Analysis: Nature of Business, Basis of Reporting, Significant Accounting Policies, Revenues Recognition

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and all its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. References to the Company refer to SUPERVALU INC. and Subsidiaries.

During fiscal 2013, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) to sell the Company’s New Albertson’s, Inc. subsidiary (“New Albertsons” or “NAI”), including the Acme, Albertsons, Jewel-Osco, Shaw’s and Star Market retail banners and the associated Osco and Sav-on in-store pharmacies (the “NAI Banner Sale”) to AB Acquisition LLC (“AB Acquisition”). The NAI Banner Sale was completed effective March 21, 2013, during the Company’s first quarter of fiscal 2014. The NAI operations disposed of under the NAI Banner Sale are reported as discontinued operations in the Consolidated Statements of Operations for all periods presented. The assets and liabilities of the NAI disposal group are presented as assets and liabilities of discontinued operations separately in the Consolidated Balance Sheets for all periods presented. Unless otherwise indicated, references to the Consolidated Statements of Operations and the Consolidated Balance Sheets in the Notes to the Consolidated Financial Statements exclude all amounts related to discontinued operations. See Note 14 – Discontinued Operations and Divestitures for additional information regarding these discontinued operations.

NOTE 1—SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Business Description

SUPERVALU INC. (“SUPERVALU” or the “Company”) operates primarily in the United States grocery channel. SUPERVALU provides supply chain services, primarily wholesale distribution, operates hard discount retail stores and licenses stores to independent operators under the Save-A-Lot banner, and operates five competitive, regionally-based traditional format grocery banners under the Cub Foods, Shoppers Food & Pharmacy, Shop ‘n Save, Farm Fresh and Hornbacher’s banners.

Principles of Consolidation

The Consolidated Financial Statements include the accounts of the Company and all its wholly and majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. References to the Company refer to SUPERVALU INC. and Subsidiaries.

During fiscal 2013, the Company entered into a stock purchase agreement (the “Stock Purchase Agreement”) to sell the Company’s New Albertson’s, Inc. subsidiary (“New Albertsons” or “NAI”), including the Acme, Albertsons, Jewel-Osco, Shaw’s and Star Market retail banners and the associated Osco and Sav-on in-store pharmacies (the “NAI Banner Sale”) to AB Acquisition LLC (“AB Acquisition”). The NAI Banner Sale was completed effective March 21, 2013, during the Company’s first quarter of fiscal 2014. The NAI operations disposed of under the NAI Banner Sale are reported as discontinued operations in the Consolidated Statements of Operations for all periods presented. The assets and liabilities of the NAI disposal group are presented as assets and liabilities of discontinued operations separately in the Consolidated Balance Sheets for all periods presented. Unless otherwise indicated, references to the Consolidated Statements of Operations and the Consolidated Balance Sheets in the Notes to the Consolidated Financial Statements exclude all amounts related to discontinued operations. See Note 14—Discontinued Operations and Divestitures for additional information regarding these discontinued operations.

Fiscal Year

The Company’s fiscal year ends on the last Saturday in February. The Company’s first quarter consists of 16 weeks while the second, third and fourth quarters each consist of 12 weeks. Because of differences in the accounting calendars of the Company and its former wholly-owned subsidiary NAI, the February 23, 2013 Consolidated Balance Sheets include the assets and liabilities of the NAI disposal group as of February 21, 2013. The last three fiscal years consist of 52 week periods ended February 22, 2014, February 23, 2013 and February 25, 2012.

Use of Estimates

The preparation of the Company’s 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 for the reporting periods presented. Actual results could differ from those estimates.

Segment Reclassification

During the first quarter of fiscal 2014, the Company reclassified the segment presentation of certain corporate administrative expenses and related fees earned under the Company’s transition services agreements, pension and other postretirement plan expenses for inactive and corporate participants in the SUPERVALU Retirement Plan and certain other corporate costs to reflect the structure under which the Company is now managed. These changes primarily resulted in the recast of net expenses from the Company’s Retail Food segment to Corporate for all periods presented and as previously reported in the Company’s Annual Report on Form 10-K for the fiscal year ended February 23, 2013 and February 25, 2012. These changes did not revise or restate information previously reported in the Company’s Consolidated Financial Statements for any period, except for the Consolidated Segment Financial Information.

