to a supply agreement with Haggen to supply goods and products to Haggen stores in Washington and Oregon. On September 8, 2015, Haggen announced that it has filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and subsequently announced plans to consolidate from 164 stores to 37 stores. At the time of Haggen’s bankruptcy filing, the Company had approximately $2 of receivables payable by Haggen to the Company related to supply, and the Company had approximately $1 of receivables payable by Haggen to the Company related to matters arising from the transition services. The Company could also be exposed to claims from third parties from which the Company sourced products, services, licenses and similar on behalf of Haggen. The Company has reserved for probable losses related to a portion of these claims and receivables. It is reasonably possible that the Company could experience losses in excess of the amount of such reserves; however, at this time the Company cannot reasonably estimate a range of such excess losses because of the factual and legal issues related to whether the Company would have liability for any such third-party claims, if such third-party claims were asserted against the Company.
Information Technology Intrusions
Computer Network Intrusions – The Company announced during fiscal 2015 that it had experienced two separate criminal intrusions 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. An investigation of those intrusions supported by third-party data forensics experts is ongoing. Given the continuing nature of the investigation, it is possible that it will be determined that information was stolen from the Company during one or both of these intrusions, or that new or different time frames, locations, at-risk data, and/or other facts will be identified in the future.
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, 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 and, although the Company’s network has previously been found to be compliant with applicable data security standards, the forensic investigator working on behalf of the payment card brands has concluded that the Company was not in compliance at the time of the intrusions and that the alleged non-compliance caused at least some portion of the compromise of payment card data that allegedly occurred during the intrusions. As a result, the Company expects the payment card brands to 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. The Company believes the payment card brands will 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 and 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 and/or their issuers' 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.
While the Company has not been notified 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 and, were that to occur, it is possible

18

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 11 under Legal Proceedings, four class action complaints related to the intrusions have been filed against the Company and consolidated into one action and are currently pending. As indicated below, the Company believes that the likelihood of a material loss from the consolidated class action 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 had $50 of cyber threat insurance above a per incident deductible of $1 at the time of the intrusions, 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. The Company now maintains $75 of cyber threat insurance above a per incident deductible of approximately $3, in each case subject to certain sublimits.
Expenses – 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.
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 12, 2015, the Company had approximately $365 of non-cancelable future purchase obligations.
Legal Proceedings
The Company is subject to various lawsuits, claims and other legal matters that arise in the ordinary course of conducting business. In the opinion of management, based upon currently available facts, it is remote that the ultimate outcome of any lawsuits, claims and other proceedings will have a material adverse effect on the overall results of the Company’s operations, its cash flows or its financial position.
In September 2008, a class action complaint was filed against the Company, as well as International Outsourcing Services, LLC (“IOS”); Inmar, Inc.; Carolina Manufacturer’s Services, Inc.; Carolina Coupon Clearing, Inc. and Carolina Services in the United States District Court in the Eastern District of Wisconsin. The plaintiffs in the case are a consumer goods manufacturer, a grocery co-operative and a retailer marketing services company that allege on behalf of a purported class that the Company and the other defendants (i) conspired to restrict the markets for coupon processing services under the Sherman Act and (ii) were part of an illegal enterprise to defraud the plaintiffs under the Federal Racketeer Influenced and Corrupt Organizations Act. The plaintiffs seek monetary damages, attorneys’ fees and injunctive relief. The Company intends to vigorously defend this lawsuit; however, all proceedings have been stayed in the case pending the result of the criminal prosecution of certain former officers of IOS.
In December 2008, a class action complaint was filed in the United States District Court for the Western District of Wisconsin against the Company alleging that a 2003 transaction between the Company and C&S Wholesale Grocers, Inc. (“C&S”) was a conspiracy to restrain trade and allocate markets. In the 2003 transaction, the Company purchased certain assets of the Fleming Corporation as part of Fleming Corporation’s bankruptcy proceedings and sold certain assets of the Company to C&S that were located in New England. Since December 2008, three other retailers have filed similar complaints in other jurisdictions. The cases were consolidated and are proceeding in the United States District Court in Minnesota. The complaints allege that the conspiracy was concealed and continued through the use of non-compete and non-solicitation agreements and the closing down of the distribution facilities that the Company and C&S purchased from each other. Plaintiffs are seeking monetary damages, injunctive relief and attorneys’ fees. On July 5, 2011, the District Court granted the Company’s Motion to Compel Arbitration for those plaintiffs with arbitration agreements and plaintiffs appealed. On July 16, 2012, the District Court denied plaintiffs’ Motion for Class Certification and on January 11, 2013, the District Court granted the Company’s Motion for Summary Judgment and dismissed the case regarding the non-arbitration plaintiffs. On February 12, 2013, the 8th Circuit reversed the District Court decision requiring plaintiffs with arbitration agreements to arbitrate and remanded to the District Court. On October 30, 2013, the parties attended a District Court ordered mandatory mediation, which was not successful in resolving the matter. On May 21, 2014, a panel of the 8th Circuit (1) reversed the District Court’s decision granting summary judgment in favor of the Company, and (2) affirmed the District Court’s decision denying class certification of a class consisting of all retailers located in the States of Illinois, Indiana, Iowa, Michigan, Minnesota, Ohio and Wisconsin that purchased wholesale grocery products from the Company between December 31, 2004 and September 13, 2008, but remanded the case for the District Court to consider whether to certify a narrower class of purchasers supplied from the Company’s Champaign, Illinois distribution center and potentially other distribution centers. On January 16, 2015, the Company filed a Petition for Certiorari to