Transition Services Agreement Revision

During the second quarter of fiscal 2014, the Company revised its presentation of fees earned under its transition services agreements. The Company historically presented fees earned under its transition services agreements as a reduction of Selling and administrative expenses in the Consolidated Statements of Operations. The presentation of such fees earned has been revised and they are now reflected as revenue, within Net sales of Corporate in the Consolidated Statements of Operations and Consolidated Segment Financial Information, for all periods. The revision had the effect of increasing both Net sales and Gross profit, with a corresponding increase in Selling and administrative expenses. These revisions did not impact Operating earnings (loss), Earnings (loss) from continuing operations before income taxes, Net earnings (loss), cash flows, or financial position for any period reported. Management has determined that the change in presentation is not material to any period reported. Prior period amounts shown below have been revised to conform to the current period presentation.

The following table represents the effect of the reclassification of fees earned under transition services agreements on the Company’s Consolidated Statements of Operations for the comparative periods being presented in the Consolidated Statements of Operations.

 

		Year Ended February 23, 2013																				Year Ended February 25, 2012
		As Originally Reported				% of Net sales				Revision				As Revised				% of Net sales				As Originally Reported				% of Net sales				Revision				As Revised				% of Net sales
Net sales		$	17,097				100.0	%		$	42			$	17,139				100.0	%		$	17,336				100.0	%		$	47			$	17,383				100.0	%
Cost of sales			14,803				86.6	%			—				14,803				86.4	%			14,926				86.1	%			—				14,926				85.9	%
Gross profit			2,294				13.4	%			42				2,336				13.6	%			2,410				13.9	%			47				2,457				14.1	%
Selling and administrative expenses			2,445				14.3	%			42				2,487				14.5	%			2,222				12.8	%			47				2,269				13.1	%
Goodwill and intangible asset impairment charges			6				—				—				6				—				92				0.5	%			—				92				0.5	%
Operating (loss) earnings		$	(157	)			(0.9	)%		$	—			$	(157	)			(0.9	)%		$	96				0.6	%		$	—			$	96				0.6	%

The Company earned $42 and $47 of fees under a previous transition services agreement during fiscal 2013 and 2012, respectively. The Company’s previous transition services agreement with Albertson’s LLC was replaced with transition services agreements with each of NAI and Albertson’s LLC at the close of the NAI Banner Sale. See Note 14—Discontinued Operations and Divestitures for additional information regarding the Company’s transition services agreements. Fees earned under the transition services agreements are recognized as the administrative services are rendered, which align with the recognition of administrative expenses required to support the transition services agreements.

Segment Revision

The Company revised its segment presentation of Operating earnings for Retail Food and Corporate for results previously reported in the first quarter of fiscal 2014 to reflect certain allocated administrative costs as Retail Food costs as a part of the Company’s segment reclassification described above. The revision had the effect of decreasing Retail Food’s operating earnings by $20 as reported in the Company’s Quarterly Reports on Form 10-Q for the first quarter of fiscal 2014 and the year-to-date presentation of the results in the second and third quarters of fiscal 2014. A corresponding increase in Corporate operating earnings of $20 also occurred. The revision did not have an impact on consolidated Operating earnings for any period. Management has determined that the change in presentation is not material to any period reported.

The following table represents the effect of the segment revision of certain administrative costs in the Company’s Consolidated Segment Financial for the Quarterly Report on Form 10-Q for the period ended June 15, 2013.

 

		First Quarter Ended June 15, 2013												Year-to-Date Ended September 7, 2013												Year-to-Date Ended November 30, 2013
		As Originally Reported				Revision				As Revised				As Originally Reported				Revision				As Revised				As Originally Reported				Revision				As Revised
Operating earnings
Independent Business		$	55			$	—			$	55			$	128			$	—			$	128			$	181			$	—			$	181
% of Independent Business sales			2.3	%			—	%			2.3	%			3.0	%			—	%			3.0	%			2.9	%			—	%			2.9	%
Save-A-Lot			52				—				52				84				—				84				124				—				124
% of Save-A-Lot sales			4.1	%			—	%			4.1	%			3.7	%			—	%			3.7	%			3.8	%			—	%			3.8	%
Retail Food			25				(20	)			5				32				(20	)			12				56				(20	)			36
% of Retail Food sales			1.7	%			(1.4	)%			0.3	%			1.3	%			(0.8	)%			0.5	%			1.6	%			(0.6	)%			1.0	%
Corporate			(50	)			20				(30	)			(50	)			20				(30	)			(62	)			20				(42	)
Total operating earnings		$	82			$	—			$	82			$	194			$	—			$	194			$	299			$	—			$	299
% of total net sales			1.6	%			—	%			1.6	%			2.1	%			—	%			2.1	%			2.3	%			—	%			2.3	%