19

the United States Supreme Court seeking to appeal certain aspects of the 8th Circuit decision and on June 8, 2015, the United States Supreme Court denied the Petition. On June 19, 2015, the District Court Magistrate Judge entered an order that decided a number of matters including granting plaintiffs' request to seek class certification for certain Midwest Distribution Centers and denying plaintiffs' request to add an additional New England plaintiff and denying plaintiffs’ request to seek class certification for a group of New England retailers. On August 20, 2015, the District Court affirmed the Magistrate Judge’s order. In September 2015, the plaintiffs appealed to the 8th Circuit the denial of the request to add an additional New England plaintiff and to seek class certification for a group of New England retailers.
In August and November 2014, four class action complaints were filed against the Company relating to the criminal intrusions into its computer network announced by the Company in fiscal 2015 (the "Criminal Intrusion"). The cases have been consolidated as In Re: Supervalu Inc. Customer Data Security Breach Litigation and are proceeding in the United States District Court in Minnesota. On June 26, 2015, the plaintiffs filed a Consolidated Complaint. The Company filed a Motion to Dismiss the Consolidated Complaint and a hearing is scheduled on the motion for November 3, 2015.
On June 30, 2015, the Company received a letter from the Office for Civil Rights of the U.S. Department of Health and Human Services (“OCR”) seeking documents and information regarding the Company’s HIPAA breach notification and reporting from 2009 to the present. The letter indicates that the OCR Midwest Region is doing a compliance review of the Company’s alleged failure to report small breaches of protected health information related to its pharmacy operations (e.g., any incident involving less than 500 individuals). On September 4, 2015, the Company submitted its response to OCR’s letter. While the Company does not believe that a loss is probable by reason of the compliance review, the Company believes that a loss is reasonably possible; however, at this time the Company cannot reasonably estimate a range of possible losses because the OCR's review is at the very early stages and the Company does not know if OCR will find a violation(s) and, if so, what violation(s) and whether OCR will proceed with corrective action, issuance of penalties or monetary settlement. The potential penalties related to the issues being investigated are up to $50 thousand per violation (which can be counted per day) with a $1.5 per calendar year maximum for multiple violations of a single provision (with the potential for finding violations of multiple provisions each with a separate $1.5 per calendar year maximum); however, as noted above, any actual penalties will be determined only after consideration by OCR of various factors, including the nature of any violation, remedial actions taken by the Company and other factors determined relevant by OCR.
Predicting the outcomes of claims and litigation and estimating related costs and exposures involves substantial uncertainties that could cause actual outcomes, costs and exposures to vary materially from current expectations. The Company regularly monitors its exposure to the loss contingencies associated with these matters and may from time to time change its predictions with respect to outcomes and its estimates with respect to related costs and exposures.
With respect to the IOS, C&S, Criminal Intrusion and OCR matters discussed above, the Company believes the chance of a material loss is remote. It is possible, although management believes it is remote, that material differences in actual outcomes, costs and exposures relative to current predictions and estimates, or material changes in such predictions or estimates, could have a material adverse effect on the Company’s financial condition, results of operations or cash flows.