Revenue Recognition

Revenues from product sales are recognized upon delivery for the Independent Business segment, at the point of sale for Save-A-Lot’s retail operations, and upon delivery for Save-A-Lot’s independent licensees, and at the point of sale for the Retail Food segment. Typically, invoicing, shipping, delivery and customer receipt of Independent Business product occur on the same business day. Revenues from services rendered are recognized immediately after such services have been provided. Discounts and allowances provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in Net sales as the products are sold to customers. Sales tax is excluded from Net sales.

Revenues and costs from third-party logistics operations are recorded gross when the Company is the primary obligor in a transaction, is subject to inventory or credit risk, has latitude in establishing price and selecting suppliers, or has several, but not all of these indicators. If the Company is not the primary obligor and amounts earned have little or no inventory or credit risk, revenue is recorded net as management fees when earned.

Cost of Sales

Cost of sales in the Consolidated Statements of Operations includes cost of inventory sold during the period, including purchasing, receiving, warehousing and distribution costs, and shipping and handling fees.

Save-A-Lot and Retail Food advertising expenses are a component of Cost of sales and are expensed as incurred. Save-A-Lot and Retail Food advertising expenses, net of cooperative advertising reimbursements, were $63, $86 and $69 for fiscal 2014, 2013 and 2012, respectively.

 

The Company receives allowances and credits from vendors for volume incentives, promotional allowances and, to a lesser extent, new product introductions which are typically based on contractual arrangements covering a period of one year or less. The Company recognizes vendor funds for merchandising and buying activities as a reduction of Cost of sales when the related products are sold. Vendor funds that have been earned as a result of completing the required performance under the terms of the underlying agreements but for which the product has not yet been sold are recognized as reductions of inventory. When payments or rebates can be reasonably estimated and it is probable that the specified target will be met, the payment or rebate is accrued. However, when attaining the milestone is not probable, the payment or rebate is recognized only when and if the milestone is achieved. Any upfront payments received for multi-period contracts are generally deferred and amortized on a straight-line basis over the life of the contracts.

Selling and Administrative Expenses

Selling and administrative expenses consist primarily of store and corporate employee-related costs, such as salaries and wages, health and welfare, worker’s compensation and pension benefits, as well as rent, occupancy and operating costs, depreciation and amortization, impairment charges on property, plant and equipment and other administrative costs.

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 book overdrafts, which are recorded in Accounts payable in the Consolidated Balance Sheets and are reflected as an operating activity in the Consolidated Statements of Cash Flows. As of February 22, 2014 and February 23, 2013, the Company had net book overdrafts of $134 and $131, respectively.

Allowances for Losses on Receivables

Management makes estimates of the uncollectibility of its accounts and notes receivable portfolios. In determining the adequacy of the allowances, management analyzes the value of the collateral, customer financial statements, historical collection experience, aging of receivables and other economic and industry factors. It is possible that the accuracy of the estimation process could be materially impacted by different judgments, estimations and assumptions based on the information considered and result in a further deterioration of accounts and notes receivable. The allowance for losses on receivables was $9 and $5 at February 22, 2014 and February 23, 2013, respectively. Bad debt expense was $16, $11 and $6 in fiscal 2014, 2013 and 2012, respectively.

Inventories, Net

Inventories are valued at the lower of cost or market. Substantially all of the Company’s inventory consists of finished goods.

The Company uses one of either replacement cost, weighted average cost, or the retail inventory method (“RIM”) to value discrete inventory items at lower of cost or market before application of any last-in, first-out (“LIFO”) reserve. As of February 22, 2014 and February 23, 2013, approximately 57 percent and 60 percent, respectively, of the Company’s inventories were valued under the LIFO method.

As of February 22, 2014 and February 23, 2013, approximately 5 percent of the Company’s inventories were valued under the replacement cost method before application of any LIFO reserve. The weighted average cost and RIM methods of inventory valuation together comprised approximately 52 percent and 55 percent of inventory as of February 22, 2014 and February 23, 2013, respectively, before application of any LIFO reserve.