NOTE 12—SEGMENT INFORMATION
Refer to the Condensed Consolidated Segment Financial Information for the Company’s segment information.
Segment operating earnings include revenues and costs attributable to each of the respective business segments and allocated corporate overhead, based on the segment's estimated consumption of corporately managed resources. Variances to planned corporate overhead allocated to business segments remain in Corporate because allocated corporate overhead affecting segment operating profit is centrally managed. Reported segment information is presented on the same basis as it is reviewed by executive management.


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NOTE 13—DISCONTINUED OPERATIONS
The following is a summary of the Company’s operating results and certain other directly attributable expenses that are included in discontinued operations:
 
Second Quarter Ended
 
Year-To-Date Ended
 
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net sales
$
—

 
$
—

 
$
—

 
$
—

Income (loss) before income taxes from discontinued operations
—

 
2

 
(3
)
 
4

Income tax (benefit) provision
(2
)
 
—

 
(6
)
 
5

Income (loss) from discontinued operations, net of tax
$
2

 
$
2

 
$
3

 
$
(1
)
Income (loss) from discontinued operations, net of tax for fiscal 2016 and 2015 year-to-date primarily reflects tax settlement matters, including pre-tax resolution matters and discrete income tax benefits and expenses.


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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(Dollars and shares in millions, except per share data)
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 28, 2015.
MANAGEMENT OVERVIEW
Second Quarter of Fiscal 2016 Highlights
Financial highlights for the second quarter of fiscal 2016 compared to the second quarter of fiscal 2015 include:
•
Net sales were $4,062, an increase of $21 or 0.5 percent, primarily due to new corporate stores at Save-A-Lot and new retail stores at Retail Food, and sales to new Independent Business customers and new stores operated by existing customers, offset by lost stores supplied by Independent Business and licensed by Save-A-Lot and lower sales to existing Independent Business customers and lower Retail Food existing store sales.
•
Gross profit was $583, an increase of $9 or 1.6 percent, primarily due to higher base margins and lower logistics costs.
•
Operating earnings were $94, flat to last year. When adjusted for $4 of costs related to the potential separation of Save-A-Lot and $4 of severance costs in fiscal 2016 and $1 of net information technology costs in fiscal 2015, operating earnings increased $7 primarily due to higher base margins, lower logistics costs and higher TSA fees.