 

Under the replacement cost method applied on a LIFO basis, the most recent purchase cost is used to calculate the current cost of inventory before application of any LIFO reserve. The replacement cost approach results in inventories being valued at the lower of cost or market because of the high inventory turnover and the resulting low inventory days supply on hand combined with infrequent vendor price changes for these items of inventory.

The Company uses one of either cost, weighted average cost, RIM or replacement cost to value certain discrete inventory items under the first-in, first-out method (“FIFO”). The replacement cost approach under the FIFO method is predominantly utilized in determining the value of high turnover perishable items, including Produce, Deli, Bakery, Meat and Floral.

As of February 22, 2014 and February 23, 2013, approximately 25 percent and 23 percent, respectively, of the Company’s inventories were valued using the cost, weighted average cost and RIM methods under the FIFO method of inventory accounting. The remaining 18 percent and 17 percent of the Company’s inventories as of February 22, 2014 and February 23, 2013, respectively, were valued using the replacement cost approach under the FIFO method of inventory accounting. The replacement cost approach applied under the FIFO method results in inventories recorded at the lower of cost or market because of the very high inventory turnover and the resulting low inventory days supply for these items of inventory.

During fiscal 2014, 2013 and 2012, inventory quantities in certain LIFO layers were reduced. These reductions resulted in a liquidation of LIFO inventory quantities carried at lower costs prevailing in prior years as compared with the cost of fiscal 2014, 2013 and 2012 purchases. As a result, Cost of sales decreased by $14, $6 and $9 in fiscal 2014, 2013 and 2012, respectively. If the FIFO method had been used to determine cost of inventories for which the LIFO method is used, the Company’s inventories would have been higher by approximately $202 and $211 as of February 22, 2014 and February 23, 2013, respectively.

The Company evaluates inventory shortages throughout each fiscal year based on actual physical counts in its facilities. Allowances for inventory shortages are recorded based on the results of these counts to provide for estimated shortages as of the end of each fiscal year.

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 lease liabilities based on 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.

The closed property lease liabilities usually are paid over the remaining lease terms, which generally range from one to 15 years. Adjustments to closed property reserves primarily relate to changes in subtenant income or actual exit costs differing from original estimates. Adjustments are made for changes in estimates in the period in which the changes become known.

Business Dispositions

The Company reviews the presentation of planned business dispositions in the Consolidated Financial Statements based on the available information and events that have occurred.

The review consists of evaluating whether the business meets the definition as a component for which the operations and cash flows are clearly distinguishable from the other components of the business, and if so, whether it is anticipated that after the disposal the cash flows of the component would be eliminated from continuing operations and whether the Company will have any significant continuing involvement with the business. In addition, the Company evaluates whether the business has met the criteria to be classified as a business held for sale. In order for a planned disposition to be classified as a business held for sale, the established criteria must be met as of the reporting date, including an active program to market the business and the expected disposition of the business within one year.

 

Planned business dispositions are presented as discontinued operations when all the criteria described above are met. Operations of the business components meeting the discontinued operations requirements are presented within Income (loss) from discontinued operations, net of tax in the Consolidated Statements of Operations, and assets and liabilities of the business component planned to be disposed of are presented as separate lines within the Consolidated Balance Sheets. The estimated loss on the sale of NAI was recorded within Current liabilities of discontinued operations as of February 23, 2013. See Note 14—Discontinued Operations and Divestitures.

Businesses held for sale are reviewed for recoverability of the carrying value of the business upon meeting the classification requirements. Evaluating the recoverability of the assets of a business classified as held for sale follows a defined order in which property and intangible assets subject to amortization are considered only after the recoverability of goodwill, indefinite lived intangible assets and other assets are assessed. After the valuation process is completed, the held for sale business is reported at the lower of its carrying value or fair value less cost to sell, and no additional depreciation or amortization expense is recognized. The carrying value of a held for sale business includes the portion of the accumulated other comprehensive loss associated with pension and postretirement benefit obligations of the operations of the business.

There are inherent judgments and estimates used in determining impairment charges. The sale of a business can result in the recognition of a gain or loss that differs from that anticipated prior to closing.

Property, Plant and Equipment, Net

Property, plant and equipment are carried at cost. Depreciation is based on the estimated useful lives of the assets using the straight-line method. Estimated useful lives generally are 10 to 40 years for buildings and major improvements, three to 10 years for equipment, and the shorter of the term of the lease or expected life for leasehold improvements and capitalized lease assets. Interest on property under construction of $1, $4 and $6 was capitalized in fiscal 2014, 2013 and 2012, respectively.

Goodwill and Intangible Assets

Goodwill

The Company reviews goodwill for impairment during the fourth quarter of each year, and also if events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The reviews consist of comparing estimated fair value to the carrying value at the reporting unit level. The Company’s reporting units are the operating segments of the business which consist of Independent Business, Save-A-Lot and Retail Food. As of February 22, 2014, Goodwill balances existed in the Save-A-Lot and Independent Business reporting units. Fair values are determined by using both the market approach, applying a multiple of earnings based on the guideline publicly traded company method, and the income approach, discounting projected future cash flows based on management’s expectations of the current and future operating environment. The rates used to discount projected future cash flows reflect a weighted average cost of capital based on the Company’s industry, capital structure and risk premiums in each reporting unit including those reflected in the current market capitalization. If management identifies the potential for impairment of goodwill, the fair value of the implied goodwill is calculated as the difference between the fair value of the reporting unit and the fair value of the underlying assets and liabilities, excluding goodwill. An impairment charge is recorded for any excess of the carrying value over the implied fair value.

The Company reviews the composition of its reporting units on an annual basis and on an interim basis if events or circumstances indicate that the composition of the Company’s reporting units may have changed. There were no changes in the Company’s reporting units as a result of the fiscal 2014 and 2013 reviews.

Intangible Assets

The Company also reviews intangible assets with indefinite useful lives, which primarily consist of trademarks and tradenames, for impairment during the fourth quarter of each year, and also if events or changes in circumstances indicate that the asset might be impaired. The reviews consist of comparing estimated fair value to the carrying value. Fair values of the Company’s trademarks and tradenames are determined primarily by discounting an assumed royalty value applied to management’s estimate of projected future revenues associated with the tradename using management’s expectations of the current and future operating environment. The royalty cash flows are discounted using rates based on the weighted average cost of capital discussed above and the specific risk profile of the tradenames relative to the Company’s other assets. These estimates are impacted by variable factors including inflation, the general health of the economy and market competition. The calculation of the impairment charge contains significant judgments and estimates including weighted average cost of capital and the specified risk profile of the tradename and future revenue and profitability. Refer to Note 2—Goodwill and Intangible Assets in the accompanying Notes to Consolidated Financial Statements for the results of the goodwill and intangible assets with indefinite useful lives testing performed during fiscal 2014 and 2013.

Impairment of Long-Lived Assets

The Company monitors the recoverability of its long-lived assets such as buildings and equipment, and evaluates their carrying value for impairment whenever events or changes in circumstances indicate that the carrying amount of such assets may not be fully recoverable. Events that may trigger such an evaluation include current period losses combined with a history of losses or a projection of continuing losses, a significant decrease in the market value of an asset or the Company’s plans for store closures. When such events or changes in circumstances occur, a recoverability test is performed by comparing projected undiscounted future cash flows to the carrying value of the group of assets being tested.

If impairment is identified for long-lived assets to be held and used, the fair value is compared to the carrying value of the group of assets and an impairment charge is recorded for the excess of the carrying value over the fair value. For long-lived assets that are classified as assets held for sale, the Company recognizes impairment charges for the excess of the carrying value plus estimated costs of disposal over the estimated fair value. Fair value is based on current market values or discounted future cash flows using Level 3 inputs. The Company estimates fair value based on the Company’s experience and knowledge of the market in which the property is located and, when necessary, utilizes local real estate brokers. The Company’s estimate of undiscounted cash flows attributable to the asset groups included only future cash flows that are directly associated with and that are expected to arise as a direct result of the use and eventual disposition of the asset group. Long-lived asset impairment charges are a component of Selling and administrative expenses in the Consolidated Statements of Operations.

The Company groups long-lived assets with other assets at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets, which historically has predominately been at the geographic market level but individual store asset groupings have been assessed in certain circumstances. Independent Business’s long-lived assets are reviewed for impairment at the distribution center level. Save-A-Lot’s long-lived assets are reviewed for impairment at the geographic market level for 11 geographic market groupings of individual corporate-owned stores and related dedicated distribution centers and individual corporate store level for 29 individual corporate stores which were part of previous asset groups for which management determined that the cash flows in those geographic market areas were no longer interdependent. Retail Food’s long-lived assets are reviewed for impairment at the geographic market group level for five geographic market groupings of individual retail stores.