Year-To-Date Fiscal 2016 Highlights
Financial highlights for the year-to-date period of fiscal 2016 compared to the year-to-date period of fiscal 2015 include:
•
Net sales were $9,469, an increase of $164 or 1.8 percent, primarily due to new corporate stores at Save-A-Lot and new retail stores at Retail Food, and sales to new Independent Business customers and new stores operated by existing customers, offset by lost stores supplied by Independent Business and licensed by Save-A-Lot and lower sales to existing Independent Business customers and lower Retail Food existing store sales.
•
Gross profit was $1,393, an increase of $64 or 4.8 percent, primarily due to higher base margins, higher sales volume and lower logistics costs.
•
Operating earnings were $252, an increase of $23 or 10.0 percent, primarily due to higher base margins, higher sales volume and lower logistics costs.
•
Net cash provided by operating activities of continuing operations was $276, an increase of $118, primarily due to lower levels of cash utilized in operating assets and liabilities, and lower benefit plan contributions.
•
Net cash used in investing activities was $119, a decrease of $2, primarily due to a $41 decrease in cash paid for acquisitions, offset by a $26 increase in cash paid for intangible and other assets, a $10 increase in capital expenditures and $3 of lower proceeds from the sale of assets.
Business Strategy and Initiatives
Management continues to focus on sales, Adjusted EBITDA and operating cash flow, as well as improvements in the balance sheet, including lowering the risk of the Company's capital structure and reducing pension obligations.
Independent Business
Independent Business continues to target sales growth through affiliating new customers, driving sales to existing customers and enhancing professional service offerings while also improving the efficiency of its operations. Independent Business continues to strengthen core merchandising and marketing programs under the Essential Everyday® and Equaline® labels while marketing and adding depth to the Wild Harvest® and Culinary Circle® brands. In addition, Independent Business continues to look at expanding its professional services, including a focus on digital and analytics.
Save-A-Lot
Save-A-Lot continues to drive sales and performance through its meat and produce programs, pricing enhancements and improved grocery and merchandise offerings. 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.

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In fiscal 2016, the Company continues to open new Save-A-Lot corporate and licensed stores including in new geographic markets, with the majority of those stores expected to be corporate stores. In fiscal 2016 year-to-date, the Company and its licensees opened 28 new Save-A-Lot stores, comprised of 17 new licensee stores and 11 new corporate stores, and closed 20 Save-A-Lot stores, comprised of 18 licensee stores and two corporate stores.
Total Company-operated retail square footage for Save-A-Lot stores as of the second quarter of fiscal 2016 was approximately 7.4 million, an increase of approximately 2.2 percent from the fourth quarter of fiscal 2015, primarily attributable to new corporate stores.
On July 28, 2015, the Company announced that it is exploring a separation of its Save-A-Lot segment, and that as part of that process it has begun preparations to allow for a possible spin-off of Save-A-Lot into a stand-alone, publicly traded company, including engaging financial and legal advisors. No specific timetable for a separation has been set and there can be no assurance that a separation will be completed or that any other change in the Company’s overall structure or business model will occur.
Retail Food
Retail Food continues to focus on driving sales and performance through competitive pricing and promotional activities, enhanced perishable offerings, and store remodels and resets. Private label product offerings, including organic products, and marketing investments continue to expand. Management believes the Company has a quality private label program for Retail Food that can continue to build customer loyalty and also drive profitable sales growth.
Total Retail Food square footage as of the second quarter of fiscal 2016 was approximately 11.5 million, an increase of approximately 1.9 percent from the fourth quarter of fiscal 2015.
Impact of Inflation and Deflation
The Company monitors product cost inflation and deflation and evaluates whether to absorb cost increases or decreases, or pass on pricing changes. We have experienced a mix of inflation and deflation across product categories within all three of our business segments during fiscal 2016, with higher deflation levels in produce, and certain meat and dairy categories.
In aggregate across all of our businesses when taking into account the overall mix of products, we estimate our businesses experienced slight cost deflation in the second quarter of fiscal 2016. We estimate our businesses experienced approximately flat cost inflation for fiscal 2016 year-to-date.  We estimate Save-A-Lot experienced cost deflation in the mid-single digits as a percentage in the second quarter of fiscal 2016, compared to cost deflation in the low-single digits as a percentage in the first quarter of fiscal 2016. Save-A-Lot cost deflation is primarily due to deflation within certain meat and dairy categories. The impact of deflation was greater at Save-A-Lot, particularly its wholesale business, compared to Independent Business and Retail Food due to product mix and product sourcing on private-label products.
Changes in merchandising, customer buying habits and competitive pressures create inherent difficulties in measuring the impact of inflation and deflation on Net sales and Gross profit.
Competitive Environment
The United States grocery channel is highly competitive and management expects operating results will continue to be impacted by the effects of operating in a highly competitive and price-sensitive marketplace.