During fiscal 2013, the Company determined it would be more appropriate to evaluate long-lived assets for impairment at the store level for two geographic markets within the Save-A-Lot segment. These markets continued to show higher indicators of economic decline that led to revised operating market strategies, such as the identification of a significant number of stores for closure within one geographic market asset group and the determined that Save-A-Lot was no longer expanding or maintaining another geographic market group. As such, these geographic market groups were not generating joint cash flows from the operation of the asset group, resulting in the disaggregation of the asset groups. These asset group disaggregations triggered a store-level impairment review within these previous geographic market asset groups, which resulted in a non-cash impairment charge of approximately $8 in fiscal 2013.

 

Due to the ongoing business transformation and highly competitive environment, the Company will continue to evaluate its long-lived asset policy and current asset groups, to determine if additional modifications to the policy are necessary. Future changes to the Company’s assessment of its long-lived asset policy and changes in circumstances, operating results or other events may result in additional asset impairment testing and charges.

During fiscal 2013, the Company announced the closure of approximately 22 non-strategic stores within the Save-A-Lot segment including the exit of a geographic market, resulting in an impairment of $16 related to these stores’ long-lived assets. See Note 3—Reserves for Closed Properties and Property, Plant and Equipment-Related Impairment Charges.

Deferred Rent

The Company recognizes rent holidays, including the time period during which the Company has access to the property prior to the opening of the site, as well as construction allowances and escalating rent provisions, on a straight-line basis over the term of the operating lease. The deferred rents are included in Other current liabilities and Other long-term liabilities in the Consolidated Balance Sheets.

Self-Insurance Liabilities

The Company uses a combination of insurance and self-insurance for workers’ compensation, automobile and general liability costs. It is the Company’s policy to record its insurance liabilities based on management’s estimate of the ultimate cost of reported claims and claims incurred but not yet reported and related expenses, discounted at a risk-free interest rate. The present value of such claims was calculated using discount rates ranging from 0.3 percent to 5.1 percent for fiscal 2014 and 0.4 percent to 5.1 percent for fiscal 2013 and 2012.

Changes in the Company’s insurance liabilities consisted of the following:

 

		2014				2013				2012
Beginning balance		$	97			$	93			$	96
Expense			39				31				22
Claim payments			(33	)			(27	)			(25	)
Ending balance			103				97				93
Less current portion			(33	)			(27	)			(26	)
Long-term portion		$	70			$	70			$	67

The current portion of reserves for self-insurance is included in Other current liabilities and the long-term portion is included in Other long-term liabilities in the Consolidated Balance Sheets. The insurance liabilities as of the end of the fiscal year are net of discounts of $7 as of February 22, 2014 and February 23, 2013.

Benefit Plans

The Company recognizes the funded status of its Company sponsored defined benefit plans in its Consolidated Balance Sheets and gains or losses and prior service costs or credits not yet recognized as a component of Other comprehensive income (loss), net of tax, in the Consolidated Statements of Stockholders’ (Deficit) Equity. The Company sponsors pension and other postretirement plans in various forms covering substantially all employees who meet eligibility requirements. The determination of the Company’s obligation and related expense for Company-sponsored pension and other postretirement benefits is dependent, in part, on management’s selection of certain actuarial assumptions in calculating these amounts. These assumptions include, among other things, the discount rate, the expected long-term rate of return on plan assets and the rates of increase in compensation and healthcare costs. These assumptions are disclosed in Note 11—Benefit Plans. Actual results that differ from the assumptions are accumulated and amortized over future periods in accordance with generally accepted accounting standards.

The Company contributes to various multiemployer pension plans under collective bargaining agreements, primarily defined benefit pension plans. Pension expense for these plans is recognized as contributions are funded. See Note 11—Benefit Plans for additional information on the Company’s participation in those multiemployer plans.

The Company also contributes to several employee 401(k) retirement savings plans.

Derivatives

The Company’s limited involvement with derivatives is primarily to manage its exposure to changes in energy prices utilized in the shipping process, and in the Company’s stores and warehouses. The Company uses derivatives only to manage well-defined risks. The Company does not use financial instruments or derivatives for any trading or other speculative purposes. The Company enters into energy commitments that it expects to utilize in the normal course of business. The fair value of the Company’s derivatives was insignificant as of February 22, 2014 and February 23, 2013.

Stock-Based Compensation

The Company uses the straight-line method to recognize stock-based compensation expense over the requisite service period related to each award. Stock-based compensation expense is measured by the fair value of the award on the date of grant, net of the estimated forfeiture rate.

The fair value of stock options is estimated as of the date of grant using the Black-Scholes option pricing model using Level 3 inputs. The estimation of the fair value of stock options incorporates certain assumptions, such as risk-free interest rate and expected volatility, dividend yield and life of options.

Income Taxes

Deferred income taxes represent future net tax effects resulting from temporary differences between the financial statement amounts and tax bases of assets and liabilities, and are measured using enacted tax rates in effect for the year in which the differences are expected to be settled or realized. See Note 8—Income Taxes for the types of differences that give rise to significant portions of deferred income tax assets and liabilities. Deferred income tax assets are reported as a current or noncurrent asset or liability based on the classification of the related asset or liability or according to the expected date of reversal.

The Company is currently in various stages of audits, appeals or other methods of review with authorities from various taxing jurisdictions. The Company establishes liabilities for unrecognized tax benefits in a variety of taxing jurisdictions when, despite management’s belief that the Company’s tax return positions are supportable, certain positions may be challenged and may need to be revised. The Company adjusts these liabilities in light of changing facts and circumstances, such as the progress of a tax audit. The Company also provides interest on these liabilities at the appropriate statutory interest rate, and accrues penalties as applicable. The Company recognizes interest related to unrecognized tax benefits in interest expense and penalties in Selling and administrative expenses in the Consolidated Statements of Operations.

Net Earnings (Loss) Per Share

Basic net earnings (loss) per share is calculated using net earnings (loss) available to common stockholders divided by the weighted average number of shares outstanding during the period. Diluted net earnings (loss) per share is similar to basic net earnings per share except that the weighted average number of shares outstanding is computed after giving effect to the dilutive impacts of stock options, performance awards and restricted stock awards (collectively referred to as “stock-based awards”).

 

Comprehensive Income (Loss) and Accumulated Other Comprehensive Income (Loss)

The Company reports comprehensive income (loss) in the Consolidated Statements of Comprehensive Income (Loss). Comprehensive income (loss) includes all changes in stockholders’ deficit during the applicable reporting period, other than those resulting from investments by and distributions to stockholders. The Company’s comprehensive income (loss) is calculated as net earnings (loss) plus or minus adjustments for pension and other postretirement benefit obligations, net of tax.

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. Changes in Accumulated other comprehensive loss by component follows below:

 

		2014				2013				2012
Pension and postretirement benefit plan accumulated other comprehensive loss at beginning of the fiscal year, net of tax		$	(612)			$	(657)			$	(446)
Other comprehensive income (loss) before reclassifications, net of tax (expense) benefit of $(85), $18 and $161, respectively			202				(20	)			(262	)
Amortization of amounts included in net periodic benefit cost, net of tax (expense) of $(38), $(40) and $(32), respectively			55				65				51
Net current-period Other comprehensive income (loss), net of tax (expense) benefit of $(123), $(22) and $129, respectively			257				45				(211	)
Divestiture of NAI pension plan accumulated other comprehensive loss, net of tax (expense) of $(31)			48				—				—
Pension and postretirement benefit plan accumulated other comprehensive loss at the end of period, net of tax		$	(307	)		$	(612	)		$	(657	)

Upon completion of the NAI Banner Sale in the first quarter of fiscal 2014, the Company disposed approximately $48 of Accumulated other comprehensive loss, which was a component of Stockholders’ deficit in the Consolidated Balance Sheets as of February 23, 2013, due to NAI’s assumption of a defined benefit pension plan established and operated under NAI. The accumulated other comprehensive loss assumed by NAI was a component of the preliminary estimated loss on the sale of NAI accrued in Current liabilities of discontinued operations in the Consolidated Balance Sheet as of February 23, 2013 and recognized in Income (loss) from discontinued operations, net of tax in fiscal 2013. Amortization of amounts included in net periodic benefit cost before tax were reclassified out of Accumulated other comprehensive loss into Selling and administrative expense in the Consolidated Statements of Operations. See Note 11—Benefit Plans for information regarding the recognition of pension and other postretirement benefit obligation activity within the Consolidated Statements of Comprehensive Income (Loss).