Transition Services Agreements
New Albertson's, Inc. and Albertson's LLC
In connection with the sale of NAI, the Company entered into various agreements with AB Acquisition LLC and its affiliates, including a Transition Services Agreement with each of New Albertson’s, Inc. (“NAI”) and Albertson’s LLC (collectively, the “TSA”) under which the Company provides certain services to each of NAI and Albertson’s LLC, and NAI and Albertson’s LLC provide certain services to the Company, in each case as described therein. On April 16, 2015, the Company entered into a letter agreement pursuant to which the Company will provide services to NAI and Albertson’s LLC as needed to transition and wind down the TSA. For additional discussion of the TSA and this letter agreement, see “Risk Factors—Changes in the Company’s relationships with NAI, Albertson’s LLC or Haggen could adversely impact the Company’s results of operations” in Part I, Item 1A of the Annual Report on Form 10-K for the fiscal year ended February 28, 2015.

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Haggen
On December 6, 2014, the Company entered into a Transition Services Agreement with Haggen (the “Haggen TSA”) to provide certain services to 164 Haggen stores owned and being acquired by Haggen in five states. The Haggen TSA is similar to the TSA supporting NAI and Albertson’s LLC and has a term of two years with three one-year automatic renewal periods unless earlier notice of nonrenewal is given by either party. On September 8, 2015, Haggen announced that it has filed voluntary petitions for reorganization under Chapter 11 of the U.S. Bankruptcy Code and subsequently announced plans to consolidate to 37 stores. For additional discussion of the Haggen TSA and Haggen's bankruptcy, see “Risk Factors” in Part II, Item 1A of this Quarterly Report on Form 10-Q.
Information Technology Intrusions
During fiscal 2015, the Company announced it had experienced two separate criminal intrusions 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 intrusions are discussed in more detail in Note 11—Commitments, Contingencies and Off-Balance Sheet Arrangements in Part I, Item 1 of this Quarterly Report on Form 10-Q.


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RESULTS OF OPERATIONS

The following table summarizes key operating data we believe is important to our business:
 
Second Quarter Ended
 
Year-To-Date Ended
Results of Operations
September 12, 
 2015 
 (12 weeks)
 
September 6, 
 2014 
 (12 weeks)
 
September 12, 
 2015 
 (28 weeks)
 
September 6, 
 2014 
 (28 weeks)
Net sales
$
4,062

 
$
4,041

 
$
9,469

 
$
9,305

Cost of sales
3,479

 
3,467

 
8,076

 
7,976

Gross profit
583

 
574

 
1,393

 
1,329

Selling and administrative expenses
489

 
480

 
1,141

 
1,100

Operating earnings
94

 
94

 
252

 
229

Interest expense, net
44

 
46

 
103

 
110

Equity in earnings of unconsolidated affiliates
—

 
(1
)
 
(2
)
 
(2
)
Earnings from continuing operations before income taxes
50

 
49

 
151

 
121

Income tax provision
19

 
18

 
57

 
42

Net earnings from continuing operations
31

 
31

 
94

 
79

Income (loss) from discontinued operations, net of tax
2

 
2

 
3

 
(1
)
Net earnings including noncontrolling interests
33

 
33

 
97

 
78

Less net earnings attributable to noncontrolling interests
(2
)
 
(2
)
 
(5
)
 
(4
)
Net earnings attributable to SUPERVALU INC.
$
31

 
$
31

 
$
92

 
$
74

Diluted continuing operations net earnings per share attributable to SUPERVALU INC.
$
0.11

 
$
0.11

 
$
0.33

 
$
0.29

Weighted average shares outstanding—diluted
268

 
264

 
268

 
263

Other Statistics
 
 
 
 
 
 
 
Depreciation and amortization
$
64

 
$
65

 
$
147

 
$
154

Capital expenditures(1)
$
55