Common and Treasury Stock

Concurrent with the execution of the Stock Purchase Agreement, the Company entered into a Tender Offer Agreement (the “Tender Offer Agreement”) with Symphony Investors LLC, which is owned by a Cerberus Capital Management, L.P. (“Cerberus”)-led investor consortium (“Symphony Investors”), and Cerberus, pursuant to which, upon the terms and subject to the conditions of the Tender Offer Agreement, and contingent upon the NAI Banner Sale, Symphony Investors tendered for up to 30 percent of the issued and outstanding common stock of the Company at a purchase price of $4.00 per share in cash (the “Tender Offer”). Approximately 12 shares were validly tendered, representing approximately 5.5 percent of the issued and outstanding shares at the time of the Tender Offer expiration on March 20, 2013. All shares that were validly tendered and not properly withdrawn were accepted as tendered in accordance with the terms of Tender Offer.

 

In addition, pursuant to the terms of the Tender Offer Agreement, on March 21, 2013, the Company issued approximately 42 additional shares of common stock (approximately 19.9 percent of outstanding shares prior to the share issuance) to Symphony Investors at the Tender Offer price per share of $4.00, resulting in $170 in cash proceeds to the Company, which brought Symphony Investors ownership percentage to 21.2 percent after the share issuance. The Tender Offer Agreement provides that until the second anniversary of the closing of the Tender Offer, transfers of shares acquired by Symphony Investors in the Tender Offer and from the Company pursuant to the Tender Offer Agreement will be generally restricted, with more limited restrictions thereafter. Following that period, the Company has agreed to customary obligations to register the shares acquired by Symphony Investors with the Securities and Exchange Commission if requested by Symphony Investors.

Recently Adopted Accounting Standards

In February 2013, the Financial Accounting Standards Board (“FASB”) issued authoritative guidance under ASU 2013-02 surrounding the presentation of items reclassified from accumulated other comprehensive income (loss) to net earnings (loss). This guidance requires entities to disclose, either in the notes to the consolidated financial statements or parenthetically on the face of the statement that reports comprehensive income (loss), items reclassified out of accumulated other comprehensive income (loss) and into net earnings (loss) in their entirety by component, and the effect of the reclassification on each affected Consolidated Statement of Operations line item. In addition, for accumulated other comprehensive income (loss) reclassification items that are not reclassified in their entirety into net earnings (loss), a cross reference to other required accounting standard disclosures is required. The Company adopted ASU 2013-02 in fiscal 2014. Accordingly, additional footnote disclosure is provided within Note 1—Summary of Significant Accounting Policies in these Notes to Consolidated Financial Statements. The adoption had no effect on the Company’s results of operations or financial position.

Recently Issued Accounting Standards

In July 2013, the FASB issued authoritative guidance under ASU 2013-11, which provides guidance on the financial statement presentation of an unrecognized tax benefit when a net operating loss (“NOL”) carryforward, a similar tax loss, or a tax credit carryforward exists. ASU 2013-11 requires entities to present an unrecognized tax benefit as a reduction of a deferred tax asset for a NOL or tax credit carryforward whenever the NOL or tax credit carryforward would be available to reduce the additional taxable income or tax due if the tax position is disallowed. This accounting standard update requires entities to assess whether to net the unrecognized tax benefit with a deferred tax asset as of the reporting date. ASU 2013-11 will be effective for the Company’s first quarter of fiscal 2015. The Company is currently evaluating the impact of this accounting standard update on its Consolidated Financial Statements.

Revenue Recognition

Revenues from product sales are recognized upon delivery for the Independent Business segment, at the point of sale for Save-A-Lot’s retail operations, and upon delivery for Save-A-Lot’s independent licensees, and at the point of sale for the Retail Food segment. Typically, invoicing, shipping, delivery and customer receipt of Independent Business product occur on the same business day. Revenues from services rendered are recognized immediately after such services have been provided. Discounts and allowances provided to customers by the Company at the time of sale, including those provided in connection with loyalty cards, are recognized as a reduction in Net sales as the products are sold to customers. Sales tax is excluded from Net sales.

Revenues and costs from third-party logistics operations are recorded gross when the Company is the primary obligor in a transaction, is subject to inventory or credit risk, has latitude in establishing price and selecting suppliers, or has several, but not all of these indicators. If the Company is not the primary obligor and amounts earned have little or no inventory or credit risk, revenue is recorded net as management fees when earned.